Architecture as Strategy
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Transcript of Architecture as Strategy
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© 2007 IMD International. Not be used or reproduced without permission.
Architecture as StrategyProfessor David RobertsonIMD International6 November 2007
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The Architecture and Strategy Study
Joint effort between IMD and MIT
Interviewed or surveyed over 150 organizations in 7 countries in the US and Europe
Quantitative survey of 103 organizations in US and Europe
Book published in June 2006
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Outline
What is architecture?
Why don’t organizations have the right architecture?
Why does aligning IT with strategy make things worse?
What decisions do organizations have to make?
How do you transform your architecture (and legacy systems)?
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The architecture of an organization is like the structure of a car
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Just like a car, an organization has a structure
Inside any organization is a base foundation of work processes and IT systems that processes thousands of daily transactions
Enterprise architecture is the organizing logic for the work processes and IT systems in an organization
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An organization’s architecture lets it execute some initiatives well but not others
Johnson & Johnson:• Over 200 operating units• $47B in annual revenues• Sales increases and double-digit earnings
increases every year for 20 years
J&J’s Management:• Autonomous management of each unit• Different systems and processes in each unit• Great local flexibility and fast response to
changing market needs
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Liverpool City Council’s Challenge
The Situation in 1999:• 9 silos of services, each grown organically over years• Information captured on paper many times, with each incident or
transaction creating many forms• 10 HR organizations, 5 IT groups, 2 different email protocols
The Result:• Call center could not answer more than 4% of calls• Revenues (tax collection) had backlog of 60,000 queries• Overall service quality 423rd out of 426 UK local authorities
SocialServicesRequest
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European Products Producer
Branded products producer:19 different country business units, each independently managed, with separate systems, processes, and staff
The Problems:• Slow to change• Expensive to run• Global customers took advantage
CustomerGroup 1
BU 1
CustomerGroup 2
BU 2
CustomerGroup 3
BU 3
CustomerGroup 19
BU 19
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Why don’t organizations have the right architecture?
ArchitecturalEntropy
M&A, or other strategic actions No Plan
Change in Environment
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How do architectures get designed?
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Corporate Networks &Infrastructure ServicesCorporate Networks &Infrastructure Services
Lack of standardization
Lack of integration
RedundancyData
Applications
Platforms
Without a plan, IT becomes project- and cost-focused, leading to a siloed architecture
Corporate Data
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Siloed architectures and a short-term cost focus lead to long-term cost increases
Time
Maintenance and Repair
NewCapability
IT Budget
63%
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Outline
What is architecture?
Why don’t organizations have the right architecture?
Why does aligning IT with strategy make things worse?
What decisions do organizations have to make?
How do you transform your architecture (and legacy systems)?
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StrategicInitiative
StrategicInitiative
StrategicInitiative
Organization Leadership
Organization FoundationCore work processes and IT Systems
How alignment should work
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
Senior managers define strategic priorities
Project teams identify and implement business changes and IT support
The resulting IT-supported processes help the organization achieve its strategic objectives
Drivesdirection
Buildsfoundation
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ABC Company strategy statement
“ABC Company aims to build and consolidate leadership positions in its
chosen markets, forging profitable growth opportunities by coordinating a strategic,
synthesized approach to achieve maximum returns for our stakeholders.”
Source: Adapted from Company, by Max Barry
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StrategicInitiative
StrategicInitiative
StrategicInitiative
Organization Leadership
Organization FoundationCore Business Processes and IT Systems
How alignment really works
Provides onlyvague direction
Reducesfutureagility
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
Strategic statements are often promises (“get closer to our customers”) or operational directives(“enter Chinese market”)
Strategy provides little information on long-term direction of organization
By the time IT finishes its work, the strategy has changed
The resulting IT legacy makes the organization less flexible in the future
Reducedflexibility
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Outline
What is architecture?
Why don’t organizations have the right architecture?
Why does aligning IT with strategy make things worse?
What decisions do organizations have to make?
How do you transform your architecture (and legacy systems)?
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Building capabilities
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Building capabilities
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To achieve greatness requires learning basic skills so well that they become second nature
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Managers need to focus on high-value activities, not routine everyday tasks
Collecting taxes,paying
benefits, delivering services
Answering calls,
processing payroll,
managing pensions
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In many organizations managers spend too much time on basic tasks – not focusing on higher-value activities
Understandingconstituent
needs
Collecting taxes,paying
benefits, delivering services
Answering calls,
processing payroll,
managing pensions
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Getting the architecture right for basic tasks gives you a platform for innovation
Developing innovative
new services
Understandingconstituent
needs
Collecting taxes,paying
benefits, delivering services
Answering calls,
processing payroll,
managing pensions
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To support your strategy, define your operating model
The operating model is your answer to two questions:1)What are the core activities in your organization?
o What activities do you want to perform repeatably, flawlessly, and efficiently?
o What activities did you perform yesterday, and will you perform today and tomorrow?
