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72 vom Brocke Copyright © 2007, Idea Group Inc. Copying or distributing in print or electronic forms without written permis- sion of Idea Group Inc. is prohibited. applied (Grob, 1993). Using VOFI, the nancial consequences of long-term decisions are structured and calculated by means of spreadsheets that serve as a database for further analyses. Compared to formulae applied by conventional methods (Seitz & Ellison, 2004; Shapiro, 2004) of capital budgeting (e.g., present value or the annuity of an investment project), VOFI mainly has the following advantages for evaluating the nancial consequences of out-tasking decisions. •. Transparency:. The description of the nancial consequences of decision making by using spreadsheets helps to show the various underlying impacts on the efciency measures. By means of VOFI, all payments driven by a decision can be taken into account comprehensively, including various conditions for funding and loaning as well as taxes. •. Adaptability:.VOFI serves as a reference model for long-term decision mak- ing. Due to the explicit description of the nancial consequences, it can easily be adapted to special decisions that have to be evaluated. On top of individual rates for loaning and funding, dynamically changing conditions like tax rates can also be calculated. Due to clearly dened interfaces for the in- and outow of data, also extensions of the framework can be built. Both the transparency and the adaptability eventually may contribute to the actual use of efciency calculations in service-portfolio management in practice. Customising VOFI-specic parameters that are relevant in a certain capital situation (e.g., funding conditions) can be considered. Typical parameters that may serve as a reference are summed up in the VOFI given in Figure 6. In order to consolidate the various inuences on the effectiveness of the decision over time, a periodic update of the capital stock has to be calculated. Starting in Period 0, each period has to be calculated in a way in which there is a balance between in- and out-payments. The following example may illustrate the essential procedure. In the rst period, usually an out-payment has to be nanced. If the internal funds available are insufcient, a loan has to be taken out. As usual, various conditions for loaning can be agreed upon, and also a combination of various loans can be calculated in the VOFI. Correspondingly, multiple forms of funding can be included. When calculating the adequate amount of loaning or funding, tax payments have to be considered. In order to calculate tax payments, an auxiliary calculation has to be carried out. Depending on tax laws, relevant parameters are, for example, individual depreciations that are chargeable to the investment, as well as tax rates. In each period, these periodical in- and out-payments have to be balanced. As a checkup, the net funding value, which is dened as the accounting balance of all out- and in-payments, should be zero. On the basis of these ow gures mentioned above, the capital stock can be updated periodically. For this purpose, the balances of all loans and funds have to be recorded. Service Portfolio Measurement (SPM) 73 Copyright © 2007, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. The accounting balance of both nally results in the net balance of the total invest- ment. By this algorithm, the value of an investment in a service-oriented architecture can be monitored during the whole life cycle of the information system simply by observing the net balance in each relevant period. For special-interest investiga- tions, additional efciency measures can be calculated on the basis of VOFI. These measures are calculated on the corporate level of the decision-support system, which is illustrated in the following. Measurement.on.the.Corporate.Level In order to facilitate the design of a company’s service portfolio properly, the various evaluation results have to be aggregated for decision purposes. On the basis of the calculations on the budgeting and process levels described above, a wide range of efciency measures can be applied from accounting science. For service-portfolio measurement, particularly the TCO and ROI are signicant. They are well spread in practice and serve as a means to illustrate the relevant parameters for decision making at the same time. Total.Cost.of.Ownership In case the consolidation of the payments was done on the basis of a total calcula- tion, the total costs of ownership brought about by a certain information-system architecture and service portfolio can be calculated. The TCO originally aims at summing up all relevant costs chargeable to an information