Technische Universität Berlin

Fakultät IV (Elektrotechnik und Informatik)

Institut für Wirtschaftsinformatik und Quantitative Methoden

Fachgebiet Systemanalyse und EDV

Enterprise Application Integration

Seminar paper

Components of the Value Added EAI

From: Sonja Pajkovska Goceva

Berlin, March 2007

---

Components of the Value Added Enterprise Application Integration

1

Introduction 3

2

Measuring IT Performance 3

2.1

Return on Investment (ROI) and Total Cost of Ownership (TCO) 3

2.2

Cost types and IT investment decisions 5

3

The Value added drivers of the EAI 6

3.1

Discretional vs. non-discretional costs 7

3.2

Non cost-based value added drivers 8

4

Conclusion 12

Literature 13

2

---

Components of the Value Added Enterprise Application Integration

1 Introduction

The IT Technology is no m ore observed only as another tool to automate handlings and

processes or as replacement of human resources. It is rather connected to contribution to

the overall value continuum 1 according to the co mpany vision. However, the resu lted

benefits of the enterprise application integration come from the synergized efforts of all

users and enablers rather then from the isolated technical solution. For exam

ple, the

success of a com plex application such as M anufacturing Executives System s or

Customer Relationship Management largely depends on the value the users involved in

processing infor mation, envisaging and unde rstanding the com pany vi sion, goals and

their conf ormance and it′s in

tegration a nd inte roperability with other business

application. Following the m easures of th e IT Perfor mance of an I T System s an d

solution in general, the following sem inar pa per attempts to highligh t the dif ferences

between the tangible and intangible contri

butions and effects of the Enterprise

Application Integration to the business organization and value.

2 Measuring IT Performance

2.1 Return on Investment (ROI) and Total Cost of Ownership (TCO)

Measuring of a IT Perform ance using cost based financial ratios is wide spread m ethod

to determine the benefit of a IT Investm ent using Return on Investm ent (ROI), Total

Cost of Ownership (TCO). Applying the general accepted accounting analyses, those

measures are intuitionally used as cost sa ving f actors. The idea that a n IT Solution

enables ongoing operations with less costs, time and hum an resources has a positive

effect on cost based financial indicators

and provide company global picture using

projected financial data and th eir present values. But as unpredictable the financial data

is, applying the cost based ratios can lead to

m isinterpretation of the IT Benefits to

present business and to determ ine the contri bution to the future business values. A s a

1 Vgl. Rau et all (2004) s.3

3

---

Components of the Value Added Enterprise Application Integration

result, such m easurements do not point at the key perform ance drivers and the key to

creating a future business value is missing.

The cost-based m easures of an IT Perfor mance often indicate th e productivity of a

overall organization perfor mance and the user s. To def ine to which extend the IT

Solution contributes to the com pany, a reallocation of costs, budgets and revenues

between different sources of productivity needs to be made.

Accounting for Reengineering and Company Transformation Benefits.

Most of the

times, a company reengineering and transformation efforts are complemented enterprise

application integration project, aim ing to maximize its benefits. The change processes

are costly and tim e consuming and m any times added to the costs of the developm ent

and implementation of the integrated system. As a result, the IT perform ance indicators

are overwhelmed with c osts/benefits that belong to the company reorganization efforts

misinterpreting the real outcome of the IT Solution.

Valuation of multiple Investment Projects

. In cases of com

peting and valuating

different Investm ent Projects within a one company, the decisions are usually made

upon ROI, IRR (Internal Rate of Return)

and present values. Most of the tim

es,

investments are g ranted to pro jects with bett er ratios, delivering faster results. Such

valuation of different projects, not consideri ng the intangible benefits and potential for

future benefits, can lead to m isinterpretation about the project value and confus

ing

because of the following:

An investment on a production line for a certain product or other investm ent in

tangible assets can not be evalu ated with the same principles as an IT System

that would become a company business support platform.

The ROI, IRR and present values often

are no t adjus ted f or future intangible

benefits, which are reflected forecasted incom e from other operations enabled

from the IT Solution.

Innovations.

