Architecture as Strategy
                     Professor David Robertson
                     IMD International
           ...
Outline


             What is architecture?
             Why don’t organizations have the right
             architecture...
Just like a car, an organization has a structure


Inside any organization
                                           Ente...
Liverpool City Council’s Challenge

    The Situation in 1999:
    • 9 silos of services, each grown organically over year...
Why don’t organizations have the right architecture?


   Change in     M&A, or other      Architectural
  Environment   s...
Without a plan, IT becomes project- and cost-
focused, leading to a siloed architecture




             Corporate Data

 ...
© IMD 2007                                            13




  Outline


             What is architecture?
             W...
How alignment should work


                                                                                     Senior ma...
How alignment really works


                                                                                     Strategi...
Building capabilities




© IMD 2007                19




  Building capabilities




© IMD 2007                20




  ...
To achieve greatness requires learning basic skills so
  well that they become second nature




© IMD 2007               ...
In many organizations managers spend too much time
  on basic tasks – not focusing on higher-value activities




        ...
To support your strategy, define
  your operating model

      The operating model is your answer to two questions:
      ...
How much standardization do you need?
  (Or: how much standardization can you live with?)

   Standardization:
        Sim...
The challenge of standardizing


Performance

                                                  Performance of new standar...
How much integration do you need?
  (How much can you live with?)

   Integration:
        Links efforts through shared da...
The Operating Model

                                           Coordination                              Unification
  Bu...
ING DIRECT
  Business Process Integration




                                     High



                               ...
ING DIRECT Architecture Description



                                                                             Extern...
Delta’s Enterprise Architecture Requirements

                                                                        Oper...
MetLife’s Enterprise Architecture Requirements

            Application Presentation Tier                               Ap...
Architecture guarantees strategic alignment, and
  provides a foundation for innovation


    Organization Leadership     ...
Enterprise Architecture Maturity Stages

   Enterprise Architecture is the organizing logic for work processes
   and IT s...
Enterprise Architecture Maturity Stages

   Enterprise Architecture is the organizing logic for work processes
   and IT s...
Enterprise Architecture Maturity Stages

   Enterprise Architecture is the organizing logic for work processes
   and IT s...
Key Findings


        The transition from one stage to the next is difficult and
        time consuming.
        Moving f...
Management practices by stage

         Business                    Standardized                      Optimized           ...
The challenge of transformation

    The business:
     • 19 different country business units, each independently
       m...
The benefits of architecture increase as
  organizations move through the stages
                 5

                4.5

...
Costs decline steadily as organizations
   move through the stages

                          Business                    ...
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Architecture as Strategy