system throughout its Figure 7. Service-portfolio measurement on the corporate level using TCO Value + Irregular Revenue – Depreciation = Total Monetary Profit I (prior Interest and Further Investments) + Revenues by Further Investments – Interest Expense = Total Monetary Profit II (prior Taxes on Profit) + Taxes on Profit = Total Monetary Profit III (after Taxes on Profit) – Calculatory Interest + Adjustment of Tax Payments = Toal Calculatory Profit Total Profit of Ownership Total Surplus of Payments for Service Portfolio = T otal Cost of Ownership 74 vom Brocke Copyright © 2007, Idea Group Inc. Copying or distributing in print or electronic forms without written permis- sion of Idea Group Inc. is prohibited. life cycle (Ferrin & Plank, 2002). At this stage of calculation, the total payments chargeable to a company’s service portfolio during its life cycle can be analysed. Apart from out-payments, in-payments can also be included in the calculation. That way, the total prot of the layout can be computed. The calculation is carried out by summing up payments of each row on the spreadsheet and balancing them like in Figure 7. The total prot of the investment can be calculated gradually. Starting from the surplus of in- and out-payments, the relevant decrease of assets used has to be com- puted. Therefore, the sum depreciation rates of all periods are calculated together with irregular in-payments, like in-payments for the liquidation of assets. That way, the so-called total monetary prot (I) is measured. Considering in-payments by further investments made during the life cycle as well as interest expenses, the total monetary prot (II) can be calculated. By charging tax payments on prot, the total monetary prot (III) can be reported. While these measures all show the monetary prot realised by the investment, alternative allocations of the capital also have to be taken into account for consistent decision making. For this purpose, calculatory interest has to be charged quantifying the prot that is assumed to be made by the alternative investment (the so-called opportunity). This total calculatory prot nally represents the total prot (or costs) of ownership calculated on the basis of VOFI. In a number of cases, no in-payments of the service portfolio are to be charged. This can, for example, be the case when in-payments are hard to identify. In other cases, the in-payments might be invariant so that the out-payments are driving the nancial efciency of alternative layouts. In the computation presented in Figure 7, the in-payments are zero. Hence, the resulting value quanties the TCO that will mostly be negative as, apart from the liquidation of resources, only out-payments are charged. For reporting the total costs of ownership, the value should consequently be transformed into a positive value. Using the total cost of ownership, out-tasking is protable if it serves to reduce the TCO. Moreover, the measure supports designing the appropriate corporate service portfolio. Accordingly, the portfolio should be designed with the aim of minimis- ing the TCO. Return.on.Investment The efciency of out-tasking decisions can also be evaluated by a measurement of protability. A widespread measure of this kind in practice is the return on invest- ment (Friedlob & Plewa, 1996). By applying this measure, a ratio is calculated that sets the total prot in relation to the stock of capital provided for the investment. Consequently, the ROI indicates the interest payment made by an investment. While the ROI seems to be suitable for comparing investments of different kinds, it is a Service Portfolio Measurement (SPM) 75 Copyright © 2007, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. static measure and, therefore, is inappropriate to support long-term decisions. This point can be considered by calculating the ROI on the basis of VOFI. In doing so, the ROI is not only a dynamic measure, but it also considers various conditions of loaning and funding as well as taxes. For evaluating the efciency of an investment, the ROI has to be compared to the average capital cost within planning periods. Figure 8 shows the denition of this ROI as well as the criteria for decision support. In particular, the ROI can be used for decision support on the design of the informa- tion-system architecture, providing the series of payments are partially calculated. The relevant data for the calculation can be taken directly from the VOFI database. In case distributions of funds are planned, these payments have to be considered in the fraction’s numerator. That way, the ROI is appropriate for evaluating whether the payments necessary for the migration to a service-oriented architecture are justied by future