Web services offer the functionality of electronic data interchange (EDI) systems, with much lower investment. Rather than requiring a direct linkage to a vendor’s databases and applications (which compromises data confidentiality and requires costly custom programming), standards-based Web services provide a platform-independent linkage between Dell and its vendors. Because Web services leverage existing technology investments, incremental costs are low, supply chain partners have a greatly enhanced payback from participating, and additional functionality can be deployed incrementally.
Opportunities on the Edge
Despite the technical complexity, Out of the Box is an easy read for anyone with even basic familiarity with information technology. Most remarkable is Hagel’s ability to focus on the strategic forest and not get lost in the technology trees. He sees four major strategic opportunities created by Web services technology:
• Cost Reduction. Web services offer all companies a low-cost, low-investment way to realize the digitization opportunity that Jack Welch describes. Whereas Welch sees the principal opportunities in the guts of the company, Hagel believes the opportunities are greatest at the boundaries of the enterprise, where the ability to link multiple hardware and software platforms is most powerful. Managers will welcome occasions to capture rapid reductions in costs as well as assets that can be pursued incrementally.
• Process Networks. Collaboration creates economic value by enhancing the effectiveness of a key process across the supply chain, not just at a single stage in the chain, as business-to-business exchanges do. Hagel hypothesizes that process networks will be formed around three core processes: supply chain management, customer relationship management, and product innovation. At the center of each process network will be an “orchestrator” such as Cisco or Nike, which will define requirements to participate in the network, recruit participants, define standards for communication and coordination, and assume ultimate responsibility for the output of the business process. Although most orchestrators focus on selling their own products and services, some existing ones — like Li & Fung Ltd., the Hong Kong–based garment industry supply chain manager — focus entirely on linking large customers (apparel designers, in this case) to suppliers.
• Selling Web Services. If Web services grow as fast and become as ubiquitous as Hagel expects, then selling such services is an exciting business opportunity. Although software providers and IT consultants are the obvious candidates, any innovator could choose to pursue the opportunity. For example, Citibank offered its payment-processing engine, CitiConnect, as a Web service.
• New Growth Avenues. Hagel hypothesizes that Web services will accelerate the trend toward companies’ focusing on just one among three types of processes: customer relationships, infrastructure management, or innovation. Then, he believes, companies will grow through “rebundling,” in which economies of scope will drive customer relationship businesses to offer an increasingly broad variety of products and services, while economies of scale cause consolidation among infrastructure providers.
The wild exaggerations and failures of New Economy prophets have made all of us skeptical of predictions that a technology will transform business. For the most part, Hagel avoids dangerous overgeneralizations and extrapolations. However, we’re skeptical of the claim that Web services will result in an unbundling and rebundling of the value chain in the way that he hypothesizes. Outside the computer industry value chain, there’s little evidence either of the underlying economic advantage of rebundling or of examples of companies successfully pursuing the strategy.
Still, that leaves three useful strategies that we agree are enabled by Web services: Offer exciting cost reduction opportunities for all companies, stimulate the development of process networks that reshape opportunities for most companies, and provide profitable opportunities to sell services for a few companies. If Web services truly enable companies to break the constraints imposed by their technology infrastructure, most of Adrian Slywotzky’s mysterious gap between profit template and strategic reality may disappear.