Out of the Box
Strategies for Achieving Profits Today and Growth Tomorrow through Web Services
- John Hagel III
Foreword by John Seely Brown

"Out of the Box is a thoughtful examination of how Web services can provide real agility and help leaders in any business realize their company's true potential."
- Steve Ballmer, CEO, Microsoft
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Executives are understandably skeptical of any grand promises made about the potential of technologies. In the 1990s, companies poured billions of dollars into massive ERP systems and Internet platforms with little to show for their investment. At the same time that their companies are built out to the walls with complex, inflexible, and even outdated technologies that don't deliver business value, they are charged with the enormously stressful and difficult task of simultaneously cutting costs and spurring growth. Managers everywhere are feeling trapped by their technology.

In the new book Out of the Box, business strategist and bestselling author John Hagel III explains how a new generation of technology-Web services-can give executives what they are desperate for: the ability to deliver operating cost and asset savings to the bottom line quickly and with modest investment. Web services-which automate connections across applications and data-offer a refreshing alternative approach to IT that is far more flexible than traditional approaches. Drawing from the experiences of pioneering adopters, Hagel shows how Web services will enable companies of all sizes to:

  • Realize bottom-line savings quickly and with modest investment
  • Leverage investments in existing applications and create more flexibility
  • Target specific areas for near-term cost reductions
  • Establish - or leave - business relationships fluidly and inexpensively
  • Create leveraged growth platforms for long-term competitiveness

According to Hagel, the pragmatism of this approach, devoid of "change the world" promises, will help drive Web services adoption. Out of the Box provides a clear view of the business implications of Web services: its distinct capabilities, its power to deliver near-term profits, and its potential to drive long-term growth. As it discusses Web services, the book provides deep insights into business strategy. At its core, this book tackles the most fundamental business issue facing managers today: how to continue to create value as competition intensifies. It also outlines innovative approaches to business process management and organization. In the end, Web services provide a catalyst to help managers break out of the organizational, structural, and mental "boxes" that have to date prevented organizations from achieving higher levels of performance.

As with Hagel's previous books, Net Gain and Net Worth, Out of the Box is a landmark book helping senior executives understand the business and economic impact of new technology. Indeed, as John Seely Brown writes in his foreword, the potential impact of Web services is so profound, they may well "hold the key to our next wave of economic growth."


Praise for Out of the Box
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"Out of the Box provides a practical road map to the information age. In the never ending chase of 'better, faster, and cheaper' business models, Hagel has written in simple English a guide to how Web services can enable businesses to leverage their existing technology while incrementally implementing new and more flexible business models. This is a must-read for any executive who expects to compete in the information age."
- Bill Coleman, Founder, Chairman, and Chief Strategy Officer, BEA Systems

"John Hagel has done it again with another compelling look at the role of technology in today's turbulent business arena. Out of the Box should be on every leader's desk. Your business and your customers will thank you for it."
- Raymond Lane, General Partner, Kleiner Perkins Caufield & Byers

"Through simple, straightforward steps, Out of the Box deftly shows how Web services can lead to important increases in a corporation's profitability and performance. Easy to read, easy to understand, and action oriented, this book should be read by any manager wanting to get-and stay-ahead of the competition. John Hagel is one of the clearest thinking and straightest talking analysts in the United States today."
- Richard N. Foster, Director, McKinsey & Company

"Web services has the potential to be as fundamental in driving the transformation of the technology landscape as IP networks and HTML were in the '90s. Hagel has always been at the forefront of each major paradigm shift, and now has done a great job in outlining a new roadmap for business and technology leaders to follow to leverage the opportunities Web services afford us."
- John McKinley, Chief Technology Officer, Merrill Lynch

"Hagel effectively answers the 'So What?' question about Web services and its impact on business. Out of the Box is an excellent strategy guide for understanding the next "big wave" of productivity and business functionality improvement and should be required reading for every manager."
- Tony Scott, Chief Technology Officer, IS&S, General Motors

"A refreshing change from the scores of 'how to' books on technology topics. Out of the Box casts the next generation of software technologies in exactly the right context for today's focus on execution and business results. His concepts are clear and insightful, and provide valuable tools for business and technology leaders."
- Mark Tolliver, Executive Vice President and Chief Strategy Officer, Sun Microsystems

"Enduring, value-creating change comes when innovators stop developing complex solutions to complex problems, and instead find ways to simplify the problems. This book describes how the disruptive technology of web services is poised to simplify and transform the information technology industry."
- Clayton M. Christensen, Robert and Jane Cizik Professor of Business Administration, Harvard Business School


Interview with the Author: John Hagel III
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Explain how companies have traditionally approached IT and how a Web services approach differs.
Until now, companies have viewed their information systems as proprietary. They bought or leased their own hardware, wrote or licensed their own applications, and hired big staffs to keep everything up and running. After years of piecemeal technology purchases that often required massive investments, companies have ended up with a mishmash of disparate systems spread throughout different units. Over the last decade, in efforts to merge these "data silos," many companies have invested large amounts of money in massively complex enterprise resource planning systems. The ERP systems have solved some problems, and created others because their inflexibility tends to lock companies into rigid business processes that make it difficult to adapt quickly to changes in the marketplace and make strategic restructurings like acquisitions, divestitures, and partnerships difficult to pull off.

