Enterprise architecture as strategy ross pdf

Enterprise Archi tecture as Strategy Creating a Foundation for

Business Execution

Jeanne W. Ross Peter Weill

David C. Robertson

HARVARD BUSINESS SCHOOL PRESS

BOSTON, MASSACHUSETTS

Copyright 2006 Jeanne W. Ross, Peter Weill, and David C. Robertson All rights reserved Printed in the United States of America 10 09 OS 07 06 5 4 3 2 1

No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, me- chanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to permissions@ hbsp.harvard.edu, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.

Library of Congress Cataloging-in-Publication Data

Ross, Jeanne W. "

Enterprise architecture as strategy: creating a foundation for business execution / Jeanne W. Ross, Peter Weill, David C. Robertson.

p.cm. Includes bibliographical references. ISBN 1-59139-S39-S

1. Industrial management-Automation. 2. Information technology- Management. 3. Strategic planning. I. Weill, Peter. II. Robertson, David c., 1935- III. Title.

HD45.2.R72 2006 65S.4'03S-dc22

2006010226

The paper used in this publication meets the minimum requirements of the American National Standard for Information Sciences-Permanence of Paper for Printed Library Materials, ANSI Z39.4S-1992.

Contents

Preface and Acknowledgments vii

1. To Execute Your Strategy, First Build Your Foundation 1

2. Define Your Operating Model 2S

3. Implement the Operating Model Via Enterprise Architecture 4S

4. Navigate the Stages of Enterprise Architecture Maturity 69

S. Cash In on the Learning 91

6. Build the Foundation One Project at a Time 117

7. Use Enterprise Architecture to Guide Outsourcing 143

8. Now..LExploit Your Foundation for Profitable Growth 16S

9. Take Charge! The Leadership Agenda 187

Notes 209 Index 221 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

us have been frustrated by our inability in our research and exec- utive education to make a breakthrough in understanding and improving IT architecture efforts. Until now ...

It is now clear our problem was the level of analysis. As Albert Einstein famously remarked, "The significant problems we face cannot be solved by the same level of thinking that created them." The problem with our efforts to understand IT architecture was that the level of analysis was all wrong. The focus needs to be higher- on enterprise architecture, the organizing logic for core business processes and IT infrastructure reflecting the standardization and integration of a company's operating model. We have come to understand that enterprise architecture boils down to these two concepts: business process integration and business process stan- dardization. In short, enterprise architecture is not an IT issue- it's a business issue.

The breakthrough in our understanding lay in an apparent contradiction. In a business world that is changing faster than ever before, the top-performing firms create a stable base-they 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. With global supply chains, pressure for ever faster time to market, more complex regulation, and huge shifts in customer demo- graphics and desires, companies cannot predict the future. But they can decide what makes them great. And then they can create a low-cost, high-quality core of stability and constancy in a tur- bulent world. With a strong digitized core, great companies slide smoothly into the next opportunity while their competitors stumble.

Top-performing companies define how they will do business (an operating model) and design the processes and infrastructure crit- ical to their current and future operations (enterprise architec- ture), which guide the evolution of their foundation for execution. Then these smart companies exploit their foundation, embedding new initiatives to make that foundation stronger, and using it as

Preface and Acknowledgments ix

a competitive weapon to seize new business opportunities. And what makes this capability a competitive advantage is that only a small percentage of companies do it well-we estimate 5 percent of firms or less.

The objective of this book is to structure and explain what top-performing companies do so others can follow and improve. To inspire and illustrate what works well, we provide many examples of outstanding companies, including 7-Eleven Japan, CEMEX, Dow Chemical, ING DIREC'L MetLife, Schneider Na- tional, Toyota Motor Europe, UNICEF, UPS, and others. This book is about what makes a company great. Ultimately, of course, people make the difference. Good people design the operating model, build the foundation, execute, and innovate. But good people need direction, leadership, and incentives to perform at their best. This book is for managers, both business and IT, who sense the business problem and want to lead their organizations to build a solution-a unique digitized foundation for execution

,for their company.