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Architecture as Strategy

  1. 1. Architecture as Strategy Professor David Robertson IMD International 6 November 2007 david.robertson@imd.ch © 2007 IMD International. Not be used or reproduced without permission. The Architecture and Strategy Study Joint effort between IMD and MIT Interviewed or surveyed over 150 organizations in 7 countries in the US and Europe Quantitative survey of 103 organizations in US and Europe Book published in June 2006 © IMD 2007 2 1
  2. 2. Outline What is architecture? Why don’t organizations have the right architecture? Why does aligning IT with strategy make things worse? What decisions do organizations have to make? How do you transform your architecture (and legacy systems)? © IMD 2007 3 The architecture of an organization is like the structure of a car © IMD 2007 4 2
  3. 3. Just like a car, an organization has a structure Inside any organization Enterprise is a base foundation of architecture is work processes and IT the organizing systems that logic for the work processes thousands processes and IT of daily transactions systems in an organization © IMD 2007 5 An organization’s architecture lets it execute some initiatives well but not others Johnson & Johnson: • Over 200 operating units • $47B in annual revenues • Sales increases and double-digit earnings increases every year for 20 years J&J’s Management: • Autonomous management of each unit • Different systems and processes in each unit • Great local flexibility and fast response to changing market needs © IMD 2007 6 3
  4. 4. Liverpool City Council’s Challenge The Situation in 1999: • 9 silos of services, each grown organically over years • Information captured on paper many times, with each incident or transaction creating many forms • 10 HR organizations, 5 IT groups, 2 different email protocols The Result: • Call center could not answer more than 4% of calls • Revenues (tax collection) had backlog of 60,000 queries • Overall service quality 423rd out of 426 UK local authorities Social Services Request © IMD 2007 7 European Products Producer Branded products producer: 19 different country business units, each independently managed, with separate systems, processes, and staff The Problems: • Slow to change • Expensive to run • Global customers took advantage BU 1 BU 2 BU 3 BU 19 Customer Customer Customer Customer Group 1 Group 2 Group 3 Group 19 © IMD 2007 8 4
  5. 5. Why don’t organizations have the right architecture? Change in M&A, or other Architectural Environment strategic actions Entropy No Plan © IMD 2007 9 How do architectures get designed? © IMD 2007 10 5
  6. 6. Without a plan, IT becomes project- and cost- focused, leading to a siloed architecture Corporate Data Redundancy Data Lack of Applications integration Lack of Platforms standardization Corporate Networks & Infrastructure Services © IMD 2007 11 Siloed architectures and a short-term cost focus lead to long-term cost increases IT Budget New Capability 63% Maintenance and Repair Time © IMD 2007 12 6
  7. 7. © IMD 2007 13 Outline What is architecture? Why don’t organizations have the right architecture? Why does aligning IT with strategy make things worse? What decisions do organizations have to make? How do you transform your architecture (and legacy systems)? © IMD 2007 14 7
  8. 8. How alignment should work Senior managers define Organization Leadership strategic priorities Drives direction Strategic Strategic Strategic Project teams identify Initiative Initiative Initiative and implement business changes and IT support Builds foundation The resulting IT- Organization Foundation supported processes help the organization achieve Core work processes and IT Systems its strategic objectives Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 15 ABC Company strategy statement “ABC Company aims to build and consolidate leadership positions in its chosen markets, forging profitable growth opportunities by coordinating a strategic, synthesized approach to achieve maximum returns for our stakeholders.” Source: Adapted from Company, by Max Barry © IMD 2007 16 8
  9. 9. How alignment really works Strategic statements are Organization Leadership often promises (“get closer to our customers”) Provides only or operational directives Reduced (“enter Chinese market”) flexibility vague direction Strategy provides little Strategic Strategic information on long-term Strategic Initiative Initiative Initiative direction of organization Reduces By the time IT finishes its future work, the strategy has agility changed The resulting IT legacy Organization Foundation makes the organization Core Business Processes and IT Systems less flexible in the future Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 17 Outline What is architecture? Why don’t organizations have the right architecture? Why does aligning IT with strategy make things worse? What decisions do organizations have to make? How do you transform your architecture (and legacy systems)? © IMD 2007 18 9
  10. 10. Building capabilities © IMD 2007 19 Building capabilities © IMD 2007 20 10
  11. 11. To achieve greatness requires learning basic skills so well that they become second nature © IMD 2007 21 Managers need to focus on high-value activities, not routine everyday tasks Collecting Answering taxes,paying calls, processing benefits, payroll, delivering managing services pensions © IMD 2007 22 11
  12. 12. In many organizations managers spend too much time on basic tasks – not focusing on higher-value activities Understanding constituent needs Collecting Answering taxes,paying calls, processing benefits, payroll, delivering managing services pensions © IMD 2007 23 Getting the architecture right for basic tasks gives you a platform for innovation Developing innovative new services Understanding constituent needs Collecting Answering taxes,paying calls, processing benefits, payroll, delivering managing services pensions © IMD 2007 24 12
