Components of the value added EAI

  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

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Components of the Value Added Enterprise Application Integration

1 Introduction

The IT Technology is no m ore observed only as another tool to au tomate 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 visio n. However, the resu lted benefits of the enterprise appl ication 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 attem pts 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 ba sed financial ratios is wide spread m ethod to de termine the benef it 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 unp redictable 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

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Components of the Value Added Enterprise Application Integration

result, such m easurements do not point at the key perform ance dr ivers 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 as sets can not be evalu ated with the s ame princip les 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

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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

motivation for making investments.” 2

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 ch anged. 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

operations, compared to companies with lower profit margin growth” ³ . This suggests that it is ne cessary to tr eat the dif ferent co mponents 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)

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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 implem ented solution will be generated. The consulting com pany Accentu re industry ex periences 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,

compared to companies with lower profit margin growth” ⁴ . 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

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Components of the Value Added Enterprise Application Integration

3.1 Discretional vs. non-discretional costs

According to the aim s of enterprise applica tion 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, valuecreating 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 opera tion 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 capabil ity 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 nondiscretionary costs.

The discretionary costs are de voted to IT investm ent enab ling 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

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Components of the Value Added Enterprise Application Integration

creating a new innovative business models. The discretionally IT spending follow the tactical and strategically de fined 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

¹⁰ Vgl. Zubrow et all.

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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 sh ort-term financial benef it 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 m easure 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 m odel. The costs of a preserv ing integ rity 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 v iew of the sys tem. The

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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 an d specify differe nt view s 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 use rs ¹⁵ 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)

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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 frequency ¹⁶ . 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 co mpany survival. The critica l success factor in for Dell’s achieved c ompetitive advantage over companies like Com paq 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

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Components of the Value Added Enterprise Application Integration

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

format to the proper destination” 19

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)

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Components of the Value Added Enterprise Application Integration

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