The ROI of Application Integration

Application integration has a split personality. By some accounts, it’s the good Dr. Jekyll, ready to cure whatever ails the enterprise: Share data with employees, efficiency soars; share data with customers, loyalty climbs; share data with partners, the supply chain hums. But by other accounts, it’s the murderous Mr. Hyde, an evil IT-led folly that sucks millions from the enterprise while throwing a monkey wrench into operations.

Just look at one of the more recent horror stories in the integrated enterprise archives. Nike reportedly spent $400 million to overhaul its supply chain infrastructure, installing ERP, CRM and SCM?the full complement of analyst-blessed integrated enterprise software. So what happened? In the third quarter of last year, the Beaverton, Ore.-based sneaker maker saw profits drop by $48 million, year over year, thanks in part to a major inventory glitch (it overproduced some shoe models and underproduced others). Nike blamed one piece of its integration puzzle?its demand and supply chain management software?for the mixup. (“This is what I get for our $400 million?” CEO Phil Knight famously asked, referring to the total cost of the integration project.) And what CIO reading the Nike tale didn’t feel an un- comfortable mix of emotions: relief that he wasn’t responsible for such a public and pricey screwup, and worry that his own integration project could fail in just as spectacular a fashion.

Both sides of the integrated enterprise story are true. Integration can make a business more efficient. Integration can break the bank. Indeed, integration work can represent up to 40 percent of total rollout costs for large-scale applications, according to Dan Sholler, an analyst at the Meta Group in Stamford, Conn. (EAI tools can help reduce some of those costs, Sholler says.) The challenge for any CIO who wants to sell his CEO on a major integration investment is to get past the hype and the horror stories, and get down to the payoff.

Sure, CIOs can take a termite’s-eye view of integration’s merits, projecting how an EAI tool will help shave software development times and maintenance costs, or how a data warehouse and decision-support tool will save IS from having to run off reams of reports. But to win support for a major integration initiative, CIOs must also take the elephant’s-eye view of ROI, showing how integration supports a business strategy, such as improving customer service, slashing inventory, speeding a product to market or standardizing business processes. Here are three CIO-100 honorees that understand how to show a return on integration that satisfies the elephants and the termites?and their CEOs.

National City: Untangling the Rat’s Nest

Integration project: Developed an EAI architecture to replace point-to-point connections between legacy applications

Enterprise payback: Faster to market with new products; a reduced risk of failure during system upgrades and changes; customers receive consistent data in all channels

IS payback: Lower development and maintenance costs; faster deployment of new features

James Hughes looks at some of his mission-critical back-end systems and sees the IT equivalent of an Indy winner that’s been around the track a few too many times. Hughes is executive vice president and CIO at Cleveland-based National City, the ninth largest bank holding company in the country and, like many CIOs, he’s faced with an aging fleet of legacy applications that are due for more than just a pit stop. The $6.2 billion company’s deposit system?which manages accounts for more than 1,100 National City branch banks and 1,600 ATMs?is 28 years old. Its loan system is 30 years old.

Hughes will eventually have to replace parts or all of his legacy systems, and because of the systems’ size and complexity “the cost is going to be enormous,” he says, running into the tens of millions of dollars. He’s not just talking about the cost of the new software. There’s the cost, hassle and sheer complexity of having to rewrite the multitudinous point-to-point application program interfaces (APIs) to these legacy systems?miniprograms that tell the deposit system how to share an account balance with the telephone banking system or the website or the bank teller’s green screen.

“Over the years, there’s been generation after generation of interfaces that have been constructed to integrate with these applications,” Hughes says. “There’s been layers and layers of rewrites. There’s been patches and upgrades and changes made over and over.” In other words, these interfaces are the most complex, least documented and hardest to support code that National City’s software team has to maintain.

That’s why National City has embarked on an EAI infrastructure effort. The company has begun writing standardized, reusable APIs to and from its legacy systems, which are accessed through shared messaging middleware. So instead of having 10 different interfaces, for example, to pull a customer’s account balance from the deposit system, National City develops one interface that can be used by any application that needs to know a customer’s balance.

