Real Time Enterprises - A Continuous Migration Approach

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Real Time Enterprises - A Continuous Migration Approach ...

    Real Time Enterprises A Continuous Migration Approach

    Vinod Khosla, Murugan Pal

    March 2002

     Vinod Khosla, Murugan Pal Real Time Enterprises A Continuous Migration Approach Current market trends, global competition, and technological innovations are driving

    enterprises to adopt the practices of Real Time Enterprises. Real Time Enterprises are

    organizations that enable automation of processes spanning different systems, media, and

    enterprise boundaries. Real Time Enterprises provide real time information to employees,

    customers, suppliers, and partners and implement processes to ensure that all information

    is current and consistent across all systems, minimizing batch and manual processes related

    to information. To achieve this, systems for a Real Time Enterprise must be “adaptable” to

    change and accept “change as the process”.

Any business process within the enterprise, including relevant processes in use by its trading

    partners (the extended enterprise), must be instantaneously reflected in all enterprise systems.

    In other words, all INFORMATION is ―real time‖ within a ―real time enterprise‖. All manual or

    batch processes related to information in an enterprise are inefficiencies in the delivery of

    products and services unless the manual and batch mode processes (as in process industries) are required as part of the business nature. For example,

    ? In a Real Time Enterprise all the systems everywhere could recognize the new product

    entered in a catalog system so that billing and customer service can be done right from

    the moment that product becomes available.

    ? A wireless carrier could activate a wireless phone as soon as the credit card payment is

    processed with out any time loss or manual intervention.

    ? A credit card company could improve customer loyalty by automating the dispute

    notifications starting with the customer, and extending to the credit card company, the

    merchant‘s bank, and all the way back to the merchant.

    ? Last year, Lexmark had $1 million worth of nonconforming material returned to one of

    its plants in a single lot. Investigation revealed that providing engineers with adequate 3information online and in real time could avoid this situation and future inefficiencies.

    ? Citibank, to avoid heavy call volume in Poland around paydays, introduced cellular text

    messaging (SMS) to inform all customers of any changes in their bank balances

    instantaneously on their cell phone.

Today‘s business practices and models demand an operational environment acting as a virtual

    enterprise, with insight into the status of customers, partners, and suppliers on a real time

    basis while lowering SG&A costs. Cisco and Dell, with better service and higher revenue per

    employee than their direct competitors, are great examples of leading technology adopters 3who have leveraged some of these capabilities. At the same time, companies like Lexmark and 7Cutler-Hammer have realized similar benefits through automation. Still, automation of an end-

    to-end value chain has not been widely adopted or fully achieved. Even though technologically

    this has been possible for some time, only now has it become realistic with the advent of

    Internet-driven standardization. This has led to orders-of-magnitude cost reductions plus the

    elimination of debate regarding the technical infrastructure to be used. With the advent of

    Internet technologies such as HTTP, HTML, standardization initiatives around XML, Web

    services, UDDI, and SOAP, it is now possible. Lexmark leveraged Internet and thin client

    technology to enable their engineers to monitor production processes at their suppliers in real-

    time, from anywhere in the world and put defective product on hold at the source. Dylan

    Tweney in his column states, ―Web services will enable companies to link up their enterprise

    systems with the production processes, bringing executives ever closer to the ideal of ‗real-

    time enterprise computing,‘ and in turn will make companies better able to respond rapidly to 7changing market conditions‖. We agree.

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Cisco‘s ambition to close their books on a daily basis is the litmus test for a Real Time

    Enterprise. Consider the benefits of having all information current in all systems such that

    books can be nominally closed within hours of the close of a quarter (or day!). Cisco does that

    today, and after adjustments including managerial and auditor input can announce financial

    results within three days of the end of the quarter. Think of the cost savings in finance alone!

    Cisco Systems' much-vaunted electronic order-entry system has decreased the rate of errors for 5the company from 20% to 0.2%. If a majority of the orders come in untouched by humans,

    think of the sales force efficiency and yield improvements. If most employee information (such

    as vacation days and 401K‘s) is ―self service‖ on the intranet, think of the savings in HR. If order status, product configuration, and ―available to promise‖ dates are self-service for

    customers on the Web, think of the improvements in customer service that are possible, while

    reducing costs. These improvements are not just about a Website but a structural change to

    Web enabled IT. The benefit of ―self service‖ is enormous as data will be cleaner when the

    owner enters it and the process will be efficient because it is outsourced to the end customers

    themselves. This is how the Internet is being used for information transport rather than a

    browsing medium. It represents a change in the way finance, operations, HR, logistics, and the

    whole corporation works. According to Roland Berger's Geissbauer, manufacturers already using

    the Internet see annual cost savings of 6 percent across the value chain. From procurement to

    Web-based supply chain management and after-sales service, it may be possible to cut costs by 3as much as 8 percent to 10 percent. We think the savings are potentially larger. On the other hand, Cisco failed to automate its supply chain deep enough into it‘s partners, resulting in

    hundred‘s of millions of excess inventory beyond what a normal demand forecasting error

    would have caused in a full real time, full visibility environment.

The reality is that the vast promise of IT, by and large, has been a mirage for most corporations.