  13. 13. To support your strategy, define your operating model The operating model is your answer to two questions: 1) What are the core activities in your organization? o What activities do you want to perform repeatably, flawlessly, and efficiently? o What activities did you perform yesterday, and will you perform today and tomorrow? 2) How standardized and integrated do they need to be? The operating model: Focuses on the “sacred transactions” of the organization – the core activities that should be second nature Provides a stable view of the organization Is more useful for guiding IT efforts © IMD 2007 25 Standardization (without integration) Business Unit 1 Customer Customer Group A Group A Business Unit 2 Customer Customer Group B Group B Business Unit 3 Customer Customer Group C Group C Examples: Marriott Hotels © IMD 2007 26 13
  14. 14. How much standardization do you need? (Or: how much standardization can you live with?) Standardization: Simplifies operations, reduces costs, and increases efficiency Allows measurement, comparison, and improvement Can accelerate innovation © IMD 2007 27 How much standardization do you need? (Or: how much standardization can you live with?) Standardization: Simplifies operations, reduces costs, and increases efficiency Allows measurement, comparison, and improvement Can accelerate innovation BUT: Can limit local flexibility May require that local units replace perfectly good systems and processes with new standards May be politically difficult to implement © IMD 2007 28 14
  15. 15. The challenge of standardizing Performance Performance of new standard Country Business Units © IMD 2007 29 Integration (without standardization) Business Unit 1 Business Unit 2 Customers Customers Business Unit 3 Examples: MetLife, Liverpool City Council © IMD 2007 30 15
  16. 16. How much integration do you need? (How much can you live with?) Integration: Links efforts through shared data Provides transparency across the organization, and the seamless flow of information across activities Allows an organization to present a single face to a customer, supplier, or partner © IMD 2007 31 How much integration do you need? (How much can you live with?) Integration: Links efforts through shared data Provides transparency across the organization, and the seamless flow of information across activities Allows an organization to present a single face to a customer, supplier, or partner BUT: Requires common data definitions Can be time-consuming and difficult to implement Unnecessary if units are organized around unique customer groups © IMD 2007 32 16
  17. 17. The Operating Model Coordination Unification Business Process Integration Business Unit 1 Business Unit 2 High Customers All Business Units Customers Customers Customers Business Unit 3 Diversification Replication Business Unit 1 Business Unit 1 Customer Customer Customer Customer Group A Group A Group A Group A Business Unit 2 Business Unit 2 Low Customer Customer Customer Group B Customer Group B Group B Group B Business Unit 3 Business Unit 3 Customer Customer Customer Group C Customer Group C Group C Group C Low High Business Process Standardization Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 33 Where is your organization? Process 12 Process 2 Business Process Integration Process 7 Process 13 Process 6 Process 10 Process 8 High Process 11 Process 4 Process 5 Process 3 Process 14 Low Process 1 Process 15 Process 9 Low High Business Process Standardization Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 34 17
  18. 18. ING DIRECT Business Process Integration High Business Unit 1 Customer Customer Group A Group A Business Unit 2 Low Customer Customer Group B Group B Business Unit 3 Customer Customer Group C Group C Low High Business Process Standardization Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 35 ING DIRECT Simple products, mostly ING DIRECT Operational Costs Average Branch Bank as Percent of Assets savings and simple loans (Basis Points) cost: 250 bps No current account, 300 no cash, no ATMs 250 250 No bank branches: internet and call centers only 200 Copy best practices 150 142 123 between country business 96 units 100 59 49 44 Shared IT architecture and 50 43 applications 0 1999 2000 2001 2002 2003 2004 2005 Branch © IMD 2007 36 18
  19. 19. ING DIRECT Architecture Description External Services Prospect Connectivity & Integration Statement Reports Payment Checks Fulfillment Fulfillment local/HQ/Tax Customer Relationship Services Core Banking Services Mutual CIF CRM Brokerage Funds Contact Product Banking Credit History Info Engine Score Common Business Services Transactions Customers Products Services Channel Services IVR/CTI Imaging E-mail Web Gateway server server server server server Customer-Contact: Self-Service: •Call Center, IVR, •Internet, MinTel, E-mail, Direct Mail ATM, WAP, (WebTV) Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 37 Unification example: Delta Airlines Business Process Integration All Business Units High Customers Customers Low Low High Business Process Standardization Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 38 19
  20. 20. Delta’s Enterprise Architecture Requirements Operational Pipeline Prepare Flight Flight Clean/ Allocate Load Monitor Unload for Flight Departure Arrival and Service Resources Aircraft Flight Aircraft Departure and Closeout Closeout Aircraft E V Pagers Gate E Readers N Kiosks Hand T Helds Voice S Delta Nervous System Video Electronic Events Location Flight Schedule Maint. Business Employee Relationship Reflexes Management Equip. Employee Aircraft Customer Ticket Nine core databases Cell Phones PDAs P Desktops R O Laptops F Scanners Reservation I Systems L E Travel Ticket Crown Skylinks Skymiles Reservations Skycap Boarding Inflight Baggage Agent Counter Room Personalization Digital Relationships Loyalty Programs Customer Experience © IMD 2007 Source: Adapted from Delta Air Lines documents – used with permission 39 Integration example: MetLife Business Unit 1 Business Process Integration Business Unit 2 High Customers Customers Business Unit 3 Low Low High Business Process Standardization Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 40 20
