IT Value: Using the Web to Divide Your Organizations for Effective Resource Management

When we think about how the Internet creates value, we naturally think about its power to connect. That’s how we define a network like the Internet: computer systems linked in a way that makes it easier to share information.

What is less obvious is the power of the Internet to create value by decoupling different types of systems, business processes and companies, enabling organizations to use their resources most effectively. The Internet allows IT infrastructure to be decoupled from front-end applications so that systems can be agile and responsive at the applications level, yet be robust and scalable at the infrastructure level. At the business process level, the Internet allows back-office operations to be decoupled from front-end activities so that companies can share common services while moving customer-facing activities closer to customers. And by decoupling different stages of the industry value chain, the Internet allows companies to focus on what they do best while outsourcing the rest to a network of partners.

Yes, the Internet connects. But it also separates. By understanding the power of decoupling, you can find dramatic new possibilities for creating value.

Break Free of Compromises

To understand how decoupling reduces the need for compromises when designing IT systems, consider the difference between desktop computing and network-centric computing. On the desktop, all functions are colocated?with storage, processing, display and applications all in one place. This colocation involves a hidden compromise. You want your computer to be small, flexible and adaptable?in a word, personal. However, you want it to be powerful, have lots of memory and be highly reliable?more like a mainframe. You get something that’s neither as powerful as a mainframe nor as customized as an information appliance that does only one thing.

If we introduce a network such as the Internet into the picture, the value of IT changes dramatically. Now you can move the mainframe-like functions of the computer to a central server that is powerful, reliable and scalable, while allowing the PC-like functions?such as displaying information on a monitor and taking user input through a keyboard and mouse?to stay close to the user. By separating the back-end infrastructure functions that best belong on a large server from the front-end functions that best belong on the client device, the Internet breaks the design compromise inherent in colocation.

In fact, infrastructure-like functions can be delivered over a pipe?just like water, electricity and natural gas. This is the essence of the “utility computing” idea that IBM and other vendors are so excited about. A paradox of the utility computing paradigm is that infrastructure will become more centralized, while devices and user applications will become more decentralized. I foresee the emergence of a few information utility companies that will supply IT infrastructure, and the creation of billions of highly focused information appliances for end users.

Extract Value from Business Processes

The decoupling logic also applies to the design of business processes. For decades, companies have struggled to find the right balance between centralization and decentralization of their operations. Centralization allows for better economies of scale and better coordination of activities across a company. But it also makes companies less responsive to their customers.

To see how decoupling can help resolve this dilemma, think about how a company’s activities can be classified into those that are close to customers and markets (such as sales, solutions design and customer relationship management), and those that provide back-end support (such as IT networks, call centers and accounting). The Internet lets companies centralize the back-end activities into a shared services organization that benefits from economies of scale while allowing front-end activities to be more decentralized and closer to customers.

Consider how General Electric is taking advantage of decoupling as it redesigns its global processes for GE Capital International Services (GECIS), which is based in India. GECIS provides 15 of the top GE businesses with services that include accounting, business analytics and software development. GECIS allows GE companies to manage their front-end activities closer to their markets while benefiting from improved scale and lower labor costs at the India-based back-end operations.

Decouple Value Chains

Decoupling is also reshaping the way companies decide the scope of their activities within the industry value chain. In the days of General Motors chief Alfred Sloan, companies believed that competitive advantage was gained through vertical integration. But it is difficult to be good at all activities in the value chain. It makes sense for companies to focus on what they do best and to outsource the rest. But if you cannot communicate effectively with partners and suppliers, the benefits of specialization are diluted because of the cost of coordinating activities across companies.

With the Internet, companies no longer need to compromise between specialization and integration. By reducing the cost of interaction between companies and their partners, the Internet allows companies to limit their operations to what they do best and to outsource noncore activities. For example, the PDA company Handspring outsources product design, manufacturing, distribution and support. Through decoupling, the Internet allows companies to benefit from virtual integration.

Putting Decoupling to Work

To exploit the power of decoupling in your company, ask yourself the following sets of questions.

1. Systems design. To what extent is your back-end IT infrastructure separated from the front-end end user applications? Is your IT architecture flexible, with clear separation between the data, business logic layers and presentation layers?

2. Business process design. To what extent has your company separated the back-office service and support processes from the front-end customer-facing processes? Have you created shared services operations across the company? To what extent have you moved these shared services to low-cost locations?

3. Business scope design. Do you understand the difference between the core activities that your company is good at and considers key to its competitive advantage and the noncore activities that somebody else can do better? How many noncore activities have you outsourced? How well can you manage outsourcers without compromising quality?

The Internet allows companies to resolve age-old debates between specialization and generalization, centralization and decentralization, and scale versus focus through its ability to decouple systems, processes and companies. If you understand the power of decoupling, you can go beyond these seemingly irreconcilable dichotomies that constrain your thinking, and you can unlock new value for your company.