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Out of The Box: Strategies for Achieving Profits Today and Growth Tomorrow Through Web Services

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The story in web services to date has been told by the technologists. That is why we see an endless supply of articles about XML, SOAP, WSDL, UDDI and the rest of the WSxL alphabet soup. Ditto for the .NET vs. Java wars. It's time to transition from architectures and protocols to business models - how does any of this help to run a business faster, better, cheaper? Enter John Hagel, who spent sixteen years as a Partner with McKinsey, and has recently set up his own consultancy company.

Hagel starts by noting that web services is the first IT technology which supports an organic and self-adaptive organisational model of the enterprise. Hagel introduces "the Service Grid". Above the computing and network protocols there is a conceptually-distinct layer of functionality which has to be there to make web services fly. We need solutions to problems such as: security; transaction integrity; billing; orchestration of functions; and in particular ontologies - the standardisation of the meanings of entities and attributes within and between businesses. (Note the "semantic web" activity in W3C).

Many people assume web services are just a re-run of the "application service provision" experiment we saw a couple of years ago. In chapter 3, Hagel provides an excellent review of the ASP wave, the business requirements which drove it and the reasons why the experiment failed. Business were keen to move from a license to a subscription model, they wanted to use enterprise application services without investing in technology and operations. But CIOs were worried about the performance and security of Internet-provided applications, and concerned that if ASPs went out of business, their own companies would be left in a lurch (and the CIO would lose his/her job!).

Although the technologies of web services are still in their infancy, some people out there are using them. In chapters 4 and 5, Hagel describes Dell's continuous improvement of its supply chain using web service interfaces to talk with its supplier systems. He points out that existing applications can be upgraded to expose their interfaces as web services to support new business processes relatively easily and cheaply.

Generalizing from his Dell example, Hagel argues that web services will be introduced from the edge of the enterprise, later penetrating the core. The "edge" is that part of the enterprise which deals with the environment: customers, suppliers, partners. The alternative view is that web services will see early introduction within the enterprise itself, as CIOs exploit the power of web service interfaces to kick-start enterprise application automation (EAI) for legacy systems, which to-date has been just too difficult, costly and time-consuming.

In chapter 6, Hagel uses the examples of Cisco and Nike to examine "process networks". The situation where an orchestrator (dominant company with market power) controls the activities of a veritable keiretsu of partners in its industry value-net. Not via micro-management or direct administrative power, more through "certification, coaching, promoting or dropping based on overall partnership performance".

In chapter 7 Hagel turns his attention to the enterprise itself. Most enterprises, Hagel observes, are coalitions of three very different kinds of business. Firstly a customer relationship business focused on "share of wallet" (customer-centric); secondly an operations business focused on low-cost, economies of scale and routine (process-centric); and thirdly a product development business focused on creativity and innovation (new-product-centric). These three business types have different drivers, cultures and types of people. Many commentators have pointed out that enterprises have to decide if their focus is to be "customers, price or product" and that it's foolhardy to try to be a bit of everything.

Why not unbundle these functions into separate enterprises? Conventionally the answer is that excessive transaction costs load the scales in favour of retaining vertical integration of these functions. However, visionaries have long argued that eBusiness, with its dramatically decreased transaction costs, will permit a generalised outsourcing model leading in the limit to the virtual corporation. Hagel's view is that rather than atomization of enterprises, we can expect to see significant consolidation, particularly in the areas of customer relationship and operations-focused companies, where strong economies of scale exist.

Concluding, Hagel has a vision of the web-services-enabled company moving over a period to a fluid, decoupled "process-network"-type architecture. I imagine this will work for some companies and not for others. Company architectures are solutions to multiple complex constraints, and web services modify the parameters of some of them, but leave others unchanged.

Conclusion

John Hagel writes in the fluid style of the McKinsey consultant, short sentence constructions embedding abstract nouns and appropriately well-judged adjectives. But it's so bland that at the end of a long day, one can barely keep one's eyes moving along the lines of the pages. It's hard to know what to advise. The parts which read best are the case studies, where the arguments are locked into real experiences. Perhaps the problem is that the ratio of ideas to words is just too low.

Is this a book about business trends or is it a book about web services? There is a reasonably familiar story about eBusiness, the "frictionless economy" and the industry-architectural consequences of increased service velocity and very low transactional costs. Anyone who has looked at web services has experienced the "aha" feeling that at last we know what will actually make eBusiness work.

