IBM Institute for Business Value Podcast

Transcription

1 IBM Institute for Business Value Podcast Component Business Modeling / Specialized Enterprise George Pohle and Shanker Ramamurthy - November 2005 POHLE: I'm George Pohle, global leader of the IBM Institute for Business Value, which is part of IBM's Business Consulting Services group. Today we're going to talk about two related topics: the first is the Specialized Enterprise; and the second is Component Business Modeling. I'm here today with Shanker Ramamurthy, who's a partner in IBM's financial services sector. Shanker leads the sector strategy and change consulting practice, and he's also the global leader of IBM's Component Business Modeling initiative. Shanker, thanks for joining me today. RAMAMURTHY: It's a pleasure to be here. POHLE: So what's the basic concept behind the Component Business Model? RAMAMURTHY: Component Business Modeling is a way of helping our clients recognize that a business is actually made up of a set of business building blocks, and that in reality what they can do is they can mix and match those business building blocks to really achieve three competing objectives that they're always grappling with: how do I achieve efficiency, how do I attain growth and differentiation? And perhaps more importantly, how do I ensure the resiliency and flexibility of my business model as I grapple with all the change that comes in the global economy of today? POHLE: Okay. How would you describe a component, or could you give us an example of what a component would look like? RAMAMURTHY: Sure. The simplest way to think about a component is as a set of capability that has ownership for the people, process and technology elements around a particular area of the business. ibm.com/bcs 1

2 And the interfaces between that and the rest of the business is neatly articulated. And from an implementation standpoint we talk in terms of services. What are the services that this building block can provide, and what are the services that it consumes, so that people have a sense for how they can use that building block to achieve the business objectives they set out to achieve. As an example, think of rewards management. In the credit card business rewards management has become a really hot capability for differentiation. Now, today, rewards capability tends to be embedded within very specific processes and has technology very specifically aligned for rewards. Now, if we are able to step back and look at rewards as a business component and we're able to model it from a people, process and technology standpoint as a standalone business building block, suddenly you have extracted this capability and created it in a way that enables a range of enterprises to be able to use this capability in interesting new ways. So rewards and credit cards is perhaps no different from frequent flyer miles in an airline context or other capabilities that retailers and other companies might have in order to bring customer intimacy to bear at the time of a transaction or when they're launching campaigns. So if we are able to reconstruct rewards as a building block, suddenly not only can we use it within the boundaries of a financial services enterprise, but increasingly across industries to unlock extraordinary value by mixing and matching this capability into existing and new processes in fundamentally new ways. POHLE: So if you're an executive in a large corporation, you can think very differently about the structure of your business and how it is you want to position yourself in the marketplace. But when would you actually use a Component Business Model as opposed to another approach? RAMAMURTHY: Component Business Modeling is a technique that's useful when you want to look at the big picture. Effectively what we're looking to do here is to enable executives to understand how to step back from the complexity that mires their day-to-day world, or at least have a mental model for what the building blocks of a business are. And so when is it important to understand that there are only a small number of building blocks that make up an enterprise when you want to step back and dramatically simplify the business, or when you want to bring to bear the breadth of resources of the enterprise on the small number of things that are absolutely critical for value creation. ibm.com/bcs 2

3 POHLE: Can you give us a couple of examples of companies who've successfully used the Component Business Modeling concept? RAMAMURTHY: Sure. IBM has been working over the last two, three years with a range of Fortune 2,000 clients helping them rethink their business model around these component frameworks. We've done about 150 projects with the Fortune 2,000 in the last 18 months or so. If I look at financial services where we have done an extensive amount of work using Component Business Modeling, clients like Bank of America, Kumin Bank in Korea, SEB in Europe spring to mind. With each of them we have addressed significant problems they've had using the CBM framework. Outside of financial services clients like International Truck & Engine Corporation come to mind. We've used these techniques to work with retailers, with large government enterprises, with public sector companies, with telecommunications enterprises. The beauty of Component Business Modeling is that it enables us to solve a pretty broad range of problems against an extensive set of industries. POHLE: Okay. We've talked a lot about Component Business Modeling, but you've also released a paper that describes what you call a Specialized Enterprise. How does Component Business Modeling relate to the concept of a specialized enterprise? RAMAMURTHY: So if we think of what Specialized Enterprise is about and what that paper is articulating, what it's talking to, it is talking to the fact that virtually every industry is going through an evolution, a change. And every industry is deconstructing in one way or another. What do we mean by that? If we go back 40, 50 years, most industries and most enterprise models tended to be vertically integrated. So if we look at, say, the automobile industry of 50 years ago, Ford Motor Company's famous for having bought rubber plantations in Brazil, to plant rubber trees, to tap rubber, to go to the tire, to go to the subassemblies that finally goes into the manufacturing of a car and then selling of a car. And Ford is famous for saying, my clients can have any colored car as long as it's black. And the whole notion is about getting extraordinary scale vertical integration. Now, increasingly as the global economy has matured and the industry value chains have matured they have deconstructed. So the automobile industry today is made up of subassembly manufacturers, spare part providers, distributors, assemblers, brand owners, et cetera. ibm.com/bcs 3

