Two ZDNet analysts, Dana Gardner and Joe McKendrick, have had recent posts (I’ve linked their names to the specific posts) regarding ROI and SOA. This isn’t something I’ve blogged on in the past, so I thought I’d offer a few thoughts.

First, let’s look at the whole reason for ROI in the first place. Simply put, it’s a measurement to justify investment. Investment is typically quanitified in dollars. That’s great, now we need to associate dollars with activities. Your staff has salaries or bill rates, so this shouldn’t be difficult, either. Now is where things get complicated, however. Activities are associated with projects. SOA is not a project. An architecture is a set of constraints and principles that guide an approach to a particular problem, but it’s not the solution itself. Asking for ROI on SOA is similar to asking for ROI on Enterprise Architecture, and I haven’t seen much debate on that. That being said, many organizations still don’t have EA groups, so there are plenty of CIOs that may still question the need for it as a formal job classification. Getting back to the topic, we can and do estimate costs associated with a project. What is difficult, however, is determining the cost at a fine-grained level. Can you determine the cost of developing services in support of that project accurately? In my past experience, trying to use a single set of fine-grained activities for both project management and time accounting was very difficult. Invariably, the project staff spent time that was focused on interactions that were needed to determine what the next step was. These actions never map easily into a standard task-based project plan, and as a result, caused problems when trying to charge time. (Aside: For an understanding on this, read Keith Harrison-Broninski’s book Human Interactions or check out his eBizQ blog.) Therefore, it’s going to be very difficult to put a cost on just the services component of a project, unless it’s entire scope of the project, which typically isn’t the case.

Looking at the benefits side of the equation, it is certainly possible to quantify some expected benefits of the project, but again, only a certain level. If you’re strictly looking at IT, your only hope of coming up with ROI is to focus on cost reduction. IT is typically a cost center, with at best, an indirect impact on revenue generation. How are costs reduced? This is primarily done by reducing maintenance costs. The most common approach is through a reduction in the number of vendor products involved and/or a reduction in the number of vendors involved. More stuff from fewer vendors typically means more bundling and greater discounts. There are other options, such as using open source products with no licensing fees, or at least discounted fees. You may be asking, “What about improved productivity?” This is an indirect benefit, at best. Why? Unless there is a reduction in headcount, the cost to the organization is fixed. If a company is paying a developer $75,000 / year, that developer gets that money regardless of how many projects get done and what technologies are used. Theoretically, however, if more projects are completed within a given time, you’d expect that there is a greater potential for revenue. That revenue is not based upon whether SOA was used or not, it’s based upon the relevance of that project to business efforts.

So now we’re back to the promise of IT – Business agility. For a given project, ROI should be about measuring the overall project cost (not specific actions within it) plus any ongoing costs (maintenance) against business benefits (revenue gain) and ongoing cost reduction. So where will we get the best ROI? We’ll get the best ROI by picking projects with the best business ROI. If you choose a project that simply rebuilds an existing system using service technologies, all you’ve done is incurred cost unless those services now create the potential for new revenue sources (a business problem, not a technology problem), or cost consolidation. Cost consolidation can come from IT on its own through reduction in maintenance costs, although if you’re replacing one homegrown system with another, you only reduce costs if you reduce staff. If you get rid of redundant vendor systems, clearly there should be a reduction in maintenance fees. If you’re shooting for revenue gain, however, the burden falls not to IT, but to the business. IT can only control the IT component of the project cost and we should always be striving to reduce that through reuse and improved tooling. Ultimately, however, the return is the responsibility of the business. If the effort doesn’t produce the revenue gain due to inaccurate market analysis, poor timing, or anything else, that’s not the fault of SOA.

There are two last points I want to make, even though this entry has gone longer than I expected. First, Dana made the following statement in his post:

So in a pilot project, or for projects driven at the departmental level, SOA can and should show financial hard and soft benefits over traditional brittle approaches for applications that need integration and easy extensibility (and which don’t these days?).

I would never expect a positive ROI on a pilot project. Pilots should be run with the expectation that there are still unknowns that will cause hiccups in the project, causing it to run at a higher cost that a normal project. A pilot will then result in a more standardized approach for subsequent projects (the extend phase in my maturity model discussions) where the potential can be realized. Pilots should be a showcase for the potential, but they may not be the project that realizes it, so be careful in what you promise.

Dana goes on to discuss the importance of incremental gains from every project, and this I agree with. As he states, it shouldn’t be an “if we build it, they will come” bet. The services you choose to build in initial projects should be ones that you have a high degree of confidence that they will either be reused, or, that they will be modified in the future but where the more fine-grained boundaries allow those modifications to be performed at a lower cost than previously the case.

Second, SOA is an exercise in strategic planning. Every organization has staff that isn’t doing project work, and some subset of that staff is doing strategic planning, whether formally or informally. Without the strategic plan, you’ll be hard pressed to have accurate predictions on future gains, thus making all of your ROI work pure speculation, at best. There’s always an element of speculation in any estimate, but it shouldn’t be complete speculation. So, the question then is not about separate funding for SOA. It’s about looking at what your strategic planners are actually doing. Within IT, this should fall to Enterprise Architecture. If they’re not planning around SOA, then what are they planning? If there are higher priority strategic activities that they are focused on, fine. SOA will come later. If not, then get to work. If you don’t have enterprise architecture, then who in IT is responsible for strategic planning? Put the burden on them to establish the SOA direction, at no increase in cost (presuming you feel it is higher priority than their other activities). If no one is responsible, then your problem is not just SOA, it’s going to be anything of a strategic nature.

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