Apart f rom increas ing the "m easurable p roductivity" a s a resu lt f rom

more efficient use of time and costs, enterprise application integration creates a platform

for further developm ent and integration wi th new business m odels and create ne w

Enterprise capabilities (exp. creating m aintain collaboration between business and

business networks). The advanced hum an be haviour and aspirations to com pile and

4

---

Components of the Value Added Enterprise Application Integration

follow the standards directed from IT Solutio n procedures should be also added to the

list of intangible factors.

The above m entioned benefits syn ergize and result in increased com petitive advantage

and quantified increm ental company value. How ever, it is s till difficult to m easure the

benefits of the Innovative contribution and to present in the scope of indicators based

indicators.

2.2 Cost types and IT investment decisions

"... There is strong evidence that managers are not simply making IT investments to cut

costs. When managers are asked "Why do they invest in IT?" surveys suggest that

customer service and quality consistently rank above cost savings as the prime

2

motivation for making investments."

When analysing the investm ents opportuni ties and deriving inve stment choices, the

investment decis ion are effected form interp retation of the used financial indicators.

Limited according company cost-reducing polic ies, during the negotiation process with

several system suppliers (acco rding to the co mpany investm ent policy) the sy stem

requirements and future tasks are b eing changed. By spending an IT Budget that will

just decrease the cost o f doing the business, it is difficult to expect that a futu re value

will be generated. The consulting company Accenture industry experiences and research

focusing on IT governance "

disclosed that companies with high profit margin growth

allocate a significantly larger portion of their IT budget to innovation rather than IT

3

operations, compared to companies with lower profit margin growth"

. This suggests

that it is ne cessary to tr eat the dif ferent components of the IT I nvestment differently,

distinguishing between investing in IT operations and IT Innovation.

When analysing the investm ents opportuni ties and deriving inve stment choices, the

investment decision are effected form interpretation of the used financial indicators.

Limited according com pany cost-reducing policie s, torn in a negotiation process w ith

several system suppliers (acco rding to the co mpany investm ent policy), the sy stem

requirements and future tasks are being cha nged. The IT budgets are being reduced and

2 Brynjolfsson E. et all. (1998)

3 Vgl. Hall et all. (2004)

5

---

Components of the Value Added Enterprise Application Integration

spending an IT Budget that will just decrease the cost of doing the business, it is

difficult to expect that a f uture value from the implemented solution will be generated.

The consulting com pany Accenture industry experiences and research focusing on IT

governance "

disclosed that companies with high profit margin growth allocate a

significantly larger portion of their IT budget to innovation rather than IT operations,

4

compared to companies with lower profit margin growth"

. This suggests that it is

necessary to treat the different com

ponents of the IT Investm

ent differently,

distinguishing between investing in IT operations and IT Innovation.

3 The Value added drivers of the EAI

The focus of the Enterprise Application Inte gration (EAI) is to provide exchange of

information between different organizational units. Existing business applications needs

to be integ rated within the scop e of an enterpr ise o r within other ente rprises

participating in the value chain of

the bus iness. The req uirements focus has been

extended and involving different stakeholders, which m akes the enterprise application

integration a process which challenges both technical and organizational capabilities.

The techn ical challeng es arise from differe nt data m anagements and legacy system s,

developed for certain tasks and not desi

gned to answer to the requirem

ents for

interoperability, secu rity, f unctional perf ormance and usability 5 of diffe rent business

applications. The organizational issues result from the requirement to converge different

business process reaching a consen sus in o rder to support th e system functionalities as

well the need to secure a financial support for the project.

As the business organisation are reorganized, merged, acquired and split over the years,

the enterprise applicat ion integration becom es more "a co ntinuous process" rather that

timely defined project, consuming large investments in both cases.

4 Hall et all (2004)

5 Vgl. Smith et all. (2002) s. 1

6

---

Components of the Value Added Enterprise Application Integration

3.1 Discretional vs. non-discretional costs

According to the aims of enterprise application integration, the bene fits are beyond just

saving costs and doing the sam e things faster and cheaper.

