Section 1.1. Virtual Enterprises

1.1. Virtual Enterprises

Most companies produce and sell products to their customers to achieve defined business goals, such as specific financial targets. Their business processes prescribe how products are designed, manufactured, marketed, distributed, and sold. From a certain level of abstraction, a company's business processes are a direct reflection of the products it offers. Therefore, the speed of changing the existing infrastructure or creating new business processes corresponds to the speed of changing or creating products.

To survive in highly dynamic markets and constantly changing environments, companies must be flexible. Flexibility here means the ability to react quickly (preferably faster than the competition) to new customer requirements, new product offerings by existing and new competitors, technology advances, and so on. The flexibility of an enterprise is a refection of its ability to adapt its business processes quickly.

The constituents of the definition of a business process (see [Ley 2000]) translate directly into actions that are necessary to alter business processes: changing the flow of activities of a business process, changing the actors who are performing these activities, changing the tools that support these activities, and so on. These might result in moving the execution of (a subset of) the activities of the business processes to partners. The result could be multiple business partners having to cooperate to perform the business processes of a given company. The company in fact becomes a virtual company (or virtual enterprise). This term indicates that externally, the company looks like a real companyperforming all of its business processes itselfbut in practice, that is not what is actually happening. Others are partially running the company's business processes, making the company virtual in this sense.

1.1.1. Business Process Optimization

The model of a business process prescribes the order in which a business must execute the activities that constitute it and under which conditions it must perform each of the activities. Collectively, this kind of prescription is called control flow. The control flow massively influences business-relevant properties of a business processsuch as its total cost and its overall durationand thus the competitiveness of a company:

• The execution of each step or activity within a business process is associated with certain costs, such as people costs that are associated with the activity if human intervention is required, or the cost of computer resources that are required to execute activities within the IT environment. Based on this information, a company can derive the overall cost for performing a business process. For example, if policy associated with a credit allocation process determines that someone must check credits with an amount greater than $1,000, and more customers are asking for credits above this limit, a business could change the policy to set manual intervention at a higher value to reduce the overall costs for running the process.

• Activities have temporal characteristics, such as the average duration for executing an activity or the average time elapsed until an activity is picked up and performed. Based on this information, you can derive the average interval for executing a business process. For example, when you are booking a business trip, you can reserve hotel and flight reservations in parallel, resulting in a shorter execution time for the overall business process relative to its sequential execution.

There are other business-relevant properties of business processes and the activities they encompass. Changing the control flow of a business process might alter the corresponding properties of the business process in an unexpected manner. For example, introducing parallelism between activities might result in a longer duration of the overall process in those cases in which the parallel activities compete for the same resources (such as staff members who have rare skills).

Therefore, modeling a business process is a non-trivial endeavor, supported by specialized design and analysis tools. After having modeled and optimized a business process, it must be executed in exactly the way it was specified to ensure the business properties that the process is optimized for. Special middleware is available that enforces the correct and model-compliant executionso-called workflow systems [Ley 2000]. Workflow systems allow monitoring of the business properties of individual business processes or aggregations of business processes at runtime. They also support the analysis of corresponding execution histories. Based on monitoring and analysis of results, you can change the model of a business process, if required, to further optimize it, especially when benchmarking shows that the execution of a business process is not competitive in terms of its key business parameters, such as cost or duration.

Sometimes, modifying the control flow of a business process is insufficient to hit the target values for certain business properties. For example, the cost structure within a company or wages for certain required staff might be too high to meet business expense targets. In such situations, a company's business process cannot gain competitiveness without significant re-engineering. The company (or a certain branch or location within a company) should probably determine its core competencies, focus on executing only the activities that correspond to these core competencies, and outsource the noncore competencies. Of course, the constraint is that outsourcing must result in hitting the target objectives of the subject business properties. SOA and Web service technology facilitates this kind of outsourcing in a secure, reliable manner.

1.1.2. Collaborations, Mergers, and Acquisitions

Figure 1-1 demonstrates an original process (denoted by "P") that a company runs. The company determines that it is no longer competitive in performing activities A, B, and E. It finds two partners that can run these activities and meet the business goals. Partner 1 runs activities A and B, and Partner 2 runs activity E. The company re-engineered the original process into a new process (P'). In the new process, activity AB kicks off the execution at the first partner (Partner 1), and E' starts the execution at the second partner (Partner 2). The company now has a new process P', which results in increased competitiveness.

Figure 1-1. Outsourcing activities to partners.

In general, a company can work in several ways with partners that run the outsourced activities. One way is for a business to acquire a partner that can effectively run some of the activities that it could not run in a competitive manner before. A company might take this approach if the activities that it has trouble performing competitively are core to its business. A company might also choose this acquisition if it is cheaper to acquire the partner than pay the partner to perform the activities. A company might also choose to merge with a partner, essentially combining its own business with that of the partner in a peer manner. This could exploit synergies between the two companies, further reducing costs and enhancing the competitiveness of the aggregate. Usually, mergers and acquisitions result in business processes that are run in a distributed manner, across partners or virtual enterprise as described here.

Mergers or acquisitions can have a deep impact on companies, and they, thus, generally take a less radical approach. They determine appropriate partners and negotiate long-term contracts for performing specific activities on behalf of the outsourcing company. These contracts especially include service level-agreements, which are specifications of service objectives such as availability of the outsourced activities, penalties applied when objectives are not met, bonuses paid if the objectives are overachieved, and so on [Dan 2004]. The result is a network of collaborating partners.

Situations might be highly dynamic. Multiple partners might provide the same services, and a company should choose on a case-by-case basis one of these to perform specific activities. For example, the cost of performing activities on behalf of a company might change depending on the actual load at each partner side. The company can then determine the partner on a best-price basis.

Collaboration might not only result from process optimization endeavors, but from supply chains that are typical within an industry. In this situation, a company and its partners are not distinguished. All partners are peers, collaborating to realize an overall business process that is spread over the partners. Some industries even have standards to define the various kinds of partners, the activities each of them runs, and how they relate. For example, RosettaNet [RN] defines such a standard and is currently moving toward Web service technology [RNWS].

1.1.3. Resource Sharing

In addition to business process optimization, businesses outsource activities or complete business processes for total cost of ownership considerations. Perhaps a business process is competitive overall, but the overall cost for running parts of it on IT equipment that the company owns is too high. In this situation, a company looks for a partner to run the corresponding activities or the whole business process on behalf of the company. This partner, also called application service provider (ASP), not only runs parts of the business process on its IT equipment, but it also runs the corresponding software, covering the whole spectrum from managing prerequisite software to monitoring the software and performing periodic backups.

Web service technology, technology from the area of Grid computing that is based on Web services, and autonomic computing facilitate the ASP model and extend it toward a model called utility computing (see [Ley 2004], [Rappa 2004]). Within this utility computing model, computer resources and other IT related resources are offered in a similar manner to traditional utilities such as electricity or telephone. The usage of the utility IT resources to run parts of a business process is metered and charged on this basis. You will read more about this topic later.