Dynamic discounting gives companies new visibility into cash flow to improve the buying-selling processes

Listen to the podcast. Find it on iTunes/iPod. Read a full transcript or download a copy. Sponsor: Ariba.

Recent trends are driving savvy companies to improve how they manage their supplier and buying processes using dynamic discounting.

The latest BriefingsDirect discussion focuses then on how discount management and dynamic discounting can dramatically improve how enterprises procure by better managing the buying process, improving cash management, and gaining an analytic edge on constantly improving processes through cloud-enabled automation.

To learn more about how buyers and sellers can benefit from such improved business processes around cash management in the procurement phase we interviewed Drew Hofler, Senior Manager, Working Capital Solution at Ariba. The discussion is moderated by Dana Gardner, Principal Analyst at Interarbor Solutions. [Disclosure: Ariba is a sponsor of BriefingsDirect podcasts.]

Here are some excerpts:

Gardner: In a long-term slack economy, finding new business efficiencies is not really an option.

Hofler: We've seen a lot of growth in this area, particularly over the last three or four years with another wave of economic bad news coming up now. In 2008, when the credit crisis first hit and supply chains became dramatically impacted, you had a lot of suppliers who found their access to credit severely curtailed. You had a lot of buyers who were using the opportunity to enhance their cash flow and their cash position by extending terms with suppliers.

So you had kind of a perfect storm of buying organizations pushing out payment terms and supplying organizations not able to fund those longer terms via traditional credit means, because those were being pulled away. So that created a real cash flow crisis within supply chains.

... If you look at that in conjunction with suppliers still having their access to credit curtailed, it's not as bad as it was at the height of 2008, but it still is far from where it was pre-2008 in terms of their access to credit.

Liquidity risk

You have this situation where there is significant liquidity risk in the supply chain due to suppliers who are not in as good a cash position -- smaller and medium sized suppliers typically -- facing a downturn in orders, facing a downturn in the economy, and not having necessarily the cash buffer or access to credit to weather that.

On the other hand, you have buyers who have massive amounts of cash that are sitting in banks, where they are earning next to nothing. In fact, two days after the S&P downgrade, Ben Bernanke and the Fed stated that they'll probably keep rates down at around zero for the next two years, until mid-2013.

... People are looking for everything to make their companies leaner and better and capture all the value that they possibly can.

Dynamic discounting is really a win-win. There is value to both sides [of purchasing relationships], and it's not just one imposing their will on the other in order to make their company better at the expense of the other. There are significant and tangible benefits to both sides when they do this.

Some of them will average around 24 percent annualized return on their cash. Others will average less. It depends on how they want to approach their supply base.

I think that's why we've seen so many companies pick this up. We've had growth rates of 60 percent or so in our buyer customer base. Our customers, shortly after going live, have been seeing growth rates in their opportunity and discount capture with their suppliers of 60-80 percent month over month. Obviously that will stabilize at some point, but I think what that says is that huge growth curve, particularly in the first year or so of doing it, speaks to the fact that there is this latent opportunity out there.

We have customers and some of them will average around 24 percent annualized return on their cash. Others will average less. It depends on how they want to approach their supply base. Many buyers will take the opportunity, when there's an opportunity to earn very significant returns on their cash of 36 percent or more from a certain part of their supply base. Typically, the longer tail, the smaller suppliers, will take advantage of that.

But others, especially more recently, are realizing that they can take a nuanced approach to this and look at their entire supply chain and approach each segment differently.

So if you are a long tail of suppliers that otherwise would take P-Card or do things like that, you can get a large amount of return on your cash. But on the other end of your supply chain, your goal as a buying organization with more strategic suppliers is not so much to wring all the value in terms of return on cash that you can out of them, but to make sure that they are there for you when you need them, to reduce the liquidity risk.

So a lot of buyers are taking the cash that they have, using this product, and offering the opportunity to their more strategic suppliers to gain access to the cash piles that the buying organization has, but at rates that are much lower, that are closer to what they might be able to get out in the marketplace from a bank.

No burden to supplier

Those are more around 6 percent, 4 percent annualized, but still much better than the buying organization gets on their cash sitting in a money market account earning less than a quarter of a percent, or close to zero right now. But they do it in such a way that does not add a burden to their supplier.

I'm seeing buying organizations take a blended, more nuanced approach to using this. The great thing about the tools online is that they have full flexibility to do that, to group their suppliers how they wish, to offer different rates to different suppliers, to control the amount of cash that they make available, and they are really starting to take advantage of that.

When you talk about dynamic discounting, what we like to say is that it enables collaborative cash flow, and that collaboration is really what the cloud, social networking, business social networking, is really all about. It's about communicating, communicating need, and collaborating over solutions.

What I see coming down the line is that, as more and more network or cloud effect takes place, where suppliers who are on the Ariba Network, for example, have multiple buyers participating in this and so they are doing this across different buyers, it becomes more of a norm.

It becomes something that is a normal part of business. I think we're starting to see that normalized, because dynamic discounting is a very fairly young industry still in terms of overall business practices and processes. But we're starting to see it become more of a norm.

When you have that happening over the cloud, when you have that kind of collaboration of information going back and forth, you have more suppliers becoming normal, we'll see buyers learning and having access to aggregated data, trends, and behaviors that show them how to approach this, because they can see how it has worked across industries in the past, and then supplying organizations finding it much more normal.

Social media

I see it tying into the communication methods that are becoming so prevalent in social media and in the cloud, just basically to give suppliers access to the opportunity and open up the opportunity. We've seen such growth when buyers become active and make this available to suppliers, simply because it's tapping into the late need that suppliers didn’t know they had a fix for, that they had a solution for, in terms of accessing this cash.

As that becomes more available and more known through the cloud, through the collaboration, the suppliers hear about it more, they realize they have the access. Just that ability for it to go viral is what's really going to happen more and more, as we go into the future and it kind of snowballs.

In the meantime, you have this big dichotomy, where you have buyers who have lots of cash earning basically nothing on it in the short-term, and their suppliers who don't have the access to that cash and have longer terms extended to them. When they do get credit, there are some pretty restrictive covenants with their banks and they're paying a little bit higher rate than they would otherwise. You have this significant liquidity risk.

All of that is to say that what we're seeing is that buying organizations are starting to realize that they can take advantage of the fact that they have all this cash and suppliers who have this need to essentially become the bank and put that cash to work.

Organizations are starting to realize that they can take advantage of the fact that they have all this cash and suppliers who have this need to essentially become the bank and put that cash to work.

They earn a greater return by paying suppliers early in exchange for a discount -- so they're earning a better return on their cash than it would have sitting in the bank -- but they also remove some risk from their supply chain by injecting liquidity into their supply chain, giving suppliers access to liquidity that they might not have otherwise in a way that, one, is not debt to their supplier, and two, improves their working capital position by lowering their days sales outstanding (DSO), when they get paid early on that receivable.

We are seeing all these things line up to create a perfect opportunity for both buyers and suppliers to collaborate over these cash flow needs that are being created by the economy right now.

Gardner: I suppose the solution then at the high level is fairly clear, but how to implement that becomes the issue. So many organizations have disparate ways of managing these issues, managing their procurement and supply chain, often manual processes still at work.

How do you allow for the suppliers to create an incentive for this improved discounting and improved cash flow for them, and how do they then manage and instantiate this and make it repeatable?

Hofler: It’s a great point, because a lot of organizations in this realm of payment terms, agreements with suppliers, paying suppliers, approving invoices, and all of this type of thing, is still a very manual process in so many organizations.

