6 Enterprise Architecture As Strategy PDF

Enterprise
Architecture
as Strategy
Creating a Foundation for
Business Execution
Jeanne W. Ross
Peter Weill
David C. Robertson
HARVARD BUSINESS SCHOOL PRESS

BOSTON, MASSACHUSETTS
Contents
Copyright 2006 Jeanne W. Ross, Peter Weill, and David C. Robertson Preface and Acknowledgments vii
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10 09 OS 07 06 5 4 3 2 1 1. To Execute Your Strategy, First Build Your Foundation 1
No part of this publication may be reproduced, stored in or introduced into a 2. Define Your Operating Model 2S
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4. Navigate the Stages of Enterprise
Library of Congress Cataloging-in-Publication Data Architecture Maturity 69
Ross, Jeanne W. "
Enterprise architecture as strategy: creating a foundation for business S. Cash In on the Learning 91
execution / Jeanne W. Ross, Peter Weill, David C. Robertson.
p.cm. 6. Build the Foundation One Project at a Time 117
Includes bibliographical references.
ISBN 1-59139-S39-S 7. Use Enterprise Architecture to Guide Outsourcing 143
1. Industrial management-Automation. 2. Information technology-
Management. 3. Strategic planning. I. Weill, Peter. II. Robertson, David c., 8. Now..LExploit Your Foundation for Profitable Growth 16S
1935- III. Title.
HD45.2.R72 2006 9. Take Charge! The Leadership Agenda 187
65S.4'03S-dc22
2006010226
Notes 209
The paper used in this publication meets the minimum requirements of the
Index 221
American National Standard for Information Sciences-Permanence of Paper
for Printed Library Materials, ANSI Z39.4S-1992. About the Authors 233
Preface and
Acknowledgments
In 1995 we started our study of enterprise architecture-we just

didn't know it. At the time we thought we were studying infor-
. mation technology infrastructure transformations. In 1998 we
thought we were studying enterprise system implementations. In
2000 it was e-business. But sometime in 2000, we recognized that
each of these studies examined basically the same thing: enter-
prise architecture. We saw a pattern across those studies of what
smart and profitable companies did differently. These companies
made a commitment to a way of operating, and they were using IT
to digitize that commitment. These companies kept getting bet-
ter, faster, and more profitable at what they did while other com-
panies were still figuring out what to do.
Most of the effort to define enterprise architecture has been
located in,companies' IT units. But the historic ineffectiveness of
IT architecture efforts in large organizations has troubled us for
years. In presentations we have railed against traditional IT archi-
tecture efforts for their remoteness from the reality of the business
and their heavy reliance on mind-numbing detail represented in
charts that look more like circuit diagrams than business descrip-
tions and that are useful as little more than doorstops. All three of
vii
viii Preface and Acknowledgments Preface and Acknowledgments ix
us have been frustrated by our inability in our research and exec- a competitive weapon to seize new business opportunities. And
utive education to make a breakthrough in understanding and what makes this capability a competitive advantage is that only a
improving IT architecture efforts. Until now ... small percentage of companies do it well-we estimate 5 percent of
It is now clear our problem was the level of analysis. As Albert firms or less.
Einstein famously remarked, "The significant problems we face The objective of this book is to structure and explain what
cannot be solved by the same level of thinking that created them." top-performing companies do so others can follow and improve.
The problem with our efforts to understand IT architecture was that To inspire and illustrate what works well, we provide many
the level of analysis was all wrong. The focus needs to be higher- examples of outstanding companies, including 7-Eleven Japan,
on enterprise architecture, the organizing logic for core business CEMEX, Dow Chemical, ING DIREC'L MetLife, Schneider Na-
processes and IT infrastructure reflecting the standardization and tional, Toyota Motor Europe, UNICEF, UPS, and others. This book
integration of a company's operating model. We have come to is about what makes a company great. Ultimately, of course,
understand that enterprise architecture boils down to these two people make the difference. Good people design the operating
concepts: business process integration and business process stan- model, build the foundation, execute, and innovate. But good
dardization. In short, enterprise architecture is not an IT issue- people need direction, leadership, and incentives to perform at
it's a business issue. their best. This book is for managers, both business and IT, who
The breakthrough in our understanding lay in an apparent sense the business problem and want to lead their organizations
contradiction. In a business world that is changing faster than to build a solution-a unique digitized foundation for execution
ever before, the top-performing firms create a stable base-they ,for their company.
digitize their core processes and embed those processes into a
foundation for execution. This stable foundation makes a com-
pany both more efficient and more agile than its competitors. The Research
With global supply chains, pressure for ever faster time to market,
The insights in the book come from a series of research projects
more complex regulation, and huge shifts in customer demo-
exploring enterprise architecture in more than 200 companies
graphics and desires, companies cannot predict the future. But
(and another 256 companies where our focus was on IT gover-
they can decide what makes them great. And then they can create
nance) from 1995 to 2005. Most of the research was done at the
a low-cost, high-quality core of stability and constancy in a tur-
MIT Sloan School's Center for Information Systems Research (CISR);
bulent world. With a strong digitized core, great companies slide
the European work was done by David Robertson at IMD. The
smoothly into the next opportunity while their competitors
main studies were:
stumble.
Top-performing companies define how they will do business (an • Case studies of eighteen firms' implementations of new
operating model) and design the processes and infrastructure crit- infrastructure capabilities, enterprise resource planning
ical to their current and future operations (enterprise architec- systems, and e-business initiatives by Jeanne Ross,
ture), which guide the evolution of their foundation for execution. Michael Vitale, and Peter Weill between 1995 and 2005.
Then these smart companies exploit their foundation, embedding The cases focused on transformations leading to-and
new initiatives to make that foundation stronger, and using it as in some cases driven by-new IT capabilities. Companies
x Preface and Acknowledgments Preface and Acknowledgments xi
included Australia Post, Brady Corp., Chase Manhattan, of those services, the vendor-client relationship, architec-
the District of Columbia's city government, Dow Corning, ture implications, and outcomes.
GTECH, JC Penney, Johnson & Johnson, Manheim Auc-
tions, MetLife, Schneider National, Texas Instruments, • Case studies of architectural implications of outsourcing
Travelers, and five others. at eight firms by Jeanne Ross, Cynthia Beath, Jeff Sampler,
and Nils O. Fonstad during 2004 and 200S. We studied the
• Case studies at eight companies on the relationship be- role of enterprise architecture in outsourcing decisions
tween IT and business strategy by Jeanne Ross and Peter and outcomes. The companies were Campbell Soup Co.,
Weill during 2001 and 2002. We studied how firms devel- Carlson Companies, Dow Chemical, eFunds, JM Family
oped IT capabilities in response to business strategy. We Enterprises, Tecnovate, and two others.
also looked at how IT units were developing and manag-
ing enterprise architecture. Companies included Air Prod- • Case studies by David C. Robertson and Nils O. Fonstad of
ucts and Chemicals, Citibank Asia Pacific, Delta Air Lines, Toyota Motor Marketing Europe, BT, ING DIRECT, and fif-
DuPont, Merrill Lynch, Nestle USA, Toyota USA, and UPS. teen other companies to explore the key issues around es-
tablishing effective engagement models.
• Case studies on enterprise architecture at sixteen compa-
nies in the United States and Europe by David C. Robert- • In addition, we drew on a body of research on IT governance,
son, Jeanne Ross, George Westerman, and Nils O. Fonstad including a study on effective IT governance led by Peter
in 2002. We studied how IT architecture enabled and con- Weill with many colleagues from 2001 to 2004. We studied ...
strained business initiatives. We also looked at how com- more than three hundred enterprises in twenty-three coun-
panies defined and managed business and technology tries, including more than twenty-five in-depth case stud-
standards. Cases were based on interviews with the CIO, ies. We studied how enterprises made five key IT decisions,
IT architect, two project heads, and others at Akzo Nobel, including architecture. We also measured governance and
BIC Graphic Europe, BT, Campbell Soup Co., Canon Europe, financial performance and what practices worked best.
Carlson Companies, ING Marriott, Novartis,
Panalpina, Partners HealthCare, Pfizer,' Secheron, Swisscom
Mobile, Tetra Pak, and Toyota Motor Marketing Europe.
Who Should Read this Book
• Surveys of 103 firms to assess architecture outcomes by This book is written for all executives who have ever wondered
Jeanne Ross and Nils O. Fonstad in 2004. We examined IT why some firms-and not others-achieve superior execution and
investments, architecture management practices, architec- are able to build on what they do well to achieve both agility and
ture maturity, and IT and business outcomes. profitability. We describe the vision and steps to design an enter-
prise architecture and create a foundation for execution, high-
• Surveys of eighty firms' IT and business process outsourc- lighting the roles of both business and IT managers. We discuss
ing initiatives by Jeanne Ross and Cynthia Beath in 2004 the enterprise architecture decisions with enough detail to guide
in conjunction with Lorraine Cosgrove at CIO Magazine. implementation. The language, style, data, examples, and lessons
We examined the services outsourced, the characteristics are about business issues that rely on technology.
xii Preface and Acknowledgments Preface and Acknowledgments xiii
We encourage senior managers, strategists, operational man- their insights and, in many cases, provided the examples for the
agers, marketing managers, financial managers, and IT managers book. These managers included Toshifumi Suzuki, Makoto Usui,
to read this book and discuss building a foundation for execution and Yuka Ozaki at 7-Eleven Japan; AI-No or Ramji, Sinclair Stock-
in their companies. For simplicity of language we adopted the man, Jan Cylwik, and Jim Crookes at BT; Doreen Wright at Camp-
word company in this book. However, our comments relate equally bell Soup Co.; Steve Brown, formerly of Carlson Companies; Karl
to all organizations-whether they are large or small; for profit, not Wachs at Celanese; John Bloom at Chevron; Frank Luijckx at Dow
for profit, or government. Our intention is to capture the imagi- Chemical; Clyde Thomas and Kathleen Flanagan at eFunds; Den-
nation and challenge the assumptions of managers in all industries nis Callahan at Guardian Life Insurance; Martin Vonk and Rob
as they build foundations for execution. Manders at ING DIRECT; Martin Curley and Malvina Nisman at
Intel; Ken Yerves and Tom Holmes atJM Family Enterprises; David
Henshaw and Phil Halsall at Liverpool Direct Ltd.; Jim McGrane at
Whom We Would Like to Thank
MeadWestvaco; Andy Brown at Merrill Lynch; Steve Sheinheit
We gratefully acknowledge the support of MIT CISR's patron and and Jerry Foster at MetLife; Chris Johnson at Nestle; Monika Ribar
sponsor firms: Aetna, Allstate, American Express Company, As- at Panalpina; Ron Carter at Pfizer; Michael Harte at PFPC; Rebecca
traZeneca Pharmaceuticals LP, Biogen Idec, Inc., Boston Consult- Rhoads, Kristine Ten Eck, Cassandra Matthews, and Alan G. Red-
ing Group, BT Group pIc, Campbell Soup Co., CareFirst Blue Cross fern at Raytheon; Brent Glendening at Schindler; Joe Antonellis,
Blue Shield, CARE USA, Celanese, Chevron, Det Norske Veritas, Ron Strout, and David Saul at State Street Corp.; John Petrey at TD
DiamondCluster International, Direct Energy, eFunds Corpora- Banknorth; Peter Heinckiens at Toyota Motor Marketing Europe; ...
tion, EMC Corporation, Gartner, Florida's Pasco County govern- Andre Spatz at UNICEF; Mike Eskew, Ken Lacy, Jim Medeiros, and
ment, Guardian Life Insurance, Hewlett-Packard, ING Groep N.V., Dave Barnes at UPS.
Intel Corporation, International Finance Corp., Merrill Lynch & We want to gratefully acknowledge all the managers who par-
Company, Inc., MetLife, Microsoft Corp., Mohegan Sun, Mo- ticipated in case study interviews and those who took the time to
torola, Inc., Nomura Research Institute, Ltd., PepsiAmericas, Inc, answer our survey questions, add their own insights, and probe
Pfizer, Inc., PFPC Inc., Raytheon Company, State Street Corp., Tata our assumptions. We are grateful to all of you for making this
Consultancy Services-America, TD Banknorth, Telenor ASA, Trin- book possible.
ity Health System, TRW Automotive, the U.N.'s Department of Colleagues at other universities who contributed to the research
Economic and Social Affairs, and the U.S. Federal Aviation Admin- in this book include Professor Cynthia M. Beath at the University
istration. Executives from these enterprises not only inform and of Texas at Austin, Professor Michael Vitale at the Australian Grad-
fund our research but also probe our assumptions, test our ideas, uate Schopl of Management, Professor Jeff Sampler at Oxford, and
debate our findings, and implement and improve our work. We Professor Don Marchand at IMD.
could not do this work without you. We want to especially thank Drs. Nils O. Fonstad and George
During research and writing we have had the opportunity to Westerman, research scientists at CISR, who participated in much
work with many extraordinary managers and academic colleagues of this research. Their contributions to this work were invaluable.
who have influenced our thinking and reinforced our passions. Thanks to Professor Ben Bensaou at INSEAD and Koki Yodo-
First, we would like to acknowledge the managers who shared kawa and Kei Nagayama at Nomura Research Institute in Japan
xiv Preface and Acknowledgments Preface and Acknowledgments xv
who helped us understand why 7-Eleven Japan is so successful. The writing of this book, as well as our ongOing research efforts,
Frank Erbrick at McKinsey & Co. and Charlie Feld at EDS enlight- would not be possible without the support of our other colleagues at
ened us about enterprise architecture. We also want to thank the MIT CISR and the MIT Sloan School of Management. Chris Foglia
many people who provided important feedback on the research in brings extraordinary talent and energy to the role of MIT CISR's cen-
this book, including Juan Ayala, Shafeen Charania, and Dinesh ter manager. She has proved that there is no technical, financial,
Kumar at Microsoft; Len Fehskens at HP; Con Kenney at the U.S. artistic, or organizational issue at MIT CISR that she cannot address.
Federal Aviation Administration; Chuck Rieger at IBM; and Chris Julie Coiro provides the friendly interface to MIT CISR. She has
Curran and John Sviokla at DiamondCluster International. We'd managed the organizational details that keep MIT CISR as a research
also like to thank the members of the Advanced Practices Council center-and each of us as individuals-running smoothly. And we
of the Society for Information Management for their thoughtful are indebted to our research colleagues George Westerman, Nils
feedback on this research. Thanks also to the many executives Fonstad (who co-authored chapter 6 of this book), Chuck Gibson,
who made comments during our presentations or came up after- Jack Rockart, and Sinan Aral. We have benefited enormously from
ward to share their insights and critique. their insights, enthusiasm, hard work, and collegiality.
In addition to three anonymous reviewers, three colleagues MIT CISR is a research center in the Sloan School of Manage-
read the entire manuscript and provided not only valuable com- ment. We feel very fortunate to work in such a rich and exciting
ments but also much appreciated enthusiasm and debate: Chris research environment. We have benefited, in particular, from the
Curran at DiamondCluster, Dinesh Kumar at Microsoft, and Chuck support and encouragement of Dean Richard Schmalensee, Dean
Gibson at MIT CISR. Thank you for your input-you will see your Steven Eppinger, Professor Don Lessard, Professor Wanda Orlikow-
comments reflected in this final version. .ski, and Professor Tom Malone.
We also want to acknowledge Shafeen Charania of Microsoft We would also like to thank Peter Lorange and Jim Ellert at
for his insightful discussions ,and his strong advocacy of applying IMD for the generous support IMD has provided for the European
IT value research to enterprises around the world. part of this research. Comparing experiences and testing our as-
We wish to thank Lenny Zeltser, Charles Zedlewski, and Niraj sumptions in a European context has deepened our understand-
Kumar, all researchers at MIT CISR who helped solicit companies ing of the issues and broadened our thinking.
and conduct interviews, and Mingdi Xin at New York University, We are delighted to work with Kirsten Sandberg at Harvard
who did detailed and painstaking quantitative analysis for this Business School Press. Kirsten, as our editor on this and three pre-
book. Individually and together as a team they added precision, vious books, knows just when to push and when to leave us to our
professionalism, collegiality, and inSight. We thank them. own devices. Kirsten adds value in all the right places, and we
Our MIT CISR colleague David Fitzgerald III managed the book thank her her colleagues at HBS Press.
production process with enthusiasm and professionalism. David We undertook this book with a bit of trepidation as to the vi-
devised the chapter template, produced the figures, enforced ver- ability of writing as a trio. Getting three people to agree on ideas,
sion control, tracked down citations, checked for contradictions, text, figures, and organizing logic might have been exponentially
and almost kept us on schedule. We benefited from his experience tougher than two. Instead, we discovered that three heads are con-
and appreciated his dedication, flexibility, and especially his good siderably better than one or two. Our different experiences, research
humor. styles, and perspectives led to interesting and valuable debates.
xvi Preface and Acknowledgments Preface and Acknowledgments xvii
And the opportunity to work together was a joy. In writing this and working on this book, I experienced a physical renewal. I went
manuscript we found enormous satisfaction in the process of bring- from not being able to walk without pain to regaining a normal
ing together our different skills, challenging our assertions, and life. I would like to thank Dr. Andrew Shimmin and his colleagues
learning together. We are all more than ready to rededicate our- at the Melbourne Orthopaedic Group in Australia for giving me a
selves to our families, but we might even do this again. new hip and a new lease on life. Thanks also to Tim Schleiger who
made the rehab work both interesting and effective.
A Personal Note from Jeanne To my wife, Margi Olson, thank you for your understanding,
support, love, and friendship. Without you this work would be
I'd first like to thank my family. I will remember this past summer meaningless. Somehow despite having your demanding day job
fondly, not because of this book, but because our family of five as dean of Business and the Graduate School at Bentley College,
adults had six precious weeks together. I reveled in our together- you managed to be encouraging and delightful. Thank you for en-
ness-five people loving one another, fixing meals, playing games, thusiastically participating in endless dinner discussions on the
watching movies, telling stories, sharing joys, unloading frustra- difference between infrastructure and architecture and why some
tions, eating (constantly), teasing, laughing, and doing the little companies perform so well.
things that make us a family. It doesn't get any better. Thank you, I hope the MBA students and executive education participants
Adam, for your curiosity and sensitivity; Julie, for your sense of in my Sloan School courses recognize their input into this book. I
adventure and fun; and Steffie, for your sweetness and joy. You are thank them all as they contributed much in the way of learning,
extraordinary blessings. clarity, and focus during the countless discussions in session and ...
And to my husband, Dan, thank you for letting me be me. I out. I am constantly amazed and grateful about how much I learn
appreciate all the sacrifices you made so that I could finish this from our interactions.
manuscript. Thank you for your intensive reading of every chap- To my mother, Hidle Betty Weill. Thank you for your good
ter-you knew how to say "this doesn't make sense" in amazingly genes, good humor, generous spirit, and most of all, love and sup-
gentle and creative ways. This book is better for your contribu- port. To my brother Steve, as well as to David, and Simon-I
tion. And I am a better person for being married to you. love you guys. Together you complete my family in Australia and
Finally, thank you to my parents, Mary a'nd Russ Wenzel, and make my hometown so special. Finally, to my U.S.-based family,
my in-laws, Jeanne and Irv Imburg-who offer their unwavering Geoffrey, Noa, and Ben Weill-thank you for making me feel part
love and support, even as they wonder whether I'm taking on too of a small but wonderful family Weill.
much-and to my siblings, Pat and Jim, Jo, Barb and Mark, Russ
and Diane, and Dave and Jill, who continue to teach me the joy of A Personal Note from David
being family.
First, a thank you to my colleagues at IMD who three years ago
A Personal Note from Peter took a chance on a former enterprise software executive with no
teaching experience. Many of you took extra time out of your busy
The last year has been an amazing experience. In addition to hav- schedules to help me learn the trade. IMD is a case study in how a
ing one of the greatest jobs in the world as director of MIT CISR high-performing organization can also be supportive and fun.
xviii Preface and Acknowledgments
Thanks to Peter and Jeanne for keeping the wonderful institu-

tion of MIT CISR alive and thriving. MIT CISR has been, and con-
tinues to be, an island of sanity in the strange and wonderful world
of MIT. Thank you both for letting me be part of such a great or-
ganization once again. 1
This work has benefited from many spirited discussions in
IMD classrooms. Thanks especially to the participants from Credit
Suisse, EMC, and Siemens for the many ideas you brought to this
book. I look forward to continuing to work with you and learn To Execute Your Strategy,
from you.
To Phoebe, Alan, and Alice, thank you for all your love and First Build Your Foundation
support. To Gordon and Caroline, thank you for the constant joy
you create. And to Anne, my foundation, thank you for your
friendship, encouragement, and love.
DOES IT FEEL AS IF the employees in your >company are work-

ing harder and harder, but you're still losing ground? You've got
. great people, you invest carefully, and you believe you have the
right strategy. You watch the market, listen to your customers, and
react as quickly as you can to competitors' moves. In short, you do
everything the management literature says you should, but you
still can't get ahead.
And the signs aren't encouraging for the future. You see Chi-
nese companies taking over manufacturing in industry after in-
dustry.! Indian companies providing more and more services. 2
Small, agile competitors from around the world picking off niche
after niche in your markets. Competition is only getting tougher.
Yet some companies-some of your competitors-seem to be
able not jtlst to survive but to thrive. In the face of tough global
competition, companies like Dell, ING DIRECT, CEMEX, Wal-Mart,
and others are growing and making money. These companies have
more-productive employees, get more from their investments, and
have more success with their strategic initiatives. What are they
doing differently?
1
2 ENTERPRISE ARCHITECTURE AS STRATEGY To Execute Your Strategy, First Build Your Foundation 3
We believe these companies execute better because they have a

What Is a Foundation for Execution?
better foundation for execution. They have embedded technology
in their processes so that they can efficiently and reliably execute Every human being performs a variety of critical, fairly complex
the core operations of the company. These companies have made tasks without actually thinking about them. These tasks include
tough decisions about what operations they must execute well, breathing, hearing, swallowing, and seeing. With experience, hu-
and they've implemented the IT systems they need to digitize mans can take on more-deliberate tasks like walking, riding a bike,
those operations. These actions have made IT an asset rather than driving a car, and making coffee. At first, these more-deliberate
a liability and have created a foundation for business agility. _tasks require some concentration and adaptation, but they quickly
We surveyed 103 U.S. and European companies about their IT become second nature. Over time, different humans develop dis-
and IT-enabled business processes. Thirty-four percent of those tinguishing capabilities. A talented musician learns how to play
companies have digitized their core processes. Relative to their com- piano; a great athlete plays basketball; a famous chef prepares ex-
petitors, these companies have higher profitability, experience a traordinary meals. Each of these distinctive capabilities has repeat-
faster time to market, and get more value from their IT invest- able, routine activities that would be hard for a novice but that the
ments. 3 They have better access to shared customer data, lower risk expert can perform without thinking. Because experts need not
of mission-critical systems failures, and 80 percent higher senior focus on the routine activities in their field, they can concentrate
management satisfaction with technology. Yet, companies who on achieving greatness.
have digitized their core processes have 2S percent lower IT costs. Companies are not blessed with the equivalent of the human
These are the benefits of an effective foundation for execution. brain, which coordinates all of a person's activities. Activities as
In contrast, 12 percent of the companies we studied are frit- simple as sending an invoice, taking an order, or mailing a pack-
tering away management attention and technology investments age can easily go wrong-even after considerable practice. To focus
on a myriad of (perhaps) locally sensible projects that don't sup- management attention on higher-order processes, such as serving
port enterprisewide objectives. Another 48 percent of the compa- customers, responding to new business opportunities, and devel-
nies are cutting waste from their IT budgets but haven't figured oping new products, managers need to limit the time they spend
out how to increase value from IT. a few leading-edge on what should be routine activities. They need to automate rou-
companies are leveraging a foundation for execution to pull fur- tine tasks so those tasks are performed reliably and predictably
ther and further ahead. without requiring any thought.
As such statistics show, companies with a good foundation for A manufacturing company, for example, needs transparent
execution have an increasing advantage over those that don't. In information on customer orders, products shipped, finished goods
this book, we describe how to design, build, and leverage a foun- inventory, raw materials inventory, work in process, invoices sent,
dation for execution. Based on survey and case study research at payments received, and a host of related transaction data-just to
more than 400 companies in the United States and Europe, we perform at a minimally acceptable level. A mistake in any of that
provide insights, tools, and a language to help managers recog- data can have ripple effects on a company's financial performance,
nize their core operatiOns, digitize their core to more efficiently its employee satisfaction, or its relationships with customers or
support their strategy, and exploit their foundation for execution suppliers. This is where a foundation for execution enters the piC-
to achieve business agility and profitable growth. 4 ture. The foundation for execution digitizes these routine processes
to provide reliability and predictability in processes that must go agile. To return to the human analogy, a great athlete will have
right. The best companies go beyond routine processes and digi- muscles, reflexes, and skills that are not easily changed. But these
tize capabilities that distinguish them from their competitors. capabilities give athletes a tremendous ability t<? react, improvise,
For example, 7-Eleven Japan (SEJ) has built a foundation for and innovate in their chosen sport.7 Similarly, digitizing business
execution that has helped make the convenience store chain the processes requires making clear decisions about what capabilities
eighth-largest retailer in the world. s SEJ's foundation for execu- are needed to succeed. And once these new processes are installed,
tion allows each of the company's 10,000 stores to individually they free up management attention from fighting fires on lower-
manage inventory while ensuring that they all generate rapid value activities, giving them more time to focus on how to in-
turnover on their large stocks of fresh foods. The underpinning crease profits and growth. Digitized processes also provide better
for SEJ's foundation for execution is a network of 70,000 comput- information on customers and product sales, providing ideas for
ers that collect data at the pOint of sale on every customer and new products and services. The foundation for execution provides
every item sold. Each day the point-of-sale data is analyzed for use a platform for innovation.
the next morning. Other digitized processes allow each store to
place orders and receive deliveries three times each day. SEJ trains Do You Have a Good Foundation
all of its 200,000 employees to use available pOint-of-sale, prod- for Execution?
uct, weather, and regional information not only to order from
existing product lists but also to create hypotheses about possi- In our visits to dozens of companies, we have learned to recognize
ble new products. SEJ's foundation then connects employees with . the warning signs of a company that doesn't have a foundation
manufacturers to develop and test new items. The effect? In the that supports its strategy. Comments from senior executives like
average 7-Eleven store in Japan, 70 percent of the products sold the following are indicators:
each year are new.
• Different parts of our company give different answers to
In short, a foundation for execution is the IT infrastructure and
the same customer questions.
digitized business processes automating a company's core capabil-
ities. As with human development, a company's foundation for • Meeting a new regulatory or reporting requirement is a
a
execution evolves-usually beginning with few basic infrastruc- major effort for us, requiring a concerted push from the
ture services (e.g., employee hiring and recruiting, purchasing, top and Significant infrastructure investment.
desktop support, and telecommunications), then encompassing
• Our business lacks agility-every new strategic initiative is
basic transaction processes (sales, accounts payable), and eventu-
like starting from scratch.
ally including unique and distinguishing business capabilities.
Building a foundation doesn't focus only on competitively dis- • IT is consistently a bottleneck.
tinctive capabilities-it also reqUires rationalizing and digitizing
• There are different business processes completing the same
the mundane, everyday processes that a company has to get right activity across the company, each with a different system.
to stay in business. 6
Paradoxically, digitizing core business processes makes the • Information needed to make key product and customer
individual processes less flexible while making a company more decisions is not available.
• A significant part of people's jobs is to take data from one foundation for execution. And the company's data, one of its
set of systems, manipulate it, and enter it into other systems. most important assets, is patchy, error-prone, and not up to date.
Companies often extract from silos to aggregate data from multi-
• Senior management dreads discussing IT agenda items.
ple systems in a data warehouse (the cloud in figure 1-1). But the
• We don't know whether our company gets good value warehouse is useful only as a reference-it does not offer real-time
from IT. data across applications.
The many squiggly lines in figure 1-1 reflect efforts to inte-
As those comments suggest, companies without an effective grate isolated systems supporting an end-to-end process. One IT
foundation for execution face serious competitive and regulatory executive in an investment banking company claimed that 80 per-
I
threats. cent of his company's programming code was dedicated to linking

An effective foundation for execution depends on tight align- disparate systems, as opposed to creating new capabilities. This
ment between business objectives and IT capabilities. Toward that executive bragged that his developers were able to link together
end, most companies put in business processes and IT systems systems so effectively that no human being ever touched a trans-
using a fairly straightforward logic. First, management defines a action-every process was supported end-to-end by meticulously
strategic directioni then the IT unit, ideally in conjunction with
business management, designs a set of IT-enabled solutions to
support the initiativei and, finally, the IT unit delivers the appli-
cations, data, and technology infrastructure to implement the SO" . FIGURE 1-1
lutions. The process starts over each time management defines

Capability from traditional approach to IT solutions
another strategic initiative.
This process goes wrong in at least three ways. First, the strat-
egy isn't always clear enough to act upon. General statements about
the importance of "leveraging synergies" or "getting close to the Corporate data
customer" are difficult to implement. So the company builds IT
solutions rather than IT capabilities. Second, even if the strategy is
clear enough to act upon, the company implements it in a piece- Data
meal, sequential process. Each strategiC initiative results in a sep-
arate IT solution, each implemented on a different technology. Applications
Third, because IT is always reacting to the latest strategic initia-
Technology
tive, IT is always a bottleneck. IT never becomes an asset shaping platforms
future strategic opportunities.
Figure 1-1 shows the combined effect of traditional approaches Corporate networks and infrastructure services
to IT development-a set of silos. Individually, the applications
work fine. Together, they hinder companies' efforts to coordinate
© 2005 MIT Sloan Center for Information Systems Research and IMD. Used with permission.
customer, supplier, and employee processes-they do not form a
integrated silo applications. But then he noted, "It's a miracle they importance of process integration. Management also
work." Eventually this company's lack of a foundation for execu- must decide on the appropriate level of business process
tion made it a juicy takeover target. Today these systems are being standardization (Le., the extent to which business units
replaced with those of the acquiring company. will perform the same processes the same way). Process
Few companies are comfortable with a dependency on mira- standardization creates efficiencies across business units
cles. They want technology to reliably support existing processes. but limits opportunities to customize services. The operat-
What's more, they'd like their existing technology to enable fu- ing model involves a commitment to how the company
ture capabilities. These companies need to take a different approach will operate.
to implementing IT-enabled business processes.
2. Enterprise architecture. The enterprise architecture is the orga-
nizing logic for business processes and IT infrastructure,
How Do You Build a reflecting the integration and standardization require-
Foundation for Execution? ments of the company's operating model. The enterprise
architecture provides a long-term view of a company's
The foundation for execution results from carefully selecting which processes, systems, and technologies so that individual
processes and IT systems to standardize and integrate. Just as hu- projects can build capabilities-not just fulfill immediate
mans must learn how to ride a bicycle (and think hard about what needs. Companies go through four stages in learning how
they are doing while they are learning), the processes built intoa to take an enterprise architecture approach to designing
foundation for execution require a great deal of concentration- bUSiness processes: Business Silos, Standardized Technol-
for a while. Eventually routine business activities-just like biCY- ogy, Optimized Core, and Business Modularity. As a com-
cle riding-become automa!ic. Outcomes become predictable. The pany advances through the stages, its foundation for
foundation for execution takes on another layer. A company's iden- execution takes on increased strategic importance.
tity becomes clearer, and executives can focus their attention on
3. IT engagement model. The IT engagement model is the sys-
the future.
tem of governance mechanisms that ensure business and
To build an effective foundation for execution, companies must
IT projects achieve both local and companywide objec-
master three key disciplines:
tives. The IT engagement model influences project deci-
1. Operating model. The operating model is the necessary level sions so that individual solutions are guided by the
of business process integration and standardization for de- enterprise architecture. The engagement model provides
livering goods and services to customers. Different compa- for alignment between the IT and business objectives of
nies have different levels of process integration across projects, and coordinates the IT and business process deci-
their business units (Le., the extent to which business sions made at multiple organizational levels (e.g., compa-
units share data). Integration enables end-to-end process- nywide, business unit, project). To do so, the model
ing and a single face to the customer, but it forces a com- establishes linkages between senior-level IT decisions, such
mon understanding of data across diverse business units. as project prioritization and companywide process design,
Thus, companies need to make overt decisions about the and project-level implementation decisions.
FIGURE 1-2
able twenty years ago and will be just as valuable twenty years
Creating and exploiting the foundation for execution from now. But there are a number of more-recent developments
that highlight the increasing importance of a foundation for exe-
Strategic
cution. Companies without a solid foundation face a number of
initiatives serious risks that weren't present just ten years ago.
Operating model
Growing Complexity in Companies' Systems
Defines Can Fossilize Operations
integration and Enterprise architecture
standardization
requirements As with the investment bank whose systems were so complex that
Updates and evolves
it was a miracle they worked, legacy systems cobbled together to
Defines core capabilities
architecture respond to each new business initiative create rigidity and exces-
Engagement model sive costs. The Internet boom exposed the inflexibility of many
companies' technology and process environments, which led to
Foundation for execution an inability to adapt to new channels. This inflexibility was not
• Core business processes the result of a digitized foundation for execution. It was the re-
• IT infrastructure
sult of systems so complex that any change required individually
rewiring systems to all the other systems Jhey connect to. Devel-
oping and testing new capabilities in such a complex environment
is time consuming, and every change becomes a risky, expensive
adventure.
Figure 1-2 illustrates how companies apply these three disci- The complexity has not added value. Most managers can list
plines to create and exploit their foundation for execution. Based processes they perform in many different ways in multiple parts
on the vision of how the company will operate (the operating of the company and support with many different systems. As
model), business and IT leaders define key'architectural require- more competitors aggressively pursue reuse of standard processes
ments of the foundation for execution (the enterprise architec- and systems across their product lines, services, or business units,
ture). Then, as business leaders identify business initiatives, the IT the inefficiencies of non-value-added variations create strategic
engagement model specifies how each project benefits from, and disadvantages. The CIO at a $5 billion manufacturing company
contributes to, the foundation for execution. reported that a global implementation of three modules of a large,
packaged enterprise resource planning system (make to ship, ac-
Why Is a Foundation for count to report, and order to cash) eliminated 450 application.s
Execution Important? and 3,150 interfaces, mostly by eliminating redundancy. Imple-
menting standardized, digitized processes carries costs, particu-
Our research found that companies with a solid foundation had larly those associated with organizational change, but the benefits
higher profitability, faster time to market, and lower IT costs. These are Simpler technology environments, lower-cost operations, and
outcomes are universally beneficial and timeless-they were valu- greater agility. 8
12 ENTERPRISE ARCHITECTURE AS STRATEGY
To Execute Your Strategy, First Build Your Foundation 13
Business Agility Increasingly Depends on For many companies, new regulations mean massive expen-
a Foundation for Execution ditures with no added value. But companies with a solid founda-
tion for execution have more transparent information and the
Business agility is becoming a strategic necessity. Greater global- ability to access data more qUickly. For example, a financial ser-
ization, increasing regulation, and faster cycle times all demand an vices company executive commented that Sarbanes-Oxley had
ability to quickly change organizational processes. Managers cannot involved any system changes in his company; the required
not predict what will change, but they can predict some things data was already available due to processes the company had im-
that won't change. And if they digitize what is not changing, they plemented. Companies may not be able to anticipate new regula-
can focus on what is changing. In this way the foundation for ex- tions, but they can increase the likelihood that needed data is
ecution becomes a foundation for agility. readily available or can easily be accumulated.
There are many types of agility, but one indicator of agility is
a company's percentage of revenue generated from new products.
Our research on 147 companies found that, from 1998 to 2002, on Building a Foundation Is Less Risky
average, 24 percent of a company's sales were from new products and Expensive Than the Alternative
introduced in the prior three years. But this percentage varied
greatly from company to company-even between those in the Many managers, scarred by their experiences in the late 1990s
same industry. For example, in manufacturing the average was with enterprise resource planning system implementations, think
24 percent. However, a third of companies achieved SO percent that implementing improvements is going to be an expensive,
of sales from new products introduced in the prior three years.9 risky proposition. 11 However, as we will describe in chapter 6, most
These more-agile companies also had a high percentage of their companies don't have to make massive investments in their foun-
core business processes digitized. While there are many possible dation. The foundation for execution can be implemented one
explanations for differences in a single type of agility, having a project at a time. By spending smarter rather than more, compa-
digitized foundation for execution probably enabled managers in nies can use ongoing projects to steadily b\lild their foundation
these companies to spend more time on what products for execution. And as the foundation gets built, IT costs decrease
would succeed and then bringing those products to market. and business efficiencies increase, paying dividends on the origi-
nal investment.
Current National and Political Environments