The Research

The insights in the book come from a series of research projects exploring enterprise architecture in more than 200 companies (and another 256 companies where our focus was on IT gover- nance) from 1995 to 2005. Most of the research was done at the MIT Sloan School's Center for Information Systems Research (CISR); the European work was done by David Robertson at IMD. The main studies were:

• Case studies of eighteen firms' implementations of new infrastructure capabilities, enterprise resource planning systems, and e-business initiatives by Jeanne Ross, Michael Vitale, and Peter Weill between 1995 and 2005. The cases focused on transformations leading to-and in some cases driven by-new IT capabilities. Companies

x Preface and Acknowledgments

included Australia Post, Brady Corp., Chase Manhattan, the District of Columbia's city government, Dow Corning, GTECH, JC Penney, Johnson & Johnson, Manheim Auc- tions, MetLife, Schneider National, Texas Instruments, Travelers, and five others.

• Case studies at eight companies on the relationship be- tween IT and business strategy by Jeanne Ross and Peter Weill during 2001 and 2002. We studied how firms devel- oped IT capabilities in response to business strategy. We also looked at how IT units were developing and manag- ing enterprise architecture. Companies included Air Prod- ucts and Chemicals, Citibank Asia Pacific, Delta Air Lines, DuPont, Merrill Lynch, Nestle USA, Toyota USA, and UPS.

• Case studies on enterprise architecture at sixteen compa- nies in the United States and Europe by David C. Robert- son, Jeanne Ross, George Westerman, and Nils O. Fonstad in 2002. We studied how IT architecture enabled and con- strained business initiatives. We also looked at how com- panies defined and managed business and technology standards. Cases were based on interviews with the CIO, IT architect, two project heads, and others at Akzo Nobel, BIC Graphic Europe, BT, Campbell Soup Co., Canon Europe, Carlson Companies, ING Marriott, Novartis, Panalpina, Partners HealthCare, Pfizer,' Secheron, Swisscom Mobile, Tetra Pak, and Toyota Motor Marketing Europe.

• Surveys of 103 firms to assess architecture outcomes by Jeanne Ross and Nils O. Fonstad in 2004. We examined IT investments, architecture management practices, architec- ture maturity, and IT and business outcomes.

• Surveys of eighty firms' IT and business process outsourc- ing initiatives by Jeanne Ross and Cynthia Beath in 2004 in conjunction with Lorraine Cosgrove at CIO Magazine. We examined the services outsourced, the characteristics

Preface and Acknowledgments xi

of those services, the vendor-client relationship, architec- ture implications, and outcomes.

• Case studies of architectural implications of outsourcing at eight firms by Jeanne Ross, Cynthia Beath, Jeff Sampler, and Nils O. Fonstad during 2004 and 200S. We studied the role of enterprise architecture in outsourcing decisions and outcomes. The companies were Campbell Soup Co., Carlson Companies, Dow Chemical, eFunds, JM Family Enterprises, Tecnovate, and two others.

• Case studies by David C. Robertson and Nils O. Fonstad of Toyota Motor Marketing Europe, BT, ING DIRECT, and fif- teen other companies to explore the key issues around es- tablishing effective engagement models.

• In addition, we drew on a body of research on IT governance, including a study on effective IT governance led by Peter Weill with many colleagues from 2001 to 2004. We studied ... more than three hundred enterprises in twenty-three coun- tries, including more than twenty-five in-depth case stud- ies. We studied how enterprises made five key IT decisions, including architecture. We also measured governance and financial performance and what practices worked best.

Who Should Read this Book

This book is written for all executives who have ever wondered why some firms-and not others-achieve superior execution and are able to build on what they do well to achieve both agility and profitability. We describe the vision and steps to design an enter- prise architecture and create a foundation for execution, high- lighting the roles of both business and IT managers. We discuss the enterprise architecture decisions with enough detail to guide implementation. The language, style, data, examples, and lessons are about business issues that rely on technology.

xii Preface and Acknowledgments

We encourage senior managers, strategists, operational man- agers, marketing managers, financial managers, and IT managers to read this book and discuss building a foundation for execution in their companies. For simplicity of language we adopted the word company in this book. However, our comments relate equally to all organizations-whether they are large or small; for profit, not for profit, or government. Our intention is to capture the imagi- nation and challenge the assumptions of managers in all industries as they build foundations for execution.