I have looked at buying organization and analyzed their vendor files and at times found literally hundreds of different payment terms to their suppliers, where a best practice would be to have maybe five to 10 that are pretty standardized, unless there happens to be some great exception. People are just making terms with the folks that they know, buyers knowing the salesperson on the supplier side, and agreeing to specific terms that may have nothing to do with the corporate objectives or strategy.

Getting visibility

In order to reap this opportunity and understand what's happening a company needs to get visibility into what's actually happening. That’s where Ariba’s cloud technology allows companies to pull this through the Ariba Network and gain visibility into what's going on and automate the process greatly.

Once they have that visibility, on the one hand, they realize they can get their terms and their payment under control. A lot of times, a company will have what's supposed to be a standard term, let’s say 45 days, 60 days payment, but a supplier is being paid immediately. Somebody called in to the company and the supplier said, "I can't wait this long for my cash. Can you pay me early?" And the person on other end of the phone changed the payment to "immediate" in the ERP for the buyer.

That’s a cash flow waste right there. You're paying immediately when a buying organization could be holding up their money for 45-60 days, or exchanging that immediate pay for some value in the form of a discount.

We're seeing that companies are getting control of that process through automating it, through sending POs through the Ariba Network to their suppliers, where it's centralized and visible to corporate as a whole, bringing invoices back in to accelerate the approval process, and also bringing it under some control and visibility as well.

That opens up the opportunity that we're talking about in terms of collaborating over cash flow, because what you have are these invoices coming in and being approved in a rapid manner, because they're coming in clean. The Ariba Network assures that invoices come in clean and they're being approved quickly. Now you have invoices that are approved say on the fifth day after receipt, but not due until day 60 after the invoice date. That time gap is where the collaboration can come in.

These invoices are coming in and being approved in a rapid manner, because they're coming in clean.

When it is in the cloud online, the buying organization has visibility to all of their suppliers, being able to offer early payment and being able to use their cash to earn greater returns and offering early payments. But all the suppliers then have visibility into that opportunity as well. And the right party at the supplier company that has visibility into that.

When you think about early payment, discount terms, we think of the classic 2/10, net 30 that’s negotiated into a contract at some point. Think of who is having that conversation? It's typically procurement and the salesperson on the side of the supplier. That salesperson on the side of the supplier really is not all that concerned about cash flow. That’s not their metric. It's not what they're measured against, and they don’t really care.

We find that not too many companies get early payment discounts into a large amount of their spend due to that. But when those invoices have come in and have been made visible through this online portal for suppliers to see, who is it at the supplier that now is looking at that? It's the accounts receivable (AR) side. It's the controller. It's the treasurer. It's finance on the side of the supplier that cares about cash flow, that realizes when they need enhanced cash flow, and has the ability to make a decision over that.

We're seeing a huge increase when we deploy clients between what they had originally captured in contracts in terms of early payment terms, versus what they're now able to capture, once they put this in place with the Ariba Network, where the right audience and their suppliers can come in and see that.

So those things -- automating the process, getting visibility into it, getting your process under control so that everything is done in a timely manner to create the opportunity, and then having an online portal visibility for your supply base to see the opportunity -- are key to accessing it.

Business process management

Gardner: So I think that at a very high level we're talking about better business process management (BPM), but across disparate systems of record, different organizations, and the role that Ariba plays, has the opportunity to cross among or between them, but automate, give them insight and visibility at the same time. So that’s pretty cool.

Now, I know the name of your product that you apply to a lot of this is called Ariba Discount Professional, but I have also heard it referred to as "dynamic discounting." What does that really mean? How does that work?

Hofler: The market term for us is Ariba Discount Pro, but the broader vernacular for the market is dynamic discounting or discount management. Dynamic discounting has two aspects to it. One, it's the dynamic nature of it, giving the supplier the ability and control to say when they want to get paid early, when they need the money, to have this sort of automated online conversation or collaboration with the buyer to agree on early payment terms, on an invoice-by-invoice basis.

The supplier can say they don’t need early payment all the time, but there are definitely business cycles, financial cycles in the quarter, or business cycles and seasonal suppliers, where they may have to purchase a lot of stock for an upcoming season, or they might want to purchase some equipment. Then, they need to accelerate some cash flow in order to do that.

The supplier can dynamically say, "Here's what's available to me, and I'll take that invoice, that invoice, and that invoice on an early payment. I agree to those terms." And boom, it's done. So it's basically like an ATM for them. They can choose which ones they want.

The other aspect of dynamic discounting is the fact that it allows for a fair and prorated discount rate to the supplier from the buyer.

The other aspect of dynamic discounting is the fact that it allows for a fair and prorated discount rate to the supplier from the buyer. Before, in the traditional 2/10, net 30 and 2/15, net 45 that a lot of companies have, the structure is such that if you can approve the invoice and pay by day 15, you take 50 percent discount. If you can't approve it by day 15, then you wait and you pay the full amount of the invoice on day 45.

With dynamic discounting and our Discount Pro product, buyers are able to offer to their suppliers a prorated discount that says, "We can pay you early from the moment this is received or from day 15," whatever fits the buyer’s needs, and then prorate that say 2 percent discount down to 0 percent on the net due date of that invoice.

It's fair to the supplier. If they are getting paid 30 days early, they pay a higher discount. If they are getting paid 15 days early, that discount gets lowered in such a way that is fair to that supplier, and yields a constant and consistent return on cash on an annualized basis to the buying organization.

So for example, the 2/10, net 30, that’s the classic textbook example is a 36.5 percent annualized rate of return. So at 20 days early on day 10, it's a 2 percent discount; at 10 days early, 20 days after the invoice is received, it's a 1 percent discount. Both of those equate to 36.5 percent annualized return on cash for the time period that the cash was deployed.

The buying organization is ensured a consistent return on their cash deployed. The supplier is ensured a fair system control discount based on when they actually receive the cash. So those two pieces, that slope line and proration, as well as the dynamic ability for a supplier to achieve early payment on an invoice-by-invoice basis based on their business need are the things that really define dynamic discounting.

Substantial returns

Gardner: I have to imagine that we're talking about very large organizations, very large procurement sums, and therefore the returns can be quite substantial. It makes sense of course for the buying organization to be able to do the best they can with their cash flow, and getting a discount would do more for them than letting it sit in a low interest-bearing account, as you pointed out.

But what really intrigues me about this, Drew, is for the suppliers, where there is complexity in inventory and there is transportation and logistics issues, it gives them a chance to really analyze some of the timing that works to their advantage and then incentivize based on these discounts as to how that could then benefit them.

There seems to be a huge efficiency, maybe difficult to measure in dollar terms, but a huge efficiency potential for these suppliers when they exercise this dynamic discount.

Hofler: I would agree with that. There is just a whole ton of benefits to the suppliers, because as you say, they have full visibility into when they are going to be paid, how much, and on what, and full control over that.

As I mentioned before, it's like an ATM for them, if they need it, where they have access to this pool of liquidity, depending on the things that come along. If anything like logistics, transportation, or added gas prices spike for a week or two and their cash flow has to increase, well, because of that outlay, they can access this early payment and this cash in a way that's very beneficial for them, because suppliers have some access to some cash flow. It's not completely shut off for them. A lot of suppliers will take credit cards or P-Cards. A lot of them will access lines of credit and things to that effect.

It's often cheaper than they can find financing elsewhere, and it does so in such a way that lowers their DSO, because they're basically turning their assets of a receivable into cash.

But those do two things to them. One, P-Cards are extraordinarily expensive in terms of the exchange rate that they have to pay. And two, lines of credit and that type of thing add debt to their balance sheet basically.