Demand Business Discipline How Does a Foundation for
Companies are buffeted by constant changes in regulations, such 'Execution Create Business Value?
as Sarbanes-Oxley, Basel II, and HIPAA.lO As companies become To illustrate the concept of a foundation for execution and its po-
more global, they become accountable for increasingly complex tential impact on a company, we provide two brief case studies.
reporting requirements. And some industries, particularly health The first is on UPS, a company well known for its use of IT in bUsi-
care and financial services, face different laws and regulations in ness processes. UPS has been building and leveraging its founda-
different regions of the same country. tion for execution since the late 1980s.
FIGURE 1-3
ups: Building New Services on a Solid Foundation
UPS's foundation for execution
Around 1986 senior management at UPS became concerned about
the company's inability to respond to competitors' technology- Flex Global View UPS
Trade
based market initiatives. UPS had dominated the U.S. package deliv- UPS Store Direct
ery market for much of its eighty years, but management recognized Defines strategic limits
that the company would need a strong IT capability to compete in Industrial engineering model. Projects
focused on
the future. Over the next ten years, UPS built a foundation for ex- enhancing
High degree of reliability and
ecution that has permitted it to seize global market opportunities integration and Enterprise architecture
efficiency of
not only in package delivery but also in a variety of related areas. standardization package
delivery
Although its immediate concern was package tracking (Le.,
Updates and evolves
reporting on the whereabouts of a package in transit), UPS set out Defines core capabilities
architecture
to build a foundation for execution embodying its industrial- IT investment process,
architecture compliance, core process owners
engineering tradition (figure 1-3). The company has long employed
a large staff of industrial engineers who study efficiency and de-
• Four core standard processes • Single package database
sign optimal business processes. Industrial engineers have speci- • High integration • Global telecommunications capability
• Standard interfaces • Standard global IT infrastructure
fied efficient processes for a wide range of tasks at UPS, including
which foot a driver should put into the truck first. The company Source: Researcher interpretation.
implements these processes as global standards. Thus, when the © 2005 MIT Sloan Center for Information Systems Research and IMD. Used with permission.
company was debating the requirements of an IT capability, it was

clear to all key decision makers that systems would have to support
UPS's global process standards. In addition, management agreed
that the nature of package delivery dema.J1ded highly integrated
systems, so that a package could not be lost·.en route. On the business process side, senior management defined four
UPS's new CIO and his staff developed an enterprise archi- core processes: package delivery, product development, customer re-
tecture to reflect the company's goals. A key characteristic of the lationship management, and customer information management.
enterprise architecture was the specification for a single package UPS standardized tasks within these processes as appropriate so
database. The CIO did not want multiple package databases, which that new initiatives could leverage existing capabilities. Starting
would risk the integrity of the data. The CIO's team also empha- from package tracking and related core processes, UPS leveraged
sized the need for a global telecommunications capability so that its systems and process capabilities first by adding channels, such
the package data could be captured and accessed from anywhere a as the Internet. Then UPS expanded into new services. For exam-
package might be picked up or delivered. The company developed ple, Flex Global View allowed customers to receive advance noti-
strict rules about architectural standards, and IT was authorized to fication of incoming packages and to track packages traveling with
enforce the rules whenever a breach could compromise reliability freight forwarders or other UPS partners. Flex Global View also
or efficiency. notified customers if any packages would arrive late. Building on
these capabilities, UPS grew from a package delivery company into 1999, the District of Columbia was half a billion dollars in debt. Its
a global commerce company. UPS Trade Direct, one of the com- public services were ranked at the bottom of big-city service rat-
pany's newer offerings, provides integrated door-to-door service for ings, and control of the district's administration was in the hands
international packages, including consolidated billing, customs bro- of a federally appointed board. Citizens complained of poor ser-
kerage and clearance, and international package tracking. vice: the process of registering a car could take a full day, and small-
UPS's innovations build on or leverage its existing foundation business owners often hired experts to represent them in the maze
for execution and create new opportunities. Because of the strate- of offices at the Department of Consumer and Regulatory Affairs.
gic importance of IT at UPS, IT leaders are consistently involved in Mayor Williams committed to turning the district around and
strategy discussions and propose new products and services based improving services to the city's residents and visitors. The CTO,
on existing capabilities. Regarding the IT unit's input to strategy Suzanne Peck, recognized that as a public service-as opposed to
discussions, Mike Eskew, UPS's CEO comments, "I get that kind of a business-the district's customers had no choice about interact-
happy surprise from IT all the time." 12 Happy surprises from IT- ing with its agencies. If residents wanted a license, or dog tags, or
that's what a foundation for execution has done for UPS. to pay their taxes, they had to deal with the government agencies.
The Williams administration's goal was to make these interac-
tions as pleasant and efficient as possible. Consequently, the CTO
Washington, D.C.: Customer-Focused Service Delivery
adopted the following set of operating tenets for interactions with
Throughout the book we mostly refer to the needs of companies. constituents:
But the principles of the foundation for execution are equally rel-
• A single point of entry. All citizen requests must be routed
evant for public and private companies, government agencies,
to a central point of entry so that citizens are not left to
and not-for-profit organizations. Performance objectives and some
wander helplessly among. seventy-four agencies to find
metrics may differ by type of organization, but the need to enable
what they need.
efficient, reliable, agile operations is the same. The government of
the District of Columbia has been bUildinga foundation for exe- • Guaranteed closure. All citizens must be assured that their
cution since 1999. Organizations of all kinds',might find its expe- requests, once submitted, will be fulfilled, no matter
rience instructive. which agency or how many agencies are involved in the
Excluding its public school system, Washington, D.C., has transaction.
21,000 employees and a $5.4 billion budget, managed by an ap-
pOinted city administrator who is accountable to the mayor and • Benign service delivery. Residents have no choice but to deal
the D.C. council. Services are provided through seventy-four oper- with government, so the CTO's office will make dealing
ating agencies, ten of which provide centralized administrative ser- with the government as positive as possible. Peck empha-
vices (e.g., purchasing, human resources, information technology, sized the goal of benign service delivery: "As a District, the
legal services), and sixty-four of which provide customer-facing finest thing I can do for you, the reSidents, is to give you
services (e.g., law enforcement, children's services, transportation). benign service delivery. I can make it easy for you to deal
When Anthony Williams was inaugurated as mayor in January with me. I can make it not horrible." 13
The district's operating model-including its concept of benign Before beginning any major application process improvements,
service delivery-called for standardization of common processes. Peck focused on first stabilizing operations and developing some
The operating model also provided for end-to-end integration of core infrastructure services, including WAN and wireless services;
processes, as well as data sharing, between related agencies (figure the consolidation of servers, storage, and software; and the intro-
1-4). At the heart of the district's enterprise architecture are nine duction of disciplined management practices such as development
service modernization programs, which represent functional clus- standards. The new infrastructure services introduced cost savings
ters of the district's multiagency systems. Each of the district's 370 and new capabilities. For example, the cost of telephony services de-
systems fits functionally into one of those nine programs: admin- creased by 33 percent while capacity increased by a factor of 1,600.
istrative, customer, educational, enforcement, financial, human, mo- The first major application improvement project was the ad-
torist, property, and transportation services. The service programs ministrative services program. Although administrative services was
create standard, multiagency, end-to-end processes for the district. not customer facing, the agencies that were customer facing re-
ported that poor administrative services-such as snafus in hiring,
lost grant applications, and purchasing difficulties-were severely
FIGURE 1-4
hindering their ability to service customers. As with all improve-
D.C. government's foundation for execution ments, the first step was to define a concept of operations that de-
scribed the desired customer experience with the service.
Administrative services
The administrative services modernization program kicked off
>1 E-government applications 1
modernization program in 2001 as a five-year $71 million program with measurable cost
I PSMPI
Human services savings of $150 million. An architecture review board reviewed each
modernization program I TSMPI
concept of operations for architectural compliance and continued
to monitor the architecture throughout the implementation of each
Benign service model
new process. In the third year of the program, management had
Process already documented $50 million in annual cost savings due to im-
standardization
Enterprise architel?ture
across programs; proved procurement, recruiting and hiring, and related services.
Integration within
and between programs The district has been initiating new projects incrementally,
Updates and evolves
building on its experiences with prior projects, and reusing infra-
Defines core capabilities
architecture structure introduced for one project in subsequent projects. For
example, the office of the eTO is building a portal that has be-
come a interface as new services are introduced. The D.C. gov-
• Sounds of silence operations • IT development standards
ernment's Web site grew from twenty pages in 1999 to almost
• Wide area and wireless networks • Data warehouse 200,000 in 2005. The Web site transformed from a public embar-
• Procurement processes • Web portal
• Human resource processes • Geographic information system rassment to one that Government Technology magazine named the
number one Web portal in government. More important, in just a
Source: Researcher interpretation.
few years, the D.C. government has gone, in the words of Suzanne
Peck, 1/ from worst to first."
Goals and Overview of the Book 10,800 stores in Japan. Worldwide 7-ElevenJapan has
28,000 stores and annual revenues of ¥25,OOO billion (ap-
UPS's experience with happy surprises from IT and its ability to prox US$22 billion). Gross margins per store have increased
design new products and services that leverage its foundation for from 5 percent to more than 30 percent from 1977 to 2004.
execution is exceptional relative to most companies we've stud- Management has reduced stock turnover from 25.5 days in
ied. But, like the District of Columbia government, companies are 1977 to fewer than 8.7 days in 2004.1 4
increasingly experiencing incremental, but significant, operating
improvements as they build and leverage a foundation for execu- • TD Banknorth: Forbes's "best managed" bank for 2004, due
tion. Building a foundation is not a quick or easy process. This to the company's steady earnings growth of 10 percent or
book is a call to action for those companies that have not yet more. TD Banknorth has acquired twenty-six banks in the
started on this journey and a handbook for those who are in the past eleven years, and since 1989, it has grown from $2
midst of building their foundation. In this book we describe how billion to $32 billion. TD Banknorth is second among banks
to (1) define an operating model, (2) design and implement an en- in the Fortune 1000 in total return to shareholders (a 37%
terprise architecture, and (3) adopt an IT engagement model. In annual rate from 1991 to 2001).15
doing so, we describe how your company can achieve greatness
This book is intended for senior managers who have-or
with a foundation for execution.
believe they should take-responsibility for developing and over-
Companies that build a solid foundation for execution do
seeing their company's foundation for execution. Business execu-
achieve greatness. Throughout this book we will describe the IT
tives should finish this book with a clear understanding of what
and business process capabilities of companies generating strate-
they need to do to lead the change and engage their business and
gic benefits from their foundations. These companies include the
following: IT colleagues in discussions on how to create a foundation for ex-
ecution. IT executives should finish this book with a clear frame of
• ING DIRECT: the number one direct bank (in terms of re- reference for their work and the tools to successfully work with
tail funds entrusted) in everyone of th,e nine countries in their business colleagues. Building a foundation for execution re-
which it operates. ING DIRECT's operational costs are only quires extraordinary IT-business alignment, so both IT and busi-
0.43 percent of assets, as compared to 2.5 percent for a ness leaders need to exert influence on the process. The result is
typical full-service bank, allowing the company to offer worth the trouble.
higher savings rates and lower-cost loans than other The structure of the book is as follows:
banks. The result has been phenomenal growth. In the
first quarter of 2005, ING DIRECT grew an average of • Chapter 2: Define Your Operating Model. In chapter 2 we
250,000 new customers and more than $5 billion in new introduce the first discipline for creating the foundation
assets each month. for execution: the operating model and its two key dimen-
sions-business process standardization and integration.
• 7-Eleven Japan: the most profitable retailer in Japan and Four different types of operating models are described: Uni-
the eighth-largest retailer in the world. Since its inception fication, Coordination, Replication, and Diversification. We
as a single store in 1973, 7-ElevenJapan has grown to explore how the operating model concept is applied to both
To Execute Your Strategy, First Build Your Foundation 23
companies and business units. Case studies of JM Family study of Schindler illustrates how the role of the CIO
Enterprises, Merrill Lynch, Dow Chemical, TD Banknorth, evolves as companies move through the maturity stages.
and Schneider National provide examples of different op-
• Chapter 6: Build the Foundation One Project at a Time. In chap-
erating models.
ter 6 we introduce the third discipline for creating the foun-
• Chapter 3: Implement the Operating Model Via Enterprise Archi- dation for execution: the IT engagement model. The IT
tecture. In chapter 3 we introduce the second discipline for engagement model has three ingredients: IT governance,
creating the foundation for execution: the enterprise archi- project management, and linkages connecting the two.
tecture. The key elements-digitized business processes, IT A good engagement model enables a company to build its
infrastructure, shared data, and customer interfaces-are foundation one project at a time. Case studies of Raytheon
identified and linked in the enterprise architecture. The and Toyota Motor Marketing Europe illustrate the different
one-page core diagram is introduced, and comparative dia- ingredients of the model.
grams are developed for each of the four operating models.
• Chapter 7: Use Enterprise Architecture to Guide Outsourcing.
Four case studies of firms and their enterprise architecture
In chapter 7 we describe how outsourcing can contribute
designs illustrate effective practices: MetLife, ING DIRECT,
to enterprise architecture maturity but warn that outsourc-
Carlson Companies, and Delta Air Lines.
ing success is far from guaranteed. To improve the likeli-
• Chapter 4: Navigate the Stages of Enterprise Architecture Matu- hood of success, we show how to use the operating model
rity. In chapter 4 we introduce the four stages of enterprise and enterprise architecture to determine what and when
architecture maturity: Business Silos, Standardized Technol- to outsource. We distinguish between three different types
ogy, Optimized Core, and Business Modularity. Companies of outsourcing-strategic partnerships, co sourcing al-
traverse these stages as they learn new organizational liances, and transaction relationships. Analyzing the expe-
processes and change their IT investment practices. We riences of Campbell Soup Co. and the City of Liverpool,
describe how the strategic value of IT,evolves as compa- we discuss how outsourcing can affect enterprise architec-
nies mature their enterprise architectu'r,es. A number of ture, and vice versa. A case study illustrates how Dow
short examples illustrate the concepts, and we conclude Chemical aggressively uses outsourcing-driven by its en-
with a discussion of how to apply the architecture stages terprise architecture-to move to what it calls the "Feder-
in your company. ated Broker Model."
• Chapter 5: Cash In on the Learning. In chapterS we explain • Chapter 8: Now-Exploit Your Foundation for Profitable Growth.
how companies get unique business benefits at each of the In chapter 8 we make the urgent case for increased agility
four stages of maturity by using various management prac- in companies that must compete in a global economy. Case
tices and roles. We explain how achieving these benefits studies of UPS, 7-ElevenJapan, and MetLife illustrate the
reqUires implementing different management mechanisms growth potential of different operating models. A case study
at each stage to formalize organizational learning. A case of CEMEX highlights the architectural challenges created
by acquisitions. We close the chapter with a look at what's

coming next-the fifth stage of architecture maturity.
• Chapter 9: Take Charge! The Leadership Agenda. Chapter 9

summarizes the key ideas in the book with a review of the
symptoms of an ineffective foundation for execution. We 2
follow with a set of six steps for rethinking your foundation
for execution. Then we provide ten leadership principles
for building and leveraging a foundation for execution.
Define Your
Operating Model
GENERAL H. NORMAN SCHWARZKOPF once observed, "Lead-

ership is a potent combination of strategy and character. But if
you must be without one, be without the strategy."l Few business
executives would be comfortable leading without a strategy. Busi-
ness strategy provides direction, an impetus for action. Most com-
panies also rely on strategy to guide IT investments. Accordingly,
IT executives work to align IT and IT-enabled business processes
with stated business strategy. But IT strategic alignment
can be an elusive goal.
Business strategies are multifaceted, encompassing decisions
as to which markets to compete in, how to position the company
in each market, and which capabilities to develop and leverage. In
addition, strategic priorities can shift as companies attempt to re-
spond to,competitor initiatives or to seize new opportunities. As a
result, strategy rarely offers clear direction for development of sta-
ble IT infrastructure and business process capabilities.
To best support a company's strategy, we recommend that the
company define an operating model. An operating model is the
necessary level of business process integration and standardiza-
tion for delivering goods and services to customers. An operating
2S
/
26 ENTERPRISE ARCHITECTURE AS STRATEGY Define Your Operating Model 27
model describes how a company wants to thrive and grow. By pro- and strategic agility (29%) than companies that had not devel-
viding a more stable and actionable view of the company than oped a foundation for execution. 3
strategy, the operating model drives the design of the foundation In this chapter we will first define the dimensions of the oper-
for execution. ating model-standardization and integration-and then describe
The choice of an operating model is a critical decision for a the four types of operating models: Diversification, Coordination,
company. It's the first step in building a foundation for execution. Unification, and Replication. We will describe the critical compo-
An operating model enables rapid implementation of a range of nents of each model and show how an operating model shapes
strategic initiatives. But that same operating model will fail to sup- future strategiC choices. We will then discuss important consider-
port initiatives that are inconsistent with the assumptions it's ations in choosing an operating model.
built on. Thus, the operating model is a choice about what strate-
gies are going to be supported. Take, for example, the ease with
Integration and Standardization:
which Charles Schwab introduced online brokerage relative to
Key Dimensions of an Operating Model
Morgan Stanley. Schwab had already implemented low-touch sys-
tems and processes. In contrast, Morgan Stanley had built its ca- An operating model has two dimensions: business process stan-
pabilities for more customer-intimate (and higher-cost) operations. dardization and integration. Although we often think of standard-
Similarly, Amazon could add consumer products to its product list ization and integration as two sides of the same coin, they impose
because its operating model highlighted its capabilities in distri- different demands. Executives need to recognize standardization
bution and online customer interactions. Barnes & Noble's oper- and integration as two separate decisions.
ating model was ill-suited to online sales but adapted easily to a Standardization of business processes and related systems means
partnership with Starbucks, which enhanced its customers' in- defining exactly how a process will be executed regardless of who
store shopping experience. is performing the process or where it is completed. Process stan-
The operating model deCision (or lack thereof) has a profound dardization delivers efficiency and predictability across the com-
impact on how a company implements business processes and IT pany. For example, using a standard processfor selIing-products or
infrastructure. A company without a clear model brings buying supplies allows the activities of different business units to
no automated, preexisting, low-cost capabilities to a new strategic be measured, compared, and improved. The result of standard-
pursuit. Instead, with each new strategic initiative the company ization-a reduction in variability-can be dramatic increases in
must effectively begin anew to identify its key capabilities. But se- throughput and efficiency.
lecting an operating model is a commitment to a way of doing Yet greater standardization has a cost. In exchange for increased
business. That can be a daunting choice. predictabUity, standardized processes necessarily limit local inno-
Our research suggests the payoff for making that choice can be vation. And the transition to standardization usually requires that
huge. Companies with a foundation for execution supporting an perfectly good (and occasionally superior) systems and processes
operating model reported 17 percent greater strategic effectiveness be ripped out and replaced by the new standard. This can be po-
than other companies-a metric positively correlated with prof- litically difficult and expensive.
itability.2 These companies also reported higher operational effi- Integration links the efforts of organizational units through
ciency (31 %), customer intimacy (33%), product leadership (34%), shared data. This sharing of data can be between processes to
Define Your Operating Model 29
The four general types of operating models are:

enable end-to-end transaction processing, or across processes
to allow the company to present a single face to customers. For 1. Diversification (low standardization, low integration)
example, an automobile manufacturer may decide to integrate
2. Coordination (low standardization, high integration)
processes so that when a sale is recorded, the car is reserved from
among the cars currently in production. By seamlessly sharing 3. Replication (high standardization, low integration)
data between the order management and manufacturing schedul-
4. Unification (high standardization, high integration)
ing processes, the company improves its internal integration and,
consequently, its customer service. In financial services, sharing
data across processes enables a loan officer to review a customer's
checking, savings, and brokerage accounts with the bank, proVid- FIGURE 2-1
ing better information about the customer's financial situation Characteristics of four operating models
and enabling better risk assessments for loans.
The benefits of integration include increased efficiency, coor- Unification
Coordination
dination, transparency, and agility. An integrated set of business • Shared customers, products, or • Customers and suppliers may be
suppliers local or global
processes can improve customer service, provide management • Impact on other business unit • Globally integrated business processes
often with support of enterprise
with better information to make decisions, and allow changes in transactions
systems
• Operationally unique business units
• Business units with similar or over-
one part of the business to alert other parts of actions they need to .r::
or functions
lapping operations
CJ) • Autonomous business management
take. Integration can also speed up the overall flow of information I • Business unit control over business • Centralized managemen,t often
applying functional/process/business
process design
and transactions through a company. c
0 • Shared customer/supplier/product unit matrices
• High-level process owners design
The biggest challenge of integration is usually around data. data
• Consensus processes for designing standardized processes
Cl
• Centrally mandated databases
End-to-end integration requires companies to develop standard IT infrastructure services; IT applica-
• IT decisions made centrally
tion decisions made in business units
definitions and formats for data that will be shared across business VI
VI
Q)
(J
units or functions. For business units to share customer informa- ec- Diversification ReplicatiO,n
• Few, if any, shared customers
• Few, if any, shared customers or
tion, they must agree on its format. Similarly, they must share a VI
VI
Q) suppliers
• Independent transactions aggregated
c • Independent transactions at a high level
common definition for terms like sale, which can be said to occur 'iii
:::I • Operationally unique business units • Operationally similar business units
IQ • Autonomous business unit leaders
when a contract is signed, when money is paid, or when product • Autonomous business management
with limited discretion over processes
• Business unit control over business
• Centralized (or federal) control over
is delivered. These can be difficult, time-consuming decisions. process design
business process design
• Few data standards across business
• Standardized data definitions but data
units
• Most IT decisions made within locally owned with some aggregation
Four Types of Operating Models busihess units at corporate
• Centrally mandated IT services
We have developed a straightforward two-dimensional model with

four quadrants, representing different combinations of the levels Low
Business process standardization
of business process integration and standardization (figure 2-1).
Every company should position itself in one of these quadrants to © 2005 MIT Sloan Center for Information Systems Research. Used with permission.
clarify how it intends to deliver goods and services to customers.

Companies adopt an operating model at the enterprise level and 2. World Omni Financial Corp. (WOFC) is a diversified finan-
may adopt different operating models at the division, business cial services company that provides a broad range of fi-
unit, region, or other level. To decide which quadrant your com- nancial products and services to consumers, dealers, and
pany (or business unit) belongs in, ask yourself two questions: lenders. Its offerings include automotive financial prod-
1. To what extent is the successful completion of one busi- ucts and services, third-party servicing solutions, whole-
ness unit's transactions dependent on the availability, sale floor-plan accounting and risk management systems,
accuracy, and timeliness of other business units' data? full-service inspection, automated risk decision software,
and automotive remarketing services.
2. To what extent does the company benefit by having busi-
ness units run their operations in the same way? 3. JM&A Group offers a variety of automotive finance and in-
surance (F&I) products and services, such as new- and used-
The first question determines your integration requirements;
vehicle protection plans, used-vehicle certification programs,
the second, your standardization requirements. What operating
prepaid maintenance plans, credit life and disability insur-
model you choose will drive important design decisions around
ance, and F&I training and consulting services.
the autonomy of business unit managers and the role of IT. Com-
pare your answers to the characteristics of each operating model 4. JM Lexus is the largest-volume retail dealership of Lexus
in figure 2-1 to see where your company fits. cars and sport-utility vehicles in the world.
The lower left quadrant of figure 2-2 describes JMFE's Diversi- ..

Diversification: Independence with Shared Services
fication operating model. Because the business units are synergis-
Diversification applies to companies whose business units have tic, they can generate business for one another. For example, JM
few common customers, suppliers, or ways of doing business. Lexus is a customer of JM&A; SET sells automobiles to dealers whose
Business units in diversified companies offer different products customers often finance those vehicles through WOFC; and WOFC
and services to different customers, so central management exer- offers loans to dealers to finance the in stock, helping in-
cises limited control over those business the Diversifica- crease orders to SET.
tion quadrant in figure 2-1). JMFE provides some centralized services to its business units
JM Family Enterprises CTMFE) has a Diversification operating through the JM Service Center. The largest of the shared ser-
model. Headquartered in Deerfield Beach, Florida, JMFE had rev- vices is IT; the others are procurement services, financial services,
enues of $8.2 billion in 2004, making it the United States' fifteenth- salon, fitness center, benefits administration, food services, corpo-
largest privately held company. 4 JMFE comprises four closely related rate staffing, distributive and document services, facilities, reloca-
businesses: tion, and dealer services. Motivation for forming shared services in
2001 included cutting costs on these services and realizing quick
1. Southeast Toyota Distributors (SET) serves more than 160 economies following expected acquisitions.
dealers in Florida, Georgia, Alabama, and North and South Historically, JMFE has grown primarily through the growth of
Carolina with vehicles, parts, and accessories. SET dealers individual business units. SET has become the world's largest fran-
sell approximately 20 percent of all Toyotas sold in the chised Toyota distributor, and WOFC is one of the world's largest
United States.
automotive finance companies. As JMFE's current markets become
FIGURE 2-2
saturated, the company is preparing to grow through acquisi-
Four operating model examples
tions-a common characteristic of Diversification companies. Be-
cause JMFE's business units are run autonomously, each of them
Coordination Unification has an operating model capturing its individual integration and
Merrill Lynch Global Private Client Dow Chemical
• Single face to customer through
standardization reqUirements. By building a foundation for exe-
• Local and global customers; global
multiple channels suppliers cution to support their individual operating models, these busi-
• Customer transactions are indepen- • Global manufacturing, financial, HR,
dent, but product data is shared order management, purchasing, cus- ness units contribute profitable growth to JMFE.
• Individual financial advisers own their tomer service, and other processes
customer relationships • Business units all support global
The organizing logic for Diversification companies is based on
• Financial advisers customize their
.s::
Ql interactions with customers
chemical research, development, synergies from related, but not integrated, business units. Business
I: and sales
• Financial advisers in 630 offices • Centralized management with matrixed units might create demand for one another or increase the com-
exercise local autonomy within bounds business unit/process/geographical
of their responsibilities management pany's brand recognition, which generates enterprisewide value
• Total Merrill platform provides shared • Centralized process design imple-
access to technology and data mented through ERP and corporate
despite autonomous management. Companies with a Diversifica-
• IT organization provides centralized process owners
technology standards tion model may pursue economies of scale through shared ser-
• Centrally mandated, single instance of
key databases vices, but they typically grow through the success of the individual
• IT decisions made through central
shared IT services organization business units and acquisitions of other related businesses.
Diversification Replication
JM Family Enterprises TD Banknorth
• Few shared customers or suppliers
Coordination: Seamless Access to Shared Data
• Few, if any, shared customers
• Mostly independent transactions with • Banks record independent customer
intercompany transactions at arm's
length
transactions aggregated centrally Coordination calls for high levels of integration but little stan-
• Banks decide locally how to serve
• Unique operations across business their customers while implementing dardization of processes. Business units in a Coordination com-
units , company practices
• Autonomous business unit heads • Growing companywide standard
pany share one or more of the following: customers, products,
reporting directly to CEO; arm's-length processes to increase efficiencies
transactions between business units and limit risk
suppliers, and partners. The benefits of integration can include
• Business unit control over business • New business processes designed integrated customer service, cross-selling, and transparency across
process design except for shared pro- centrally'
curement, HR, financial, dealer, and • Data locally owned; standard data supply chain processes. While key business processes are inte-
corporate services definitions accompanying process
• Few data standards across units standard implementations grated, however, business units have unique operations, often de-
• Shared IT services to realize • Assimilating existing IT systems of
economies of scale individual banks into central systems
manding unique capabilities.
For companies with a Coordination model, low cost is usually
not the primary driver in companywide decisions. Autonomous
Low High
Business process standardization business heads execute their processes in the most efficient man-
ner pOSSible, but corporate directives and negotiations focus on
© 2005 MIT Sloan Center for Information Systems Research. Used with permission.
providing the best service to the customer. Strong central man-
agement defines the need for cooperation. Successful companies
rely on incentive systems and management training to eflcourage
companywide thinking at the business unit level. (See the Coor-
dination quadrant of figure 2-1.)
34 ENTERPRISE ARCHITECTURE AS STRATEGY Define Your Operating Model 3S
Merrill Lynch, one of the world's largest financial services GPC's standard technology platform and access to shared busi-
companies, is composed of three major business units: the Global ness data enable the company to productively employ the largest
Markets & Investment Banking Group, Merrill Lynch Investment number of financial advisers in the industry. These financial advis-
Managers, and Global Private Client. Its Global Private Client (GPC) ers have the industry's best revenue per adviser, earnings per adviser,
business provides an example of a Coordination operating model and assets per adviser'?
(figure 2-2). GPC delivers wealth management products and ser- Like GPC, most companies in the Coordination quadrant can
vices to individuals and small businesses through more than 14,000 grow by extending their reach to defined customer segments in
financial advisers in approximately 630 offices around the world. new markets. They can also increase services to meet new, but re-
While financial advisers each serve their individual customers, their lated, customer demands. By integrating, but not standardizing,
services are integrated through what's called the Total Merrill plat- product lines or functions, the Coordination model fosters process
form, which gives all advisers access to the full range of Merrill expertise while enhancing customer service. This expertise attracts
products: commission- and fee-based investment accounts, credit new customers and sells more products to existing customers, thus
products, banking services, cash management and credit cards, trust enabling profitable growth.
and generational planning, consumer and small-business lending,
retirement services, and insurance products. s Replication: Standardized Independence
GPC focuses on delivering comprehensive, innovative solu-
tions to meet the financial needs of its target customers. These Replication models grant autonomy to business units but run op-
customers want to do business with Merrill Lynch through a vari- . erations in a highly standardized fashion. In a Replication model
ety of channels, such as the telephone call center, the Internet, the company's success is dependent on efficient, repeatable busi-
and advice-based interactions with financial advisers. In addition, ness processes rather than on shared customer relationships. The
customers want access to non-Merrill products. GPC's operating business units are not dependent on one another's transactions
model, therefore, coordinates services to its customers by provid- or datai the success of the company as a whole is dependent on
ing integrated access to products across customers and integrated global innovation and the efficiency of all business units imple-
access to customer data across products and',channels. Such ser- menting a set of standardized business processes. Accordingly, busi-
vice requires highly standardized product and customer data, but ness unit managers have limited discretion over business process
it allows financial advisers to customize their individual interac- design, even though they operate independently of other business
tions to the needs of their customers. Merrill Lynch calls its model units. McDonald's, like other franchise operations, provides a clear
providing "all things to some people," and customized service is reference point for a Replication model. (See the Replication quad-
important to retaining high-value customers. 6 rant of figure 2-1.)
Merrill Lynch's GPC grows by increasing the number of finan- TD Banknorth, one of the thirty-five largest commercial bank-
cial advisers who, with their access to product data, can identify ing companies in the United States, also provides an example of a
and then serve more customers. GPC also regularly innovates to Replication model (figure 2-2). Over the past decade, the company
expand its product line, recently adding products such as new has grown by a factor of ten from a small community bank to the
credit cards and loan management services. These new services largest bank headquartered in New England. TD Banknorth's core
help GPC provide a strong portfolio of products as it seeks to re- strategy is to grow through acquisitions of community banks with
tain its ability to provide a full range of services to clients. customer-focused corporate cultures. The company adds value by
36
ENTERPRISE ARCHITECTURE AS STRATEGY
introducing economies of scale and providing its banks' cus-

services by presenting integrated data and driving variability out
tomers with new and improved products.8
of business processes.
Founded in Vermont in 1824, TD Banknorth grew with the
Unification companies typically have integrated supply chains,
objective of understanding its customers better than anyone else.
creating interdependence between distributed business units. These
As a result, each local bank developed its own processes and infra-
business units share transaction data, often including global cus-
structures to meet the perceived needs of its specific customers.
tomer and supplier data. Standardized processes support global in-
But when John Petrey became the company's CIO in September
tegration and increase efficiency. The Unification operating model
2001, he set out to integrate and standardize its information tech-
often benefits from implementation of large packaged systems to
nology. Petrey created standardized processes for bringing new
banks onto TD Banknorth's foundation. support company standardization and integration requirements.
(See the Unification quadrant in figure 2-1.)
These new standardized processes are converting TD Banknorth
The Dow Chemical Company has adopted a Unification model
from a Diversification model, with independent operations in each
for its core chemicals-manufacturing business. 9 Founded in 1897,
of the company's banks, to a Replication model, in which banks
Dow Chemical develops and sells innovative chemical, plastic,
are run independently but with the same IT infrastructure and
and agricultural products and services to customers in more than
a set of standardized core processes. To facilitate this transition, a
175 countries around the world. From 1994 to 2004, despite a
new Enterprise Projects Committee, headed by COO Peter Verrill
downturn in the market, Dow nearly doubled its revenues while
reviews projects for their strategic impact in light of the
growing its employee base less than 10 percent-a productivity
focus on developing synergies across its banks. While Banknorth
of 8 percent per year. Management attributes much
looks for the efficiencies and predictability of standardized processes
of the company's success to its well-tuned globally integrated
it also aims to preserve the image of a community
processes (figure 2-2).
by retammg local decision making wherever feasible.
Managers at Dow estimate that approximately 60 percent of
Many Replication companies grow through acquisition like
the company's work processes are standardized. For example, fi-
TD Banknorth, but most Replication companies can also build new
nancial work processes are common around,the globe. Manufac-
businesses from scratch. Whether companies are growing organi-
turing has common processes for building plants, driven in part
or through acquisition, the Replicatiort model helps them
by the need for those facilities to be highly cost effective and en-
mcrease profits when management quickly installs its standard-
vironmentally secure. Standardized human resource processes allow
ized practices and technology foundation into a new unit and
Dow to do performance management and to plan salaries and in-
then allows a local manager to bUild the bUSiness.
centives around the globe in three weeks, equitably and transpar-
ently, even,taking into account multiple currencies and differing
Unification: Standardized, Integrated Processes rates of inflation. Finally, some supply chain work processes (e.g.,
order to cash) are globally standardized; others (e.g., planning and
When organizational units are tightly integrated around a stan-
scheduling) are specific to particular products or regiOns.
dardized set of processes, companies benefit from a Unification
Dow constantly reengineers processes to introduce greater
model. Companies applying this model find little benefit in busi-
standardization and automation, as appropriate. These efforts are
ness unit autonomy. They maximize effiCiencies and customer
intended, first and foremost, to cut costs, but they also increase
quality, safety, and security-other important organizational ob- FIGURE 2-3
jectives. Dow invests substantial resources in understanding the Different operating models position companies for different
costs of its processes and the impacts of its improvement efforts. types of growth
Dow sustains its integration and standardization through global
systems, such as SAP's enterprise resource planning system, and Coordination Unification
through a management structure that assigns owners to the vari- • Organic: stream of product
innovations easily made available to
• Organic: leverage economies of
c scale by introducing existing products/
ous global processes. Five of Dow's eight global processes are housed 0 .<: existing customers using existing services in new markets; grow product
i... 0>
I integrated channels line incrementally
in a shared services organization that includes IT, purchasing, sup- CI • Acquisition: can acquire new • Acquisition: can acquire competitors
customers for existing products but to leverage existing foundation; must
ply chain services, and customer service (including e-business), III must integrate data rip and replace infrastructure
III
along with expertise on Six-sigma and work processes. Dow's ma- Q)
()
trixed management structure, in which managers often report to e

Q.
Diversification Replication
III • Organic: small business units may • Organic: replicate best practices in
III
product and process heads or to product and geographic heads, Q)
C
feed core business; company grows new markets; innovations extended
'Iii through business unit growth globally
further encourages global integration. :::I
IX)
• Acquisition: unlimited opportunities; • Acquisition: can acquire competitors
must ensure shareholder value to expand market reach; must rip and
Unification companies invariably have highly centralized man- replace
agement environments. Management drives out inefficiencies and
Low High
then grows the company by leveraging economies of scale. Since
Business process standardization
minimizing variation is key to driving efficiencies, Unification is
best suited to companies whose products and services are largely © 2005 MIT Sloan Center for Information Systems Research. Used with permission.
commodities. Companies more focused on innovation may find

that the costs of standardization outweigh its benefits.
business with its own. But both the Unification and Replication
Applying the Operating Model models depend on leveraging processes already in place. Neither
model offers much leverage when a company chooses to expand
An operating model represents a general vision of how a company into synergistic, but operationally distinct, lines of business.
will enable and execute strategies. Each operating model presents The Diversification model imposes fewer constraints on the
different opportunities and challenges for growth. For example, the organiC growth of individual business units and fewer challenges
need to integrate business processes, as in Coordination and Uni- in an acquisition. But it also leverages fewer capabilities than the
fication operating models, makes acquisition more challenging other models, thus offering fewer opportunities to create share-
because the new company must reconcile disparate data definitions. holder value. Figure 2-3 summarizes the growth opportunities pre-
On the other hand, the process integration of the Coordination sented by each of the operating models.
and Unification models facilitates organic growth through expan-
sion into new markets or extensions of current product lines.
Deploying Operating Models at
Process standardization, as in Unification and Replication mod-
Different Organizational Levels
els, enables growth through a rip-and-replace approach to acquisi-
tions. When the acquisition is intended to create a mirror image, a Although most companies can identify processes fitting every op-
company can replace the systems and processes of the acquired erating model, they need to select a single operating model to guide
management thinking and system implementations. Management operating model is not well suited to its market realities, the com-
can then organize responsibilities for business units and IT based pany must shift to a new operating model. Shifting from one
on principles about how the company will operate most of the time. operating model to another is transformational. A transformation
One way companies respond to conflicting demands is to adopt disrupts a company, imposing new ways of thinking and behav-
different operating models at different organizational levels. For ing. l l But while companies would not want to regularly introduce
example, a company with a Diversification model, like JM Family new operating models, such changes are sometimes necessary.
Enterprises, often adopts different models in its business units.
Johnson & Johnson a&J) has long operated in the Diversifica- From Diversification to Unification:
tion quadrant. General managers in the company's more than 200 a European packaging company
operating companies have always had significant autonomy, and A European packaging company recognized a need to change
for most of]&]'s 100-plus years of existence, analysts believed that operating models in the late 1990s. 12 At the time, the company was
this decentralized management style was key to the company's suc- organized into separate country-based business units, each of which
cess. But as major global customers increasingly demand integra- was responsible for its own operations. Different countries had dif-
tion across multiple business units, J&J responds by introducing ferent enterprise resource planning (ERP) systems, order manage-
new organizational levels that can provide shared customer data ment processes, invoice formats, and even pricing. Each country
across subsets of related business units.l° made its own decisions about IT systems and data standards, which
J&],s U.S. pharmaceutical group applies a Coordination model, was a slow, inefficient, and expensive way to do business. Alarm-
presenting a single face to health-care professionals. In Europe, its ingly, management discovered some corporate customers were tak-
Janssen Pharmaceutical Products applies a Replication model, pro- ing the same order to multiple organizations to drive down the
viding low-cost, standardized processes for drug marketing, deliv- price by bidding one country-based unit against others!
ery, and monitoring. Having different operating models at different The management team decided its key operations were sales,
organizational levels allows J&J to meet the multiple objectives of order processing, new product introductions, and after-sales ser-
large, complex companies while keeping organizational design rea- vice. Management decided it could accomplish those operations
sonably simple at the individual operating cdmpany level. better with a Unification model than with a Diversification model.
Many companies in the Diversification quadrant, including The company didn't need to adopt a new strategy-it was still de-
DuPont, Citicorp, and General Electric, have multiple organiza- livering the same products to the same customers. The change in
tional levels, each adopting a different operating model so that operating model was designed to help it deliver products and ser-
it can simultaneously meet the company's and its own business vices faster, better, and more efficiently.
objectives. To transform its operating model, management replaced the
different order management systems in each country with a central
Transforming to a New Operating Model ERP system and process. The countries now enter orders through
a browser interface with one product list, price list, and order man-
An operating model helps define the range of strategic initiatives agement system for the entire business.
a company can readily pursue. As long as the operating model The company's new operating model dramatically reduced order
presents attractive options, it provides a stable approach for deliv- management cycle time, lowered operational costs, and increased
ering goods and services. If a company determines that its existing business flexibility and agility. In the old operating model, adding
a product with a new pricing structure required updating IS dif- company's existing foundation for execution. Trucking demands
ferent systems, which could take weeks. In the new system, one centralization, standardization, and integration to serve customers
central change is made, usually in a matter of hours. But the new who need reliable service delivery and accompanying informa-
operating model had dramatic effects on the power structure of tion. Schneider intended to provide localized, customized logis-
the company, making the transition difficult. In the old model, a tics services, managed by logistics representatives who would sit
country manager could, within limits, make independent deci- at customer sites and access local databases. Thus, the operating
sions about products, pricing, and promotions. That authority was platform that had regularly enabled innovation in the trucking
greatly reduced, and local managers naturally resisted the change. business was not a good fit for logistics. So when Schneider
Shifting from Diversification to Unification introduces trau- launched the logistics business, it did so with a new and separate
matic organizational change. As companies attempt to increase management structure and segregated IT processes and operations.
standardization and integration, they obsolete existing systems, Over time, Schneider has found synergies between its two
processes, and organizational structures and roles. Successful trans- businesses. In particular, the trucking business has benefited from
formations of this kind are costly, time consuming, risky-and some of the newer technologies introduced to support logistics.
sometimes necessary. As we saw with the packaging company, the But Schneider has two foundations for execution: one for the
rewards of the change can be substantial. Unification operating model of the trucking business and one for
the Replication operating model of the logistics business. As a
From Unification to Diversification:
whole, Schneider has a Diversification model with some shared
Schneider National
infrastructure and services to benefit both businesses. Companies
Schneider National, a large, privately held trucking company, with a core business adopting a Unification model, like Schneider,
built a strong Unification model in the early 1990s.1 3 Schneider may run out of opportunities to leverage that core. A Diversifica-
had highly standardized and integrated operations processes and tion model provides opportunities to feed the core business.
systems built around a centralized management model in which
most employees were based in Green Bay, Wisconsin. The company
The Operating Model as Company Vision
had long been recognized as an in the effective
use of IT. Schneider was the first trucking company to implement Focusing on the operating model rather than on individual busi-
satellite tracking systems and then the first to integrate its track- ness strategies gives a company better guidance for developing IT
ing systems with both operations and customer service applica- and business process capabilities. This stable foundation enables
tions. But management decided in the early nineties that many of IT to become a proactive-rather than reactive-force in identify-
the United States' SO,OOO trucking companies were dropping prices ing future strategic initiatives. In selecting an operating model,
and pushing down margins throughout the industry. Any person management defines the role of business process standardization
with a truck could go into the trucking business, making it in- and integration in the company's daily decisions and tasks.
creasingly difficult for Schneider to grow profitably. The operating model concept requires that management put
Responding to the requests of some of the company's key cus- a stake in the ground and declare which business processes will
tomers, Schneider decided to offer logistics services. Management distinguish a company from its competitors. A poor choice of
recognized that a new logistics business could not leverage the operating model-one that is not viable in a given market-will
have dire consequences. But not choosing an operating model is

just as risky. Without a clear operating model, management ca-
reens from one market opportunity to the next, unable to leverage
reusable capabilities. With a declared operating model, manage-
ment builds capabilities that can drive profitable growth. 3
Because the choice of an operating model guides development
of business and IT capabilities, it determines which strategic op-
portunities the company should,-and should not-seize. In other
words, the operating model, once in place, becomes a driver of Implement the
business strategy. In addition, the required architecture-as well
as the management thinking, practices, policies, and processes Operating Model via
characteristic of each operating model-is different from one op-
erating model to another. As a result, the operating model could Enterprise Architecture
be a key driver of the design of separate organizational units.
We encourage senior managers to debate their company's op-
erating model. This debate can force managers to articulate a vi-
sion for how the company will operate and how those operations
will distinguish the company in the marketplace. In clarifying IN 1884 Sarah Winchester, heiress to the Winchester Repeating
this vision, management provides critical direction for building a Arms Co. fortune, bought a six-room house in Santa Clara while
foundation for execution. it was still under construction. She quickly discarded the building
plans and instead met with her foreman every morning to de-
scribe the work she wanted done that day. With no master plan,
she kept twenty-two carpenters at work, year round-for thirty-
six years! The house had three elevators, forty-seven fireplaces,
rooms built around rooms, staircases leading to nowhere, doors
opening to blank walls, doors opening to steep drops to the lawn
below, and a variety of other curiosities. The house had every type
of heating technology available. The design is so complex that no
one knows for sure the number of rooms in the house-though
most counters agree it's around 160. 1
Crazy as it seems, the architecture of the Winchester House is
perfectly designed to meet the needs of its owner. Sarah Winchester
wanted to confound the spirits of the men who had been killed by
the Winchester rifle and might want to harm her. As companies
4S
46 ENTERPRISE ARCHITECTURE AS STRATEGY Implement the Operating Model via Enterprise Architecture 47
cobble together their systems and processes-year after year, often the core of a company's operations. Enterprise architecture directs
for more than thirty-six years-they run the risk of having an ar- the digitization of the foundation for execution.
chitecture much like Winchester House. But since few companies Unfortunately the term architecture has acquired a negative con-
are battling evil spirits, a confounding architecture may just be notation in some companies. Many companies have questioned
the result of poor management, rather than the intended chaos of the value of their architecture initiatives. Some of those initiatives
Sarah Winchester. are viewed as IT ivory towers that are isolated from business real-
Responding to market opportunities is critical to any busi- ity. The chief architect of a large telecommunications company
ness-particularly in new areas where the company must estab- confirmed this idea, saying, "Architectures, like fondue sets and
lish a presence and a value proposition quickly. For example, sandwich makers, are rarely used. We occasionally dig them. out
many companies sprang into action in response to the Internet and wonder why we ever spent the money on them."3
boom in early 2000. One such company was Manheim Auctions, In this chapter we discuss how to make enterprise architecture
a division of Cox Communications and the largest automobile a powerful management tool for aligning business and technol-
auction company in the world. In February 2000 Manheim Auc- ogy initiatives throughout a company. We define what we mean
tions launched Manheim Interactive, a business-to-business In- by the term enterprise architecture. We then show how four differ-
ternet company. By the end of its first year, Manheim Interactive ent organizations draw and describe their architecture. In doing
had 275 employees dedicated to rapidly building new, innovative so, we explain how companies convert the fairly general vision of
technology-based tools to help dealers, manufacturers, and other the operating model into a guide for their business processes and
automobile marketers manage the used-car remarketing process: IT capabilities.
The focus on rapid introduction of a stream of new products and
services superseded architectural concerns. Short-term, Manheim The Enterprise Architecture
Interactive generated the desired results from its efforts, but even-
tually, management had to examine the underlying architecture Enterprise architecture is the organizing logic for business processes
of its IT and business process capabilities. As Steve Crawford, di- and IT infrastructure reflecting the integration and standardiza-
rector of software development at Manheirrl.Interactive, explains, tion requirements of the company's operating model.
"The ability to always quickly respond eventually became a prob- Many companies attack the enterprise architecture exercise
lem. We became very good at scrambling to meet demands very with lots of drawings and analysis of both existing and hoped-for
quickly. But that has a cost and eventually we just said, 'Okay, systems capabilities. But massive analytical efforts do not focus re-
we're out of magic dust now. We need to rethink. 1II2 sources on what matters. The key to effective enterprise architec-
Companies looking to build a strong foundation for execution ture is to iclentify the processes, data, technologies, and customer
need more detail than the operating model provides-they need interfaces that take the operating model from vision to reality.
an enterprise architecture to guide their efforts. The operating The key elements of enterprise architecture are different for
model outlines, in general terms, the expectations for integration each of the four operating models. For JM Family Enterprises,
and standardization across business units; the enterprise architec- which runs its business units autonomously, the key element of
ture delineates the key processes, systems, and data composing enterprise architecture is its shared technology environment. For
guiding development of technical capabilities. However, they need