  21. 21. MetLife’s Enterprise Architecture Requirements Application Presentation Tier Application Business Logic and Data Tier Portal – Security & Licensing Rates & Suitability Forms & Presentation Entitlements Calcs Requirements Integration Customer Screen Entry & Validation Sign-on Marketing Operational Business Producer ACORD JLife Navigation Illustrations Data Store Rules Search Order Entry Sales Sessions Underwriting Party Office ACORD XML Integration Management Hub Billing/Payment Underwriter Service Underwriting L XM Eligibility & Issue D OR AC Call Center Claims Product Admin Partner Service Portals Events Service Workflow Provider Recording © IMD 2007 Source: Adapted from MetLife documents – used with permission 41 The problem with strategic alignment Strategic statements are Organization Leadership often promises (“get closer to our customers”) Provides only or operational directives vague direction (“enter Chinese market”) Strategy provides little Strategic Strategic information on long-term Strategic Initiative Initiative Initiative direction of organization Reduces By the time IT finishes its future work, the strategy has agility changed The resulting IT legacy Organization Foundation makes the organization Core Business Processes and IT Systems less flexible in the future Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 42 21
  22. 22. Architecture guarantees strategic alignment, and provides a foundation for innovation Organization Leadership Operating Model Defines Process business Drives integration & Innovation requirements direction standardization (“Happy requirements Surprises”) Defines solutions Strategic Strategic Strategic Enterprise Initiative Initiative Initiative Updates Architecture architecture Builds foundation Organization Foundation Core Business Processes and IT Systems © IMD 2007 43 Outline What is architecture? Why don’t organizations have the right architecture? Why does aligning IT with strategy make things worse? What decisions do organizations have to make? How do you transform your architecture (and legacy systems)? © IMD 2007 44 22
  23. 23. Enterprise Architecture Maturity Stages Enterprise Architecture is the organizing logic for work processes and IT systems in an organization Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 45 Enterprise Architecture Maturity Stages Enterprise Architecture is the organizing logic for work processes and IT systems in an organization Business Silos • Collection of separate departments/units rather than integrated enterprise • Separate choices made for each product, function, and segment • Investments based on project ROI Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 46 23
  24. 24. Enterprise Architecture Maturity Stages Enterprise Architecture is the organizing logic for work processes and IT systems in an organization Business Standardized Silos Technology • Collection of • Centralized separate standardization of departments/units technology rather than platforms with integrated exception enterprise management • Separate choices • Business process made for each and IT application product, function, decisions made and segment locally • Investments • Investments based on based on cost project ROI reduction Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 47 Enterprise Architecture Maturity Stages Enterprise Architecture is the organizing logic for work processes and IT systems in an organization Business Standardized Optimized Silos Technology Core • Collection of • Centralized • Standardization/ separate standardization of integration of departments/units technology processes and rather than platforms with data integrated exception • Separation of enterprise management decisions about • Separate choices • Business process processes, made for each and IT application applications, data, product, function, decisions made and infrastructure and segment locally • Business case • Investments • Investments made on based on based on cost performance project ROI reduction Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 48 24
  25. 25. Enterprise Architecture Maturity Stages Enterprise Architecture is the organizing logic for work processes and IT systems in an organization Business Standardized Optimized Business Silos Technology Core Modularity • Collection of • Centralized • Standardization/ • Information and separate standardization of integration of process interface departments/units technology processes and standards rather than platforms with data defined integrated exception • Separation of • Business enterprise management decisions about process • Separate choices • Business process processes, ownership made for each and IT application applications, data, defined product, function, decisions made and infrastructure • Business case and segment locally • Business case made on time to • Investments • Investments made on market, flexibility based on based on cost performance project ROI reduction Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 49 Enterprise Architecture Maturity Stages Business Standardized Optimized Business Silos Technology Core Modularity • Collection of • Centralized • Standardization/ • Information and separate standardization of integration of process interface departments/units technology processes and standards rather than platforms with data defined integrated exception • Separation of • Business enterprise management decisions about process • Separate choices • Business process processes, ownership made for each and IT application applications, data, defined product, function, decisions made and infrastructure • Business case and segment locally • Business case made on time to • Investments • Investments made on market, flexibility based on based on cost performance project ROI reduction (12) (48) (34) (6) Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 50 25