With this type of dynamic discounting, suppliers access this cash flow in a way, depending on what the buyer offer might be or what the buyer might accept in terms of the counteroffer from the supplier, that is typically cheaper than than credit cards. It's often cheaper than they can find financing elsewhere, and it does so in such a way that lowers their DSO, because they're basically turning their assets of a receivable into cash. It lowers their DSO, which is great for their working capital metrics and cash convergence cycle.

And it does so in such a way that adds zero debt to their balance sheet, because it's just transferring one asset into another from a receivable into cash. So definitely a lot of supplier benefit.

Discount Pro is based on the Ariba Network platform. From the buying side, it simply requires the ability to send a message from your ERP -- we call it a payment proposal message -- to the Ariba Network. It requires a connection, and there are a number of ways to do that.

We have standard adapters for most of the large ERPs -- PeopleSoft, Oracle, SAP. We've integrated with JD Edwards, Lawson, and various others. Simply installing this kind of middleware adapter takes the feed of data from the ERP, translates it into the Ariba cXML. You put that in place. It's basically that middleware to communicate that information back and forth from the Ariba Network, and that's essentially it.

There obviously is some work involved in that, but it's so much lower than on-premise type of work that you would have to do. There's much lower cost, and much quicker time -to-benefit for that. From the supplier’s side, being based in the cloud and on the Ariba Network, it literally can be as simple as a three minute process of signing up on the Ariba Network.

Gardner: Do you have some examples of folks that are doing this? What sort of returns it's getting for them? How it's impacting them in terms of productivity benefit as well as pure dollars and cents?

Hofler: We've had a number of organizations, a large retail and sporting goods organization, that came in and increased their discount capture by about 90 percent.

One thing is coming onto the Ariba Network and getting your process under control. As I said before, companies don't necessarily have a lot of their spend under contract discount term, but they do have some. Their procurement folks have negotiated some discounts, early payment discounts, in the contract. A lot of that is not being captured, because the process doesn’t allow them to approve the invoices in time, and that type of thing.

That was the case with this organization. It was capturing about 35 percent of their discounts, and raised that to about 95 percent very quickly. So that's an immediate savings and immediate capture of lost opportunity and value to them. Simply by getting their process under control allowed them to capture millions of dollars of lost savings.

In addition, they saw their capture of savings go from about 5 percent of their suppliers to a penetration of over 20 percent of their suppliers in a short period of time as well.

Seeing the opportunity

I believe it’s because of the things that I mentioned earlier. It was now putting the opportunity in front of the right people at the supplier’s side. When they realized they had the opportunity, they took advantage of it, because as I said, the fundamentals are there in the market, where suppliers are typically hurting for cash and cash flow and opportunities for that, willing to take early payment.

Buyers have lots of cash. When you just bring those two parties together in a way that makes it easy for them to collaborate and meet that need, your participation is going to go up for sure. And that's what we've seen.

Listen to the podcast. Find it on iTunes/iPod. Read a full transcript or download a copy. Sponsor: Ariba.

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Executive Interview: VMware's Carl Eschenbach on the scope and depth of cloud computing and how CIOs will have to adapt

Listen to the podcast. Find it on iTunes/iPod. Read a full transcript or download a copy. Sponsor: VMware.

The move to cloud is far more than an IT delivery model adjustment. It really presents a unique opportunity to get IT -- and the business of IT -- right at the highest levels.

On the main stage at VMworld 2011 this week, VMware Co-President Carl Eschenbach demonstrated that impact through testimonials on how cloud computing and virtualization infrastructure are advancing the business goals of three major corporations, Revlon, NYSE Euronext, and Southwest Airlines.

BriefingsDirect caught up with Eschenbach after the presentation to gain his impressions and insights on the scope and depth of cloud computing -- and how it's impacting CIOs in general. The interview comes as part of a special BriefingsDirect podcast series from VMworld in Las Vegas. The interview was conducted by Dana Gardner, Principal Analyst at Interarbor Solutions. [Disclosure: VMware is a sponsor of BriefingsDirect podcasts.]

Here are some excerpts:

Gardner: Some people seem to think that the move to cloud makes IT less relevant. Do you agree, and how are the CIOs you are talking to viewing it?

Eschenbach: When people ask if cloud is real or if it's happening, I can tell you unequivocally that the answer is yes. In fact, one of the things that VMware is so excited about is our position around cloud computing.

The reason I say that is that the cloud era is here, and VMware has the solutions to help our customers actually bridge the gap between their existing data centers and legacy applications to this new world of cloud computing. It's us and the strength of our ecosystem partners who are leading this technology innovation and services that enable people to accelerate their cloud adoption.

It's been a very exciting show here at VMworld. We had 20,000 plus people in attendance, and I can tell you that the energy at this show only proves that our industry is going through a major transformation toward cloud computing.

So while it's true there are some CIOs who are resistant or hesitant to move to the cloud, it's not whether they're going to in the future. It's really how fast. Clearly people are thinking about it. They need help along the way, because they need to bridge their existing investments, as I said earlier, to move to the cloud.

Hybrid cloud

Once they find a way to do that in a very secure manner, people will start to build not public cloud offerings and solutions, not private cloud offerings and solutions, but they will truly build what we call a hybrid cloud.

Gardner: You seem to be saying that IT becomes more fundamental, that with cloud the role of IT becomes more strategic.

Eschenbach: IT needs to become a strategic asset or weapon to help drive revenue generation for the company. It no longer needs to be a cost center or just something that becomes a barrier to success for the company.

Today, in a lot of cases, people look at IT as the barrier, meaning they're not agile enough to service and support the line of business. In effect, what happens when you start to build either a private or public cloud, is that they actually become opaque. They become transparent to the line of business.

There's no longer an issue or challenge with how fast a company can roll out a new business opportunity or solution. It's actually removed now, when it gets to IT or the existing CIO organization, because they take that away. They're able to service them much faster, because when you deploy cloud-based solutions, you have a much more agile infrastructure to support the line of business.

When you start to build either a private or public cloud, is that they actually become opaque. They become transparent to the line of business.

Gardner: We've been hearing about cloud infrastructure management, cloud application platforms, end user computing, and additional use of virtualization on the client tier. This is coming together as a seamless strategy, and I'm curious about the paybacks.

Those companies that are biting this off fully, that are going full-bore at cloud at these different levels, seem to be getting a lot back in return. Do you see this as a whole greater than the sum of the parts? Is there an advantage to being a full cloud-enabled organization?

Eschenbach: There clearly is, Dana. We have customers that are going through multiple phases of a journey toward a cloud platform.

First, everyone has to start with just thinking about how they'll virtualize their existing assets and their data center, which is exactly what VMware has done over the last many years. We've helped our customers drive out a lot of CAPEX savings in IT by just moving to a highly virtualized environment.

But what cloud brings is more than just CAPEX savings. It brings OPEX savings and operational savings, because when you move from a highly virtualized infrastructure to a true private, public, or hybrid cloud, you are now focused on leveraging management and automation tools, which really then focuses on the OPEX savings you get.

Business benefit

So again, moving from a highly virtualized environment moves you from a technical discussion and a CAPEX savings discussion to one that’s more of a business benefit by leveraging cloud, because of the management and automation you put around that highly virtualized environment, therefore leading to much more agile infrastructure to service the business.

Gardner: I've been talking to a number of customers this week and I'm certainly hearing from them that the more they adopt and adapt to cloud, the better the returns. They're seeing better disaster recovery efficiencies. They're getting better data efficiencies. They're doing better with their networks. It seems as if it becomes pervasive.