Distinguishing Between Enterprise to provide enough detail on how they will execute processes, and
what data those processes depend on, for the IT unit to develop
Architecture and IT Architecture
current solutions meeting long-term needs. A high-level enterprise
architecture creates shared understanding of how a company will
T he enterprise architecture core diagrams we describe in this operate, but the convergence of people, process, and technology
chapter are focused on communicating the high-level business necessary to implement that architecture demands shared under-
process and IT requirements of a company's operating model. They standing of processes and data at a more detailed level.
do not provide the necessary detail to map out technical or process The IT unit will develop far more detailed architectures of appli-
design requirements. The IT unit typically addresses four levels of cations, data and information, and technology.a When these draw-
architecture below the enterprise architecture: business process ar- ings elaborate on enterprise architecture, they have considerable
chitecture (the activities or tasks composing major business processes long-term value because they provide the long-term context for
identified by the business process owners); data or information immediate solutions. When IT units attempt to develop detailed ar-
architecture (shared data definitions); applications architecture (in- chitectures without a clear understanding of the company's enter-
dividual applications and their interfaces); and technology architec- prise architecture, they may have developed the equivalent of a
ture (infrastructure services and the technology standards they are fondue pot-an ornament rather than a tool.
built on).
a. Detailed architecture development conducted within the IT unit is an impor-
The term enterprise architecture can be confusing because the IT
tant element of building a foundation for execution. However, it is outside the
unit in some companies refers to one of these architectures-or the scope of this book. A variety of resources describe the IT unit's role in enterprise
set of all four architectures-as the enterprise architecture. Our use architecture. Some highlight one specific type of architecture (e.g., information
of the term refers to the high-level logic for business processes and or application architecture). For an overview of the IT unit's role, see Steven H.
Spewak, Enterprise Architecture Planning: Developing a Blueprint for Data, Applica-
IT capabilities.
tions, and Technology (New York: Wiley, 1993) or John A. Zachman, "A Frame-
For the most part, non-IT people need not he involved in the de- work for Information Systems Architecture," IBM Systems Journal 26, no. 3 (1987):
velopment of the detailed technical and applications architectures 276-292.
Merrill Lynch's Global Private Client, which works to meet the architecture is the set of standardized processes and shared data
total financial needs of each individual customer, the key element built on its single instance of an ERP system. TD Banknorth's suc-
of enterprise architecture is the customer's data and the interface cess depends on implementation of a shared technology and busi-
that captures and accesses that data. For Dow Chemical, which ness process environment.
prides itself in the cost-effectiveness and safety of its manufac- All four of these companies have legacy systems and processes
turing and distribution processes, the key element of enterprise that aren't a perfect fit with current technologies and business
goals. But these companies understand their operating models, 1. Core business processes. This small set of enterprise processes
and they capture the critical components of their operating model defines the stable set of company-wide capabilities the com-
in their enterprise architecture. They use their architecture to con- pany needs to execute its operating model and respond to
tinually improve their foundation for execution. market opportunities.
2. Shared data driving core processes. This data may be the cus-
Encapsulating Enterprise Architecture tomer files shared across the product lines of a full-service
in a Core Diagram financial services institution or the master supplier and
While the architecture for a new building is captured in blue- item data shared across the business units of a company
prints, enterprise architecture is often represented in principles, instituting a global supply chain.
policies, and technology choices. Thus, the concept can be diffi-
3. Key linking and automation technologies. These technologies
cult for managers to get their arms around. We have found that a
include software known as "middleware" (Le., a linking
simple picture, which we refer to as the "core diagram," helps
technology), which enables integration of applications
managers debate and eventually come to understand their com-
and access to shared data, and major software packages,
pany's enterprise architecture. This simple one-page picture is a
such as ERP systems (Le., an automation technology). Key
high-level view of the processes, data, and technologies constitut-
technologies also include portals providing standardized
ing the desired foundation for execution. The core diagram pro-
access to systems and data or a customer interface distin-
vides a rallying point for managers responsible for building out
guishing a company from its competitors. Electronic inter-
and exploiting the enterprise architecture. It also has implications
faces to key stakeholder groups (employees, customers,
for the design of organizational roles and structures. Although
partners, suppliers) also might appear on an enterprise
these structural requirements are not usually captured in the core
architecture core diagram.
diagram, roles and reporting relationships also need to be aligned
with the enterprise architecture. 4. Key customers. These show the majorcustomer groups
All companies have entrenched legacy that are the ac- (e.g., channels or segments) served by the foundation for
cumulation of years of IT-enabled business projects. Intentionally execution.
or not, the resulting capability locks in assumptions about inter-
nal and external relationships and business process definitions. The key elements highlighted in a core diagram are specific to
The role of the one-page core diagram is to help facilitate discus- that company's operating model. Thus, we tend to see similarities
sions between business and IT managers to clarify requirements between the core diagrams of companies adopting the same oper-
for the company's foundation for execution and then communi- ating model. We will now describe characteristics of the enterprise
cate the vision. architecture for the four operating models. To illustrate an archi-
Although different companies take different approaches to tecture for each, we will start with a company example and then
developing their core diagram, all highlight key components of provide a general template and steps for designing the core dia-
their foundation for execution. We have observed four common gram. We will look at Delta Air Lines, Carlson Companies, MetLife,
elements in enterprise architecture core diagrams: and ING DIRECT.
ENTERPRISE ARCHITECTURE AS STRATEGY Implement the Operating Model via Enterprise Architecture S3
S2
FIGURE 3-1
Enterprise Architecture for a Unification Model
Delta Air Lines core diagram
In a Unification operating model, both integration and standard-
ization of business processes are required to serve different key
customer types. Technology is used to link as well as to automate
processes. Delta Air Lines has arguably the best foundation for ex-
ecution of any of the full-service airlines.
In 1997 Leo Mullin became CEO of Delta Air Lines, the United
States' third-largest airline in terms of revenues and passenger miles
flown.4 Mullin quickly learned that Delta's IT capability had been
constructed in response to a failed outsourcing effort. Unhappy Employee relationship
with the outsourcer's services, each of Delta's seventeen functional management
units had effectively built its own IT capability. The firm had as
many IT platforms as it had functions, and those platforms were
not capable of communicating with one another. The predictable
outcome was that Delta's ticket agents, reservation agents, gate
agents, baggage handlers, and others often lacked the information
they needed to do their jobs-frustrating both customers and em-
ployees. Negotiating the core diagram helped Delta's management
and IT staff reach a common understanding of the capabilities the Customer experience
company would develop to support future strategies.
Source: Adapted from Delta Air Lines documents. Used with permission.
As a first step in clarifying the vision, the management team de-
fined four core processes: customer experience, operational pipeline,
business reflexes, and employee relationship :management (figure
3-1). The customer experience identified all the ways Delta touched system-software that accesses the company's shared data for
its customers. The operational pipeline was concerned with load- real-time updates. The Delta nervous system is designed to make
ing, moving, unloading, and maintaining planes. Business reflexes data available to customers, employees, and the company's core
focused on how the company made money: scheduling, pricing, processes on a need-to-know basis. This linking technology is a
and financial processes. Employee relationship management en- key to enabling Delta's highly standardized and inte-
compassed processes involved in the scheduling, compensation, grated operating model.
and development of Delta's highly mobile workforce. In early 2001, Mullin noted that technology and process im-
Once the management team agreed on the core processes, provements resulting from enterprise architecture efforts had shifted
they identified nine types of data critical to process execution. Delta from regularly appearing in last place on key performance in-
These nine databases are shown in the center of the core diagram. dicators (in 1997) to being the only airline that was consistently in
Surrounding the shared data in this diagram is the Delta nervous the top three on the most metrics: on-time performance,
S4 ENTERPRISE ARCHITECTURE AS STRATEGY Implement the Operating Model via Enterprise Architecture SS
lost baggage, and customer complaints. Delta's enterprise archi- or link processes, these can be shown as well (optional elements
tecture, however, was not sufficient to save the company from are identified with a dashed outline in the figure).
bankruptcy after difficult times hit the major airlines in late 2001. The bottom half of figure 3-2 presents the enterprise architec-
Delta's current financial woes are a sobering reminder that a foun- ture core diagram of a company with a Unification operating model.
dation for execution cannot sustain a company if its market strat- The diagram reflects a highly standardized and integrated envi-
egy is not viable.
ronment with standard processes accessing shared data to make
The top half of figure 3-2 identifies the process for designing products and services available to customers. The core diagram
the enterprise architecture core diagram of a Unification com- mayor may not show key technologies, depending on the signifi-
pany. For the core diagram of a Unification company, three ele- cance of any particular technology to the management
ments are required. Start by identifying the key customers (Le.,
segments and/or channels) the company serves. Next, list the key
Enterprise Architecture for a Diversification Model
processes to be standardized and integrated. Then identify the
shared data needed to better integrate processes and serve cus- The Diversification operating model is the opposite of the Unifi-
tomers. Finally, if there are key technologies that either automate cation model and entails both low integration and low standard-
ization. Each business is run more or less independently, although
there can be opportunities for shared services across the company.
FIGURE 3-2
Carlson Companies, a $20 billion company in the marketing,
Unification core diagram liospitality, and travel business, has a Diversification modeLS Carl- <-
son's portfolio includes Radisson Hotels, T.G.1. Friday's restau-

------" rants, Carlson Marketing Group, Carlson Wagonlit Travel, Radisson
m
u
e Shared.data
Linking and
automating
"> " Seven Seas Cruises, and the Gold Points Reward Network.
Q. technologies / Even though these companies are run autonomously, Carlson
/
'------'---__.f_ - - - - - - /
has captured cost savings and synergies with a world-class shared
services capability, which was awarded the 2004 International
Productivity and Quality Council's award for the "best mature
- - - Required
- - - Optional
shared services organization." Carlson's Shared Services organiza-
Business
tion is set up to operate as a business, offering IT and financial ser-
Q)
E
process vices with plans to offer more.
Carlson's enterprise architecture core diagram emphasizes tech-
o nologies, reflecting management's belief that technical infrastruc-
ture services should be shared while business units retain control
Customer over local business processes and IT applications. Carlson's Diver-
types
sification model calls for a lean core diagram at the overall com-
pany level. Thus, the core diagram capturing Carlson's enterprise
© 2005 MIT Sloan Center for Information Systems Research and IMD. Used with permission. architecture shows only shared services and the technical infra-
structure needed to provide them (figure 3-3).6
Implement the Operating Model via Enterprise Architecture S7
S6 ENTERPRISE ARCHITECTURE AS STRATEGY
FIGURE 3-3 FIGURE 3-4
Carlson's core diagram Diversification core diagram
H Travel management
Customer requirements
Business initiatives
Loyalty Hotel distribution
t--
Customer relationship
management
I I
I Enterprise portal I
0----
Presentation
f----.
OJ
Application <..l
0----
c: - - - Optional
J?
:J
<..l
OJ
(/)
I Data trust I 'm Business
!:: process
Technology
H
=:>
OJ
C
Middleware E
0
H Data object f-. 0

Stack
H Platform
Customer
L--H Network
f--. types
Source: Carlson Companies. Used with permission.
An extreme example of Diversification would be a total lack

of an enterprise architecture-a company intending to have no syn- scale, standardization, or other benefits. Illcorporate the remain-
ergies across its businesses. More often, adopting the Di- ing elements-key customer types, business processes, and data-
versification operating model establish economies of scale through only when needed for the operating model. For example, some
a shared technology platform. These shared technologies are the Diversification companies require a standardized process and data
key element of the enterprise architecture core diagram. Shared for financial reporting, risk management, and compliance across
technologies and services often include data centers, the telecom- their business units. Providing a single interface to common cus-
munications network, offshore systems development and mainte- tomers in a Diversification company, however, is rare.
nance capability, centralized vendor negotiations, and help desks.
Diversification companies that value other shared services might Enterprise Architecture for a Coordination Model
also represent some standard processes or even shared data in their
core diagram, particularly if a subset of business units is sharing data The Coordination model provides integrated service to each key
but hasn't created a formal structure to manage it (figure 3-4). customer group. The integration results from sharing key data
When designing a Diversification model core diagram, start across the business units to present a common face to the cus-
with the technologies that can be shared to provide economies of tomer. Because of their wide range of distinctive products, many
0>
In 'E0> C 0>
large financial services institutions, such as MetLife, have adopted " .... :t=i ::J
"i:: en
.!Il
In E ro g'
a Coordination model. Coordination allows companies to inte- E Q.
c
ro
0>"
"c ro
c
OCT
E =>
grate untold numbers of products or processes without forcing LL
standardization.
MetLife is a leading provider of insurance and other finan-
cial services to millions of individual and institutional customers
throughout the United States'? Through its subsidiaries and affili-
ates, MetLife offers life insurance, annuities, automobile and home-
owner's insurance, and retail banking services to individuals, as
well as group insurance, reinsurance, and retirement and savings
products and services to corporations and other institutions. Out-
side the United States, the MetLife companies have direct insur-
ance operations in Asia Pacific, Latin America, and Europe.
Following a series of mergers in the 1990s, MetLife's manage-
"c ....
ment worked to reduce costs through increased standardization of ro
In
business functions and common processes, such as finance, human ";::

:J+'
Q)
O+:i
0> C
resources, and regulatory compliance. But like most insurance com- (/)0>
panies, MetLife had built systems supporting key operations, such

as underwriting, payments, workflow, and account origination, into
individual insurance products. Extracting processes from individ-
ual products was a slow, costlX proposition. More important,
vidual products and product lines required specialized knowledge, 'E0>
0>
thereby limiting opportunities for standardization across products 0>" 0>
In
C
C
E 0> In
c:::.= C 0
0> iii' 0
15 E
Sl g! a. 'OJ
and business u n i t s . " lii -..0> 0> :f2> <3
b"E
(/) ro
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0>
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Accordingly, MetLife focused on developirig a strategy and op- 0
il5 f-----1
eratingmodel to provide integrated customer service across prod- L.-- l..-- L...- L...- L-- ' - - l..--
'--
ucts-a Coordination model. This integrated view of the customer g c
.. +=i.Q
""ffi!!1U c
required extracting customer information from individual prod- -e c ....
00>0> c
0
.r:
In
C
0
O,.III,S:! 9c 0> f2ro 'iii
ucts and making it centrally available. MetLife's enterprise archi- c
a. .- 0> 0>
In
0>
(/)
Cii Z (/)
tecture core diagram reflects the importance of integrated data by
locating at the center of its diagram an integration hub-software
developed in-house using commercial packages to access cus- 1 1 1 1 1 1 lii
t"
0>
lii lii0 In
0> 0 C
E (ijif; 0>
tomer data from existing systems (figure 3-5). 0
:J
"e
(/)0
0>
0
"lil
:J
1ij
MetLife is now building a centralized data store to hold customer ()
Q. c ()
=>
data and other information separate from individual insurance
Implement the Operating Model via Enterprise Architecture 61
FIGURE 3-6
products. This data store is a long-term project, so, as it is being
developed, the integration hub accesses data embedded in legacy Coordination core diagram
applications and provides exclusive access to the customer in-
formation file. Subject to MetLife's privacy and other compliance
requirements, most stakeholders gain access to the data using a
standardized portal, shown on the left-hand side of the diagram.
A separate electronic link to the integration hub provides MetLife's
partners (labs, brokerages, regulatory agencies, etc.) with access
to certain company systems and data. The processes listed on the
right-hand side of the core diagram are examples of the systems
and processes the integration hub accesses. Unlike the processes in
the Delta core diagram (and any Unification model), most insur-
ance processes will not be standardized across all business units or
products. However, within individual business units and product
lines, MetLife is moving toward a Unification model to capture po-
tential efficiencies and enable predictability.
The enterprise architecture core diagram for the Coordination
operating model encapsulates a company's integration emphasis © 2005 MIT Sloan Center for Information Systems and IMD. Used with permission.
and thus focuses on shared data (figure 3-6). Often, the core dia-
gram will also highlight important technology that depicts how
stakeholders can access that Because most processes in a Co-
ordination model are unique, it is less important to show them on Enterprise Architecture for a Replication Model
the core diagram. However, it can be useful to show at least some
Replication operating models are successful when key processes
of the processes to be coordinated.
are standardized across the company and supported by automat-
When designing a Coordination model core diagram, start with
ing technology. This Replication allows rapid expansion and scal-
the key customers (e.g., segments and channels) to be shared across
ability of the business, as demonstrated by ING DIRECT.
business units. For MetLife this was a combination of internal and
ING DIRECT, a subSidiary of the Dutch financial services giant
external groups that tie into the portal. Next, identify the subset 8
ING Groep, was founded in 1997 as a telephone bank in Canada.
of the company data that must be shared across the business units
One of the fastest-growing companies in history, ING DIRECT is
to serve key customers. Then, identify any technology that is key
a direct-to-customer operation, offering simple banking products
to the data integration. It is not essential to reflect the technology,
to 13 million customers of nine country-based bank organizations
but it is usually helpful for business and IT managers to under-
in Europe, North America, and Australia. Customers access ING
stand, at a high level, the key to data integration. Finally, consider
DIRECT via the Internet, mail, or phone. There are no branches
whether to include business process elements.
and few ATMs. Products are transparent and easy to understand FIGURE 3-7
with no fees or minimum deposits and simple features with no ING DIRECT's core diagram
confusing fine print or complex rules. ING DIRECT has only a
limited number of product offerings, including savings accounts,
simple mortgages, certificates of deposit, and a handful of mutual 1 Prospect J 1 Statement 1
External services
I Payments I BChecks rlocal/HQ/tax

Reports
-
fulfillment fulfillment
funds. The company's low fees, high returns, and multiple chan-
nels appeal to a broad range of customers. ---
Customer relationship services Core banking services
IBrokerage I
ING DIRECT's country-based businesses operate autonomously, ! CIF
I I CRM I I Mutual
funds
\
I 11\
but they share a common set of standardized business solutions as Contact J Product I
I Ir Credit
well as standardized technical infrastructure components. ING DI-
RECT selects business solutions on behalf of all business units with a
I \ history info
Common business services

\ engine score
(
joint request-for-proposal process reflecting shared requirements. ITransactions I ICustomers I I Products I I Services I
Architectural fit and global support are key requirements. Country
Channel services
managers can decide which modules they would like to adopt, but
they cannot introduce customized local solutions for key compo- I IVRlCTI
server
J r Imaging
server
II E-mail
server
II Web
server
\ \ Gateway
server
nents (although some customized solutions are allowed when it's

----
C ustomer contact Self-service
f----- Internet, MinTel, ATM,
unavoidable). Module reuse keeps operational costs low (0.43% of Call center, IVR, e-mail,
direct mail WAP, lY'Jeb TV)
assets, as compared to 2.5% for a typical full-service bank) and allows
the company to offer higher savings rates and lower-cost loans. 9 Note: CIF (customer information file), CRM (customer relationship management), IVR (interactive voice response),
CTI (computer-telephony integration), WAP (wireless access point).
ING DIRECT's enterprise architecture core diagram reflects its Source: Adapted from ING Direct documents. Used with permission.
Replication operating model (figure 3-7). The modularity of ING
DIRECT's systems is highlighted by seven service groupings. Even
external services, such as prospecting and publishing agency re-
ports, are designed as modules interfacing with the ING DIRECT ING DIRECT's service modules digitize standardized processes
infrastructure. Customer relationship services allow each country- across its businesses, thereby enabling ING DIRECT's Replication op-
based bank to manage its customer data and interactions. These erating model. By identifying major service categories, the enterprise
modules are distinct from common business service modules, architecture core diagram helps management understand existing
which manage interactions between systems as transactions are capabilities and target new opportunities. The core diagram shows
processed. For example, when a new customer signs up for an ING no data qecause the nine country-based banks do not share data
DIRECT product, common business service modules update the (each bank serves its own customers-regardless of where they are at
customer information file, contact history file, and customer rela- the time they seek service). Instead, the core diagram highlights the
tionship management system. These common business services also key process components, which management refers to as "services."
record a customer's deposit and process the transaction. A differ- Replication operating models revolve around standardized
ent set of services-the channel services-connect back-end systems processes. Thus an enterprise architecture core diagram will show
to systems that communicate with customers. key standard processes and, in most cases, the key technologies
enabling those processes (figure 3-8). Data rarely appears in

the core diagram because Replication companies don't typically Who Should Design
share data across business units. To improve the economics of Enterprise Architecture?
Replication these companies automate key processes, often creat-
In many companies enterprise architecture design is the responsi-
ing reusable business modules (shown as business processes sur-
bility of a small IT staff sequestered in a back room for several
rounded by technology in figure 3-8). The enterprise architecture
months, emerging only after drawing a book's worth of diagrams.
core diagram also typically shows shared technologies linking the
These drawings often map out the linkages between existing sys-
standardized processes.
tems. The exercise is justified by an expectation that mapping out
When designing a Replication model core diagram, start with
existing legacy systems will lead to reduced complexity in the sys-
the key processes to be standardized and replicated across the
tems environment. Most of these architecture exercises end up
business units. Next, identify the technologies automating those
abandoned on a shelf. Detailed architectural drawings of business
key processes. Then consider what linking technologies, if any,
processes and systems applications-apart from a specific business
can be shared across the business units. It is not usually necessary
process initiative-can make companies feel as if someone is doing
in a Replication model to share data or identify key customers. In-
something about complexity, but they are rarely acted upon.
stead, each business unit makes those decisions locally.
Instead, the enterprise architecture process should start with
senior management debating the operating model. The templates
FIGURE 3-8 for the core diagram for each operating model provide a starting
pOint for helping management teams design their foundation for
Replication core diagram
execution. In the process of populating an enterprise architecture
---------..- - - - -- core diagram, management must decide what is really core to the
Automating
company. Choosing an operating model forces a decision on a
Business-
o
e and linking unit-specific general vision. Identifying the key customer types, core processes,
c.. technologies data
shared data, and technologies to be standatdized and integrated
demands a commitment to a particular course of action. As a
company builds the capabilities defined in the core diagram, im-
plementing strategies around the core becomes easier, faster, and
cheaper. However, once the core is in place, it is difficult to change
Q)
the way the company does business. Not only must a company
E
redesign implement technical capabilities-its people must
o relearn processes. Thus, enterprise architecture embodies tough
decisions by experienced managers. When it leads to process and
system reuse, the benefits are enormOUSj when it forces standard-
ization that doesn't fit business needs, it's very costly.
The idea that enterprise architecture discussions should in-
© 2005 MIT Sloan Center for Information Systems Research and IMD. Used with permission. volve senior management will not be a surprise to most IT execu-
tives. But many IT leaders find themselves taking the lead. We
have seen two successful strategies to involve senior executives: IT Leaders Design the Core Diagram
IT-facilitated senior management discussions and senior manage-
ment approval of IT-led designs. At MetLife business managers looked to the IT unit to provide systems
rationalization as they drove benefits from prior and future acquisi-
tions. The company lacked IT capabilities needed to elicit the value
IT Facilitates Senior Management Discussions
expected from its acquisitions. IT leaders developed the core diagram,
For some companies, enterprise architecture design efforts start offering a vision of the company that IT could start to deliver on
with establishing core capabilities. Development of these capabil- quickly (figure 3-5). This core diagram envisioned significant business
ities will involve operational and often organizational reengineer- change, so senior managers needed to support and communicate
ing. The scope of the changes is significant-and usually traumatic. the vision. Today, the integration hub has become a key capability
These changes require senior management leadership, and start in the company's operating vision. Fittingly, IT took the lead.
with mapping out the operating model and then the enterprise ar- MetLife architects use their core diagram to communicate to
chitecture core diagram. Companies using this approach include senior managers and business partners the underlying logic for IT
Delta Air Lines, BT, and State Street Corp. At BT and State Street, development. The core diagram shows how the architecture en-
the CEOs announced transitions from Diversification models to ables business objectives by providing a common customer view,
more integrated models through initiatives they called "0neBT" improving information integrity, and reducing redundancy. It
and "One State Street" respectively. also guides the development of new applications by explaining
Enterprise architecture core diagrams are tough to draw be- how IT will deliver on the company's operating model.
cause they force management to develop a simple vision of a com-
plex organization. Management is trying to articulate the essence Now What?
of the company in the core d\agram. Charlie Feld estimated that
the management team at Delta Air Lines reqUired sixty iterations We have observed that some management teams can develop
to complete the drawing of its core diagram. But once complete, and share a clear vision without the benefit of core diagrams. But
management should anticipate that, despite rapidly changing busi- many management teams find a core diagram to be a helpful tool
ness conditions, the essence of the company'will stay the same. to create a shared understanding of how the company will func-
The goal is to digitize the core to make it predictable, reusable, and tion and then to communicate that shared vision tothe rest of the
reliable. By digitizing the core processes, data, and technologies organization. By thoughtfully preparing an enterprise architecture
depicted in the core diagram, management expects to provide a core diagram, management commits to IT and IT-enabled busi-
foundation for execution, not a set of handcuffs. ness processes that build and leverage a foundation for execution.
The inclination of some management teams is to include too Now comes the hard part-building and using it!
many processes or too much detail in the enterprise architecture The building process is a journey. Companies learn from early
core diagram. Agreeing on what not to include can be a challeng- initiatives how to build capabilities and how to get value from
ing but fruitful exercise in management focus. Intense manage- them. In the next chapter we describe this learning through four
ment debate can expose options for the foundation for execution. stages of enterprise architecture maturity.
The enterprise architecture design exercise forces clarification of a
workable vision.
4
Navigate the Stages of

Enterprise Architecture
Maturity
IN 1991 the city of Boston, Massachusetts, began a multiyear

construction project to replace 7.8 miles of its elevated inner-city
highway. Built in the 1950s, the old highway had long been a
source of controversy. During the decade it was constructed, the
old highway displaced 20,000 residents, cut off the North End
and waterfront neighborhoods from Boston's economic hub, and
\ blocked daylight and disrupted business. By the early nineties, the
highway, which was designed to carry 75,000 vehicles per day, was
experiencing near-constant congestion. Each day 200,000 vehicles
crowded the highway, accidents happened four times more than
the national average for urban interstates, and traffic was bumper-
to-bumper, for six to eight hours-and getting worse. 1
Boston officials wanted a solution that not only handled
greater numbers of vehicles but also eliminated an eyesore and
enhanced the city's quality of life. The resulting vision was an
underground highway system that would dismantle the elevated
highway and allow development of parks and walkways to reunite
69
70 ENTERPRISE ARCHITECTURE AS STRATEGY Navigate the Stages of Enterprise Architecture Maturity 71
the neighborhoods divided by the old highway. Unofficially We label this pattern the "four stages of architecture maturity." 3
dubbed the "Big Dig" (the official name was the Central Artery/ The four stages are:
Tunnel Project), the project was intended to transform the high-
1. Business Silos architecture: where companies look to maxi-
way system in Boston without Crippling the city. Major compo-
mize individual business unit needs or functional needs
nents of the project included (1) building the widest cable-stayed
hybrid bridge ever built and the first using an asymmetrical de- 2. Standardized Technology architecture: providing IT efficien-
sign; (2) creating a casting basin where sections of an underwater cies through technology standardization and, in most
tunnel could be built and then floated out to the precise position cases, increased centralization of technology management
where they would be lowered into the channel; and (3) applying a
3. Optimized Core architecture: which provides companywide
technique called "slurry walls," which reduced the area to be exca-
data and process standardization as appropriate for the
vated in the building of the underground tunnels, thus minimiz-
operating model
ing disruptions to existing traffic.
Initial project estimates called for a budget of $2.6 billion and 4. Business Modularity architecture: where companies manage
a completion date of 1998. 2 But the project was not completed and reuse loosely coupled IT-enabled business process
until mid-200S and cost nearly $lS billion. While many manage- components to preserve global standards while enabling
ment decisions and some engineering mistakes contributed to the local differences
delays and cost overruns, the biggest factor was simple miscal-
Companies move through these stages by first building and
culation. The Big Dig became the biggest public-works project in
then leveraging a foundation for execution. Each stage involves or-
U.S. history. Key managers had underestimated the task involved
ganizationallearning about how to apply IT and business process
in maintaining existing transportation capabilities while imple-
discipline as strategic capabilities. Advancing through the stages re-
menting a new infrastructure.,
quires lots of perSistence, but as companies advance from the first
In building a foundation for execution, companies face some
stage to later stages, they realize benefits ranging from reduced IT
of the same challenges. New information technologies, changing
operating costs to greater strategic agility. In this chapter we discuss
industry boundaries, and the expanding global economy are cre-
how to navigate the enterprise architecture journey where compa-
ating new opportunities. But many of the processes and systems a
nies learn to build and leverage their foundations for execution.
company has built over time constitute obstacles to a new busi-
ness vision. Management cannot shut down the company and
start from scratch. Building a foundation for execution requires The Four Stages of Architecture Maturity
changing core processes and systems even as the company is de-
pending on them to complete its daily operations. Management As companies build out their enterprise architecture, they gradu-
needs to redesign and then implement new systems, processes, ally shift their investments in IT and business process redesign. In
and IT infrastructure without sabotaging daily operations. particular, they identify where global synergies offer greater value
Fortunately, unlike the Big Dig, firms navigate a fairly predictable than local autonomy. Figure 4-1 shows the relative IT investments
path to achieve a foundation for business execution and follow a in data, shared infrastructure, enterprise systems, and local appli-
consistent pattern for building out their enterprise architectures. cations in each of the four architecture stages.
FIGURE 4-1 Organizationally, applications in the Business Silos stage align

Architecture maturity stages naturally with a company's business unit, functional, or geographic
structures. The architecture imposes no constraints on business
Architecture maturity units' activities, thereby encouraging innovation. StrategiC initia-
tives can be executed with few, if any, constraints from other parts
Local of the business. Consequently, functional, plant, and geographic
applications
managers often respond positively to applications developed in
E Enterprise silos. Business silos can compete for capital funding using locally
.ft: systems
focused cost-benefit analysis. System benefits are predictable (al-
'0
Q) Shared beit frequently overstated), and outcomes are measurable.
f infrastructure
Solutions developed in a Business Silos architecture can en-
hance company competitiveness within the context of local spe-
Shared data
cialization. For example, in an investment bank, IT is the product.
Firms in stage 12% 48% 34% 6% New investment products are most profitable when they are first
© 2005 MIT Sloan Center for Information Systems Research. Used with permission. introduced (Le., until competitors introduce a similar product).
Thus, time to market is critically important in investment bank-
ing-each day a new product is on the market without a competing
product can mean millions of dollars to the innovating com-
Stage 1: Business Silos pany. Investment banks generate huge profits from these IT-based
investment products.
In the Business Silos stage, companies focus their IT investments These one-off solutions, however, create a legacy of systems
on delivering solutions for local business problems and opportu- that cannot talk to each other. Many IT professionals are quite
nities. These companies may take advantage of opportunities for adept at making disparate systems look integrated, but the code
shared infrastructure services like a data certter, but such shared required to link applications becomes increasingly complex. Over
services accommodate the unique needs of the local business units. time, key systems have so many links to other systems that even
Companies in this stage do not rely on an established set of tech- small changes are time consuming, expensive, and risky. More
nology standards. important, a Business Silos environment obstructs integration and
The role of IT in the Business Silos stage is to automate specific standardization of business processes.
business processes. Thus, IT investments are usually justified on the Only 12 percent of the companies in our research were in the
basis of cost reductions. In a well-managed Business Silos environ- Business Silos stage; most companies had already moved past this
ment, business managers design business processes and specify re- first architecture stage. It is not the frustration of isolated systems
quired IT functionality. IT then develops or buys an application to that usually drives management from this stage. It's the cost. More-
fully meet the reqUirements. Ideally, systems delivery in this stage lucrative industries, such as investment banking and pharmaceu-
generates a 100 percent solution to the specified business need. ticals, have thus been among the last to abandon the Business
74 ENTERPRISE ARCHITECTURE AS STRATEGY Navigate the Stages of Enterprise Architecture Maturity 7S
Silos architecture. New, fast-growing businesses can easily fall into we've been able to reduce people's costs by bringing in standard-
the trap of addressing immediate business needs without regard ization. That has given us credibility. Their jaws hit the table when
for future capabilities. Eventually, the need for efficiency in IT op- they saw the impact of standardization on their bottom line."
erations and the desire to build a solid data and process platform Most companies move into the Standardized Technology
to support the business forces companies to move to the Stan- stage by creating a corporate CIO role or by endowing the incum-
dardized Technology stage. bent CIO with authority to mandate IT-related behaviors. The
CIO then introduces efficiencies by standardizing and consolidat-
Stage 2: Standardized Technology ing technology and providing shared infrastructure ser-
vices. The migration to a Standardized Technology architectwe
In the Standardized Technology stage, companies shift some of fundamentally changes a company's approach to solutions deliv-
their IT investments from local applications to shared infrastruc- ery. Instead of defining the solution and looking for technology
ture (figure 4-1). In this stage, companies establish technology that best delivers that solution, companies in this stage negotiate
standards intended to decrease the number of platforms they man- the best possible solution given the acceptable technology plat-
age. Fewer platforms mean lower cost. In our study, Standardized forms. The commitment to technical standards means that the IT
Technology companies had IT budgets that were 15 percent lower application representing the best fit in terms of functionality may
than Business Silos companies. 4 But fewer platforms also mean be rejected because it doesn't work with the company's technol-
fewer choices for IT solutions. Companies are increasingly willing ogy architecture.
to accept this trade-off. Forty-eight percent of companies in our In addition to consolidating and standardizing hardware, com-
study were in the Standardized Technology stage. panies in the standardized technology stage start to reduce the
As in the Business Silos stage, the role of IT in the Standard- number of software products performing similar functions. For
ized Technology stage is to automate local business processes. The example, one manufacturer reduced the number of order man-
emphasis in IT management, however, shifts from concerns about agement systems from twenty-eight to four-a common outcome
the functionality of the applications to the and of Standardized Technology initiatives. Technology standardiza-
reliability of the company's systems. Thus, the management of tion, however, does not readily overcome the Business Silos prob-
technology standards is key to this stage. lem of data embedded in applications. Companies in this second
Early in this stage, most business unit managers and develop- stage usually increase access to shared data by introducing d"ata
ers cling to the belief that business needs should drive technology. warehouses, but transaction data is still embedded in individual
The initial encounter with technology standards is the first time applications.
management allows IT to shape business solutions. Soon business Companies that have achieved significant cost savings and re-
managers see that standardization reduces risk, and the costs of liability through Standardized Technology include Guardian Life
shared services (such as support, maintenance, and purchasing) Insurance, Johnson & Johnson, Carlson Companies, Brady Corp.,
and reliability, security, and development time improves. When and Pfizer. These organizations' managers found that early resis-
these benefits become apparent-usually through benchmarking tance to standards fades because after a while, early battles are
of IT unit costs and system quality-business unit managers quickly forgotten and people stop questioning the value of standards or
become believers. As one CIO noted: "We've had successes where shared infrastructure. This evolution positions companies for the
optimized core stage, where standardization practices expand to Delta Air Lines created its Delta Nervous System to capture the
incorporate data and business processes. interrelated reqUirements of the customer experience and airline
operations. Citibank Asia Pacific established a core set of stan-
dardized banking processes that could be centrally served out of
Stage 3: Optimized Core
Singapore to both existing and new markets. In all of those cases,
In the Optimized Core stage, companies move from a local view digitizing the company's core data and processes provided a foun-
of data and applications to an enterprise view. IT staff eliminate dation for existing and future operations and customer interac-
data redundancy by extracting transaction data from individual tions. Each company's, unique strategiC advantage resulted from
applications and making it accessible to all appropriate processes. building on that foundation.
In this stage companies are also developing interfaces to critical Optimizing the core processes and data in a company is a for-
corporate data and, if appropriate, standardizing business processes midable technical challenge, but the corresponding management
and IT applications. Thus, IT investments shift from local applica- challenges are even more demanding. Standardizing shared data
tions and shared infrastructure to enterprise systems and shared and core business processes involves taking control over business
data (figure 4-1). process design from local business unit leaders. Thus, the opti-
Thirty-four percent of companies in our study were in the op- mized core stage is a much harder sell to business managers than
timized core stage. These companies are working to digitize their technology standardization. One CIO we interviewed described data
core data and/or business processes to capture the essence of and process standardization as the most top-down effort we've
/I
their business. Companies choose to optimize their data, business ever made in this organization."
process, or both depending on whether they're using a Diversifi- In the Optimized Core stage, senior IT and business managers
cation, Coordination, Replication, or Unification operating model. learn together how to articulate the company's operating model
Once optimized and digitized, making fundamental changes to and how to identify the IT capabilities required to implement the
the business process or data becomes more difficult, but building operating model. The architecture matures, enabling the company
new products and services onto the core bec()mes easier and faster. to optimize the core while identifying opportunities to leverage
The role of IT in the Optimized Core stage is to facilitate achieve- it. A more modular architecture is the next stage of maturity and
ment of company objectives by building reusable data and busi- business value.
ness process platforms. Senior managers who lead the adoption of
Optimized Core architectures embrace the principle that stan- Stage 4: Business Modularity
dardization enables innovation. In providing predictable business
outcomes, standardized data and processes allow for process in- The Business Modularity architecture enables strategic agility
novation closer to the customer. through customized or reusable modules. These modules extend
Companies' reusable data and business process platforms are the essence of the business built into the infrastructure in the Op-
composed of a set of totally predictable core processes. Both at Air timized Core stage. Few companies have reached the Business
Products and Chemicals and at Nestle, management is digitizing Modularity stage-6 percent in our study-so it is difficult to as-
supply chains using ERP systems. UPS built its business around a sess how IT investment patterns change as companies move from
single package database supporting its package delivery business. the third to the fourth stage (figure 4-1).
In the fourth stage management refines, and increasingly mod- gic experiments that respond to changing market conditions. In
ularizes, the processes that were digitized in the third stage. Man- the Business Modularity stage, companies reuse expertise in process,
agement can take two approaches to this task. One is to create data, and technology standardization gained in earlier stages.
reusable modules and allow business units to select customer-
oriented processes from a menu of options. For example, through a Organizational Learning: Key to Generating
technology known as "Web services," companies can create reusable Value from Enterprise Architecture
business services with standard interfaces for accessing those mod-
ules and the related data. s Web services can select modules from both As companies transition through the architecture stages, they fun-
internal and external sources. A second approach is to grant business damentally change how they do business. Companies in stage 1,
unit managers greater discretion in the design of front-end processes, which implement IT-enabled processes with little regard for busi-
which they can individually build or buy as modules connecting to ness synergies with other processes, look nothing like companies
core data and back-end processes. In effect, managers get the free- in stage 4, where reusable business process modules have become
dom to bolt functionality onto the Optimized Core. a core discipline and the company has carefully delineated be-
In either case, the role of IT in a Business Modularity archi- tween enterprise and local processes and data. Getting from stage
tecture is to provide seamless linkages between business process 1 to stage 4 is a journey. Some companies choose not to make that
modules. Modularity does not reduce the need for standardiza- journey; others falter along the way. Understanding both the gen-
tion. Individual process modules build on the standard core and eral nature of the organizational change at each stage and the spe-
link to other internal and external processes through standardized cific learning enables companies both to generate value from the
interfaces. To continue to provide all the benefits of the Optimized current stage and to prepare for the next.
Core stage-efficiency, single face to the customer, process inte-
gration-modular architectures extend, rather than replace, Opti- Changing from a Local to a Companywide Perspective
mized Core architectures.
By ensuring the predictability of core I?rocesses, modular ar- As companies migrate through the architectpre stages, they shift
chitectures provide a platform for innovatiort,; The modular archi- from a focus on local optimization to global optimization. This
tecture enables local experiments, and the best ones can be spread evolution has important implications for organizational flexibil-
throughout the company. To enable this, the Business Modularity ity. Most notably, through the second and third stages, companies
stage requires negotiations between senior management and IT are exchanging local flexibility for global flexibility. Figure 4-2 de-
executives to clarify which processes are standardized, which are scribes this change.
required, and which may be developed locally. In the first stage, business unit managers have full control over
To benefit from modular architectures, companies must learn their business and IT decisions. From an enterprisewide perspec-
how to quickly idehtify the strategic opportunities that best lever- tive, this limits global flexibility. For the company to introduce
age their core and then how to develop or reuse modules that ex- global change, all business unit managers first have to agree on
tend the core. Reusable modules will build a thicker, denser core, the change, and then they need to simultaneously implement it.
providing greater efficiencies while allowing local customization. On the other hand, stage 1 companies can be highly responsive to
Quickly developed and very focused add-on modules allow strate- local market changes because they are not constrained by global
FIGURE 4-2 designs (e.g., purchasing) introduce processes that are locally sub-
Changes in organizational flexibility through the optimal in favor of processes best suited to the company's global
architecture stages needs. But global flexibility increases as data becomes more trans-
parent and processes become more comparable and predictable.
Architecture maturity - - - - - - - - - - _••
In the fourth stage, Business Modularity, flexibility grows both
Business Standardized Optimized Business
silos technology core modularity locally and globally. With a solid platform of core processes, data,
High I=-----t-----,---.::.:--t----=-::..:...:.---+------=-------i
flexibility
and technology, a company can plug and play business modules
Global ort either level, and modular interfaces make changes simpler
flexibility
to implement. For example, ING DIRECT allows local managers to
adjust what modules they use in response to local regulatiOns and
requirements, but the company expects its country-based man-
agers to use standardized modules wherever possible to keep costs
Local low. Executives can choose how much flexibility they want local
flexibility
Low managers to exercise. MeadWestvaco, as a paper manufacturer, fo-
flexibility
cuses on controlling cost. Building modules on its ERP system will
© 2005 IMD and MIT Sloan Center for Information Systems Research. Used with permission. give local managers greater autonomy over marketing decisions.
Manufacturing decisions, on the other hand, will remain more
standardized to maximize efficiencies. 6 The ability to customize . .
global capabilities as appropriate is the benefit of the Business
mandates. In addition, because they can-at least in theory-in- Modularity stage.
sist on the 100 percent solution to their business needs, they can The shifting of flexibility between local and global manage-
design their business processes to their precise specificatiOns and ment highlights the magnitude of change as companies move
define IT requirements to support those processes. through the architecture maturity stages. In some cases, managers .
In the standardized technology stage 2), business units will resist these changes. In all cases, they will need to learn new
give up some discretion over technical decisions. Working within behaviors. The time required to learn new behaviors means that
the constraints (and benefits) of technical standards, local busi- the expected benefits of architecture maturity may be delayed. It
ness unit managers increasingly settle for the 80 percent solution, is important that both IT and business managers recognize the
which reduces local flexibility. However, the use of standardized need to allow time for learning. anxious managers
technologies increases global flexibility by reducing technical com- may alloc,ate large sums of money to technical upgrades, only to
plexity and thus reducing implementation time. find that the organization is unable to absorb the capabilities the
Organizational change is felt most profoundly in the third stage. new technology makes available.
Optimized core means that local managers lose discretion over core Because of the major organizational changes encountered at
business processes and sometimes over the people and systems that each new stage, we have found that companies cannot skip stages.
execute them. Companywide data and process standards disrupt We observed a number of unsuccessful attempts to skip stages-for
local decision-making patterns. In some cases, standardized process example, a manufacturing company implementing an ERP system
skipping from stage 1 to stage 3 and an investment bank im- Successful organizational learning in each dimension results
plementing Web services skipping from stage 1 to stage 4. These in greater business value and enhances the strategic importance of
companies invested significant resources in technologies intended IT in the company. The bottom row of table 4-1 identifies the
to enable transformations. Management found, however, that strategic implications of each stage.
the organizational changes exceeded the companies' capacity for
change.7 Following a major ERP implementation, one plant man-
ager reported, "I feel like we turned out the lights but we keep try-
ing to do our jobs anyway." Another stated, "It's like I'm standing TABLE 4-1
on my head but still trying to manage. In several of the compa-

