The new business imperative the capacity to respond.

Business is increasingly characterized by rapid and unpredictable change. Here are key concepts that can make your company more adaptive -- and turn volatility to your advantage.

Volatility is redefining the business environment. Just ask the investors who saw their savings go up in smoke with the dot-corn era, or the many CEOs whose lob security is more tenuous than ever.

This changing environment presents a new challenge to many companies, as most business models were built in a period of relative stability. Sustainable competitive advantage, growth and profitability are driven by continually adjusting in response to volatility. Yet while the occurrence of volatility is predictable, its nature, timing and magnitude are not.

Never before have traditional predictive models lost their effectiveness for developing sustainable strategy and plan investments. But opportunities for transformation do exist. Technology advances, connectivity and the blurring of industry boundaries as business networks emerge not only are driving volatility, but are also defining new cost and capital structure standards, allowing new value delivery mechanisms and accelerating the rate at which business models appear and disappear.

PATHS TO THE ADAPTIW ENTERPRISE

While the need for adaptability may be clear, becoming an adaptive enterprise is no small accomplishment, requiring substantial change in strategy, processes and attitudes. "In the 1990s, companies were focused on optimizing business processes -- reducing costs, improving quality, organizing the business around the work that had to get done," says John Avallon, vice president and global leader of Tansformation Consulting for Cap Gemini Ernst & Young. "But you can only reduce costs so much, you can only optimize processes so far. The volatility inherent in today's marketplace requires a new flexibility, a new focus on the capacity to respond."

Four key concepts can help business leaders move away from prediction and guesswork and toward continuous adaptation -- and without risking sudden organizational upheaval.

(1) Sense and Respond

Today, the priority has shifted from trying to forecast the future to developing the capacity to pick up and amplify signals from the market, and to respond automatically and continuously to each new development.

(2) Learn and Adap

Companies need to learn from their experiences and quickly share that, knowledge throughout the organization and beyond Supply chain information must drive to real time exception handling to the greatest extent possible"

And the elimination of unnecessary human intervention throughout the extended value chain is crucial. This forms the basis for effective collaboration throughout the extended value chain.

(3) Plug and Play

Adaptability is rooted in modular organizations and processes that can be combined and recombined as needed.

In the 1990s. the emphasis was on making business connections tighter arid locking in business partners. Now, the emphasis is on adding or discarding partners quickly, based on their contributions.

(4) Transformational Outsourcing

Organizations are seeking to offload crucial but non-core activities to service providers for which the activity is a core competency. Such outsourcing can be a means of transforming and radically improving processes by "vanabilizing" costs and bringing greater flexbility into their core funcitons.

For chief executives, the shift in mind-set from predictive to responsive can drive fundamental change in a company's approach to transformation activities. These "adaptive" principles can lead them to focus on new structures, operating practices and management techniques that produce the capacity to respond.

Even in the face of such volatility, some companies continue to prosper. What's their secret? Increasingly, they have one characteristic in common: They have developed the capacity to respond to change. In fact, they are systematically adaptive in their infrastructures, processes and mind-sets. Consider these examples:

* Dell Computer leverages an adaptive supply chain to lower fixed costs while responding to and profiting from increases in demand -- maintaining its position as a leading PC maker in the process.

* GE Capital creates or sells off business units based on market conditions, incubating new units until they reach a minimum profit threshold.

* Wal-Mart has built a private exchange for tier-one suppliers to exchange real-time information about sales within each store worldwide, enabling greater transparency and responsiveness.

* Nokia has created an internal division whose mission is to facilitate business opportunities among company divisions and partners, unlocking value in the extended supply chain.

Although each of these organizations deals with change differently, they all share a distinct ability to respond to change and use it to their advantage. "These companies recognize that they are no longer able to predict change, and instead have focused on strategies and operational tactics for building the capacity to respond," explains John Avallon, vice president and global leader of Transformation Consulting for Cap Gemini Ernst & Young (CGE&Y). "This represents a fundamental shift in mind-set."

Change isn't new, of course. But the rapid pace of change is. In 1980, the average tenure for Fortune 300 CEOs was eight years. Two decades later, it was only four years. In 1950, 10,000 companies failed. By 1998, eight times that number foundered, according to Standard & Poor's Compustat. The number of new product introductions has more than doubled in the past decade, to 32,000 in 2001 from 15,000 in 1991, according to the Center for Business Innovation, based in Cambridge, Mass. The S&P 500 saw a tenfold increase in value between 1980 and 2000, followed by a decline in excess of 40 percent from 2000 to 2002.

