plug and play towards a component-based business

---

background

We are in the Middle Ages. System engineers try to capture The Business Requirements, to which they can develop an ageless Solution. Vendors and users quibble about the magical powers of one or other Device. Businessmen and investors try to build a permanent position of Competitive Advantage or Profit, from which they can be safe from the dragons of Uncertainty and Risk. And customers dream of Frustrations finally Alleviated, Demands Satisfied at last.

Everyone acknowledges that the landscape for business and IT has changed. Many people admit that the rules of the game have changed. But most practitioners continue to set themselves the same old tasks, attempt to erect the same old defences against the same old monsters.

The traditional goals are increasingly meaningless. What good are Efficiency or Control or Integration, if you’ve sacrificed Flexibility? How important is Certainty or even Identity, in a fluid world where "stationary" apparently means "stagnant"? What Trust can be invested in business relationships and software artefacts? We still need people who are successful at delivering projects and developing solutions, but more than ever we need people who are aware of the new forces, and who can play a new fast-moving game

This book doesn’t equip you with an alternative suit of armour, magic weapons, a new way of constructing castles in the air. It tries to help you improve how you think through the practical difficulties and opportunities of what’s really going on in the forest.

And remember: we’re still in the Middle Ages. The forest is still full of knights lumbering about with lances. At some point you may decide to discard your own lance altogether – but you might need it for a little while longer. Don’t suddenly stop doing things in the old ways – the old ways are often convenient, sometimes even necessary – but you may start loosening your attachment to them. And if your competitors are still firmly attached to the old ways, it should be easy to get the better of them, by paying attention to some of the things they are overlooking.
 

what is component-based business?

Is this new? No, of course not. But what is new is the way it’s done, and the speed. Thanks to the plug-and-play approach, a new business can be rapidly assembled as a loosely coupled set of partnerships and services, with a complex business process spanning many organizations. These business structures (and the software and services that support them) evolve in complex ways, beyond the control of any single player. Even a substantial company can now be viewed as a component of a much larger system, rather than as a self-contained business operation, and this has huge implications for planning and managing at all levels.

From vertical integration to deintegration.

But by the end of the twentieth century, it became apparent that the strategy of vertical integration was vulnerable to a radically different strategy: value chain specialization. IBM’s dominant position in the computer industry was challenged, and then overtaken, by such firms as Microsoft and Intel, which focused on specific steps in the computing value chain. In his book on Profit Patterns, Adrian Slywotzky cites this as an example of what he calls the "Deintegration" pattern, and estimates the value released at $600 billion.

In the past, thin slices of the value chain were often overlooked by the big players, and were left as niches for small companies to occupy. Today’s business dynamics can catapult a niche player into the major league almost overnight. This is particularly evident in telecommunications, where a combination of deregulation and technological change has created many opportunities for high value specialization.

Management trends.

In some respects, component-based business is merely the logical extension of outsourcing. In traditional outsourcing, a firm contracts out some well-defined support processes (such as IT, property services or logistics), allowing it to focus on the primary value-adding or customer-facing processes. The benefits and dangers of outsourcing have been well rehearsed in the management literature, and I’m not going to repeat them here. Component-based business goes a step further than outsourcing, since it typically involves partitioning the primary value-adding process between two or more independent partners. This raises critical issues about ownership of (and access to) a series of intangible assets such as customers, brands, data and knowledge. Component-based business often also takes on some elements of franchising, where the partners are jointly exploiting some brand or other assets.

If a complex business is unbundled into separate components, or if a new enterprise is configured from separate components, each component can be easier to manage. Unbundling also provides greater transparency to outsiders, including investors and regulators. When large conglomerates are demerged, the separate parts can turn out to be worth more (in market capitalization) than the whole, reflecting a perceived net benefit either to the firms themselves or to their investors.

Technology trends.

First and foremost, there is the Internet, which provides new methods of interconnecting separate firms with each other and with their customers. Such jargon as e-this or e-that, B2C, B2B, or even B2B2B have been scattered across the media. To the extent that these technologies drive down the transaction costs for connecting business processes across organizational boundaries, they make the traditional hierarchical organization much less attractive from an economic point of view.

Alongside the growth of the Internet, there has been a parallel, although less hyped, growth in Computer-Supported Cooperative Work (CSCW). There has been an explosion of tools and methods aimed at supporting cooperation between workers separated by geography, culture or organizational allegiance. CSCW allows a complex task or process or workflow to be carried out by a virtual organization or team, and is an important technological prerequisite for some aspects of component-based business. Sometimes workflow tools are seen as liberating, apparently providing support for self-governing teams; but sometimes the same tools are used to exert greater management control over a complex business process.

Thirdly, we should mention Component-Based Software Engineering (CBSE). (People who restrict their thinking to software, or who cannot imagine developing anything other than software, refer to this as Component-Based Development.) This is a method for the construction of large flexible software systems from kits of standard, reusable software components. These components are often distributed across multiple platforms, and may be owned and operated by separate commercial entities. As the software components themselves increasingly become standard commodities, we can see software suppliers moving up the service supply chain, in many cases offering a full range of business services rather than simply selling lumps of software, and becoming active participants in a range of business ventures. The traditional split between business and IT isn’t going to go away altogether, but it’s getting much more complicated.

