Service-

oriented
architecture
IBM Global Business Services
Application
Innovation Services
A practical guide to
measuring return on
that investment
IBM Institute for Business Value
IBM Institute for Business Value
IBM Global Business Services, through the IBM Institute for Business Value,
develops fact-based strategic insights for senior business executives around critical
industry-specific and cross-industry issues. This executive brief is based on an
in-depth study by the Institutes research team. It is part of an ongoing commitment
by IBM Global Business Services to provide analysis and viewpoints that help
companies realize business value. You may contact the authors or send an e-mail to
[email protected] for more information.

1
Service-oriented architecture

Introduction
Unless youve been incommunicado for
the last few years, youve doubtless noticed
the extensive press that SOA has recently
received. Though the term can be intimi-
dating, the fundamental concept is really
quite simple and very powerful. Its that to
meet your present and projected business
needs, you can turn your software applications
into building blocks that you can infinitely
rearrange, and usually at great speed. It gives
you a new way not only to reconfigure your
business, but to connect to suppliers, partners
and customers.
Much like the Internet before it, SOA is
sweeping through companies and industries,
upending the competitive order. Thanks to
SOA, companies are fast commissioning new
products and services, at lower cost and with
less labor, often with the technology assets
they have right in hand. Its like discovering
that with your existing condiments, you can
make an entirely new and unexpected recipe,
to the delight of your diners and of course
yourself. Most important, SOA is helping to put
IT squarely where it belongs: in the hands of
the business executive, under whose direction
it can create the most value.
This is, at any rate, the theory of the case
but, IBM wasnt content to accept the theory
at face value. So we undertook to study 35
SOA projects, across a range of industries
and regions, with which we were intimately
involved.
1
We discovered that indeed, every
last one of them exhibited improved flex-
ibility, and the vast majority decreased costs
as well as realizing a host of other benefits.
But we also discovered something very
intriguing: Companies, if they developed a
business case at all for SOA, werent doing it
in the traditional way replete with exhaustive
evidence. They all recognized the difficulties
A practical guide to measuring return on that investment
With service-oriented architecture (SOA), good things dont come to
those who wait. While companies shouldnt abandon building a business
case for SOA, they should, in the interest of speed, take a simpler, more
intuitive approach.
Service-oriented architecture
2 IBM Global Business Services
and limitations inherent in building a business
case for any fast-emerging technology. But
whether they built a business case or not,
they all implicitly understood that SOA entails
massive business benefits not least in the
crucial area of innovation and that given
the speed with which SOA was conquering
their industries, they had better get on with
it if they didnt want to be left out in the cold.
Striking the middle ground between no
business case and the traditional one IBM
has developed a simplified approach to
measuring the business value of SOA. That
approach is the subject of this paper.
2 IBM Global Business Services
3 Service-oriented architecture
Diminishing returns of measuring returns
Jim Smith, business analyst at De Vine Enterprises, rubbed his eyes in exhaustion.
2
It was 11 p.m., and this
was the third night in a row he was stuck in the office this late. Why? He was laboring over the business case,
now 30 pages long, his manager had asked him to prepare and he still had numerous assumptions to verify.
The business case sought to define the costs and benefits of using SOA instead of more traditional approaches
to developing a new capability to electronically connect De Vine with its business partners. This morning, he
read in the trade press that a competitor that had introduced a new Web-based service using SOA was able to
connect six major partners (two formerly De Vines) in a matter of days, with scant labor and cost. He compared
that to the round of reviews his own business case would have to endure, only to meet an uncertain fate at the
hands of the numerically-exacting CEO. True, he mused, the initial cost of an SOA approach is comparatively
high, but implementation after implementation, application after application, the incremental costs decline while
the benefits rapidly introducing new products and services, entering new markets, generating new revenue
and more soar. Jim sighed. He knew that some kind of formal business case was necessary, but, he lamented,
while others act and reap the advantages, we overanalyze.
SOA: A brief primer
First, what exactly is SOA, and why should
companies press ahead with it?