There are reasons the marketplace has become more volatile. For starters, globalization means that we are no longer cushioned against events that take place in other parts of the world. Turmoil across the ocean can have an almost immediate impact on your local economy. Likewise, increasing connectivity means that collaboration at every level is becoming faster and easier. It means that richer sources of information are becoming more widely available. Consumers have more power and supplier relationships can be initiated and terminated faster than ever before.

For companies that attempt to ride out change still clinging to outmoded ways of doing business, volatility can mean the loss of customers, market share and revenue. But for enterprises that embrace volatility, that actively seek out changing market conditions and respond rapidly and intelligently -- in short, those that are adaptive -- the payoffs can include greater opportunity, increased customer loyalty and profitable growth at a rate much faster than their more conventional competitors. For smart businesses, in fact, turbulent times are the perfect opportunity to put distance between themselves and their competitors.

Adaptive Advantage

What is an adaptive enterprise? It's one that constantly senses changes in the marketplace and quickly adapts both its strategies and its operations accordingly. It's one that leverages the extended value chain -- including employees, suppliers, partners and customers -- to take advantage of unanticipated developments faster than its competitors do. It's one that recognizes that traditional business models aren't designed to deal with permanent volatility and therefore adopts more modular and flexible processes, capabilities and attitudes.

Traditional companies build processes to handle specific tasks in specific situations. Adaptive enterprises organize themselves and develop capabilities to sense and respond to changing requirements. They capture and analyze information from internal processes, partners, customers and competitors. They change direction rapidly, deploy assets responsively, and start up or wind down activities quickly.

Adaptability reduces costs by enabling companies to make the best use of available resources and apply intelligent systems to speed decision making. "The cost of change is becoming a primary management focus," notes Chris Meyer, director of the Center for Business Innovation and co-author of It's Alive! The Coming Convergence of Information, Biology and Business (Crown Publishing Group, 2003). "In the past, direct costs for things like labor and materials were key. Then we automated many functions, and indirect costs became more important. But today, as change accelerates, managing the cost of change becomes crucial."

(1) Sense and Respond

Sense and respond is about gaining real-time visibility into the business environment and then adjusting actions continually and even automatically as appropriate. The result is fewer missed opportunities and a faster response to emerging problems.

One key aspect of sense and respond is customer relationship management (CRM). Nearly 70 percent of companies report that customers are becoming more demanding, and almost as many note that customers are better informed than in the past, according to a recent CGE&Y survey of executives in the United Kingdom and Ireland. CEOs cited building customer loyalty as among their most urgent challenges. The need to understand, target and satisfy constantly changing customer demands is a key requirement--and many CRM tools simply have proved inadequate.

"Adaptive companies are those that are sensitive to signals from the marketplace, and a key source of those signals is customers," says David Flint, research director for Stamford, Conn.-based Gartner. "That's why CRM is so important."

Companies expect CRM to reduce costs and increase revenues, but few have been able to measure significant returns. While they are increasingly able to capture information from every customer touch point--call centers, point-of-sale, the direct sales force--companies have been less successful in implementing consistent processes that consolidate and analyze that information to support decision making.

"One reason companies haven't achieved the full benefits of CRM is that many of these programs were undertaken without really taking the customer's behavioral characteristics into consideration," explains Kirk Strawser, vice president and global leader of CGE&Y's CRM practice. "We believe that the 'voice of the customer' should be the primary design variable in any CRM initiative."

A technology-only approach to CRM is often insufficient, as it is typically focused simply on introducing greater efficiencies in the selling organization. What's needed is a more holistic, customer-driven approach.

"There are two common problems associated with CRM," says Rich Milliman, vice president and Americas leader of CGE&Y's CRM practice. "The first is a failure to create a single point of storage for all customer data enterprise-wide. Without such a capability, the organization is at a sharp disadvantage in intelligently communicating to customers and prospects in a time-effective manner. The second common problem is a failure to adequately connect customer analysis with operational capabilities. There exist many organizations that do impressive, in-depth analysis of their customers, but then lack the organizational and operational structure to actually act on the analysis."

Approaching CRM effectively is an iterative process that involves three primary components:

* Customer experience. Effective CRM addresses the total customer experience, with the goals of improving customer satisfaction, building customer loyalty and increasing customer lifetime value. That requires ongoing capture and analysis of consumer needs and behavior to allow for effective segmentation, product innovation, and targeted marketing and sales. Just as important is consistency: Research shows that customers become dissatisfied when they receive different levels of service from different channels, products or services.