4 And every industry is going through that kind of change and evolution. If you look at financial services, if I look at the mortgage industry. The mortgage industry is no longer a vertically integrated business. Today, in America, the mortgage industry is broken into people who focus purely on origination -- the mortgage brokers, if you may. POHLE: Right. RAMAMURTHY: There are people who focus purely on servicing mortgages. A lot of financial institutions actually consolidate and then sell the mortgages that they might be originating. And so it's a bunch of players who focus on credit risk management, and then there are people who focus on interest rate risk management. So that whole industry is deconstructed. The interesting point here is that as an industry deconstructs the profit pools in an industry tends to migrate. POHLE: Okay. RAMAMURTHY: And what we are seeing is, it's not the first mover who necessarily creates value, but the one who recognizes where the profit pools is likely to migrate to. And the ones who will take a proactive position as the industry deconstructs are the ones who are seemingly creating disproportionate shareholder value -- what economists call economic rents. POHLE: So it's then up to the management team of the business to really define what parts of their business or what components of their business they want to be the specialists in. RAMAMURTHY: Absolutely. To recognize where the industry is going and then to take a proactive position in figuring out where profit pools are migrating to, the whole, what are the products and services that they should offer, what are the customers and markets they need to go after... Let me give you a couple of examples of some interesting companies who have recognized this and who have created disproportionate value in the last couple, three decades. Financial services, Fair Isaac's springs to mind. Now, here is a company that is at the heart of credit decisioning of every credit card company in North America and increasingly around the globe. And they're extending their footprint into other industries as well. ibm.com/bcs 4

5 Fair Isaac's have produced a scoring capability called the FICO score which is at the heart of credit decisioning for card companies and increasingly insurance companies in the way they do underwriting. Now, think about this. Here is a non-financial services company that established a capability that's at the heart of what a financial institution or an insurance company might be all about: about managing risk, about credit decisioning. POHLE: Right. RAMAMURTHY: Now, is it going to be easy for somebody to replicate what Fair Isaac's have done in that space? Absolutely not. And so they're able to create disproportionate economic rents for having occupied that space. Microsoft did the same in the operating system space around PCs, and they've been able to get economic rents that come from that. A whole bunch of companies are recognizing this trend, and where Specialized Enterprises and Component Business Modeling come together is when enterprises figure out they need to specialize. Now, you can do specialization without componentization by using process based techniques, but extraordinary power comes when you bring these two techniques together. Recognize that in order to succeed in a deconstructing global economy, you can't be everything to everybody and you've got to figure out what battles you're going to fight and what positions you're going to take in order to ensure that you maximize the economic value for your shareholders from the migrating profit pools... And then saying, now that I recognize this, how do I rethink my people, process, technology and organizational capability so that I'm only focused on the small number of things I need to in order to extract economic value. That's where componentization as a technique enables enterprises to become specialized. POHLE: Right. And so what do you do if you've decided that one component of your business is not something you need to be specialized in? RAMAMURTHY: Once you figure out that specialization means figuring out where to focus by implication then you want to disproportionately focus management attention on the small number of building blocks that are at the heart of value creation. The classic curator role, which means, typically, 20 percent of your building blocks represent about 80 percent of the value both today; perhaps equally importantly for the future. ibm.com/bcs 5