savings due to the performance of the company’s service portfolio. Up to this stage, the decision-support system has been described from a method- ological perspective. In the next section, the system is applied to a concrete situation of a company. Figure 8. Service-portfolio measurement on the corporate level using ROI Target: ROI n n 0 0 NBI EF CI (1 pt) ROI 1 IF EF + + ⋅ − = − + and NBI n + EF 0 + CI > 0 Benchmark: c n n 0 NB OI CI (1 pt) c 1 IF EF + + ⋅ − = − + Decision Support Investment is financially profitable, if ROI > c Symbols ROI ROI, on a dynamic basis NBI n Net Balance of the Total Investment in t=n IF Internal Funds Used EF 0 External Funds Used in t=0 n Planning Horizon pt Tax Rate on Profit CI Total Cre ditor Interest OI Total Interest of the Opportunity c Average Capital Cost 76 vom Brocke Copyright © 2007, Idea Group Inc. Copying or distributing in print or electronic forms without written permis- sion of Idea Group Inc. is prohibited. Application. of. the. Measurement. System for. Financial. Performance. of . Service-Oriented. Information. Systems In this passage, the decision-support system for the management of service-oriented information systems will be illustrated by means of an application. The case of the travel agency TravelSmart Ltd. may serve as an example. The situation is invented following a practical case. Introduction TravelSmart is a travel-management service provider that predominantly offers holiday travels for private and business customers. Round trips only form a small part of its product portfolio. The core competence of the business is the individual conguration of holidays according to the specic needs and wishes of its custom- ers. Therefore, the company’s tourism market is limited to the high-end segment. TravelSmart uses both digital chains of distribution and classic travel-agency sales. Excellent customer service is the trademark of the company, which differentiates itself clearly from other businesses and competitors. However, especially in recent years, TravelSmart has been exposed to increased pressure by more and more competitors who have been pushing both reduced costs and an amelioration of the service. Until now, IT tasks have only been accomplished by the IT department of the company itself. The company’s IT development has achieved excellent tasks, yet the costs for individual IT services have been partly too high compared to the market value. The business processes of TravelSmart are substantially based on information sys- tems for e-commerce as well as travel-agency sales. The goal from management’s perspective of the business is now to use, despite the high cohesion, service-oriented architectures. That way, parts of the information-system environment could be given away to external service providers. The focus of the evaluation is whether the supply of a service-oriented architecture would be worthwhile. Furthermore, the service portfolio has to be determined. The funds needed are covered by internal funds, an installment loan, and a loan in the current account. Figure 9 gives an overview of the nancial conditions. The management of TravelSmart has grasped the long-term character of the decision that needs to be taken. It determined a planning horizon of ve periods. Thus, the decision-support system described in this chapter was applied. Service Portfolio Measurement (SPM) 77 Copyright © 2007, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. Identication of Services At the kick-off meeting, the following services were identied for further analy- sis. •. Service.travel.records: In this business process, extensive and informative records for individual tours are being collected and set for the customer on the basis of data warehouses and internal work ows. This extensive and high-qual- ity processing, and its quick delivery to the customer via e-mail right after the booking of the travel or within a maximum of 2 days in the mail, is a strategic characteristic for differentiation from the competition. This core competence is constantly being extended and ameliorated by means of software solutions in the internal IT department. The question that comes up concerns sourcing as greater adaptations are planned in the near future. •. Service.credit.assessment: The service provides TravelSmart with a digital assessment of the solvency of its customers from accredited rating agencies. On the basis of assessment, customers receive generous or restricted payment and nancing conditions for the individual travel package. The process is of high operative importance as it gives both the customer and company a higher degree of exibility. •. Service.order.processing: This business process is conducted by a