* Operations. Sales, service and fulfillment operations should all be geared toward continuous improvement of the customer experience. But the importance of operations goes beyond call centers and customer-facing staff, It also must involve the integration of information across all channels and touch points, customer-oriented training even for appropriate back-office employees and a fundamental realignment of corporate culture to foster responsiveness to changing customer demands.

* Technology. CRM technology is what enables customer-focused operations and a customer experience that results in loyalty and value. That technology must be integrated and adaptable; collecting, analyzing and making available accurate, timely information requires integration across the extended value chain. For example, CRM processes must become equally adept at capturing customer information from person-to-person contact as it is from online sales.

"The good news is that the promised benefits from CRM are real and are there for the taking," says Strawser. But gaining these benefits often requires a different way of thinking. "CRM is not a bottom-up exercise, in which you build internal capabilities across the enterprise and expect them to substantially improve the customer experience," he says. "In fact, that approach can have an adverse impact on customer experience."

What's needed is a top-down, "voice-of-the-customer" approach, which starts with an understanding of what determines desirable and undesirable behavior in customers when they interact with the business. "We refer to these moments of truth as customer events," Strawser says. The handful of customer events that really shape behavior is the key to unlocking the true benefits of CRM."

(2) Learn and Adapt

Learn and adapt is about learning from experience, sharing that knowledge throughout the extended value chain, and reusing it to adapt to market changes. Benefits include faster reaction to volatility, fewer repeated mistakes and the ability to use the increasing pace of change to drive rapid innovation and gain competitive advantage.

"If the '80s and '90s were the information age, then the beginning of the 21st century is the execution age," says Greg Cudahy, vice president and Americas leader of Consulting Services and global leader of Supply Chain for CGE&Y. "Most process and technology changes implemented in the late 20th century were about information capture, processing and related planning. Decision making for tactical issues was largely rule-based or required human intervention, while strategic issues were either gut-feel or study-related. In today's business environment, to adapt and survive, the time between capturing new information and acting appropriately on that new information has to be as close to real time as possible. Companies that fail at this will soon fall behind those that can more quickly make strategic and operational decisions."

Collaboration is a key aspect of the learn-and-adapt principle. "In the natural world, a new organism isn't created by inventing new genes, but by combining the existing genes of two parents," notes Meyer. "The same applies in the business world. Developing new capabilities internally can be slow and expensive. It often makes more sense to collaborate with others who already have the capability or who can help you develop the capability."

To make collaboration effective, however, "you need strong commitment from executive leadership that your organization is going to operate collaboratively," says Bruce Richardson, senior vice president for AMR Research in Boston. "You also need a change management program that drives cultural change and that forces people to work in a collaborative environment."

Trouble is, few companies have been successful in truly integrating systems and processes to enable effective collaboration. Part of the problem is that customer-supplier relationships can be confrontational in nature, with each party focused on its own needs and unresponsive to the needs of the entire supply chain.

"Collaboration is critical," says Paul Matthews, Americas leader of Supply Chain for CGE&Y "Having the ability to adapt to change while minimizing the ripple effect throughout the value chain will further the knowledge sharing and value creation process."

Only half of all companies routinely share information with suppliers and customers, according to CGE&Y, and only 20 percent engage in in-depth collaboration across the supply chain--this despite the fact that more than 60 percent of companies have implemented systems for Web-based collaboration, well over one-third are involved in online exchanges, and about half routinely conduct electronic transactions with suppliers and customers.

"Companies that are able to drive true collaboration with their value chain partners can enjoy truly impressive results," says Kevin Poole, vice president, Supply Chain for CGE&Y. "For instance, Ford Motor Company was able to reduce inventories by 20 percent and improve customer fill rates by 6 percent in its service and parts operation by collaborating more effectively with its global supplier community."

Using collaboration to promote both quick wins and long-term strategic advantage depends on building an adaptive supply chain. The rapidly changing business environment--marked by rising customer expectations, mounting cost pressures, shorter product lifecycles, increasing globalization, ubiquitous connectivity, powerful enabling technologies and heightened volatility--demands it. According to a recent study by Gartner, "by 2004, 90 percent of enterprises that fail to apply supply chain management technology and processes to increase their agility will lose their status as preferred suppliers."

An adaptive supply chain is built on several levels. At the strategic level, adaptability is created through an ecosystem of manufacturing, distribution, service and design partners, and by managing the entire network to provide the organization with flexibility, scalability and maximum options. At the operational level, modular business processes and capabilities play a role, as well as dynamic planning systems that optimize multiple business dimensions such as total cost, inventory, customer satisfaction and responsiveness. And at the execution level, the adaptive supply chain provides an organization with a sense-and-respond mechanism, allowing it to identify events that go wrong -- from materials shortages to plant shutdowns -- and quickly correct them.