/I
Learning requirements of the architecture stages
nies we spoke to, ERP implementations that tried to skip stages had
to be halted or scaled back. Business Standardized Optimized Business
Silos Technology Core Modularity
IT capability Local IT Shared technical Companywide Plug-and-play

applications platforms standardized business
Learning How to Benefit from processes process modules
the Four Architecture Stages or data
Business ROloflocal Reduced Cost and quality Speed to market;

Companies gradually learn to adapt to the changes demanded by objectives business IT costs of business strategic agility
initiatives operations
each new stage. Through this learning process companies gener-
Funding Individual Shared Enterprise Reusable
ate value from their current stage. Table 4-1 provides a summary priorities applications infratructure applications business process
services components
of the changes associated with each new stage. Two characteristics
define all four stages: (1) the IT capability being developed and (2) Key Technology- Design and update Core enterprise Management
management enabled change of standards; process of reusable
the strategic business implications of that capability. To support capability management funding shared definition and business
services measurement processes
these evolving characteristics, companies must acquire learning
in five areas: Who defines Local business IT and business
.,
Senior IT, business,
" applications leaders unit leaders management and industry
1. Business objectives as captured in a formal business case and process leaders
leaders
(a document identifying expected costs and benefits)
Key IT Measuring and Establishing Aligning project Defining,
governance communicating local/regional/ priorities with sourcing, and
2. Funding priorities, specifying the focus of major IT initiatives issues value global architecture funding business
responsibilities objectives modules
3. Management capabilities key to generating benefits from
Strategic Local/functional IT efficiency Business Strategic agility
new IT capabilities implications optimization operational
efficiency
4. Managers taking primary responsibility for defining Source: Adapted from Jeanne W. Ross "Creating a Strategic IT Architecture Competency:
applications Learning in Stages," MIS Quarterly Executive 2, no. 1 (March 2003): pp 31-43.
5. Critical IT governance issues
84 ENTERPRISE ARCHITECTURE AS STRATEGY Navigate the Stages of Enterprise Architecture Maturity 8S
around technology standards and then around data and process

Business objectives for IT standards. By the time the company reaches stage 4, the entire
In stage I, companies usually create a business case for IT organization has become comfortable with the discipline of im-
investments estimating the financial return on investment. Ex- plementing, maintaining, and benefiting from standards. The
pected project outcomes tend to be localized and measurable. In company is ready to tackle the stage 4 challenge of building onto
stage 2, companies typically build their business case based on its standard platforms with internally and externally designed
companywide IT cost reductions. As long as a company's IT unit business process modules.
costs are documented prior to standardization, the impact of The transition from stage 1 to stage 2 introduces new levels of
new IT investments can be assessed. By stage 3, management has discipline in organizational process. This diScipline starts slowly
the more difficult challenge of measuring process improvements and focuses on IT management and use. The third stage greatly
across functions or business units. The benefits may be difficult to expands the need for diScipline, and the fourth stage is dependent
trace to the bottom line, observable instead in increased customer upon a culture of discipline. Organization members learn over time
satisfaction, reduced inefficiencies in the use of organizational re- how to design,implement, and leverage standards. An individual
sources, or more-efficient operations. In the fourth stage, the busi- can view any standard as an unnecessary constraint or as a sim-
ness case is based on metrics such as speed to market or strategic plifying mechanism. The individual's perception will be largely
agility. Moving from stage 1 to stage 4 generally increases reuse of shaped by the extent to which a company has adopted a culture
IT services (stage 2), data and processes (stage 3), and business of discipline. A key component of this discipline includes aligned
modules (stage 4) with associated improvements in cost and speed incentives (e.g., the 'right balance of companywide or local perfor- ...
to market. In the process of transitioning from one stage to the mance targets).
next, companies learn how to tackle these metrics.
Who defines applications
Funding priorities
In the first stage, local business managers usually define appli-
Consistent with business case changes, funding priorities cations to support local business needs. By stage 2, IT leaders as-
change as companies move through the stages. These changes sume greater leadership across the company. Business leaders still
align with changes in their investment patterris discussed earlier establish requirements, but IT leaders define possible solutions
in the chapter. and technology standards impose limits. In stage 3, the quest for
enterprise solutions involves senior management and eventually
Key management capabilities high-level corporate process leaders. By the fourth stage, industry
To generate value from IT investments, managers must lead the leaders helping define applications by establishing indus-
process changes enabled by new technology. If business processes try standards while business and IT leaders negotiate solutions for
don't change when _new technology is installed, the investment their company. The change in who defines applications is reflected
has less value. As companies mature their architecture, manage- in implementation challenges. As business leaders lose tight con-
ment focus extends beyond local business process changes. Man- trol over applications reqUirements, it is more difficult for them to
agers develop the capability to lead companywide change, first own business process changes.
companies in the oil and gas industry were attempting to skip

IT governance
from stage 1 to stage 3 by implementing ERP systems, Air Products
In stage 1, IT governance focuses on ensuring effective IT instead worked deliberately through Standardized Technology be-
investments and accountability through careful business case de- fore embarking on Optimized Core. The result was an easier tran-
velopment and effective project management. In the second stage, sition from stage 2 to stage 3 and a single global implementation
the company needs to set up effective governance mechanisms of its ERP system. 9
for implementing and maintaining technical standards. Stage 3 Given the forces driving companies to optimize their cores,
governance emphasizes the need to implement enterprise busi- it can be difficult to work through the stages one by one. But it is
ness objectives, and stage 4 demands governance of business our experience that there is no other way. Learning the
process modules. architecture stages encompasses both technology and business
processes. On the technology side, companies learn how to invest
Learning Takes Time-Don't Skip Stages their IT dollars for greatest impact, how to estimate the value of
different IT investment opportunities, how to manage technology
Although companies can hire managers with experience in stage standards and secure compliance, and how to assess and commu-
3-and possibly even stage 4-companies cannot hire leadership nicate the value of IT. On the business process side, organizations
that allows the company as a whole to skip a stage. Learning takes learn how to design and manage enterprise processes, how to in-
time. Companies differ in how long these transitions take, but for still discipline in process execution, how to leverage IT capabili-
large companies each stage is several years. At Delta Air Lines and ties in their business process initiatives, how to lead IT-enabled
the government of the District of Columbia, the distinction be- change, and how to define business process components. It is
tween Standardized Technology and Optimized Core was blurred. not enough for only senior managers to understand these con-
Both organizations were in when they started their architec- cepts. Organizational learning must seep throughout a company
ture efforts. Delta was concerned about its ability to survive Y2K for businesses to leverage IT and core business processes.
and the D.C. government was in bankruptcy. At Delta, manage- Building out an enterprise architecture, is a long, challenging
ment moved aggressively from Business Silos',through Standard- process. It involves ongoing negotiations about a company's busi-
ized Technology and into Optimized Core between 1997 and 2001. ness strategy and how IT both shapes and responds to that strat-
The D.C. government took six years (1999-2005) to make the same egy. It also involves defining a target technology architecture (Le.,
transition. These two organizations accelerated the Standardized applications, data, and infrastructure technology) and doggedly
Technology stage but allowed an extended period of time to de- pursuing that architecture even at times when immediate busi-
velop their Optimized Core. ness needs beg for trade-offs.
Changes are less disruptive at companies that pursue the stages
one at a time. Guardian Life Insurance recognized Significant cost-
How to Apply Architecture Maturity Stages
cutting benefits over a three-year Standardized Technology stage. 8
Guardian management focused on extracting maximum value from
in Your Company
that stage before moving on to the next. Air Products and Chem- As companies embark on their enterprise architecture journeys, they
icals also eased the shock of organizational change. While many face their own Big Dig. Their challenge is to grow new business
capabilities before dismantling the old. Like Boston's Big Dig- levels of the company support different business objectives,
which separately opened a major tunnel, then a major bridge, then they can be at different maturity stages. Each stage requires
a major artery, and eventually a set of important interchanges- its own set of management practices (see table 4-1), which
companies can generate significant benefits from incremental should then be coordinated across the company.
enhancements to their architecture. Unlike the Big Dig project,
companies have the benefit of a road map derived from other suc- • Build an architecture capability in-house. Inexperienced
cessful companies making the same journey. As an added incen- managers might want help, but negotiations leading to an
tive, companies regularly generate benefits from small projects understanding of business strategy and IT architecture re-
addressing a specific business need as they move toward an en- quire a close working relationship between business and
terprise architecture and a platform for execution. For example, IT. An ongoing dialogue about the relationship between
Guardian Life's CIO, Dennis Callahan, found that the company's IT and business process is essential for effective enterprise
IT unit costs started dropping early in its stage 2 efforts, and they architecture. And, as we will discuss in chapter 7, you can
kept dropping in subsequent years. out source architectural initiatives, but you can't outsource
The objective of the enterprise architecture is not so much to architectural decision making.
achieve a particular end state as it is to recognize what direction
the company is going. Transitioning through the architecture • Aim for business modularity. Our research found that com-
panies with more-mature architectures reported greater
stages allows companies to rack up benefits. The four-stage model
success in achieving strategiC goals. And companies re-
offers a number of lessons to companies attempting to generate
porting greater success in achieving their strategic goals
more value from IT and implement greater process diScipline:
achieved higher average return on invested capita1. 10
• Focus architecture efforts 0!:l strategic organizational processes. Companies with a Diversification operating model may
Architecture exercises attempting to establish linkages have little need to advance beyond stage lor stage 2 (al-
between applications, data, and infrastructure for all of a though even Diversification companies increasingly im-
company's business processes will almbst certainly stall. plement shared services that benefitfrom thinking about
No company can afford to eliminate all its silos. The best architecture maturity). All other companies will benefit
companies are focused on eliminating those silos that are from the flexibility that Business Modularity offers.
limiting business efficiency and agility.
Companies reap a number of benefits from building out en-
• Move incrementally. Skipping stages leads to either failures or terprise architecture. But the process of generating those benefits
delayed benefits. Companies will benefit more from small involves .a great deal of learning-about the strategic direction of
improvements in their existing stage than from higher-risk the company, about how IT contributes to that direction, and
and premature moves into later stages. about how to manage IT and business process capabilities. In the
next chapter we will discuss the benefits effective architecture can
• Recognize that complex organizations have enterprise architec- deliver at each stage as well as the management practices that help
tures at multiple levels. Because architectures at different companies acquire and formalize the necessary learning.
5
Cash In on the Learning
WHEN LARGE NUMBERS OF BUSINESSES firstinstalledelec-

tricity in their plants in the 1890s, they saw few immediate ben-
efits. Electric generators replaced steam engines, but underlying
business processes changed very little. Most factory engineers placed
the new electrical generators in the same, central, cleverly archi- ...
tected position in the factory that enabled the steam engine to
power as many machines as possible via mechanical driveshafts. It
took decades for most factory engineers to redesign workflow and
factory layout to take advantage of the increased flexibility and ef-
ficiency of electrical power. Not until forty years after the first cen-
tral power station opened did electricity make a significant impact
on business productivity.1 The delay represented the learning re-
quired to take advantage of electrical capabilities.
In the auto industry, Henry Ford was the first to realize the po-
tential of electric motors, and he used this knowledge to change
forever the terms of competition in the industry.2 Rather than
power his factories with one or a few large engines, Ford used
smaller electric motors to power each workstation, which allowed
him to change the structure of his factory into an assembly line.
As this new way of working was implemented, productivity in-
creased, costs declined, and Ford steadily reduced the price of his
cars. Sales took off-the first auto to be produced this way, the
91
92 ENTERPRISE ARCHITECTURE AS STRATEGY Cash In on the Learning 93
Model T, saw sales grow from 6,000 in 1908 to 230,000 in 1914. As business benefits. These benefits are evident in five areas: IT costs,
of 1919, half of all cars manufactured were produced using elec- IT responsiveness, risk management, managerial satisfaction, and
trified manufacturing processes ... all of them Fords. strategic business outcomes.
Today's managers must redesign their companies as Ford did-
this time, to take advantage of the potential of modern informa-
Reduced IT Costs
tion technologies. Designing an enterprise architecture is the first
step in building a foundation for execution capable of delivering At most companies, concerns about IT costs drive the initial in-
the benefits of new technologies. But moving from architecture terest in enterprise architecture. In most cases, systems built to
blueprint to realizing benefits reqUires managers to think differ- achieve immediate business needs have become expensive, re-
ently about how business will be conducted. dundant, and difficult to maintain. One financial services IT exec-
In earlier chapters we have argued that to align IT with a com- utive describes a familiar dilemma: "In the late 90s, accounts were
pany's strategic business initiatives, management must first define growing exponentially ... We had no time to look internally at ra-
an operating model and then design and bUild out an enterprise tionalization or architecture. We grew our customer base through
architecture. So far, however, we have provided little evidence of acquisition. We'd do the barebones, integrate the general ledger,
the benefits of these efforts. In this chapter, we describe the evi- make sure the networks could talk to each other and then move
dence of the payoff from enterprise architecture. We've found on to the next thing. In 2000 and beyond, market growth slowed
that companies can start generating benefits soon after they com- down. All of a sudden, 'we're not acquiring, we're protecting cur-
mence the architecture maturity journey. These benefits grow rent accounts. That's when we sawall these legacy problems, the
as companies move into later architecture stages. We have also problems of yesterday that we're dealing with today." 3
found that the goal is not to reach a particular endpoint. Compa- As enterprise architecture introduces discipline in systems and
nies learn, through their management practices, how to generate processes, companies start to control the high costs of business silos.
value from IT early in the journey. Those benefits multiply as long Companies can expect to reduce at least two types of IT costs:
as the company continues to learn.
• IT operations unit costs: the actual cost of services, such as
laptop provision and support, the help desk, application
The Benefits of Enterprise Architecture
operations, access to enterprise data, network capacity,
An enterprise architecture is critical for building a foundation for and e-mail. Use of these services grows over time, but the
execution because it maps out important processes, data, and unit costs should decrease with architecture maturity.
technology enabling desired levels of integration and standard-
• Applications maintenance costs: the time and total cost for
ization. In the process of implementing the enterprise architec-
making changes to existing applications to reflect business
ture (Le., building- the foundation for execution), companies
and technology changes.
achieve a number of benefits, many of which can be tracked inde-
pendently. Successful implementation of each stage of an en- Figure 5-1 shows the magnitude of change in average IT costs
terprise architecture generates new or expanded technology and as companies mature their enterprise architectures. The biggest
Cash In on the Learning 9S
impact on cost is achieved in stage 2, as companies move to con- As shown in figure 5-1, the main reason for the decrease in
solidate data centers, reduce the number of technologies in use, costs is that companies are investing in more shared (as opposed to
and introduce standards to guide the platform design of new sys- business-unit-specific) capability. The shared IT capability-which
tems. On average, companies in stage 2 have 15 percent lower IT includes technical infrastructure, shared data, and enterprise sys-
budgets than companies in stage 1. 4 Global companies, and com- tems-increases from 64 percent to 75 percent of the company's IT
panies that have experienced repeated mergers, often cite much investment between stage one and stage two.
higher savings. For example, at Celanese, a more than $5 billion The trend toward increased shared IT capability continues into
chemical company, standardizing technology addressed the nega- the Optimized Core stage, growing to 84 percent of total IT invest-
tive IT cost impacts of several mergers and acquisitions. Accord- . ment. In the process, IT costs drop another 10 percent; IT budgets
ing to CIO Karl Wachs, "We went from a very diverse system and of stage 3 companies are 75 percent of stage 1 budgets. Even though
process landscape to a pretty homogenous environment, and we companies typically make big investments in the third stage as part
cut costs by 30 to 40 percent within four years. And, now, we de- of business process integration and standardization efforts, their IT
liver better services." 5
budgets, on average, decrease. The drop in local departmental or di-
visional spending offsets the increase in the central budget. Charlie
FIGURE 5-1 Feld, former CIO at Delta Air Lines, explains the phenomenon this
way: "Even though we spent hundreds of millions of dollars on the
Cost implications of architecture maturity
infrastructure ... we were spending it anyway. That's the fallacy in
Business Standardized Optimized
what most people think. When it's being spent in departments and ...
Business
silos technology core modularity in divisions the money is being spent. It's just not being seen."6
Local By stage 4, even though companies are continuing to invest in
shared IT capability, their IT costs rebound. IT budgets in stage 4
companies (for our small sample) are 20 percent higher than stage
Enterprise 1 budgets, an increase of 45 percent over stage 3 budgets. The in-
systems
crease in IT costs in the Business Modularity stage may result from
several different factors. For example, costs that were previously
hidden in business budgets may be converted to IT costs in stage
Technical
infrastructure 4 as business process modules are formed and true costs are allo-
cated. In addition, early adopters of stage 4 architectures may ex-
75% 84%
perience higher costs associated with being on the leading edge.
85%
But the most important reason why Business Modularity may
100% 85% 75% 120% have higher costs is companies' increased investment in leading
Note: IT budgets are corrected for industry differences. Application silo budget is the baseline. Budgets edge innovation.
for other stages are represented as a percentage of the baseline budget. Only five firms in stage 4
reported their IT budgets. so that data is not reliable. Companies moving into Business Modularity have developed
© 2005 MIT Sloan Center for Information Systems Research. Used with permission. a solid foundation for execution. They have digitized their core
business processes and have access to the critical customer and
Cash In on the Learning 97
product data they need to develop new products and services. FIGURE 5-2
They start to see new opportunities to develop this core. These IT- Benefits from increasing enterprise architecture maturity
enabled opportunities require IT investments, but the returns are
easy to justify. These investments increase IT costs, but they also 5 --+-- IT responsiveness'
create new business opportunities. 4.5 Risk management"
-*- Managerial satisfaction C
4
___ StrategiC business impactsd
3.5
Increased IT Responsiveness
C) 3
/ f
In a standardized environment, IT and business leaders have fewer
c
:;::;
f! 2.5
/
0
technology choices and thus spend less time making technology (3 2
decisions or addressing unexpected technical problems. The result 1.5 V

is reduced development time, including both the elapsed time and
total development hours required to implement a new system. 0.5
When companies are still relatively new, they can build silo appli- 0 ..
Business Standardized Optimized BUSiness
cations rapidly, but as the silos multiply, those silos increasingly act Silos Technology Core Modularity
as inhibitors to future development. In our research, IT executives Architecture stage
noted a significant improvement in development time as a result of a. Development time .

b. Business risk, security breaches, and disaster tolerance
moving into stage 2 and working on more-standardized platforms. c. Senior management and business unit management satisfaction .,.
d. Operational excellence, customer intimacy, product leadership, and strategic agility
The incremental improvement in IT responsiveness from © 2005 MIT Sloan Center for Information Systems Research. Used with permission.
moving to stage 3 is minimal. Many companies are implementing
major enterprise systems in stage. These projects are large
and, for most companies, both IT and business expertise on these • Reduced business risk: the extent to which systems are con-
systems is limited. But IT responsiveness ratings climb dramati- sistently and reliably up and running as needed to support
cally as companies move into Business (average rating
the business
up 37 percent over stage 3). Whereas the third stage involves large-
scale projects, stage 4 involves reusing or customizing smaller • Increased disaster tolerance: the ability to minimize business
modules. By definition, faster development time should be a key losses during outages or natural disasters
benefit of achieving stage 4 architecture maturity. Figure 5-2 • Reduced security breaches: avoidance of computer viruses
shows how CIOs rated the impact of architecture maturity on IT and'inappropriate access (both internal and external) to
responsiveness and other benefits
private or confidential data
While enterprise architecture demonstrates a positive impact
Improved Risk Management
on risk management, the impact is smaller than it is for the other
Cleaning up IT infrastructure, shared data, and enterprise applica- benefits. However, in companies focused on building risk man-
tions provides a more manageable IT environment. This con- agement into their enterprise architecture, the impact is much
tributes to at least three risk-related benefits: more dramatic. For example, PFPC, a subsidiary of PNC Financial
Services Group, provides a variety of financial services to corpo- • Greater senior management satisfaction with IT reflects re-
rate clients who demand a very high level of security and reliabil- actions of corporate leaders.
ity. When Michael Harte became corporate CIO, he was expected
to cut costs and improve service quality. He identified risk man- • Greater business unit leader satisfaction with IT reflects
agement as key to fulfilling his charge: "When I got here, I saw attitudes of managers toward the impact of IT on local
the need to position information teChnology as a business center business results (e.g., costs, business value, service levels,
that would enable the company to move from being focused on reliability).
back office processing to being a leader in solution integration and
information products. The first stage in that transformation was Satisfaction increases dramatically at each architecture stage.
to bring greater discipline to risk management and governance as Despite the discomfort caused by major organizational change,
the foundation for change."? senior managers clearly value the benefits. In advancing from
PFPC's architecture efforts revolved around a Global Enterprise stage 1 to stage 2, management sees the reductions in IT costs-
Platform initiative. Key efforts in this initiative reduced the num- invariably accompanied by increased IT responsiveness and im-
ber of technologies the company used, created a single portal for proved IT services. From stage 2 to stage 3, senior managers be-
customer access to PFPC services, and restructured applications. come more involved in aligning IT with the strategic direction of
Early efforts on the Global Enterprise Platform initiative suc- the company. Jim Barrington, CIO of Novartis, a $28 billion phar-
ceeded in taking PFPC through stage 2 of architecture maturity. IT maceutical company, describes how the conversation about IT
spending decreased from 32 percent to 24 percent of total expenses. changes:
In addition, a U.S. Federal Reserve audit indicated that Harte had
greatly improved PFPC's risk management competence. As the com- I really to want to find out what [business managers'] real
pany now pursues business process and IT application improve- business issues are-what works well in the business, what
ments, Harte expects more risk management improvements. doesn't work well in the business. And, then, perhaps try
Global events ranging from terrorists attacks to legislation like to figure out from an IT perspective we can address
Sarbanes-Oxley will likely focus more attentl'on on risk manage- some of those areas, particularly the ones that don't work
ment as an outcome of enterprise architecture maturity. Compa- well, or to understand their top three strategic drivers, let's
nies with more-mature architectures are better pOSitioned to meet say. In consumer health, it's customer excellence. So, I
these new demands for risk management. want to know all about customer excellence so that we
can direct some of our IT resources to see what it means
Increased Management Satisfaction for us., Does it mean technology? Does it mean more un-
derstanding of process? Does it mean bringing systems
Satisfaction is a more subjective measure, but it's important for gen- from multiple business units together? What information
erating enterprisewide commitment to architectural improvements do they need to drive the business?8
and the organizational changes those improvements enable. Satis-
faction scores indicate the confidence of non-IT executives in the Management satisfaction increases again in stage 4. Ideally, by
IT unit's ability to deliver business value: stage 4, the distinction between IT and business disappears.
Enhanced Strategic Business Outcomes company then reused this module to quickly enter new markets in
Asia and Eastern Europe. Chapter 8 provides detailed examples of
While all the benefits identified thus far can have bottom-line im- how UPS, 7-Eleven Japan, MetLife, and CEMEX have reaped strate-
pacts, the most compelling need for enterprise architecture is to gic benefits from enterprise architecture maturity.
enable strategic business goals. Companies derive four important
strategic outcomes from enterprise architecture:
Management Practices for Realizing Value
1. Better operational excellence: low-cost, reliable, and pre- from Architecture Maturity
dictable operations, with an emphasis on cost
Generating the expected benefits of a foundation for re-
sults not just from changing IT investment patterns (as described
2. More customer intimacy: extraordinary customer service,
in chapter 4), but also from new management practices. These new
responsiveness, and relationships, based on deep customer
knowledge management practices formalize organizational learning about how
to leverage IT capabilities and adopt business process changes. Prac-
3. Greater product leadership: first to market with innovative tices include both formal roles (e.g., project architects, enterprise
products and services, usually dependent on rapid R&D to process owners, steering committees) and managerial processes (e.g.,
develop and commercialize architecture exception processes, postimplementation reviews, busi-
ness case development).
4. More strategic agility: the ability to respond rapidly to com- Many architecture practices are widely deployed, but the im-
petitor initiatives and new market opportunities 9 pact of each practice varies with how effectively a company has
implemented it (figure 5-3). For example, less than 70 percent of
Strategic business outcomes increase dramatically from the companies have created full-time enterprise architecture teams,
first to the second and the third to the fourth stages of architec- but those that have rate the teams as highly valuable. In contrast,
ture maturity. The lesser impact of the transition to stage 3 is a similar number of companies have implemented an architecture
likely related to the scope of the change. Managers exception process, but they find that this practice is considerably
at companies like Dow Corning, for example, have noted that less effective in generating business value.
major enterprise systems cause significant discomfort before they Different stages place different demands on management, so
start delivering measurable business and IT benefits. 10 some management practices are important for capturing the ben-
The payback for higher IT expenses in stage 4 is evident in the efits of early stages while other practices are less important-and
strategic impact of enterprise architecture initiatives. Overall, ex- sometimes unnecessary-until later stages. Figure 5-4 shows the
ecutives rated strategic business benefits 40 percent higher in stage stage at which key management practices become important.
4 than in stage 3. These benefits come from having a set of well- The need for growing numbers of management practices reflects
engineered business modules that provide a platform for execution that increased learning is important to first building and then
and agility at a more granular level than that of stage 3. For exam- generating value from a foundation for execution. As a company
ple, Citibank Asia Pacific developed a new credit-card-processing implements each practice in figure 5-4, organizational learning
module yielding a 50 percent reduction in processing costs. The accumulates for future organizational change processes.
102 Cash In on the Learning 103
ENTERPRISE ARCHITECTURE AS STRATEGY
FIGURE 5-4
FIGURE 5-3
Enterprise architecture management practices How architecture management practices evolve
Mean Standardized Business

rating Business Silos Technology Optimized Core Modularity
of value
Business cases - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - . .
Processes ,----,-----,r------,--,-----,----,----,-----.-- (1-5)
Centralized funding of Project methodology - - - - - - - - - - - - - - - - - - - - - - - - -...
enterprise applications 4.0
Architects on
Enterprise architecture project teams - - - - - - - - - - - - - - - - - - - - .
guiding principles 3.8
Standard project IT steering committee - - - - - - - - - - - - - - - - - - .
management methodology 3.8
Architecture
Busi ness cases for exception process' - - - - - - - - - - - - - - - - - - .
architecture investments 3.8
Formal compliance
Formal compliance process process' - - - - - - - - - - - - - - - - - - - - - - .
3.8
Infrastructure
Annual infrastructure
3.7 renewal process' - - - - - - - - - - - - - - - - - - - .
renewal funding
One-page enterprise Centralized funding
architecture graphic 3.7 of enterprise
applications' - - - - - - - - - - - - - - - - - - - -...
Formal architecture
exception process 3.3
Centralized standards
Formal technical research team
and adoption process 3.2
Process owners' - - - - - - - - - -.....
Postimplementation
assessment 3.1 Enterprise architecture
guiding principles' - - - - - - - - -...
Roles Business leadership of
Full-time enterprise project teams' ••
architecture team 4.1
Senior executive
IT architects on
4.1 oversight' - - - - - - - - - - - -....
project teams
IT program managers' - - - - - - - - - - . .
IT program managers 4.0
Enterprise architecture
Full-time centralized core diagram"
technology standards team 3.8
Postimplementation
Business leadership
assessment'
of project teams 3.7
Enterprise-level process Technology research
owners 3.6 and adoption
process'
IT steering committee 3.6 Full-time enterprise
Senior business executives architecture team
architecture oversight 3.4 Architecture maturity - - - - - - - - - - - - - - - - - - - - - - - - - - _ .
L - - L_ _ __ __
o 10 20 30 40 50 60 70 80 90 , These items are statistically significant related to architecture maturity; they are associated with greater
Percentage of 103 firms engaging in this practice value in later stages. We identified the stage at which each practice emerged as most important by
comparing the means and determining the stage at which the value of the practice demonstrated its
largest increase in mean value.
Note: Ratings represent the value received from these practices as reported by 103 CIOs.
104 ENTERPRISE ARCHITECTURE AS STRATEGY Cash In on the Learning lOS
Stage 1 Management Practices and initiatives to change business processes as well as how they
manage the standardized technologies they are introducing.
In our research only two practices proved critical for supporting Three critical management practices in stage 2 address issues
companies' efforts to generate value from the Business Silos stage: related to more centralized IT funding:
1. Business cases: accurate and compelling analyses of the 1. An IT steering committee: a small group of executives held
expected costs and benefits of a proposed change to a busi- accountable for determining IT priorities
ness process or technology
2. Centralized funding of enterprise applications: capital budget
2. Standardized project methodology: a disciplined, consistent allocations supporting implementation of enterprisewide
approach to converting an approved project concept into standards
an improved business process
3. An infrastructure renewal process: a funding mechanism for
This finding suggests that no IT governance or organizational projects intended primarily to retire aging technologies and
change processes are necessary in the first stage. When a business upgrade the technology base
unit owns its IT projects, good leaders see to it that the project
Four other practices relate to managing a standardized tech-
generates value. Getting business cases and project methodology
nology environment:
right doesn't sound very hard-but for most companies, it takes
lots of practice! 1. A formal architecture compliance process: a process for ensur-
It is unwise to move into the second stage of architecture ma- ing new projects are adopting standard technologies
turitybefore these two management practices have become part of 2. Architects on project teams: individuals responsible for en-
the company's DNA. These first two practices help companies gen- suring that technical standards are observed or that neces-
erate value in the first stage, out the value these practices generate sary exceptions are adopted
actually increases as companies mature their architectures. Com-
panies with weak business case and project .tnethodology practices 3. An architecture exception process: a formal process for iden-
will need to acquire those management prad:ices while tifying when exceptions to standards add value
ously attempting to develop practices specific to later stages. 4. A centralized standards team: technical experts who iden-
tify appropriate standards and recognize when to retire or
update those standards
Stage 2 Management Practices
The seven practices important to stage 2 reflect the growing
Stage 2 presents companies with far more daunting management need to address the challenges of using IT as a companywide, rather
challenges. As theystandardize technology, companies force new than business unit or functional, asset. Combined, they represent
behaviors on their business unit leaders and IT developers. When a significant difference in managing a stage 2 environment rela-
it comes to IT decisions, these leaders need to start thinking about tive to a stage 1. For example, in 1996 a $S billion process manu-
what's best for the company in addition to the business units' facturer learned that the company's IT spending represented 3.6
needs. This change in thinking affects how companies fund IT percent of sales compared to an industry average of 2 percent. To
bring IT costs under control, management supported a transition model that helped us consolidate and shape the company.
to Standardized Technology. The CIO noted that this decision led So once we reduced a couple thousand legacy applica-
to a number of important changes: "So, over the ensuing five years tions, once we went from 150 payroll systems to one, 28
we repatriated all of the IT from the groups and the geographies- email systems to one, we reduced IT spend by over 40 per-
that all reports centrally now. We standardized the desktoPi we cent. That's what we needed to do over the first three to
standardized the service offerings and our approach to services, four years of being the new company, because if you don't
which changed the budgeting mechanisms and governance mech- get the synergy of the merger in that timeframe, you're
anisms to focus on fewer higher-impact things rather than the lit- not going to ever be able to come up for air. 11
erally thousands of small projects that were getting done."
As a result of initiating all seven of the recommended prac- Stage 3 management practices help companies to understand
tices for stage 2, management had developed habits easing the the need for process integration and standardization and to adjust
transition into the Optimized Core. In 2001, with its IT costs around to the resulting organizational changes. Process standardization
industry average, the company began an ERP implementation. By depends on senior management leadership. Five practices emerg-
2004 management declared that key business processes were glob- ing as important in stage 3 include:
ally standard and efforts to transform the company had resulted
in an 18 percent increase in revenues and a 52 percent increase in 1. Enterprisewide process owners: individuals who own, design,
operating income over the prior year. and implement one or more enterprisewide processes
2. A statement of enterprise architecture guiding principles: tough

Stage 3 Management Practices choices specifying how IT will be applied in the company
(e.g., to serve customer interests versus to cut business
The practices implemented stage 2 are not sufficient to help process costs)
companies succeed in stage 3. Rebecca Rhoads is vice president
and CIO at Raytheon, a $21 billion aerospace and defense com- 3. Business leadership ofproject teams: high-level managers ac-
pany that has grown to its current formtl?rough mergers with countable for generating expected benefits and actively in-
Texas Instruments, Hughes, General Dynamics, and E-Systems. volved in project management
She explains that the practices guiding Raytheon to Standardized 4. Senior executive oversight of enterprise architecture: high-level
Technology following the mergers were just the first step in learn- reviews of enterprise architecture initiatives and design of
ing how to generate value from IT: incentives to encourage adoption
Over time, you will outgrow the governance model that 5. IT program managers: individuals who coordinate systems
makes you successful. And it took me awhile to figure and projects to map integration and minimize redundancy
that out because we had developed a governance model Rhoads found that, following the cost-cutting success, Ray-
that was so effective-everybody was so supportive of it. theon's senior management team started to adopt practices artic-
We had buy-in and alignment, and it was a governance ulating business direction and defining companywide processes.
At Raytheon, Rhoads says, these practices focused on how the 1. A one-page core diagram: a tool that communicates a high-
company would grow: level picture of integration and standardization require-
ments (as described in chapter 3)
We had fine-tuned a governance model, a financial model, 2. Postimplementation assessment: a formal process for secur-
planning tools, everything around consolidating legacy ing and communicating lessons learned from each project
systems and reducing our spend. We were successful in 3. A formal research and adoption process: a process for identi-
pulling down and getting the right systems in place for fying the new technologies that could have a significant
the company to manage human capital and finances. What impact on the company
we found next was that very quickly, once we had kind of
4. A full-time enterprise architecture team: IT staff who help' fit
declared victory around that, the shoe was too small-the
immediate business needs into the company's longer-term
governance model didn't fit right anymore. When we
vision
looked at our growth strategy and the fact that we had to
start making some important investments, and maybe These practices accelerate learning about the role of IT in
even some aggressive investments, the governance model enabling the business. BT, formerly British Telecom, is a £18.6 bil-
didn't support that. 12 lion U.K. company in the midst of transforming from a telephone
company to a provider of telecommunications solutions. To sup-
port the transformation, BT is aggressively pursuing the benefits
As the name implies, the Optimized Core stage involves digi-
associated with accelerated learning by instituting ninety-day proj-
tizing key business processes into the foundation for execution.
ect cycles. AI-Noor Ramji, Group CIO of BT, describes the com-
The critical management practices in stage 3 ensure that senior
pany's review process at the end of each cycle: "Every ninety days,
management is defining processes are built into the founda-
every IT program undergoes a postimplementation review, or PIR.
tion and providing ongoing leadership to protect and enhance
We use PIRs to make sure every program is delivering on its com-
the capabilities constituting the foundation.
mitments; if they don't deliver, the PIR proc:ess will cut them off.
The important thing is to measure and then calibrate all the pro-
Stage 4 Management Practices grams every ninety days. It's a new way of working, but after a few
cycles, people get used to it. 13
II
Companies in the fourth stage are sophisticated users of IT. They As Ramji notes, people get used to this kind of learning. In
have developed disciplined business processes and are learning fact, by stage 4, companies have learned how to squeeze addi-
how to define standard process components, enabling greater tional benefits from practices instituted in stage 1. For example,
agility in response to different business opportunities and cus- postimplementation reviews inform the business case by provid-
tomer needs. Thecritical management practices in this stage focus ing evidence of the actual benefits received from earlier projects.
on how companies communicate architecture goals and assess Consequently, the estimated benefits for proposed projects be-
their IT-enabled business change initiatives. Four practices are key come more predictable and realistic as companies move through
to stage 4: the architecture maturity stages.
Lessons from Top Performers: Greater Senior Management Involvement

What Helps the Most?
High performers on strategiC effectiveness enjoy greater senior
Large companies reaping benefits from stage 4 architectures have management involvement in enterprise architecture planning
generally implemented most, if not all, of the practices in figure and implementation. For example, senior management teams
5-4. All of these practices can make enterprise architecture efforts explicitly define the reqUirements for enterprise architecture at
more valuable, but they are not equally important. Specifically, almost half of the top-performing companies, but at only one-
top performers distinguish themselves from other companies in quarter of the other companies. And senior management in-
three ways: greater senior management involvement in enter- volvement does not stop at the planning stage. Senior managers
prise architecture issues; greater effort to build architecture into in high performers are also more than twice as likely as their
project methodology; and more mature enterprise architecture counterparts in other firms to be able to describe their company's
(table 5-1). enterprise architecture. They also provide oversight on architec-
ture initiatives.
In big companies, it's easy to imagine overwhelming senior
TABLE 5-1 managers and everyone else with IT and business process issues.
Lessons from high-performing companies Ramji explains how BT brought its priorities into focus:
Low strategic High strategic When I arrived at BT, there were 4,300 active projects.
effectiveness effectiveness
Characteristic (n = 78 firms) (n = 25 firms) The average person was working on 5.3 projects at any
Senior management involvement
given time. To introduce greater discipline and focus, we
Senior management explicitly defined 25% (of firms) 44% (of firms) developed an ROI model and pushed everything through
architecture requirements
Senior management oversees 45% (of firms) 60% (of firms)
it; as a result, we now have under 30 programs ... and
architecture initiatives the programs are judged on ROI. If there's no ROI be-
Senior managers who can describe 19% (of manage'rs) 39% (of managers)
high-level architecture
cause it's a speculative program, CEO sign-off is required.
Now, that's diScipline, and it frames the discussion around
Architecture built into project methodology
Project teams with architects assigned 49% (of projects) 81 % (of projects) the right issues. Why would we do this without an ROI or
Projects subject to architecture 60% (of projects) 80% (of projects) a CEO signature? We shouldn't do it just because some-
compliance review
one dreamt it Up.14
Median architecture maturity stage (1-4) 2 3
Note: Statistically significant difference between the responses of top 25% of firms on strategic Like many companies with more-mature architectures, BT has
effectiveness. Strategic effectiveness is measured as strategic outcomes (operational excellence,
customer intimacy, product innovation, and strategic agility) of architecture initiatives weighted by their reduced the number of projects it pursues at one time. Otherwise,
relative importance to each firm. The top 25% of firms on strategic effectiveness reported significantly
higher profitability, which correlated with industry-adjusted measures of companywide profitability. management attention can be diluted on projects of little signifi-
© 2005 MIT Sloan Center for Information Systems Research. Used with permission. cance to the company. The increased focus afforded by fewer ini-
tiatives improves outcomes on the projects that matter most.
strategic business benefits until later stages. Not surprisingly, then,

Architecture Built into Project Methodology
top-performing companies have more-mature architectures.
Companies realizing strategic benefits from enterprise architec-
ture have project methodologies emphasizing the importance of The Evolving Role of the CIO
architecture. Successful companies involve IT architects early in
project design and typically demand that projects pass an archi- The CIO is a key driver-in most companies, the CIO is the key
tectural compliance review. In these companies the IT architect driver-of enterprise architecture benefits. As companies advance
plays a pivotal role in project implementation. through the architecture stages, they need different CIO skills and
For example, at one financial services firm, an IT architect is governance models. Brent Glendening is the CIO of the
assigned to every project. The architect reviews requirements and and escalators division of Schindler, an SFr 8.3 billion (approxi-
identifies any needed capabilities that are inconsistent with archi- mately $6.3 billion) manufacturer located in Ebikon, Switzerland.
tecture standards. The architect is authorized to take actions in the He has led his company from Business Silos through Standardized
company's best interest-which may involve forcing a compro- Technology into Optimized Core, and is now moving it into Busi-
mise on functionality to maintain architectural integrity or, con- ness Modularity.1s He is one of the few CIOs in our research who
versely, allowing an exception to the standards to meet a unique has led his company through more than one transformation. He
business need. As in many companies that have established a key describes his role in migrating from stage 1 to stage 2 as having a
role for IT architects on business projects, the architects in this technical focus: "Back in the early 1990s the CIO role was very
company play the additional role of jointly establishing archi- technical. Both my country IT managers and myself had to un-
tecture standards. This means identifying when standard tech- derstand the technology, keep it running, and manage the vertical
nologies are outdated. It also means identifying the need for projects under our control. We saw that hardware standardization
new infrastructure and defining a standard before a was a critical success factor for the tasks at hand and was a prereq-
new project chooses one by default. Recently, this financial ser- uisite for moving to an optimized core."
vices company defined a standard for an integrated voice response Glendening led the introduction of a number of critical stage
.,
system in anticipation of several upcoming initiatives that other- 2 management practices:
wise would have sought their own solutions.
The challenge was to choose the right platforms and enforce
the standards. Coordination with finance and purchasing
Greater Architecture Maturity
was critical to ensure that the benefits of a standardized en-
As companies mature their architectures, they position them- vironment were not eroded by rogue purchases. Enforcing
selves for greater strategic impact from IT because their focus shifts and deploying the standards also provided us with the op-
from technology standardization to IT-enabled process standard- portunity to set up IT steering committees in each country
ization and integration. Maturing involves transitioning from sys- to explain and enforce IT decisions. The IT steering com-
tems and platforms that resemble a plate of cold spaghetti to mittees consisted of the country president, key business
modular architectures suited to a plug-and-play business model. owners, and the country IT managers. As standards were de-
Companies generate benefits in every stage, but they don't acquire ployed, these committees evolved from enforcement to the
establishment of IT strategy and the prioritization of proj- ularity, 50 percent of the CIOs had these second titles. This evolu-
ects and resources. tion of titles is a Signal to the organization about the skills, knowl-
edge, and responsibilities of the CIO.
By the late nineties, Glendening was helping the business as- There is no reason that one person, or a top team of two or three
sess the need for a transition to stage 3: leaders, cannot have all the skills listed in table 5-2 and provide
the leadership needed to move the company through multiple
The move to standardized processes was three to four
phases. But hiring the right CIO reqUires that companies under-
times more difficult than the move to standardized hard-
stand where they are going in the longer term with their operating
ware. There were three stages of learning we had to take
model and architecture. More top-level support should strengthen
the country presidents through. The first was, "Will it
the recent trend of longer tenures for CIOs.
work?/I Will a standard process be able to fully support the
needs of my country? The next stage was, "What does it
mean for my business?/I How will the structure, roles, and TABLE 5-2
performance of my business unit change? Then, finally, As the company's architecture matures, the CIO role evolves
"What does it mean for me?/I How would the job of a
country president change? Only after answering all of these Optimized Corel
Standardized Business
questions would they trust us enough to jointly redesign Business Silos Technology Modularity
their entire business processes, based on uniform corporate Key skills • Technical knowl- • Detailed knowl- • Ability to facilitate
products and processes. of the CIO edge to help edge of how the innovation off new
with standards business functions platform
decisions
Glendening found he had to transform his own skills, as he at- • Ability to manage • Detailed knowl-
• Ability to imple- large organizational edge of core
tempted to guide the business'transformation: "To make the leap ment standard change efforts bUSiness-could
project methodol- potentially run a
• Credibility with
to standardized processes, you must earn the trust of the business ogy and oversight business unit or business unit if
necessary
unit presidents and key executives. That will only happen if you • Ability to work with functional heads
top management • Ability to delegate
understand how the business works and about the busi- • Ability to manage
team to establish large central ownership of key
basic governance process and data
ness in their language. You have to be a businessman first and a budget
modules while still
• Ability to make • Understanding of
technologist second./I business case for architecture as a
ensuring adher-
standardization ence to standards
Glendening's experience is representative of other CIOs we business enabler
• Understanding of
surveyed. Each transformation required new leadership skills, as strategic benefits
of architecture
summarized in table 5-2. We also found that as these skills evolved,
Reports to: CEO or CFO CEO CEO
the titles of the CIOs we surveyed evolved as well. In the compa-
nies in the Business Silos stage, the head of IT had only the CIO or Percentage of 0% 26% 50%
IT heads with
vice president of IT title. Of the companies in the Standardized second title"
Technology stage, 36 percent of the CIOs had a second, business- 'Percentage of CIOs having second VP title, from samples of 25 CIOs in the United States and Europe.
oriented title such as vice president of strategy or vice president © 2005 IMD. Used with permission.
of logistics. Of the companies in Optimized Core or Business Mod-
6
Build the Foundation

