Out of the Box--Strategies for Achieving Profits
Today and Growth Tomorrow through Web Services
[This week, a special edition dedicated to a review of John
book. I shared an early draft of this review with John, who
generously took time to reply. Where he convinced me of his opinions,
I've preserved some of my original comments for the sake of encouraging
debate and to further illustrate the issues.]
Whether you tend to agree with him or not, there's no doubt that
John Hagel III has become one of the most influential business/technology
strategists of the dot-com-and-beyond era. Last month, accenture
ranked him 67th on their list of Top
100 Business Gurus.
I first became aware of John in 1997 when I read his book, Net
Gain (co-authored with Arthur G. Armstrong) that addressed
the concept of virtual communities. As part of a management
team then building an on-line dating service, I found the book
both inspirational and distracting--a reaction I've now come to
expect to John's writings.
John continues to write important books aimed squarely at the
current hot topics. He did it again in 1999 with Net
Worth (co-authored with Marc Singer) all about infomediaries.
At that time I was developing just such a business, and again,
I was both inspired and distracted. And now here he comes with
Out of the Box, just as I'm trying to finish my own book
on web services. John is always a few steps ahead of the rest
Why distracted? Because John gets us thinking beyond our current
concerns. He straddles the line between strategist and futurist,
and he's good at both roles. But the reader's challenge is to
separate the solid strategy from the hypothetical futurism. It's
often hard to find the boundaries in John's books, and the latest
is no exception. In fact, the subtitle warns us to expect it:
of the Box--Strategies for Achieving Profits Today and Growth
Tomorrow through Web Services. (We cut futurists some
slack, and only expect them to be right half of the time. For
example, those venture-backed pure-play infomediaries are all
dead. With perfect hindsight, we can see why, but in 1999 I drank
the Kool-Aid along with everyone else.)
This is not a technical book. It's for business managers. If
you want to learn anything technical about web services, look
elsewhere. The book has four parts, each emphasizing a high-level
- Part One (64 pages) introduces web services to the business
- Part Two (40 pages) describes the near-term opportunities
to reap benefits from web services. Dell Computer Corporation
provides the primary case study.
- Part Three (46 pages) introduces the concept of Process Networks
as opposed to the traditional tightly coupled approaches to
business-process re-engineering. Cisco and Nike are used as
- Part Four (44 pages) is John's longest-range pitch for leveraging
growth. He refers to Li & Fung as pure-play business-process
I'm not going to tell you all I agree with in this book. There's
too much. But I'll use this opportunity to point out the few themes
with which I take some exception to John's positions.
The Service Grid
Together with his frequent accomplice, John Seely Brown, John
introduced the phrase service
grid to describe the delivery of middle-tier technologies
of web services--those that are not yet standardized, but that
are still horizontal or non-application specific--by specialized
third-party service providers. The service grid supports shared
utilities (security, auditing, billing and payment); service management
(provisioning, monitoring, QoS) resource knowledge management
(directories, brokers, registries, data transformations); and
transport management (message queuing, routing, resource orchestration).
John believes that the "...functionality delivered by
the service grid [will] be provided by specialized utilities,"
specifically these third-party service providers. "All of
this functionality could be provided by software utilities installed
within the enterprise. Managers who choose this option, however,
must wrestle with significant complexity, both in terms of the
implementation of the software and then in terms of the management
of regular updates of functionality...Take the example of security
services...in the absence of a service grid [security] would
need to be dispersed across each enterprise. Even very large enterprises
would have difficulty building the depth necessary to ensure world-class
If that was the case, we wouldn't be using network-layer firewalls
today. Instead, we'd all be accessing the public Internet through
EDI-style value-added networks (VANs) whom we'd be paying to manage
security for us.
Many of the elements of the service grid can be delivered as
well or better by software or appliance vendors. Application firewalls
or XML proxies are no harder to maintain than today's network
firewalls. To the extent they require development of extensive
application-specific rules, those tasks are equally as demanding
when implemented by third-party services. There's no reason we
can't plug rules into our own firewalls rather than dictating
them to suppliers who then enter them for us.
In a subsequent discussion with John, he expressed two concerns:
First, that it's to everyone's advantage to reduce complexity
and cost at the end points of the connections and to concentrate
it in shared services that are better equipped to leverage economies
of scale and scope. I see his point. But I wonder if it's not
a temporary phenomenon. Once the standards are in place, won't
the solutions become commoditized and easily packed as appliances?
As I wrote back in early July, I expect the horizontal technologies
of the service grid (the center layer of my web-service
pyramid) to so migrate over time, forcing the web-services
networks to work their way higher up the pyramid.
