The ROI of SOA

In today’s world of tight IT budgets, increased regulation, global competition, and accelerating change, companies (and governments) require quantifiable results from their investments in technology. No executive will sign off on any investment in new technology without a solid expectation for how it will deliver value to the business. When people understand an established technology and how it will provide value over time, calculating the return on investment (ROI) for an IT expenditure will often be a straightforward process. However, calculating ROI on projects involving new technologies or emerging IT approaches like Service-Oriented Architecture (SOA) is frequently more of an art than a science.

What makes calculating the ROI of SOA even more challenging is that architecture, by itself, doesn’t offer specific features that companies can readily identify with some particular return. After all, architecture is an investment that companies must make well in advance of any return, and must continue to make over the lifetime of their SOA implementations. How, then, can managers calculate the ROI of their SOA initiatives before those projects take place? What are the tangible benefits of SOA that can result in a quantifiable ROI for the implementers? On the other hand, how should companies calculate the expected return that those tangible benefits will provide to the organization? Only by understanding the full range of SOA value propositions can companies begin to get a handle on calculating the ROI of SOA, and even then, it may be impossible to understand SOA’s true ROI before the project is complete, because SOA addresses issues of fundamentally unpredictable business change.

Reducing Integration Expense
SOA provides benefits in four basic categories: reducing integration expense, increasing asset reuse, increasing business agility, and reduction of business risk. These four core benefits actually offer return at many different levels and parts of the organization, depending on which set of business problems the company is applying SOA to. First, implementing loosely-coupled integration approaches can reduce the complexity and hence the cost of integrating and managing distributed computing environments. While moving to standards-based interfaces such as Web Services reduces integration cost somewhat, the real win with SOA is in replacing multiple function calls at a fine level of granularity with coarser-grained, loosely coupled Services that can handle a wider range of interactions in a more flexible manner than API-based integration.

Calculating the ROI for using SOA to reduce integration expense is fairly straightforward. Companies can compare their investment in Web Services-based SOA to an equivalent traditional integration middleware approach and then compare both the immediate licensing and configuration cost reductions as well as the longer term maintenance and change costs. As we’ve detailed in our Understanding the Real Costs of Integration ZapFlash, companies can realize significant and immediate ROI from simply moving from tightly-coupled forms of integration to loosely-coupled ones.Eventually, companies can phase out their more expensive integration approaches altogether, without suffering from the traditional pain associated with “ripping” out the infrastructure. Companies are now implementing SOA side-by-side with their existing EAI and ETL projects, providing immediate cost reduction, while over the long term, SOA can lead to significant complexity reduction, as companies gradually replace their legacy middleware technologies.

Increasing Asset Reuse
While reducing integration expense can often justify an initial SOA project, seeing SOA as simply a way to reduce such expense is short-sighted. For one, an SOA is viable even in an environment of homogeneity. Second, an integration-centric mindset doesn’t provide a way to achieve ROI when companies require new uses of existing infrastructure. Instead, the reuse of existing Services provides an additional ROI for companies looking to implement SOA.
It is well known that companies spend very little of their time and budget building new applications that solve the continually evolving needs of the business. Part of the reason for the lack of emphasis on new application development is the fact that each new application is frequently created in isolation from the previous applications built, resulting in a new piece of the IT puzzle that in turn must be integrated with other components, exacerbating the integration problem that we addressed earlier in this Flash. Clearly, new applications need to be built in such a way that not only reduces the cost of development, but also maintenance, over time.

One of the most important benefits of SOA is that users can create new business processes and composite applications from existing Services. In other words, Service reuse becomes the mantra, rather than application integration. As they create new Services that they can in turn reuse for new composite applications, companies can realize significant return from their composite application development investment. As a result, the economics of composite application development that leverages SOA improve over time, as companies build and reuse an increasing number of Services. It may even be possible to shift the 70% now spent on integration to new app development. The returns companies can realize in this asset reuse scenario for SOA are not simply the cost reduction of simplified integration, but also improved time-to-market, more responsive customer service, reduction in overall staffing, and a greater ability to outsource or offshore Service creation, implementation, and even composition. Any ROI calculation based on the asset reuse benefits of SOA must therefore take into account all of these parts of the SOA value proposition.