SOA is an approach to designing software that
dissolves business applications into separate
services that can be used independent
of the applications of which theyre a part
and computing platforms on which they run.
When individual services within applications
are all available as discrete building blocks,
companies can integrate and group them in
different ways to create completely new capa-
bilities (see Figure 1).
Service-oriented architecture
A practical guide to measuring return on that investment
A common analogy for this sort of software
design is the popular childrens toy: LEGO
building blocks. A service-orientation turns
your entire application portfolio and that
of your partners into technological LEGO
blocks that can be snapped into virtually any
configuration. Since, like LEGO, the only real
limit on what can be done with these blocks
is the builders imagination and vision and
no longer the technology itself (stripped of its
rigidity and incompatibility) SOA turns tech-
nology into a supple instrument of business
strategy.
4 IBM Global Business Services
The benefits to individual firms, as they them-
selves recognize, are substantial. Based on
an analysis of 35 actual SOA implementations
in 11 industries worldwide, we gained a very
clear picture of the kinds of benefits firms are
obtaining from SOA (see Figure 2).
As shown in Figure 2, one hundred percent
cited improved flexibility, the root of all the
other benefits. For example, for one of its
brands, a large retailer with both a physical
and Web presence redesigned its Website to
better match the selling process in its stores.
The store not only improved the business
process for that brand, but, using SOA, availed
the application for use across its multiple
other brands. This new flexibility compounded
the original benefits of shorter cycle times,
increased collaboration, and reuse of IT assets.
These benefits were typical of the projects we
reviewed.
Therefore, the case for adopting SOA is
exceedingly strong. But that doesnt neces-
sarily mean that the way you approach it is
predestined, or that youre absolved of the
necessity to measure its benefits. Like any
other investment, SOA has to be assessed
systematically. To assist business leaders with
this assessment, we suggest a method for
analyzing SOA investments that balances rigor
with the need to act fast.
FIGURE 1.
SOA illustration.
Business applications
Fixed rate mortgage
system
(Packages)
Broken into discrete services (repeatable business tasks, e.g., open new account, check credit history)
New capabilities
Integrated
statement processor
(Mainframe legacy)
Unsecured loan
system
(.NET)
Adjustable rate mortgage
system
(Custom J2EE)
Partner
service
Source: IBM Institute for Business Value.
New hybrid credit product system
that combines services from
legacy applications
New WebCredit portal that assembles
services from both internal and
external sources
A B C D E F G H
B C G A C F
Businesses need a
simpler method for
measuring returns on
SOA investments.
5 Service-oriented architecture
The challenge with measuring SOA
Not everything that can be counted counts,
and not everything that counts can be counted.
Albert Einstein
3


Measuring returns on emerging-technology
investments is notoriously difficult, but the
problem is compounded when as with SOA
implementations cross internal and external
organizational boundaries, but budgets do not;
when inadequate controls exist to measure
performance; and when returns are at least
partly dependent on external partners, or
performance is measured elsewhere.
Indeed, numerous companies and individuals
attest to the difficulty of measuring technology
ROI. A British study found that 89 percent
of companies use intuition or guesswork
to calculate the ROI of IT expenditures, and
that those that calculate it more precisely
are predominantly medium-size and large
organizations in the IT sector.
4
Echoing the
frustration of many business and IT execu-
tives, Intel CIO John Johnson recently said,
Its not always easy to predict how you would
even do an ROI analysis. You could spend a
year figuring out ROI, and then you might have
wasted a year.
5
Expressing the total return in
precise financial terms is difficult and can
Improve exibility
Decrease cost
Reduce risk
Increase revenue
Enable new products
Enable compliance
FIGURE 2.
Benets reported by the SOA projects studied.
Source: IBM Global Business Services analysis of 35 SOA implementations.
Percent
100
43
51
26
97
71
sometimes be misleading. A CIO Magazine
article quoted one IT executive as saying, ROI
has more credibility when its stated in raw
benefits, which are sometimes non-quantifi-
able, rather than translated into dollars. That
translation is often fuzzy and tends to lose
some audiences.
