EC Infrastructure Investments:
Will You Get What You Pay For (and Need)?
(Originally published in Messaging Magazine, March/April 1999)

By Mark Becker and Robert Booker, Control Data Systems, Inc.

Introduction

Today’s progressive business environment requires that organizations embrace electronic commerce (EC) for business-to-business and business-to-consumer initiatives. Organizations must consider and deploy critical, and often new, infrastructure for directory services, information security, messaging, and browser-based applications.

The decisions required to deploy the required architecture for electronic commerce are complex. Careful consideration of the system requirements in the business context is necessary to determine the financial benefits, the requirements for the technical infrastructure, and to justify the investment for executive approval.

A Case Study

Consider the case in which financial institutions handle stock trades. Traditionally, brokers have been the focal point for account and transaction control. That has changed. Now, individual investors do research, monitor their portfolios, and order and confirm trades electronically. The role of the broker has been reduced to that of trader.

Trading institutions have fostered this change in business model through deployment of browser-based services. A typical "electronic trade" scenario is summarized in Figure 1 and described in Table 1. The process has been simplified for brevity and to sharpen the focus on its infrastructure implications. The process does not necessarily dictate that technology be employed. However, when the competitive environment, electronic marketplace, and individual investor expectations are considered in terms of the three process time slices (Pre-trade, Trade, Post-trade), three business applications emerge whose functional scope are defined in Table 1. These applications are a microcosm of a trader’s comprehensive portfolio of electronic commerce solutions and illustrate the requirement for a shared directory, security, messaging, and Web infrastructure.

 Figure 1. Electronic Stock Trade Process

Table 1. Electronic Trade Functional Needs

This article examines:

  1. The electronic trading business environment,
  2. The interaction of the multiple infrastructures for electronic trading,
  3. Quantitative and qualitative factors driving the go/no-go investment decision, and,
  4. Lessons learned which can be extrapolated to similar electronic commerce programs.

Business Requirements and Financial Impact

The role of the broker has changed and so has the technology requirement. Traditional brokers provided significant value to individual investors by monitoring corporate performance, plans, and hearsay (some may say gossip); then forecasting stock price movement seasoned with their experience and assessment of general market conditions. Based upon the personal investment strategy of their clients, brokers recommend market actions.

Electronically connected individual investors choose to perform the research and analysis function for themselves. Such investors look to a registered broker only as a conduit for the transaction. As such, trading services have become a price sensitive commodity. Many individuals "shop" for the lowest transaction fee. This change in the business environment requires a creative and aggressive response for investment brokers to preserve their business margins. Trading organizations are streamlining all aspects of electronic trade support to minimize recurring costs, provide their clients with self-service, simplify account administration, and leverage their installed client base.

The competitive war is being waged on the service front as well as the price front. The individual investor is still dependent upon information from the trading organization to make buy, hold and sell decisions. Access to research, news reports, and business forecasts are still an essential part of the investment process. However, the access and delivery channel to share that information has evolved from print media, telephone, and fax to the Internet. The brokerage house, not the individual broker, now provides information services to the growing market of individual investors who are electronically connected. Trading organizations that fail to provide an Internet channel and related services jeopardize current business volume and prohibit access to an expanding market and its cross-selling opportunities. Failure to rapidly deploy new services risks market share and business leadership.

Investment trading is no longer the sole purview of brokerage houses. Rather, financial institutions offer planning and trading services as part of a suite of customer services. The total value of the account and the customer relationship are as important as the profitability of an individual transaction. Financial institutions recognize that the trust relationship must be preserved irrespective of delivery channel. Security and audit requirements will not be compromised to promote business volume.

Lastly, the expectations of the electronically connected clientele have grown with their computer literacy. The general awareness of Internet security or lack of security forces traders to provide increasing levels of security infrastructure. More importantly, the individual investor has discovered through trial and error what defines a "user friendly" interface. They have encountered personalized Web pages and will accept no less from their financial providers.

The competitive environment, electronic marketplace, and individual investor expectations define the drivers that justify the technology investment for electronic commerce. Refer to Table 2. At issue is not whether Internet services will be provided, but how.

 Table 2. Drivers For Technology Investment

Technical/Infrastructure Implications: Infrastructure Capabilities

Too often, the requirements for directory, security, Web, and messaging infrastructures are considered in a disjointed fashion rather than as an integrated set of services in support of a business initiative. Subsets of the each infrastructure’s capabilities are deployed for use by a single application; or an alternative technology is deployed without any intention to reuse it in the future. Doing so increases construction costs and slows system development.