work-ow- management system that connects numerous application systems in order to support individual steps in the processing for a booking order, and to possibly coordinate the interaction of the responsible employee and the applications. Figure 9. Financial conditions for the investment in the service portfolio at Trav- elSmart Financial Conditions of TravelSmart Internal Funds 10,000 € Installment Loan Funds provided 10,000 € Creditor Interest Rate 6% Disagio 5% Duration 2 Years Loan in Current Account Creditor Interest Rate 8% Debitor Interest Rate 6% Tax Rates t = 1 55.0% t = 2 52.5% t = 3 50.0% t = 4 47.5% t = 5 45.0% 78 vom Brocke Copyright © 2007, Idea Group Inc. Copying or distributing in print or electronic forms without written permis- sion of Idea Group Inc. is prohibited. As a starting point, the sourcing strategy for the services has to be agreed upon. Figure 10 gives the classication of the services in the model from Lacity et al. (1996). The travel-records service as one result of the analysis should be carried out internally in the future. The strategic impact and the internal further developmental potentials can possibly balance the possible advantages of the outsourcing. The service of credit assessment demonstrates a service that can be supported by the best practices of external service providers, leading to a cost reduction for the company. Also, for the order processing, an appropriate out-tasking alternative should be provided. Due to experiences gained during the project, the management denes the demands of the services as follows. • For credit assessment and order processing, a medium availability of 99.5% according to the ITIL standard is required. The error ratio should not exceed 0.01%. • For the service of providing travel records, quick, high-quality, and highly available functionality is required. The requirement concerning availability is around 99.9%; the maximum error ratio is around 0.001%. In order to ground the decision on the service portfolios, a calculation of the monetary consequences was carried out according to the decision-support system introduced in this chapter. Hence, an assessment of the payments on the process level was conducted rst. Figure 10. Deriving sourcing strategies at TravelSmart Commodity Critical Differentiator Usefu l Commodity Outsource Useful Contribution of IT Acitivty to Business Positioning Useful Differentiator Eliminate or Migrate Critical Commodity Best Source Critical Differentiator Insource Contribution of IT Acitivty to Business Operations Credit Assess- ment Travel Records Order Processing Best Source Insource Outsource Eliminate or Migrate Service Portfolio Measurement (SPM) 79 Copyright © 2007, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. Measuring. on. the. Process. Level Payments.Related.to.the.Architecture The assessment of the payments on the process level led to the following initial situation: The implementation of the SOA goes along with 14,000€ for the provision of hardware and 4,000€ for software (which is an enterprise service bus applica- tion). On a time schedule of 5 years, 16,000€ on the whole have to be written off of the capital costs. The write-off has to be considered for the calculation of the foundation of the tax calculation. Furthermore, out-payments for the training of the administrators will cost about 10,000€. In the company, 1,000€ have to be calculated for maintenance, 4,000€ for the opera- tion, and 2,000€ for rst- and second-level support. A periodical increase of 10% can then be expected. Further payments of 3,000€ are caused by license fees for both software and maintenance. At the same time, in-payments of 6,000€ can be expected for the parallel use of the architecture with a partner enterprise. Starting with the fourth period, an intensication is planned that increases in-payments to 9,000€. Adaptations of the architecture were expected to be necessary. As to the value, 10% of the capital costs of the purchase per period were estimated. In the phase of dis- integration, TravelSmart can realise in-payments by aid of the further utilisation of hardware (liquidation proceeds of 15,000€) as well as the decrease of idle time of resources due to an early cut of capacities (1,000€). Additional payments for ending contracts are not being calculated. The results are summed up in Figure 11. The nancial efciency of the investment in SOA is essentially driven by the per- formance of the service portfolio that can be run on the architecture. Consequently, the payments related to the services available for TravelSmart were assessed in the following. Payments.Related.to.the.Services. For the process of credit assessment, two service offers were identied in an an- nouncement for external service providers. The offers were assessed by aid of the payment categories provided in this study. For one of the offers, SOA technology (B1) has been applied; for the other, it was not (B3). The conditions concerning the service offers are compared in Figure 12. 