6
Clearly, the attempt to measure technology
ROI is fraught with difficulty. But then it isnt
impossible and, done right, it can yield a
wealth of valuable insight. Hence, weve
developed a simplified framework for under-
standing SOAs return on investment.
The SOA investment analysis
framework
We sought to simplify the measurement
approach and make it more meaningful by
doing several things: establishing a benefits
framework specific to SOA, but without adding
any predetermined metrics that project
managers would need to collect; establishing
a cost framework that focuses on limited
choices and ways to depict the costs incurred;
setting the number of implementations as
the basis for including the time element to
examine the return; and avoiding complex or
indirect metrics such as labor learning curves,
cost savings from the retirement of legacy
systems and so on.
6 IBM Global Business Services
The investment analysis framework we
propose has five primary steps:
1. Selecting the expected benefits from the
benefits framework
2. Identifying the applicable cost scenario
3. Calculating the initial, simple return
4. Assessing and selecting the cost scenario
for the second and subsequent implementa-
tions
5. Keeping the benefits constant, calculating
the returns for the second and subsequent
implementations.
We believe this method will make it quite clear
if it isnt already that the benefits of SOA far
outweigh the costs and that the benefits grow
over time, while the costs decline.
1. Select the benefits received from the
benefits framework.
The SOA benefits shown in Figure 2
improved flexibility, decreased costs, reduced
risk, increased revenue, the enablement of
new products and services, and improved
compliance were analyzed to create the
benefit value tree shown in Figure 3.
As Figure 3 shows, we found that we could
distill the benefits into two broad categories:
improved flexibility, culminating in increased
profitability (from both increased revenues and
decreased costs, a double boon not associ-
ated with most technologies). Further, we
found that there were two major more-qualita-
tive elements that contributed to increased
profitability: reduced operating risk and
improved ability to comply.
FIGURE 3.
Flexibility and protability value drivers.
Source: IBM Institute for Business Value.
Existing
revenue
protected
Improved
ability for
compliance
Improved
exibility
Ease of
integration
New product
development
enabled
Improved
ability to
change
Increased
reuse
Reduced
time-to-
market
Reduced
systems
downtime
Reduced
errors
Reduced
processing
time
Increased
protability
Reduced
integration
Reduced
operational
risk
Decreased
costs
Increased
revenue
Reduced
maintenance
cost
Reduced
integration
cost
Existing
revenue
increased
New revenue
generated
Flexibility
value
drivers
Protability
drivers
The many expected
benefits from SOA begin
with improved flexibility
and culminate with
increased profitability.
7 Service-oriented architecture
These last two might not be obvious, but
consider: SOA affords an alternative to
rip-and-replace the present outcome of
technological obsolescence by exploiting
and extending the life of existing IT invest-
ments. And it provides reusable software,
reducing the risk of delayed IT projects and
thus increasing the likelihood of timely new
product and service introductions. As well,
SOA enables faster and more thorough
compliance with external and internal
mandates. How? By centralizing a common
source of functionality, changes made to
comply with the mandate can be done once
and used throughout the enterprise, elimi-
nating duplication.
The point is that though you can look at the
benefits in Figure 3 in isolation and theyll
be quite sizeable, to capture their full extent
you have to factor in the impact that various
benefits have on other benefits (e.g., from the
chart, increased reuse leads to reduced
maintenance, which leads to decreased
costs; or in another path, increased reuse
leads to reduced integration time, which
leads to reduced integration cost and thus
to decreased costs). In any event, the sum
of the monetary value of all the benefits you
deem applicable will be your overall benefit.
The benefits of SOA are very real, and theyre extending from individual companies to entire
industries.
A cellular telecommunications company we studied created an entirely new service for locating cell phones
out of its existing IT assets. Though estimates vary, this capability could open up a US$2 billion market by
2009 for this telco.
7
A large agricultural machinery manufacturer needed to boost its ability to finance sales in
its showroom. It tapped SOA not only to improve and expedite current lending practices, but to provide a new
lending product to keep pace with competitive alternatives. It was able to double loan application volumes and
increase the loan decision rate from 15 percent to 55 percent, all while maintaining prudent risk management
levels.