Increasing Business Agility
While reducing costs and increasing reuse provide clear ROI for SOA, increasing business agility is the most promising benefit of SOA as well as the most difficult to quantify. While simplification of integration and improvement of reuse are technology-centric benefits, business users also demand greater flexibility from IT. Rather than simply creating requirements that they then toss over the IT development wall for months-long implementation cycles, business users want immediate control over their operations so that they can make rapid changes to their businesses as market forces change.

The ROI scenario required for calculating the value of this business agility benefit centers on the ability for business users to directly control business process definition and management. Through Service-Oriented Process, companies can delegate parts of their overall business process flows to different parts of the organization, each of which have direct and immediate control of the actual operation of the business. The resulting business return from an SOA investment are dramatic improvements in business efficiency as well as the ability to embed a company’s business processes inside the operations of their suppliers or business partners. Thus, the return here affects not just the bottom-line of a company’s operations, but also its top line. Increased business agility may result in the ability to capture revenue streams that the company previously considered to be inaccessible, and affords companies ways to provide value to their suppliers and partners that can result in significant new business opportunities. By extending the reach of SOA to business users, it can deliver ROI to the business as a whole, rather than simply the IT department.

Calculating the business agility ROI of SOA, however, can be extraordinarily difficult, because the new uses that businesspeople will apply their IT resources to are inherently unpredictable. After all, the whole point to agility is to be able to deal with unexpected change! Therefore, it often makes sense to restrict the business agility ROI calculation to a particular scope, for example, situations where product information is regularly changes, business partners and processes regularly modified, or other supply chain scenarios.

Reducing Business Risk and Exposure
Regulatory compliance is essentially a business agility issue, because such regulations are inherently arbitrary, and can change over time. Today, regulations like Sarbanes Oxley, the PATRIOT Act, and Basel II mandate changes within companies that drive IT implementations. The penalties of non-compliance can severely impact a company’s financial position, as well as the liberty of its executives. Many companies simply lack the visibility into their business operations that they need to make intelligent planning decisions and control their risk, let alone respond to the increased visibility that these regulations require.

Increased business visibility in the face of changing regulations is a concrete instance of the business agility benefit that SOA can provide. Specifically, SOA primarily offers a risk-reduction capacity to companies looking for increased operations visibility. Governance, compliance, and general risk reduction is a different quantifiable benefit than increased business agility. Compliance and governance offers a reduction of liability, while business agility offers an increase in business opportunity. Both are important, but they speak to different parts of the corporate psyche.Quantifying the reduction of risk in order to calculate the ROI of an SOA-based compliance project is actually a tricky proposition. Just how much is compliance worth? The answer lies in how much non-compliance will cost a company. The ROI of risk reduction is much like the ROI of insurance or security — its value derives from the prevention of an unknown expense.

Implementing SOA for the purpose of controlling business processes, establishing corporate-wide security, privacy, and implementation policies, and providing auditable information trails, are all examples of ways that SOA can reduce several of the risks facing companies today. In fact, the central technology offices of many large companies often find that the primary benefit of SOA is in regulatory compliance and the associated reduction in risk. While the reduction in risk that SOA provides is tangible, it is difficult to quantify the true ROI of an SOA implementation where risk reduction is a primary benefit. At the end of the day, companies will find value in implementing SOA to reduce risk to some arbitrarily acceptable level, and base the ROI of that implementation on the perceived avoidance of loss that the implementation addresses.

The ZapThink Take
Because of the multi-faceted nature of the SOA value proposition, ROI calculations for SOA projects can vary greatly from one project to another. Rather than seeking a single ROI goal for an SOA implementation, companies should take the same iterative, composite approach to ROI that they take for SOA implementation itself. For example, every time they define a Service as part of a company’s Service model, they should also define a corresponding ROI objective for that Service. How much will they spend on this Service? What direct and indirect returns can they realize from this Service’s implementation, in terms of reduced integration costs, improved asset reuse, or greater business agility? Furthermore, as this particular Service is reused in the company, how will the composition of the Services into processes realize additional ROI for the business?

In many cases, SOA implementations can provide a clear, positive ROI from the first day a Service goes live. However, it is more likely that ROI expectations, like SOA implementations, should be iterative in nature, frequently assessed, and composite. In doing so, users can not only quantify, but also realize, the return on investment of their SOA implementations.

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