"The current debate over IT

spending often misses the point. It′s not how much you spend, it′s the way you manage

your IT spending

that counts. The goal is not reduced spending but selective, value-

creating spending that makes a greater contribution to the bottom line."6

One way o f

determining the IT budget spending behaviour is to it′s benchm arking against revenues

generated on different level. The issue of how the IT budget should be spent, and how

it should be m easured is discussed in th e article from [Cha ng, et.al.,2003], where the

authors argue that using benc hmarking indicators linked to the com pany revenue do es

not provide a "com plete actionable infor mation"7. As a cons equence to linking the IT

investments to com panies revenue, a so ca lled "capability gap" can be created. When

the company revenues are decreasing, cutting cost measures are being introduced. The

new investments support only the operational requirements, or according to Accenture

SITE survey non-discretional areas 8. In such cases, it will k eep the pres ent operation

running, but it definitely elim inates the t echnology innovative and growth initiatives.

Therefore, it is v ery important at the IT Investment decision m aking level to focus on

which portion of the budget is going to be investm

ent for the support of present

operations and which should be reserved for supporting the company strategic growth.

"... the critical questions should be: What value am I receiving from IT? What value

should I be receiving from IT? How do I get more value from IT?"9

As a solution to this

problem, Accenture has developed a IT capability diagnostics that focuses on a creating

value rather then using benchm arking based on costs or revenues. The basis of this

diagnostic is to distinguish the IT spending in two groups: Discretionary and non-

discretionary costs.

The discretionary costs are de voted to IT investm ent enabling future functionality. IT

Solutions are used as a platform for creating business growth and ta king active part in

6 Rau, Bye (2003) s. 9

7 Vgl. Chang (2004) s. 8

8 http://www.accenture.com/NR/rdonlyres/F47EBF87-503E-458E-BD2D-F256468D09A2/0/sba_bigger.pdf

9 Chang et all s. 6

7

---

Components of the Value Added Enterprise Application Integration

creating a new innovative business models. The discretionally IT spending follow the

tactical and strategically defined IT developm ent scope, wi th the aim of creating n ew

and increasing present business value, which includes the following activities:

integrating with the existing operational applications;

development of a Knowledge Management System

development and integrating of a Customer Management Relation System;

implementing and integrating a Manufacturing Execution System;

Develop and comply with relevant standards to achieve higher interoperability;

According to Accenture best practices, the d iscretional costs cover 35 ­ 45% of the IT

budget. The non-discretionary costs covers the expenditure in IT Solution that maintains

and support the current operations, and are di

recting to optim ize the efficiency of

current processes. As exam ple of such cost s, given are costs for m aintenance of a I T

Solution, C omputer Planning and adm inistration and curre nt IT system s operations.

According to Accenture best practices, 55%-60 % of the total IT spending is devoted to

IT non-discretional spending. As those cost gene rate little innovative capabilities, it is

also stated, that in a high-perform ance businesses, the big part of non-discretionary are

redirected to spend for stra

tegically and d iscretionally investm ents. For this

investments, cost-based and revenue indicato rs are appro priate, as they are always

linked to a certain operating application or even more to a defined business process with

clearly defined roles and resources. This wi ll help to easier review and analyze tho se

costs, and relocate to other operating inve

stment opportunities or relocate to value

added discretionary costs.

3.2 Non cost-based value added drivers

To answer the still open question, how to measure the impact of an IT Solution to future

business va lue and it′s f uture capa bilities a voiding the cost saving effect as a main

criteria, different components of m

easurements are to be analysed. In the study

"Measures f or Software Product Line" 10, such Consideration Aspects were analys ed

regarding a single IT Product and P roduct line. The following is an attempt to justify

10Vgl. Zubrow et all.

8

---

Components of the Value Added Enterprise Application Integration

and explain how the sam e approach can be us e to determ ine the benef its of enterprise

application integration.

"Mission focus"

determines to which extend the i mplemented IT Solution supports the

defined general company mission in term of present operations and future growth. If the

company′s mission is to integrate the Customer Relation Management processes, one of

the requirements to the IT Solution should cove r the issue of genera ting, integrated and

storing cus tomer data. Such consid erations of the future com pany perspectives are

increasing investment costs little short-term financial benefit leading to lower ROI and

higher TCO.

Following the Miss ion f ocus, the IT Solution helps a

nd enable s the com pany

development consistent with strategic objec tives defined with the company m ission.

However it can be dif ficult to rep resent and measure the f ulfilment of this criter ia as a

numerical value. In this case, that data

can be derived from surveys conducted on

different m anagement levels on their judge ment of IT Solution com pliance with the

company mission and scope. Those surveys

can be perform ed and reported during

different stages of the implem entation pro cess and periodically wh en the IT Solu tion

already ope rates. If the stra tegic c ompany m ission changes, those changes should

influence Mission Focus surveys and show whe ther the IT Solution is still within the

given framework. As Mission Focus improves, other measures such as productivity and

quality should improve due to the increasing use of the core assets.