But I'm wondering too, Carl, for those companies that resist this, are they facing a penalty? It seems to me that they could be at a competitive disadvantage pretty quickly.

Eschenbach: Among our customers, the people who typically resist moving to cloud-based architectures or solutions are actually the CIOs and their infrastructure team itself.

The reason for that is that the line of business has this notion,or has this understanding, that they can move to public cloud models and it's much cheaper, faster, and in some cases, they think more reliable. In effect, they forget that the CIO has processes in place, has existing expenses on building out its infrastructure, has security, compliance, and controls of the IT that’s already running on that infrastructure.

The CIOs are really the ones who may resist cloud today, but in the end they're the ones who have to move to a cloud faster, so the line of business does not go around them and fall into alternatives to support the business.

If we can help the CIO build out a cloud infrastructure within their own four walls of their data center, the line of business would much rather leverage them, if they can get all the security, compliance, and controls that they are accustomed to getting, but get it at a faster, cheaper rate, which is the promise of the public cloud.

So the CIOs are really the ones who may resist cloud today, but in the end they're the ones who have to move to a cloud faster, so the line of business does not go around them and fall into alternatives to support the business.

Gardner: That gets back to that relevancy. It seems to me that they risk becoming irrelevant if they resist, but they could actually increase their role and importance in the organization by embracing cloud.

Eschenbach: No question. There was an example on stage here. I had an opportunity to interview the CIO at Revlon. One of the things that he talked about was the fact that he increased the IT project throughput through his organization by 300 percent, when he built out a highly automated, private-cloud infrastructure.

What's happened, he said, is that the line of business and his business partners no longer think of IT as the barrier or the roadblock to rolling out new revenue-generating services. Instead they look to them, because they know they can service them in a much faster way.

Large ecosystem

Gardner: I look around me here at the show and I see some of the largest corporations in the world. I also see some of the largest IT vendors in the world. There's a big ecosystem that’s developed here.

But I'm also seeing smaller companies. So cloud’s message, cloud’s value to small to medium-sized business (SMBs), is it just as good as what we are telling them in terms of their enterprise size companies and the benefits. Or is there even greater opportunity for SMBs?

Eschenbach: Cloud provides business benefit for all types of customers, regardless of the vertical market segment they're in or their size and scope.

If you think about cloud computing, the promise it brings customers is the ability to get access to infrastructure and data in a very cost-efficient, rapid way and only pay for what you use. It's a great value proposition, regardless of size and scope of your organization and company.

With that being said, some of the people moving to cloud services first are actually SMB organizations and companies, because they don’t necessarily have the IT skill set that’s required to keep up with the business demands. Therefore, if they can get this service from someone else, and get a service level agreement (SLA) that’s relevant to their business, then they will move to a cloud model faster than the large enterprises will.

We're seeing many SMB and mid-sized companies move to cloud-based models and offerings much faster than the large enterprise or the multinationals.

We're seeing many SMB and mid-sized companies move to cloud-based models and offerings much faster than the large enterprise or the multinationals.

Gardner: Let's slice it another way. How about vertical industry-specific clouds? We've started to see a little bit of this. NYSE is probably a great example. Do you expect to see more of that, where we've got intermediaries between a general-purpose cloud approach and that more specific to the business processes that are germane and relevant to specific industries?

Eschenbach: We're really excited about the partnership we've formed with the NYSE Euronext and the Capital Markets Community Platform that we had announced back in May. The feedback from that announcement has been pretty positive.

In fact, their CIO was on stage with me just the other day, and he not only spoke about how they're supporting their own infrastructure at NYSE Euronext based on vSphere, but now with this Capital Markets cloud they are taking some of their same services and offering them to this new community cloud market.

While that is the first cloud that was really stood up, we do expect and believe that there will be other vertical clouds that are going to be stood up, whether it's in the federal government, where there’s already been some announcements around that.

Trend will continue

I also think you can anticipate seeing some other financial services clouds, as well as healthcare clouds, being stood up as well. This is a trend that will continue.

One of the reasons we believe it will continue is because people can stand up clouds and bring very specific business benefit that is very repeatable across the customers who are going to run on that cloud because they are in the same vertical. If they have the same compliance issues, or security, or other regulatory things that they have to adhere to, building a community cloud for one specific vertical is a lot easier than trying to serve an entire market with multiple, vertical clouds.

Gardner: I'm still impressed by the amount of energy I'm seeing here. You'd never know that we have an economic stagnation problem around the world. People here are really jazzed, but I suppose we need to look at this as a trying time as well.

What are you encouraged by in your meetings with folks and discussions in terms of how they are able to do more with less essentially?

Eschenbach: This week I've had a great opportunity to spend a lot of time with customers and our ecosystem set of partners. I can tell you that everyone is excited for this major tectonic shift we are seeing in the industry, and these shifts only happen every 10 or 20 years.

People are trying to look at IT in a different way. They want IT to be their business partner so that they can differentiate themselves in this global economic environment.

People are starting to say that this whole cloud computing era is coming to life, and people are trying to look at IT in a different way. They want IT to be their business partner so that they can differentiate themselves in this global economic environment.

One thing that VMware and our ecosystem set of partners do is that we allow our customers to do more with less, and that’s kind of a cliché statement. A lot of people say, we will bring IT services and solutions to you and we will allow you to do more with less. Well, quite honestly, if you look back over the history of VMware, that has been a very consistent value proposition that we bring to our customers.

Even potentially in a down market or a market where we have a strong headwind, I believe VMware and the rich set of ecosystem partners we have, we will always move to the top of the pile, when people think about IT investments, because we will indeed reduce their overall CAPEX and OPEX cost, at the same time providing better IT agility for the lines of business.

Strategic weapon

As we move into 2012, our customers and business partners can continue to bet on VMware as being a very strategic weapon for them to differentiate themselves in this very competitive market.

The thing I will end on here is one thing that we are focused on is helping our customers go through this transformation towards cloud computing in a very programmatic way that allows them to protect their existing assets in the data center, and also protect their legacy applications, but move to a new world of cloud computing all at the same time. That is what excites me in the opportunity we collectively have with our partners as we look into 2012.

Listen to the podcast. Find it on iTunes/iPod. Read a full transcript or download a copy. Sponsor: VMware.

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VMworld Showcase: How ADP Dealer Services benefits from VMware View in its expanding use of desktop virtualization

Listen to the podcast. Find it on iTunes/iPod and Podcast.com. Read a full transcript or download a copy. Sponsor: VMware.

Our next VMworld case study interview takes aim at ADP Dealer Services and details how they're benefiting from expanding use of desktop virtualization. We'll learn about how ADP Dealer Services is enjoying increased security, better management, and higher productivity benefits as they leverage desktop virtualization across their applications development activities.

This story comes as part of a special BriefingsDirect podcast series from the VMworld 2011 Conference in Las Vegas the week of August 29. The series explores the latest in cloud computing and virtualization infrastructure developments.

To hear more about their VMware View expansion experience, we're joined by Bill Naughton, the Chief Information Officer at ADP Dealer Services, and Shane Martinez, Director of Global Infrastructure at ADP Dealer Services. The discussion is moderated by Dana Gardner, Principal Analyst at Interarbor Solutions. [Disclosure: VMware is a sponsor of BriefingsDirect podcasts.]

Here are some excerpts:

Gardner: Why have you pursued desktop virtualization for application development first?

Naughton: We had an interesting problem to solve. The first issue was developer productivity, which is very important to us, because we do have a big software development engineering house that needs to be productive.