  26. 26. Key Findings The transition from one stage to the next is difficult and time consuming. Moving from one stage to the next requires a business transformation as well as a technical one Companies that try to skip a stage are usually unsuccessful Each stage involves a very different view of the value of IT and the role of IT in the organization The leadership challenges are very different for each transition © IMD 2007 51 The role of the CIO changes as organizations move through the stages Stage Business Silos Standardized Optimized Core/ Technology Business Modularity Key Skills Technical knowledge Detailed knowledge of Ability to facilitate of the CIO: to help with standards how the organization innovation off new decisions functions platform Ability to implement Ability to manage large Detailed knowledge of standard project methodology and organizational change core business - could oversight efforts potentially run a Ability to work with top Credibility with business business unit if management team to unit or functional heads necessary establish basic Ability to manage large Ability to delegate governance ownership of key central budget Ability to make process and data business case for Understanding of modules, while still standardization architecture as a ensuring adherence to business enabler standards Understanding of strategic benefits of architecture Reports to: CEO or CFO CEO CEO Percent of IT heads with second title:* 0% 26% 50% * Percent of CIOs having second VP title, from sample of 26 CIOs in US and Europe Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 52 26
  27. 27. Management practices by stage Business Standardized Optimized Business Silos Technology Core Modularity • Business cases • Project methodology • Architects on project teams • IT steering committee • Architecture exception process • Centralized funding of enterprise • Process owners applications • Enterprise • Centralized architecture standards team guiding principles • Business leadership of project teams • Senior executive • Enterprise arch. oversight core diagram • Post-impl’n assessment • Full-time enterpr architecture team Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 53 The challenge of transformation The business: • 19 different country business units, each independently managed, with separate systems and processes • Business units sell approximately the same products The challenge: • Slow to change • Expensive to run • Global customers taking advantage BU 1 BU 2 BU 3 BU 19 Customer Customer Customer Customer Group 1 Group 2 Group 3 Group 19 © IMD 2007 54 27
  28. 28. The challenge of transformation The business: • 19 different country business units, each independently managed, with separate systems and processes • Business units sell approximately the same products The Solution: • Ripped out all systems in country BUs • Replaced with standard system, centrally designed and controlled Customer Customer Customer Customer Group 1 Group 2 Group 3 Group 19 © IMD 2007 55 The challenge of transformation Business Standardized Optimized Business Silos Technology Core Modularity Global Agility Local Agility Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 56 28
  29. 29. The benefits of architecture increase as organizations move through the stages 5 4.5 4 3.5 CIO Rating 3 IT Responsiveness (1) 2.5 Strategic Business Impacts (2) 2 1.5 (1) Development 1 time. (2) Operationalexcellence, customer 0.5 intimacy, product leadership and strategic agility. 0 Business Standardized Optimized Business Silos Technology Core Modularity Architecture Stage Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 57 The benefits of architecture increase as organizations move through the stages 5 4.5 4 3.5 CIO Rating 3 IT Responsiveness (1) 2.5 Strategic Business Impacts (2) 2 Managerial Satisfaction (3) 1.5 (1) Development 1 time. (2) Operational excellence, customer 0.5 intimacy, product leadership and strategic agility. 0 (3) Senior management and Business Standardized Optimized Business business unit management Silos Technology Core Modularity satisfaction. Architecture Stage Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006 © IMD 2007 58 29
  30. 30. Costs decline steadily as organizations move through the stages Business Standardized Optimized Silos Technology Core Local Applications Shared IT 36% Capability 25% 16% Enterprise Systems 18% 21% 32% 11% 14% Data 17% 35% 40% Technical 35% Infrastructure IT Budget: 100% 85% 75% IT budgets are corrected for industry differences. Application silo budget is the baseline. Budgets for other stages are represented as a percentage of the baseline budget. Only five firms in stage four reported their IT budgets so data is not reliable. Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by IMD 2007 Weill and D Robertson, Harvard Business School Press, 2006 © J Ross, P 59 Summary Enterprise architecture is the organizing logic for the foundation of your organization: your work processes and IT systems In most organizations, architecture is hindering execution and preventing innovation Defining your operating model is the first step in choosing the right architecture for your organization Transforming architecture is a difficult, time- consuming process, but the benefits begin immediately © IMD 2007 60 30

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