Business processes-from making a mousetrap to hiring a CEO-are being analyzed, s tandardized, and quality checked.

That work, as it progresses, will lead to comm oditization and outsourcing on a massive scale. The Conning Commoditization of PROCESS Throughout the history of business, most firms have built their own processes fo r almost everything that needed to be done. Producing widgets. Paying vendors. A dministering payroll. Whether tbe processes involved were critical to the organi zation's strategy or incidental to it, tbey were generally performed by people w ithin tbe organization. Sometimes tbey were done well, sometimes tbey were done badly-but since a company bad no way of determining how well an outside business migbt perform tbese processes, they were kept in-house. in the 1970s and 1980s, companies improved their processes with total quality management. In tbe 1990s, they attempted to radically advance them through business process reengineering . In the current decade, many firms have returned to process improvement with Si x Sigma programs. Yet the process improvements often don't deliver quick cost re ductions or balance-sheet enhancements. Toward tbe end of tbe twentietb century, the idea of outsourcing processes and capabilities began to gain currency as a means to achieve more rapid benefits. Companies may have previously outsourced a few ancillary by Thomas H.Davenport JUNE 2005 101

The Coming Commoditization of Processes A business process is simply how an organization does its work-the set of activi ties it pursues to accomplish a particular objective for a particular customer, either intemai or external. Processes may be large and cross-functional, such as order management, or relatively narrow, like Despite the trend toward outsourci ng, however, most order entry (which could be considered a process in itself com panies have remained in do-it-yourself mode for most or a subprocess of order ma nagement). Tbe variability in processes. (Huge multinationals are the most likel y to bow organizations define processes makes it more diffitake advantage of out sourcing, but even tben, only for cult to contract for and communicate about the m across bigbly transactional and administrative activities.) Becompanies. cause of a paucity of process standards, it would be risky to do otherwise. Witb tbe exception of !T system develFirms seek to standardize processes for several impo ropment, there is generally no clear basis by which comtant reasons. Within a co mpany, standardization can fapanies can compare the capabilities provided by ext ernal cilitate communications about how the business operates, organizations v^i tb tbose offered in-house, or to compare enable smootb handoffs across process b oundaries, and services among multiple outside providers. As a result, make poss ible comparative measures of performance. firms that choose to outsource their c apabilities have to Across companies, standard processes can make commerce proce ed on two criteria: faith that the extemal provider easier for tbe same reasons - better communications, will do a good job, and cost. Given tbe lack of compara more efficient bandoffs, and performance bencbmarking. bility, it's almost surpr ising that anyone outsources today. Since information systems support processes, standardBut it isn't surprising that cost is by far the primary criteization al lows uniform information systems witbin comrion that companies apply in evaluati ng outsourcers, and panies as well as standard systems interfaces among difthat cost reduction is their primary objective. The lack of ferent firms. standards m ay also explain why, in tbe few broad studies Standard processes also allow easi er outsourcing of of satisfaction with outsourcing, many companies - up to proce ss capabilities. In order to effectively outsource probalf insome studies-are di ssatisfied with their outsourccesses, organizations need a means of evaluating t hree ing relationships. things in addition to cost. First is the extemal provide r's set of activities and how they fiow. Since companies bave However, a new wor ld is coming, and it will lead to dranot reached consensus on just what comprise s cost acmatic changes in the shape and structure of corporations. counting or H R benefits management, for example, it remains ambiguous what services should be performed beThomas H. Davenport (tdavenport@babson.edu) is a protween buyers an d providers. Therefore, organizations fessor of information technology and manag ement and the need a set of standards for process activities so that they academ ic director of the Process Management Research Center at Babson CoUege in Welies ley, Massachusetts. He is can communicate easily and efficiently when discussing outsourced processes. also an Accenture Fellow and the author of Tbinking for a Living: How to Get Better Performance and Results from These process activity a nd flow standards are beginKnowledge Workers, to be published by Harvard Busines s ning to emerge in a variety of businesses and industries. School Press in Sept ember. Some are the result of efforts by process groups sucb as 102 HARVARD BUSINESS REVIEW activities like building maintenance or specialized legal work, but now they wer e beginning to outsource major capabilities involving tbousands of people. Tbe f irst step in this evolution occurred when firms such as Kodak and DuPont outsour ced tbeir information technology management. Later came business process outsour cing when companies such as AT&T and BT outsourced human resource administration processes like payroll, pensions, and benefits management; recruiting; and HR a dvisory and information services. Companies such as BP and Procter & Gamble outs ourced major pieces of their finance and accounting functions, and Nike and Hewl ettPackard outsourced their manufacturing to a substantial degree, often sending it overseas. These companies were drawn to tbe idea of outsourcing processes la