One Project at a Time
SEVERAL YEARS AGO a friend of ours invited an interior deco-

rator to refurbish the living room in her family's house. The dec-
orator pointed out that any change to the living room would force
changes in the adjoining dining room if the horne was to look
"put together." No problem. But the eventual theme of the liv-
ing room and dining room argued for redoing the stairs to the sec-
ond floor. Of course, the carpet on the stairs extended throughout
the second floor (and quantity discounts were available), so the
carpet in the entire house was slated for replacement. Unfortu-
nately, the temptation to choose new and exciting colors for the
carpet proved too much to resist. But that meant the new carpet
wouldn't match the existing walls or draperies. Ultimately, the fam-
ily had to move out of the house for six weeks so the decorator
could fulfill her vision. The final effect was, to be sure, magnifi-
cent. And expensive. *
Companies encounter similar temptations when they map out
their foundation for execution. Once a vision is clear, it seems
*This chapter was coauthored with Nils O. Fonstad, a research scientist at

the MIT 7Sloan Center for Information Systems Research.
117
118 ENTERPRISE ARCHITECTURE AS STRATEGY Build the Foundation One Project at a Time 119
logical that the fastest way to create the foundation is to tear out nance mechanisms assuring that business and IT projects achieve
existing-typically functional-processes and systems. In times of both local and company-wide objectives. 2 At top performing com-
crisis or disruptive change, massive projects that build a new foun- panies the engagement model has three main ingredients:
dation can make sense. A company may need to transform quickly 1. Companywide IT governance: decision rights and account-
to survive. But massive change is expensive and risky, sometimes ability framework to encourage desirable behavior in the
too expensive and risky for a company to pursue all at once. use of IT
Large systems-based implementations have a lousy track record
of success. Many companies have implemented extensive ERP sys- 2. Project management: formalized project methodology, with
tems, expecting their core business processes to be automated into clear deliverables and regular checkpoints
a foundation. The size, complexity, disruption, cost, and learning 3. Linking mechanisms: processes and decision-making bodies
required all contributed to the failure of more than SO percent of that align incentives and connect the project-level activi-
these implementations, with millions of dollars and much man- ties to the overall IT governance
agement goodwill going down the drain.1
The alternative to the "big-bang" implementations is to build In large companies, the IT engagement model contains six key
the foundation one project at a time. To do so, every business proj- stakeholder groups: the overall company management, business
ect must not only meet its short-term business goals but also help unit management, and line or project management-each of which
implement (or at least not undermine) the company's architec- exists on both the IT and business sides of the company. (See figure
ture. Assigning each project responsibility for implementing a 6-1.) The different perspectives, objectives, and incentives of these
piece of the architecture has at least three benefits. First, it ensures groups create two challenges: coordination and alignment.
that the architecture isn't an ivory-tower abstraction of the world, At the company level, senior leaders set direction, create a cli-
but a useful model for how to do business. Second, it ensures that mate for success, and design incentives to meet companywide
the foundation for execution becomes increasingly robust as the goals. Business unit leaders focus on the of their
business and available technology evolve. Finally, it can cut costs business unit. Project leaders are typically eptirely focused on the
dramatically by distributing the costs and of implementing success of their projects, garnering all the company resources they
the company's enterprise architecture across many smaller and can find, beg, borrow, or steal to get the job done.
more-manageable projects. It is often no more expensive to im- The IT engagement model coordinates these three different lev-
plement project solutions in an architecturally sound manner, and els: company, business unit, and project. The IT governance estab-
over time the progress toward implementing the company's de- lishes high-level goals and incentives. Project management applies
sired architecture is substantial. the best practices of company-specific project management tools
and techniques to every major project, ensuring local project suc-
cess. Linking mechanisms ensure that, as projects move forward,
The IT Engagement Model
they reflect and inform the goals and priorities of all parties.
Building a foundation one project at a time requires the en- The second challenge of engagement is to align the company's
gagement of key stakeholders in the design, implementation, and IT and business activities to ensure that value is generated from
use of new IT and business process capabilities-an IT engagement IT investments. In some top-performing companies, IT-business
model. We define the IT engagement model as the system of gover- alignment is ingrained in every management process. More often,
FIGURE 6-1 gration and standardization are ignored and the foundation for
The IT engagement model execution never emerges. In this chapter we further describe the
ingredients of the IT engagement model and give examples of each.
ALIGNMENT We then show all three in action using a case example.
Business IT
Company
IT Governance
Companywide Enterprise Company
strategy and
IT governance architecture level
operations
IT governance is the decision rights and accountability framework
for encouraging desirable behaviors in the use of IT. IT governance
., ...................................... .
z reflects broader corporate governance principles while focusing on
o
Business unit the management and use of IT to achieve corporate performance
z strategy and
Business unit Business
15
II: operations
architecture unit level goals. 3 IT governance shouldn't be considered in isolation because IT
o is linked to other key company assets (Le., financial, human, know-
o
()
how/intellectual property, physical, and relational assets). Thus, IT
governance might share mechanisms, such as executive commit-
Project plan
Project IT
architecture
Project team tees and budget processes, with other asset-governance processes,
level
thereby aligning companywide decision-making processes.
IT governance encompasses five major decision areas related
to the management and use of IT in a firm, all of which should be
driven by the operating model:
1. IT principles: high-level decisions about the strategic role

of IT in the business
however, the IT and business managers' priorities lead
2. Enterprise architecture: the organizing logic for business
to unresolved differences. IT executives focus on providing the
processes and IT infrastructure
most powerful, risk-free IT environment possible. Business leaders
focus on cutting costs and delivering rapid solutions. CQnstruc- 3. IT infrastructure: centrally coordinated, shared IT services
tive tension between business and IT leads to effective resolution providing part of the foundation for execution
of these discrepancies. The IT engagement model helps leaders
4. Business application needs: business requirements for pur-
recognize and resolve their differences in accordance with com-
chased or internally developed IT applications that both
panywide business objectives.
use and build the foundation for execution
By linking IT governance and project management, the en-
gagement model coordinates and aligns. Without an engagement 5. Prioritization and investment: decisions about how much
model, project leaders execute in isolation. They choose solutions and where to invest in IT, including project approval and
that meet project goals, but the company's overall goals for inte- justification techniques
TABLE 6-1
Each of these decisions can be made by corporate, business
unit, or functional managers-or some combination-with the Key issues for each IT decision
operating model as a guide. Thus, the first step in designing IT
governance is to determine who should make, and be held ac- IT principles • How does the operating model translate to IT principles to guide IT
decision making?
countable for, each decision area. To help think about who should • What is the role of IT in the operating model?
• What are IT-desirable behaviors?
make these decisions, we provide in table 6-1 a sample of the • How will IT be funded - by the company or by business units?
questions that each decision area should cover. Enterprise • What are the company's core business processes? How are they related?
Every company engages in IT decision making, but firms dif- architecture • What information drives these core processes? How must this information
be integrated?
fer considerably in how thoughtfully they have defined account- • What technical capabilities should be standardized companywide to sup-
port IT efficiencies and facilitate process standardization and integration?
ability and how rigorously they formalize and communicate • What activities must be standardized companywide to support data
integration?
decision-making processes. Without formal IT governance, indi- • What technology choices will guide the company's approach to IT
initiatives?
vidual managers are left to resolve isolated issues as they arise.
These individual actions can be at odds with each other and can IT • What infrastructure services are most critical to achieving the company's
infrastructure operating model?
lead to misalignment and a lack of coordination. For example, the • What infrastructure services should be implemented companywide?
• What are the service-level requirements of those services?
CIO at a global transportation firm was instructed to cut the cor- • How should infrastructure services be priced?
• What is the plan for keeping underlying technologies up to date?
porate IT budget. This CIO introduced a charge-back system to • What infrastructure services should be outsourced?
curtail demand for IT services. Unhappy with the new charges,
Business • What are the market and business process opportunities for new business
managers within each of the business units hired local technical application applications? .
needs • How can business needs be addressed within architectural standards?
specialists to provide services. The new technical specialists did • When does a business need justify an exception to the standards?
• Who will own the outcomes of each project and institute organizational
not show up in the corporate IT budget, so it looked as if the CIO changes to ensure value?
had achieved his goal, but the new business unit hires increased, • What strategic experiments should we take on? How should we measure
success?
rather than decreased, the firm's total IT spending. Worse, the busi-
IT • What process changes or enhancements are strategically most important
ness unit employees developed local services that compromised the investment to the company?
integrity of the company's architecture, reducihg the quality of ser- and • What is the distribution in the current IT portfolio? Is this portfoliO consistent
prioritization with the company's objectives?
vice for customers of more than one business u'nit. • What is the relative importance of companywide versus business unit in-
vestments? Do actual investment practices reflect their relative importance?
In contrast, when UNICEF's senior managers recognized that • What is the right balance between top-down and bottom-up projects to
balance standardization and innovation?
IT was playing an increasingly strategic (and expensive) role in en-
abling the organization's mission of delivering services to children,
the senior management team defined the role of ITin the organi-
zation, decided on project priorities and funding levels, clarified
the need for shared services, and established organizationwide Over the past few years, IT has fundamentally transformed the way
standardization and integration requirements. 4 These managers UNICEF operates. Andre Spatz, UNICEF's CIO, explains:
held division directors accountable for implementation of global
systems, and the CIO was held accountable for delivering key in- As a CIO, I invest a lot of my time in making governance
frastructure services and coordinating IT use for the company. work at all levels, to educate, coach, mentor and lobby. In a
global organization, governance is quite a challenge. We at regular checkpoints, often called "gates." Many companies
face high pressures for synergy across UNICEF and at the design metrics for assessing project performance and conduct
same time, we have high pressures for local autonomy from postimplementation reviews to improve project managers' skills
the regional and country offices. CIO leadership in a global and the company's methodology.
IT organization is not just command and execute. We need IT-related projects have long been guided by a project life
to continually empower people with a vision and execu- cycle. Variations of the life cycle define a set of four to eight proj-
tion strategy, and position governance elements within ect phases (e.g., proposal, requirements, speCification, develop-
a global framework. Part of my role is to ensure that we ment, implementation, and change management), each with a
do not centralize too much and that our IT organization specific set of objectives, deliverables, and metrics. s Good project
adapts to the different cultural environments we work in.s management establishes a set of gates that check on projects'
progress and assess their chances for meeting their goals. Compa-
Companies with effective IT governance have profits that are nies may have as many as twelve to fifteen gates during a project.
20 percent higher than companies pursuing similar strategies. 6 Disciplined project management processes are a necessary condi-
But IT governance is a mystery to many key decision makers at tion for good engagement. They ensure that all projects execute
most companies. Our research indicates that, on average, only 38 certain tasks at certain times.
percent of senior managers in a company know how IT is gov- Few companies have integrated project governance into their
erned. And ignorance is not bliss. Senior management's awareness DNA like Raytheon. 9 Raytheon, the aerospace and defense com-
of IT governance processes proved to be the best indicator 9f gov- pany, has 80,000 employees worldwide with about 80 percent of
ernance effectiveness. At top-performing firms, as many as 80per- revenue from government and defense. Raytheon also provides and
cent of senior executives are aware of how IT is governed. manages nearly every air-traffic-control system around the world.
In our study of almost thre,e hundred companies around the About 30 percent to 40 percent of Raytheon's revenue is generated
world, we did not identify a single best formula for governing IT.? outside the United States. The company's customers are typically
However, one thing is clear: effective IT governance doesn't hap- men and women in uniform (e.g., military, pilots). To manage the
pen by accident. Top-performing companies ca,refully design gov- large number of programs within its seven semiautonomous busi-
ernance, and managers throughout those companies make daily ness units, Raytheon has developed a single approach for all proj-
decisions putting that design into practice. ects. Rebecca Rhoads, vice president and CIO, explains:
Project Management "When you have 8,000 programs, you very quickly de-
velop <l; governance model that manages your exceptions.
Project management has emerged as a critical competence in many, You have to have flawless execution. But if you start re-
if not most, companies. Increasingly, companies are adopting stan- viewing 8,000 programs every month to make sure you're
dardized project methodologies-either homegrown or industry- okay and that you're executing properly, you'll never fin-
developed approaches. A good project management methodology ish before you've got to start again. So we have a gover-
has well-defined process steps with clear deliverables to be reviewed nance model and a structure that reviews the programs on
an exception basis. We have scorecards and metrics and U)
don't look at the program in detail unless it's triggered an .§

exception on the scorecard." o Ol
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product development system (lPDS)-the multi-gate process for 'iii
managing all projects at Raytheon. IPDS is used to develop any so-

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Build the Foundation One Project at a Time 129
consistent manner to maximize learning. Good linking mechanisms

linkage connects the IT governance decisions about architecture
ensure that projects incrementally build the company's founda-
with project design decisions. For example, a company working to
tion and that the design of the company's foundation (its operat-
increase integration may have a mechanism for insisting that a
ing model and enterprise architecture) is informed by projects.
supply chain project-rather than focus narrowly on its own data
Figure 6-3 describes three important types of linking mecha-
needs-restructure an inventory database so that it facilitates an-
nisms for any IT engagement model: architecture linkage, business
ticipated future uses of the inventory data. Companies may fulfill
linkage, and alignment linkage. These three types of linking mech- architecture linkage with one mechanism, such as an architecture
anisms address the key alignment and coordination concerns of
review board. More commonly, firms employ multiple mechanisms,
the company as long as key stakeholders take responsibility for
ranging from architect training programs to architecture exception
them-and IT governance and project management are effective. processes.
Architecture linkage establishes and updates standards, reviews Similarly, business linkage ensures that business goals are trans-
projects for compliance, and approves exceptions. Architecture
lated effectively into project goals. Business linkage coordinates
projects, connects them to larger transformation efforts, and fo-
cuses projects on attacking specific problems in the best possible
FIGURE 6-3 way. For example, a key linking mechanism for companies pursu-
ing companywide standardized processes is the use of process
Types of linking mechanisms
owners with primary responsibility for designing and updating
processes. Business linkage also includes incentive programs to
Business IT
Business linkage guide behavior as new projects demand new ways of thinking.
• Program prioritization
• Business sponsors
Alignment linkage mechanisms ensure ongoing communica-
Enterprise
for projects
level tion and negotiation between IT and business concerns. Business-
• Early stage involvement
of people representing IT .relationship managers or business unit CIOs are typically a
companywide objectives
(e.g., hot housing) critical linkage for translating back and between business
• Regular project reviews goals and IT constraints. Other mechanisms in this category in-
Business
conducted by company-
unit level
level office clude a project management office, training and certification of
• Postimplementation
review tied to company project managers, and metrics for assessing projects.
goals
• Bonuses and incentives Effective engagement models have all three types of linking
Project
tied to company goals
• Process owners
level mechanisms implemented via a few well-understood mechanisms.
Earlier we t;1oted that a company's management practices evolve
Alignment linkage
• Business-IT relationship managers
Architecture linkage through the stages of architecture maturity. Many of these evolving
• Project teams include architect
• Project management office • Architecture exception management practices are linking mechanisms. As they are implemented and
• Project manager training • Architect training
• Project funding and continuation improved, they contribute to increasing sophistication of the IT en-
dependent upon architecture compliance gagement mode}. Over time, linking mechanisms can become in-
© 2005 MIT Sloan Center for Information Systems Research and IMD. Used with permission. creasingly embedded in IT governance and project management
processes so that linking becomes an organizational habit.
A case study of Toyota Motor Marketing Europe illustrates it while that exact car could be just over the border, a few kilome-
how a company links its projects to higher-level objectives to ters away. The same situation was true for repair parts. Manage-
build a foundation for execution one project at a time. ment realized that TMME had to start acting like a single European
entity rather than like individual country-based units.
Toyota Motor Marketing Europe: Architecture Principles

Continuous Architecture Improvement
To address this challenge, the IT unit in TMME has been working
Toyota Motor Co. is one of the world's leading automobile manu- to build a foundation for execution to support a European ope,rat-
facturers, offering a full range of models, from small passenger vehi- ing model. Members of the architecture group did not find the
cles to truckS.lO Toyota's global annual sales, combined with those company's European strategy statements specific enough to give
of Hino and Daihatsu, totaled 7.5 million units in 2004, which gen- them the direction they needed. So they surveyed the ongoing
erated almost $130 billion in net revenues. Toyota has forty-six strategic initiatives to understand the operational capabilities that
manufacturing companies in twenty-six countries and regions, ex- the company was trying to build. They condensed these into a
cluding Japan, and markets vehicles in more than 140 countries, simple statement that they used to guide the design of the archi-
supported by a consolidated workforce of 264,000 people. tecture. Ludo Vandervelden, CIO and vice president of the vehicle
Toyota Motor Europe is a holding company for Toyota Motor logistics group, explained: "Complete customer satisfaction and the
Marketing Europe (which handles the wholesale marketing of Toy- realization of cost reduction are the pillars around which we de-
ota and Lexus vehicles, parts, and accessories in Europe) and Toy- signed our customer-centric processes. Enterprise architecture is the
ota Motor Engineering & Manufacturing Europe (which manages road map to turn processes into efficient and effective solutions/'ll
Toyota's European manufacturing and engineering operations). From the statement of these desired capabilities, the archi-
Sales in Toyota's European operations increased 10 percent tecture group designed a high-level set of architectural principles
from 2003 to 2005 and represented 13.4 percent of total company showing how each principle helped the company achieve its goals.
revenues. Net income in Europe has revived-'{rom a loss in 2002 These principles drove the architecture linking process for TMME.
and small gain in 2003 to a respectable 6.3 percent of sales in fis- In 2000 the management team endorsed the principles. The IT
cal year 2005. unit then used the principles to start conversations with country-
Over the past ten years, Toyota Motor Marketing Europe's based units about the need to comply with a regional enterprise
(TMME) operations have changed dramatically. European opera- architecture. Peter Heinckiens, chief architect and deputy general
tions started as a central headquarters, handling only supply and manager of IT strategy, explained: "It was important to connect
demand management for Toyota's many independently managed the architecture principles to the company's goals. If we were to
country-based operations. As Toyota's sales grew in Europe, the talk to project managers only about architectural compliance, they
management team realized it needed to take more control over op- would dismiss it. By connecting the architecture with the strategy
erations if the company was to serve its European customers well. of the company, we make architecture relevant. Now, if managers
For example, before 1999 inventories of new cars were maintained resist complying with the architecture, we simply point out that
within country-based units-a customer desiring a green Corolla this means that they are not supporting Toyota's strategy. That
with an automatic transmission would have to wait months to get changes the conversation."
Project Methodology spare-parts inventory database that required updating, then that
project was given the task of updating the database and its in-
The architecture group then began implementation. After a few terface. In some cases, this led to a higher project cost, which
initial missteps, the group realized that the only way to effec- prompted the architecture group to look for other projects that
tively ensure that business projects didn't violate the architecture also required interaction with that database to share the cost. If
was to install a disciplined process for them and to assign an ar- no other projects could be found, then the architecture group
chitect to each one (wjth some architects handling many different funded the extra development cost itself. Heinckiens explained:
projects simultaneously). To introduce discipline into the project "If you have good engagement, most architecture efforts get
management process, the architecture group adapted and in- funded through the projects. The projects need to do the work
stalled a standard project methodology. anyway, so all you're doing is asking them to do the work in an ar-
chitecturally sound way. The cost of doing something right is usu-
Incentives ally no greater, and often leads to overall savings for the project."
Heinckiens assigned a project architect to each team and created a

Enforcement Authority
unique reward system for these architects. The first and most basic
requirement used to evaluate a project architect was whether his Another important component of TMME's engagement model is
or her project succeeded. If the project was successful-even if the authority to "pull the line" on a project. Because of the careful
it violated the architecture to some degree-the architect was linkage of the architecture with the company's strategic goals and
judged to have "nearly achieved" his or her goals. If the project extensive education about the importance of architecture, the
was successful,and the project helped implement the enterprise chitecture team has gained the credibility and authority it needs
architecture, then the architect "fully achieved" goals. And if the to stop a project if necessary. This is an authority that is rarely
project was successful, helped implement the enterprise used, but it is an integral part of the Toyota culture. 12 This option
ture, and the architecture work resulted in improvements to the gives the architects some added power to a(,:hieve TMME's goals
design of the overall enterprise architectur'e, then the architect and adds weight to the architecture linking process.
"exceeded" goals. This focus on successful project delivery con-
tributed to the project teams' acceptance of the project architects
Initial Appraisal
and further ensured that the architectural solutions were realistic
and aligned with business goals. These changes facilitated the im- But the architecture group found that this level of engagement
plementation of the architecture linkage at TMME .. was not e:oough. Projects were commissioned that were funda-
mentally out of line with the enterprise architecture, and no
Funding amount of effort from the project architects could prevent archi-
tecture violations. The architecture group realized that it had to
Another key element of the engagement model at TMME was engage earlier in the project life cycle-it had to be involved in the
funding. The central architecture group had a limited pool of funds creation of the project. Group members created a new first phase
to support projects. For example, if a project had to connect to a in the project methodology-called "appraisal"-in which the
architecture group worked with the management team to ensure model. And the results have been positive: Toyota's European de-
that the project was defined in a way that would support the en- livery lead time for vehicles was reduced by 35 percent, and the
terprise architecture. inventory of spare parts was reduced by almost SO percent. And
The appraisal phase now effectively achieves alignment link- Toyota's European unit sales have grown by more than 11 percent
age at TMME. For example, the IT group was asked to create a per year from 2001 through 2004.
Web-based service to allow customers to select automotive acces-
sories-steering wheel covers, gearshift knobs, and the like. The
What Is Good Engagement?
goal was to provide customers with pictures of the accessories and
the ability to choose the ones they wanted. The architecture Independently and together, the three ingredients of
group realized that the underlying data was located in a number create business value. Without effective IT governance, there is no
of places, including in an application whose vendor had gone out clarity about who makes what decision and how those people are
of business. Rather than build an application on top of this data held accountable. Without good project management, projects
structure, the architecture group worked with business managers risk cost and schedule overruns and failure to meet objectives.
to rescope the project and incorporate the design and construc- Without effective linking mechanisms, there are no regular op-
tion of a new accessories database. The initial project only had to portunities to have discussions and make decisions about a proj-
implement one small piece of this new database, but the design ect's ability to leverage the foundation and contribute to the
made it easy for future projects to finish the job. By being in- foundation's evolution. Together, the engagement model ingredi-
volved before the start of the project and res coping the proj- ents reinforce desirable behavior to create a foundation for execu-
ect, the architecture group helped push the architecture forward, tion one project at a time.
without increasing the cost of the original project. Based on case study research at eighteen companies, we have
identified some principles for ensuring that IT governance, proj-
Outcomes ect management, and linking mechanisms lead to successful
engagement:
TMME measures the effectiveness of its arch:i,tecture efforts with a
• Clear, specific, and actionable objectives. Effective IT engage-
number of metrics. It uses these metrics to measure the degree of
ment models clarify strategic objectives so standardization
architectural compliance of projects and how the architecture is
and integration requirements are clear. The first activity of
contributing to business success. The technical architectural com-
TMME's architecture group was creating this clear state-
pliance of projects increased from 26 percent in 2001 to 93 per-
ment and gaining top management's endorsement of it.
cent in 2005. In addition, the company assessed- the degree to
which its enterprise architecture enabled strategic initiatives. The • Motivation to meet company goals. Formal incentives (e.g.,
score on this assessment improved by 76 percent between 2001 bonus plans, annual reviews, and performance metrics)
and 2005.13 help focus business unit leaders and project managers on
Toyota Motor Marketing Europe's engagement model has company, business unit, and project goals. For TMME,
helped transform Toyota's European operations from a set of in- these were embodied in the reward systems of the project
dependent country-based units to a more integrated operating managers and project architects.
, 136 ENTERPRISE ARCHITECTURE AS STRATEGY Build the Foundation One Project at a Time 137
• Enforcement authority. Complementary to formal incen- sosco: The Engagement Model in Action
tives are formal enforcements. Both help build an effort's
credibility. Enforcement provides a process for changing, One large U.S.-based software and services company had tradi-
discontinuing, or granting an exception to a project that tionally been structured to encourage business unit specializa-
is not compliant with the target enterprise architecture. In tion.1 4 The company, which we will call "S0SCO, 11 had no agents
several companies, the first project to actually get penal- or branches. Instead, each business unit developed a call center with
ized for noncompliance (either by being delayed or losing specialized customer service representatives. When a new CEO
funding) was an important tipping pOint that boosted the was hired in early 2000, he created a vision for a more integrated
credibility of engagement efforts. operating model (a Coordination model, with high integration ard
• Early intervention and prevention. Successful IT groups en- low standardization). IT management used this vision to develop
gage with business projects during the earliest stages of a new enterprise architecture. The new architecture specified that
development to prevent bad solutions from being designed SOSCO customers would gain access to the company's products
in the first place and to learn how to improve the target and services through multiple channels integrated through a stan-
architecture. For example, Raytheon's IT organization en- dardized technology and data environment.
gages with business projects in the first stages.
• Transparent, regular, two-way communication. With good Designing IT Governance for Companywide Synergies
engagement it is clear to everyone how the model works
and who is involved. In addition, alignment and coordi- To implement the new vision for a more integrated firm, SOSCO
nation are not simply achieved; they are maintained made structural changes emphasizing companywide processes. For
through regular between business and IT and example, the business unit marketing departments were consoli-
across business units. This helps dispel perceptions that dated in a corporate marketing function. A key change was the
engagement processes are simply a way for the corporate creation of a new companywide operations (CWO) unit. Headed by
center or IT to assert its will; it enables"1?arties to learn an executive vice president, CWO is responsible for all company-
from each other, negotiate differences, and develop a com- wide projects.
mon understanding of the foundation for execution. In addition to structural changes, SOSCO designed IT gover-
nance processes to encourage companywide synergies. SOSCO clar-
And, as noted in Chapter 5, the results of engagement can be
ified IT decision rights for each of the key IT decisions (see table 6-2),
profound. Companies whose architectural initiatives were strate-
vesting decision-making responsibilities in five different groups:
gically effective had architects on 81 percent of their project
teams; less successful companies had architects on only 49 per- 1. SOSCO's executive committee: consists of the CEO, the pres-
cent of teams. Successful companies reviewed significantly more idents of the seven major operating companies, the CIO,
of their projects for architectural compliance and involved more and the head of CWO. This committee meets monthly to
of their senior managers in the definition and oversight of archi- clarify companywide goals and distinguish company and
tectural initiatives. business unit boundaries.
2. Companywide operations: defines and implements major TABLE 6-2
projects reflecting the companywide goals specified by the SOSCO's IT governance arrangements
executive committee. CWO has a staff of 275, including
15 program managers who coordinate multiple projects IT decision Process
related to a single business process (e.g., customer relation- IT principles Executive committee of CEO, CIO, executive vice president of
ship management). companywide operations (CWO), 7 business unit general managers
Enterprise Architecture committee of 15 senior technologists headed by CTO

3. The IT unit: headed by the corporate CIO. Business unit architecture
CIOs have dual reporting relationships-to the CIO and IT infrastructure Senior IT management team
strategies
to the general managers of their business units. The IT
Business CWO unit for companywide systems; business unit leaders for
unit designs shared IT services and delivers service-level needs local systems
agreements negotiated with each of the business units.
IT investment Investment steering committee of 9 senior managers, including IT,
The IT unit takes responsibility for ensuring that invest- and prioritization headed by vice president of CWO
ments in the company's technical infrastructure move © 2005 MIT Sloan Center for Information Systems Research. Used with permission.
the company toward its foundation for execution.
4. The architecture committee: a subset of key technologists

within the IT unit. The fifteen-member architecture com-
mittee defines technical standards and works with IT ar- the investment steering committee. Thus, as the executive com-
chitects to identify common needs across the company's mittee defines company priorities, the executive vice president
several hundred business unit and companywide projects. takes responsibility for reflecting those priorities in the funding
decisions of the investment steering committee and the project
5. The investment steering committee: establishes project prior- designs of CWO.
ities. Chaired by the executive vice of CWO, this
nine-member committee includes seni'qr managers repre- Project Management
senting each of the major business units. In establishing
project priorities, the committee considers the potential Each project at SOSCO follows a standard project development
value to the company of both business-unit-specific and methodology mandating an eight-phase project life cycle. Every
company projects. The committee also considers the avail- senior manager and project team member is familiar with the
ability of needed infrastructure and the readiness of the company's internally developed project methodology. Early phases
firm to effectively implement each project. of the project life cycle help determine the viability of the proj-
ect-ability to implement, likelihood of receiving benefits, and
SOSCO ensures coordination of IT decisions through overlap- availability of needed infrastructure. For companywide projects,
ping memberships in these decision structures. For example, CWO's management assigns a project sponsor in the key business unit as
executive vice president is on the executive committee and heads well as coleaders from CWO and the business unit.
Linkages Between IT Governance and their individual objectives. In this way, SOSCO has supported its
Project Management engagement processes with an incentive system that rewards de-
sired behavior.
SOSCO has implemented a set of roles and processes at the project IT governance and project management are explicitly con-
level to ensure that IT governance decisions are communicated to nected via business, architecture, and alignment linking mech-
the projects and enacted throughout the firm. To link project anisms. As a result, the project management process reinforces
management with IT governance, SOSCO has implemented the high-level governance decisions. Typically SOSCO spends only 2
three major types of linking mechanisms to coordinate project percent of project expenses on projects eventually declared non-
goals with the company's overall goals and to achieve on-time, viable while delivering 99 percent of its projects on time and on
on-budget results. budget.
The architecture linking mechanisms consist of a network of
key decision makers, including project architects, CWO, and,
with the most important projects, the CEO. Like TMME, SOSCO
Using Enterprise Architecture as an
assigns an IT architect to each project team. These project archi-
Organizational Compass
tects are responsible for ensuring that individual projects are com- Describing the challenges of implementing an IT architecture, Jim
pliant with technology standards and that related projects reuse Crookes, chief architect at BT, remarked: "Architecture implemen-
technologies as appropriate. If a project architect feels an excep- tation is like sailing. You have to use the energy of the wind, but
tion to the standards is warranted, he or she either seeks approval it's not always blowing in the same direction you want to go. It's
from one of the assistant vice presidents authorized to grant ex- a lot easier to tack your way forward than to row into the teeth of
ceptions or refers the request to the architecture committee. the wind, which is what architects sometimes try to do. You have
CWO members lead companywide projects and take responsi- to use the momentum of business projects to get to where you
bility for the business linkage. In addition, to ensure that major want to go, even if it means you're not always heading directly
projects are on track, the CEO meets with unit presidents toward your goal." 15
every month to review financials and discuss"progress. These one- Companies building a 'foundation for execution should use
on-one meetings serve to identify the need for any senior man- their enterprise architecture as a compass, directing the company
agement intervention, to reassess resource allocations and goals, toward its intended operating model. To stay on track these com-
and to avoid surprises in business unit or company outcomes. panies use an IT engagement model to influence the direction of
These meetings are an important business linkage mechanism. projects and ensure that each project achieves both local and
Finally, the CEO encourages behavior consisteht with his vi- companywide objectives.
sion through a bonus program for all employees based on com- By embedding architectural improvements in projects, the
pany goals. In 2004 every SOSCO employee-from the mailroom costs of architectural transformation are spread over those projects
clerk to the top executive-received a 15 percent bonus to recog- with little incremental cost to individual ones. By engaging with
nize achievement of those goals. Senior managers were also com- projects early and regularly, a company can ensure that each proj-
pensated for operating company results and their success in meeting ect helps build out the architecture and that the architecture is
realistic and aligned with company goals. Effective engagement

ensures that all key stakeholders share the risks and responsibili-
ties associated with changing business process and IT systems
necessary for achieving companywide synergies. And with good
engagement, the company ensures that the right foundation gets 7
built steadily and reliably, one project at a time.
Use Enterprise Architecture,