Except that eBusiness and web services are both very much works in progress. We don't know exactly how web services will transform business, and we don't know exactly how the needs of eBusiness will shape and form web services. This book is a great scene-setter at some level of generality, (although it is too long), but it flies a little high over the terrain, and we don't seem to see where the major issues will be over the next two to three years. I guess that book remains to be written.

John's book is very well written, and the subject matter is timely. But the fact remains that the content is a 200k foot vision. Web services is the next BUZZ and the hype machine is being driven by consultants, software vendors and authors (constantly looking to create case for change).

I have been in front of 30 of the Fortune 100 CIOs, and heavily involved in high tech initiatives. Few production operations do anything beyond traditional EDI, and file transfer. The case studies within this book (ex Dell and Cisco) are very mis-leading. In both cases the suppliers, CMs and 3PLs are largely (90%) translating EDI to hub specific XML formats. Which leads me to believe that: a) the execs at Cisco and Dell don't know what is going on, b) case studies are part of the hype, c) not properly interpreted.

Integration and exposing web services is too expensive, which is why few companies have sucessful hubs or service based architectures. This book confuses business strategy and software "mechanics". I would make the case that there are very few truly "new" things in software.

The connected business models which have matured are prospering in EDI particularly within Aerospace and Automotive. What "new" business models are supported by WebServices? What is the case for change from EDI? What is the cost of implenting now? The opportunity cost for waiting until they are packaged in latest version of ERP? ... Many questions that need to be answered.

If you are looking for a good vision book, on what is possible, then this is a very good book. However, there needs to be some critical mass of success stories before mainstream business starts to act on these ideas. As well as an assessment of cost.

I do agree with John that Business Strategy must be the driver. My question is why are we confusing the software mechanics of interaction with the strategy?

Tom Industry Analyst

Co-author of two previous bestsellers (Net Gain and Net Worth), Hagel has now written what I expect to be his most influential work thus far. In it, he identifies and then discusses "strategies for achieving profits today and growth tomorrow through Web services." First, I want to express my admiration of the Foreword which John Seely Brown provides. Unlike most other such introductions, it offers substantial benefits of its own to the careful reader in addition to "setting the table" for the "banquet" which Hagel serves. I agree with Brown that decision-makers in all organizations (regardless of size or nature) must break out of the mental models and other barriers which hold them back. As he correctly observes, "The challenge for all of us over time will be to develop a deeper understanding of the practices required to create and capture even more economic value." It is indeed a formidable challenge to overcome what Jim O'Toole once characterized as "the ideology of comfort and the tyranny of custom." I also agree with Brown that Hagel provides in this book both the counsel and inspiration to do so effectively.

It is important to keep in mind that Hagel views technology as a means by which to increase the effectiveness of a given strategy. That is to say, a commitment to providing Web services should be driven by an appropriate strategy. At a time when change is the only constant, when those involved in a competitive marketplace must (in effect) thrive to survive, the importance of having an effective strategy is incalculable. I agree with Hagel that one of the most important lessons learned since the 1980s is that "information technology is at best a catalyst and an enabler. It is never an answer in itself." Nor could it be.

For non-technologists such as I, Hagel carefully explains "how a new generation of IT and related architectures -- known generally as Web services technology and distributed service architectures -- will provide a significant catalyst in helping management break out of the [four] boxes that confine it": (1) financial performance pressures, (2) enterprise infrastructures, (3) enterprise boundaries, and (4) mental models. "The real value [of avoiding or breaking out of these boxes] is the increased capability of business managers for flexibility and collaboration -- capabilities that can in turn produce significant operating savings and growth options across the entire business."

The material is organized as follows:

Part I: Finding Flexibility (i.e. how to identify and then respond to unmet needs, how and why Web services create new options, how and why Application Service Providers made a "false start")

Part II: Finding Near-Term Profitability (i.e. what a "pragmatic adoption" of Web services and "moving from the edge to the core" involves)

Part III: Creating Focus (i.e. how process networks create value through specialization, and, why it is necessary to "unbundle" inorder to "rebundle" core business processes)

Part IV: Accelerating Growth (i.e. how to create value through leveraged growth, and, what "reconfiguring" any organization involves)

Throughout this book, he includes several multi-purpose Tables which illustrate as well as clarify core topics such as "Four Management Boxes" (page 5), "Moving from the Edge to the Core with Web Services" (page 87), "Alternative Platforms for Leveraged Growth" (page 161), and "Migration Path of Layered Organizational Change" (page 187). It has always been my custom to highlight key passages in a business book for future reference and reacquaintance; I also plan to do so with all of Hagel's Tables.