rgeiy because of the potential for reduced costs and leaner balance sheets, but tbey gained greater fiexibiiity and access to specialized expertise as well. Mos t recently, companies bave begun to internationalize much of their outsourcing, sending not just manufacturing but also service work to India, Cbina, the Philip pines, and other countries with low labor costs. A broad set of process standards will soon make it easy to determine whether a b usiness capability can be improved by outsourcing it. Such standards will also m ake it easier to compare service providers and evaluate the costs versus the ben efits of outsourcing. Eventually these costs and benefits will be so visible to buyers tbat outsourced processes will become a commodity, and prices will fall d ramatically. The low costs and low risk of outsourcing will accelerate the flow of jobs offsbore, force companies to look differently at their strategies, and c hange the basis of competition. Tbese cbanges are already happening in some proc ess domains, and there are many indications that they will spread across virtual ly all commonly performed processes. Three Types of Process Standards

The Coming Commoditization of Processes iiven the lack of comparability across companies, it's almost surprising that ia t anyone outsources. the Supply-Chain Council, which has more than 800 businesses as members. It has developed the Supply-Chain Operations Reference (SCOR) model, which lays out a t op-level supply chain process in five key steps: plan, source, make, deliver, an d return. Tbe model also specifies typical activities for second-, third-, and f ourtb-level subprocesses with increasing levels of detail. For many activities, the council also has defined key metrics (but not benchmarks)sucbas"fill rate" o r"retums processing cost." Hundreds of organizations (from Alcatel to the U.S. N avy) have begun to use tbe SCOR model to evaluate tbeir own processes; software vendors sucb as SAP have begun to incorporate SCOR fiows and metrics into their supply chain software packages. Some companies have already benefited greatly fr om a SCOR-based analysis of tbeir supply chain processes: Alcatel increased its on -time delivery from 10% to 50% in nine months and reduced its material acquisiti on costs by a third. Mitsubishi Motors reduced tbe number of vehicles in ports fro m 45,000 to zero, saving tbe organization more than $ioo million in costs. United Space Alliance, a partnership between Boeing and Lockheed Martin, improved sever al aspects of its parachute refurbishment process, including its ontime delivery performance and productivity. Of course, a process standard by itself doesn't a chieve such benefits. The SCOR model is only a catalyst for change and a framewo rk for analysis. As with any approach to process improvement, firms must still m ake difficult cbanges in how they do tbeir work and to associated systems and be baviors. Some process activity and flow models are for multiple processes. For e xample, a few years ago a group of researcbers at MIT created the ProJUNE 2005 cess Handbook, an online library of more tban 5,000 processes and activities. Se veral companies have applied MiT's model to their own operations. Dow Corning, f or instance, used tbe handbook to model its own processes during a large SAP imp lementation and tben added its own new process fiows to a repository (and also c reated a Dow Coming-specific version of the SCOR model). Tbe APQC (American Prod uctivity and Quality Center) created a Process Classification Framework that des cribes all processes in an organization; the group bas used tbis framework to or ganize the process benchmarks it bas collected for more tban a decade. A number of telecommunications companies around the world, organized as the TeleManagemen t Forum, bave created the eTOM process fiow standard for business processes in t elecom firms. Following on tbe success ofthe SCOR model, a number of organizatio ns (including representatives from the Product Development Management Associatio n, firms such as Hewlett-Packard and Intel, and several consulting firms) are to gether attempting to create a SCOR-1 ike mode! for all major processes in organi zations. In addition to tbe supply chain, it will address processes for product development, customer relationship management, and customer 103