The EAI effort has cost roughly $10 million since 1997 ($3 million for the hardware and software to support it, and $7 million to define and develop interfaces to core functions on the company’s legacy systems). “The problem with the EAI architecture is that the very initial investment is a little higher,” Hughes says. “But it doesn’t take too long before you can get a payback.”

To wit: Each time an interface is reused, the company saves 200 hours of coding time. That means IT projects are getting out the door faster, says H. Anthony Hai, senior vice president and director of project services. In 2001, the IT department slashed its project completion time by 45 percent; much of that gain was because it had reused interfaces (projects don’t need to wait anymore for the one programmer who understands the intricacies of how to get X information out of Y legacy system?any programmer can just point to an existing interface). It also means that development costs drop: In 2002 alone, rather than writing new code for every connection between applications, National City expects to reuse 109 existing interfaces and save $1.9 million.

That’s not the only benefit. By reusing interfaces, Hai says, National City can ensure that customers receive the same information, whether they call on the phone, visit a branch or log on to the website.

By using and reusing standard interfaces, the hope is that National City’s legacy rat’s-nest will begin to resemble a modern, streamlined computing environment. Hughes also hopes for a smoother road when any system needs to be replaced?with a lower price tag too. “My expectation is that EAI could save us at least 25 percent if not 50 percent of the cost [of the legacy systems upgrade],” Hughes says. “More important, it’s going to dramatically reduce the risk. We’ll have reusable components that are tried and tested.”

Cabot: United We Stand

Integration project: Revamp front- and back-office business processes worldwide, supported by standardized and integrated enterprise software systems

Enterprise payback: Global sharing and reporting of information; better service to global customers; e-business enablement

IS payback: Get better deals from vendors; savings on development and maintenance

Specialty chemicals company Cabot reorganized four years ago into global strategic business units. But its data behaved otherwise. Why? Because each of the old business units marched to the beat of a different drummer when it came to their organization, software systems, data models and fundamental business processes.

This lack of standardization hampered Cabot’s plan to set up shared finance, HR and IS services within each geographic region. “We had multiple customer numbers for the same customer,” says Craig Bickel, a Cabot vice president and its CIO, who works in the $1.7 billion company’s Boston headquarters. “We would have had to have a call center person run three or four distribution systems, depending on what customer would call them” and what product the customer asked about.

The data dissimilarities also made it hard for the heads of the new global units to get the information they needed to run their business. Not that Bickel didn’t try: The finance function supported by an IS team put up a set of data marts to cull information from the disparate systems. But there were nagging inconsistencies in terms of data definitions, coding structures and data models. The revenue numbers from one system, for example, might include the cost of freight, while those from another might not.So in late 2000 Cabot began a major enterprisewide business process revamp in which IT plays a crucial, enabling role: overhauling and standardizing all of its back- and front-office business processes, and globalizing and integrating all the software systems that support them. According to Bickel, the company is spending in the mid-eight-figures to achieve four goals: standardize business practices and processes; clean up the company data and reports being shared with management; get ready to do business online (ordering, inventory checks, shipment status and the like); and be ready to handle the ISO standards requirements of global customers.

The implementation involves 20 full-time-equivalent employees from IT, and from the business side, 10 dedicated employees and the contributions of 150 more. Cabot is standardizing on a collection of enterprise software applications?ERP, CRM, manufacturing execution, quality management?plus a global data warehouse and manage- ment reporting tool. And it’s linking them all together using an EAI tool (which Bickel says will be 15 percent to 20 percent cheaper than hand-coding the point-to-point integrations, and even more when maintenance costs are factored in). Cabot has completed the bulk of the data standardization effort and is about halfway through the application rollout, having gone live with it in eight plants in Europe, five in North America and one in South America. It has already started to see some gains, says Peter Smith, director of business process improvement.

