Speaker 1:          Welcome to the MIT Sloan Center for Information Systems Research podcast series, providing brief introductions to MIT CISR research topics.

Jeanne Ross:        Hello, I'm Jeanne Ross, Director of the Center for Information Systems Research at MIT Sloan School of Management. Today I'd like to share the research we've been doing on enterprise architecture. We've been doing this research now for almost 15 years. And we are convinced that enterprise architecture is a business as well as an IT concept that is essential to success in a digital economy.

Jeanne Ross:        To give you a sense of what we mean by enterprise architecture, let me tell you about Johnson & Johnson in 1995. This is a company that was enormously successful, but its success had been based on the autonomy of its 170 operating companies. This was fine with the J&J management team, but they learned it was not as fine with their customers. So for example, one very large customer approached them and said, "Listen, J&J last month you sent us 17 different account reps, followed that with 17 different sales orders and 17 different invoices. Next month we want one."

Jeanne Ross:        Well, J&J was in no position to provide that kind of service. It wasn't structured that way. It didn't have business processes that would allow it, and it certainly didn't have an underlying technology capability that would allow that. This is an architecture problem. Now, J&J has been working on this for 15 years. And has certainly transformed itself in many ways. We believe companies throughout the world are facing similar challenges. And that enterprise architecture is providing the map they need to enable that transformation.

Jeanne Ross:        So let me give you a definition of enterprise architecture as we use it here at the center. We think of enterprise architecture as the organizing logic for business process, data, and IT capabilities. This organizing logic reflects the integration and standardization requirements of the firm's operating model. Now, I described the operating model in a different podcast. So what I want to do here is to describe what it is you are trying to build and the journey you'll go through to try to build it.

Jeanne Ross:        Enterprise architecture focuses on the design of what we call digitized platforms. A digitized platform gives you a high level design for the scaffolding for your business. It's how you'll be running your business. A digitize platform is a coherent set of standardized business processes along with the supporting infrastructure, applications, and data intended to ensure the quality and predictability of core transactions.

Jeanne Ross:        So think of this platform as providing some stability to an organization that's certainly facing turbulent times and constant need to change. There are things about your organization that are relatively stable. You're likely to have customers forever. You're likely to have certain processes, like order to cash that are fairly permanent. The concept of a digitized platform is that you can build a technology base and related processes and data that wire these things into the business so you don't have to think about them every day. You can instead focus on the things that are changing about the business.

Jeanne Ross:        Let me show you how a digitized platform works by giving you the example of UPS's is packaged delivery business. Here's a picture of how we think of the platform that UPS's built. It consists at the core of some networks and infrastructure, but more importantly, it consists of standard disciplined processes that UPS's is designed to ensure a consistent set of practices with every single package that gets picked up and delivered.

Jeanne Ross:        UPS's committed to build this platform in the late 1980s when it wanted to make sure it could compete with Federal Express. And it actually started by saying the single most important asset for us will be our package database. We need to have one package database forever and ever. And if we're going to have just one package database, we need to make sure that whoever needs to get data from that database or put data into that database can do so wherever they are.

Jeanne Ross:        For that reason, they develop their handheld device that they call a diet. And they put that handheld device in the hands of every truck driver. Then they could build applications to support a disciplined set of processes that UPS's developed through the largest core of industrial engineers that exist anywhere in any company on the earth. All those pieces get built onto a global network and a digital environment and an infrastructure that UPS's can rely on for low cost, high quality technology process, and data capabilities.

Jeanne Ross:        Most firms have been building systems of one by one and did not start in 1987 like UPS's to build platforms. These platforms though are essential for any organization that's been around for say, more than 10 years. Thus, we have most companies facing a much more complex and messy IT environment that corresponds by the way to a somewhat messy process environment. Our sense is that every organization facing this complexity will eventually want to build a digitized platform or several digitized platforms just as UPS's has done.

Jeanne Ross:        This picture shows the journey that accompany will go on to transform from its messy legacy to the strategic asset that it wants its IT enabled processes to become. You'll see that there are four stages. The first stage we call business silos. This is what companies do in their early stages. They actually don't really know how they're going to make money. So they find opportunities, they design processes to respond to them, and eventually build systems to support those processes. This works fine in our youth, but over time it becomes very complex and very expensive and risky. So eventually organizations find that they're spending a lot of money on IT, and not getting much value from it. They'll also notice if they look a little deeper that their processes are not very good. And as they recognize this, they will eventually decide that they need to clean up their act.