The Coming Commoditization of Processes service, as well as support processes such as finance, accounting, and HR manage ment. A second set of needed process evaluation approaches are process performan ce standards. Once companies in a particular industry achieve consensus about wh ich activities and flows constitute a given process, tbey can begin to measure t heir own processes and compare tbeir results witb tbose of extemal providers. If there is agreement, for example, on what it means to "process a new employee," managers can analyze how much it costs the intemai HR function to provide that s ervice, on average, and how long it takes. They can also bave an informed discus sion witb extemal service providers about tbeir process performance measures. The SEI's Capability Maturity Model The Software Engineering institute's Capability Maturity Model (CMM), nowa world wide process management standard for software development, moves from Level i-wh ere a company has a very ad hoc development environment-up to Level 5, where the organization has repeatable project management routines, quality and engineerin g standards,detailed measures of performance, and an environContinuously improve processes through change management. Control variation through quantitative manageTient. Develop common processes through engineering management. lepeatabw Stabilize environment through process management ment that encourages continuAgain, this sort of performance benchmarking is begi nning to ocous improvement cur. Benchmarks for the SCOR model are already availa ble, and more are being gatbered. Tbe APQC is working with a consortium of compa nies called the Open Standards Benchmarking Collaborative to create one standard public database of process definiand flow standards for order management (which have tions, measures, and bencbmarks to help organizations not yet been agreed upon) would address what the key acworldwide quickly assess and improve tbeir pe rformance. tivities in order management should be-perhaps beginOrganizations as diverse as Bank of America, Cemex, IBM, ning witb order entry and concluding wit b the receipt of Shell Oil, and tbe World Bank are participating. It's clear cas h. Process performance standards for order managethat there will eventually be g ood performance benchment would posit bow much time, money, and other remarks fo r each major process in an organization. sources it should take to perform the o rder management process and its key subprocesses-suggesting, maybe, that Finally , organizations need a set of process management a company should bave a certain number of full-time emstandards that indicate how well their processes are manp loyees per million dollars of revenue who are dedicated aged and measured and wh ether they're on course for to entering, processing, and tracking orders. A proc ess continuous improvement. Because this third type of promanagement standard fo r order management would cess standard doesn't require consensus on process acti vspecify what constitutes good handling ofthe order manities and fiows, it is th e easiest to create and the most agement process, including bow it is measured, controlled, widely available today. Process management standards and documented. are based on the assumption that good process management will eventually result in good process flows and performance. In some domains such as information tech nology and manufacturing, these standards are already in wide use (via the Softw are Engineering Institute's Capability Maturity Model and tbe ISO 9000 series, r espectively). Tbey are beginning to lead to the commoditization of capabilities that will eventually transform organizations. Software development is a good exa mple of a process that needs an overhaul. Whether done internally or externally, As an example of tbe differences between types of prosoftware development is er ror-prone, expensive, and timecess standards, let's consider order management, a

n imconsuming. The overall level of software quality is low; portant process for many organizations. Process activity The Standards-Driven Commoditization of Software Development 104 HARVARD BUSINESS REVIEW

The Coming Commoditization of Processes a 2002 study from the U.S. National Institute for Stansoftware engineering, such as quality assurance, into a dards and Technology estimated that software bugs cost standard software process. Level 4 organizations collect the U.S. economy a lmost $60 billion a year. Software qualdetailed measures of software process and quality. And ity is particularly unpredictable when purchased from a Level 5 or ganizations have all ofthe previous capabilities provider-and virtually every or ganization buys software. but also an environment that encourages continuous imT here are many providers of software-package vendors, provement, with learning fr om quantitative feedback and consultants, and lower-cost "body shops"-each with uncontrolled experiments. certain quality levels. The SEI offers training course s on the Capability MaOne reason for quality and cost problems is the wayturity Model and its derivatives and has created processes or ways - in which software is usually developed. There to authorize appraisers (though the SEI does not con duct has been no standard method or approach for software appraisals itself). Si nce 1987, more than 2,700 certified apdevelopment or engineering; it is normally a "craft" propraisals have been performed on organizations in 51 cess. Some ind ividual software developers are much more countries-from Argentina to Latvia to Vietnam. Indeed, productive and offer much higher quality than others. the numbe r of appraisals in a particular country is a good Some development shops have st andard methods and measure of its ambitions in the software industry. The tools, but most don't The variations in both practice and United States has had the la rgest number of appraisals outcome are enormous, in part because no process acti vsince 1987 with 1,896. India is second witb 359. China is ity and flow standard s or process performance standards third with 182. The UK is fourth with 135, an d japan fifth exist. In addition to the quality problems with software, with 131 . poorly managed processes often result in late projects it's clear that both In dian and Chinese companies see and high costs. The Standish Group estimated in 2 003 CMM certification as key to tbeir software industry obthat only 34% of softw are projects were implemented on jectives. Indian companies dominate the list of published time and within budget. Carnegie Mellon's Soft,^^^^^^ ware Engineerin g Institute (SEI) has developed the CapaOf course, a process standard by itself doesn't bility Maturity Model (CMM) to address a number of these achieve anythin g. Firms must still make difficult problems. (See the exhibit "The SEI's Capabil ity Matuchanges in how they do their work. rity Model.") The model, created in 1 987, has become a worldwide standard for software development processes and is n ow embedded Level 5 appraisals, with more than twice as many as U.S.within many government and industry organizations. It based organizations. (The SEI in 2003 stopped publishing has provided an objective basis for measuring progress in a l ist of organizations achieving certain CMM levels, but software engineering and for comparing one software data show that U.S. defense contractors bave come on provider's processes to another's. This in turn has facilistrong in recent years .) tated the growth of offshore providers in India and China If a country wants to establish sufficient credentials in by commoditizing software development pro cesses and software development so that global customers might hire making them more transparent to buyers. its programmers unseen, there are few better ways to do The CMM is a process management standard, not a this tban to qualify for Lev el 5 ofthe CMM. In India, CMM process flow or process performance standard. It d oesn't Level 5 certification is becoming so common that softrequire that organiz ations follow a particular process for ware providers say they typically compete only witb other software deveiopment or that they achieve a certain numLevel 5 providers for software outsourcing business - a ber of "lines of code per day" o r other metric-only that sure sign of commoditization. they have processes in pl ace for addressing quality issues. SEI's appraisal data on tbe CMM also suggest that there Each ofthe five levels (initial, repeatable, defined, manhas been glo bal progress in the software industry. The aged, and optimizing) defines greater degrees of managenumber of appraisals has increased from fewer than 50 in ment control and sophistication. Level 1 describes a very 1990 to more than 500 in 20 03. Ofthe organizations that ad hoc software organization that has few defined p