2)How standardized and integrated do they need to be?
The operating model:Focuses on the “sacred transactions” of the organization – the core activities that should be second natureProvides a stable view of the organization Is more useful for guiding IT efforts
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Standardization (without integration)
Business Unit 2
Business Unit 3
Customer Group B
Customer Group B
Customer Group C
Customer Group C
Examples: Marriott Hotels
Business Unit 1
Customer Group A
Customer Group A
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How much standardization do you need?(Or: how much standardization can you live with?)
Standardization:Simplifies operations, reduces costs, and increases efficiencyAllows measurement, comparison, and improvementCan accelerate innovation
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How much standardization do you need?(Or: how much standardization can you live with?)
Standardization:Simplifies operations, reduces costs, and increases efficiencyAllows measurement, comparison, and improvementCan accelerate innovation
BUT:Can limit local flexibilityMay require that local units replace perfectly good systems and processes with new standardsMay be politically difficult to implement
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The challenge of standardizing
Country Business Units
Performance
Performance of new standard
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Integration (without standardization)
Business Unit 1
Business Unit 2
Business Unit 3
CustomersCustomers
Examples: MetLife, Liverpool City Council
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How much integration do you need?(How much can you live with?)
Integration:Links efforts through shared dataProvides transparency across the organization, and the seamless flow of information across activitiesAllows an organization to present a single face to a customer, supplier, or partner
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How much integration do you need?(How much can you live with?)
Integration:Links efforts through shared dataProvides transparency across the organization, and the seamless flow of information across activitiesAllows an organization to present a single face to a customer, supplier, or partner
BUT:Requires common data definitionsCan be time-consuming and difficult to implementUnnecessary if units are organized around unique customer groups
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HighLow
Low
High
Business Process Standardization
Bus
ines
s P
roce
ss In
tegr
atio
n
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
Business Unit 2
Business Unit 3
Customer Group B
Customer Group B
Customer Group C
Customer Group C
Business Unit 1
Customer Group A
Customer Group A
All Business Units
CustomersCustomers
Business Unit 1
Business Unit 2
Business Unit 3
Customer Group B
Customer Group B
Customer Group C
Customer Group C
Customer Group A
Customer Group A
Business Unit 1
Business Unit 2
Business Unit 3
CustomersCustomers
Coordination Unification
Diversification Replication
The Operating Model
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HighLow
Low
High
Business Process Standardization
Bus
ines
s P
roce
ss In
tegr
atio
n
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
Where is your organization?
Process 1
Process 2
Process 3
Process 4Process 5
Process 6Process 7Process 8
Process 9
Process 10Process 11
Process 12Process 13
Process 14
Process 15
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HighLow
Low
High
Business Process Standardization
Bus
ines
s P
roce
ss In
tegr
atio
n
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
ING DIRECT
Business Unit 2
Business Unit 3
Customer Group B
Customer Group B
Customer Group C
Customer Group C
Business Unit 1
Customer Group A
Customer Group A
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ING DIRECT
Average Branch Bank cost: 250 bps
142123
96
59 49
250
0
50
100
150
200
250
300
1999 2000 2001 2002 2003 Branch
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2004
43
2005
ING DIRECT Operational Costs as Percent of Assets(Basis Points)
Simple products, mostly savings and simple loansNo current account, no cash, no ATMsNo bank branches: internet and call centers onlyCopy best practices between country business unitsShared IT architecture and applications
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ING DIRECT Architecture Description
Connectivity & IntegrationExternal Services
Customer Relationship Services Core Banking Services
Common Business Services
Channel Services
Self-Service:•Internet, MinTel,ATM, WAP, (WebTV)
Customer-Contact:•Call Center, IVR, E-mail, Direct Mail
IVR/CTIserver
Imagingserver
Gatewayserver
Webserver
E-mailserver
Transactions Customers Products Services
ContactHistory
CIF
ProductInfo
CRM
BankingEngine
MutualFunds Brokerage
CreditScore
ProspectFulfillment
StatementFulfillment Payment Checks Reports
local/HQ/Tax
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
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HighLow
Low
High
Business Process Standardization
Bus
ines
s P
roce
ss In
tegr
atio
n
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
Unification example: Delta Airlines
All Business Units
CustomersCustomers
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Delta’s Enterprise Architecture Requirements
Source: Adapted from Delta Air Lines documents – used with permission
BusinessReflexes
Employee RelationshipManagement
Delta Nervous System
Electronic Events
Nine core databases
Location Maint.ScheduleFlight
Equip. Employee Aircraft Customer Ticket
Clean/ServiceAircraft
UnloadAircraft
FlightArrival andCloseout
MonitorFlight
FlightDepartureand Closeout
Load Aircraft
Prepare for FlightDeparture
AllocateResources
BaggageInflightBoardingCrownRoom
TicketCounterSkycapTravel
AgentReservationsSkymilesSkylinks
Personalization Digital Relationships Loyalty Programs
Customer ExperienceCustomer Experience
Operational PipelineOperational Pipeline
Reservation Systems
PDAs
ScannersLaptops
EVENTS
PROFILE
Desktops
Cell Phones
Video
Voice
Pagers Gate Readers Kiosks Hand
Helds
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HighLow
Low
High
Business Process Standardization
Bus
ines
s P
roce
ss In
tegr
atio
n
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
Integration example: MetLife
Business Unit 1