to Guide Outsourcing
IN THE EARLY 1970S, Mazda and Isuzu entered the U.S. market
for small pickup trucks. But rather than manufacturing the trucks
themselves, they outsourced the final assembly to Ford and GM.
Why? Because of the price of chickens in Germany.1
Ten years earlier, a trade war had erupted between the United
States and West Germany over the sale of U.S. poultry in the West
German market. Concerned about the health of its domestic in-
dustry, the European Economic Community, led by West Germany
and France, designated poultry as an important growth industry
and tripled the tariffs on U.S. poultry. Exports of U.S. chickens to
Europe dropped from more than $30 million to less than $600,000.
To retaliate, the United States slapped a tariff of 25 percent on "au-
tomobile trucks," targeting the import of VW cargo vans and pickup
trucks. The'sales of VW light trucks in the United States dropped
by a third the following year and ended soon after.
When the Japanese entered the U.S. market ten years later, the
"chicken tariff" found a new target. The Japanese realized that to
avoid the tariff, they had to do the final assembly of their trucks
in the United States. The cost of building assembly plants was pro-
hibitive, so they found U.S. partners to help them. To this day,
143
144 ENTERPRISE ARCHITECTURE AS STRATEGY Use Enterprise Architecture to Guide Outsourcing 145
FIGURE 7-1
more than 99 percent of the light trucks on U.S. roads are assem-
bled in the United States. Outsourcing objectives
Like Japanese automakers, many companies find that for cost,
regulatory, or other reasons, they have to outsource critical activities. Efficiency objectives .-----,-,---,,----,--,----,--,--,---,----,
Cost reduction
IT and IT-enabled business processes are candidates for outsourcing,
Variable capacity/
but the importance of a company's foundation for execution argues expertise on demand
for exercising caution. Outsourcing can be a valuable approach to
Architectural improvement
helping mature an architecture, but a company can lose ground if objectives
Reengineer internal
outsourcing is inappropriately applied. In this chapter we discuss business processes
how architecture can be a guide to outsourcing decisions. Increase business
process discipline
Strategic adaptation
Three Types of Outsourcing Relationships objectives
Management focus
on competencies
Companies outsource IT and IT-enabled business processes for a
Strategic agility
number of reasons, including lower costs, variable capacity, risk
mitigation, process reengineering, and the opportunity to focus Leverage new IT
on core capabilities. Consistent with other studies, our study of Mitigate technology risks
eighty outsourcing efforts found that executives most often cite Technology/
variable capacity (almost 90% of respondents) and cost savings expertise transfer
10 20 30 40 50 60 70 80 90
(more than 70%) as key objectives for outsourcing (figure 7-1).2
Percentage of contracts citing objective
Less than a third of executives cite objectives related more specif- as important*
ically to supporting architectural initiatives, such as process reengi- • Survey conducted of 80 outsourcing contracts. Results reflect number of contracts that cited
neering or business process discipline. .... \ objective as important (4) or very important (5) on a scale of 1 to 5.'
To understand the architectural implications of outsourcing, © 2005 MIT Sloan Center for Information Systems Research and Cynthia M. Beath. Used with
permission.
it's useful to recognize the differences between three types of out-
sourcing relationships: (1) a strategic partnership, in which an out-
sourcer takes on responsibilities for an integrated set of client
operationsj (2) a cosourcing alliance, in which the client and ven-
dor share management responsibility for project succeSSj and (3)
a transaction relationship, in which an outsourcer executes a well-
defined, repeatable- IT or IT-enabled business process for a client.
These three types of outsourcing relationships have different
benefit-risk profiles (figure 7-2). Each also has differentimplica-
tions for enterprise architecture.
FIGURE 7-2
Strategic Partnerships
Three outsourcing models
In a strategic partnership, vendors provide an integrated set of op-
Three mutually exclusive outsourcing models erational services. For example, a single strategic partnership deal
Strategic might encompass mainframe operations, WAN and LAN manage-
partnership Cosourcing Transaction
ment, telephony, Web hosting, and help desk services. Similarly,
What is Broad responsibility Project management Narrowly defined, outsourcing of an IT-intensive function like human resource man-
outsourced for operational activities and implementation repeatable process
agement can include processes such as reward and recognition,
Key Bottom-line impact Project success Quality and/or cost per
metrics transaction learning and development, employee documentation, and
Client- Negotiated Joint project Arm's length
sory services. 3 By integrating service offerings, the vendor adds value
vendor accountability management beyond the value of the individual services.
relationship
Client Cost savings; variable Cost savings; access World-class processes; How strategic partnerships build a
expectationsa capacity; management to expertise on variable capacity;
focus on core demand management focus on foundation for execution
competencies core competencies
Strategic partnerships should allow companies to focus on core
Vendor Capability to deliver Labor arbitrage; Standard best practice
offerings b broad range of project management process components; capabilities while a vendor handles major operational responsibili-
specialized services; expertise; expertise economies of scale;
integration expertise; on specialized distinctive platforms or ties. 4 Strategic partnerships often deliver cost savings (at least ini-
disciplined practices; technologies assets
economies of scale
tially) by introducing more disciplined processes and by providing
variable capacity to limit a company's need to build excess capacity.
Client 50% 63% 90%
successc Vendors profit from strategic partnerships by leveraging economies
Vendor 50% 75% 90%
success of scale and scope, unique expertise, and disciplined management
Decreasing risk practices. Despite the potential for mutual benefit, these deals are
risky. In our study only 50 percent of strategic partnerships were
a. Client expectations based on 80 surveys of outsourcing success; there was a statistically significant
relationship between the outsourcing model and the listed client expet;tations. viewed as successful by the client company.
b. Derived from 8 case studies of company outsourcing experience.
c. Client views based on 80 surveys of outsourcing success. Statements presented: "Within the firm Metrics are part of the problem. While vendors expect to earn
we view this outsourcing agreement as a success" and "The vendor is profiting from the outsourcing
arrangement." Percentage is based on number of respondents who rated the statement as a 4 or 5
a margin on the integrated set of services, clients often assess their
on a scale of 1 to 5. partners based on the price and performance of each individual
© 2005 MIT Sloan Center for Information Systems Research and Cynthia M. Beath. Used with
permission.
service-level agreement. If the client's management practices are
sloppy, the vendor can introduce efficiencies, and both parties can
realize value from the relationship. However, some of the efficien-
cies are realized only if clients forgo entrenched behaviors. In IT
partnerships many companies struggle with behavior changes that
require adhering to technology standards or limiting the number
of discretionary changes to systems and system schedules. Without
behavioral changes, there may not be enough real savings for both and health conscious. Significant consolidation in the industry
client and vendor to achieve their bottom-line objectives. meant that Campbell, a medium-sized firm, competed in an indus-
The behavior changes necessary for outsourcing success are also try dominated by giants such as Kraft, Unilever, and Nestle. More-
required for building a foundation for execution. Strategic part- over, Campbell's upstream agribusiness partners and downstream
nerships involving IT or IT-intensive functions (e.g., human re- retail partners were consolidating and, as a result, had become in-
sources, accounting) engage external experts in the process of creasingly powerful in their dealings with Campbell and its peers.
defining and implementing standardized technologies and manage- Meanwhile, the downstream retailers were increasing their offer-
ment practices. For companies in the Business Silos stage or early ings in private-label foods.
in the Standardized Technology stage, vendors' best practices will In 2002 CEO Doug Conant committed to moving Campbell
inevitably lead to consolidation of existing technical platforms from a Diversification operating model (low standardization and
and a reduction in the variety of technologies in use. A strategic low integration) to a Unification model (high standardization and
partnership forces a shared-services mentality, requiring business high integration). His planned transformation had huge implica-
leaders to come to agreement on which services will be provided tions for IT, and he brought in Doreen Wright as senior vice pres-
centrally and which will be provided locally. Of course, compa- ident and the company's first corporate CIO, to address the IT
nies can introduce shared services without external assistance, but challenge. According to Wright:
they need expertise and a commitment to continuously improv-
ing their administrative functions. Looking at the IT function is like having the company
A strategic partnership is particularly valuable early in stage look at itself in the mirror: Whatever's wrong with the
2 (Standardized Technology) because it helps move a company company will show up in the IT function. Clearly, Camp-
toward increased standardization. In an effective partnership, the bell had been run as a portfolio of independent busi-
client benefits from world-class operations without having to in- nesses-too independent. Similarly, the various IT groups
vest in the development of world-class skills. Campbell Soup Co. were independent ... We were a hodgepodge of disparate
provides an example of how such partnerships can work to help a computing platforms and network protocols without an
.'.
company develop its foundation for execution: enterprise [architecture]. We had every conceivable tech-
nology running somewhere. [We were] a confederation of
Case study of a strategic partnership: global IT groups, with little or no governance and an in-
Campbell Soup Co. flexible IT infrastructure that was very costly to support.
Campbell Soup Co., a $7 billion food company, sells more than
just soup.s Its brands in the United States include Pepperidge Farm, To transform itself, Campbell's management team pursued a
Godiva, V8, Pace, and Prego as well as Campbell's. In FY 2004, Camp- strategy of distinguishing between core and non core business ac-
bell had approximately 24,000 employees in twenty-two countries tivities. The company is managing core activities-sales, market-
and earned $647 million (an increase of 8.7% over FY 2003). ing, R&D, retail execution, trade management, and product life
At the tum of the last century, Campbell, like other compa- cycle management-for differentiation and growth. In contrast,
nies in the consumer packaged-food industry, was experiencing Campbell is managing noncore activities for low cost. Outsourcing
competitive pressures from many sides. Consumers were both price is one approach to managing those noncore activities. Wright says:
Because we are trying to transform ourselves, not just from proved IT service quality, reliability, and security; improved IT's
a technology perspective, but much more importantly alignment and relationships with the business; and strengthened
from a business perspective, the thing that I need more vendor relationships. From 2002 to 2004, IT banked nearly $S mil-
than anything else is management capacity. I need the ca- lion in one-time savings and $8 million in annual savings. CIO
pacity of my staff to introduce the new, to understand it, Wright credits more than half ofthe annual savings to various ad-
and keep up. I've got business people clamoring to do data justments in Campbell's sourcing arrangements, including im-
synchronization and collaborative planning with our cus- proved service levels at no additional cost and various cost-saving
tomers, and introducing new R&D capabilities, and trade upgrades, migrations, and replacements.
promotion capabilities, all of that kind of stuff. The last Despite the cost savings, Wright believes the real value of out-
thing I want to soak up my leaders' heads with is the run- sourcing lies elsewhere: "There are things that you do as a company
ning of the computers themselves. I need everybody's mind which are critical. You couldn't run your company without them,
on introducing the new. So, I completely outsource the in- but they should not differentiate you. They should be as standard
frastructure. The running of infrastructure is all done by as possible. And if you can find someone who can do it as well or
IBM. The maintaining of the legacy applications is proba- better at an equal or lower cost, why would you not do that? What
bly seventy-five percent outsourced. In almost all cases, I you would get out of that is management capacity to focus on the
hire a third party as my integrator. That doesn't mean we things that are core and differentiating to your company."
don't have a high level of involvement, but I have the ex- Campbell is now moving its architecture into stage 3 (Opti-
pertise of a partner who knows how to integrate. mized Core). To achieve this transition, the company has engaged
IBM to lead its implementation of an ERP system. With a reliable,
Consistent with its business strategy, the IT unit at Campbell secure infrastructure as a base, Campbell managers will take re-
has adopted an "IS Lite" organization model. 6 In an IS Lite model sponsibility for business process design and for changing organi-
many traditional IT services (applications development, mainte- zational behaviors. IBM project managers will lead the technical
nance, and computer operations) are outsourced. Technical gover- side of the implementation. To make this arrangement work, both
nance, strategy (Le., architecture), and shared infrastructure are parties have made a long-term commitment to enhance Camp-
centralized for coherence and cost-efficiency. Relationship manage- bell's IT capabilities. Says Wright:
ment, business process analysis, and solution delivery are localized
in the businesses to ensure business alignment and speed to market. You know, if I were providing my own data center ser-
Between 2002 and 2004 Campbell moved its architecture from vices, I would blow it sometimes. I would make bad deci-
stage one (BUSiness Silos) to late stage 2 (Standardized Technology). sions. It is not different when you have an outsourcer.
With the help of IBM, its strategic partner, Campbell achieved vir- What is important is that the two sides are each deriving
tually 100 percent global commonality with respect to standards, benefits, that they trust each other, and that each gives
networks, and e-mail. Except for some international facilities, the and takes. A good number of our IBM people, including
company is running common operating systems, platforms, and the manager, sit right with us in Camden [New Jersey].
middleware. This standardization has reduced IT unit costs; im- The manager reports to the Campbell CTO and is at every
staff meeting. They have obviously signed confidentiality a growing model for delivering new systems and processes that
agreements. They have access to our business and IT strate- demand both business and technology expertise.
gic plans, and the senior IBM partner has strong relation- For example, 'one large financial services company has engaged
ships with many of our business leaders, in addition to an offshore company_to handle much of its development. The ven-
me. They have a huge vested interest in this company. dor partner has brought project management staff to the client's
They want us to win like we want us to win, and there is a site so that teams comprise client staff, and on-site and offshore
very, very high level of trust. vendor staff. As is typical of co sourcing alliances, this relationship
draws on both the client's deep business knowledge and the ven-
An effective strategic partnership involves constant negotia- dor's specialized skills in technology and project management.?
tion around inevitable changes in business and technology. Clients
need vendors to adapt their offerings and processes to changing How cosourcing alliances build a
business conditions; vendors need clients to adjust their behav- foundation for execution
iors to permit appropriate process innovations and service changes. Client interest in cosourcing arises from the desire to access
Successful partnerships like the Campbell-IBM partnership often technical and project management expertise on an as-needed basis.
apply a first-choice provider principle, meaning that the strategic In addition, clients see opportunities for cost savings in their al-
partner is favored (although not always chosen) when new activi- liances. Vendors meet these demands by building project man-
ties are to be outsourced. This reduces search costs for the client agement, industry, and technical expertise and then leveraging
and sales costs for the vendor-and it encourages both partners that expertise across multiple projects with multiple clients. Ven-
to focus on strategic value, not just lower costs, from the out- dors meet client demands for cost savings by adding offshore re-
sourcing arrangement. sources to their talent pools. A co sourcing alliance allows a client
As the Campbell case shows., a strategic partnership can con- firm to rely on a core set of project team members-some internal,.
tinue to reap benefits beyond stage 2, as managers in the client some external. In response to shifts in project loads, clients rely
company focus on addressing new strategic opportunities, rather on vendors to provide supplemental resour-<=es. Vendors build in
than ongoing operations. But a stage 3 relatid:qship may benefit protections against extreme and unanticipated variations but can
even more from a cosourcing alliance. normally shift talent between clients.
Cosourcing alliances are not aHisky as strategic partnerships.
Cosourcing Alliances In our study 63 percent of clients felt their alliance was successful,
and 75 percent felt the vendor was making money on the relation-
In a strategic alliance, responsibilities are assigned clearly to one ship 7-2). The risks of co sourcing can be managed through
partner. The client and vendor define boundaries distinguishing negotiation of accountabilities. As with strategic partnerships,
the responsibilities of each party. In a cosourcing alliance, clients however, metrics can be a challenge. In an effective alliance, both
and vendors share responsibilities, usually in a project-oriented the vendor and client populate project teams. While the proj-
environment. Team members from both client and vendor con- ect leader-often from the vendor-is ultimately accountable for
verge and form a team to meet a business objective. Co sourcing is the outcome, it is a team that delivers (or doesn't deliver). Thus,
IS4 ENTERPRISE ARCHITECTURE AS STRATEGY Use Enterprise Architecture to Guide Outsourcing ISS
the contribution of the outsourcer in a cosourcing alliance is diffi- second half of the twentieth century. The shipping industry, in
cult to isolate from the contribution of the client's employees. Dow which it had its roots, was in decline. The city's population of
Chemical, which deploys project teams with, on average, four ven- 468,000 was decreasing. The outward migration of younger, skilled
dor employees for every internal team member, has a set of met- people had resulted in a higher proportion of dependent people.
rics to assess team productivity on factors such as function pOints. In 1998, 33 percent of the population was unemployed, retired, or
But ultimately, the CIO notes, the measure of success for the out- unable to work.
sourcing arrangement is the project outcome. He considers his al- David Henshaw, who became chief executive of Liverpool City
liance a success because alliance teams consistently deliver high Council (LCC) in October 1999, inherited an organization in col-
functionality on time and on budget. lapse. Out of 426 local authorities, LCC was third from the bottom
Cosourcing proves particularly valuable for companies in the in terms of service quality, and it had the highest local tax in the
third architecture maturity stage (Optimized Core). Companies at- United Kingdom. Delivery of social services such as housing, med-
tempting to integrate their data and standardize their processes ical care, educational support, and financial benefits was slow,
often have to rip out legacy systems and replace those systems error-prone, and inefficient.
with new ones with which they have little experience (e.g., ERP Henshaw was charged with achieving the city council's goal
systems, Web services, customer relationship management sys- of "making Liverpool a premier European city again." He wanted
tems, enterprise application integration software). Rather than in- to reengineer the council's services around the needs of its cus-
ternally develop expertise in these new technologies, companies tomers, stripping out bureaucracy and focusing on frontline ser-
can rely on experienced third parties. 8 Vendors can help imple- vice delivery. IT was integral to this vision of improving service,
ment, maintain, upgrade, and where necessary, link to other tech- quality, and cost.
nologies. They can also help with process-reengineering efforts. In 2001, to deliver new processes and underlying technology
With this kind of help from a v:endor, the client can focus man- support, LCC entered the joint venture with BT. LDL took respon-
agement attention on the organizational changes necessary to im- sibility for five services, cosourced with LCC: (1) revenues and
plement more standardized and integrated environments. benefits, (2) HR, (3) payroll, (4) information technology, and (5)
Cosourcing alliances can take a variety of f6rms. Liverpool Di- call center functions. LDL was managed via a joint venture board
rect Ltd. (LDL) is a cosourcing alliance establish'ed as a jOint ven- made up of the CEO, four BT directors, and two LCC represen-
ture between Liverpool City Council and BT. The case provides an tatives. Staff (30 from BT and 880 from LCC) who joined LDL
example of how a cosourcing alliance allowed an organization (in reported to LDL management but, partly to appease union require-
this case a local government) to achieve improved processes, lower ments, remained employees of their respective companies, with
costs, and architecture maturity. their existing salary and benefits.
According to the joint venture and shareholders agreement,
Case study of a cosourcing alliance: LCC paid the joint venture £30 million a year for the ten years
Liverpool Direct Ltd. of the contract. This annual payment represented LCe's estimate
Liverpool, the sixth-largest city in the United Kingdom, is fa- of how much it would cost the council to run the five services
mous as the home of the Beatles and Liverpool Football Club. 9 Once cosourced with LDL. The annual £30 million payment covered
a dominant trading center, Liverpool fell on hard times during the the salaries of LCC employees and the interest on an operating
lease, a financial arrangement that allowed BT to spread its agreed- rates, from sixteen days to the national average of ten days per
upon investment in IT over the life of the contract. BT is entitled person. The council expected these benefits to grow over time.
to the remainder of the annual payment to cover its own costs Although most cosourcing alliances don't have a formal joint
and generate a profit. venture arrangement, all co sourcing alliances depend on the ef-
LDL's first move was to rationalize and standardize the IT forts of joint client-vendor teams. Cosourcing can help companies
infrastructure. Standards for hardware were defined for all new standardize technologies in the second stage of architecture ma-
PCs and peripherals. Staff began to consolidate the council's 500 turity (as in the case of Liverpool City Council), but co sourcing
different databases into a single database. Software standards en- alliances are particularly valuable for helping companies through
sured compatibility between services and facilitated the transfer stage 3 (Optimized Core). It is in stage 3 that a vendor can provide
of information. IT expertise, business process design, and project management sup-
More important, LDL improved the delivery of city services to port to assist with the transformation to more standardized and in-
residents. In the revenues and benefits department, LDL reengi- tegrated business processes. Yet as companies move into the fourth
neered business processes and introduced a document manage- stage (Business Modularity) and rely more on external processes
ment system. These changes reduced the department's backlog for their plug-and-play environments, co sourcing may give way
from 60,000 queries to 4,OOO-a reduction of about a year's worth to more transaction relationships.
of work. Revenue collection also improved, resulting in an esti-
mated gain of £1.5 million from high-rent debtors who had disputes Transaction Relationships
with the council. LDL implemented a new customer relation-
ship management system to redirect most resident inquiries to Transaction relationships-sometimes called "out-tasking"-out-
the call center. By June 2002 the call center handled and resolved source specific services like accounts payable processing, expense
90 percent of inquiries at the (lrst pOint of contact. Abandoned reporting, desktop provisioning, backup, and disaster recovery.
calls dropped from 25 percent to 12 percent. In parallel, the ser- Like strategic partnerships, transaction relationships assign clear
vice grew from 80 seats taking 40,000 calls per month during of- responsibility to the vendor for executing the outsourced processes,
fice hours to a 24/7 operation, with 225 seats"handling 160,000 but they are much more narrowly defined, arm's-length relation-
calls. LDL also implemented an ERP system t'o replace the old ships. Transaction relationships outsource not only business process
paper-based processes in HR and payroll. The new system offered and IT support but also ownership of the software and the design
self-administration of transactions via an intranet and reduced of the process. Transaction relationships are appropriate for activ-
the number of staff by 50 percent. ities guided by clear business rules that are common across many
The benefits of this partnership were obvious for the council. organizatio,ns.
The number of council staff was reduced from 23,500 to 19,800
Benefits and risks of transaction relationships
while the quality of services sharply improved; 75 percent of the
council's key performance indicators improved from rock bottom Transaction relationships enjoy statistically significantly greater
to the upper quartile of local government performance. Moreover, satisfaction than either of the other types of relationships. Respon-
LCC was able to announce a 3 percent reduction in council tax. dents in our study considered their transaction outsourcing to be a
Increased morale resulted in a six-day cut in annual absenteeism success for both client and vendor in 90 percent of cases. Clients
have three key objectives in their transaction relationships: access low-maintenance interfaces to their data and systems. A more ma-
to best practices, variable capacity, and the ability to redirect man- ture architecture will also enable secure access to data; otherwise,
agement attention to core capabilities. Vendors address those needs risks will multiply as the number of interfaces grows.
by developing best practices, implementing and supporting stan- Transaction outsourcing, as applied in stage 4, allows a com-
dardized platforms, and developing economies of scale. pany to plug external processes into a solid foundation for execu-
Where feaSible, vendors also build unique assets or expertise. tion. Dow Chemical offers an example of a company designing its
These capabilities allow them to improve service and lower costs. foundation for execution to readily implement transaction out-
For example, eFunds Corp., which provides a range of outsourcing sourcing relationships.
services to financial institutions, telecommunications companies,
and retail organizations, has built a large database of credit infor- Case study of transaction relationships:
mation that is the key to its credit-checking process. This distinc- Dow Chemical
tive asset-which clients either cannot or would not replicate- In chapter 2 we discussed Dow Chemical's highly integrated
helps protect the vendor's margins while providing a valued ser- and standardized operating model. 10 This operating model gives
vice to clients. Dow very cost-effective and reliable global business processes. Dow
Successful transaction relationships have low management has built this foundation for execution with extensive help from
overhead. Customization, protracted contract negotiations, or client vendors. A co sourcing alliance with Accenture has, since 1996,
interference with how the vendor performs the process increases supplemented Dow's own capabilities in application development
cost and undermines benefits for both parties. Conversely, a hands- and support. Since 2000, Dow has relied on a strategiC partnership
off transaction relationship can deliver hassle-free, high-quality to manage computer operations. Management credits IBM with pro-
services to clients and reasonable margins to vendors. viding cost benefits through its economies of scale and with giv-
As long as a process can isolated from other company ac- ing Dow the benefits of world-class infrastructure management
tivities, companies can implement transaction outsourcing rela- without forcing in-house development of a capability that would
tionships at any architectural stage. For example, processes like prove to be neither rare nor distinctive.
personal computer configuration, business travel arrangements, Dow's foundation for execution has been less valuable, how-
and employee benefits processing are good candidates for out- ever, in supporting growth. Dow management expects that much
sourcing in early architecture maturity stages. of the company's future growth will come through jOint ventures
Transaction outsourcing cannot become strategically impor- OVs). President and CEO Andrew Liveris cites the benefits of joint
tant or widely adopted until the Business Modularity stage. It is ventures as "lower capital intensity, access to regional expertise
in this stage that companies have developed sufficient business and advantaged feedstocks; the ability to leverage our technology
process expertise to be able to extract and out source those activi- and know-how; and accelerated penetration in high-growth mar-
ties to which they can and should apply industry standards while kets." l l In 2004 Dow's approximately one hundredJVs accounted
retaining those activities that are necessarily unique. In,addition, for 25 percent of the company's earnings. ButJVs cannot rely on a
premature adoption of transaction outsourcing involves creating highly integrated, highly standardized IT and business process en-
new interfaces to connect to each new vendor, whereas companies vironment. Dow needs modules that can be assembled as-needed
with mature architectures will adopt increasingly standardized, while protecting the boundaries between itself and the JV. Frank
160 ENTERPRISE ARCHITECTURE AS STRATEGY 161
Use Enterprise Architecture to Guide Outsourcing
Luijckx, senior director of information systems strategy and archi- control how companies work. It is more of a battle among providers
tecture, explains: on open platforms."
In the ideal state of the FBM vision, Dow will maintain its
Today's IT architecture [at Dow], which is a monolithic ar- valuable horizontal and vertical integration, but it will no longer
chitecture, is sometimes referred to as the castle. Within buy, build, or run applications. Nor will Dow buy individual com-
the castle, things are really nice. It's very secure, people ponents from individual providers-a scenario entailing significant
work together very well, there is plenty of food, and we management overhead. Instead, Dow managers envision buying
are generating a lot of value. But if there is somebody that application functionality from a strategic alliance that will bun-
we want to work with, we always have to bring them in dle hardware, network, desktop, software, and process capability
the castle, right? Because the perimeter defense is on the (combinations of ASP and BPO providers) into an integrated ser-
outside of the castle. I don't mean just the security-it's re- vice model, giving Dow-and any other company-a single point
porting, everything. And within the castle, we don't have of contact for this bundle. This alliance, not Dow, will choose the
any rooms with doors. So, if we bring in a joint venture technology and make IT investments. Dow will pay for process-
that we want to work closely with, we have to bring them enabling functionality as needed.
in the castle and trust them. And you can't do that. It is Dow management recognizes that vendors are not yet able to
only a question of time before you are going to bring meet the FBM's requirements. According to Dave Kepler, Dow's
somebody in and it is not going to work, or where some- corporate vice president for shared services and CIO:
body else will say, yes, I know you trust them, but we
don't, we don't think this is a good relationship.12 One of the realities is to recognize the marketplace and
what you can leverage and where there are things that
To support its JVs and to moye into a more modular environ- you're going to have to really design yourself and use. We
ment, Dow is gradually implementing a concept it calls the "Fed- have to be very practical about the fact that the service
erated Broker Model" (FBM). In this model Dow purchases services providers will have a fair amount of volatility. So, the Fed-
from vendors who provide commodity busine$s processes from erated Broker Model isn't an end state as much as it is a
their own systems. For example, Dow is planning to purchase ERP recognition that, boy, we can't develop all the software
services rather than maintain ERP systems. These services will offer and we will try to leverage these variable services that we
integration across companies instead of solely within companies, need. That means we're going to have to have a lot of in-
allowing Dow to selectively integrate processes with its JVs and terfaces and be pretty flexible in what we're trying to do.
other partners and customers. As Michael]. Costa, cOrporate direc-
tor of six sigma and work process expertise at Dow, explains: "The While waiting for this market to emerge, Dow has imple-
vision of the Federated Broker Model is that we shift workflow into mented a few capabilities reflecting the promise of the Federated
the BSP [business service provider], ASP [application service provi- Broker Model, including outsourcing expense reporting to Bank of
sioning], BPO [business process outsourcing] area that is emerging. America, outsourcing 401(k) and stock options to Fidelity and
You enjoy a much more competitive pricing environment because Smith Barney, and outsourcing functions like payroll and elements
now it is not the SAPs and the PeopleSofts and the Oracles that of transportation logistics. Dow managers believe the Federated
Broker Model will win converts as fast as vendors can produce use- FIGURE 7-3
ful and affordable process modules. Dow is transforming from Different outsourcing relationships are suited to different stages
stage 3 (Optimized Core) to stage 4 (Business Modularity), and out-
sourcing is a big part of that transformation. Business Standardized Optimized Business
Silo Technology Core Modularity
Few companies are ready to embark on transaction-processing
What to Easily
relationships on the scale that Dow Chemical is currently pursu- outsource isolated IT infrastructure
processes management Project
ing. Dow's expertise in managing global process integration and management
Process design
standardization-its development of a stage 3 foundation for exe- of major systems
and operation
implementations
cution-has positioned the company to seize business process with supporting
technology
services as they become available in the marketplace. Other compa-
Narrowly
nies will outsource the small set of processes that are easily extracted Ideal
relationship focused Strategic
from the business core (e.g., employee benefits, travel services) while transaction partnership Cosourcing
outsourcing alliance Transaction
they mature their architectures and build their foundations for outsourcing
execution. Achievable Cost savings IT management Technology/ Strategic agility;

outsourcing discipline; cost expertise transfer; leverage IT and
objectives savings; risk process discipline process expertise
reduction; and reengineering; for world-class
Aligning Outsourcing Relationships management management focus; business processes;
focus cost-effectiveness; variable capacity;
with Architecture Stages variable capacity; management focus;
risk sharing cost-effectiveness;
risk sharing
Dow Chemical demonstrates that a company can become compe-
© 2005 MIT Sloan Center for Information Systems Research and Cynthia M. Beath. Used with
tent in all three types of outsourcing relationships. But it is impor-
permission.
tant to match the objectives and the services outsourced with the
appropriate type of relationship. Clients and vendors in strategic
partnerships who refuse to adapt to the strategic needs of their
partners will become embroiled in bitter coni:t":lct battles. Compa- Outsourcing for Architecture Maturity
nies managing transaction relationships like strategic partnerships
incur expensive and unnecessary overhead. And cosourcing that While outsourcing can facilitate maturation of an enterprise ar-
is treated like anything but a team environment is sure to subopti- chitecture, it cannot radically transform the company as the ar-
mize outcomes. chitecture matures. The technical challenges of architecture can
A company's ability to capitalize on the potential benefits of be transfelired, at least in part, to a vendor. But those technical
outsourcing to build a foundation for execution is, at least in part, challenges will be replaced with relationship management chal-
dependent on an awareness of how outsourcing will contribute to, lenges. And the organizational change challenges are in no way
or leverage, enterprise architecture. Each of the three types of out- diminished. The bottom line is: you can outsource to support the
sourcing relationships can help companies build their foundation building of your foundation for execution, but you shouldn't out-
for execution. But each contributes to architecture maturity in a source your architecture. The management practices listed in chap-
different way. Figure 7-3 identifies how outsourcing contributes to ter 5 remain the responsibility of every company looking to evolve
architecture maturity. its architecture.
We noted at the start of the chapter that modular, plug-and-

play companies are likely to become the norm. However, this
model is only beginning to emerge and, thus, will not become the
norm in most industries for quite some time. This is good news
because it means that companies have time to learn how to change, 8
how to move incrementally through the architecture stages, and
how to implement outsourcing as appropriate vendor services be-
come available.
Now-Exploit Your
Foundation for
Profitable Growth
IN THE AUTO INDUSTRY, companies could once succeed

by developing a single popular car model. A popular car like the
Volkswagen Beetle, the Dodge Caravan, or the Saab 900 would
keep the profits rolling in for years. But the terms of competition
have changed. No longer is it enough to do a single car well; to
succeed a car company has to develop a platform of models.
Companies now have to develop a family of products that share
the same chassis, engine, and drivetrain but appeal to different
market segments. Thus when Volkswagen introduced the new Bee-
tle, it used the same platform as the VW Golf, Audi IT Coupe, and
other models. 1
Like a !2ar platform, a foundation for execution must serve
more than one business need. Executives must look to leverage
their foundation in new and innovative ways. In a business envi-
ronment in which China is the world's factory and India is the
world's service provider, and where the market sells world-class
business processes for anyone to use, companies must continually
165
166 ENTERPRISE ARCHITECTURE AS STRATEGY Now-Exploit Your Foundation for Profitable Growth 167
evolve and exploit a foundation for execution to support new

Profitable Growth in a Unification Model
business activities. Companies that fail to build, or continuously
augment, a foundation for execution will not be able to grow-or In a Unification operating model, companies leverage standard-
more accurately, they will not be able to grow profitably. ized IT infrastructure, standardized business processes, and shared
There are two general strategies for profitable growth: organic data. As a company matyres its enterprise architecture, the foun-
growth and acquisition-driven growth. A good foundation for exe- dation gets thicker-more of its repetitive processes are digitized
cution helps with both. For organic growth, a solid foundation helps end-to-end. This strong base facilitates profitable growth when line
companies leverage-rather than re-create-technology platforms and managers use the integrated data to better serve customers and se-
business process expertise. Instead of inventing capabilities for each nior managers turn their attention to new markets, products, or
new business opportunity, a company can apply existing capabili- process innovations.
ties, allowing faster response and greater profitability. As described earlier, UPS has been leveraging its foundation
Companies pursuing growth through mergers and acquisitions to create agility around its core package delivery business. 2 This
can also leverage their foundations. In this case, companies have agility allows the company to regularly create new products and
a choice of two strategies: to "rip and replace" or to diversify. Rip- services. During the 1990s, UPS grew its revenues from $14 billion
and-replace companies use their foundation to drive a transfor- to $30 billion. Revenues in 2004 exceeded $36 billion. UPS deliv-
mation of the acquired company, leveraging their best practices in ered 3.6 billion packages in 2004, an increase of 4 percent over the
the combined entity. Companies using a diversification strategy prior year. In the past five years, UPS has consistently outperformed
allow their acquisitions to use their existing foundations. They gain the Dow Jones Industrial Average, the Standard & Poor's 500, and
synergy through standardized technology and shared services. its major competitors. One reason is that UPS's operating margin
This chapter uses case studies to show how companies can was nearly three times the industry average and 50 percent higher
grow profitably by building and leveraging a foundation for exe- than Federal Express's. In 2004 UPS was named by Fortune maga-
cution. We end the chapter with our forecast for the next stage of zine as the most admired company in its industry for the sixth
architecture maturity and the benefits it will offer companies. consecutive year.
'\
UPS's growth has stemmed from its agility to leverage economies
of scale and to innovate to extend its core. For example, UPS started
Leveraging the Foundation using the Internet for package tracking and customer communica-
for Profitable Growth tions as early as 1995. Next, UPS gave customers tracking software
that many linked to their homegrown purchasing and distribution
Companies become more agile as they move their foundations systems. But as customers bought ERP systems to handle their pur-
through the different stages of architecture maturity. A company's chasing and distribution needs, they could no longer use UPS's
operating model dictates the route it takes to architecture matu- tracking software. So, the company established alliances with key
rity and the benefits it achieves. Three companies with three dif- vendors, like Orade, Peoplesoft, Harbinger, IBM, and SAP, who
ferent operating models-UPS, MetLife, and 7-ElevenJapan-show built the UPS tracking interface into their enterprise systems soft-
the different types of agility companies develop to achieve prof- ware, making it easier for customers to do business-much more
itable growth. business-with UPS.
Similarly, UPS has gradually implemented processes to lever- Profitable Growth in a Replication Model
age its investment in its delivery information acquisition device
(DIAD). Introduced in 1991-and upgraded in 1993, 1999, and In a Replication operating model, companies leverage standard-
200S-this device captures a customer signature with every deliv- ized IT-enabled business processes to grow into new markets and
ery and then uploads the data in real time to the package infor- increase products and_ services. As a company matures its enter-
mation database. The device was initially justified on the basis of prise architecture, it expands the number of processes and systems
cost savings: each driver saved about thirty minutes per day, time in its foundation. These digitized processes readily support new
formerly spent summarizing the day's activities. With 60,000 dri- products and services. When Replication companies move their
vers, the cost savings represented by one half hour per person foundation for execution into a new market, automation reduces
were significant, but the real value of the DIAD was in the addi- start-up costs, so the revenue base can expand profitably. Seven-
tional information collected about each package and customer. This Eleven Japan is a Replication company that has leveraged its foun-
information contributed to better understanding of the profitabil- dation to grow profitably.
ity of individual customers and packages. The company used this Seven-Eleven Japan (SEJ) has built its Replication founda-
information to make routing and pricing decisions and, ultimately, tion for execution around its product-mix capabilities. 3 Using this
to provide UPS customers with new services based on their indi- foundation, SEJ grew from 6,000 to 10,000 stores between 1997
vidual shipping habits. and 2005 while maintaining its position as the most profitable re-
UPS has continued to add more capabilities to its foundation tailer in Japan.
for execution, increasing the company's efficiency and agility. UPS's CEO Toshifumi Suzuki describes his vision of SETs stores as
systems now dictate where packages are placed on the truck, the follows: II [They're] stores where you can find a solution for any of
order in which packages are delivered, and how drivers record a your daily life problems. We always try to plan and design a store
delivery. Because its delivery processes are digitized, drivers have in such a way that our store neighbors, in particular, can get what-
little discretion in these tasks. But the precision of the company's ever they need at any time they want." 4
delivery practices leads to greater efficiency and predictability, and Suzuki believes that one of the most serious problems in retail
minimizes the time managers spend on issues, allow- is a missed opportunity to sell an item because it is out of stock.
ing them to turn their attention to product and service innova- Accordingly, ever since he opened his first store in 1974, Suzuki
tions, as described in chapter l. has focused on maintaining optimum product mix. Since the late
Digitization limits UPS's ability to change its core delivery seventies, SEJ has built and exploited IT-enabled processes sup-
process, but the company can easily take on new customers-and porting item-level control-meaning that the items on the shelf
the employees who serve those customers-knowing that its own in any given store have been precisely selected for customers of
new employees will perform to the same high standard because that store. With the goal of better customer service, SEJ has, over
they are trained to use the same systems. UPS has further leveraged the past thirty years, evolved its IT, inventory management, and
its IT infrastructure and business process foundation by expanding distribution capabilities. The lower half of figure 8-1 describes the
globally. UPS's international business, which constituted 15 percent evolution of the technologies and distribution processes that cu-
of revenues in 1999, has grown at double-digit rates ever since. mulatively built SETs foundation for execution.
FIGURE 8-1
7 -Eleven Japan creates more value each year
Average stock turnover time, daily sales, and gross margin per store
(¥thou-
sands) (days) (%)
71313 313 32
...
. ..
61313 . 313
Average daily sales

213 """"
.
' ,,
per store
(¥ thousands)
,, Average gross
51313 28
" '..... margin per store
...
---'
_-- ................. (%)
41313
113
,. time per store

___________________________ -------------------. 26
, (days)
31313 13 24
Period ended 1977 1978 1979 19813 1981 1982 1983 1984 1985 1986 1987 1988 1989 19913 1991 1992 1993 1994 1995 1996 1997 1998 1999 2131313 213131 213132 213133 213134
February of:
Period ended 1977 1978 1979 19813 1981 1982 1983 1984 1985 1986 1987 1988 1989 19913 1991 19921993 19941995 1996 1997 1998 19992131313 213131 213132 213133 213134
February of:
1 1 Nijos 1 1
Started jtarted
11 1
Interactive POS
11
Installed
1
]1 1 1
EOS EOB registers introduced
1
registers satellite
Information antennas Ticket sales
Computers
System POSsystem using color GOT, ST, ISDN put Fifth-genera- NewPOS using multi-
Innovation graphics and SC into tion total infor- registers functional copier
introduced introduced operation mation system introduced
-- ----- -------- -- ----_.
Started combined Introduced a weather
Distribution distribution of information system I Seven-Meal
Reduced Started three-times-a-day
System frozen foods
deliveries of rice products Started combined distri- Service
number I
Innovation of vendors Started combined bution of nonfood items
distribution of dairy products Combined distribution
of rice products and chilled items
Started three-times-a-day
combined distribution of
refrigerated items
Started twice-a-day Started combined Started frozen-food warehouse
deliveries of rice products distribution of refrigerated foods . system for combined distribution
. Self-confirmation system expanded
Note: EOS (electronic ordering system), EOB (electronic order book), ST (scanner terminal), SC (store computer), ISDN (integrated services digital network).
Source: 7-Eleven Japan. Used with permission.
One of SEJ's earliest distribution management initiatives was stores to benefit from SEJ's practice of ordering and delivering
to combine similar products from different suppliers at a delivery fresh food three times a day. The result is that on hot days Tokyo's
center. By first combining dairy products, then frozen products, 7-Eleven stores have plenty of bento boxes while on cold days
then refrigerated products, and later rice and fresh food products there are lots of hot noodles for sale.
and nonfood items, SE] reduced the number of different deliveries Seven-Eleven]apan's digitized distribution and inventory man-
a store received each day from seventy to nine over an eighteen- agement capabilities give it agility with product mix. The result
year period. SEJ's manufacturers now deliver to one of four "com- is an industry-leading 70 percent of each store's products being
bined delivery centers," which, in turn, ship to the stores in four new each year. Because all SE] employees rigidly follow standard-
types of vans classified by the temperature of the goods: frozen, ized processes for identifying and ordering the products their
chilled, room temperature, and hot. store's customers most want, SE] achieves customer loyalty and
By the early eighties SE] was introducing technology support higher sales. SEJ's foundation for execution helped SE] stores to
for inventory and distribution management, including its first nearly double the average daily sales between 1977 and 1992. Seven-
point-of-sale (POS) systems. The POS data helped SE] analyze its Eleven Japan's average daily sales are 35 percent higher than in-
customers' buying habits to improve the product ordering process. dustry average.
The POS data became even more valuable in the early nineties
when SE] installed high-speed telecommunications lines and sub-
sequently satellite antennae. High-speed telecommunications pro-
Profitable Growth in a Coordination Model
vide instantaneous sales reports to SEJ's entire supply chain. In a Coordination operating model, a company leverages a strong
Today SEJ's "total information system" connects 70,000 com- IT infrastructure to share data across unique businesses. As a com-
puters in stores, at headquarters, and at supplier sites, providing pany matures its architecture, the foundation of shared, easily
transparency across the entire value chain.s Vendors, distributors, accessible data becomes increasingly powerful. Profitable growth
and manufacturers share a common infrastructure consisting of comes from superior customer service, better knowledge of cus-
1,800 terminals at 1,100 locations. The standi:lrdized systems han- tomer buying patterns and needs, and greater ability to cross-sell
dle raw material ordering, inventory production and upsell customers. This improved understanding of customers
management, and automated sorting. SEJ's partners are delighted leads to better business decisions and better-targeted new prod-
with the information, as a salesperson for one supplier commented: ucts. New products and services come from business units that are
"Their information system is so good that we can now instantly not bound by standard processes-which local inno-
find out which goods of ours are selling and how much."6 vation. MetLife is a good example of a company leveraging its
Meanwhile, store employees can access recent sales, weather foundation 'to provide a growing set of products to a growing set
conditions, and product information, all presented graphically, to of customers.
support store orders. SE] trains store owners and clerks, including MetLife, formed in 1863, is the United States' largest life in-
part-time workers, in inventory management. In addition, coun- surer'? MetLife's chairman and CEO, Robert Benmosche, defines the
selors visit stores twice a week to provide advice on store opera- company's mission as "to build financial freedom for everyone."
tions and information on the portfolio of available items. The To achieve that vision, MetLife needs to create an ever-groWing
professional development of even part-time employees allows portfolio of financial products. MetLife is working to provide an
integrated view of its products for its customers and a single view and an innovative survivor income benefit for its universal life
of the customer for its employees to enable better service. product.
Like most financial services companies, MetLife's history works Business units in a Coordination model have considerable
against integration. In the past twenty years, MetLife has under- autonomy in designing products and serving customers. This au-
gone a series of mergers, so its systems legacy includes systems tonomy encourages product innovation and allows companies to
from several large, formerly independent companies. MetLife has expand revenue per customer while also appealing to a broader
been structured by product line, where systems were built to sell range of customers. Building and leveraging its foundation through
one product to many customers and not to provide an integrated new products, MetLife generated record net income in 2002,
view of customers. Adding to the complexity of MetLife's systems 2003, and 2004.
and processes, the company sells directly to individuals as well as
through employers who provide MetLife products as an employee Profitable Growth ina Diversification Model
benefit.
To integrate data, Executive Vice President and CIO Steven In a Diversification operating model, there may be no integra-
Sheinheit focuses on clarifying what data is needed and how it is tion or standardization of business processes across business units.
created. While some Coordination companies look to packaged Companies grow by giving business units autonomy to pursue
customer relationship management systems to provide integra- local growth, or they create or acquire new businesses. As a Diver-
tion, MetLife's large-scale and complex relationships cannot be eas- sification company matures its enterprise architecture, it offers
ily addressed by packaged software. Instead, the company relies shared IT infrastructure to reduce costs across the company. Many
on world-class technical talent to provide the integration of pack- Diversification companies will not mature their architecture past
aged software with the needed infrastructure, as well as to design stage 2, wishing only to generate some economies of scale in IT.
the information architecture and extract the needed data. Those that move to stage 3 focus on introducing shared services
Integrated customer data enables MetLife employees to un- for functions like finance, HR, and purchasing.
derstand their customers, follow the history ot transactions, and Diversification companies choosing not to mature their archi-
provide better service. MetLife's "One MetLife" i:nitiative, to attack tecture rely on management capability (e.g., risk management,
the inefficiencies of its history of product line structures and growth merger and acquisition capability, etc.) to add ·shareholder value
by acquisition, will introduce greater business process standard- from headquarters. This model of a diversified company, typified
ization throughout the company. However, the thrust of its enter- by GE and Johnson & Johnson through the 1980s, has largely lost
prise architecture is business integration enabled by shared data favor among stockholders. More often, companies with a Diversi-
access. Data access is what MetLife people need to meet customer fication model choose to hold a portfolio of businesses with a nat-
needs and sell company products. Because employees need not ural synergy and thus have some corporate technical standards
spend time tracking down data to answer customer questions or and shared services.
resolve issues, more of MetLife's resources can go into develop- For example, Carlson Companies has a portfolio of brands in the
ing new products that help customers "build financial freedom." hospitality industry. While hotels, restaurants, cruise ships, and
In 2004 MetLife added products like critical-illness insurance, a travel agencies don't share many business processes, they do have
suite of retirement products designed to provide "income for life," natural synergies. So Carlson has been able to generate economies
from shared infrastructure and shared services, particularly finance. 1. The company leverages a mature foundation either through
The company also anticipates developing a data store to leverage a strategy of ripping out existing processes at the acquired
multiple relationships with customers. Diversification companies company and installing the digitized processes of the ac-
don't need an extensive foundation for execution company-wide, quiring company (Unification or Replication), or through
but they can take a few relatively simple actions that generate cost a strategy of moving the acquisition onto a standard por-
savings and cross-business-unit synergies. tal and forcing data integration (Coordination).
2. The company makes the acquisition for purposes of mar-