What makes this book even more valuable is that it succeeds so well in discussing a subject which has not as yet received the attention it both needs and deserves. With meticulous care, Hagel explains how Web services can help any organization to realize bottom-line savings quickly and with a (relatively) modest investment, leverage other investments in existing applications while creating more flexibility, target specific areas for near-term cost reductions, establish or eliminate business relationships and do so with both expedition and grace, and finally, how to create leveraged growth platforms for long-term competitiveness and sustainable profitability. Out of the Box is a brilliant achievement.

Whenever it seems appropriate, I include in a review suggestions for "further study." It is highly desirable but not imperative to read Hagel's previous books (Net Gain and Net Worth) before reading this one. I do recommend Adrian J. Slywotsky's Value Migration: How to Think Several Moves Ahead of the Competition and his more recently published The Art of Profitability as well as Robert S. Kaplan and David P. Norton's The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment, and Jason Jennings' Less Is More: How Great Companies Use Productivity as a Competitive Tool in Business.

If you're like me and spend a lot of time with techies and read lots of tech journals, you're well familar with the "nuts and bolts" of how web services work. "Out Of The Box", however, takes a decidedly different approach, exploring not only what web services are, but also how they came to be, and where they're going.

John Hagel's observations are generally high-level and strategic, exploring the ways that web services can change how businesses operate and interact with one another. Hegel's thesis is that web services have the power to transform the fundamental ways in which business is conducted, removing many of the barriers and problems in information management, and allowing business relationships to form and dissolve more rapidly than ever before. As a result, wholly new business models can emerge that allow businesses to respond to changes in customer preferences, compensate for new economic or political realities, and make continuous improvements in quality and value.

A highly readable work, just about the book's only weakness is that it is indeed based largely on conjecture, and the premise that today's web service protocols will form the foundation of long-term IT development. Anyone even remotely familiar with IT knows that change can be sudden and dramatic. However, Hagel presents a lot of sound and creative thinking that is especially helpful for an emerging technology such as web services.

"Out Of The Box" should be essential reading for any manager or executive whose job involves implementation of web services at any level. By contrast, techies will find this book sorely lacking in specifics. But that's okay, as there are a host of other books by O'Reilly and other technical publishers that do an excellent job of "drilling down" into the details of the technology.

John Hagel has written the book we have been waiting for. For years now, we have heard escalating hype around Web services technology from every vendor under the sun (no pun intended). John provides a clear-headed perspective to combat all the hype. Rather than focusing on the claims of the technology vendors, John takes the refreshing path of looking to find out what early adopters are actually doing with the technology in real business environments. The results are surprising and contradict much of the "conventional wisdom" that we hear in the press regarding Web services. By focusing on these early adopters, John develops a compelling business case for deployment of Web services technology today - it offers the potential of delivering real operating savings with relatively modest investment and short (six to twelve month) lead-times. He provides a balanced perspective of both the opportunities and the limitations of the technology.

This is a book targeted to the non-technology executive, but it also has enormous insight for technology executives. Again, by focusing on early adopter experience, John identifies some key missing ingredients in the Web services technology arsenal. In particular, his concept of a service grid will prove to be essential in accelerating adoption of the technology. This represents a significant business opportunity for technology vendors who understand and address the unmet needs of users.

But John's book is a lot more than a book on the business implications of a specific technology. In the end, it is a deeply insightful book on business strategy. He argues that we will need to develop a very different set of business practices in terms of operations, organization and strategy to succeed in markets characterized by intensifying competition. While he helps us to understand profound changes on the horizon, he also is clear that they will not occur overnight. Particularly intriguing is his emphasis on rapid incrementalism, guided by clear operational milestones, as an antidote to the "big bang" change philosophies of the recent past. This is a book that should be on every managers bookshelf, but only after they have read it and internalized it from cover to cover.

...

Don't read this book because you expect everything John Hagel says is right or will become true, (they're not, and they won't), but because John has articulately presented the business potential of web services. I disagree with "a reader from New York" and Thomas Noyes regarding the future of web services--they're very real. (I guess I'm speaking to a different subset of the Fortune 100 CIOs.) True, not all web-services projects are in production (yet), but they're coming.