Whom We Would Like to Thank

We gratefully acknowledge the support of MIT CISR's patron and sponsor firms: Aetna, Allstate, American Express Company, As- traZeneca Pharmaceuticals LP, Biogen Idec, Inc., Boston Consult- ing Group, BT Group pIc, Campbell Soup Co., CareFirst Blue Cross Blue Shield, CARE USA, Celanese, Chevron, Det Norske Veritas, DiamondCluster International, Direct Energy, eFunds Corpora- tion, EMC Corporation, Gartner, Florida's Pasco County govern- ment, Guardian Life Insurance, Hewlett-Packard, ING Groep N.V., Intel Corporation, International Finance Corp., Merrill Lynch & Company, Inc., MetLife, Microsoft Corp., Mohegan Sun, Mo- torola, Inc., Nomura Research Institute, Ltd., PepsiAmericas, Inc, Pfizer, Inc., PFPC Inc., Raytheon Company, State Street Corp., Tata Consultancy Services-America, TD Banknorth, Telenor ASA, Trin- ity Health System, TRW Automotive, the U.N.'s Department of Economic and Social Affairs, and the U.S. Federal Aviation Admin- istration. Executives from these enterprises not only inform and fund our research but also probe our assumptions, test our ideas, debate our findings, and implement and improve our work. We could not do this work without you.

During research and writing we have had the opportunity to work with many extraordinary managers and academic colleagues who have influenced our thinking and reinforced our passions. First, we would like to acknowledge the managers who shared

Preface and Acknowledgments xiii

their insights and, in many cases, provided the examples for the book. These managers included Toshifumi Suzuki, Makoto Usui, and Yuka Ozaki at 7-Eleven Japan; AI-No or Ramji, Sinclair Stock- man, Jan Cylwik, and Jim Crookes at BT; Doreen Wright at Camp- bell Soup Co.; Steve Brown, formerly of Carlson Companies; Karl Wachs at Celanese; John Bloom at Chevron; Frank Luijckx at Dow Chemical; Clyde Thomas and Kathleen Flanagan at eFunds; Den- nis Callahan at Guardian Life Insurance; Martin Vonk and Rob 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 MeadWestvaco; Andy Brown at Merrill Lynch; Steve Sheinheit and Jerry Foster at MetLife; Chris Johnson at Nestle; Monika Ribar at Panalpina; Ron Carter at Pfizer; Michael Harte at PFPC; Rebecca Rhoads, Kristine Ten Eck, Cassandra Matthews, and Alan G. Red- fern at Raytheon; Brent Glendening at Schindler; Joe Antonellis, Ron Strout, and David Saul at State Street Corp.; John Petrey at TD Banknorth; Peter Heinckiens at Toyota Motor Marketing Europe; ... Andre Spatz at UNICEF; Mike Eskew, Ken Lacy, Jim Medeiros, and Dave Barnes at UPS.

We want to gratefully acknowledge all the managers who par- ticipated in case study interviews and those who took the time to answer our survey questions, add their own insights, and probe our assumptions. We are grateful to all of you for making this book possible.

Colleagues at other universities who contributed to the research in this book include Professor Cynthia M. Beath at the University of Texas at Austin, Professor Michael Vitale at the Australian Grad- uate Schopl of Management, Professor Jeff Sampler at Oxford, and Professor Don Marchand at IMD.

We want to especially thank Drs. Nils O. Fonstad and George Westerman, research scientists at CISR, who participated in much of this research. Their contributions to this work were invaluable.

Thanks to Professor Ben Bensaou at INSEAD and Koki Yodo- kawa and Kei Nagayama at Nomura Research Institute in Japan

xiv Preface and Acknowledgments

who helped us understand why 7-Eleven Japan is so successful. Frank Erbrick at McKinsey & Co. and Charlie Feld at EDS enlight- ened us about enterprise architecture. We also want to thank the many people who provided important feedback on the research in this book, including Juan Ayala, Shafeen Charania, and Dinesh Kumar at Microsoft; Len Fehskens at HP; Con Kenney at the U.S. Federal Aviation Administration; Chuck Rieger at IBM; and Chris Curran and John Sviokla at DiamondCluster International. We'd also like to thank the members of the Advanced Practices Council of the Society for Information Management for their thoughtful feedback on this research. Thanks also to the many executives who made comments during our presentations or came up after- ward to share their insights and critique.

In addition to three anonymous reviewers, three colleagues read the entire manuscript and provided not only valuable com- ments but also much appreciated enthusiasm and debate: Chris Curran at DiamondCluster, Dinesh Kumar at Microsoft, and Chuck Gibson at MIT CISR. Thank you for your input-you will see your comments reflected in this final version.

