It's time for a reality check on the hype around inter-business processes. Enterprises are now moving "over the firewall" to link with others in the value chain. Suppliers and customers are becoming part of an increasingly integrated value chain. Yet there are many difficulties to overcome in creating inter-business processes (IBPs) where two or more parties use IT to integrate a portion of their value chain. Operational benefits increase with the level of integration, but so do integration costs and risks. Delivering the IT links that make integration possible is an enormous challenge. When should you integrate IBPs and to what degree? The potential benefits of value chain integration are many. The downturn in the economy has focused attention on profitability. Value chain initiatives have the potential to drive down costs and increase efficiency by eliminating bottlenecks and blind spots, and taking advantage of the Web. You can be more responsive to key events, such as a sudden change in demand, and linked processes can give managers access to the information they need to better manage. Creating an end-to-end view can, if done right, bring real benefits and lay the foundation for successful collaborative commerce initiatives.
Take Earthgrains, the US-based bakery our researchers studied. Earthgrains uses point-of-sale information (POS) from more than 2000 retailers to automate payment from its retailers and to determine what assortment of bread to stock shelves with on the following business day.
Prior to implementing scan-based-data (SBD), Earthgrains delivery people had to stand in line at the retailers' back doors to have their deliveries counted. SBD saves time: delivery people no longer line up at the back door, nor deliver only during the restricted number of back-door operating hours. They stock the shelves themselves based on historical POS information. The shared database of prices and products, hosted by third party viaLink, also eliminates chasing deductions, which is a huge non-value-added activity in the industry. By increasing visibility across a value chain, IBP integration offers potentially huge benefits. However as you tighten the integration you also increase the costs and risks. The challenge facing enterprises is to decide when to integrate, and to what level. With benefits like these for the taking, why wait? Caution comes before collaboration. It's not all good news. What seem like small differences between enterprises - in data, processes and standards - can make integration technically challenging. Whatever the vendors may say, integration is difficult. To get it right requires care and experience.
One challenge is the sheer number of parties in a value chain. Most large enterprises have many partners, suppliers and customers. You're likely to want closer ties with some parties more than others. It can be unclear how to make that selection and what level of integration will yield the most benefits. Another challenge is that processes change over time, due to the emergence of new products, new types of orders, new kinds of contracts, and different fulfilment processes. When you share these processes with other enterprises, it's going to be even more difficult to make changes swiftly. A third challenge is agreeing on what information to exchange. With whom should you share confidentialities about new products or services? Some parties may work with your competitors. How can you protect your interests?
Integration enables other parties to "see" inside your business. Can you be sure they're going to like what they see? Logistics company DHL International has a sophisticated track-and-trace system that gives customers real-time shipment status information. But it has a risk. As Tim Roberts, DHL's business initiative process manager, says: "If something goes wrong, the customer will know about it, and will want an explanation. You can't hide any more." Before you integrate, you have to get your own house in order. There's a long way to go before enterprises can "plug and play". And you have to be sure that the level of integration is matched by the benefits it brings. This means you're going to end up with a portfolio of relationships.
Benefits vary with the level of integration. We identified three major levels of integration: first, loose integration is characterised by ad hoc information sharing where both parties and their IT remain separate. Second, close integration is characterised by more formal information exchange where there is significant overlap between parties and their IT. Third, tight integration is characterised by business process sharing. The parties and their IT are intertwined. Potential benefits increase with each level of integration, and so do integration costs and risks. Before tightening the integration of an IBP, you first need to be convinced that the benefits are justified. You'll want to manage no more than a few such relationships - the ones where the benefits are really worthwhile. The tighter the integration the more critical the relationships. Building and managing relationships across enterprises is important. Relationship management nurtures personal and organisational dealings between parties and enterprises and provides a single point of contact.
In loose integration, relatively little relationship management is necessary as there is little or no contact between the parties. In close relationships, the middle managers concerned with the IBP can manage the relationship. In tight relationships, a specific relationship management role is frequently required, as is approval/involvement of the senior officers of the enterprise. DHL appoints global account managers (GAMs) to manage relationships with other parties in its industry segment. A GAM has the dual responsibility of ensuring the success of the relationship and ensuring that the other party receives the promised benefits. Don't share what you don't need to share. As integration tightens, a growing portion of a business process becomes shared between the parties. Strategic assets, such as people, customers, and data, shift from the private domain to a shared domain. Tighter integration brings an exponential growth in the volume and complexity of shared information. An illustration is event messages, such as pricing changes and demand changes. Making such messages available to others in your value chain allows them to synchronise their activities with yours - a huge potential benefit for improving your value chain's competitive position.
But there comes a point when, should something go wrong, your business could be seriously hurt. This risk can be mitigated somewhat through a negotiated agreement. A good guiding principle is: do not share what you do not need to share. Develop a set of standard solutions. To simplify the process of integrating IBPs, we found leading companies were using "pre-built" solutions and standards wherever possible, including standards that are dominant in their industry. For loose integration, it's best to use only standard Web-access solutions and interfaces. For close integration, use standard solutions and interfaces but recognise that some custom development will be necessary as well. For tight integration, again make use of standards as far as possible, but be prepared for a lot of custom development to integrate what is sure to be a large number of systems. A good example is the use of XML by the consumer durables firm Whirlpool. Whirlpool formed eWhirlpool in 1995 and has been integrating its retail channel ever since. But process integration has proven difficult with many of its largest customers because their proprietary EDI systems have limited functionality and flexibility. Smaller customers, though, who had not built such solutions, have been able to take full advantage of the flexibility of eWhirlpool's XML-based solutions.
The future isn't what it used to be. So where is IBP integration heading? Three trends in particular stand out: increased integration, increased virtuality, and the use of IT to track relationships. Despite the cautions I have outlined, there's a clear trend to increasing IBP integration because the costs and risks are falling relative to benefits. Integration experience is growing. Though still daunting, it's an area that's less mysterious and less strewn with land mines than even five years ago. The costs of IT connection are falling. Software, networking, tools and resources are becoming better established by the day. Virtual businesses are still few and far between. But plenty of enterprises are already partially virtual. Increased virtuality is occurring as enterprises focus more closely on their core competencies - the things they do well. To improve that focus, they are buying secondary activities from outsiders who in turn are specialising. Growing dependence on outsiders is fuelling the importance of inter-business processes, and placing more of a premium on effective management.
As an enterprise's web of relationships becomes more complex, IT becomes an indispensable management tool for tracking what's going on. Checklists will be monitored by software for every close and tight IBP. The reason? In order to avoid confusion, to maximise each relationship, and to find opportunities for tightening and loosening integration levels. Proceed with care . . . So despite the hype, there is still a long way to go with the smart implementation of inter-business processes. Most enterprise value chains are only now coming to grips with the real possibilities for truly IT-enabled business processes. Inter-business process linkages are even more challenging. But if you start with caution and understand the risk and rewards there are real benefits to be gained.
Dr Marianne Broadbent is Group Vice President and Global Head of Research for Gartner's Executive Programs