And we had issues where our traditional approach of putting them on the user based plan was not giving them the creativity, flexibility, and productivity they needed to spin up new environments, to have a free workspace so they could do what they needed to create products.

So we thought that a VDI solution, combined with a quick provisioning and deprovisioning for development environments, would make them more productive and protect their normal day-to-day use of email, ERPF, Salesforce automation apps that they might need on the traditional production environment.

It's been now going on for probably about a year-and-a-half. We were looking at what was the right design and what was the process, because there is a lot of process involved with change management, with the provisioning and deprovisioning. So we did some pilots and now we're in full roll out and pretty excited about the results.

We're talking over 1,000 technical people who will use the solution -- software engineers, QA type people, test people. And because ADP Dealer Services has a pretty big application portfolio, we're talking about hundreds of environments, thousands of servers that have kind of grown up over the years that support our R&D environment.

Gardner: What does ADP Dealer Services do that relies to heavily on software development prowess?

Naughton: ADP is the world’s largest outsourced human resources, payroll, and tax benefits company started in 1949. It's about a $10 billion company, with 50,000 employees and close to 600,000 clients. It's one of Fortune’s most admired companies and one of only four companies with a AAA credit rating from Moody’s and Standard & Poor’s.

ADP Dealer Services, is a division of ADP, about a $1.7 billion company that’s serving the auto retail client base throughout the globe.

ADP Dealer Services, is a division of ADP, about a $1.7 billion company that’s serving the auto retail client base throughout the globe. It has about 8,000 employees and 25,000 clients to serve through software and services the auto retail and the OEM auto manufacturing industry.

Gardner: So I imagine that the applications that you are creating for these dealers are very intensive in terms of data, and many different types of applications, custom apps, as well as more off-the-shelf or third-party, need to be integrated, so a fairly complex set.

Naughton: It's a very complicated set. You are right on the money. It's all the way from ERP systems that we develop for the industry, CRM applications, digital marketing applications, all the way to the telephony side of the business.

So there is hardware integration, third party integration, but it’s mostly ground-up software development that is the core base of the business of cloud computing apps, multi-tenant applications, and then applications that will tie into telephony systems and other applications through APIs. But the core products are ground-up software development.

Gardner: So it's a highly technical undertaking and your developers are really on the front lines of making this business work for you. This isn’t a nice to have. This is mission critical across the board?

Creativity and freedom

Naughton: Absolutely. And you want to make sure the developers have as much creativity and freedom as they can possibly have.

At the same time, ADP being a public company and being a company that people entrust the data with, we need to have good security across our different platforms. So the challenge was to give the developers a platform where they could be creative, where they could be given a wide range of latitude of tools and technology and at the same time, protect their day-to-day compute that they needed for things like messaging or applications the managers need to administer the workforce.

Gardner: Bill, as CIO, you had this vision about how to empower and enable your developers, perhaps even cut some costs along the way, I can imagine that you went to Shane and said, "Make it happen." Is that how it happened or did Shane come to you and say, "Listen, I've got this great idea?"

Naughton: It was a joint effort between knowing that we wanted to do something different, knowing that the developers had unique needs, knowing that security had definite requirements on how we protect from malware, how we protect from viruses, how do we patch and protect the environments. And then we had a cost consideration too in that the spiral of development that we provide to the CTO in his office was getting quite big.

So the combination of Shane being forward-looking at a solution, the requirements we had from the development community, and the security requirements from our GSO office brought it all together into something where we're going to try something a little bit different than traditional approaches.

There's been a tremendous consumption. The adoption by the associate community has been wonderful.

Gardner: Shane, how has this impacted you from the infrastructure point of view?

Martinez: There's been a tremendous consumption. The adoption by the associate community has been wonderful. We were faced with a challenge where we had to present the development community with an environment, which as Bill mentioned, had the latitude for them to perform their job function and they could be creative again. They were re-empowered to do their job and had all of the operational benefits that a typical compute would give them.

In addition to just that environment flexibility, also with the VDI View infrastructure, we were able to provide them with compute environment that was more specifically designed to meet their needs.

As Bill mentioned, we have a litany of different applications and development communities, and each one of their specific compute requirements are different. Using a technology like View that allows us to abstract from the hardware, we create infrastructure specific to each one of their needs.

Two discrete networks

There was a complex challenge that obviously we had to overcome, which was how do we present this pretty powerful environment and construct to people who are distributed, not just across the continental United States, but globally. By creating a separate VRF instance in our wide area network, we were able to bifurcate our WAN and create two discrete networks. That second network, which effectively became a shadow of our production infrastructure, is where the VDIs and all of our lab environments live.

As Bill said, that separate environment is one that is specifically designed to meet the needs of our development community. By virtue of having VDI and View out there for them to access over the separate network, they then can reach it from anywhere within our global network. So we have associates that are distributed across all of our sites that have the ability to consume these resources that we made available.

Gardner: And they have been mostly happy with the latency issues and performance?

Martinez: Oh, very pleased. As a matter of fact, there are several different ways in which we allow them to consume it. The first one is they can access the assets direct. With the View client, they can access their remote workstation and work on it however they are comfortable with.

In addition, though, we have the ability for them to check out that workstation and they can use that workstation either locally or when they are remote on the road. They can use that on their assets and then come back in and check it back in the library. It works very well for them.

There are two great benefits. The first thing is, from an administrative standpoint, just purely the FTE consumption. I have a very small staff that is designed to manage this specific environment. Currently, we're managing 300-400 workstations per administrator. So we get a very high level of density to associate from a support standpoint.

In addition, we can create and deploy workstations exceedingly fast, at a rate some days of up to 50 and 60 a day.

In addition to that, there's the server administration, as Bill mentioned, with Lab Manager and the accompanying technologies from VMware that we use. This small team is also able to manage in excess of 2,000 servers for the same group of developers and the development community.

Naughton: It's really important that we try to provide a service to the development community that they send a case in and Shane’s team does the provisioning, deprovisioning for them. We spin the environments up real quick and deprovision and reclaim the space. So we get efficiency there.

Service component

The service by the admin is taken care of -- the whole process that they need for new environments. You want to make sure the environments get taken care of. So they do both of that. There is a service component to it that we think is important.

Gardner: You're referring here to your application development activities, but your R&D and lab, are they separate? Do they overlap? How does that work, and what have you been using to support them both with VDI?

Martinez: There are two different environments, as Bill mentioned, throughout the lifecycle of creating a new product. Our development community has to obviously create code and write code, but as we become more of a cloud-based service provider to the auto, truck, marine industries that are out there in the world, we become more of that and interact with the Internet.

So that lab, that test environment, needs to be very dynamic as we create new product, release it ,and have it interact with the Internet and some of the OEMs and external parties that have access to that.

As a result of that, this environment also is able to provide us with a very secure, remote location that is separate from our ERP applications, our standalone Salesforce automation applications, etc., where we can have people connect and test product, beta product, alpha product even, in a place that poses no risk to the rest of our infrastructure.

For all of their activities interacting with the lab, it stays contained in the lab, thus securing the rest of our infrastructure.

As we as an organization continue to abstract our operating systems and the applications from the hardware that underlies it, it allows us to become more flexible in how we deliver compute, and application services, both to our internal associates as well as to our external clients.

Private cloud

So ADP has undertaken a great deal of effort in order for it to create its own private cloud infrastructure and the View client and the vSphere environment really is an adjunct to that strategy.

Gardner: All right. One other area that I've heard folks mention, when it comes to the benefit of more centralized control and management, is in the disaster recovery and business continuity aspects. Are you able to also feel lower risk in terms of how you can back up and maintain continuity regardless of external factors for both your application development activities as well as production?