Business Unit 2
Business Unit 3
CustomersCustomers
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Sign-on
Navigation
Search
SessionsSales Office Party
Management
Underwriter
ACO
RD X
ML Underwriting
& Issue
Business Rules
Service Recording
Producer
Customer
Partner Portals
ACORD XML
Security & Entitlements
ACORD JLife
Rates & Calcs
Licensing SuitabilityForms &
Requirements
Events Workflow
Product Admin
Operational Data Store
IntegrationHub
Application Presentation Tier Application Business Logic and Data Tier
Screen Entry & Validation
Call Center
ServiceProvider
Portal –Presentation Integration
Illustrations
Order Entry
Service
Claims
Marketing
Eligibility
Billing/Payment
Underwriting
MetLife’s Enterprise Architecture Requirements
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StrategicInitiative
StrategicInitiative
StrategicInitiative
Organization Leadership
Organization FoundationCore Business Processes and IT Systems
The problem with strategic alignment
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
Strategic statements are often promises (“get closer to our customers”) or operational directives (“enter Chinese market”)
Strategy provides little information on long-term direction of organization
By the time IT finishes its work, the strategy has changed
The resulting IT legacy makes the organization less flexible in the future
Provides onlyvague direction
Reducesfutureagility
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StrategicInitiative
StrategicInitiative
StrategicInitiative
Organization Leadership
Organization FoundationCore Business Processes and IT Systems
Architecture guarantees strategic alignment, and provides a foundation for innovation
Drivesdirection
Definessolutions Enterprise
Architecture
Operating Model
Updates architecture
Builds foundation
Definesbusiness
requirementsInnovation(“Happy
Surprises”)
Process integration &
standardizationrequirements
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Outline
What is architecture?
Why don’t organizations have the right architecture?
Why does aligning IT with strategy make things worse?
What decisions do organizations have to make?
How do you transform your architecture (and legacy systems)?
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Enterprise Architecture Maturity Stages
Enterprise Architecture is the organizing logic for work processes and IT systems in an organization
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
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Enterprise Architecture Maturity Stages
Business Silos
• Collection of separate departments/units rather than integrated enterprise
• Separate choices made for each product, function, and segment
• Investments based on project ROI
Enterprise Architecture is the organizing logic for work processes and IT systems in an organization
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
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Enterprise Architecture Maturity Stages
Business Silos
StandardizedTechnology
• Collection of separate departments/units rather than integrated enterprise
• Separate choices made for each product, function, and segment
• Investments based on project ROI
• Centralized standardization of technology platforms with exception management
• Business process and IT application decisions made locally
• Investments based on cost reduction
Enterprise Architecture is the organizing logic for work processes and IT systems in an organization
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
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Enterprise Architecture Maturity Stages
Business Silos
OptimizedCore
StandardizedTechnology
• Collection of separate departments/units rather than integrated enterprise
• Separate choices made for each product, function, and segment
• Investments based on project ROI
• Centralized standardization of technology platforms with exception management
• Business process and IT application decisions made locally
• Investments based on cost reduction
• Standardization/ integration of processes and data
• Separation of decisions about processes, applications, data, and infrastructure
• Business case made on performance
Enterprise Architecture is the organizing logic for work processes and IT systems in an organization
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
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Enterprise Architecture Maturity Stages
Business Silos
BusinessModularity
OptimizedCore
StandardizedTechnology
• Collection of separate departments/units rather than integrated enterprise
• Separate choices made for each product, function, and segment
• Investments based on project ROI
• Centralized standardization of technology platforms with exception management
• Business process and IT application decisions made locally
• Investments based on cost reduction
• Standardization/ integration of processes and data
• Separation of decisions about processes, applications, data, and infrastructure
• Business case made on performance
• Information and process interface standards defined
• Business process ownership defined
• Business case made on time to market, flexibility
Enterprise Architecture is the organizing logic for work processes and IT systems in an organization
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
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Enterprise Architecture Maturity Stages
Business Silos
BusinessModularity
OptimizedCore
StandardizedTechnology
• Collection of separate departments/units rather than integrated enterprise
• Separate choices made for each product, function, and segment
• Investments based on project ROI
• Centralized standardization of technology platforms with exception management
• Business process and IT application decisions made locally
• Investments based on cost reduction
• Standardization/ integration of processes and data
• Separation of decisions about processes, applications, data, and infrastructure
• Business case made on performance
• Information and process interface standards defined
• Business process ownership defined
• Business case made on time to market, flexibility
(12) (48) (34) (6)Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
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Key Findings
The transition from one stage to the next is difficult and time consuming.