A large insurance company that sells annuity products through a network of broker/dealers used SOA to
streamline and automate data feeds, improve cycle time for data assets, protect an important sales channel, and
position itself to reuse this data-access channel to sell through additional broker/dealers in the future.
If individual firms can extract these kinds of benefits from SOA, then masses of them are likely to adopt it, and
whole industries are bound to change. Consider that according to IT analyst Forrester Research, 67 percent of
the largest enterprises those with 40,000 employees or more will be using SOA by the end of this year.
8

Nearly 70 percent of enterprise SOA users say theyll increase their use of it.
9
Clearly, SOA has already reached a
tipping point.
How exactly could it change industries or how is it changing them now? SOA could become the required way
to collaborate among firms; dominant suppliers and buyers could demand it. SOA-enabled collaboration could
cross current industry lines, inviting, among other things, the swift penetration of industries by new, unforeseen
competitors. Even though SOA is relatively early in its lifecycle, it will soon become table stakes in many
industries particularly those where IT capability is a vital characteristic. By our reckoning, that includes most
industries today.
Taking the logic a step further, its not hard to imagine the advent of an SOA-enabled global economy one day.
8 IBM Global Business Services
Of course some of these benefits will be
difficult, if not impossible, to quantify (e.g.,
improved ability to change). But that doesnt
make them any less real or important. If theyre
by nature not numerical proof of the benefits
of SOA, theyre certainly conceptual proof,
and they constitute a powerful addition to the
argument that SOA is worth the investment.
2. Identify the relevant cost scenario for your
initial investment.
With SOA, costs vary based on whether you
are using services, providing services or
both (see Figure 4). Each of the components
depicted in this figure include one or more
cost elements, such as software, hardware
and labor. To keep the evaluation simple,
weve left out factors like learning-curve cost
estimates, which are minor relative to the total
cost and difficult to measure.
If youre only a service user (e.g., a Web-
based e-commerce site using a shipping
service), your application is using services
made available to them by a service provider.
The service provider could be other lines
of business within your firm, your partners
or, within the near future, external providers
making services available separately. Your total
cost would be to change your front-end appli-
cation, allowing you to tap these services.
If youre a service provider (e.g., providing
information services from your internal
systems), you are creating services that
others, within your firm or outside of it, can use
with their applications. In this case, the total
cost would be the SOA infrastructure, plus the
development of new, or alteration of existing,
applications, plus the generation of interfaces.
If youre both a user and provider, you would
add user and provider costs together to arrive
at the total cost of implementation. In this case,
youre building the entire application, and incur
the costs for all the components you see in
Figure 4.
FIGURE 4.
Costs vary based on whether scope is A, B or C.
Source: IBM Institute for Business Value.
Front-end
application
C. Full implementation
A. Service user
SOA
infrastructure
B. Service provider
Business
application
Service
interface
Costs typically align
with one of these three
scenarios, based on the
type of implementation
being evaluated.
9 Service-oriented architecture
3. Calculate the initial, simple return.
As Figure 5 shows, the simple return is equal
to the benefits youve assigned to SOA,
divided by the cost scenario youve incurred.
4. Assess and select the cost scenario for the
second and subsequent implementations.
The calculation shown in Figure 5 for the
simple ROI applies to your first investment.
When you move to the second implementation,
you wont incur the cost for the infrastructure
(typically the most expensive part of an SOA
implementation); youll just be reusing that
infrastructure, lowering the total cost (see Figure
6). Whats more, if youre just providing, or
exposing, services from existing applications,
your cost is even lower merely the cost to
develop the service interfaces. At this point, you
should be able to determine the cost for the
second implementation and calculate the return
for that implementation. And so on for all the
succeeding implementations.
FIGURE 5.
Simple return on investment.
Source: IBM Institute for Business Value.
=
Return on
investment specic
to incremental
investment in SOA
$
$
FIGURE 6.
Subsequent implementations require less
build and spend.
First implementation
with infrastructure
Subsequent implementations
building new backend functions
making services available from existing applications
$ $ $
$ $
$
Source: IBM Institute for Business Value.