To make it work, adaptive IT architectures and management models that extend an organization's capability to respond rapidly to changing business conditions must be in place. Events up and down the supply chain must be monitored with real-time visibility tools that let companies know when operations aren't running as desired, and allow them to redirect resources and activities in light of market changes.

(3) Plug and Play

"Technology changes will always mean that we try to second-guess ourselves," says John Parkinson, CTO of the Americas region for CGE&Y. "To be successful as a provider of business automation services, you have to be able to quickly adapt to and incorporate new technologies as soon as they can give you a real benefit in terms of operating and ownership costs or the provision of new services."

Plug and play is about breaking down a company's business and technology capabilities into modular components to gain greater operational flexibility, and being able to combine components as the market demands. Moreover, companies can respond quickly to challenges and opportunities while minimizing capital expenditures and optimizing asset yields.

However, business modularization can be a significant inhibitor to flexibility. "The focus on that reengineering process has tended to modularize the business around the work that needed to be accomplished, with little emphasis on flexibility," says Avallon. "This created relatively inflexible and high fixed-cost structures that are unable to adjust to changing circumstances. This was an input-output mind-set focused on throughput and reduction of cost and cycle time. Today, the home run is this, plus a 'variablized' cost structure and rapid response ability.

"The challenge," he continues, "is to rethink the modularization of the business around the capabilities necessary to enable cost-effective flexibility. At issue is the ability to reconfigure, or plug and play, capabilities to respond to volatile events." The new modularization needs to be designed to set up the ability to reconfigure internally and externally via outsourcing or alliances.

IT infrastructure plays a key role here, as well. Two-thirds of companies believe that their best investment is in making their IT infrastructures more adaptive, according to the CGE&Y survey. And about 60 percent of senior executives anticipate major, rapid configuration of both IT and internal processes because they believe it's crucial to reducing costs, improving operational efficiencies and increasing customer focus.

On the downside, nearly 90 percent of CIOs in the survey indicated that their IT infrastructures do not respond quickly and flexibly to unexpected challenges -- partly because of their complexity. IT infrastructure grows through accretion as disparate servers, applications, databases, desktop equipment and network components are added to legacy systems. As a result, it can become difficult to manage and time-consuming to change.

An adaptive IT infrastructure, on the other hand, enables managers to capture customer and market data wherever it's available and quickly disseminate it to employee and partner teams, regardless of how those teams may be recombined and deployed. Organizations whose infrastructure qualifies as adaptive see improved supply chain performance, faster innovation and increased responsiveness to customer demands.

Some companies have attempted to achieve this flexibility simply by deploying new applications and investing in CRM systems, collaborative solutions and e-business software. While doing so presents new capabilities, it is not sufficient for achieving adaptive IT, and, in fact, it can make the IT infrastructure even more complex and undermine the goal of making the enterprise more adaptable.

"The key to adaptability is a combination of standards and architected simplicity," says Parkinson. "Standards, because they let you connect to and interoperate with business partners of all kinds. Simplicity, because you have to be able to react quickly, and the fewer moving parts you are dealing with, the faster your reaction time."

"What's required is a flexible infrastructure that can be reconfigured quickly as needs dictate," agrees Al Gillen, research director for LOG, the market research firm based in Framingham, Mass. "Instead of being designed around specific applications, it's designed for flexibility, so you can change applications as necessary." As a consequence, you don't waste your time and resources replacing your infrastructure every time there's a change in your business.

Being clear about the definition of standards is important. Most large corporations have a large installed base of legacy systems, and they are not about to throw them out in order to standardize on another proprietary platform, whatever the likely efficiency gains may be. In adaptive infrastructures, common standards are used to link a huge range of applications to an equally complex range of processing systems, via interfaces that mediate between the two. Web-enabled systems, in which a single portal provides fast access to all relevant processing capability and data within a growing ecosystem of partners, are typical of this approach.

While outsourcing is widely accepted as a viable business tactic to reduce costs and improve efficiencies, the nature of outsourcing best practices is evolving. In today's economic climate, companies are facing constant change, more options and greater complexity. Quite simply, they can't do everything well. As a result, many are leveraging new transformational outsourcing models and collaborative partnerships between buyers and service providers to drive strategic business transformation. In effect, outsourcing has evolved from a tactical, cost controlling mechanism to a business execution strategy.