"Integrity Conformance"

should be considered separately whether the IT Solution is a

stand alone product or is it a part of an

already existing application. Regarding the

importance to m aintain com patibility and interoperability be tween different IT

applications and tools, the Integrity Conf ormance should be considered on different

layers of the integ ration model. The costs of a preserving integrity to the system and

providing interoperability between different segments and operation applications can be

high. This will hav e a negativ e effect on a co st based p roductivity ratios while future

benefits will appear.

"Business Process Conformance"

of an inte grated ente rprise applic ation to th e

organization′s business processes, which repr esent the us er′s view of the sys tem. The

9

---

Components of the Value Added Enterprise Application Integration

end-to-end business processes aligned

with the integration requirem

ents are

contemplating the need for integration. 11 A complete Business Process Conformance of

an integ rated system requires coo peration between all in the integ ration invo lved

stakeholders and m ore im portant their c onsensus for the common understanding of

process elem ents, roles and relations. This often triggers requirem ents for business

process restructuring as efforts for optimal operations. Introducing an overall enterprise

model, will repres ent and specify differe nt views of the inte grated organization 12 and

will a ssure certain contributions w hich a re to be cons idered as a v alue dr iver o f a

enterprise integration project s. Such contributions includ e avoiding of redundant steps

and procedures, autom ating process steps ac ross business units, reduction of non-core

activities and improvement of collaboration within the organization and the value net.13

"Usage Ratio"

determines what percentage of th e im plemented business application

capabilities is actually being used. A "purchase itself" of an IT Solution is not correlated

with the pe rformance of the f irm, while a positiv e perf ormance is a result o f a

implementation and "in-use" status of the solution, is a correlation which triggers

additional investm ents in system e xtensions.14 Integration of those solutions increase

the number of users creating a user-network ut ilizing the network effects. According to

the network effects, the value of a servic es increase with the number of it′s users15 and

the derived value from the integrated solution to the organization is positive.

"Innovative Focus"

considers to which extend the IT Solution supports the innovating

efforts for establishing new business models and creation of new products. For example,

development of a new innovative product requires coordination and integration of a

product development and production planning activities. As a result, innovative leaders

will benefit from possibility to "speed ­up" the new product rump up, while creating

barriers for entry from the direct competition.

"Integration within the value chain",

gives the possibility for a better coordination

within the other networked companies. An integrated Supply Chain Management(SCM)

11 Vgl. Salaka, Prabhu (2006) s. 3

12 Salaka, Prabhu (2006) s. 4

13 Bartek et all (2007),

14 Vgl. Aral et all (2006), s. 2

15 Vgl. Katz, Shapiro (1996)

10

---

Components of the Value Added Enterprise Application Integration

provides the involved companies with accurate and timely information about the supply

and dem and, integrating the IT-enabled pr

ocesses like planni ng, logistics and

distribution managements.

Apart from reduction of operational costs deriving from better inventory and production

planning, improved fulfilled rates, companies can expect also improvement of customer

service and sale forecast, increase order frequency16. Integrated enterprise systems have

a larger opportunity to act as a value driver for the organizations within a value chain, as

the effort for coordination, exchange of in formation, structure of contracts and their

legal consequences have high impact on the overall performance.

The ability to integrate the applications within the value chain within the value chain of

the business can have a big im pact on the company survival. The critical success factor

in for Dell′s achieved competitive advantage over companies like Compaq and IBM is

the "ability to provide in tegrated and efficient end-to-end service including order entry,

tracking, fulfilment, back-end processing and customer support".17

"Data Quality Level"

needs to be set for comparison and tracking purposes. Analyses

in banking sector shows that the low level of

data quality is di scovered on ly after

extracting the data and generating the reports , a process that requires a big am ount of

time and resources. According to this study, due to a poor data quality, "90% of the

effort devoted to get, analyze and use da

ta is tied u p in extrac t delay s, d ata

checking/verification and manual fix the reports" 18. Removing invalid data and

recurrent efforts in data cleans ing p rocesses (of ten influenced by wrong source data )

leads to m isinterpretation of conclusions and inaccurate calcula tions. W ith data

integration within the scope of enterprise application integration, the data syntax the

data sem antic and the possibility to exch ange data be tween the applic ations is

considered. This results with im proved da ta accuracy, consistency, and elim inating

redundancies.