Jeanne Ross:        Invariably, the first step is to take a close look at operations within IT. So IT leaders need to standardize the processes. Often they'll pick on a well known process like ITIL. They need to understand their costs, they need to standardize project methodology if it's not already been done, they need to limit the number of technologies that the company uses, so they need to come up with standard technology environments, and opportunities to update those environments and have exceptions to those environments. All of that is going on in this second stage that we call standardized technology. And in the process of the second stage, organizations find that IT becomes more professional. It becomes more cost effective, and it becomes more reliable. When IT is more reliable, then companies can start thinking about how to make it into a strategic asset. And that's when they're ready for the third stage, which we call the optimized core.

Jeanne Ross:        In the third stage, firms start to standardize their systems, their processes, and their data that they need to share in the organization. So they can take an enterprise view of serving their customers. They may want to focus on their data, they may want to focus on their processes, but whatever it is that their company relies on to become more competitive, they'll build those systems and that core technology base in the third stage. We see companies implementing ERP systems, customer relationship management systems, and in-house systems, for example, an airline that would build a customer reservation system. These kinds of core transaction systems are developed in the third stage. Of course, the challenge of the third stage is also fundamentally re-engineering processes so that they have at enterprise point of view, rather than focusing on individual efforts.

Jeanne Ross:        When companies get good at building and using standard processes and systems, they start to identify how these can be modularized and reused in new environments. That's when they've reached the fourth stage. It's a business modularity stage. We start to understand the critical components of our business and when they can be reused. You'll notice in the numbers on the bottom of this figure that there are many companies still in the early stages of their enterprise architecture journey. In fact, in our most recent study in 2008, which looked at 1500 firms, we found that only 27% of firms had reached stage three, and only 2% were in stage four. So there is much work to be done. This can be for our large companies a very long journey. But with each stage companies define more and more value from information technology.

Jeanne Ross:        This is a difficult journey. And what this next picture reflects is the nature of that journey. So you'll see that when we're in the first stage, these are glorious days for individual managers. They think of something they want, they go to IT and ask for it. IT delivers it. They get what we think of as 100% solution. And they're pretty happy. When the company gets large however, the individual happiness does not convert into enterprise value. And so the company starts to recognize that they need to impose some standard discipline around the organization.

Jeanne Ross:        That's a tough change. And so you'll see in this second stage there that individuals will feel reduced local flexibility. But what the organization gets in exchange is more global or enterprise wide agility because they have a standardized set of technologies that will be quickly reused the next time the organization needs to put in a system. That understanding of the value of standards and reuse grows in the third stage. But it is again, painful for individual managers who are now being told not only do you have to use standardized technology, but you have to use standardized business practices, or you have to use our standard definitions of data.

Jeanne Ross:        In the optimized core stage, individual managers can feel pretty robbed of local autonomy. This will differ by organization and the extent of the processes and data that are included in what we're calling the optimized core. But that sense of local flexibilities should return as the company moves forward into business modularity because as they get their, individual managers can start to identify the modules that it makes sense to reuse, and the modules that need to be unique to their individual situation. So the story ends happily, but this is a transformation for the business as a whole. Many, many things change and we never get to go back to the way things were before. So it will be fundamentally uncomfortable.

Jeanne Ross:        Notice that the bottom of the picture, the other thing that's going on here is, we are changing how we invest in IT. Here, I'm showing the operating budget for it because we had many industries in this sample. We are using a consumer price index approach to this. So if we think of the money you spend on IT in stage one as being 100% of what you are going to spend, what we find is that as you approach the second stage, you start to reduce your IT expenditures. This is because you become more efficient. You've have standards, you reuse them, you're saving time, you have more disciplined processes within IT.

Jeanne Ross:        So you're much more cost effective and on average we find that companies in stage two are expending 16% less of their operating budget on IT. But as IT becomes strategic, this starts to turn around. You'll notice the companies in stage three are spending 92% of what they spend in stage one. They still are realizing some efficiencies, but they're starting to ramp up their investment because they're getting more value.

Jeanne Ross:        The big challenges in stage four where so many more things are included in the IT budget that it looks like the IT budget is actually out of control. We don't actually think this is the case. And in fact, we have so few companies, this 145% may actually be an overstatement as we get a bigger sample. But we do believe that as IT becomes more strategic as we're reusing business process components and outsourcing business processes, we will see things in the IT budget that we've never seen before. So we can expect the IT budget as a percentage of the total operating budget to increase.

Jeanne Ross:        This is the journey that you are on. We believe nearly every firm that has been around for a number of years will need to go through this journey. And we encourage you to learn more about it by checking our website where we've done a great deal of research on enterprise architecture and a number of case studies of companies that have been on this journey and are successfully driving value from a strategic asset that we call IT. We wish you the best of luck with your efforts. And thank you for your time.

Speaker 1:          This has been a production of the MIT Sloan School of Management, Center for Information Systems Research. Thank you for listening. We welcome your comments and questions.