(4) Transformational Outsourcing

Instead of attempting to control change, a transformational approach to outsourcing focuses on managing uncertainty, affording both companies and outsourcers greater flexibility and shared risk to meet and match ever-changing market dynamics.

"Companies cannot afford to look at outsourcing too narrowly," says Bob Pryor, vice president and Americas leader of Outsourcing for CGE&Y. "The new market reality requires companies to develop a clearly defined outsourcing strategy that is aligned with the business strategy and enhances business execution. The decision to outsource is moving into the boardroom and is becoming a strategy used by companies to improve or transform their businesses."

Transformational outsourcing is fundamentally different from traditional outsourcing, which is typically used to save money on specific functions such as payroll or billing. It pervades an organization horizontally, not vertically, and therefore requires multiple groups be involved in the process.

Outsourcing may be appropriate for a single aspect of IT infrastructure, such as data center management, or it can involve an entire business function, such as payroll or logistics. "To determine which processes are candidates for outsourcing, you need to ask yourself two questions," says Flint. "First, is it critical -- is it important to the business? Second, is it core -- does it contribute to our differentiation in the marketplace? If the process is both critical and core, then you don't want to outsource it. You want to invest in it and develop it and make it the best you can."

If, however, the process is critical but non-core, it may be a candidate for outsourcing. "These might be activities such as employee benefits or customer call centers, which aren't differentiators but for which users expect a high level of service," Flint explains.

Finally, for outsourcing to be truly transformational, both the company and its outsourcing provider should work together toward mutual goals and benefits. Without that kind of relationship, the prospects for long-term success are less than promising. Companies should seek service providers whose corporate culture fits well with their own, allowing the staff of both organizations to become a virtual team.

"The real benefit to outsourcing is that the process no longer occupies as much of leadership's time, so they can focus on other, more strategic activities," says Flint. "Outsourcing also allows business leaders to find other companies that are adaptive at what they do." That, in turn, makes your company more adaptive.

From Here to Adaptability

Sense and respond, learn and adapt, plug and play, transformational outsourcing--all are key enablers of the capacity to respond. But there are more fundamental characteristics of the adaptive enterprise, manifested in the attitudes and priorities that underlie its strategies. Whereas in the past companies tended to focus on minimizing operating costs, the new emphasis is on "variablizing" operating costs, scaling operations up or down as needs dictate. Likewise, the trend is shifting from accelerating cycle time to accelerating response time; from structural efficiency to structural flexibility; and from owning assets to influencing assets across the extended value chain.

Avallon recommends that companies address the issue along three key dimensions: structure, operations and management.

Structure. Modularize the business around processes and capabilities that enable cost-effective flexibility. "Laying off workers is not cost-effective flexibility. Neither is shutting down plants or writing off machinery," says Avallon. "Think about how you can make the business more modular, including people, what they do and the technology that supports them." Beyond internal restructuring, he recommends that companies set up reconfiguration options to take advantage of outsourcing and/or partnering and alliances to produce an optimal mix of scalability, flexibility and return on assets. Also look for opportunities to achieve "workload shifting"--for example, deploying self-service portal capabilities for customers, suppliers or employees.

Operations. Processes and technologies that provide visibility into relevant events should be implemented, along with the capability to manage and deliver in the face of those events. "Leverage technology to improve responsiveness and disrupt economic relationships," Avallon says. Market-sensing product development can capture market signals, leverage internal and external value networks, and take advantage of collaborative platforms to address emerging customer needs. Dynamic management of the customer experience can enable you to understand customer perception of value and respond accordingly.

Management. Finally, monitor relevant events to trigger business adjustments, and align performance metrics with desired strategy and behavior. Avallon points to the need to share and incorporate knowledge so that leaders can continuously adjust business models. Comprehensive knowledge of customer behavior can enable companies to identify the most profitable customers and offer products or services that meet their needs; continuous innovation ensures that companies are propagating new capabilities and offerings while eliminating those that don't deliver value.

Becoming an adaptive enterprise does not render obsolete the need to minimize costs, optimize processes and achieve operational excellence. Instead, it acknowledges the reality of permanent volatility--and recognizes the new imperative of creating the capacity to respond. "In an environment of rapid and unpredictable change," Avallon says, "enterprises must embrace new strategies for developing sustainable competitive advantage and achieving profitable growth--the objectives of every business." Those objectives, at least, will never change.