Constructed on Internet-based technologies, a Web services architecture is open rather than proprietary and offers clear advantages over its predecessor. First, it can be implemented incrementally in small slices to deliver business benefits quickly. Second, it leverages existing technology investment, rather than requiring companies to rip out existing platforms. Third, it creates much more flexibility in connections across applications so that businesses can change their operations - and business partners - much more readily than they could before. Finally, it is much more effective in dealing with the inevitable complexity confronted when enterprises try to automate connections with many business partners, each operating on their own technology platforms and possessing varying degrees of technology expertise.

Where should companies adopt Web services first?
Look for major operating inefficiencies in business processes. Early adoption tends to concentrate at the edge of the enterprise, where business processes need to interact with many other enterprises and managers are most likely to encounter a bewildering variety of incompatible technology platforms operating across their business partners. It is exactly here, in functions like sales and procurement, that the limitations of existing technologies are most evident and onerous. It is also here that businesses can achieve significant near-term operating savings by tackling the inefficiencies in business processes spanning multiple enterprises. But the edge is only the entry point. The business needs are so compelling and the advantages of the architecture so clear that managers will inevitably expand the reach of this architecture to all corners of the enterprise.

You say that the early adoption of Web services will be driven by the opportunity for cost and asset savings. What are the other economic benefits?
In delivering near-term operating savings, Web services technology creates the potential for much greater flexibility and collaboration in business operations. Managers who understand this will use the architecture first to focus the enterprise more tightly, because they can now achieve more visibility into the operations of business partners who can provide world-class capabilities in complementary areas. They will then move aggressively to substantially accelerate business growth. Even better, they will be able to grow rapidly by mobilizing assets owned by other enterprises, delivering more value to their customers with modest asset commitments of their own. This leveraged growth opportunity is the real economic prize offered by this next generation of technology.

You clearly emphasize that technology is only a catalyst and enabler. Beyond possessing the technology, what must companies do to realize the benefits of Web services?
The early stages of benefits can be realized with only minor changes in business practices - most of the impact is through automation of existing connections. But to truly exploit the full potential of the technology, businesses will need to change how they operate. Over the years, the business world has built up massive organizational infrastructures and management practices based on the assumption that businesses do not have a lot of flexibility. These practices will need to be systematically broken apart and rebuilt if Web services technology is to deliver more value. In particular, companies will also need to develop new approaches to managing relationships across enterprises - establishing and deepening trust, using appropriate incentives to motivate action and more quickly establishing shared meaning so companies can communicate without misunderstanding. Organizations will need to change as well to implement these new management practices - new structures put into place, new skills developed and new performance measurement and reward systems designed.

Business process management is one area that you say can benefit from restructuring. How so?
Managers have an opportunity to apply a very different approach to the management of business processes, especially as these processes span multiple enterprises. The orchestration of process networks offers a much more flexible way of managing business processes. Traditional approaches require a process manager within the company to tightly manage the activities of participants within the business process who are also within the company.

Process networks are expanding groups of companies organized by an orchestrator across multiple levels of activity in a business process. These loosely coupled business processes make it easier to tailor a business process to the needs of specific products, customers, or transactions. But that is only the beginning. The real power of this orchestration approach will be to foster opportunities for specialization and rapid performance improvement among the participants. To exploit this potential, managers will need to develop a different focus on business processes, understanding that the processes do not begin and end at the boundaries of the enterprise, but instead reach out to encompass and mobilize a very diverse set of enterprises.

You also discuss a significant restructuring of the enterprise itself-what you refer to as "unbundling" the enterprise-which will accompany the development of process networks. Explain.
Process networks are emerging around three core business processes: customer relationship management, supply-chain management, and product innovation and commercialization. These core business processes are tightly bundled together in most companies today. Even those that consider themselves highly focused, are really an unnatural bundle of these three very different kinds of businesses that are driven by different economics, thrive on different cultures, and require different skill sets. They've been bundled together in large part because of the difficulties in establishing flexible connections across enterprises. In keeping these different businesses bundled together, most companies significantly compromise the performance of all three. For example, customers may prefer something else, but the company still tries to get them to buy its products, which undermines the trust required for a customer relationship business.

We've already begun to see some unbundling, but Web services will significantly accelerate this trend.
Web services will give managers much greater ability to focus on one of these three businesses while increasingly relying on other enterprises that focus on the other two types of businesses. Not only will they be able to focus tightly, but as competitive pressures intensify, they will have to do so to deliver world-class performance to their customers. Although this might appear to be a case for shrinking the enterprise, the opposite is the case. It creates a new, more focused platform for significant growth. Significant economic value will be created as companies rebundle into larger, more focused enterprises following the earlier stage of unbundling.

You say that the ultimate economic prize is the opportunity to pursue leveraged growth strategies. What do you mean by leveraged growth?
Leveraged growth refers to the ability to access and mobilize assets of other companies to add more value to your customers. This is not about financial leverage in the sense of piling on debt to pay for assets. It is certainly not about eliminating all assets and creating a "virtual" corporation. It is about building trust and creatively structuring economic incentives to establish "win-win" relationships motivating other companies to provide access to their assets. An early example of a company pursuing a sophisticated leveraged growth strategy is Li & Fung, an orchestrator of global process networks in the apparel and other consumer goods industries.

Part of the challenge for managers pursuing leveraged growth strategies is to determine what assets they must own in order to create appropriate incentives for business partners. Other challenges include the complexity created by a broad set of business relationships spanning across diverse enterprises and the need for flexibility to change these relationships as customer needs and market conditions change. In the past, information technology made it difficult to pursue leveraged growth strategies - it was simply too expensive and inflexible to help build the kinds of business relationships required. Web services offer the potential to change that - their capabilities are precisely tailored for the needs of leveraged growth.




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