Managing the Architecture Through ket synergies and does not attempt to integrate or stan-
Mergers and Acquisitions dardize the new business, thus moving the enterprise as a
whole to a Diversification operating model.
Acquisitions are easiest, though arguably least valuable, in compa-
nies with a Diversification model. Diversification demands mini- CEMEX provides an example of the rip-and-replace strategy.
mal organizational change. In the other three models, the challenge UPS's recent growth illustrates the diversification strategy.
of growing by acquisition rather than organically is that two com-
panies have to try to merge incompatible foundations. If the two The Acquisition Process at CEMEX: Rip and Replace
companies involved in an acquisition have not achieved the same
stage of architecture maturity, the change can be highly disrup- CEMEX, a $ 7 billion Mexican cement manufacturer, has long been
tive. For example, if a company with a stage 3 enterprise architec- admired for its IT capabilities relative to its competitors. 8 As early
ture acquires a company with a stage 1 enterprise architecture, the as 1987, the company built telecommunications capabilities to
acquiring company can install its foundation, but the acquired coordinate the activities of its production facilities and later to
company will have to skip stages. 'As we noted earlier in the book, support dispatching of ready-made concrete. In 1990 CEMEX de-
skipping stages imposes significant learning requirements on a com- veloped an executive information system that focused IT capabili-
pany. During the learning process, the acquiripg company may ties on providing access to operating information-this system
regress to stage 1 or stage 2 by virtue of its acquishion. also forced business managers to think about how to use informa-
Even if two companies are at the same architectural stage, a tion to improve operating results. In 1992 CEMEX implemented
merger will be disruptive as management sorts out which of the two an ERP system, applying IT to standardize processes like finance
foundations for execution will work best. Some companies try to and distribution. These capabilities have helped CEMEX grow
pick and choose from the two companies' best capabilities. But if from Mexico's second-largest cement producer in 1990 (tenth in
the companies have not achieved modularity in their business de- the world) to the world's third-largest cement producer in 2003. Of
sign, such selectivity will almost certainly cause problems. None- the world's top three cement companies, CEMEX has the highest
theless, some companies outside the Diversification quadrant have profit margin and highest net sales and cash flow per employee.
the agility to grow profitably through mergers and acquisitions. We In the early 1990s, Lorenzo Zambrano, CEMEX's CEO and
have observed two different architectural approaches to profitable grandson of its founder, recognized that CEMEX could not escape
growth through acquisitions: the impacts of global competition. He said, "We suddenly found
ourselves competing with very large international companies at a The company's focus on IT-enabled process standardization
time of consolidation in the global cement industry. There were few and process improvement has facilitated assimilation of its acqui-
independent producers left. Either we became large and interna- sitions. For example, in 2000 CEMEX acquired Southland, the
tional, or we would end up being purchased by a bigger player." 9 United States' second-largest cement manufacturer, in a $2.8 bil-
Zambrano responded to this threat by purchasing Spain's lion deal. IT and process teams completed assimilation in four
two largest cement producers in 1992. Subsequently, CEMEX ac- months. Subsequent acquisitions have been assimilated in as little
quired companies in thirty countries, including the United States, as two months. l l
Japan, France, Panama, the Dominican Republic, Indonesia, and CEMEX's biggest challenge in acquisitions is to bring the learn-
the Philippines. CEMEX sent postmerger acquisition teams to the ing of a stage 3 architecture to the new company. CEMEX's forp1er
acquired companies to facilitate integration and knowledge trans- head of information technology described the challenge this way:
fer. In early acquisitions, teams spent as long as twenty-four months "The biggest stumbling block lies with people. When you make a
training managers on CEMEX practices. Despite initial resistance foreign acquisition you face biases and reluctance to give up cur-
from local managers, the implementation of the CEMEX founda- rent practices and corporate cultures. While the importance of
tion led to significant improvements in the operating results of platforms is undeniable, technology is not an end in itself. Man-
its acquisitions. Companies acquired between 1992 and 1996 in- agement must figure out how its processes, functions and systems
creased their operating margins by an average of more than 10 can accommodate the different needs of the employees. II 12
percent in the three years after acquisition. CEMEX rapidly replaces existing technology platforms and
Despite Cemex's efforts to share management practices, the business processes in the companies it acquires. Such rip-and-
acquisitions led to a proliferation of systems and processes and replace efforts, however, meet with resistance from the acquired
climbing IT costs. Zambrano believed the solution was to stan- company's employees. CEMEX invests heavily in training-send-
dardize best practices globally: "The company now is much more ing in teams of strong managers who work with the new com-
complex, and we had to go through a process of amalgamating pany's management team. With strong performance results and
our business processes throughout the world,saying, 'This is THE appropriate rewards, the resistance subsides and enthusiasm builds.
CEMEX WAY of doing x, y, and z' ... and it a way of grow- We do not know of an alternative approach that allows a com-
ing very fast and leveraging what we know. II 10 pany to avoid slipping back to a less mature architecture following
Building on earlier efforts to increase process standardization, an acquisition.
Zambrano launched the "CEMEX Way" in 2000. This initiative
standardized eight key business processes: commercial (customer The Acquisition Process at UPS:
facing and cement logistics), ready-mix manufacturing, account- Moving to' a Diversification Model
ing, planning and budgeting, operations, procurement, finance,
and HR. In 2004 he created the IT and business process evolution UPS has created opportunities for growth by adding new bUsi-
organization, which looked for additional opportunities to lever- nesses that, while becoming profitable in their own right, are ex-
age IT not only for business process standardization but also for pected to add value by feeding the core. Much like Schneider
local innovation and global sharing of best practices. National's transition to a Diversification model as it developed a
logistics business (see chapter 2), UPS builds and acquires busi- FIGURE 8-2
nesses related to package delivery. These new businesses cannot The UPS business model
use the existing foundation for execution for new business opera-
tions because they operate differently.
With its package delivery business at its core, UPS has crafted
a set of smaller, growth-oriented businesses such as UPS Supply
Chain Solutions, UPS Capital Corp., UPS Consulting, The UPS ,
-""-.......... @k.
Store/Mail Boxes Etc., and UPS Professional Services (figure 8-2). "
",
(91)t,
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UPS
CEO Mike Eskew explains the rationale for the new businesses: package network \
\
\
• Trucks and planes
"The core package business has a lot of growth opportunities and • 14m + packages/day
\
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capability ... but we also need to sow new areas that leverage on • DIAD
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6.1 million
that core. Some of those new areas will fail ... and we would like • Integration into ERPs
/
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/
them to fail fast. And some of them will work ... As much as we Four key processes
/
/
• Customer relationship management /

can, we will integrate that [new business] into the core. We are • Custom information management /
/
//
seeing terrific opportunities in logistics with Capital Corp .... and ..... .,...-//
our service parts businesses. We are going to find new ways to ex- -------------
pand this core business by trying new things and feed that core." 13
Unlike UPS's core business expansion into the global busi- Note: UPS Professional Services and UPS Consulting fall under the UPS Supply Chain Solutions
umbrella in the enterprisewide structure.
ness arena, its new businesses do not leverage UPS's economies of
Source: Derived from (1) Jeanne W. Ross, "United Parcel Service: Delivering Packages and E-Commerce
scale or foundation for execution. UPS can certainly leverage its Solutions," working paper 318, MIT Sloan Center for Information Systems Research, Cambridge, MA,
August 2001, and (2) Peter Weill and Michael R. Vitale, Place to Space: Migrating to eBusiness MOdels
industrial-engineering expertise and elements of its core IT infra- (Boston: Harvard Business School Press, 2001).
structure in new businesses. But the invaluable standard package © 2005 MIT Sloan Center for Information Systems Research. Used with permission.
delivery processes that give UPS so much agility in its core busi-
ness don't provide much value to its new Laurie John-
son, CIO of UPS Supply Chain Solutions, explains the boundaries
between the core business and UPS's newer subsidiaries: "I'd love self-reinforcing business model. UPS is developing a parallel foun-
to leverage what's good about the core, but the subsidiaries still dation to support the new businesses.
need a different sense of urgency; the ability to take higher risks
with products, technologies, and customer relationships; flexibil- The Acquisition Process at 7-Eleven Japan:
ity that allows us to serve the customer faster, better, cheaper- Moving Toward Modularity
and rules that are made to be broken. II 14
These new businesses don't leverage UPS's foundation for ex- 7-Eleven Japan has achieved much of its growth through a rip-
ecution, but they feed the core business by increasing package vol- and-replace approach to acquiring new stores. Although manage-
umes, which creates strong market synergies and a very profitable, ment believes the company still has many opportunities to grow
in Japan, SEJ is looking for additional growth opportunities. Like portfolios of businesses. Based on the core capabilities of the com-
UPS, it adopts some diversification practices to extend its range of pany, managers will look for opportunities to partner, acquire,
opportunities. jOint-venture, collaborate, integrate, and connect with many other
Recently, SEJ purchased a controlling interest in 7-Eleven Inc. companies. Business strategies will focus on dynamically coupling
Expanding into the U.S. market creates new challenges. The with many other businesses to quickly exploit market opportuni-
market share of convenience stores is much lower in the United ties by bringing together the world's best players at each position
States, where the market is heterogeneous, the income gap is big- in the value chain.
ger, and the shopper is more cost sensitive than in Japan. In addi-
tion, unlike the Japanese stores that became franchisees one at a The Dow Chemical Vision of Stage 5
time, the United States already has almost 6,000 stores. James
Keyes, president and CEO of 7-Eleven Inc., believes SEJ will suc- Dow Chemical's Federated Broker Model, described earlier in the
ceed in bringing value to the U.S. market: "7-Eleven of the United book, offers one glimpse of the fifth stage. 17 Dave Kepler, corpo-
States will have a strong potential for success if we learn more rate vice president for shared services and CIO, explains Dow's
about 7-ElevenJapan's item-by-item control and effective delivery vision:
system. II IS
Facing different demographics and an established base of stores, Historically, theJVs [joint ventures] we've managed stand
SE] may not be able to simply rip and replace the foundation in alone or Dow had a responsibility for the operational
6,000 U.S. stores. Instead, it may have to pick and choose modules management and the other partner didn't put a lot of
that will work in the United States. This will demand increased their own employees in. TheJVs we're going into now-in
modularity-a stage 4 level of architecture maturity. the Middle East and China-are not going to be as highly
leveraged and integrated into the company's business
model, but have a mix of companies and employees en-
What's Next? The Fifth Stage of
gaged. So, we know our systems need to be more flexible
Architecture Maturity,,,
to support this model. We need to leverage Dow's know-
As companies achieve stage 4 architecture maturity, they might how and low cost structure, and we have to put some [IT]
like to stop and rest. But we doubt that Business Modularity is the architecture in to give the JV the capability that we've ne-
last stage. Thomas Jefferson once remarked, "I like the dreams of gotiated, but not at the expense of opening up our entire
the future better than the history of the past."16 In the spirit ofjef- enterprise.
ferson, we will now set aside some of the legacy of the past and
present our view of the next stage of maturity. Kepler is already facing the need for a stage 5 architecture,
We call the fifth stage of architecture maturity "Dynamic Ven- but Dow will learn how to build stage 5 capabilities as it works its
turing." Building naturally on the capabilities developed in the way through stage 4. In stage 4 Dow will increasingly plug and
Business Modularity stage, the fifth stage extends the concept of play process modules. In the fifth stage, a company can plug and
reusable modules to enable companies to rapidly reconfigure their play new businesses, not just process modules.
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9
ernments, jOint ventures, vendors, outsourcers, service
providers, and regulators
• Security: rules for connecting, encryption, self-diagnostics, Take Charge!
defense against attacks, and the like
• Rules for coupling: strategic, negotiated, and legal rules em- The Leadership Agenda
bedded into the component
Why not upset the apple cart.

Preparing for Stage 5
If you don't, the apples will rot anyway.
Few companies are ready to think specifically about how they will
-Frank A. Clark!
adapt to the fifth stage. But, like prior stages, the fifth stage will be
a natural evolution from the modularity of the fourth stage. Clearly,
there are many strategic, legal, technical, financial, risk, and other
issues to be addressed. We are convinced, however, that the con-
cept of a portfolio of businesses that dynamically couple-based on IN CHAPTER 1 we described the benefits of a foundation for
their unique capabilities captured in components-is the logical execution. Now we ask-would you like your business to have:
extension of the economic and business conditions we face today.
• Higher profitability?
In the immediate future, we recommend that your company
focus on squeezing all the value you can out of current stage • Faster time to market?
of architecture maturity. In doing so, you will position your com-
pany for the next stage-and all the benefits associated with it. • More value from your IT investments?
Just as we argue against big-bang implementations of enterprise • Twenty-five percent lower IT costs?
architecture capabilities, we caution you not to expect big-bang
benefits. But we do believe that as you build your foundation for • Better access to shared customer data?
execution, you will buil<i a much stronger performing company,
• Lower risk of mission-critical systems failures?
one that regularly discovers happy surprises. Thinking about what
dynamic coupling means in your company will help set your long- • Eighty percent higher senioJ management satisfaction
term architecture goals and identify the business modules needed with technology?
in stage 4.
187
188 ENTERPRISE ARCHITECTURE AS STRATEGY Take Charge! The Leadership Agenda 189
I
To achieve these objectives via a foundation for execution there because they didn't have the tools to do their job-the confronta-
is one more question to answer: what is the leadership agenda for tions between frustrated customers and poorly equipped employ-
creating and leveraging a foundation for execution? ees were neither pleasant nor productive. And then someone would
Throughout this book we have argued for upsetting the apple have to follow up with the correct information. Before Delta in-
cart-rethinking how your company builds and leverages capabil- vested in its Delta nervous system (see chapter 3) employees were
ities. This chapter lays out a leadership agenda. First, we consider looking at different systems that used different and sometimes
the case for action in your company. We look at nine symptoms of conflicting data-there was no foundation for execution. Actually,
an ineffective foundation for execution-the more symptoms like there were several incompatible functional foundations!
these you see, the more urgent the need for senior management Think back over the past year in a customer-facing group you
action. Then we briefly review the steps to designing or rethinking know well and ask yourself what percentage of employees' t'otal
your foundation for execution and acquiring key organizational time was spent on rework-that is, redoing something that should
learning. Finally, we identify the top ten leadership principles for have been done right the first time. Ideally, the answer is zero. The
building and exploiting your foundation. higher the percentage in your company, the more urgent the case
for action.
Symptoms of an Ineffective
Foundation for Execution New Regulations Require Major Effort
In chapter 1 we provided a substantial list of the warning signs of For some companies listed on stock exchanges in the United
not having a foundation for execution to support strategy. We States, Sarbanes-Oxley was a motivation to create a better founda-
suggested you would find this book helpful if one or more of the tion for execution that also included meeting the government's
warning signs were true of your Qrganization. Now we will explore new reporting requirements. For many other companies, it was
some of these warning signs in more detail, identifying symptoms yet another mandatory investment diverting resources from im-
of problems and metrics for you to self-assess. The objective is to portant business initiatives. A cm Magazine ,tech poll reports that
help you calibrate the urgency of your need to work on nearly half of the large companies surveyed will divert more than
its foundation for execution. 15 percent of their 2005 IT budgets to Sarbanes-Oxley compliance. 2
In sharing this figure with an audience of CIOs, Gary Beach, pub-
One Customer Question Elicits Different Answers lisher of CIO Magazine, was met by a sea of heads nodding in dis-
gust. Afterward, a CIO said to him, "I make a lot of sales calls and
When customers get different answers to the same question from never oncEl have I heard a sales rep tout to a prospective customer:
different parts of your company, two bad things happen. First, the the reason you should do business with us is because we are more
customer gets annoyed and confused. This was exactly the experi- compliant than our competition."
ence Delta Air Lines had when employees could not accurately Regulatory compliance creates overhead, but new regulations
answer a question about the time a flight was expected. Second, will likely appear every year. A foundation for execution signifi-
people in your organization have to do loads of rework to fix the cantly reduces the marginal cost of meeting the next regulation by
problem. At Delta the result was that employees were frustrated creating a reusable capability to access data and metrics. In your
organization what percentage of the IT budget is allocated to meet- How agile is your firm? What percentage of last year's sales came
ing regulatory requirements (often called "mandatory investment")? from new products introduced in the past three years? How prof-
If that percentage doesn't decrease over time, and especially if it's itable are your new initiatives? How urgent is the case for action?
anywhere near 15 percent, your case for action is urgent. 3
IT Is Consistently a Bottleneck
Business Agility Is Difficult and
Growth Initiatives Aren't Profitable Companies pursuing IT implementations the old-fashioned way
(Le., by articulating business strategy and then aligning IT) usu-
It takes time to develop new capabilities. Thus, when a growth ally find that IT is a bottleneck rather than a strategic asset. In
initiative forces a company to develop new capabilities, the ini- many companies the standard answer to a question about how
tiative is usually slow to yield a profit. For example, mergers and long it will take to implement a new system to support a new
acquisitions-such as Time Warner-AOL and Chase Manhattan- strategic initiative is one to two years. During that time the mar-
JPMorgan-are often slow to deliver expected economies because ket and the business will change. In contrast, Citibank Asia starts
they fail to leverage an existing foundation. Similarly, new market up services in new regions faster than the competition using a
initiatives, such as AT&T's early foray into television or GM's pio- preexisting credit-card-processing capability tailored for local
neering efforts with OnStar, are typically better at generating rev- needs. And UPS regularly introduces new customer services based
enues than profits. on existing customer and package information. Top companies
In our research, companies with a higher percentage of their are increasingly demanding that projects deliver added value every
core business processes digitized were more agile. 4 In contrast, ninety days.
companies that were not building and leveraging digitized capa- By focusing IT investments on enabling the integration and
bilities felt as if they were starting over to develop new capabilities standardization required of the company's operating model, a come
to address each new management directive. Do your new strate- pany prepares itself for future strategic initiatives, without know-
gic initiatives leverage existing capabilities? One useful metric for ing what those initiatives might be. What is your average lead
agility is the percentage of your company's that comes time for new initiatives? If your large projects don't consistently
from new products introduced in the past three years. deliver value in fewer than twelve months, the case for action is
In chapter 1 we reported that for companies in our research, urgent.
the percentage of sales from new products introduced in the past
three years was 24 percent. s This type of agility varied greatly by Different Business Processes and Systems
company even in the same industry. For example, in manufactur- Complete the Same Activity
ing the average was also 24 percent. However, a third of manufac-
turing companies were much more agile, achieving SO percent of One large, global manufacturing company we visited had twenty-
sales from new products introduced in the past three years. The nine order-entry systems. A large insurance company had more
least agile third of companies only achieved 5 percent of sales from than thirty different ways to pay customer benefits. A pharmaceu-
new products. A foundation for execution makes a big difference. tical company had eighteen inventory management systems. And
another insurance company had more than twenty underwriting effective action on the same set of useful customer and product
systems. The IT departments in these companies operated these data every day? If not, your case for action is urgent.
systems, enhanced functionality when requested, and maintained
the technical platform supporting each individual system. Redun- Employees Move Data from
dant systems are expensive. In addition, they are difficult to inte- One System to Another
grate with other systems, so companies run the risk of inaccurate
data for compliance reporting, customer service, and management When people key in data from one system to another, they are
decision making. Sometimes, real business differences justify the doing work computers do better. Worse, the process introduces
existence of different systems supporting the same processi the ex- opportunity for errors, and a company's scarcest resource-atten-
pense of implementing common systems and processes does not tion-is being wasted. Financial services companies have long
outweigh the benefits. But many companies are paying excessively valued straight-through processing of key business processes.
for variation that doesn't add value-and might very well under- Straight-through processing refers to business processes, such as buy-
mine a foundation for execution. ing or selling a security, that are being completed without humans
How many different business processes and associated systems processing the data. The concept of straight-through processing
exist in your company to complete the same activity? Are they can be applied to any industry-many retail stores and service
adding value? If the number of redundant systems in your com- providers have automated replenishment systems to reorder every-
pany isn't declining, the case for action is urgent. day items. For example, HP offers auto-replenishment where print-
ers automatically reorder cartridges when toner runs low, without
Information Necessary for Making Decisions user intervention and within certain preset limits'?
Is Not Available On average, companies complete 19 percent of their sales and
23 percent of their purchases electronically with little variation
7-Eleven Japan stores manage thrice-daily orders for same-day across industries. s However, the third of companies with the most
delivery based on current sales, weather, and inventory levels (see digitized processes complete 50 percent of their sales and 55 per-
chapter 8). Marriott prices rooms based on up"to-the-minute de- cent of their purchases electronically. How do you compare? What
mand forecasting information. 6 But many companies still rely on percentage of your key transactional processes requires people to
approximations and instinct to make key operating decisions. Com- take data from one system, manipulate it, and enter it into an-
panies have spent enormous sums developing data warehouses, other system? If that percentage is above zero and isn't consis-
implementing customer relationship management systems, and tently decreasing, your case for action is urgent.
installing middleware to provide better data access. But these in-
vestments haven't necessarily led to better decisions-either the Senior Management Dreads Discussing
right information isn't available, or the decision maker doesn't IT Agenda Items
know how to use it effectively.
A strong foundation for execution has the data decision mak- A key mechanism in most companies' IT governance is the senior
ers need. People know how to use the data to make decisions, often executive committee that deals with IT. These committees are crit-
by enacting standardized processes. Do your decision makers take ical to establishing IT principles and priorities for IT investment.
Despite this important role, many senior executives dread IT (table 5-1). These senior managers are also more likely to be able
steering committee meetings-one executive described them to to describe the company's high-level enterprise architecture. What
us as "mind-numbingly boring." In some companies, it is not un- percentage of senior managers at your company can describe, at a
common for senior executives to send a staffer to meetings in high level, your enterprise architecture? If the answer is less than
their place. a third, your case for action is urgent.
When senior executives are not engaged in IT decision mak- Looking back over your answers to the questions about symp-
ing, they cannot provide direction or incentives for the company toms, how urgent is the case for action in your company? If your
to build and exploit a valuable foundation for execution. Without company reaches the threshold described on anyone symptom
senior management involvement the IT unit takes on too much (e.g., less than a third of senior managers can describe
risk-and is actually best off spending as little as possible. architecture) your business process and IT capabilities are under-
The CIO of the average company rates the success of his or mining, rather than contributing to, your competitiveness. The
her most senior committee as 3.5 (on a scale of 1 to 5). In top- more symptoms observed (relative to the thresholds) in a com-
performing companies CIOs rate these committees at 4.1 (on a pany, the sicker the foundation and the more urgent the need for
scale of 1 to 5).9 CIOs of these effective committees set agendas management attention. The next section presents a brief summary
that focus their senior management colleagues on strategic issues of the steps to attack the symptoms by designing or rethinking
and choices. The project reviews and detailed technical matters your foundation for execution (the chapter in parentheses pro-
are handled elsewhere. How effective is the most senior commit- vides details).
tee that makes your IT decisions? If that score is less than 3.5, your
case for action is urgent.
Key Steps in Rethinking Your
Foundation for Execution
Management Doesn't Know Whether
It Gets Good Value from IT We advocate six steps to rethink your foundation for execution:
If senior executives don't know whether they, are getting good 1. Analyze your existing foundation for execution (chapter 1).
value from IT, it's a sure bet they aren't. As companies build IT ca-
2. Define your operating model (chapter 2)
pabilities, either they exploit those capabilities in ways that are
both visible and measurable, or they are wasting money. Recently, 3. Design your enterprise architecture (chapters 3 and 4).
as the CIO of a large financial services company sat in a meeting,
4. Set priorities (chapters 4 and 5).
he received the following message on his BlackBerry from his
CEO: "How does the [XYZ] project affect our enterprise architec- S. Design and implement an IT engagement model (chapter 6).
ture?" If it's never occurred to you to ponder that question, you
6. Exploit your foundation for execution for growth (chapter 8).
are part of the problem, not part of the solution.
As noted in chapter 5, companies getting strategic value from These steps should be a group exercise for members of the
IT have senior managers specifying requirements for enterprise ar- senior management team. To be valuable the first four steps
chitecture and overseeing the results of architecture initiatives should be intense, even confrontational, exercises between senior
executives. If everyone quickly agrees, management hasn't recog- • Identify the processes that distinguish you competitively. De-
nized that these steps set the direction for the company-how termine what elements of those processes should be stan-
the company will grow, what projects you'll pursue, how IT in- dardized across the company.
vestment dollars will be spent. If you don't force a shared under-
• Envision your customer's experience as it ought to be. Deter-
standing of your operating model and enterprise architecture, you
mine what integration of data and end-to-end connection
will fritter away your company's resources on projects that don't
of processes is necessary to make that real.
matter, and you will watch more-focused companies march off
with your customers. • Decide how you would like your company to grow. Can you
offer current customers more products or services? Should I
you expand globally? Should you acquire competitors?

Step 1: Analyze Your Existing Foundation for Execution
Should you acquire or grow adjacent businesses?
Examine figures 1-3 and 1-4. These are abbreviated analyses of the Once you have articulated your expectations, examine figures
foundations for execution at UPS and the government of the Dis- 2-1 and 2-3 to determine which operating model best meets your
trict of Columbia. Using the generic form of this assessment (fig- requirements. The good (and bad) news is that you only have four
ure 1-2), consider each element in your foundation for execution. options to choose from. Pick one dominant model at each level in
Questions to consider include the following: your company to provide a clear vision of how the company will
• What processes are digitized end-to-end? Are these mission- operate.
critical transactions in your company?
• What data is easily accessible to your employees and cus- Step 3: Design Your Enterprise Architecture
tomers? Is this the data they most need to make decisions
leading to customer and shareholder value? Once you have defined how you want to operate and grow, you
are ready to rough out your core companywide business processes,
• What elements of IT infrastructure are wQrld class? shared data, key technologies, and critical customer interfaces.
• Does the infrastructure provide the reach, security, data Start by using the process and operating model templates from
access, and flexibility you need? chapter 3 as a guide. For example, if your base operating model is
Unification, figure 3-2 identifies three elements that must be part
• What strengths and weaknesses do you see in your of your foundation for execution: customer interfaces, processes,
foundation? and data. Apply the appropriate template (figure 3-2, 3-4, 3-6, or
3-8) for your operating model.
Step 2: Define Your Operating Model If you find you have too many elements to fit onto one standard-
sized piece of paper, take your discussion up a level. You're not
Your operating model should encapsulate your integration and trying to identify every important process, data element, or tech-
standardization requirements. To design your operating model, nology. The key is to recognize which particular elements compose
complete the following exercises: the essence of your business-your foundation for execution.
Step 4: Set Priorities Step 6: Exploit Your Foundation for Growth

Most organizations have more change initiatives than they can Even as you start building the foundation you must cash in on the
reasonably implement. The enterprise architecture core diagram benefits. This means first allocating generous funding for training
reveals a company's priorities because it highlights the base on and development. If the company's people don't know how to use
which future capabilities depend. Building out the foundation for the foundation, the payback won't happen. Second, align incen-
execution demands management focus, particularly at budget time. tives so that people are motivated to exploit the foundation. If the
A company's project portfolio should reflect its enterprise archi- operating model demands integration and standardization, make
tecture priorities. sure reward systems encourage integration and standardization,
We suggest that every major project champion in the com- individual heroics. Third, encourage and reward creativity. Creativ-
pany should address the following question: how can the project ity identifies-both from the outside in and the inside out-op-
build out or leverage the foundation for execution? portunities for new and existing products and markets. Outside-in
If the answer is that the project can't, the company should in- creativity looks to the marketplace to identify opportunities that
vestigate carefully whether the project has strategic value. Urgent leverage or add to the foundation. Inside-out creativity looks to
business needs might require that some projects not help push the the foundation to see what is possible and may appeal to customers.
architecture forward. But, for the most part, the company should As the company learns how to effectively deploy the foundation-
leverage project-related expenditures to help evolve and improve particularly via testimonials of successful initiatives-everyone will
the foundation for execution. become dearer about the benefits of the foundation.
Step 5: Design and Implement an Top Ten Leadership Principles

IT Engagement Model
From studying and working with hundreds of companies, we have
To sustain focus on iteratively building and leveraging a founda- distilled lessons from many outstanding executives into ten lead-
tion for execution, companies need a formal ITe'l).gagement model. ership principles for creating and exploiting a foundation for exe-
As described in chapter 6, three ingredients are c'ritical: (1) IT gov- cution. We intend these to provide a succinct summary of the
ernance at the senior levels of the company, (2) disciplined project book and a primer, refresher, or checklist for all leaders. 10
management across all major projects, and (3) linkages to ensure
that IT governance and project management mutually reinforce 1. Commit to the Foundation
one another.
All three of these ingredients require management to imple- A foundation for execution should have fundamental impacts on
ment mechanisms for articulating company goals, setting priori- how a company does business. Instead of strategies based on re-
ties, managing to objectives, and measuring results. The engagement acting to customer demands and competitor initiatives, a company
model brings continuous reinforcement of company goals in every- with a foundation will primarily base its strategies on identifying
day tasks, making it a critical tool for building and leveraging a opportunities to leverage its capabilities. Management literature
foundation for execution. has long preached that companies must develop and apply unique
capabilities to succeed in global markets.ll The foundation-for- first to identify a valuable customer service using wireless tech-
execution framework provides an orderly view of how to plan, nologies. The company's funding mechanisms required the inno-
implement, and leverage a coherent set of capabilities. vating business unit to pay for the entire wireless infrastructure,
Companies must exercise strong organizational discipline to even though other parts of the company had identified wireless
build and leverage a foundation. First, a company must embrace technologies as important to their future. Faced with paying the
the discipline to declare an operating model and implement the full infrastructure cost, the business unit leader was motivated to
required standardization of processes, data, and technology. Sec- create a silo of technology because an enterprisewide solution
ond, management must embrace the discipline to pursue those would cost more and take longer to integrate into the foundation.
strategic opportunities that leverage its foundation-without forc- There are many solutions to this dilemma. For example, corporate
ing opportunities that don't fit. As ING DIRECT (chapter 3) fol- can underwrite a percentage of the cost of the infrastructure. Al-
lows its established formula for success, introducing a narrow set ternatively, or in addition, the business leading the investment
of existing products into new banks in new countries, it is buck- can receive a dividend from business unit followers as a reward for
ing the trend toward full-service financial institutions. Its success taking the lead and the risk. In any case, senior management can-
reflects discipline in both its business processes and its strategic not simply decide how the company will operate-it must rectify
decisions. all the forces working against its vision. Senior management must
create the climate for success.
2. Initiate Change from the Top and Remove Barriers
3. Feed the Core-Experiment
Building a foundation for execution is central to a company's abil-
ity to execute its strategies and thus needs the attention and ded- While companies are pursuing profitable growth by building and
ication of senior management. Left to their own devices, most leveraging a foundation for execution, they will certainly encounter
people in a company attempt to do what they think is right. But promising strategic opportunities that don't leverage their foun-
without clear direction,· some of their actions will do as much dation. When market synergies argue for strategic bets that can-
harm as good. Senior management needs to driv.e the choice of not leverage an existing foundation, companies should pursue them
the operating model and be involved in the of the separately from the core business, as Schneider National's logistics
enterprise architecture. And senior managers should take respon- business, UPS's financial services business, and Manheim's online
sibility for converting an architecture into a foundation for exe- auctions all did. Such ventures allow a company to experiment with
cution both directly and via reinforcing governance. synergistic businesses that might feed the core.
The need for senior management leadership and funding is A strong foundation for execution prepares the company for
visible in the leader-follower dilemma. Building out the founda- unknown future customer demands. A stream of small, focused
tion for execution requires investments in IT infrastructure, but as experiments apart from the core helps a company learn about
companies build out their foundations one project at a time, emerging businesses and the capabilities of new technologies. Be-
funding mechanisms often limit important investments in infra- cause these ventures do not leverage the company's foundation,
structure. For example, the securities trading business unit in a fi- they involve higher risk and slower profitability. By acknowledg-
nancial services company with multiple business units was the ing that they are experiments and not part of the core business,
companies can establish a budget for experiments, design distinct current stage. For example, Guardian Life Insurance cut IT costs
metrics for assessing the success of each experiment, and allow a 30 percent between 2000 and 2003 by consolidating servers, rene-
realistic amount of time for the most promising experiments to gotiating contracts, introducing offshore outsourcing, and enforc-
achieve profitability. 1 ing financial discipline. 13 That kind of benefit has an immediate
4:
impact on the company's bottom line while positioning the com-
4. Use Architecture as a Compass and pany for even more-powerful business benefits.
Communication Tool
6. Implement the Foundation One Project at a Time
Jim Crookes, chief architect at BT, has observed, Companies get
/I
the systems they deserve. A company's systems estate is a result of Some executives are tempted to solve all problems with a single
its culture, organizational history, and its funding structures. Co- huge effort. Unless a company is on the verge of bankruptcy, how-
herent, well-integrated systems will only ever exist in companies ever, the big-bang approach is almost never a good idea. Imple-
that value coherence and integrated service."12 menting a foundation, one project at a time, uses the momentum of
Enterprise architecture should guide companies to greater co- current business needs to create the foundation. In the process, the
herence. A one-page core diagram of the enterprise architecture most important elements of the architecture get implemented first.
can act as a compass accessed by managers to resolve differences Every business has critical strategic initiatives to execute. These
of opinion about next steps in building organizational capabili- initiatives can be implemented quickly with no thought to their
ties. The objective of the enterprise architecture is not.so much to long-term impact on the efficiency and flexibility of the business,
achieve a particular end state as it is to serve as a blueprint for the or they can help implement the foundation for execution. Imple-
company's direction. It's easy for companies to become enamored menting a foundation one project at a time gives the entire com-
with the next big project or new strategic opportunity. But that pany time to absorb new capabilities and recalibrate its next steps.
kind of enthusiasm creates a rush to the next project without en-
suring that employees are driving benefits fro.ru the last project.
7. Don't Do It Alone-Outsource
Enterprise architecture maps a path in which company incre-
mentally builds and then leverages capabilities. The company be- Defining an operating model, designing an enterprise architecture,
comes smarter-and more successful. and building the foundation for execution are all major undertak-
ings. Every company needs to take control of setting the direction,
S. Don't Skip Stages but it makes sense to get help with the implementation. Over time
many of the processes a company standardizes will be candidates for
The architecture maturity stages identify the business transforma- outsourcing. Certainly, some standardized processes will be unique
tions necessary to leverage the foundation for execution. Skipping to a company. But whenever world-class providers can find enough
stages leads to either failures or delayed benefits by taking on more customers desiring the same process, companies will have no reason
organizational change than a company's people can handle. Each to retain processes internally.
stage has very different learning requirements. (See table 4-1). Outsourcing those capabilities that don't distinguish you com-
Companies yield huge benefits by driving the value from their petitively frees up management attention to focus on activities
ENTERPRISE ARCHITECTURE AS STRATEGY Take Charge! The Leadership Agenda 205
204
that will differentiate your company and help you grow prof- moved from a relatively autonomous business unit model to "One
itably. Companies will have to postpone some outsourcing while State Street." A critical success factor was increasing the sharing and
waiting for an external market to develop, but ultimately, out- reuse across different business units while still maintaining a cul-
sourced processes will constitute part of most companies' founda- ture of innovation. 15 Several factors needed to change. Consequently,
tion for execution. a new governance model was implemented, an enterprisewide IT
budget was instituted, and more recently, the organization was
restructured so that both operations and IT now report to Execu-
8. Invest in Your People tive Vice President and CIO Joe Antonellis.
Automating core activities and providing useful data can release To reinforce the new approach to bUSiness, the basis for incen-
the creativity of the company's people. A foundation for executives and bonuses was also changed. Today at State Street, business·
tion presents both an opportunity and a requirement to develop unit executives typically receive annual incentives based SO per-
and capitalize on people's capabilities. Most companies woefully cent on the performance of the business unit and SO percent on
underinvest in IT education and training, allocating on average enterprisewide performance, such as earnings per share. All IT
about 2 percent of the typical IT budget to employee develop- professionals-with their responsibility to focus on such company-
ment. 14 Worse still, when an economic downturn occurs, training wide issues as creating a common foundation for execution-re-
and trayel are the first areas to be cut. ceive incentives based 100 percent on enterprisewide performance.
Many companies also miss out on the important opportunity This type of bonus structure helps clarify individuals' priorities.
for learning that a project postimplementation review offers. Grow-
ing numbers of companies now include in their project budgets an 10. Empower Employees with the
allocation for developing people that includes education, training, Foundation for Execution
and postimplementation review. Professional development helps
companies generate the expected benefits of new systems-it is A foundation for execution is where people, systems, and processes
also important for motivating and energizing the company's key converge to make companies more effective. Some companies,
asset, its people. Postimplementation reviews 'provide critical feed- including Verizon Wireless, Lands' End, and Nordstrom, have de-
back into the next round of project justification with data on risk, veloped reputations for effective customer interactions. These com-
performance, and resource needs. Leading firms are linking their panies empower their employees to make decisions, provide clear
regular postimplementation reviews to individual performance objectives or guidelines for their behavior, and give them power-
assessments and incentives. ful systems to guide those decisions. At the end of the workday,
employees'should find satisfaction in their accomplishments,
whether that involves helping customers, designing strategic part-
9. Reward Enterprisewide Thinking
nerships, introducing new products, or updating the account-
A foundation for execution can be foiled by unaligned incentives. ing books. Instead, many employees regularly spend their day re-
If people are instructed to build and leverage a foundation for exe- working tasks that have already been completed, fighting bureau-
cution but rewarded for maximizing local performance, the com- cracy to get approvals for obvious deciSions, or manipulating data
pany's foundation will be disregarded. In recent years State Street on tasks that a computer could do faster, better, and cheaper. The
promise of the foundation for execution is that a company's Third, as we discussed in our prognostications on the fifth
people will do more value-added work-and the company will, stage of architecture maturity, companies will increasingly partner
perform far better as a result. to enter new markets and create new industries. Many of the most
exciting strategic opportunities will require companies to quickly
The Journey That Lies Ahead join forces-and just as quickly to separate again-exploiting their
distinctive competences by linking modular business capabilities.
Enterprise architecture in many companies refers to a detailed These dynamic partnerships are already becoming important-
blueprint of systems, data, and technology. It is now clear that en- even though few companies have the technology or business process
terprise architecture is instead a business vision. Enterprise archi- infrastructure to support them. Companies whose foundation for
tecture begins at the top-with a statement of how a company execution can easily reach across company boundaries and plug
operates-and results in a foundation of IT and business process and play their modular business capabilities with partners will win
capabilities on which a company builds its competitiveness. Es- in this fast-paced world of global opportunities.
tablishing this foundation for execution is a joint responsibility of Fourth, vendors will increasingly provide industry-standard
business and IT executives-it shapes the strategic opportunities a business processes for the same or lower cost than companies can
company can respond to in the future. We believe that a number provide internally. Increased outsourcing will accelerate the archi-
of pressures will make a foundation for execution more important tecture maturity process, so companies will develop more-robust
in the coming years. foundations. Companies that have not learned how to implement
First, companies will increasingly face customers who demand and manage standardized and integrated processes will struggle
high service levels at low cost-and competitors will give those with the realities of the marketplace.
customers exactly what they ask for. Market conditions change A foundation for execution allows a company to automate pre-
rapidly-sometimes shaped by customers, sometimes by com- dictable processes so management can focus on higher-value tasks
petitors, but in all cases, requiring a rapid response. Companies like innovating, partnering, and identifying new opportunities.
without a robust foundation for execution will a tough time The foundation empowers employees and enriches jobs by reduc-
battling competitors who have already automate<;l their process ing redundant and tedious tasks while providing the information
capabilities. needed to innovate and customize. Few companies have built a
Second, companies will continue to encounter greater foundation of digitized processes facilitating agility throughout
technology-related risks and growing regulation. A well-designed the organization. Those that have are better positioned to take ad-
foundation simplifies the IT and business environment, thus re- vantage of market opportunities and grow profitably. These lead-
ducing the risks of systems failures, security and privacy breaches, ing companies 'are evidence that the enterprise architecture journey
and loss of data integrity. A simplified IT and business process envi- is one worth taking.
ronment is critical to reducing a company's vulnerability to a wide
range of risks. Companies do not have a choice as to whether they
want to manage risk-business continuity, security, data integrity,
and regulatory compliance must be managed, and managed well.
Notes
Chapter 1
1. Pete Engardio, Dexter Roberts, and Brian Bremner, "The China
Price," Business Week, December 6,2004, Issue 3911.
2. Partha Iyengar, "State of the Information and Communication
Technology Industry in India," research report G00126192, Gartner,
Stamford, CT, March 28,2005.
3. To substantiate that these companies were more profitable, we ver-
ified that respondents' reported profitability was statistically significantly
correlated with the firms' reported three-year financial performance.
4. Our research includes fifty case studies on enterprise architecture
and eighteen case studies on the IT engagement model. We conducted
two surveys on enterprise architecture that reached 180 companies. In
addition, we surveyed 256 companies on IT governance and its influ-
ence on' architecture.
5. Kei Nagayama and Peter Weill, "7-Eleven Japan Co., Ltd.: Rein-
venting the Retail Business Model," working paper 338, MIT Sloan Cen-
ter for Information Systems Research, Cambridge, MA, January 2004.
6. The concept of core capabilities as a source of competitive ad-
vantage was developed by a number of researchers. See, for example,
Kenneth R. Andrews, The Concept of Corporate Strategy, 3rd ed. (Home-
wood, IL: McGraw Hill/Irwin, 1994) and C. K. Prahalad and Gary Hamel,
"The Core Competence of the Corporation," Harvard Business Review,
May-June 1990, 79-91. Kathleen Eisenhardt refined the concept in her
discussion of dynamic capabilitiesj see, for example, Kathleen M. Eisen-
hardt and Jeffery A. Martin, "Dynamic Capabilities: What Are They?"
209
210 Notes Notes 211
Strategic Management Journal 21, no. 10/11 (2000): 1105-1121. Jay Bar- Portability and Accountability Act of 1996 (HIPAA) had as a goal "to im-
ney also addressed the concept of core capabilities; see, for example, Jay prove the efficiency and effectiveness of the US health care system by
Barney, "The Resource-Based Theory of the Firm," Organization Science 7, encouraging the widespread use of electronic data interchange in health
no.5 (1996): 469. We use the concept somewhat differently than these care." HIPAA established national standards for electronic health-care
authors: the firm's foundation for execution digitizes not just the capa- transactions and addresses the security and privacy of health-care data.
bilities that "make a significant contribution to the perceived customer (From Centers for Medicare and Medicaid Services, "HIPAA General In-
benefits of the end product" (to use Prahalad and Hamel's view), but . formation," http://www.cms.hhs.gov/hipaa/.)
also the capabilities that provide the business process integration and 11. Enterprise resource planning systems are among the biggest,
standardization necessary for delivering goods and services to customers. most complex systems companies can buy. They have multiple mod-
Such capabilities may not be "core" in the sense of competitively dis- ules, encompassing processes such as financial planning and account-
tinctive, but they are necessary and digitizing these capabilities allows ing, supply chain management, and human resource management.
company management to focus on higher-level tasks. These systems are known by the vendor's name: SAP, Oracle, and a host
7. As Michael Jordan has shown, however, being great in one of vendors who provide systems for smaller companies.
arena-basketball-doesn't guarantee success in others, such as golf or 12. Quotation from video interview with Mike Eskew, chairman and
baseball. Similarly, a foundation built for one approach to delivering CEO of UPS, with Jeanne Ross and Peter Weill at MIT Sloan School Cen-
goods and services can limit the ways a company competes. ter for Information Systems Research, Cambridge, MA, April 10, 2002.
8. For a discussion of the risks associated with organizational 13. Both this quotation and the subsequent one from Suzanne Peck
change, see Cyrus Gibson, "IT-Enabled Business Change: An Approach are from an interview with Suzanne Peck conducted by Jeanne Ross,
to Understanding and Managing Risk," MIS Quarterly Executive 2, no. 2 May 2005, Washington, DC.
(September 2003): 105-115. 14. Nagayama and Weill, "7-ElevenJapan."
9. For more details see (1) Sin an Aral and Peter Weill, "IT Assets, 15. Francisco Gonzalez-Meza Hoffmann and Peter Weill, "Banknorth:
Organizational Capabilities, and Firm Performance: Asset and Capabil- Designing IT Governance for a Growth-Oriented Business Environ-
ity Specific Complementarities," working paper 343, MIT Sloan Center ment," working paper 350, MIT Sloan Center for Information Systems
for Information Systems Research, Cambridge, MA, August 2005 and Research, Cambridge, MA, November 2004.
(2) Peter Weill and Sinan Aral, "Generating Premium Returns on Your
IT Investments," MIT Sloan Management Review 47 no. 2 (Winter 2006):
39-48\ Chapter 2
10. The Sarbanes-Oxley Act of 2002 creates a public- 1. ThinkExist.com Quotations Online, "Norman Schwarzkopf
company accounting oversight board, which has the authority to set Quotes," http://en.thinkexist.com/quotes/norman_schwarzkopf/ .
and enforce auditing, attestation, quality control, and ethics (including 2. The measure for strategic effectiveness was a weighted average of
independence) standards for auditors of public companies. (From AICPA, the company's priorities for operational efficiency, customer intimacy,
"Landmark Accounting Reform Legislation Signed into Law," http:// product leadership, and strategic agility relative to its success in meet-
www.aicpa.org/pubs/cpaltr/Sept2002/landmark.htm.) Basel II is an ef- ing those
fort by international banking supervisors to update the original inter- 3. These statistics are based on a survey of 103 companies. These
national bank capital accord (Basel I), which has been in effect since were perceptual measures of well the company's existing IT-
1988. Current proposals aim to improve the consistency of capital regu- enabled business processes were addreSSing each of these strategic
lations internationally, to make regulatory capital more risk sensitive, needs. The first three strategic impacts refer to the diSciplines described
and to promote enhanced risk management practices among large, in- in Michael Treacy and Fred Wiersema, The Discipline of Market Leaders:
ternationally active banking organizations. (From The Federal Reserve Choose Your Customers, Narrow Your Focus, Dominate Your Market (Read-
Board "Basel II Capital Accord," Federal Reserve Board, http://www ing, MA: Addison-Wesley, 1995). We have added strategic agility because
.federalreserve.gov/ generalinfo/baseI2/ default.htm.) The Health Insurance of its growing importance to companies .
212 Notes Notes 213
4. The description of JM Family Enterprises is from (1) Cynthia M. Most Haunted Places," 2001, http://www.prairieghosts.com/winchester
Beath and Jeanne W. Ross, "JM Family Enterprises, Inc.: Selectively Out- .html.
sourcing IT for Increased Business Value," MIT Sloan Center for Infor- 2. Richard Woodham and Peter Weill, "Manheim Interactive: Sell-
mation Systems Research, forthcoming working paper and (2) Forbes ing Cars Online," working paper 314, MIT Sloan Center for Informa-
.com, "America's Largest Private Companies," 2005, http://www.forbes tion Systems Research, Cambridge, MA, February 2001.
.com/finance/lists/21 /2004/LIR. jhtml? passListId=21 &pass Year=2004& 3. Nils O. Fonstad and David C. Robertson, "Realizing IT-Enabled
passListType=Company&uniqueId=PTGE&datatype=Company. Change: The IT Engagement Model," research briefing IV, no. 3D, MIT
5. The description of Merrill Lynch is from (1) Merrill Lynch, An- Sloan Center for Information Systems Research, Cambridge, MA, Octo-
nual Report, 2004 and (2) V. Kastori Rangan and Marie Bell, "Merrill ber2005.
Lynch: Integrated Choice," Case 9-500-090 (Boston: Harvard Business 4. The Delta Air Lines vignette is drawn from Jeanne W. Ross,
School, March 2001). "E-business at Delta Air Lines: Extracting Value from a Multi-Faceted 'Ap-
6. Quoted phrase from V. Kastori Rangan and Marie Bell, "Merrill proach," working paper 317, MIT Sloan Center for Information Systems
Lynch: Integrated Choice," Case 9-500-090 (Boston: Harvard Business Research, Cambridge, MA, August 2001. See also "E-business at Delta Air
School, March 2001). Lines: Extracting Value from a Multi-Faceted Approach," Video Case
7. Merrill Lynch, Annual Report, 2004. 317-V, MIT Sloan Center for Information Systems Research, August 2001.
8. The description of TD Banknorth is extracted from Francisco 5. The Carlson vignette is drawn from Nils O. Fonstad and Jeanne
Gonzalez-Meza Hoffmann and Peter Weill, "Banknorth: Designing IT W. Ross, "Case Vignette of Carlson," (Cambridge, MA: MIT Sloan School
Governance for a Growth-Oriented Business Environment," working of Management Center for Information Systems Research, January 2003).
paper 350, MIT Sloan Center for Information Systems Research, Cam- 6. Individual business units in diversification companies like Carl-
bridge, MA, November 2004. son often have separate core diagrams reflecting greater standardiza-
9. The description of Dow Chemical is extracted from Jeanne W. tion and integration (and thus a different operating model).
Ross and Cynthia M. Beath, "The Federated Broker Model at The Dow 7. This case is derived from Peter Weill and Jeanne W. Ross, IT Gov-
Chemical Company: Blending World Class Internal and External Capa- ernance: How Top Performers Manage IT Decision Rights for Superior Results
bilities," working paper 355, MIT Sloan Center for Information Systems (Boston: Harvard Business School Press, 2004), 27-34.
Research, Cambridge, MA, July 2005. 8. The ING DIRECT vignette is drawn from David C. Robertson,
10. See Jeanne W. Ross, "Johnson &Johnson: Building an Infrastruc- "ING Direct: The IT Challenge {B)," working paper IMD-3-1345, IMD,
ture to Support Global Operations," working MIT Sloan Cen- Lausanne, SWitzerland, 2003, 5.
ter for Information Systems Research, Cambridge, MA, September 1995. 9. Martin Vonk, "ING DIRECT: ICT and Governance" (presenta-
11. Clayton M. Christensen, The Innovator's Dilemma: When New tion at IMD, Lausartne, SWitzerland, June 29, 2005).
Technologies Cause Great Firms to Fail (Boston: Harvard Business School
Press, 1997). Chapter 4
12. The example company's industry has been disguised, but it has 1. See project information on the Big Dig at http://www.massturn
many characteristics of the packaging industry. pike.com/bigdig/background/index.html.
13. The Schneider National vignette is drawn from Jeanne W. Ross, 2. Associated Press, "Boston's Big Dig Opens to Public," MSNBC
"Schneider National Inc.: Building Networks to Add Customer Value," .com, December 20,2003, http://msnbc.msn.com/id/3769829/.
working paper 285, MIT Sloan Center for Information Systems Re- 3. The concept of architecture stages was introduced in Jeanne W.
search, Cambridge, MA, September 1995. Ross, "Creating a Strategic Architecture Competency: Learning in Stages,"
MIS Quarterly Executive 2, no. 1 (March 2003): 31-43.
Chapter 3
4. See Jeanne W. Ross, "Maturity Matters: How Firms Generate Value
1. Troy Taylor, "The Winchester Mystery House: The History of One from Enterprise Architecture," research briefing IV, no. 2B, MIT Sloan
of America's Most Haunted Houses," "Ghosts of the Prairie, America's Center for Information Systems Research, Cambridge, MA, July 2004.
214 Notes Notes 215
S. For a description of the potential of Web services, see John Hagel Choose Your Customers, Narrow Your Focus, Dominate Your Market (Read-
and John Seely Brown, "Your Next IT Strategy," Harvard Business Review, ing, MA: Addison-Wesley, 1995). We have added strategic agility because
October 2001,105-113. of its growing importance to companies.
6. Jim McGrane, interview by Jeanne W. Ross, September 2002. See 10. Jeanne W. Ross, "Dow Corning Corporation: Case Studies A, B
Peter Weill and Jeanne W. Ross, IT Governance: How Top Performers Man- an dC" , working paper 305, MIT Sloan Center for Information Systems,
age IT Decision Rights for Superior Results (Boston: Harvard Business Research, Cambridge, MA, June 1999.
School Press, 2004). 11. Rebecca Rhoads, "RTN on Governance" (presentation at the
7. See Wesley M. Cohen and Daniel A. Levinthal, "Absorptive Ca- MIT Sloan Center for Information Systems Research Summer Session
pacity: A New Perspective on Learning and Innovation," Administrative June 2005). '
Science Quarterly 35, no.1 (March 1990): 128-152. 12. Ibid.
8. Geoffrey E. Bock, "The Guardian Life Insurance Company of 13. AI-Noor Ramji, interview by George Westerman and Nils O. Fon-
America: Improving Business Responsiveness with an Extensive Enter- stad, videotape recording, Cambridge, MA, May 19, 2005.
prise Infrastructure," IBM, http://www-306.ibm.com/software/success 14. Ibid.
/cssdb.nsf/CS/BEMY-5UH33J?OpenDocument&Site=software, December 15. The description of Schindler's stages, and the corresponding
2003. quotations, are from Brent Glendening, interview by David C. Robert-
9. Air Products and Chemicals, Annual Report, 2004. son, Ebikon, Switzerland, May 2003.
10. Respondents rated their profitability relative to competitors on a
scale of 1 to S. These ratings were significantly correlated to a three-year Chapter 6
average return on invested capital. 1. Daniel Robey, Jeanne W. Ross, and Marie-Claude Boudreau
"Learning to Implement Enterprise Systems: An Exploratory Study
Chapter 5 the Dialectics of Change," Journal of Management Information Systems
1. Paul A. David, "The Dynamo and the Computer: An Historical 19, no. 1 (Summer 2002): 17-45.
Perspective on the Modern Productivity Paradox," American Economic 2. The term IT engagement model was introduced by Nils O. Fonstad
Review 80, no. 2 (May 1990). and David C. Robertson. See Fonstad and Robertson, "Realizing IT-
2. Andrew Hagadorn, How Breakthroughs Happen (Boston: Harvard Enabled Change: The IT Engagement Model," research briefing IV; no.
Business School Press, 2003), 36-46. 3D, MIT Sloan Center for Information Systems Research, Cambridge,
3. George Westerman and Robert Walpole, "PFPC: Building an IT MA, October 2005. For more on the IT engagement model, Fonstad and
Risk Management Competency," working paper 352,"MIT Sloan Center Robertson, "Transforming a Company Project by Project: The IT En-
for Information Systems Research, Cambridge, MA, April 2005. gagement Model,"MIS Quarterly Executive 5, no. 1 (March 2006).
4. For this analysis we used stage 1 budgets as a baseline for IT bud- 3. This section draws on Peter Weill and Jeanne W. Ross, "A Ma-
gets and compared it to the IT budgets of companies in other stages, trixed Approach to Designing IT Governance," MIT Sloan Management
controlling for industry differences. Review 46, no. 2 (Winter 2005): 26-34.
S. Karl Wachs, interview by Peter Weill, George Westerman, and 4. The information on UNICEF is drawn from Peter Weill and
Nils O. Fonstad, videotape recording, Cambridge, MA, May 5,2005. Jeanne W. RO!ss, IT Governance: How Top Performers Manage IT Decision
6. Charlie Feld, interview by Jeanne W. Ross, videotape recording, Rights for Superior Results (Boston: Harvard Business School Press, 2004),
Cambridge, MA, April 15, 2002. pp. 206-210.
7. Westerman and Walpole, "PFPC." 5. Ibid., 210.
8. Jim Barrington, interview by Peter Weill, George Westerman, 6. Ibid.
and Nils O. Fonstad, videotape recording, March 25, 2005. 7. Ibid.
9. The first three strategic impacts refer to the disciplines described 8. Information systems textbooks provide an introductory view
in Michael Treacy and Fred Wiersema, The Discipline of Market Leaders: of alternative project life cycles. For example, Steven Alter describes
216 Notes Notes 217
four phases; E. Wainwright Martin and his coauthors list three phases tency, the belief that core competencies should not be outsourced has
encompassing eight steps; Efraim Turban, Ephraim McLean, and James gained considerable traction. See, for example, James Bryant Quinn,
Wetherbe list eight stages; Kenneth C. Laudon and Jane P. Laudon de- "Strategic Outsourcing: Leveraging Knowledge Capabilities, II Sloan
scribe six steps with fourteen activities. See Alter, Information Systems: Management Review 40, no. 4 (1999): 9-21.
Foundation ofE-business, 4th ed. (Upper Saddle River, NJ: Prentice Hall, 5. This case study is adapted from Cynthia M. Beath and Jeanne W.
2002); Martin et al., Managing Information Technology, 4th ed. (Upper Ross, "Campbell Soup Company: Creating Business Value Through an
Saddle River, NJ: Prentice Hall, 2002); Laudon and Laudon, Management IT Partnership, II working paper, MIT Sloan Center for Information Sys-
Information Systems: Managing the Digital Firm, 9th ed. (Upper Saddle tems Research, forthcoming. Additional quotations are from an inter-
River, NJ: Pearson Prentice Hall, 2006); Turban, McLean, and Wetherbe, view with Doreen Wright by Cynthia M. Beath and Jeanne W. Ross,
Information Technology for Management: Transforming Organizations in the February 9, 2005, Camden, New Jersey.
Digital Economy, 4th ed. (New York: Wiley, 2004). 6. The concept of IS Lite was developed by Gartner. See Chuck
9. All quoted material relating to Raytheon drawn from Rebecca Tucker and Roger Woolfe, "The Reality of IS Lite," Gartner EXP Premier
Rhoads, "RTN on Governance" (presentation at the MIT Sloan Center Report, September 2003.
for Information Systems Research Summer Session, June 2005). 7. Katie M. Kaiser and Stephen Hawk, "Evolution of Offshore Soft-
10. This section draws from Peter Heinckiens interview by David C. ware Development: From Outsourcing to Cosourcing," MIS Quarterly
Robertson, Lausanne, Switzerland, July 2005. Executive 3, no. 2 Gune 2004): 69-81.
11. Ludo Vandervelden, interview by Peter M. Heinckiens, Brussels, 8. Third-party expertise was identified as a critical success factor in
July 2005. ERP implementations in Carol Brown and Iris Vessey, "Managing the
12. In the Toyota production system every employee has the right Next Wave of Enterprise Systems: Leveraging Lessons from ERP," MIS
and duty to stop the line if a quality problem occurs. Quarterly Executive 2, no. 1 (March 2003): 65-77.
13. Toyota Motor Marketing Europe's architecture and how it is 9. This case study is adapted from (1) Henri Bourgeois and David C.
measured is based on Peter M. Heinckiens, "Meta-Level Business Inte- Robertson, "Liverpool City Council (A): The ICT Outsourcing Deci-
gration for Supporting New-Economy Business Models" (PhD diss., sion," Case IMD-3-1289 (Lausanne, Switzerland: IMD, 2004) and (2)
University of Ghent, May 2004). Henri Bourgeois and David C. Robertson, "Liverpool City Council (B):
14. This example has been disguised at the company's request. Co-sourcing Public Services Through a Joint Venture with BT," Case
Dates and names of committees have been changed, but the structure IMD-3-1290 (Lausanne, Switzerland: IMD, 2004).
of committees and performance results are accurate., 10. This case study is adapted from Jeanne W. Ross and Cynthia M.
"
15. Jim Crookes, interview by Nils O. Fonstad and,David C. Robert- Beath, "The Federated Broker Model at The Dow Chemical Company:
son, London, March 2004. Blending World Class Internal and External Capabilities, II working
paper 355, MIT Sloan Center for Information Systems Research, Cam-
Chapter 7 bridge, MA, July 2005.
1. Dan Ikenson, "Ending the Chicken War, II trade briefing paper 11. Andrew Liveris, "Letter to the Stockholders of The Dow Chemi-
17, Cato Institute, Washington, DC, June 2003. cal Company, II February 9,2005.
2. See www.forrester.com and www.gartner.com for reports on the 12. Both this quotation and the subsequent two are from Ross and
outcomes of outsourcing. Beath, "Federated Broker Mode1."
3. For an example of an }lR partnership, see Mary C. Lacity, David
Feeny, and Leslie P. Willcocks, "Transforming a Back-Office Function: Chapter 8
Lessons from BAE Systems' Experience with an Enterprise Partnership, II 1. For more on platform development, see David Robertson and
MIS Quarterly Executive 2, no. 2 (September 2003): 86-103. Karl Ulrich "Planning for Product Platforms, II Sloan Management Review
4. While there is much debate as to what constitutes a core compe- 39, no. 4, Summer 1998: 19-31.
218 Notes Notes 219
2. Parts ofthis case are drawn from (l)Jeanne W. Ross et al., "United 11. Normally, executives refer to the process of developing synergies
Parcel Service: Business Transformation Through Information Technol- with an acquisition as "integration." However, because we are using the
ogy/' working paper 331, MIT Sloan Center for Information Systems Re- term differently, we have chosen to refer to CEMEX's approach to ac-
search, Cambridge, MA, September 2002; (2) Jeanne W. Ross, "United quisitions as "assimilation"-bringing the companies onto standard
Parcel Service: Delivering Packages and E-Commerce Solutions/' work- processes, but not integrating processes across business units.
ing paper 318, MIT Sloan Center for Information Systems Research, 12. Chung, Paddack, and Marchand, "CEMEX: Global Growth/' 7.
Cambridge, MA, August 2001; (3) Mike Eskew, interview by Peter Weill 13. Eskew, interview by Weill and Ross.
and Jeanne W. Ross, videotape recording, Cambridge, MA, April 10, 14. Ross et al., "United Parcel Service: Business Transformation."
2002. 15. Bensaou, "Seven-Eleven Japan."
3. Parts of this case are drawn from (1) Kei Nagayama and Peter 16. "Brainy Quote/' 2005, http://www.brainyquote.com/quotes
Weill, "7 -Eleven Japan Co., Ltd.: Reinventing the Retail Business Model/' / quotes/t/thomasjeff12999 7.html.
working paper 338, MIT Sloan Center for Information Systems Research, 17. The section on Dow Chemical, including the accompanying
Cambridge, MA, January 2004; (2) Peter Weill and Michael R. Vitale, quotation from Dave Kepler, is based on Jeanne W. Ross and Cynthia
Place to Space: Migrating to eBusiness Models (Boston: Harvard Business M. Beath, "The Federated Broker Model at The Dow Chemical Com-
School Press, 2001); (3) Ben M. Bensaou "Seven-Eleven Japan: Managing pany: Blending World Class Internal and External Capabilities," work-
a Networked Organization/' case study 05/7-4690, INSEAD Euro-Asia ing paper 355, MIT Sloan Center for Information Systems Research,
Centre, May 1997;(4) Seven-Eleven Japan, "Corporate Outline 2004/, Cambridge, MA, July 2005.
http://www.sej.co.jp/english/investor/irtool!c02004_e.html.
4. Bensaou "Seven-Eleven Japan." Chapter 9
S. While SE]'s standardized systems give headquarters a great deal 1. "Brainy Quote/' 2005, http://www.brainyquote.com/quotes/au
of transparency about inventory levels, supply chain operations, and thors/f/frank_a_clark.html.
sales, we don't classify the company as a Unification operating model 2. Gary Beach, "Repeal Sarbanes-Oxley," CIO Magazine, April I,
because data flows to corporate, not to other business units. In other 2005.
words, business unit activities do not depend on receiving data from 3. A survey of 649 companies by Gartner Worldwide Benchmark-
other business units. ing Survey, 2005, found that the more efficient public companies spent
6. Bensaou, "Seven-Eleven Japan." less than 4% of their overall 2005 IT budget on regulatory compliance.
7. This case is derived from Steven Sheinheit, "E'(olution of IT Ar- Source: Dr. Howard Rubin.
chitecture at MetLife" (presentation at the MIT Sloan Center for Infor- 4. Peter Weill and Sinan Aral, "IT Savvy Pays Off: How Top Per-
mation Systems Research Summer Session, June 2005) and from formers Match IT Portfolios and Organizational Practices," working
MetLife, Annual Report, 2004 (available at http://library.corporate paper 353, MIT Sloan Center for Information Systems Research, Cam-
-ir.net/library/12/121/121171/items/1421S3/MET_2004AR. pdf). bridge, MA, May 2005.
8. This case is drawn from (1) Rebecca Chung, Donald Marchand, S. This information comes from an MIT Sloan Center for Informa-
and William Kettinger, "The CEMEX Way: The Right Balance Between tion Systems Research study of 147 companies' IT investment and per-
Local Business Flexibility and Global Standardization," Case IMD-3- formance froin 1998 to 2002. For more details see (1) Sinan Aral and
1341 (Lausanne, Switzerland: IMD, 2005) and (2) Rebecca Chung, Kata- Peter Weill, "IT Assets, Organizational Capabilities, and Firm Perfor-
rina Paddack, and Donald Marchand, "CEMEX: Global Growth Through mance: Asset and Capability Specific Complementarities," working
Superior Information Capabilities/, Case IMD-3-09S3 (Lausanne, Switzer- paper 343, MIT Sloan Center for Information Systems Research, Cam-
land: IMD, 2003). bridge, MA, August 2005; and (2) Peter Weill and Sinan Aral, "Generat-
9. Chung, Paddack, and Marchand, "CEMEX: Global Growth/' S. ing Premium Returns on Your IT Investments," MIT Sloan Management
10. Chung, Marchand, and Kettinger, "CEMEX Way/' 1. Review 47, no. 2 (Winter 2006): 39-48.
220 Notes
6. Stephanie Overby, "The Price Is Always Right," CIO Magazine,

