Wilfred Thinking Aloud

Vertical Integration vs. Horizontal Partnerships

The shift from vertical integration to horizontal partnerships is IMHO one of the important business drivers behind SOA.

In the past, organizations used to have a desire to control the entire supply chain. Large corporations would own both the local retailer and the mines providing the basic material for their products. Corporations like that resemble the red organizational structure in the figure below. Let's call them Red inc.

Over the years, business has been moving away from this old "vertical integration" school of thought into a new business model that prefers "horizontal partnerships". Divisions and business units became responsible for their own profit and loss, which eventually led them to search for other opportunities to grow and stabilize the incoming flow of revenue by searching for other clients of their services. It is only a natural consequence that the strong ties with old organization would get weaker and that ties with new organizations would grow stronger.

Eventually, this has led business units to become business partners. Because of the weaker ties with the old organizations, and because of their desire to offer services to other clients than the old organization, old ad-hoc integration processes would no longer work. Instead, the business unit would search for a coherent and well-defined market proposition, and seek for standards adoption to become more attractive for potential new customers.

The following figure illustrates it. In this case, a business unit of the Red inc., is starting to offer its services to the green organization. This way, it is drifting away from its original position in the old organization, and is starting to become a business partner for the old organization. It is responsible for its own profit and loss, so its basically crawling up on its own feet now: let's call them Yellow inc. The green organization (Green inc.) has come to the conclusion that it no longer wants to have the services of the business unit in house, and decided to outsource the entire set of services originally provided by the Green inc. business unit to the Yellow inc.

The mechanisms in a typical SOA architecture facilitate exactly these kinds of rearrangements in your organization:

• Having a clearly defined market proposition and a related clearly defined coherent set of services allows Yellow inc. to offer its services to other organizations than Red inc.
• Adoption of vertical standards in the definition of the services of Yellow inc. allows Green inc. to pick another business partner in a relatively painless way.
• The loosely coupled nature of the open Web Services standards attribute to this freedom of choice and flexibility even more.
• At the same time, being alligned with the direction in which the industry is heading (embracing the Web Services standards), works as an excellent sales argument for Yellow inc.
• Both Red inc. and Green inc. are able to focus on their core business.
• ...

Expect to read more about this in my blogs in the near future.

P.S. Make sure to check out John Crupi's blog about the role of the business unit too.