Flexibility for Better IT-Business Alignment

Most of you are probably familiar with the concept of loose coupling since it is a key design philosophy underlying new generations of technology platforms. Loose coupling, for example, is necessary to deliver the flexibility promised by service-oriented architectures (SOAs). But the concept of loose coupling also holds tremendous promise in transforming how executives organize business processes, especially as they extend across global business enterprises. Many businesses today are organized along a very different model using tightly specified, hardwired management approaches. While this strategy has been responsible for delivering a great deal of operating savings to many companies, it makes improvisation difficult because changes in one area will cause unanticipated disruptions in others. As a result, such flexibility in business practices is often discouraged.

Enterprises today are hardwired at two levels: IT platforms generally remain hardwired, and the business processes we manage on top of these IT platforms are also hardwired. Companies now have an opportunity to introduce loose coupling at both levels. The innovation of loose coupling will not only change how companies operate within the enterprise. A loosely coupled approach transforms how they collaborate and innovate across enterprises by enabling the formation of global process networks that can mobilize large numbers of highly specialized business partners to deliver more value to customers.

For example, Cisco has created a global process network consisting of thousands of channel partners who provide everything from basic fulfillment operations to highly specialized consulting or engineering services to adapt Cisco’s networking products to the unique environments of its customers. The partners in this network are loosely coupled and orchestrated by Cisco. This process network works because Cisco has developed standardized ways of specifying capabilities and performance requirements, and it familiarizes all the partners when they join the process network with its standardized vocabulary. This approach to defining standardized "interfaces" for each module of activity makes it possible for Cisco to quickly assemble the right modules and ensure that the best qualified partner is assigned to each module. This is an example of loose coupling at the business process level.

CIOs are especially well positioned to help the rest of the senior management team make the transition toward loosely coupled business processes. They understand both the technology and design principles needed to support such processes, both within and across enterprises.

The Advantage of Interchangeable Apps

Loose coupling begins with the notion of modularity, grouping activities into separate modules where the outputs can be clearly specified and where the activities in each module can be performed relatively independently without relying on activities in other parts of the application. For example, at the IT level, it makes sense to create a separate module for currency conversion in an order entry application so that introductions of new currencies can be handled independently without affecting the rest of the order entry procedures. The currency conversion module should be designed from the outset as a service that can be used by a broad range of applications—not only order entry but also procurement, expense report processing, financing and any other application—in a wide range of computing environments distributed around the world.

But modularity is not enough. Loose coupling also seeks to create standardized ways of describing the procedures or information contained within the modules. In the IT domain, this is one of the major advances of Web services technology; through the Web services description language (WSDL), it defines a set of standards for creating documents that describes what a Web service offers, how it communicates and where to find it. Because these standards have been widely adopted throughout the technology community, we are now able to access a much broader range of modules or services. For example, the developer of a new app could quickly make use of the currency conversion module based on the information provided in the interface document and just as easily switch to another currency conversion module if it offered better functionality (say, more frequent updates of conversion rates).

Loose coupling is attractive on many levels. By making it easier to move modules in and out depending on need, it enhances flexibility. For example, a loosely coupled IT environment might make it easier for an insurance company to access a novel, highly specialized algorithm that allows it to assess risk in certain categories of commercial buildings in a more rigorous way than a more general algorithm might. Hence, the company no longer has to rely on a single general purpose algorithm to cover all commercial buildings. Instead, it can use best-in-class algorithms for specific insurance categories and thereby manage its risk exposure more effectively.

Loose coupling is likely to be even more attractive in the long term because of its role in enhancing innovation. To begin with, orchestrators of these systems can recombine modules in creative ways to deliver distinctive value. For example, online stockbrokers are using loosely coupled IT architectures to bring together a rich array of specialized information in highly tailored ways to serve the needs of high net-worth investors. Investors need detailed information about the performance of their portfolios, as well as access to a variety of specialized third-party information—analyst reports, technical charts, company profiles, macroeconomic data and so on—to make better investment decisions. SOAs enable stockbrokers to assemble a much broader array of resources for their investors so that stockbrokers can experiment with new ways of combining data and analytic techniques.

Innovation by recombining modules is just the beginning. Loose coupling facilitates rapid incremental innovation within modules as well. By reducing interdependencies across modules, loose coupling makes it easier to experiment and improvise within a module without worrying about unanticipated disruptions in other parts of the system. In this respect, loose coupling at the IT level amplifies the potential for rapid incremental innovation through loose coupling at the business process level.