5. Keeping the benefits constant, calculate
the returns for the second and subsequent
implementations.
Rather than picking an arbitrary number of
years, we suggest using a time horizon of
three or more implementations when calcu-
lating the return on SOA investments. Heres
our rationale.
Most of the cost of SOA is in establishing it in
the first implementation which you can think
of as the foundation, or platform. After that,
thanks to reuse, the overall return rises, as
Figure 7 shows.

10 IBM Global Business Services
Now, its in the second and subsequent imple-
mentations using the same infrastructure that
not only is the real return evident but that its
likely to be higher than planned. For example,
its widely accepted that reuse yields benefits
beyond whats immediately measurable as
reusable application code is applied to new
business problems. Large travel providers,
for example, expose their online reserva-
tion systems to third-party Web sites (like
travel agencies and other complementary
travel providers), allowing for a big market
expansion, at relatively little cost.
For revenue-generating SOA-based services,
the returns can be even higher because appli-
cations that previously added only cost are
now contributing revenue to the bottom line.
Another reason for using a multiple implemen-
tation time horizon is because business and IT
benefits materialize on different timetables. As
soon as the first implementation is completed,
companies can begin realizing IT-related
benefits right away, as components of the
solution are reused in subsequent projects.
But business benefits accrue according to a
different schedule one based on the rollout
of associated business changes, such as
modified processes or new product launches.
Because of the variances involved, the time
horizon for evaluating returns must be long
enough to encompass both the IT- and
business-related benefits that materialize over
multiple implementations.
Since SOA is so new, seeing will be a large
part of believing. Many people will need to
witness the first implementation to fully grasp
the transformational power of SOA, not only
technological, but strategic. As this awareness
grows, its likely that the demand for these
SOA-based services will grow.
FIGURE 7.
Return of succeeding SOA implementations.
Source: IBM Institute for Business Value.
$ $ $ $
$ $ $
$ $ $ $
$ $
$ $ $ $
$
Number of implementations
R
e
t
u
r
n

o
n

i
n
v
e
s
t
m
e
n
t
First implementation
Subsequent implementations
Business leaders need
to extend the financial
evaluation over multiple
implementations to
assess the real return.
11 Service-oriented architecture
An illustration of the framework
To lend some concreteness to our explanation,
we extracted an example from our analysis of
the 35 projects we studied to demonstrate the
framework. A large insurance company was
setting up a claims application for one line
of business and reusing interfaces to other
systems for other lines of business.
First, we selected the expected benefits from
the benefits value tree and established the
costs incurred according to one of the three
cost scenarios, as shown on the left side of
Figure 8.
With its claims business solution, the company
expected benefits such as:
Reduced processing time, where the
overall cycle time for claims processes was
shortened on multiple claims-related activities
Reduced errors, where costs and payments
were reduced as a result of improved quality
in execution and handling of claims
Reduced staff, where fewer staff at multiple
levels were needed to staff the revised
processes
Protecting existing revenue streams,
where the improved process controls and
improved management resulted in more
favorable benefit and cost ratio results
Increased sales, as new functionality helped
retain existing policy holders as well as posi-
tively impacted new sales
Reduced maintenance costs, as older
applications were being phased out, their
maintenance costs were being eliminated
and the new application maintenance costs
were lower.
The costs incurred were for the full implementa-
tion. These included the cost to implement the
front-end application interface, a Web-based
solution that was part of the business applica-
tion, and a purchased software package. The
SOA infrastructure required some software
and hardware, as well as the labor costs to
implement it. Last, the cost to develop the
interfaces to other applications was added.
This included the costs for the SOA interfaces
needed for the other applications.
Source: IBM Institute for Business Value.
63
67
107
233
648
350
SOA Implementations
R
O
I

p
e
r
c
e
n
t
a
g
e
Example 1
Example 2
$
$

=
FIGURE 8.
Return on investment for example implementations.
1 2 3
12 IBM Global Business Services
In this example, it should be noted that
second and third implementations used the
same infrastructure and the same services.