John has become one of the most influential business/technology strategists of the dot-com-and-beyond era. He's always a few steps ahead of the rest of us, and he gets us thinking. He straddles the line between strategist and futurist, and he's good at both roles. But the reader's challenge is to separate the solid strategy from the hypothetical futurism. It's often hard to find the boundaries in John's books, and the latest is no exception. In fact, the subtitle warns us to expect it: Out of the Box--Strategies for Achieving Profits Today and Growth Tomorrow through Web Services.

I don't agree with everything John writes, but this book contains far more to agree with than not, including some gems. Here are four of my favorite quotes:

*** With regard to process-reengineering proponents..."their end-to-end view usually stopped at the edge of the enterprise. More enlightened proponents would occasionally include direct business partners of the enterprise. None expanded the notion of end-to-end to include the entire value chain..."

*** "The high cost of complexity was the dark side of the much-touted network-effect business models on the Internet...Due to the n-squared problem operating costs were also rising exponentially as more participants joined."

*** "Whenever a company decides to outsource a business process, the process becomes part of the edge of the enterprise."

*** "...most of the economic value of a business is concentrated in the processes that surround a transaction, rather than in the transaction itself."

In Out of the Box, John Hagel continues his string of stimulating writings. This is his best book to date, and because it's not specific to the world of e-commerce--or perhaps because e-commerce now is the world--this is the book I suspect will appeal to the broadest audience.

This book did the best job of anything I've read in describing what web services is, the history behind it and what it means for businesses.

As Hagel has done in his other books, he successfully synthesizes a signficant emerging trend into some provocative concepts and models. The three phases of restructuring, reduced cost of interaction, notions of loosely coupled process networks, unbundling/rebundling, etc. are all provocative and applicable concepts. There is much that I liked alot in this book and many new and interesting examples bring his ideas to life. I have already handed out over 50 copies of this books to friends and associates.

As with Hagel's other books, however, some of the concepts are taken too far almost to the point of being contrived...or to an unpractical level of abstraction. I think he actually could have left the almost "technical" explaination of the Web services grid out entirely. Components of the Web-services architecture don't tie to the rest of the book. A non-technical exec could skip/skim that chapter entirely and not miss much and still gain lot's from the book. Bottom line: Web-services (2nd Generation Web apps) facilitates easy connections between systems and building and extended real-time enterprise(big deal) but is still very much a work in progress...with lot's of value to be achieved today while remainder of grid is maturing.

I think there will be many more books written on this topic. The next logical one would examine and model the economics of process networks and rebundling while providing examples of rebundling and likely incorporate offshore/low-cost sourcing...and illustrate the practical tradeoffs, returnes, risks, against the existing human capital.

Great start!

Out of the Box provides a visionary approach to the promises of this new web programming and architecture called web services. In the second chapter he warns the ready about the writing becoming technical challenging but does a fair job of bringing the technology to the beginner's level. Perhaps more business books should help executives understand Internet technology so that the complexity could be appreciated in a realistic light. As with many books which try to predict future trends in Internet technology in business, Hagel works from a limited number of examples and tends to overuse some. The main weakness of the book is what many who purchase IT consulting services understand too well - early applications of new technology can easily be overpromised and deliver disappointing or more costly results. However, the book's strength is its forward-looking application of a technology that does indeed have great potential.

Well, Web services won't change the world, but maybe some important aspects of it. We are still using paper, even though web-sides are extensively used for information retrieval. So, companies will still need technical stuff to keep their own infrastructure running and up-to-date, even though they might be able to buy external Web services. But this technical stuff is maybe doing different things, at least for a part, and/or it will do things differently. This book helps non-technical people to get a good idea of these upcoming changes. It helps to set the right priorities, to make choices, what to do, and what not. In the light of this expectation the reader may have, it's very good written and may be used as a model for your own reasoning. The technical concepts of Web services are not really new, but new is the potential of having them implemented on a global basis, this, from my point of view, is the innovative point of this story. Ex.: Just imagine to "plug in" a web service for language translation (engl. to chin.) of a translator at Peking. You would book his service, integrate it in your own process with very little technical overhead. That's new. (BTW, everything that was written, I am currently realizing. So, the arguments are real and evident. It's BPR combined with IT at work.)