The Li & Fung Story

Given the limitations of hardwired approaches, it is not surprising that some companies have begun to develop an alternative strategy in designing business processes. One of the companies pioneering this alternative approach at the business process level is a Chinese company, Li & Fung, based in Hong Kong. Li & Fung is very well-known in the apparel industry, but surprisingly little-known outside this industry. Its customers are apparel designers who are located around the world. On their behalf, Li & Fung will orchestrate highly customized end-to-end supply chains starting with the sourcing of yarn or fibers and ending with delivery of assembled goods to specified retailer distribution centers. This could involve bringing together dozens of specialized participants on a global scale to ensure that appropriate capabilities are brought to bear, for example, to produce high-end wool sweaters targeted to the European market versus synthetic-fiber slacks targeted to the U.S. market where a quite different set of companies might be required. This enormous flexibility is made possible because Li & Fung has assembled a loosely coupled process network of 7,500 business partners around the world.

Li & Fung can orchestrate this complex and highly flexible network because it focuses on defining standardized ways of specifying outputs from each partner and leaves decisions on how to execute against the outputs up to each partner. For example, it provides a standardized way of representing color for the garments, but does not tell its partners how to produce this color.

At the IT level, Li & Fung is now deploying Web services technology and building an SOA extending across its entire process network to support its loosely coupled business processes. This kind of architecture is attractive for Li & Fung because it does not require its business partners to rip out existing technology and adopt a common set of technology platforms. Instead, each partner can use Web services standards to implement loosely coupled interfaces for their existing applications and databases and automate connections with other business partners in the Li & Fung network.

Using a loosely coupled management approach, Li & Fung has been able to compress cycle times across its global apparel supply chains from months to weeks, exceeding the performance of more hardwired competitors. In highly demanding, fast-moving industries like apparel and consumer electronics, loosely coupled approaches could not possibly succeed without delivering against aggressive cost, performance, quality and cycle time requirements. Li & Fung’s strategy is quite successful. It generates more than $5 billion in revenue and has grown at double-digit rates over many years. With only 5,000 employees of its own, Li & Fung generates about $1 million in revenue per employee. In an industry accustomed to razor-thin margins, Li & Fung is also quite profitable, with 30 percent to 50 percent return on equity.

Trust Is Paramount

Effective loose coupling requires the formation of long-term relationships among business participants that are far richer than conventional transaction-based relationships. Loose coupling cannot work without significant investment in building trust-based relationships among participants. These business elements need to be woven together with technology elements to provide the foundation for shared meaning, trust and orchestration to develop and evolve.

So far, the loosely coupled approach to business process management has been implemented across the boundaries of enterprises in order to coordinate business processes spanning multiple companies. We expect that, over time, this approach will be applied to business process management within the enterprise as well. Hard wiring within the enterprise has given companies cost savings, but at the expense of flexibility. As companies see the performance benefits of loose coupling, they will want to embrace this approach within the enterprise to enhance flexibility there as well.

CIOs are naturally positioned to play a leadership role in helping companies to adopt and deploy these loosely coupled technology platforms. They would do well to start with business functions that have the greatest interaction with third parties (for example, sales and marketing, customer support, procurement and supply chain management). This completely flips the historical pattern of IT deployment that started within the centralized "glass house" and eventually reached functions that dealt with external business partners and only in a very limited way touched business partners (for example, through EDI connections and Web-based portals). By tying IT architecture evolution to the most pressing current business needs, CIOs can mobilize support from their business colleagues for more ambitious architectural migration strategies.

More broadly, CIOs can help nontechnology line executives to understand the compelling benefits created by a loosely coupled design approach. In focusing on the business applications of loose coupling, CIOs have the potential to become major players in the next wave of innovation.

John Hagel and John Seely Brown are coauthors of a new book called The Only Sustainable Edge: Why Business Strategy Depends on Productive Friction and Dynamic Specialization. Hagel is a management consultant who spent 16 years with McKinsey & Co. He can be reached at john@johnhagel.com. Brown, the former chief scientist at Xerox, is now a visiting scholar at the University of Southern California. He can be reached at jsb@johnseelybrown.com.

Copyright © 2005 IDG Communications, Inc.

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