Before discussing an integrated electronic trading solution, the architecture of each basic infrastructure component must be considered. Infrastructure in the general case refers to a common set of shared services and capabilities.

  • Directory Infrastructure refers to the management of, access to, and delivery of shared, descriptive information required to manage and/or enable transaction processing by multiple and distributed technologies. The group of applications that require the service defines the content of the service. Directory systems are deployed to minimize the recurring cost of maintenance and administration, to avoid rework and confusion spawned by information assets that are not current and accurate, and to provide a centralized source of data to speed application development.
 Figure 2. Directory System Architecture

Figure 2 depicts a common directory system. Note that directory services are provided at three levels:

  1. Meta level directories join multiple master directories to produce a composite record or access Lightweight Directory Access Protocol (LDAP) compliant directory services and databases. It provides a single point for applications to access directory information.
  2. "Master" level directories are the source at which data is created and managed.
  3. "Application" level directories are specific to a specific service or technology.
  • A Security Infrastructure protects information assets. However, when access to corporate technology assets (applications, data, devices, and services) is available through a managed user session, security changes from a service that denies and protects access to a business enabler. A security infrastructure can be a strategic business tool to promote electronic commerce. Implementation of security technologies limits exposure to litigation and theft, and also satisfies fiduciary responsibilities and meets customer expectations for privacy and confidentiality. Figure 3 summarizes the typical security infrastructure in terms of user sessions.
Figure 3. Enforcement Technologies By Security Level

Note that users must navigate a series of enforcement technologies as summarized in Table 3. Each enforcement technology acts independently. Yet the quality of customer session requires that the data used by each technology must be accurate, timely, and consistent. Therefore, the directory infrastructure is used to manage and distribute required information for each enforcement technology.

 Table 3. Enforcement Technologies By Secuirty Level

As shown in Figure 4, the Web infrastructure is not deployed without a companion security infrastructure. Content with unrestricted read access is published outside of the electronic perimeter. Web servers should be hardened (that is, made tamper-proof) to ensure that their content is not subject to unintended modification and that the service is restricted to its designed use. Web technology offers secure socket layer (SSL) encryption to provide a modicum of privacy over the Internet.

 Figure 4. Typical Web Infrastructures

Finally, the level of transaction assurance required for the application must be considered. Some electronic applications require a very high level of authorization and transaction assurance—originator assurance, content integrity, and date/time certification—that has evidentiary value. Combined, the Web and security infrastructure is supported by a directory system to maintain and distribute required descriptive information.

Infrastructure Interaction for Electronic Trading

The process as summarized in Table 1 affords traders an opportunity to provide electronic services to a self-subscribed clientele. In the process, the user produces a profile that forms the basis of the electronic relationship. User profiles describe the electronic user, record contact information about the user, and define the how their session is to be personalized. User profiles are also the basis for management of access rights and privileges, and may hold information required to secure subsequent transactions such as authentication credentials.

User profile information is maintained, then accessed and delivered by the directory infrastructure to distributed applications on demand. Moreover, the client may desire to join distribution groups to receive trader-generated updates and market alerts. The directory infrastructure is the maintenance and administration focal point for security, Web, and messaging services (see Table 4).

Table 4. Technical Requirements By Infrastructure

The technical requirements come from the business environment as well as the process itself. For example, the process flow does not require that transactions, sessions, nor information assets be secured. However, the business environment and financial drivers in Table 2 indicate that clients have expectations for confidentiality, that the trader has legal responsibilities when acting as an agent for the buyer, and that it is prudent to avoid denial of service. These implicit requirements can be found in Table 4 as well.

Some infrastructure-related observations follow:

  1. An electronic trading solution requires services provided by the interaction of all four infrastructures. The directory system provides the logical glue between them.
  2. The benefits from electronic trading require multiple applications and a suite of infrastructure services. Generally, each infrastructure is required for each application. The business initiative is at risk if each respective infrastructure is not deployed effectively.
  3. An appropriate design and the lowest total cost construction program demand that the suite of applications and infrastructure services be defined concurrently then built in a manner to minimize their total cost.