We also want to acknowledge Shafeen Charania of Microsoft for his insightful discussions ,and his strong advocacy of applying IT value research to enterprises around the world.

We wish to thank Lenny Zeltser, Charles Zedlewski, and Niraj Kumar, all researchers at MIT CISR who helped solicit companies and conduct interviews, and Mingdi Xin at New York University, who did detailed and painstaking quantitative analysis for this book. Individually and together as a team they added precision, professionalism, collegiality, and inSight. We thank them.

Our MIT CISR colleague David Fitzgerald III managed the book production process with enthusiasm and professionalism. David devised the chapter template, produced the figures, enforced ver- sion control, tracked down citations, checked for contradictions, and almost kept us on schedule. We benefited from his experience and appreciated his dedication, flexibility, and especially his good humor.

Preface and Acknowledgments xv

The writing of this book, as well as our ongOing research efforts, would not be possible without the support of our other colleagues at MIT CISR and the MIT Sloan School of Management. Chris Foglia brings extraordinary talent and energy to the role of MIT CISR's cen- ter manager. She has proved that there is no technical, financial, artistic, or organizational issue at MIT CISR that she cannot address. Julie Coiro provides the friendly interface to MIT CISR. She has managed the organizational details that keep MIT CISR as a research center-and each of us as individuals-running smoothly. And we are indebted to our research colleagues George Westerman, Nils Fonstad (who co-authored chapter 6 of this book), Chuck Gibson, Jack Rockart, and Sinan Aral. We have benefited enormously from their insights, enthusiasm, hard work, and collegiality.

MIT CISR is a research center in the Sloan School of Manage- ment. We feel very fortunate to work in such a rich and exciting research environment. We have benefited, in particular, from the support and encouragement of Dean Richard Schmalensee, Dean Steven Eppinger, Professor Don Lessard, Professor Wanda Orlikow- . ski, and Professor Tom Malone.

We would also like to thank Peter Lorange and Jim Ellert at IMD for the generous support IMD has provided for the European part of this research. Comparing experiences and testing our as- sumptions in a European context has deepened our understand- ing of the issues and broadened our thinking.

We are delighted to work with Kirsten Sandberg at Harvard Business School Press. Kirsten, as our editor on this and three pre- vious books, knows just when to push and when to leave us to our own devices. Kirsten adds value in all the right places, and we thank her her colleagues at HBS Press.

We undertook this book with a bit of trepidation as to the vi- ability of writing as a trio. Getting three people to agree on ideas, text, figures, and organizing logic might have been exponentially tougher than two. Instead, we discovered that three heads are con- siderably better than one or two. Our different experiences, research styles, and perspectives led to interesting and valuable debates.

xvi Preface and Acknowledgments

And the opportunity to work together was a joy. In writing this manuscript we found enormous satisfaction in the process of bring- ing together our different skills, challenging our assertions, and learning together. We are all more than ready to rededicate our- selves to our families, but we might even do this again.

A Personal Note from Jeanne

I'd first like to thank my family. I will remember this past summer fondly, not because of this book, but because our family of five adults had six precious weeks together. I reveled in our together- ness-five people loving one another, fixing meals, playing games, watching movies, telling stories, sharing joys, unloading frustra- tions, eating (constantly), teasing, laughing, and doing the little things that make us a family. It doesn't get any better. Thank you, Adam, for your curiosity and sensitivity; Julie, for your sense of adventure and fun; and Steffie, for your sweetness and joy. You are extraordinary blessings.

And to my husband, Dan, thank you for letting me be me. I appreciate all the sacrifices you made so that I could finish this manuscript. Thank you for your intensive reading of every chap- ter-you knew how to say "this doesn't make sense" in amazingly gentle and creative ways. This book is better for your contribu- tion. And I am a better person for being married to you.

Finally, thank you to my parents, Mary a'nd Russ Wenzel, and my in-laws, Jeanne and Irv Imburg-who offer their unwavering love and support, even as they wonder whether I'm taking on too 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 being family.

A Personal Note from Peter

The last year has been an amazing experience. In addition to hav- ing one of the greatest jobs in the world as director of MIT CISR

Preface and Acknowledgments xvii

and working on this book, I experienced a physical renewal. I went from not being able to walk without pain to regaining a normal life. I would like to thank Dr. Andrew Shimmin and his colleagues at the Melbourne Orthopaedic Group in Australia for giving me a new hip and a new lease on life. Thanks also to Tim Schleiger who made the rehab work both interesting and effective.

