Service Oriented Architecture - Why should CEOs care?
The announced takeover of ABN AMRO by Barclays confirms the trend: M&As are high on the CEO agenda. Last year went down in history as the biggest year for corporate takeovers in Europe and bankers are predicting that 2007 will match, if not exceed, last year’s M&A activity. Announced deals targeting European companies totalled US$1.4 trillion in 2006. That’s more than a third higher than the US$1.03 trillion in 2005 and comfortably above the previous record of US$1.2 trillion set in 1999, according to data provider Thomson Financial.
In fact, the finance sector is facing a dramatic change in its competitive landscape. CEOs need to assess it and steer their company in the right direction. They may merge or acquire companies throughout the world, share technology platforms with partners or even competitors and re-engineer a whole business unit to prepare for upcoming competition. In the meantime, delivering financial services becomes increasingly complex, as competition, risk mitigation and regulatory compliance put more pressure on operations.
CEOs are often frustrated since the organization may be slow to react and to execute their strategy. When considering mergers and acquisitions, their objective is often to create value by merging operations, achieving economies of scale, better market coverage or improved competitive positioning. Value realization is therefore tied to the ability to execute the strategy at a given cost within a specific timeframe.
In theory, one of the key success factors of M&A should be successful process integration and automation through a flexible IT architecture. Unfortunately, the reality is not exactly what one would expect. Years of system legacies have generated complexity: processes logic and business policies are embedded into application code. As a result, when a strategic event such as M&A or a joint venture occurs, this complexity gets in the way of value delivery. Merger teams discover that what should have been a straightforward exercise requires suddenly a large amount of extra time and resources: they have a hard time understanding where the business logic is buried and face skyrocketing integration costs.
A service oriented architecture (SOA) is one approach that can help provide the required flexibility and ease the process of integration. Any successful M&A strategy should therefore include a due diligence on IT architecture, evaluate IT integration costs and the benefits a SOA approach could bring.
However, senior directors evaluating an M&A project often underestimate the IT changes needed and do not sufficiently assess whether or not an SOA architecture will add to the success of their M&A strategy. This could be explained either by a lack of interest or, more probably, by a lack of understanding. In a 2006 survey conducted by Vanson Bourne and ILOG into UK financial services department heads’ attitudes to business-IT alignment within their organisations, 89% admitted that they had never heard of SOA and of those surveyed who were aware of the concept, 63% were not conscious of the benefits of adopting such an approach.
That is not to say that it’s the job of the CEO, CFO or department heads to be aware of different IT strategies, such as SOA. It should however be the responsibility of the IT department to put forward a business case for SOA adoption. Business decision makers need to understand the value equation of SOA for their strategy; they don’t need technical soft benefits explanations. The challenge for the IT department is therefore to demonstrate the potential value creation of an SOA strategy. Instead of taking a standard ROI calculation, they should adopt an option-based value creation/destruction scenario. In the case of M&A, they might need to connect the cost of moving to SOA to an accelerated integration delivering value and reducing operating costs (i.e. leveraging and delivering faster on economies of scale at the IT level). They should alternatively evaluate the option of doing nothing, staying with a business-as-usual scenario and evaluate the cost of redundancy or incompatibility, both in terms of operating overheads and time to market.
Beyond standardized access to application or infrastructure services, one of the compelling promises of SOA has been service reuse. In early days though, this promise has not been fulfilled. In fact, the rate of reuse has been fairly low, ranging from 10-40% according to a survey conducted by Gartner. This, in turn, has resulted in service proliferation and duplication.
For ILOG, this was the consequence of a simple fact: the business logic was embedded, ‘hardwired’ in services. As a result, it was extremely difficult to review it or query what rules were applied to a specific business object. SOA suffered from a black box effect: “If I can’t understand it, I can’t reuse it.”
Helping organisations factor their business rules out of application services or processes is a core value provided by using a business rules management system (BRMS). These rules are expressed in business language accessible to business users, applied to familiar business objects. Business users can query the rules repository to understand which rules apply to which business objects. Hence, service oriented architectures featuring a business-rule-management function provide ‘transparent decision services’ to business users. It means that users can understand, explain and audit which rules have been applied and why a service has produced a given result.
With this technology, the SOA journey becomes much faster and effective and the IT department can easily add value to the business. In an M&A scenario, the business rules would be shared and a new policy governing applications and processes would be re-engineered faster, generating incremental value for the new company.
For example, the merger of two European banks would rapidly leverage credit management processes, payment processing, fraud management systems, risk policies, regulatory and trade reporting, automatic accounting, order management and many other core functions. They can also update their ‘routing’ policies to third parties including internalised services, regulated exchanges and inter-banking systems. The return would be fast and tremendous.
In conclusion, IT preparation for M&A is tightly linked to the ability to extract business logic from existing applications and processes. This is not a simple and easy exercise and, when undertaking this, the organisation may face its own contradictions. However, when envisaging a strategic operation, the timely integration of processes would have a direct impact on the value creation scenario. IT plays a big role in this and that’s why CEOs should ensure they have a flexible SOA.