80 vom Brocke Copyright © 2007, Idea Group Inc. Copying or distributing in print or electronic forms without written permis- sion of Idea Group Inc. is prohibited. The values of these gures were grounded in the following considerations. • By applying standards for Web-service specication, implementations and adaptations of service interfaces can be carried out in an efcient manner. In particular, out-payments for the removal of the service can be reduced because the complexity of the system is shifted toward the supplier. Over and above that, no further architecture components that would have to be removed later on are required. Figure 11. Estimated series of payments with SOA at TravelSmart Estimated Series of Payments with SOA for TravelSmart Point in Time 0 1 2 3 4 5 Phase of Development Out-Payments - for building up know-how 10,000 - for implementing SOA as a new architecture 18,000 In-Payments + due to not implementing services in-house Phase of Operation Out-Payments - for additional maintenance work on the interfaces 1,000 1,100 1,210 1,331 1,464 - for support (1 st / 2nd level) 2,000 2,200 2,420 2,662 2,928 - for conducting operation 4,000 4,400 4,840 5,324 5,856 - for licenses with service providers 3,000 3,000 3,000 3,000 3,000 In-Payments + for shared service 6,000 6,000 6,000 9,000 9,000 + by savings concerning lowering resources needed 1,000 1,000 1,000 1,000 1,000 Phase of Adaptation Out-Payments for adaptation work on interfaces 1,800 1,800 1,800 1,800 1,800 Phase of Disintegration In-Payments + by saving according to idle time costs of the resources 1,000 + by liquidation of technology 1,500 Series of Payments According to Partial Calculation -28,000 -4,800 -5,500 -6,270 -4117 -2,549 - st nd Service Portfolio Measurement (SPM) 81 Copyright © 2007, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. • The clearly dened and manageable out-tasking interfaces reduce the expen- ditures connected to the know-how of the service provider. • Using the best-sourcing strategy, service providers for B1 can be provided that are highly specialised. Thus, scale effects lead to a reduction of production costs and an increase in the quality of the services. • Coordination costs are lower than before due to standardised interfaces sim - plifying internal result control. • Independent from SOA, B1 offers better availability and a lower error rate. That way, out-payments for risks of failure and breakdown are lower. For the calculation of the series of payments for the investment of the service offer B1, the amount of in-payments caused by internal payments was calculated. With respect to the quantity structure, 7,500 travel bookings (transactions) per period have been forecasted with a dynamic development rate of 10%. On the basis of this information, the series of payments have been calculated along the process described above. The calculation is presented in Figure 13. By means of a market analysis, further service offers have been collected. The results are described in the following. For credit assessment, there are now three external service offers available. Two have been implemented on a Web-service basis (B1 and B2), and one has been implemented on the basis of an alternative architecture (B3). According to the process of the travel records, the IT department made a sug- gestion to migrate toward SOA and to provide the service internally (A1). Apart from that, the service may well be carried out according to the current state of the Figure 12. Conditions of services for SOA and non-SOA at TravelSmart Conditions of Services B1 (SOA) B3 (Alt.) Phase of Development Out-payments 1,500 € 3,500 € - for building up relations to services provider - for implementing t he interface for integrating the service 1,000 € 3,000 € - for providing the software components 0 € 4,000 € Phase of Operation Out-payments - for production of a service (per transaction) 0.70 € 0.85 € - for co-ordination of service integration 3,000 € 8,000 € Average percentage - of service availability 99.9% 99.5% - of service f ailure 0.001% 0.01% Phase of Adaptation Proportional work on adaptation per period 4.0% 4.0% Phase of Disintegration Out-Payment - for replacement 1,000 € 8,000 € [...]