By combining and standardizing vendor information from all of its plants, for example, Cabot discovered that some plants were getting better deals than others from the same vendor. That information can help Cabot negotiate better deals for everyone.

When it comes to the ROI for the project as a whole, Bickel and Smith demur about revealing specific figures, other than to say that the effort is expected to pay for itself within a year of completion in mid-2003.

Con-Way Transportation Services: “Hi, We Both Work for the Same Company!”

Integration project: Data warehouse, CRM system, enterprise portal and Web services connectivity to suppliers

Enterprise payback: Single view of customer activity across the company’s multiple business units improves service

IS payback: Users can generate their own reports without relying on IS; applications are easier to maintain and support

Three years ago, Con-Way Transportation Services wanted to get more mileage out of its sales efforts?a hefty challenge for the $1.9 billion transportation and services company. With headquarters in Ann Arbor, Mich., Con-Way is made up of multiple business units across the United States and Canada that sell everything from long-haul trucking to logistics outsourcing. But each business unit used (and still uses) an idiosyncratic collection of software to track its operations. So if a customer of one Con-Way business unit expressed interest in another’s services, the latter’s sales reps would have no way of knowing about it.

To make that information accessible, Jacquelyn Barretta, vice president of IS, built a data warehouse that pulls customer information from each business unit’s systems and merges it into a single customer record. She is also rolling out an enterprisewide CRM system that tracks every customer interaction?including a customer’s potential interest in new services.

The data warehouse cost about $700,000 to build, including software, hardware and development time, Barretta says; the CRM tab ran about $1.5 million. The company has already begun seeing the payoff: When Con-Way AIR launched last year, the new business unit pitched to those trucking customers that had already expressed an interest in airfreight, thereby saving millions in marketing costs, says Bryan Millican, executive vice president of sales and marketing.

The data warehouse and CRM system also make it easier for Con-Way to use sales reps from one business unit to sell the services of another business unit. In the past, such cross-business-unit sales efforts would founder because the sales reps would make calls but never know whether they’d been successful (the data was locked up in another business unit’s systems). The data warehouse now gives the reps a window into their sales activity, and that has boosted their enthusiasm?so much so that Con-Way did $300,000 of business in the new service’s first month. “We’re 50 percent ahead of our expectations for this new product line,” Millican says. “A big part of it is allowing the salespeople visibility and access to data.”

Other integration projects on Con-Way’s pallet include an enterprise portal that’s used by employees and customers, letting them access a variety of back-end applications and information in one place. Con-Way has also developed XML-based Web services that can talk directly to customers’ back-office systems and exchange key account information and deliver customized rate quotes, transit times and status tracking.

Con-Way customers now perform 500,000 status queries and 300,000 other transactions online each month, Barretta says, and Con-Way’s call center volume has dropped between 12 percent and 25 percent. The company has also shaved 2.5 days off its average accounts receivable days outstanding, and Barretta believes integration has played a role in getting the money in faster. “[Customers] can easily see what their outstanding balances are, and they can drill down to the detailed level of justification for those balances,” she says. Therefore they’re more likely to get their billing questions answered more quickly and, in turn, pay more quickly.

Integration has big benefits for the IT department too, Barretta says. “[Thanks to the data warehouse, employees and customers can] generate many of their own reports, instead of relying on IT to build them.” The enterprise portal has also eased maintenance and support burdens: All the applications are built in the same architecture so that the IT staff doesn’t have to support different ones. And “users have fewer questions, after they get used to the applications, because the systems are more intuitive and all function alike,” she says.

Over the years, Barretta has found that the best way to drive support for an integration effort is to leave her calculator behind and focus on the concrete: How much time users say they will save thanks to the new connectivity, what new revenue streams they say they will be able to tap because of it and so on. “ROI has more credibility when it’s stated in raw benefits, which are sometimes nonquantifiable, rather than translated into dollars,” she says. “That translation is often fuzzy and tends to lose some audiences.”