Shifting Priorities for Building Adaptive Enterprises

Traditional Priorities           Adaptive Priorities

Minimize operating costs         Variable operating costs
Minimize cycle time              Minimize response time
Efficiency of the structure      Generate structural options
Own assets                       Influence assets across ecosystem
Internal integration             External connectivity
Manage P/L                       Manage P/L balance sheet and risk
Top-down, directive command and  Market-driven self-initiated learn
control                          and organize

Source: CGE&Y, "Point of View on Adaptive Enterprise," February 2003

RELATED ARTICLE: CREDIT ADAPTABILITY FOR SUCCESS

Perhaps no sector has been harder hit with permanent volatility than financial services. The industry is grappling with increasing connectivity, decreasing customer loyalty, technology innovation and changes in the competitive landscape.

Increasing connectivity has had a particular impact on financial services companies. Customers and partners are better informed and can more easily find and switch to new providers. Electronic channels lower entry barriers to new competitors. They must manage a larger portfolio of products and channels, and handle a growing amount of information to understand and respond to customer needs.

Add to that decreasing customer loyalty, in part a result of price transparency that enables consumers to easily shop for the best deals. Greater choice of services and lower barriers to switching are encouraging retail consumers and even institutional customers to change providers more frequently.

Many of these factors are driven by technology innovation. Customers today can quickly and easily access information, interact with providers and conduct transactions. Internet banking and online brokerages are attracting a growing number of customers. And person-to-person payments such as PayPal and the use of ATM products instead of credit cards for online transactions are eroding banks' core franchise.

Last, changes in the competitive landscape have been wide-reaching. Mergers and acquisitions are forcing financial service providers to find larger partners to compete. Price wars, especially among credit card providers, are increasing margin pressures. Non-traditional players, such as the $158 billion Ford Credit, are beginning to rival existing banks in size. Companies in energy, telecommunications and retail are launching financial services offerings.

But the news is not all bad. These entities have significant opportunity to apply sense and respond, learn and adapt, and related concepts to adapt to changing market conditions. For starters, financial institutions have access to substantial customer intelligence and the ability to monitor consumer behavior in real time.

By analyzing that data, they can segment their customer base with increasing granularity, and develop targeted product offerings, such as microbilling, account aggregation and trading Web sites. Banks can also provide increasingly customized services -- for example, that allow online customers to determine their net worth through a personal balance sheet.

In addition, feedback loops in the financial supply chain can provide a better understanding of product and services suppliers. Real-time financial data and ERP tools can provide a single view of business operations and enable a better understanding of financial performance. Stochastic modeling, which uses randomly generated variables to predict a range of outcomes, can provide a clearer view of operational risks, while real-time monitoring of customer behavior can promote cross-selling and upselling throughout the organization.

Several unique learn-and-adapt opportunities exist for financial companies: They can share results of real-time demand simulation throughout the enterprise, and can share information about product successes and failures, reinforcing the modeling of best-in-class offerings. Project teams can continuously exchange results and lessons learned, building feedback loops that ensure the smooth flow of knowledge.

Finally, they can collaborate with key partners and customers to co-develop products, offering incentives to employees to embrace collaborative processes that result in competitive advantage.

A Surround Strategy doe IT

In 2000; Amsterdam-based ING expanded its presence in the Americas with the acquisition of ReliaStar Financial Corp. and Aetna Financial Services. Shortly after, INC set out to integrate the three companies. "We wanted to migrate from being a product-siloed organization to being an integrated, flexible financial services organization," explains Paul Donovan, CIO of INC Americas Financial Services.

That mandate presented ING's information technology group with some significant challenges. "We had 32 different platforms supporting different segments of the business, and bringing them together was no small feat," Donovan says. "Also, while business was migrating to a more integrated model, we were constrained by an IT model that was still based on products and location."

INC determined that it would have been too costly to perform a wholesale consolidation of those platforms. Instead, the company developed an innovative IT architecture that weaves its numerous platforms into a coherent whole. "We call it a surround strategy," says Donovan. "We are surrounding those 32 legacy platforms with a sound, open architecture."

In essence, his Integrated Americas Adaptive Architecture (IA (3)) leaves existing systems in place while creating an overarching layer that ties them together. It also provides INC with consistent access to information across its various platforms. For example, because users access the architecture layer rather than individual databases, information is delivered in a standardized form, even though it comes from many different sources. "This helps us better service the customer and makes it easy for the customer to do business with us," Donovan says.

INC is gradually moving functions from its various systems to the IA (3) layer of its infrastructure, which means the company can take an evolutionary approach to consolidating its collection of platforms. "Over time, we will eliminate the more legacy-type platforms and get down to a more manageable number, say, five or 10," explains Donovan.