... to service B1 on the process level at Travelsmart Series of Payments related to Service B1 Point in Time 0 1 Phase of Development Out-Payments - for building up relations to 1,500 services provider - for implementing the interfaces 1,000 Phase of Operation Amount of Transactions 7,500 Out-Payments - for production of a service 5,250 - for co-ordination of service 3,000 integration - for risk of service. .. Integration in a service- oriented world vom Brocke, J., & Lindner, M A (2004) Service portfolio measurement: A framework for evaluating the financial consequences of out-tasking decisions Paper presented at the ICSOC04 Second International Conference on Service Oriented Computing, New York Wang, G., Chen, A., Wang, C., Fung, C., & Uczekaj, S (2004) Integrated quality of service (QoS) management in service- oriented... analysis, performance measures can be calculated on the database Figure 15 Financial consequences of the investment in the service portfolio with SOA on the budgeting level at TravelSmart Series of Payments Point in Time Service A1 Service B1 Service C2 Series of Payments for Services Series of Payments for Architecture Total Series of Payments 0 1 2 3 4 -3,000 35,746 39,457 43,539 48,028 -2,500 21,200... written permission of Idea Group Inc is prohibited Service Portfolio Measurement (SPM) 91 Section II Enterprise Service Computing: Requirements Copyright © 2007, Idea Group Inc Copying or distributing in print or electronic forms without written permission of Idea Group Inc is prohibited 92 Sangwan Chapter IV Requirements Engineering for Integrating the Enterprise Raghvinder S Sangwan, Penn State Great... 87 from programming to decision making in a service- oriented enterprise In order to meet this challenge, decision-support systems for service- portfolio measurement were the subject of this chapter In order to consider long-term economic consequences that come along with decisions on the system’s design, a measurement system for the financial performance of service- oriented information systems has been... Quality of service for workflows and Web service processes Journal of Web Semantics, 3(1), 281-308 Coase, R H (1937) The nature of the firm Economica, 4(11), 386-405 Craggs, S (2003) Best-of-breed ESBS: Identifying best-of-breed characteristics Retrieved from http://www.sonicsoftware.com/products/whitepapers/docs/ best_of_breed_esbs .pdf Day, J., & Deters, R (2004) Selecting the best Web service Paper... 10,000 – Creditor Interest 500 600 600 Loan in Current Account + Credit Intake 27,000 – Redemption 27,000 – Creditor Interest 2,160 Series of Payments Point in Time Service A1 Service B1 Service C2 Series of Payments for 84 vom Brocke Services Series of Payments for Architecture FigureTotal Series of Payments 15.continued 0 1 2 3 4 -3,000 35,746 39,457 43,539 48,028 -2,500 21,200 23,630 26,303 29,243... particular, the benefits result from the opportunity of out-tasking services to specialised service providers according to common standards In addition, out of the various service offers available, the most profitable sourcing strategy for TravelSmart could be calculated By aid of the decision-support system, a combination of the service offers A1, B2, and C2 is suggested That way, an ROI of 36.43%... Requirements Engineering for Integrating the Enterprise 97 Business Use-Case Model The business context can be elaborated to create a business use-case model to show the business use cases for the business actors Figure 2 shows this model for the car-rental enterprise Each use case represents a business process that must be implemented within the enterprise to service the business event related to its... comprises the aggregation of the series of payments, the VOFI, and auxiliary calculations for computing tax payments During the computation, further VOFI calculations have been carried out for each combination of services regarding their specific requirements on the architecture As an example, the calculation for a service portfolio without SOA is given in Figure 16 As part of the various calculations of . B1 -2, 500 21 ,20 0 23 ,630 26 ,303 29 ,24 3 31,478 Service B2 -7,500 16,700 18,800 21 ,110 23 ,651 22 ,446 Service B3 -10,500 12, 580 14,680 16,990 19,531 14, 326 Service. Out- Payments 64,409 71,706 79,7 32 91,561 9 327 4 – Creditor Interest 2, 760 600 + Debtor Interest 150 1,6 82 4 ,22 0 7, 328 – Depreciation 3 ,20 0 3 ,20 0 3 ,20 0 3 ,20 0 3 ,20 0 Assessment Base for Taxes 58,449 68,056 78 ,21 4 92, 5 82 97,4 02 In-Payments Out-Payments 32, 147 35, 729 39,107 43,976 43,831 Calculation. Out- Payments 64,409 71,706 79,7 32 91,561 9 327 4 – Creditor Interest 2, 760 600 + Debtor Interest 150 1,6 82 4 ,22 0 7, 328 – Depreciation 3 ,20 0 3 ,20 0 3 ,20 0 3 ,20 0 3 ,20 0 Assessment Base for Taxes 58,449 68,056 78 ,21 4 92, 5 82 97,4 02 In-Payments Out-Payments 32, 147 35, 729 39,107 43,976 43,831 Calculation
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