February 15, 2005.
7. See Hewlett-Packard, "Infrastructure Management 2005,"http:/ /
h41137.www4.hp.com/tpm/uk/en/ppuservices/infrastructure-man-
agement.html.
8. See note 5.
9. Peter Weill and Jeanne W. Ross, IT Governance: How Top Perfor-
mers Manage IT Decision Rights for Superior Results (Boston: Harvard Busi-
ness School Press, 2004).
10. Many of the examples in this section are further descriptions or Index
summaries of examples in earlier chapters where the sources are identified.
11. Kenneth R. Andrews, The Concept of Corporate Strategy, 3d ed.
(Homewood, IL: McGraw Hill/Irwin, 1994); c. K. Prahalad and Gary
Hamel, "The Core Competence of the Corporation," Harvard Business
Review, May-June 1990, 79-91; Kathleen M. Eisenhardt and Jeffery A.
Martin, "Dynamic Capabilities: What Are They?" Strategic Management Accenture, 159 stages of architecture maturity
Journal 21, no. 10/11 (2000): 1105-1121; and Jay Barney, "The Resource- acquisitions. See mergers and committees, 138
Based Theory of the Firm," Organization Science 7, no. 5 (1996): 469. acquisitions efforts, 88
12. Jim Crookes's e-mail message to Jeanne Ross, November 2005. activities. See tasks/task exception process, 105
13. Dennis Callahan and Rick Omartian, "A New Breed of IT Exec," management implementation, 141-142
FinanceTech, February 4, 2004, http://www.financetech.com/featured agenda, leadership, 199-206 improvement, 130-135
/showArticle. jhtml?articleID=17 602496. future considerations, 206-207 linkages, 132
14. Dr. Howard Rubin, Gartner Worldwide Benchmarking Survey, rethinking foundation for exe-
2005. cution, 195-199
15. Peter Weill and Richard Woodham, "State Street Corporation: agenda items, IT, 121-123, Barrington, Jim, 99
Evolving IT Governance," working paper 327, MIT Sloan Center for In- 193-194 Basel II, 12
formation Systems Research, Cambridge, MA, August ., 2002. agility, 12, 190. See also flexibility Beach, Gary, 189
Air Products and Chemicals, 76, behaviors/behavior changes, 74,
86-87 75,80,81,104,119,121,
alignment, 6, 99, 119-120, 135,147-148,205
128-129, 141-142 benefits of enterprise architec-
alliances. See co sourcing; strategic ture, 92-101
partnerships Benmosche, Robert, 173-174
Antonellis, joe, 205 best practices, 158
applications. See business Big Dig, 69-71, 88
applications bottlenecks, IT, 191
architectural stages. See stages of Brady Corp., 75
architecture maturity BT pIc, 109, 111
architecture. See also enterprise Budgets, IT, 2, 94, 105, 198
architecture; IT architecture; allocations, 122, 190
221
222 Index Index 223
Budgets, IT (continued) generating value from, 104 CIO role, 74, 113-115, 194 data
establishing/implementing, learning requirements for, 185 Citibank Asia, 77, 1QO-101, 191 accessibility of, 159, 173, 186,
202,205 outsourcing relationships, 163 companywide IT governance, 192-193, 195
related to stages of architecture overview, 71, 72-74 119 companywide versus local, 75,
maturity, 94, 95 business units, 30-33, 175 companywide versus local per- 80
Sarbanes-Oxley Act compli- autonomy/integration of, 8, f spective, 79-82, 204. See also connecting core and back-end
ance, 122 35,36-37,39-40 I perspectives processes, 78
I
building out an enterprise archi- in diversified companies, 30 complexity of systems, 11 consolidation of data centers, 94
tecture, 87, 89 Merrill Lynch's, 34 Conant, Doug, 149 for decision making, 192-193
business agility, 12, 190 placement of, 30 Coordination operating model, digitizing, 66, 76
business applications separation of country-based, 41 29,32, 33-35, 39. See also inaccurate, 192, 206
t
centralized funding of, 105 standardization across, 9, 48 operating models integration of, 57-58, 60, 154,
defining, 85 thinking at business unit level, rr\
1,
enterprise architecture for 167, 174, 177, 197
maintenance costs, 93
needs, 121, 123
33
business value creation, 13-19
I (MetLife's),57-61
Johnson & Johnson's, 40
investments in, 71-72
optimization of, 76, 77
preparations for beginning i profitable growth in, real-time, across business
improvements, 19
real-time data across, 7
Business Modularity, 9, 71, 77-79,
81, 89, 95-96. See also stages
of architecture maturity
Callahan, Dennis, 88
capabilities, 7, 89
management, 82, 83,84-85
shared IT, 95
I 173-175
core diagrams
Carlson's, 56
Coordination, 61
Delta's, 53
applications, 7
security of, 97
shared,33-35,51,186
data stores, 58, 176, 193
decision making
learning requirements for, 185
outsourCing relationships, 163
Carlson Companies, 55-57, 75,
175-176
I
i:
difficulty of drawing, 66
Diversification, 57
data for, 192
disruption of, 80
7-ElevenJapan's move toward, CEMEX, 177-179 elements in, 50-55 engagement model, 9-10
181-182 changes ING DIRECT's, 62, 63 information for, 192-193
transaction outsourcing, analysis of proposed, 104 MetLife's, 59 IT governance for, 121-124
158-159 associated with \
architectural Replication, 64 key issuesfor, 123
business processes, 184 stages, 83 Unification, 53-55 operating models, 26, 30
designing, 9 capacity for, 82 core processes,·Sl-53, 77, 78 processes to include in core
digitizing, 4-5, 11, 108, 168 initiating, 200-201 cosourcing, 144, 146, 152-157 diagrams, 66
integrated, 8-9, 27-28, 36-38, leading companywide, 84-85 Costa, MichaelJ., 160 Delta Air Lines, 52-55, 66, 77,
175 making massive, 118 costs 86, 188-189
standardized, 36-38, 107-108 needed for outsourcing, of business silos, 93 designs/designing
strategic, 6-7, 88 147-148 cutting, 95; 203 business processes, 9
business process owners. See en- in organizational flexibility, implications of architecture Coordination model core dia-
terprise process owners 79-82 maturity, 94 grams, 59
Business Silos, 6-9, 71, 75,86, prioritizing, 198 100-101 Diversification model core
148. See also stages of archi- Charles Schwab, 26 savings through strategic part- diagram, 56-57
tecture maturity chicken tariff, 143 nerships, 147 enterprise architecture, 197
costs of, 93 CIG Magazine, 189 Cox Communications, 46 IT engagement models, 198
224 Index Index 225
designs/designing (continued) designing/implementing, foundation-building. See build- growth, stages of company, 9. See
by IT leaders, 66 198 ing out an enterprise archi- also profitable growth
Replication model core dia- effective, 142 tecture; IT entries Guardian Life Insurance, 75,86,
grams, 64 ingredients of, 23 foundation for execution. See 88,203
responsibility for, 65-67 linking mechanisms, 126-130 also infrastructure
Unification model core dia- principles for effective, about, 3-5
gram, 54 135-136 analyses of, 196 Harte, Michael, 98
development time, 96 project level of IT, 19 assessing your company's, Heinckiens, Peter, 131, 132, 133
digitizing business processes, SOSCO's, 137-141 5-8 Henshaw, David, 155
4-5, 11, 108, 168 TMME's, 132-135 for better execution of strate- Hewlett-Packard (HP), 193
disaster tolerance, 97 uses of, 141 gies, 1-2 high-performing companies,
disciplines for building founda- enterprise architecture, 9-10, changing core processes for, 110-113
tions, 8-10, 86. See also stages 47-50, 141 70-71 HIPAA,12
of architecture maturity as compass, 141-142,202 commitment to, 199-200
District of Columbia, 86 benefits of, 92-101 creating/exploiting, 10
Diversification operating model, core diagrams of, 50 creation of business value IBM,151-152
29,30-33,39,41-42,89,149. need for, 46-47 with,13-19 implementation. See also core
See also operating models as organizational compass, employee empowerment, 205 diagrams
companies that use, 40 141-142,202 how to build, 8-10, 46 architecture, 141-142
enterprise architecture for as organizing logic, 9, 121 importance of, 10-13 engagement model, 198
(Carlson Companies), 55-57 who should design, 65 steps for rethinking, 195-199 postimplementation assess-
profitable growth in, 175-176 enterprisewide process owners, strategic partnerships building ment,109
unification to diversification 17,38,48,101,107,114, with, 147-148 incentives, 135
transformation, 41-42 129 symptoms of ineffective, ineffective foundations, 188-195
UPS's move to, 179-181 Eskew, Mike, 15 188-195 infrastructure, 105. See also foun-
Dow Chemical Company, 32, executive committees, 137 UPS's, 14-16 dation for execution
37-38,48-49,154,159-162, expenditures, ftom regulatory Washington, D.C.'s, 17 analyzing: 5, 196
183 changes, 13"-, foundation for growth, 199 architecture for, 9
Dow Corning, 100 experimentation, 201-202 funding Campbell's, 148-152
Dynamic Venturing, 182-186. mechanisms, 201 in Coordination model, 173
See also stages of architecture priorities, 82-83, 84, 104-105 development of, 19
maturity Federated Broker Model (FBM), TMME's, 132-133 Dow's, 159
159-162, 183 future considerations, 206-207 impact of operating model
Feld, Charlie, 66, 95 on,26
effectiveness, 110-113 fleXibility, changes in organiza- implementing, 70
eFunds Corp., 158 tional, 79-82. See also agility GE,175 lNG's, 62
enforcement authority, 133, 135 fondue sets, 47 Glendening, Brent, 113-114 investments in, 95, 200-201
engagement model, 9-10, Forbes magazine, 21 governance. See IT governance LDL's, 156
118-121 Ford, Henry, 91 Government Technology magazine, MetLife's, 174
adoption of, 20 Ford Motor Company, 91-92 19 outsourcing, 150
226 Index Index 227
infrastructure (continued) decision areas of, 121-124 business agility/growth initia- ture, 88-89, 101-109,
renewal processes, 105 designing, 137-138 tives, 190-191 113-114
shared, 43, 55, 71, 72, 74, 75, lack of, 122 decision making, 192-193 mandatory investment, 190
76, 172, 175-176 linking mechanisms and, discussing IT agenda items, Manheim Auctions, 46
UPS's, 168, 180 126-130 (see also linking 193-194 market opportunities, 46
ING DIRECT, 20, 61-64, 81, 200 mechanisms) IT bottlenecks, 191 Marriott, 192
integrated processes, 36-38, 175 principles for successful, management's knowledge of IT maturity. See stages of architec-
integration 135-136 value, 194-195 ture maturity
of business processes and sys- project management linkage principles for, 199-206 McDonald's, 35
tems, 7-9, 27-28 to, 124-126, 140-141 learning, 109, 185 MeadWestvaco,81
determining requirements for, IT responsiveness, 96-97, company, 67, 92, 185, 199, mechanisms, linking. See linking
30 IT roles 201,203,207 mechanisms
International Productivity and in Business Modularity stage, new behaviors, 81 mergers and acquisitions,
Quality Council award, 55 78 organizational, 79-87,89 175-176, 176-182, 190
Internet boom, 46 in Business Silos stage, 72 requirements for, 185, 202 Merrill Lynch Global Private
investment decisions, 121, 138 in Optimized Core stage, 76 stages in, 9, 67, 71 Client (GPC), 32, 34, 47-48
investment patterns, IT, 77 in Standardized Technology legacy systems, 48-49, SO, 73 MetLife, 58-61, 173-175
"IS Lite" organization model stage, 74 leveraging growth. See profitable metrics, 147
(Campbell's), 150 UNICEF's, 122-124 growth for agility, 190
IT linkages for architectural compliance,
alignment, 6 architecture, 132 125-126
agenda items, 193-194 Janssen Pharmaceuticals Prod- IT governance/project manage- challenge of, 153
bottlenecks, 191 ucts,40 ment, 120-121, 124-126, designing, 202
budgets, 2, 93-94,190 JM&A Group, 31 140-141 Dow's, 154
costs, 93-96 JM Family Enterprises OMFE), between systems, 73 problem of, 147-148
engagement model, 9-10, 30-33,40,47-48 linking mechanisms, 119, modular architecture. See Busi-
118-121 JM Lexus, 31 126-130, 135-136, 140-141 ness Modularity
investment patterns, 77 Johnson, Laurie,\l80 Liveris, Andrew, 159-162 modules, reusable, 182-186
operations unit costs, 93 Johnson & Johnson, 40, 75,175 Liverpool Direct Ltd. (LDL), Morgan Stanley, 26
principles, 121, 123 joint ventures OVs), 159-160 154-157 motivation, 135
units, 138 local versus companywide per- Mullin, Leo, 52, 53
IT architecture spective, 79-82
compared with enterprise Kepler, Dave, 161, 183 logic, 9, 121
architecture, 48-49 key performance indicators Luijckx, Frank, 159-160 national environments, 12-13
facilitation of management (KPIs), 53-54 Nestle, 76
discussions with, 66 Novartis, 99
IT engagement model. See en- management satisfaction, 97-99
gagement model leadership. See also senior management capabilities, 82, 83,
IT governance, 82, 83, 86-87 management 84-85 objectives, 84, 135, 144, 145,
companywide,119 agenda, 25, 193-194 management practices, architec- 158,202
228 Index Index 229
operating models, 8-10, 25, 29. behavioral changes for, strategies for, 166 responsiveness, IT, 93, 96
See also Coordination operat- 151-152 through acquisitions, 176-182 reusable modules, 182-186
ing model; Diversification cosourcing alliances, 144, 146, in Unification operating Rhoads, Rebecca, 106-108,
operating model; Replication 152-157 model, 167-169 125-126
operating model; Unification of light trucks in U.S. market, program managers, 107 rip-and-replace method of archi-
operating model 143-144 project level of IT engagement tecture transformation,
applying the chosen, 38-39 objectives, 145 model,19 177-179
choosing the wrong, 43-44 of standardized processes, project management, 119, risk factors, 13, 96-98, 153-154
as company vision, 43-44 203-204 124-126. See also project
core diagram examples. See strategic partnerships, 144, methodology
core diagrams 146, 147-152 embedding architectural im- Sarbanes-Oxley Act, 12, 98, 189
decision making, 26, 30 transaction relationships, 144, provements in, 141-142 satisfaction, senior management,
defining your, 196-197 146, 157-162 IT governance linkage to, 98-99
enterprise architecture 140-141 Schindler, 113-114
overview, 47-50 principles for successful, Schneider National, 42-43, 179,
examples, 14-16, 17-19, partnerships, strategic, 144, 146, 135-136 201
32-33,34-35,35-36,37-38 147-152, 153-154 Raytheon's, 127 Schwartzkopf, H. Norman, 25
key dimensions of, 27-28 Peck,Suzanne, 17, 19 SOSCO's, 139 security, 97, 186
overview of types of, 28-30 Petrey, John, 36 project methodology, 104, 112, senior management. See also
process for designing, 65-67 Pfizer, 75 119-120, 124-126, 132, 139 leadership
purpose of, 25-26 PFPC (PNC Financial Services projects, initial appraisal, design role of, 65-67
transforming, 40-43 Group),97-98 133-134 focus of, 119, 120
operational excellence, 100 political environments, 12-13 involvement of, 110-111
operations unit costs. See IT costs postimplementation assessment, oversight of enterprise archi-
optimization, 76-77, 79-80,87 109 Ramji, AI-Noor, 109, 111 tecture, 107
Optimized Core, 9, 71, 76-77. See principles, IT, 121, 123, 135-136 Raytheon, 106-107, 125-126, responsibilities for change,
also stages of architecture principles for leC!;dership, 127, 136 200-201··
maturity 199-206 realizing value from, 101-109 7-ElevenJapan (SEJ), 4, 20-21,
Campbell's transition to, 151 priorities, Ill, 121, 198 redesigning companies, 91 169-173, 181-182
learning requirements for, 185 process owners, business, 17,38, regulations, 6, 12-13, 189-190 service-oriented architecture. See
local managers' roles, 80 48, 101, 107, 114, 129 Replication operating model, 29, architecture; Business Modu-
outsourcing relationships, 163 profitable growth 32,35-36, 39. See also oper- larity
organizational learning, 79-87 in Coordination ating models shared services, 30-33, 148
organizational levels, 39-40, model, 173-175 enterprise architecture for (ING Sheinheit, Steven, 174
88-89 in Diversification operating DIRECT), 61-64 silos, 6-7. See also Business Silos
organizing logic, 9 model,175-176 Janssen Pharmaceuticals Prod- skills of CIOs, 113-115
outcomes, 100-101, 134-135 foundation for, 199 ucts,40 SOSCO, 137-141
outsourcing lack of, 190-191 profitable growth in, 169-173 Southeast Toyota Distributors
for architecture maturity, in Replication operating research/studies/surveys, agility (SET), 30, 31
163-164 modet 169-173 indicators, 12 Spatz, Andre, 123-124
230 Index Index 231
stages of architecture maturity. effectiveness of, 26-27, 83, 100 business value creation, 13-19 Web services, 78
See also Business Modularity; leading without, 25 creation of, 79-87, 84-85, Williams, Anthony, 16-17
Business Silos; Dynamic Ven- Suzuki, Toshifumi, 169 88-89, 135-136, 170-171 Winchester, Sarah, 45-46
turing; Optimized Core; symptoms of ineffective founda- realizing, 101-109, 194-195 World Omni Financial Corpora-
Standardized Technology tions, 188-195 Vandervelden, Ludo, 131 tion (WOFC), 31
applying, 87-89 vendors, 147-148, 153-154, 158, Wright, Doreen, 149, 151
benefits of increasing, 97 161
budgets related to, 94 tasks/task management, 3-4, 14, Verrill, Peter, 36
business objectives in, 84 43, 125 vision, 43-44 Zambrano, Lorenzo, 177-179
for Diversification companies, TD Banknorth, 21, 32, 35-36
175 top performing companies,
greater strategic impact, 110-113, 124 Wachs, Karl, 94
112-113 Toyota Motor Marketing Europe Washington, D.C., 16-19
learning how to benefit from, (TMME), 130-135
82-83,86-87 transaction relationships,
management practices, 88-89 157-162
organizational learning associ- transitions between stages of
ated with, 79-87 business practices, 113-114
outsourcing contributions to, transparency, 136
162-163, 163-164 trucking industry, 42-43
overview, 71
skipping, 176,202-203
transitions between, 86 UNICEF,122-123
standardization Unification operating model, 29,
across business units, 9, 48 32,36-38, 39. See also oper-
business process, 9, 27-28, ating models
36-38, 38-39, 107-108 core diagram,54-55
'\
credibility through, 74 Delta Airlines' ep.terprise archi-
determining requirements for, tecture, 52-55
30 Diversification to Unification
project methodology, 104 transition, 41-42
Standardized Technology, 9, 71, profitable growth in, 167-169
74-76, 80, 106, 148, 163, Unification to Diversification
185. See also stages of archi- transition, 42-43
tecture maturity UPS, 13, 14-16, 76, 167-169,
State Street, 204 179-181, 191
strategic partnerships, 144, 146,
147-152, 153-154
strategy value
drivers of, 44 from architectural stages, 186
About the Authors
Jeanne W. Ross is Principal Research Scientist at the MIT Sloan

School's Center for Information Systems Research (CISR). CISR under-
takes practical empirical research on how firms generate business value
from IT and is funded by corporate patrons and sponsors. The center
disseminates its findings through briefings, papers, workshops, and ex-
ecutive education. At MIT Jeanne lectures, conducts research, and teaches
public and customized executive courses on IT management. She has
published widely, including journal articles, book chapters, and case stud-
ies. Her prior book, IT Governance: How Top Performers Manage IT Deci-
sion Rights for Superior Results, coauthored with Peter Weill, was published
by Harvard Business School Press in 2004. Jeanne's research focuses on
how businesses generate value from IT. She regularly speaks at major fo-
rums, discussing IT management and value. As Editor in Chief of MIS
Quarterly Executive, she is working to increase collaboration between the
academic and professional IT communities.
Peter Weill is Director of the MIT Sloan School's Center for Informa-
tion Systems Research and an MIT Senior Research Scientist. His re-
search and advisory work centers on the strategic impact, value, and
governance of IT in enterprises. He has presented widely at industry fo-
rums, executive education, and MBA programs on the business value of
IT and has published award-winning books, journal articles, and case
studies. These include his book with Jeanne W. Ross, IT Governance. He
also coauthored the bestselling Leveraging the New Infrastructure: How
Market Leaders Capitalize on Information Technology (Harvard Business
233
234 About the Authors
School Press, 1998) and Place to Space: Migrating to eBusiness Models

(Harvard Business School Press, 2001), which won one of the Library
Journal of America's best business book of the year awards. Peter is cur-
rently researching business agility and which business models will be
most successful.
David C. Robertson is a professor at IMD in Lausanne, Switzerland,

where he teaches innovation, technology management, and IT in the
school's executive and MBA programs. At IMD, David is currently di-
recting executive programs for Credit Suisse, EMC, Skanska, and HSBC.
He was also codirector of Making Business Sense of IT, a joint program
between IMD and MIT. Prior to IMD, David was a postdoctoral research
fellow at the MIT Computer Science and Artificial Intelligence Labora-
tory, a consultant at McKinsey & Co., and an executive at four enter-
prise software companies. In addition to his responsibilities at IMD,
David is cofounder of a product design firm that is patenting and bring-
ing its first product to market, and he serves as a consultant to compa-
nies on such issues as innovation, enterprise architecture, and overall
business strategy.

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Enterprise

HARVARD BUSINESS SCHOOL PRESS

In 1995 we started our study of enterprise architecture-we just

Thanks to Peter and Jeanne for keeping the wonderful institu-

DOES IT FEEL AS IF the employees in your >company are work-

We believe these companies execute better because they have a

threats. cent of his company's programming code was dedicated to linking

lutions. The process starts over each time management defines

Current National and Political Environments

company was debating the requirements of an IT capability, it was

by acquisitions. We close the chapter with a look at what's

• Chapter 9: Take Charge! The Leadership Agenda. Chapter 9

GENERAL H. NORMAN SCHWARZKOPF once observed, "Lead-

26 ENTERPRISE ARCHITECTURE AS STRATEGY Define Your Operating Model 27

The four general types of operating models are:

We have developed a straightforward two-dimensional model with

clarify how it intends to deliver goods and services to customers.

The lower left quadrant of figure 2-2 describes JMFE's Diversi- ..

introducing economies of scale and providing its banks' cus-

quality, safety, and security-other important organizational ob- FIGURE 2-3

trixed management structure, in which managers often report to e

commodities. Companies more focused on innovation may find

have dire consequences. But not choosing an operating model is

guiding development of technical capabilities. However, they need

son's portfolio includes Radisson Hotels, T.G.1. Friday's restau-

FIGURE 3-3 FIGURE 3-4

Carlson's core diagram Diversification core diagram

H Data object f-. 0

Source: Carlson Companies. Used with permission.

An extreme example of Diversification would be a total lack

business functions and common processes, such as finance, human ";::

panies, MetLife had built systems supporting key operations, such

I Payments I BChecks rlocal/HQ/tax

Common business services

nents (although some customized solutions are allowed when it's

enabling those processes (figure 3-8). Data rarely appears in

Navigate the Stages of

IN 1991 the city of Boston, Massachusetts, began a multiyear

FIGURE 4-1 Organizationally, applications in the Business Silos stage align

on my head but still trying to manage. In several of the compa-

IT capability Local IT Shared technical Companywide Plug-and-play

Business ROloflocal Reduced Cost and quality Speed to market;

around technology standards and then around data and process

companies in the oil and gas industry were attempting to skip

Cash In on the Learning

WHEN LARGE NUMBERS OF BUSINESSES firstinstalledelec-

decisions or addressing unexpected technical problems. The result 1.5 V

as inhibitors to future development. In our research, IT executives Architecture stage

noted a significant improvement in development time as a result of a. Development time .

Enterprise architecture management practices How architecture management practices evolve

Mean Standardized Business

2. A statement of enterprise architecture guiding principles: tough

Lessons from Top Performers: Greater Senior Management Involvement

strategic business benefits until later stages. Not surprisingly, then,

Build the Foundation

SEVERAL YEARS AGO a friend of ours invited an interior deco-

*This chapter was coauthored with Nils O. Fonstad, a research scientist at

1. IT principles: high-level decisions about the strategic role

an exception basis. We have scorecards and metrics and U)

don't look at the program in detail unless it's triggered an .§

product development system (lPDS)-the multi-gate process for 'iii

managing all projects at Raytheon. IPDS is used to develop any so-

For IT project governance Raytheon builds on what niakes it a t Ol 0