The IA (3) -- which has earned a Computerworld Smithsonian Award -- puts INC in a better position to adapt IT to business processes and, more important, to respond to new business opportunities. New products, for example, can be accommodated by making changes in the overriding architecture layer rather than in numerous, disparate systems, which translates to a shorter time to market.

Donovan has complemented these technological changes with some changes in the IT organization, as well. Each line of business has an IT manager who participates in its cross-functional market team and whose compensation is partially tied to the performance of that business. The arrangement accelerates decision making and helps the IT department and the business work in concert.

That link extends to the top of the company, with Donovan reporting directly to CEO Thomas McInerney. The two have a close working relationship. "IT is fundamental to this business, so we both believe that it's important that the CIO have a seat at the table," Donovan explains. "Technology is a tool, and it's how you use that tool that gives you competitive differentiation. That's why we have done quite a bit to make sure that IT is, in fact, aligned with the business."

Peter Haapaniemi

FINDING OPPORTUNITY IN VOLATILITY

Energy, utilities and chemicals, or EUC, companies are no strangers to volatility. Over time, they have adopted approaches to cope with uncertainties in supply, demand and industry structure. But experts believe that adaptive mechanisms will become even more prevalent in the future, as EUC companies grapple with consolidation, regulatory uncertainty, swings in supply and demand, and other volatility factors.

In the energy industry, prices have fluctuated wildly, plunging 35 percent in 2001. The structure of the industry has also changed, as BP and Amoco merged in 1998, Exxon and Mobil 'in 2000, and Phillips and Conoco in 2002. Likewise, upstream and downstream activities have been integrated, with many services companies entering multiple market segments to offer a wider range of products and services.

For utilities, the lifting of price regulations in certain markets means that many are subject to greater demand fluctuation. Utilities have also faced their share of industry restructuring, with consolidated utilities divesting into energy generators that operate power plants, energy distributors that control power transmitters and power lines, and energy retailers that deliver energy to customers.

In chemicals, the nexus of soaring energy costs, declining product prices and overcapacity made 2001 the most volatile year in two decades. The industry has also seen significant consolidation, with Dow Chemical and Union Carbide merging, Royal Dutch/Shell and BASF forming Basell, and Chevron and Phillips Petroleum forming Chevron Phillips Chemical.

For energy companies, prices vary not only day by day but also across regions and product mixes. That presents tremendous opportunity to increase profits by moving volume to areas or products with higher margins. The ability to dynamically reallocate production to meet demand can mean savings in the tens of millions of dollars. In addition, oil companies can respond to volatility by integrating external markets into their operations. By inserting trading mechanisms between the upstream and downstream business, they can respond to the local internal market in ways that mirror external market conditions.

Utilities, for their part, are using real-time data to make faster decisions. In managing their asset portfolios, generators and diversified utilities try to hedge against fluctuations in supply and demand. When base generating power is at capacity, they can bring on flexible capacity such as gas-powered turbines that have high operating costs but require low investment. They can also build a portfolio of complementary generating assets to address volatility in raw-material supply and prices.

Adaptive chemicals companies are encouraging supply chain collaboration to drive innovation. For example, one company formalized collaborative product development by identifying common objectives between related business units. This allows the company to leverage advancements in each unit and break down both technical and incentive barriers between units. In addition, chemicals companies are deploying new sensor technology to improve distribution and fulfillment. For example, they can provide customers with sensors that automatically monitor and replenish inventory, improving service while capturing valuable usage data.

Characteristics of an Adaptive Enterprise

Piloting Culture

* Encourage experimentation

* Regard failures as an investment

Reconfigurable Business Model

* Business modularized

* Easy plug-and-play new components

Customer-centric

* Investment and processes based aound the customer

Unhindered Information Flow

* System integration and transparency

* Connectivity across ecosystem

Closed Feedback Loops

* Measurement of the reaction of customers and themarket of business initiatives

Adaptive enterprises sense and respond to environmental changes, learning from their actions how to change their behavior for next time. The ability to respond faster and better means that they can find opportunities in situations that seem merely threatening to others.

Source: CGE&Y, "Point of View on Adaptive Enterprise," February 2003

The Customer-Centered Organization

For David Helwig, president and chief operating officer of InfraSource, Inc., there are a number of shifts in the business environment that bear watching, but one in particular stands out. "We are seeing a sea change in terms of what our customers expect," he says.