Preparing for the Go/No-Go Decision: Economic Justification

It is incumbant on architects and designers to both minimize the infrastructure investment and maximize returns. The technical discussion demonstrated that directory, security, Web, and messaging infrastructures are interdependent. Leveraging these common infrastructures for multiple applications minimizes the investment. In addition, the design process should also consider how benefits are to be generated. Figure 5 demonstrates the linkage between value generation and three aspects of "enterprise"—applications, organization, and data. Infrastructure deployments tend to cover each aspect to different degrees. For example, a typical "enterprise" e-mail system is a single application for inter-departmental or inter-business unit support with data requirements limited to employees. Figure 5. Benefit -- "Enterprise" Infrastructure Linkage

The first step in the design process should be a clarification of scope in the context of functionality required to produce the anticipated benefits. Frequently, extending scope to integrate additional applications, to support more users, and/or to include more data will improve investment payback.

Infrastructure is more than a transport or service layer to facilitate critical applications. The tools imbedded in the infrastructure provide functional support that dramatically affects recurring cost and therefore total cost of ownership. The information technology/MIS organization can make a significant contribution to net benefits or the scale of benefits by extending the reach of services. Extended services reduce the cost and time to deploy new services, improving the quality and timeliness of data, and minimizing the cost to administer and maintain the new system.

When all potential benefits are considered for a comprehensive program, the return will exceed your expectations. The traditional return on investment (ROI) computation does not adequately describe the value of the investment. Cash flow return on invested capital (CFROIC) is the analysis method preferred by infrastructure intensive industries.

CFROIC = (sum of net discounted benefits over program life)/total investment.

CFROIC demonstrates the leverage of the invested dollar — "for every dollar we invest, we get x dollars back."

Historically, infrastructure investments have been hard to justify. "Pipes and plumbing," while necessary, are perceived as having little intrinsic value. Benefits are associated instead with the supported applications. In truth, without infrastructure support, the applications do not perform and the benefits do not accrue. Since the application portfolio and the infrastructure are together required to produce the benefits, they are a common investment, jointly justified by their combined net benefits. Therefore, the CFROIC should be computed for the program.

Communicating a Qualitative Case

Financial justification alone does not spell success. Not all persons think in the same terms, learn the same way, or are "sold" with the same story. Economic justification should be combined with a qualitative assessment of operational improvements that illustrate intrinsic value. Process quality, innovation, flexibility, and efficiency all have intrinsic value; their improvement generally translates into or drives financial rewards. Development of measures that reflect operational improvement infer changes that correlate to financial performance.

Table 5 summarizes the qualitative justification for electronic trading based upon intrinsic value.  

 

 Table 5. Describing the Intrinsic Value of Electronic Trading

When considering the effectiveness of an investment, improvement in performance measures may be more important than estimated financial return. For instance, while labor productivity is directly quantifiable, it is difficult to attribute cost reductions to specific operational changes. Worse yet, how do you measure the effect on cost when an operational change holds the line on expenses that would ordinarily increase, or avoid revenue erosion otherwise expected to be lost. Given that one cannot measure that which does not happen, benefit translation can be confirmed by tracking measures tightly linked to value generation, or by comparing current performance to a target objective.

Even with a strong, multi-dimensional story line, every stakeholder will want to know what is in it for him or her and for the enterprise. Too often, well-conceived technology programs are launched without regard for the political environment and without consideration for the impact of changes to the organization. The linkage among requirements, benefits, solution, and finances should be demonstrated not only at the program outset, but also as often as possible. Doing so requires a formal communication program in which stakeholder interests, fact-based messages, communication tactics, and "ownership" for communicating with all stakeholders are shared by the project team. Ultimately, the challenge is to balance the technical messages with commitment building messages. Great design without stakeholder support stays just that—a design!

Lessons Learned

A number of lessons have been learned in implementing electronic commerce infrastructure programs. The following steps are critical in deploying a well-designed and well-justified program:

  1. Employ a design methodology that ensures the technical design will generate expected business benefits and meets the requirements of the business environment. Review the scope to maximize returns. Align the system architecture with "enterprise" conditions.
  2. Produce a general design for the entire solution. Plan with a 3-year outlook. Avoid premature detail design.
  3. The directory infrastructure and its information flows act as the glue between reusable current IT assets, other infrastructures, and new technologies to be integrated.
  4. Link the infrastructure business case to the portfolio of applications that it must support. Portfolio benefits are easier to estimate and track when systems are deployed. Moreover, applications produce value but they require shared services to do so. Avoid associating an infrastructure investment with a single project.
  5. Develop and execute a communication program that builds then maintains corporate enthusiasm for the investment, proactively manages expectations, and keeps all eyes on the completed target design and its benefits rather than specific projects. Incorporate both qualitative and quantitative justification. MM

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