"EAI allows data sharing between unrelated systems in the organization,

provides a single point of interface to which all applications and databases connect,

16 Vgl. Aral et all (2006), s. 6

17 Smith et all. (2002) s. 1

18 J McDuffie Brunson, "Data quality as a productivity tool",

September 2005,

B-EYE Network,

http://www.knightsbridge.com/pdfs/POV_DQ.pdf

11

---

Components of the Value Added Enterprise Application Integration

resolves differences between systems, triggers processes and delivers data in the proper

19

format to the proper destination"

4 Conclusion

The benefits of the above mentioned Value Added Drivers should not be seen as

isolated measures to evaluate the Performance of enterprise application integration, but

to provide assistance to set a framework that helps in the IT Investment decision, assess

the future benefits from the IT Solution and to provide additional information in already

defined ROI, TCO and other cost-based ratios. Reliable IT performance parameters are

hard to find in order to solve the problem whether the EAI really pays-off and to which

extend it contributes to the overall business performance.

19 Vgl. Schroek, Michel (2000)

12

---

Components of the Value Added Enterprise Application Integration

Literature

Business Integration ROI Building The Business Case For Integration,

(2005),

www1.webmethods.com/PDF/Business_Integration_ROI.pdf

Aral, Sinan, Brynjolfsson, Erik and W u, D.J.(2006), "

Which Came First, IT or
Productivity? The Virtuous Cycle of Investment and Use in Enterprise Systems"

.

http://ssrn.com/abstract=942291

Michael L. Katz, Carl Shapiro "

Network Externalities, Competition, and
Compatibility "

The American Economic Review, Vol. 75, No. 3 (Jun., 1985), pp.

424-440

Salaka L. and Prabhu1 V. (2006) "

Project Management for Enterprise Integration ,

Enterprise Distributed Object Compu ting Conference",. EDOC ′ 06. 10th IEEE

International

Smith D., O′Brien L., Barb acci M., Coallier F. (2002)

"A Roadmap for Enterprise
Integration"

Proceedings of the 10th Intern ational W orkshop on Soft ware Techn ology an d

Engineering Practice (STEP′02)

Bartek D., Behnke L., Bezwada S., Lai R ., McPherson C., Patterson L. Selling (Jan

2007)

"IBM′s Innovative Solutions "

www.redbooks.ibm.com

Alsene E., (1999)

"The Computer Integration of the Enterprise"

Transactions on engineering management, vol. 46, no. 1, february 1999

Brunson J.M. (2005)

"Data quality as a productivity tool"

B-EYE Network, http://www.knightsbridge.com/pdfs/POV_DQ.pdf

By Ja mes Hall and Bob Suh (2004)

"Breaking Away: Creating Business Value
through Information Technology"

http://www.accenture.com/Global/Research_and_Insights/Outlook

Brynjolfsson E., Hitt L. M., (1998) "B eyond the Productiv ity Paradox: Com puters

are the Catalyst for Bigger Changes", Communications of the ACM

Rau S. E., Bye B.S. (2003)

,,Are you getting value from your it?,

Journal of

Business Strategy, May/June

Chang B. R, Harris, B Maistry, B " Beyond benchmarking: The role of IT

13

---

Components of the Value Added Enterprise Application Integration

diagnostics in high-performance businesses", May 2004,

http://www.accenture.com/Global/Research_and_Insights/Outlook

Wolfhart G Siviy, J (2004)

"Applications of the Indicator Template for
Measurement and Analysis,

, Software Engineering Measurement and Analysis

Initiative www.sei.cmu.edu

Zubrow, D. , Chastek, G " Measures for Software Product Lines" (2003)

Software Engineering Measurement and Analysis Initiative

www.sei.cmu.edu

Schroeck M., (2000) Insigh

ts from the Front Line:

Increasing ROI with Enterprise Application Integration, DM Review Magazine,
March 2000

Curtis G., Page S., Kaltenmark J, (2003) "Thinking Bigger. "

http://www.accenture.com

14

---