Assessing the overall significance of these trends is difficult. Is the Internet going to trigger a revolutionary transformation in society; is it a revolutionary technology equivalent to or greater than the mechanical clock, crop rotation, railways or electricity? Will workflow tools turn out to be a force for liberation or constraint? Will Component-Based Software Engineering gradually or suddenly replace other forms of software engineering? We can leave these questions to future historians. For our purposes, it is enough to note the existence of these trends, and their impact on component-based business.

Plug-and-play.

What is involved in plugging businesses together? You might need to negotiate a business relationship between two or more legal entities, involving service levels, ownership of customers and intellectual property, as well as specifying the distribution of costs, benefits and risks. This could take anything from months (if the legal department gets involved) to micro-seconds (if the relationship can be based on standard protocols implemented by an electronic broker).

Plugging business components together usually involves, among other things, plugging together the computer systems on both sides. If the computer systems were already built to accommodate such relationships, this would be practically instantaneous, once the legal departments on both sides had done their stuff. In practice this is rarely the case, and the IT departments often delay things even more than the legal departments.

Notwithstanding the impatience of the typical businessman, the IT and legal departments are both essential to the success of component-based business. The role of the lawyers is to anticipate the ways in which the relationship might need to be unplugged. Putting the worst case into the contract might sometimes be a way to make sure it doesn’t happen, or it may sometimes be a way of ensuring that there is a clean and efficient way of terminating something that isn’t working.

In most cases nowadays, plugging the computer systems together is an obvious precondition for a successful joint operation. But if this task is difficult, it will often divert attention and resources from "softer" preconditions, such as getting the people and the human systems to work effectively together.

who is doing component-based business?

Example: bank and supermarket.

If we look at this from the perspective of the supermarket, we can think of it as plugging a "bank-in-a-box" into the supermarket’s operations. If all goes well, the supermarket can achieve a kind of virtual diversification at high speed, low cost and low risk.

The bank may be providing a similar set of services to firms in other industries as well, and this can become one of the bank’s standard offerings. As the banking services to the end-customers may become a standard commodity, the relationship to the joint venture partners becomes a well-understood and easily repeatable service. This may reduce still further the time and expenditure needed to establish another new joint venture.

From the perspective of the bank, the supermarket provides access to a further set of customers and some new distribution channels, under a different brand name. Indeed, some financial institutions will wish to concentrate business strategy on developing third party distribution channels, and may even pull out altogether from direct relationships with end-customers. For example, an insurance company may become a "manufacturer", concentrating on product development and underwriting, and leaving "distribution", including sales and marketing, to other organizations.

But these joint ventures can bring further benefits. One leading UK bank, the Royal Bank of Scotland, is currently involved in three separate joint ventures: with Tesco (supermarket), Virgin (multiple sectors), and Scottish Power (utility). Each of these four organizations has a different corporate culture, and a different view on customers and their needs. This diversity has proved to be a valuable source of innovation and market trial; the Royal Bank of Scotland has more than once developed extra capabilities initially for its joint venture partners, which it has subsequently rolled out to its own customers.

From application service providers to business service providers.

As we saw earlier, some software suppliers are now starting to sell business services rather than software artefacts. This may simply involve operating software applications or other technical services for customers, perhaps charging on a different basis (e.g. pay-per-use). Companies offering these services are known as Application Service Providers (ASPs).

Some software suppliers are moving still further up the supply ladder, to provide a complete business service. A company specializing in software for insurance companies can plug in some additional capabilities, including underwriting, and then offer a full insurance back-office service to retailers.

opportunities?

	Articulation	A properly articulated business, structured from loosely coupled components, can often be more flexible and manageable than a monolithic structure.  If the structure is well chosen, it can enhance the adaptability to changing business demands, as well as allowing the contribution and competitiveness of separate units to be more clearly visible. But that’s an important IF – it’s not easy to get the structure right. Articulation is sometimes chosen, sometimes imposed by external regulation.
	Diversification	A company can use a component-based approach as a route into a new business. This may take several forms: plugging in capability from another source packaging capability for distribution through new channels and intermediaries, perhaps under alternative brand names franchising.
	Mass Customization	The component-based approach strongly supports the ability to reconfigure a set of standard services for each customer. Most of the popularly quoted examples of mass customization are fairly trivial, but e-commerce enables some more complex (and interesting) examples.
	Merger	When two companies merge, there is often an expectation that the back-office processes and systems supporting the two businesses will merge onto a single platform. Indeed, this is typically the basis for much of the promised synergies and cost-savings. This can be regarded as a form of component-based business. Instead of a single platform supporting a single business, the merged company operates a single platform that provides services to multiple businesses.  If the prior operating configurations of the merging companies were favourable, we might imagine that the post-merger integration could be effected extremely quickly and easily, simply by plugging them together as components of an enlarged structure. At present, this remains an unrealized dream for most large industries currently undergoing consolidation. However, component-based thinking is still valuable in managing the post-merger integration programme, and in preparing organizations and systems for potentially easier mergers in future.
	Demerger	Demergers are typically done for one of two apparently contradictory motives: either to increase shareholder value or to increase competition and customer value. In either case, separating a large operation into its constituent parts is much easier if there are already well-managed interfaces between these parts.  A financial services company recently announced an intention to convert an existing branch network into a franchise network. In any franchise situation, but particularly in this one, we can expect to see a complicated set of services provided by the franchiser to the franchisee, and an equally complicated set of information flows in both directions. Demergers are often fiercely resisted, especially when they are imposed by regulators or by hostile takeovers. In fact, any move towards decoupling the business is often interpreted as a step towards demerger, and is sometimes resisted for this reason. Such resistance can be conscious as well as unconscious, and can include the design of the organization’s structure.