Martinez: Absolutely. By virtue of compressing a great deal of this very critical data and intellectual property into an environment that is virtualized and abstracted by virtue of all the benefits you get with just a virtual environment, vMotion, etc., our data and our environment are much more highly available.

In addition, by virtue of the design, the way in which it’s architected, by bringing all this critical data together, we then can better manage it through a variety of ways that we manage our DR. However, this has really been the stepping stone for us to begin to compress and consolidate all of our distributed lab environments across the world.

Gardner: It almost sounds like a snowball effect, the more you do this, the more you can avail it. The more you can avail it, the more you can apply it, and so on and so forth. Does that overstate in the case when it comes to virtualization?

By virtue of the design, the way in which it’s architected, by bringing all this critical data together, we then can better manage it through a variety of ways that we manage our DR.

Naughton: No. Shane worked with some of the more forward-looking and toughest R&D owners we have -- Hamid Mirza, our CTO and Mark Rankin, the VP of Engineering for our core products, a person who has very demanding requirements -- and they started at the places where we felt we had the most benefit.

So he has evangelized what we have done. That’s really helped with adoption across the business and it's really starting to gain momentum.

Martinez: From a business standpoint we've stopped the technical infrastructure sprawl that we had in our lab environment. So we don’t see that. It was lots of small purchases for servers, for backup infrastructure, for commodity items. That has stopped. So there's a business benefit on just the rates of buying an infrastructure sprawl.

The provisioning and deprovisioning has compressed the cycles that they have of the rote activity that we had in the past. Developing software is a complicated process. So we've automated the steps that we could through the provisioning and deprovisioning.

Relieved the burden

In terms on all the connectivity challenges for developers, where they had to get to environments and the management of those environments, we have relieved the burden on that. They have the client, it spins up, and they are ready to go instantaneously, versus a lot of traversing and a lot of custom configurations just to get the environments to make a mark.

Gardner: What’s the business payback for this so far?

Naughton: This had an ROI, and sometimes the infrastructure on the ROIs are difficult because this is enabling technology. But it made our criteria that we have investment. So the ROI is pretty quick. We have certain criteria before we make any investment. This one fell right in line with it and it’s delivering what it’s supposed to.

Gardner: Is there anything about what you've done with virtualization and desktop virtualization that you think might allow you to go out and bring your apps and business processes to a wider range of devices?

Martinez: Absolutely. The environment has very powerfully allowed us to open up our compute activities at the end-user, associate level, so that they can consume applications that typically wouldn’t be available to them on a pad, tablet device, or even a smartphone. Now, by virtue of being able to access those particular workstations in that environment with the View client, they now can consume those applications that don’t have something specifically written for a tablet or a smartphone.

So effectively, they use that remote View workstation as a jump post that allows them to interact with any application. So we are no longer bound by the restriction that a tablet or a smartphone may normally present our associates.

With this View application, we can disconnect, check out a workstation, allow it to securely VPN in, and then interact with all of our applications in the infrastructure.

In addition to that access, we're allowed to do it securely. Historically if you wanted to allow a tablet or a smartphone to interact with applications, you had to do so straight from the Internet. It was very difficult to do so unless the person was connected to your network.

Now with this View application, we can disconnect, check out a workstation, allow it to securely VPN in, and then interact with all of our applications in the infrastructure, via a mechanism that the associate is comfortable with, and an interface that they have historically worked with. So our adoption rates have been very high.

Naughton: What Shane is describing is for our internal users who need applications that we provide internally to our workforce. From product development side of the house, what’s been exciting about what we have put together is, as they have come up with mobile platforms, as they want to do native development, or they want to go to HTML5, this environment, we'll be able to scan up those environments for new technology for them to test and to write code against very quickly. In the past we would have to set up a mobile platform, set up a gateway, or put up an environment that would do native apps.

Quick spin-up

What we have done here is allowed test, QA, and development very quickly for new technology like mobile, which is there in the midst, where we have actually put product in the marketplace, put mobile product out there against our core applications and we are able to spin up those environments very quickly.

Gardner: Here at VMworld, we're hearing a lot about the new View 5.0. Do you have any impressions about anything in it in particular that’s enticing?

Martinez: Some of the greatest benefits that we see coming down the pike from the new product releases is going to be specifically around the protocols it will support. I think that with some of the features and functionality that can be difficult over high latency links over a wide area network, with improved and tighter protocols, PC-over-IP as an example, the benefits to our associates will be huge.

Some of the challenge is that when you abstract the associate locally from their interface, it can be the WAN, high latency links, etc. We have no challenges with this today, but I can see as we go into more and more remote markets, that we need to support third-world countries, where links can be exceedingly pricy or can be very poor in their quality, this will be a huge benefit to our associates.

Naughton: Depending on where the profiling ends up, that’s also important, because as we get into different user bases in our associate community, profiles is going to be an important piece that will help with faster adoption and the ability to include more of our workforce up to a VDI solution.

Some of the challenge is that when you abstract the associate locally from their interface, it can be the WAN, high latency links, etc.

Gardner: Last question before we wrap up. I imagine too that your success in using VDI for application development is a harbinger of expanding this into other parts of ADP Dealer Services or maybe even ADP at large. Any thoughts about whether you're a proof point that others will look to in terms of taking VDI into even more of your organization?

Naughton: At our payroll division in our corporate office they're looking at different solutions and have solutions in production for VDI. Obviously, the benefits of administrative productivity improvements with patching, deployment, roll outs, streaming applications, are all stuff that are exciting developments.

We have probably gone deeper in our home shore, in our application development areas. But I think that there’s some pretty strong use cases where more of our transaction-based functions like customer support, internal sales, where they are high transaction volumes where a VDI solution would be very helpful.

Listen to the podcast. Find it on iTunes/iPod and Podcast.com. Read a full transcript or download a copy. Sponsor: VMware.

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Exploring business-IT alignment: A 20-year struggle culminating in the role and impact of business architecture

Listen to the podcast. Find it on iTunes/iPod and Podcast.com. Read a full transcript or download a copy. Sponsor: The Open Group.

We've assembled a distinguished panel in conjunction with the recent Open Group Conference in Austin, Texas, to explore the impact, role and opportunity for business architecture.

We'll examine how the definition of business architect has matured, and we'll see why it’s so important for this new role to flourish in today’s dynamic business and IT landscapes. We'll also see how certification and training are helping to shape the business architecture leaders of tomorrow.

Here to help better understand the essential impact of business architecture on business success is Harry Hendrickx, the Chief Technology Officer, CME Industry Unit, HP Enterprise Services and a Certified Global Enterprise Architect; Dave van Gelder, Global Architect in the Financial Services Strategic Business Unit at Capgemini; Mieke Mahakena, Label Leader for Architecture in the Training Portfolio at Capgemini Academy and also a Certified Architect; Peter Haviland, head of Architecture Services in the Americas for Ernst & Young, and Kevin Daley, Chief Architect in the Technology and Innovation Group at IBM Global Business Services.

The discussion is moderated by Dana Gardner, Principal Analyst at Interarbor Solutions. [Disclosure: The Open Group, HP and Capgemini are sponsors of BriefingsDirect podcasts.]

Here are some excerpts:

Gardner: We see that CEOs around the world really are seeking fundamental change from IT. They recognize that we're at an inflection point. Why then is the role of business architect so important now?

Hendrickx: Over the past one or two decades, business-IT alignment has been number one on the CIO agenda, and apparently the organizations have increasing difficulty getting business-IT alignment resolved.
There are quite a few people pioneering in business-IT alignment, but apparently there was no urgency yet to recognize this role more specifically.