That change has prompted a reexamination of how InfraSource is structured. Part of Exelon Enterprises, the unregulated division of the Chicago-based Exelon electric utility, InfraSource offers engineering, construction, process design, maintenance and program management, among other services, to infrastructure-intensive industries such as electric and gas utilities and telecommunications companies. "This is no longer a bid-and-buy contractor's business," Helwig explains. "Customers have rising expectations for performance and broader value propositions." In essence, InfraSource's customers want myriad services delivered in an integrated fashion, as well as higher-level, more-strategic relationships with service providers.

To meet those expectations, Helwig says, "we've basically done a wholesale transformation of our organization, and formed several business lines that weren't clearly defined before." InfraSource was essentially a collection of more than a dozen separate organizations brought together through a series of acquisitions. They have been reorganized into four business lines: high-voltage electrical, construction and services; underground construction and services; telecommunication leasing and services; and commercial electrical services.

"The new approach creates a structure for our organizations that provide similar services to work together in an integrated fashion and work more strategically with the customer," says Helwig. "That facilitates the ability to adapt to changing customer needs."

It was a big change, but adjusting systems and processes was the easy part. The more critical element, Helwig explains, has been instilling the right mind-set--one that embraces a more collaborative, high-level approach to customer relationships.

"It takes more than an explanation of theory," he says. "It often takes real experience, with people sometimes running into limited success, for folks to really learn to do things differently. You have to let them try things, and then relentlessly follow up and support them where they need more help."

The new organizational design has clearly been effective. In 2002, says Helwig, "we improved the profitability of every one of our line of businesses in the face of a soft economy. I attribute that in large measure to the changes we've made and the unique value proposition that we offer."

But Helwig also knows that in a changing business, the company cannot simply rest on its laurels. "You have to be able to rethink your business strategy on an ongoing basis to match up with business conditions and customer desires," he says.

In the end, Helwig says, the ability to adapt is largely a leadership issue. "You need a management team that understands the need to be nimble and responsive, as opposed to being tied to a fixed business model," he says. "The leadership team has to have a like-mindedness about the need for flexibility and a willingness to not be parochial and keep searching for better approaches."

Outsourcing for Flexibility

In the financial services industry today, banks must contend with growing margin pressures; with an increasing emphasis on commission-driven revenue; and with high costs, due in large part to the array of processes needed to be a full-service provider -- and to do it all in-house.

"All three of these factors are not going away, and all three require us to adapt," says Hermann-Josef Lamberti, COO and a member of the Group Executive Committee at Deutsche Bank. In response, the Frankfurt, Germany-based bank has been focusing on its core competencies, shedding businesses that are outside that core, and working with partners to gain efficiency and a lower cost base.

To support this approach, Deutsche Bank is exploring the potential of outsourcing activities outside its competitively differentiating core processes. Lamberti describes three "layers" of processes that are likely candidates:

* Utility processes, which include the delivery of market data and IT infrastructure services such as voice and data centers and networks and desktop services. Outsourcing such services typically involves usage-based costs, which gives individual Deutsche Bank businesses the flexibility to match outsourced services to their budgets and to changing market volumes.

* Non-core business processes, such as payroll, statement printing, purchasing, HR and accounting. These are appropriate for outsourcing or an internal shared-services approach.

* Core-but-commodity bank processes, such as retail payment transfer, check processing, security settlement and the running of ATM networks. These can often be handled through industry groups or organizations in which the bank participates.

"Each of these layers involves a different philosophy," says Lamberti. The utility layer is used to switch the bank from fixed costs to variable costs. In the non-core layer, the idea is to have well-defined service levels provided at a given price. And in the core-but-commodity layer, which typically involves investment on the bank's part, Deutsche Bank is striving to create a governance model that gives it some control over costs and the direction of the provider organization.

As part of its heightened focus on its core businesses, Deutsche Bank identified key global processes, such as risk management, controlling and customer relationship management. It then created an integrated IT and operational infrastructure that enables those processes to work seamlessly across its businesses. The result, says Lamberti, has been an enhanced ability to respond to change -- or extraordinary circumstances--almost instantly.

For example, during the Sept. 11 World Trade Center attacks, Deutsche Bank's New York facility, which was across the street from the south tower, was destroyed. Nevertheless, says Lamberti, "we were able, on the very same day, to clear more than $300 billion with the Fed." That was possible because the bank's global cash management process enabled it to quickly shift its New York operations to its facilities in Ireland.

What's more, Lamberti adds, these efforts have clearly increased efficiency--a critical point in a competitive industry. "Last year we drove more than $2 billion in costs out of the operational environment," he says. "Roughly half of that was linked to our process reengineering."