Complex and proprietary ERP systems symbolize the final evolution of “Old IT”. They are the embodiment of a frame of mind that is inherent in the culture of the industrial economy and its great invention – the assembly line. That mindset attempts to organize every activity down to the lowest levels of detail. It makes rules and regulations for everything and then tries to run each activity over and over, faster and faster without changing anything. This is how you get greater and greater productivity at lower and lower costs; this is what we call efficiency. But this model is breaking down.
The assembly line model requires things to stay the same long enough to churn out large quantities of predefined products and services. It is the best way to deliver masses of standard products and services at the lowest cost. But what happens when people no longer want standard products and services? What happens when product life cycles are measured in months instead of years?
The global scale of our economy and the fast pace of events now overwhelms the assembly line operating model. We wind up spending too much time organizing work, writing out rules and procedures and putting systems and facilities in place. Then the world changes in unpredictable and uncontrollable ways and our best-laid plans don’t work out because they become so quickly irrelevant.
Responsiveness Trumps Efficiency
In a high-change environments like our global economy, responsiveness trumps efficiency. It is more important to sense and respond quickly and effectively than it is to operate at the lowest possible cost. Operating costs have to be “in the ball park” but not necessarily lower than your competitors in order to win business and be profitable. In high change environments, companies optimized for efficiency actually deliver the worst performance because they have no flexibility – no way to respond quickly to unexpected developments.
The ERP promise to deliver ultimate efficiency and control over enterprise operations is an illusion because the functions, the boundaries and the products of the enterprise itself continue to change so profoundly (outsourcing, restructuring, mergers, downsizing, etc.). Unless we expect the world to slow down and become a whole lot more predictable, we need to start using a different approach to the way we organize and enable work. And we need to support this approach with “New IT” methods and strategies.
I saw proof of this first hand. I recently completed a six year term as CIO of a multi-billion dollar national distribution cooperative. While there, I used “New IT” methods to run rings around two much larger (and richer) corporate competitors who used “Old IT” methods to compete with us. Being a cooperative, the organization was made up of and owned by its 76 member companies. Each member company has its own people, systems, facilities and customers. Often they even compete against each other on a local level. But we all worked together to sell to and serve big national account customers that wanted a single supplier to cover all their locations from coast to coast.
We could not hope to compete with our two big competitors on price alone because we could not hope to be as efficient as they aspired to be. As a co-op we had a built in duplication of people, systems and facilities that could not be eliminated. So instead, we got innovative and responsive. I built systems that let us offer a whole range of supply chain services that we could mix, match and customize to respond to each customer’s needs. And we bundled these services with the physical products we sold. The total cost of use for our bundle of products and services was actually lower for the customer even though they often paid us product prices that were a few percentage points higher.
Strategy for Responsiveness Using SOA and BPM
While my counterparts in those two corporate behemoths struggled to install complex, expensive, and rigid ERP systems that never actually did deliver on their promise of ultimate efficiency, I did something entirely different. Instead of trying to standardize on a single ERP system, I built a simple and robust Internet based data transport system that electronically connected the different existing ERP systems of the member companies. This system allowed all members to electronically exchange data such as purchase orders, invoices and advance ship notices between their different systems and the systems of our customers and suppliers.
Then I built a central data warehouse that connected to the data transport system and collected transaction data as a by-product of daily operations. Using a business intelligence system (BI), members, customers and suppliers could access this data over the Internet so everyone could see what was going on. Customers doing business with us could get all the purchasing and usage reports they needed to plan and budget their procurement operations. Yes, they did use this data against us in price negotiations. But the data also showed we really did lower their total cost of use so we still got a few percentage points extra because customers saw the value we provided.
Then I interfaced a business process management system (BPM) to the data transport system and data warehouse. It monitored system operations and data transactions and alerted people when operations drifted outside of predefined parameters or when transactions contained data that was not correct. It automated routine operations and enabled people to focus their attention on exception handling and fixing the root cause of errors. This was powerful. It enabled us to be very responsive to customers and changing conditions. I spent less than one tenth of what my competitors spent on their balky, cumbersome, dysfunctional ERP systems.
My strategy, simply put, was to leverage the existing installed IT base by building new systems composed of elements of existing systems coupled with small chunks of new code and best of breed software that focused on specific new functional needs. This is services oriented architecture (SOA) used to quickly and cost effectively build out a whole new enterprise architecture in phases as business needs dictate.
Then, by adding the BPM system, I created an easily changeable business logic layer that monitored and regulated the actions of the SOA based data transport system. Now I had an IT infrastructure flexible enough to keep up with the changes that were happening and are still happening in the wholesale distribution business.
This is the “New IT” foundation that supported the growth of revenue from $6 billion to $8 billion over five years. In particular, it enabled our business with big national account customers to go from $250 million to over $600 million. And those systems are now driving the business toward its goal of again doubling national account sales. The systems I put in place are cheap, stable, and easy to enhance. They also scale like crazy because they are so simple.
This is the power of “New IT”. This is what the future of enterprise IT looks like.