HP, in the past two years, interviewed CIOs worldwide, and they all indicated that they face quite large and complex transformation processes. They also recognize that business-IT alignment is one of key issues. We think that the business architect really can provide some resolution to get those processes in better shape and more successful.

Daley: At IBM, we have a CEO study and a CIO study that come out in alternating years. One of the things that started coming out loud and clear in 2010 was that managing complexity and building operating dexterity required a better understanding across the entire company.

We've started seeing a trend to move not just from business IT alignment, but to business and IT convergence. There's an understanding more and more that information technology, and technology in general, is a core part of the business model now. There's an understanding that now we have a situation where business and IT aren’t so much aligned, because of the fact that IT is part of business.

Where we did interviews and surveys and then compiled them for thousands of CEOs, we came up with three key elements. Amongst those was managing and taking advantage of complexity while building operating dexterity. That’s the key theme.

One of the problems that we're seeing from the CEOs is having for decades separated IT as if it was its own business unit, instead of part of the true sense of the business. It's been an interpretive science. To manage that complexity they needed a means by which to start with the design of where they're going and have have a business strategy.

To manage that complexity they needed a means by which to start with the design of where they're going and have have a business strategy.

How do they take that strategy and transform it into technology and into information management? They needed an ability to have a framework in which to have that substantive discussion between the people who were responsible, such as the CIO who is responsible for technology and the operations and the COOs, who are really about the execution of the overall picture.

What we've seen from our CEOs is a need to start being more integrated. There have been market pressures that they having to respond to. The big economic downturn was a big change for everyone, and they are trying to address it.

They're looking at means that they can start integrating more globally. They can start to increase their cost variability and start becoming more agile in how they operate their business. To do that they need a means by which they can more effectively communicate.

Driving understanding

So far, we've been seeing that business architecture is a perfect way to start driving an understanding. It's a place where both people who are used to seeing standard business models like revenue and capability are able to associate that to the different types of architectures and designs that we see coming out of the technology group.

It's giving them a common place to meet and jointly move forward with what they're trying to do in terms of managing the complexity, so they can be more agile and dexterous.

Gardner: What are the stakes here for business architecture and for organizations that can master this? How important is this now?

Haviland: It’s extremely important. What I see is that this is a discipline that’s just crying out for more people and more maturity. You almost need it to become pervasive throughout organizations now.

The most common story I encounter is simply that organizations spent a lot of time in the past creating their processes and then they spent a lot of time feeding technology solutions to those processes. In recent times, the pace of technology change has moved faster than that previous paradigm.

What you're looking at is at people saying, well, I am the business, there are all of these technology options out there. I cannot find a way forward and so how do I exploit those? That is where the business architecture profession is really being pushed to the front.

That said, there is a slight risk here that it may be considered too much in isolation. I mean, it is an architecture profession, it is a part of architecture, and the value of architecture is to provide that aligned view across the various domains that are important in terms of business, technology, information, security, and those types of elements.

When it comes back to what’s at stake for businesses that are investing in this particular area and for businesses that are trying to reconsider the way that they can operate themselves to support technology, they are moving ahead and they have competitive advantage. Businesses that aren’t doing that tend to be left behind, because the pace of change of technology is going to get faster.

Gardner: Does a business architect and architecture have to be at a high level to be successful? Where in the org chart do we typically see this role? Is it near the top? Does it matter?

van Gelder: It depends on the maturity of an organization. Within Capgemini nowadays, we talk about business technology. As Kevin said, business and technology are not separate. Technology is part of the total business.

When we started the Business Architecture Working Group in 2006, there was a lot of discussion about two words, business and architecture, and nobody knew exactly what we were talking about. Everybody had a different understanding of those words. In the last years what you have seen is that business architecture is looked at in a different way.

Currently in the Business Architecture Working Group, we see business architecture as something that brings the balance between all the other architectures in the company -- that’s IT architecture, financial architecture, money, people architecture, and a lot of other architectures.

If business architecture is bringing the balance between the different aspects of a company, then business architecture is something that should be handled in the top of the organization, because balance should be created between all the different aspects in the organization.

Gardner: What then is the fundamental problem that the business architect needs to solve?

Mahakena: It's more like making sure that, whatever transformation you're going to implement, you align all those different aspects. As Dave told us, there are a number of aspects in an organization that might need to change, and you can have all those different architectures for those aspects. But, if every aspect goes its own way in changing, then they will never be aligned. Business architecture is meant to align all of those aspects to make sure that you have a balanced, consistent, and coherent set of operations at the end.

Gardner: It sounds as if we're in agreement that this is a high level function, but what is it that people might stumble upon, if they direct this in a wrong direction? What is business architecture not good at?

Many things at once

Haviland: Business architecture is similar to other forms of architecture, in that it tends to try to do many things all at once. The idea of enterprise alignment is definitely the right outcome, but there is enough complexity there to blow steam out of your head for many, many years to come.

Certainly in our experience in implementing these types of functions in organizations, functions that constrain scope very well, also tend to communicate very well around what their status is, what their progress is against milestones, and what outcomes they've achieved, and they tend to articulate those outcomes in terms of real business value.

What business architecture is not very good at are broad-reaching types of goals that don’t have measurable outcomes.

Gardner: Anyone could stand up and call themselves a business architect, but what is The Open Group, in particular, doing about actually certifying and moving toward a standardization of some sort?

Hendrickx: The first question we get asked is, what's the difference between a business consultant and a business architect or a business analyst and a business architect? We also have enterprise architect and technology architects. Is there a reason for being for the business architect?

This is something we did a lot of research on at HP and we delineated the role of the business architect quite clearly from the business consulting and the business analyst aspect.

The business architect's role is distinct, because he combines the organizational strategy with the operations. He identifies the implications of this strategy, as well as that of the technology for the business operations. This is opposed to the business consultant, who is more outwardly looking to the commercial aspects of the organization and what that means for the structure. The business analyst is looking more at not the structure of the operation, but at the solution level.

When we look at the enterprise architect and the solution architect, the business architect focuses more on the complete implications of the strategy and technology trends on the operations, whereas the enterprise architect is more interested in the IT and the implications for the IT strategy and how IT should be deployed. The business architect is much more focused on the complete performance of the business operations.

So, the bottom line of these delineations of the past one-and-a-half years is that there is a reason for being for a business architect. It is a distinct role and it has a real solution for a problem.

Defining the profession

Mahakena: What we've been doing in the Business Forum, after we decided that business architecture has its own reason for existence, we described the business architecture profession -- what's the scope and what should be the outcome of business architecture. Now, we're working on the practice of business architecture by defining a framework, looking at methods, and defining approaches you can use to do business architecture.

Parallel to that, if you know what the profession is and what the practice is, you're able to create the business architecture certification, because those things help you define the required skills and experience a business architect needs. So, we are working on that in the Business Forum.

Daley: Let's look at business architecture from the concept that has existed, combining the thoughts of what Mieke and Harry have already talked about. When we work with clients, for those of us that are in consultancies, we see that there is normally something that’s similar to business architecture, but it's either a shadow organization inside a purely business unit that isn't technology focused, or it is things like the enterprise architects who are having to learn the business concepts around business architect anecdotally, so that they can be successful in their roles.

I'd suggest that we're seeing a need to make it more refined and more explicit, so that we're able to identify the people that fit for this. They have specific things, instead of having general things that we have today. For me, the certification helps provide that certainty as a hiring manager or as somebody who is looking to staff an organization.