As such, the second and third projects expe-
rienced much lower costs, as both services
and infrastructure were reused beyond their
original intent.
As we look at the ROI for this overall solution,
the reuse of these components resulted in an
exponential increase in the ROI (see right side
of Figure 8). Whats more, when we performed
the same analysis on another project in the
insurance industry, we saw similar reduced
costs for implementation. This second project
(example 2 in Figure 8) shows a similar curve,
but a steeper return.
While the individual elements of the return
calculation will likely vary project by project, a
similar curve and return for successive uses of
the same infrastructure can be expected.
Conclusion
No matter how you slice it, the case for SOA
as a software design framework is very
powerful. Chances are, because the business
logic is so compelling, youll deploy it sooner
or later. The measurement approach weve
suggested should help you to add simplicity,
sense and speed to the process, allowing you
to exploit the first-mover advantages momen-
tarily available.
About the author
Jay DiMare is an Associate Partner within IBM
Global Business Services. He has over twenty-
five years experience in the development of
large-scale, complex, cross-organization appli-
cations in the financial markets, banking and
insurance industries. He is currently the global
leader for the Application Innovation Services
team at the IBM Institute for Business Value.
Jay recently coauthored a paper, CEOs are
expanding the innovation horizon: Important
implications for CIOs, that addresses the
changing role of the CIO in the innovation
process. He holds a patent for software
algorithms applicable to document manage-
ment applications, and he has developed
IBM software products in partnership with
clients. Jay is an IBM Certified IT Architect
and a certified Master IT Architect with The
Open Group, as well as a member of the IBM
IT Architect Certification Board. Jay can be
contacted at [email protected].
Contributors
Nicole Baker, Advisory IT Architect, IBM Global
Business Services
Rolando Franco, Senior IT Architect, IBM
Global Business Services
Maria Stein-Marrison, Senior Consultant, IBM
Global Business Services
13 Service-oriented architecture
About IBM Global Business Services
With business experts in more than 160
countries, IBM Global Business Services
provides clients with deep business, process,
and industry expertise across 17 industries,
using innovation to identify, create, and deliver
value faster. We draw on the full breadth of IBM
capabilities, standing behind our advice to
help clients innovate and implement solutions
designed to deliver business outcomes with
far-reaching impact and sustainable results.
References
1
The intent of this study was to develop
a simplified means of identifying and
measuring the return on SOA investments.
For the 35 projects we studied, we collected
data through in-depth interviews with
members of the actual project teams. The
projects included in our sample spanned
11 industries. Nearly half of the projects
were being implemented in North America;
another third were worldwide, and the
remainder was from Asia Pacific, Europe
and South America. The detailed analysis of
these projects led to the benefit value trees
and cost scenarios included in our SOA
investment analysis framework.
2
Jim Smith and De Vine Enterprises are ficti-
tious names and are not modeled after any
company in particular.
3
BrainyQuote. http://www.brainyquote.com/
quotes/quotes/a/alberteins100201.html
4
McCue, Andy. Most Companies Guess Tech
ROI. BusinessWeek online. May 24, 2006.
5
Hamblen, Matt. Focus on ROI too limiting,
Intel CIO Says. Computerworld. May 29,
2006.
6
Kalin, Sari. Return on investment,
Calculating ROI. CIO Magazine. August 15,
2002.
7
Driscoll, Clement. U.S.Mobile Resource
Management Systems Market Shows Strong
Growth in Subscribers and Revenues.
Location Intelligence. January 3, 2006.
8
Survey Data Says: The Time For SOA Is
Now. Forrester Research, Inc. April 2006.
9
Ibid.
G510-6320-00
Copyright IBM Corporation 2006
IBM Global Services
Route 100
Somers, NY 10589
U.S.A.
Produced in the United States of America
10-06
All Rights Reserved
IBM and the IBM logo are trademarks or
registered trademarks of International Business
Machines Corporation in the United States, other
countries, or both.
Other company, product and service names
may be trademarks or service marks of others.
References in this publication to IBM products
and services do not imply that IBM intends to
make them available in all countries in which
IBM operates.