tips / best practices

	Let go the old goals: efficiency, control, certainty, integration.
	Balance short-term problem-solving with longer-term adventure.  Operate at two strategic levels: core components and overall configuration.
	Identify what components (or component strategies) are likely to be successful, and position yourself to share in the success. Core components must be world-beating. Focus on areas where you have, or can achieve leadership and excellence. Develop new areas of excellence. Acquire and maintain "rising stars" as well as maximizing "cash cows".
	Promote excellence in partners. Be prepared to switch partners regularly. Exercise the switch. Don’t let partners take you for granted. Don’t take your partners for granted. Develop commitment and trust in balance with partners.
	Follow standard frameworks for articulating your business.  Adopt, adapt and improve business patterns or interaction stamps.  This makes it easier for you to learn from others, to acquire patterns and best practices as well as standard business components. It also increases the range and value of potential partnerships.
	Develop deal-making as the primary strategic competence at all levels of management. (Many firms limit this ability to top management.) This includes: consortium management, risk management, supply chain management and procurement, and above all relationship management.
	To seize strategic advantage: pay attention to aspects that your competitors are overlooking.

---

pitfalls / risks / nightmare scenarios

At first sight, component-based business seems to offer great benefits to all and sundry. Some firms can exploit their assets (tangible and intangible) by packaging them into black boxes, for sale to other firms. These other firms can then achieve the benefits of diversification, with virtually no lead time, and at a greatly reduced cost and risk. Existing firms can grow into new markets, while well-focused start-up firms can convert a small niche into a world-beating product or service. Managers can increase the flexibility of business processes and operations while reducing their complexity. Everyone shares the benefits from reduced transaction costs. Investors can "cherry pick" the components that represent the most attractive business opportunities. Competition becomes fairer and more open. Business excellence abounds.

But there are hidden costs, and hidden risks, to all players. Many of the potential benefits of component-based business are not realised, for various reasons. Many ventures are poorly negotiated, poorly structured and poorly managed. The primary transaction costs may be reduced, but unplanned secondary costs may spring up. And some ventures are ill-conceived from the start, with no consideration of the profound ability of large complex systems to defeat any human efforts to control them. (Instead of reducing overall complexity, you may merely succeed in suppressing complexity in one place, only to see greater complexity spring up somewhere else.)

The components can be problematic. There may be a lack of quality, the component may demand too much attention or may require special effort to achieve a non-standard connection. And the usage of components can be problematic: there may be a lack of availability or choice, or there may be an effective monoculture or monopoly.

The apparent ability to enter a new market, or to make short-term gains, may discourage longer term planning and investment. A firm may rush to deliver a box of services, but the internal design may be a mess, and this may compromise many of the potential benefits of the component-based approach. A firm may rapidly plug in some new capability, and find that it’s not so easy to unplug. A firm may gain commitments and risks, which it finds itself unable to control.

Benefits to some stakeholders may be at the expense of other stakeholders. For example, if investors can cherry pick, this may make it more difficult to raise funds for the less glamorous, but nonetheless essential components of the whole system. And ultimately the investors themselves may suffer, if their cherry-picking tactics damage the financial viability of the whole.
 

	Adhoc wiring	Two large companies with incompatible strategies or cultures, inextricably entangled in multiple joint products, services or processes.
	Quality trap	Excessive vulnerability to external failure or loss of service, with no immediate or short-term replacement.
	Excellence trap	Excellent component, servicing whole market including you. Effective monopoly or monoculture means effective entrapment, with no possible replacement or contingency.
	Adhoc componentry	Poor architecture.  Components are hacked, cloned or bodged, inefficient and unreliable. Capability is not robust or scaleable
	Baroque componentry	Excess functionality, excess complexity, excess cost.
	Attention trap	Relationship demands too much management attention.
	Duplicated capability	Checks and balances, redundant effort, in order to guarantee business critical or safety critical service, contingency and business continuity.
	Autodisintermediation	You can’t keep up with the rest of the consortium. You’re the one that gets sidelined, bypassed, squashed out.

top veryard projects home page contact us
	This page last updated on September 26th, 2000 Copyright © 2000 Veryard Projects Ltd  http://www.component-based-business.com/cbbintro.htm