It provides that kind of clarity of what they should be doing, giving them specific activities, specific things they do that create value for the company. It takes out of the behind the scenes action and pull something that's critical to success into the front with people who are specifically aligned and educated to do that.

Globalization is creating more and more complexity in the business models that organizations are trying to operate within.

Gardner: How does the globalization impact the importance of this role?

Haviland: Globalization is creating more and more complexity in the business models that organizations are trying to operate. Over the last couple of decades, with the science and engineering of IT, there has been enormous investment by companies to actually operate, maintain, and improve their IT in their current world.

In many cases, this IT work has outpaced the comparable business efforts inside those organizations, when they actually think about their business, their business models, and their business operating principles.

What we're actually seeing now is that the rigor, the engineering, and the effort that’s put into technical architecture and IT architecture is now being proposed on the business side, with many business management process improvement activities. These tend to be at quite a low level, however, when you compare them to business architecture initiatives at the enterprise level.

Scope and challenge

If those architecture initiatives are at the high levels that are needed, you start to consider the scope and challenges that come into play, when you start talking about globalization. So, with the increase in scope and the global way that people are operating across cultures, geographies, and languages, that requires this discipline, which does operate at that high level to start to organize the other areas, but perhaps at a lower level.

Hendrickx: There are two aspects that need to be paid more attention to with globalization and more complexity. First, the business architect is, or should be, equipped to look at the organization, not only within the boundaries of an organization, but also the ecosystem of organizations that will mold together and have to be connected to produce the value.

Since these are more formalized contracts or relationship with different organizations connected to each other, there is a dynamic that is hardly seen anymore, that is not transparent anymore. There clearly needs to be some more detailed insights and transparency for each organization, so that people understand what the impact of certain developments or events will be. This can't be done just by logic or just by watching carefully. This really needs some in-depth analysis for which the business architecture is built.

The second part of it is that the due to the complexity, the decision making process has become more complex and there will be more stakeholders involved in the different areas of decision making. The business architect has a clear task and challenge as well. By absorbing the strategy, technology trends, and the different developments and focusing on the applications for operations, he has the opportunity to discuss with the different stakeholders. He has the opportunity to get those stakeholders either mobilized or focused on specific decisions: the deliverables you will provide.

If you start talking to all those other areas in the business, then suddenly people have a completely other way of thinking. Sometimes they use the same words and don't understand each other.

Gardner: We certainly see a lot of important characteristics in this role: global, strategic high level, encompassing business understanding, as well as technology. Where do you go to find these kinds of people? Who tends to make a good business architect or is there no real pattern yet established as to who steps up to the plate to be able to manage this type of a job?

van Gelder: To all the complexity already mentioned, I'd want to add something else that we found in the Business Architecture Working Group, which is more research in the whole field. That's the problem of communication. How do people communicate with each other?

If you look in the IT world, most people come from an engineering background. It's hard enough to talk to each other and to be clear to each other about what's possible and how you should go or what you should go for. If you start talking to all those other areas in the business, then suddenly people have a completely other way of thinking. Sometimes they use the same words and don't understand each other.

It’s not easy to have these kinds of people that need very good communication skills next to all the complexity that you have to handle. On the other hand, you need an architect when it's complex. You don't need an architect when it's simple, because everybody can do it. But an architect is just a person. I say if I am a simple person, I can only handle simple things.

What you need are people who can structure. I can only work with things when I can structure it, when the complexity is fairly well-structured. I then have overview of all those complexities, and then I can start communicating with all the parties I have to communicate with.

No real training

At the moment, I don't see any real training or development of these kinds of people that you need. Most of them come with a lot of experience in a lot of fields, and because of that, they have the possibility to talk to all kinds of people and to bring the message.

Gardner: Mieke, at Capgemini Academy, you’ve obviously encouraged and encountered folks moving towards a business architect role. What are your thoughts on what it takes and where they tend to come from?

Mahakena: Let's have a look where they can come from. What you see is that this role of business architect can be a next step in one’s career. For example, a business analyst, who has been creating a lot of experience in all kinds of fields, and he could evolve to watch a business architect. This person needs to get away from the detail and move towards the strategy and a more holistic view.

Another example could be an enterprise architect who already has analytics skills and communication skills. But, enterprise architects are more or less focusing on IT, so they should move more towards the business part and towards strategy and operations.

One could be the business consultant who is now focusing on strategy, also should have those communication skills, and will be able to communicate with stakeholders in high positions in companies. Business consultants have a lot of industry knowledge. So they should need more knowledge about technology and perhaps improve their analytics skills and learn more to how to structure operations.

There are number of existing roles that already have a lot of skills required for business architecture. They just have to enhance skills and get new skills to do this new role.

So, there are number of existing roles that already have a lot of skills required for business architecture. They just have to enhance skills and get new skills to do this new role.

Gardner: We talked about how this is important because of the internal organizational shifts and the need for transformation. We’ve seen how globalization makes this more important, but I’d like to also look a little bit at some of the trends and technology.

We’ve seen a great deal of emphasis on cloud computing, hybrid computing, the role of mobile devices, wirelessly connected devices, sensors, and fabric of information which, of course, leads to massive data, and they need to then analyze that data.

This is just a handful of some of the major technology trends. Kevin Daley, it seems to me that managing these trends and these new capabilities for organizations also undergirds and supports this need. So how do you see the technology impetus for encouraging the role of business architect?

Daley: I'm seeing from my work in the field that we’ve got all these things that are converging. Certainly, you've got all these enabling technologies and things that are emerging that are making it easier to do technology types of things and speeding them up. So, as they start maturing and as organizations start consuming them, what we’re seeing is that there’s a lack of alignment.

Business relevancy

What this trend is really doing is making sure that you have something that is your controlling device that says what is the business relevancy? Are we measuring these peer-to-peer -- measuring something such as massive data and information fabrics compared to something like cloud computing, where you are dispersing the ability to access that more readily. It creates a problem in that you have to make sure that people are aligned on what they're trying to accomplish.

We're seeing that the technologies that are emerging are actually enabling business architecture in a fashion. It provides that unified vision, that holism, that you can start looking at combinations of these technologies, instead of having to look at them as we’ve had to in the past of siloed elements of technologies that have their own implications.

We're using business architecture as a means to provide the information back to the business analyst who is going to look and help. You can provide the business implications, but then you have to analyze what that implication means and make decisions for how much of that you’re willing to accept within your organization.

In the notions around how I investigate risk, how I look at what is going to improve market, and what is the capacity of what I can do, there's a disconnect that business for which architecture is helping provide the filler for to get to the people that are doing these corporate strategies and corporate analysis at a level. That allows them to virtualize the concept of the technology, consume what it means and what that relates to for a business or in terms of its operation and strategy and the technology itself.

We’re seeing this become the means by which you can have that universal understanding that these are the implications, and that those implications can now be layered, so that you can look at them in combination instead of having to deal with each technology trend as if it's a standalone piece.

When you adopt technology, it obviously has a level of maturity it has to reach, but it also has a level of complexity.

We're seeing this as a means by which to provide some clarity around what any adoption would be. When you adopt technology, it obviously has a level of maturity it has to reach, but it also has a level of complexity. It's being able to start taking advantage of more than just one technology trend at the same time and being able to realistically deliver that into their business model.

What I have been seeing is that the technologies are driving the need for business architecture, because they need that framework to make sure that they are talking apples to apples and that they are meaning the same thing, so that we get out of the interpretation that we have had in the past and get into something that’s very tactical and very tactile, and that you can structure and align in the same way, so you understand what the full ramifications are.

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