    But does this have to be true? Does the promise only work for some organizations? Are missed

    opportunities for productivity gains just that, or can they be realized? Are budget overruns,

    process delays, and ―additional costs‖ to recover the investments already made an unavoidable fact of life? We have gone from MIS departments with large in-house software development

    efforts, to inexpensive desktop enablement, to large packaged software applications, to

    productive application development tools, client server applications, portable environments

    like JAVA, and system integration tools. We have gone through IT consultants, outsourcing

    vendors, ASPs, the Big 5 and their system integration expertise, but the problems of IT remain

    largely the same. Even more tantalizing are the stories of ―benefits‖ of good IT strategies.

    Cisco has substantially higher revenues per employee than its direct competitors, Nortel and

    Lucent. The cost of doing business is lower at Cisco, and their responsiveness and customer

    service levels are higher. Geissbauer stresses that many of the top challenges for

    manufacturers relate to competitive pressure and manufacturers need to respond faster to

    customers in order to achieve their top-line sales goals. Dell can offer ―mass customization‖

    and still maintain much higher inventory turns than its competitors, generating greater

    profitability in its PC business. Wal-Mart and Amazon have used IT technology as strategic

    weapons to increase their competitiveness. FedEx could not economically provide the level of

    customer service that it does without IT. The cost to FedEx of a ―package pick up call‖ or a

    ―where is my package‖ inquiry have declined substantially (greater than 10X) because of the

    use of appropriate technology. We guesstimate that each 1% (of sales) of increased IT spending

    or spending redirected from rigid and outmoded forms of systems integration in a corporation

    should reduce SG&A spending by 1.5% to 2% (of sales) beyond the improvements in IT

    productivity. It is important to note that the bigger role of IT is not managing IT functions and

    expenses, but rather to manage expenses and service levels for the ―rest of the corporation‖.

    IT can be a strategic weapon and help reduce SG&A costs relative to competitors while

    improving customer experience. The rate of savings depends on industry sector; those sectors

    with high SG&A can realize the most significant benefits. This applies especially to business

    processes, collaboration environments, and personalized applications where the bulk of

    enterprise activity can be automated. It is clear that every business process, every manual or

    Page 3 of 30 Real Time Enterprises A continuous migration approach Vinod Khosla, Murugan Pal March 2002

batch process, and every human touch point that is properly automated and eliminated will

    result in an economic saving as well as an improvement in quality by reducing the risk of human

    error and improving the availability of information.

Any astute CEO or CFO will choose to automate and eliminate provided that the risks can be

    managed and results can be demonstrated in small projects with 90-180 day implementation

    and payback cycles. IT can become a competitive weapon, with the CIO becoming as critical in

    reducing costs or improving ―product‖ as the VP R&D, in defining products as the VP of

    Marketing, in improving customer service as the VP of Customer Support, or in improving

    operations and reducing operations and administrative costs as the VP of Operation or the CFO.

    In summary, the CIO becomes a strategic leader.

The goal of this paper is to define the ―ground rules‖ of an IT transformation from the stark

    reality of legacy applications forward to the promise of the future. In fact, the goal should not

    be a radical transformation but rather continuous migration of systems, transforming the

    organization into an adaptive enterprise. It is easy to define the ideal ―new‖ world, particularly with the promise of Web services, but harder to achieve a practical reorientation

    towards such a goal. No magic bullets or ideal solutions exist. However, biases in certain

    directions and small probing steps do help. Differences in approach can result in a significant

    impact over a three to five year time frame. Ground rules and technology choices can make

    environments more flexible, adaptable and pliable over time. It is this paper‘s goal to highlight

    these, as well as the ―current best targets‖ towards an ideal environment. Keep in mind we are

    dealing with first generation attempts at this new model and will run into many ―gottchas‖,

    issues and practical problems. But iteration towards the above goal is necessary because it is

    unlikely that we will ever have an instantaneous or ideal tool for the transition. What we will

    need to do is dedicate an increasing part of our maintenance budget, the largest component of

    most IT budgets, to approaches that will enable the legacy environment to move towards the

    new vision.

The inflexible structure of conventional systems has long been the subject of loud complaints

    by top management. Today‘s customer expectations, evolving business models and technology

    trends demand the need for adaptability. It is important to accept CHANGE AS A PROCESS,

    rather than as an EVENT. IT spending must be evaluated against the total expenditures of an

    organization, and the potential savings from the effective usage of IT. These evolving business

    needs demand:

    ? Inter-enterprise integration‖ to shift from Enterprise Resource Planning (ERP) to Inter-

    enterprise Resource Planning (IRP) and to resolve issues arising from the rigidity and

    cost of linking systems.

    ? Intra-business functional integration‖ to unify business process beyond what packaged

    applications capture.

    ? ―Self sufficiency‖ from a systems perspective, allowing adaptive, low cost iterations,

    customizations and change isolations, rather than a requirement to get it right the first


    ? Understanding that optimization for adaptability is more important than optimizing for

    cost, performance or features.

The ability to encapsulate existing systems, automating them as business processes, and letting

    users collaborate via appropriate interfaces are the keys to Real Time Enterprises as illustrated.

    Page 4 of 30 Real Time Enterprises A continuous migration approach Vinod Khosla, Murugan Pal March 2002