John's second clarification about the importance of the service
grid is particularly interesting as it relates to this evolving
role of service providers. He pointed out the value (and cost)
of learning. "No matter how well defined the rules are,"
he said, "there will always be exceptions--this is where
much of the complexity and cost is concentrated. The opportunity
is to create robust feedback loops regarding exceptions that have
occurred so that rules and practices can be further enhanced to
reduce exceptions. Service grid providers will see a broader range
of exceptions than any individual company will see and they therefore
have a potential to accelerate learning and refinement of policies
and practices in a way that would be difficult, if not impossible,
for any individual company to replicate." [I took the liberty
of quoting a private communications from John because I just couldn't
think of a better way to say it.]
By the way, readers should consider that John was a founder of
12 Entrepreneuring, the incubator that gave birth to Grand
Central Communications, the quintessential third-party
service-grid providers. I'm not suggesting any conflict of interest--indeed
John's consistency is a virtue--but there are viable alternatives
to fleshing out the service grid.
The "Where to Start?" Question
"Given the capabilities and economics of web services
technology, early adoption tends to concentrate at the edge of
the enterprise, where business processes need to interact with
many other enterprises. It is here, in functions like sales and
procurement, that the limitations of existing technologies are
John has been leading the charge for companies to focus their
initial web-services efforts at the edge of the enterprise. He's
repeatedly said and written that this is where companies will
realize the greatest benefit in the short term, and throughout
the book he makes a convincing case to support his argument.
On one hand, the arguments are anecdotal, based on case studies
such as Dell, who undoubtedly has achieved tremendous benefit
from their efforts. Does this apply to all companies? I suggested
that only companies that are the 800-pound gorillas of their markets
or companies whose businesses are dedicated to supporting one
such gorilla can make the case for a positive ROI from such external
web-services projects today. On the other hand John has now studied
over 60 production web-services implementations, probably
more than anyone else, and he's convinced that not only is this
what companies are actually doing, but that it makes sense because
it's where the distinctive advantages of web services today are
most pronounced relative to previous generations of technology.
John does caution against having unrealistic expectations, but
he doesn't go far enough. "Precisely because not all elements
of the technology architecture are in place today, business managers
must be realistic about what is achievable with the current state
of the technology. They must map out a migration path based on
an objective assessment of current capabilities of the architecture.
They need to avoid initiatives that depend on elements not yet
If you're one of those 800-pound gorillas, by all means mandate
the XML business semantics for your suppliers and/or channel and
reap the benefits today. But most companies aren't in this position,
and I think it's important to consider that for such companies
the R in ROI may not exceed the I at this time. Remember,
the cost of investments in web services will decline sharply over
the next few years. There's a tremendous risk of investing in
external projects too early. [Take a look at my so-called O'Reilly
Curve, an early version of which I published in April.
It illustrates how ROI can be dramatically improved by delaying
the start of a projects in situations where development costs
are declining rapidly.]
John questioned why my argument doesn't equally apply to internal
projects. It's because more of the costs associated with these
simpler projects have already declined, whereas many of the problems
unique to external projects (those addressed by the service grid,
in fact) are still complex and expensive to solve. By definition,
the service grid exists only to meet the needs of external web
John also predicts the future relationship between ISVs and
web services. "Even leading application vendors like PeopleSoft
and SAP are racing to implement XML standards within their major
Racing? I'm not sure about that. They're doing so, but only to
keep up with their competitors. Indeed, web services represent
a substantial threat to the entrenched ISVs, for web services
will undoubtedly lower the barriers to entry for any upstart companies
that want cherry-pick opportunities to replace functions of major
application suites on a module-by-module basis. ISVs certainly
fear such a commoditization of applications and components. Web
services are a classical disruptive-technology catalyst.
I've gone out of my way to find topics on which I disagree
with John, but this book contains far more to agree with, including
some gems. Here are four of my favorite quotes:
- With regard to process-reengineering proponents..."their
end-to-end view usually stopped at the edge of the enterprise.
More enlightened proponents would occasionally include direct
business partners of the enterprise. None expanded the notion
of end-to-end to include the entire value chain..."
- "The high cost of complexity was the dark side of the
much-touted network-effect business models on the Internet...Due
to the n-squared problem operating costs were also rising
exponentially as more participants joined."
- "Whenever a company decides to outsource a business process,
the process becomes part of the edge of the enterprise."
- "...most of the economic value of a business is concentrated
in the processes that surround a transaction, rather than in
the transaction itself."
It's important to remember that like any other hard-copy book,
Out of the Box was subject to publication lead times of
many months, and in this rapidly changing world of web services,
that can be an eternity. I urge you to visit John's web
site and check out his more-recent working papers.
In Out of the Box, John Hagel continues his string of
stimulating and distracting writings. This is the best to date,
and because it's not specific to the world of e-commerce--or perhaps
because e-commerce now is the world--this is the book I
suspect will appeal to the broadest audience.