Moving from one stage to the next requires a business transformation as well as a technical one
Companies that try to skip a stage are usually unsuccessful
Each stage involves a very different view of the value of IT and the role of IT in the organization
The leadership challenges are very different for each transition
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50%26%0%Percent of IT heads with second title:*
CEOCEOCEO or CFOReports to:
Ability to facilitate innovation off new platformDetailed knowledge of core business - could potentially run a business unit if necessaryAbility to delegate ownership of key process and data modules, while still ensuring adherence to standardsUnderstanding of strategic benefits of architecture
Detailed knowledge of how the organization functions Ability to manage large organizational change effortsCredibility with business unit or functional heads Ability to manage large central budgetUnderstanding of architecture as a business enabler
Technical knowledge to help with standards decisionsAbility to implement standard project methodology and oversightAbility to work with top management team to establish basic governanceAbility to make business case for standardization
Key Skills of the CIO:
Optimized Core/Business Modularity
Standardized Technology
Business SilosStage
* Percent of CIOs having second VP title, from sample of 26 CIOs in US and Europe
The role of the CIO changes as organizations move through the stages
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
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Management practices by stage
Business Silos
BusinessModularity
OptimizedCore
StandardizedTechnology
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
• Enterprise arch. core diagram
• Post-impl’nassessment
• Full-time enterprarchitecture team
• Process owners• Enterprise
architecture guiding principles
• Business leadership of project teams
• Senior executive oversight
• Architects on project teams
• IT steering committee
• Architecture exception process
• Centralized funding of enterprise applications
• Centralized standards team
• Business cases• Project
methodology
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The challenge of transformation
The business:• 19 different country business units, each independently
managed, with separate systems and processes• Business units sell approximately the same products
The challenge:• Slow to change• Expensive to run• Global customers taking advantage
CustomerGroup 1
BU 1
CustomerGroup 2
BU 2
CustomerGroup 3
BU 3
CustomerGroup 19
BU 19
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The challenge of transformation
The business:• 19 different country business units, each independently
managed, with separate systems and processes• Business units sell approximately the same products
The Solution:• Ripped out all systems in country BUs• Replaced with standard system, centrally designed and
controlled
CustomerGroup 1
CustomerGroup 2
CustomerGroup 3
CustomerGroup 19
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The challenge of transformation
GlobalAgility
Business Silos
BusinessModularity
OptimizedCore
StandardizedTechnology
LocalAgility
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
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0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
BusinessSilos
StandardizedTechnology
OptimizedCore
BusinessModularity
IT Responsiveness (1)
Strategic Business Impacts (2)
Architecture Stage
CIO
Rat
ing
(1) Development time.(2) Operational excellence, customer
intimacy, product leadership and strategic agility.
The benefits of architecture increase as organizations move through the stages
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
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0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
BusinessSilos
StandardizedTechnology
OptimizedCore
BusinessModularity
IT Responsiveness (1)
Strategic Business Impacts (2)
Managerial Satisfaction (3)
Architecture Stage
CIO
Rat
ing
(1) Development time.(2) Operational excellence, customer
intimacy, product leadership and strategic agility.
(3) Senior management and business unit management satisfaction.
The benefits of architecture increase as organizations move through the stages
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
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BusinessSilos
StandardizedTechnology
Optimized Core
IT Budget: 100% 85% 75%
36%
18%
11%
35%
25%
14%
40%
21%
16%
32%
17%
35%
Local Applications
Enterprise Systems
Data
Technical Infrastructure
IT budgets are corrected for industry differences. Application silo budget is the baseline. Budgets for other stages are represented as a percentage of the baseline budget. Only five firms in stage four reported their IT budgets so data is not reliable.
Shared IT Capability
Costs decline steadily as organizations move through the stages
Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006
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Summary
Enterprise architecture is the organizing logic for the foundation of your organization: your work processes and IT systems
In most organizations, architecture is hindering execution and preventing innovation
Defining your operating model is the first step in choosing the right architecture for your organization
Transforming architecture is a difficult, time-consuming process, but the benefits begin immediately