6 And then the question is, what do I do with the rest? How do I reshape my enterprise so that I'm not dissipating my energies and attention on the balance of the 80 percent of the building blocks, which I need to keep commerce going, which I need to make things happen for my company. POHLE: Sure. RAMAMURTHY: And that's where you look at the ecosystem and you say, how can I work with strategic partners and how can I ensure that these capabilities are able to be provided without taxing my enterprise resources? POHLE: Okay. RAMAMURTHY: And that could mean outsourcing, transformation, offshoring, globalization, strategic partnerships. But we've also seen clients suddenly recognize interestingly when we use the CBM approach around specialization, that some building blocks that tended to be cost focused where they were best in class could actually be turned into an asset that produces revenue. So we've seen some interesting model shifts as well as clients have recognized that something that they have within their enterprise that is best in class, which is today hidden as an operational capability can tomorrow be used to unlock economic value and create revenue. POHLE: So why does this concept come to mind now? Why did you write this paper, you know, in today's context you describe the fact that you know, 50 years ago companies were highly vertically integrated. What's changed in the past 50, 30, 20 years to change some of the dynamics here? RAMAMURTHY: Many of the trends that have...that have precipitated the need for specialization have been around for several years. The increased globalization of commerce, the increased regulatory focus across the globe, the extraordinary advances in technology and digitization and globalization and standardization. All these things are coming together in a way that's making it increasingly difficult for enterprises to create value in a business as usual model. And everybody's looking for these competing objectives of, how do I achieve scale without complexity and achieve efficiency? How do I achieve growth and differentiation quickly and rapidly by bringing new products to market? And equally importantly, how do I ensure that my overall business model is resilient and flexible in reacting to market opportunity and competitive threats. ibm.com/bcs 6

7 Traditional techniques work at a project level, perhaps at a program level. But at an enterprise level traditional techniques have actually ended up forcing our clients' businesses to become more complex. And you can see that in the economic returns. Many of the studies we have done as IBM show that actually as enterprises become large there is not much of a correlation between size and scale and return on equity -- contrary to what one might expect. POHLE: Sure. RAMAMURTHY: And so our clients are now forced to look, step back and say, you know, is doing more of the same going to get me to where I need to get to? And our sense is, you've got to continue to do the things you are doing, but equally there is value in stepping back and looking at the whole business model. And our work shows that by looking at the business model and using a component framework as you react to the specialized nature of the global economy that you can create disproportionate economic value for the shareholders. POHLE: So what kinds of economic returns are you seeing here? I mean, how would you kind of measure the impact that the Specialized Enterprise concept and/or Component Business Modeling has on an organization? RAMAMURTHY: Sure. The notion of Specialized Enterprise, by the way, is something that is being espoused not just by us as IBM BCS, but by a number of the CEOs of some of our largest clients and the Fortune 100 enterprises around the world. So, executives of companies like P&G have been in the public domain talking about the need for specialization. Bharti Telecom in India is an interesting example of Specialized Enterprise that's grown virtually exponentially in the telecommunications space by moving forward with the whole Specialized Enterprise model. When we have done work using componentization by helping our clients rethink their business model, we have often found that we are able to help increase their profitability potential by anywhere from 15 to 30 percent, which is a rather significant impact. In fact, I was with the executive vice president and chief operations officer and CIO of a large Canadian bank recently who's been using Component Business Modeling to help rethink their entire back office capability across all their lines of business and products. ibm.com/bcs 7

8 And what he and his operations executive was mentioning to us is that they have been using traditional regulating techniques. They'd been using six sigma and lean sigma techniques, and they'd been...they'll continue to use those techniques, but we've been helping them with the CBM approach, and his point was, was that CBM was able to help give them an incremental 15 to 25 percent increased efficiency over and above his traditional techniques... POHLE: Wow. RAMAMURTHY: Which, if you think about, you know, the implications for a large financial institution, can be substantive. POHLE: So, thanks very much for your time today, Shanker. It's been great learning a little bit more about the Specialized Enterprise and CBM. RAMAMURTHY: Thanks a lot, George. Copyright 2005 IBM Corporation. All rights reserved. IBM and the IBM logo are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. Other company, product and service names may be trademarks or service marks of others. References in this publication to IBM products and services do not imply that IBM intends to make them available in all countries in which IBM operates. ibm.com/bcs 8