To my wife, Margi Olson, thank you for your understanding, support, love, and friendship. Without you this work would be meaningless. Somehow despite having your demanding day job as dean of Business and the Graduate School at Bentley College, you managed to be encouraging and delightful. Thank you for en- thusiastically participating in endless dinner discussions on the difference between infrastructure and architecture and why some companies perform so well.

I hope the MBA students and executive education participants in my Sloan School courses recognize their input into this book. I thank them all as they contributed much in the way of learning, clarity, and focus during the countless discussions in session and ... out. I am constantly amazed and grateful about how much I learn from our interactions.

To my mother, Hidle Betty Weill. Thank you for your good genes, good humor, generous spirit, and most of all, love and sup- port. To my brother Steve, as well as to David, and Simon-I love you guys. Together you complete my family in Australia and make my hometown so special. Finally, to my U.S.-based family, Geoffrey, Noa, and Ben Weill-thank you for making me feel part of a small but wonderful family Weill.

A Personal Note from David

First, a thank you to my colleagues at IMD who three years ago took a chance on a former enterprise software executive with no teaching experience. Many of you took extra time out of your busy schedules to help me learn the trade. IMD is a case study in how a 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.

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 from you.

To Phoebe, Alan, and Alice, thank you for all your love and 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.

1

To Execute Your Strategy, First Build Your Foundation

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

Nando
Nando
2 ENTERPRISE ARCHITECTURE AS STRATEGY

We believe these companies execute better because they have a better foundation for execution. They have embedded technology in their processes so that they can efficiently and reliably execute the core operations of the company. These companies have made tough decisions about what operations they must execute well, and they've implemented the IT systems they need to digitize those operations. These actions have made IT an asset rather than a liability and have created a foundation for business agility.

We surveyed 103 U.S. and European companies about their IT and IT-enabled business processes. Thirty-four percent of those companies have digitized their core processes. Relative to their com- petitors, these companies have higher profitability, experience a faster time to market, and get more value from their IT invest- ments. 3 They have better access to shared customer data, lower risk of mission-critical systems failures, and 80 percent higher senior management satisfaction with technology. Yet, companies who have digitized their core processes have 2S percent lower IT costs. These are the benefits of an effective foundation for execution.

In contrast, 12 percent of the companies we studied are frit- tering away management attention and technology investments on a myriad of (perhaps) locally sensible projects that don't sup- port enterprisewide objectives. Another 48 percent of the compa- nies are cutting waste from their IT budgets but haven't figured out how to increase value from IT. a few leading-edge companies are leveraging a foundation for execution to pull fur- ther and further ahead.

As such statistics show, companies with a good foundation for execution have an increasing advantage over those that don't. In this book, we describe how to design, build, and leverage a foun- dation for execution. Based on survey and case study research at more than 400 companies in the United States and Europe, we provide insights, tools, and a language to help managers recog- nize their core operatiOns, digitize their core to more efficiently support their strategy, and exploit their foundation for execution to achieve business agility and profitable growth.4

To Execute Your Strategy, First Build Your Foundation 3

What Is a Foundation for Execution?

Every human being performs a variety of critical, fairly complex tasks without actually thinking about them. These tasks include breathing, hearing, swallowing, and seeing. With experience, hu- mans can take on more-deliberate tasks like walking, riding a bike, driving a car, and making coffee. At first, these more-deliberate

_ tasks require some concentration and adaptation, but they quickly become second nature. Over time, different humans develop dis- tinguishing capabilities. A talented musician learns how to play piano; a great athlete plays basketball; a famous chef prepares ex- traordinary meals. Each of these distinctive capabilities has repeat- able, routine activities that would be hard for a novice but that the expert can perform without thinking. Because experts need not focus on the routine activities in their field, they can concentrate on achieving greatness.

Companies are not blessed with the equivalent of the human brain, which coordinates all of a person's activities. Activities as simple as sending an invoice, taking an order, or mailing a pack- age can easily go wrong-even after considerable practice. To focus management attention on higher-order processes, such as serving customers, responding to new business opportunities, and devel- oping new products, managers need to limit the time they spend on what should be routine activities. They need to automate rou- tine tasks so those tasks are performed reliably and predictably without requiring any thought.