roreported their maturity levels to SEI before 1992, 80% cesses. Organizations t bat reach Level 2 have basic, rewere appraised at Level 1, and only 0.3% were at Level 5. peatable approaches to project management that track In 2004, only 26% of appraisals were at Level 1, and 6.6% costs, schedules, and functionality. Le vel 3 organizations were at Level 5. Eighty-five percent of tbe more tban 500 em bed basic tenets of both good management and good organizations tbat have been r eappraised moved up in JUNE 2005 105

The Coming Commoditization of Processes their CMM level, and over 25% moved up more than one level. This is clear eviden ce that using the CMM leads to improvement in software development processes and that this once-chaotic process is becoming more predictable and commodity-like. As other evidence, software used by the U.S. military, for which CMM Level 3 co mpliance is required, has error rates one-sixth to one-tenth that of commercial software. Generalizing Process Management Standards The successful adoption and implementation of process standards in software deve lopment seems to be providing inspiration in other business domains. The five-le vel maturity model has been modified by the SEI, for example, to assess HR manag ement practices, software acquisition, and other forms of engineering. At one po int, the SEI was supporting five different types of CMMs. Brett Champlin, a proc ess improvement manager at Allstate, has recently identified more than i8o versi ons of capability maturity models. Some, such as one from the IEEE (Institute fo r Electronic and Electrical Engineers), employ alternative capability models for software development. Others, sucb as one from the Electronics Industries Assoc iation, focus on development of software-intensive products. Others have nothing to do with software and deal witb process management maturity in general. Sever al academics, consultants, and process-oriented companies are attempting to esta blish a standard for process management maturity. The SEI has decided to impleme nt a broader approach to process standards that can be used for any engineering process, not just software development. Called CMMI (the "I" stands for integrat ion), the new model is a suite of standards tbat allows for the addition of new processes in a modular fashion. For example, the SEI is currently working on add ing a module for the Department of Defense acquisition community. CMMI already i ncludes standards for software development and engineering, systems engineering, software product development, and supplier sourcing. There is, of course, a ris k to broadening the CMM; its clear focus on software development processes was a key element of its appeal. Thus far, however, adoption rates for the CMMI are t en times as rapid as those for the software CMM, so in practice this broader app lication appears to be working. How Does a Process Standard Become Successful? A process standard has impact only if the world adopts it. Therefore, it's impor tant to understand why a process model like the CMM has been so influential in i mproving software processes around the world. One major factor in the CMM's succ ess is the simplicity of tbe idea. The five-level rating system is easily unders tood and offers a clear indication of progress, or lack thereof. Of course, ther e is some complexity beneath the five levels - for example, there are 18 key pro cess areas, such as software quality assurance and software subcontract manageme nt, that can be evaluated with respect to their maturity. But the simplicity oft he overall model makes it possible for nontechnical workers and managers to unde rstand and apply it. Another factor in the CMM's growing influence and success i s the support ofthe U.S. govemment and defense sectors. Certain divisions within the Defense Department advanced the CMM further by making it a requirement amon g contractors. A major player in another industry, such as Wal-Mart in consumer products, could mandate compliance with a process in a similar fashion. Various aspects of the CMM's governance structure have also been important factors in it s success. The SEI is somewhat evangelistic; it produces a large amount of docum entation around the standard and its application and also facilitates a number o f software process improvement networks around the world. In addition, the indep endence ofthe SEI and Camegie Mellon has aided the CMM by keeping the standard f ree of ties to any particular company. A third governance-related factor in the CMM's growth has been tbe network that has grown up around the SEI and the stand ard. A variety of large and small companies offer consulting, education, and app raisal services that support the CMM. Finally, a key reason for the popularity o f tbe CMM is the flexibility of its use and application within organizations. It

provides a framework for improvement but doesn't specify how an organization sh ould improve. The CMM supports both process-heavy methods, in which there are de tailed specifications for each aspect of software engineering, and agile process methods such as extreme programming, in which the process is largely left up to developers. 106 Other Process Management Standards The CMM is not the only process management standard that bas transformed its ind ustry. A variety of such standards are now in use around the world. Perhaps most prominent among them are the ISO 9000 family of quality standards for product m anufacturing. These standards primarily assess whether certain processes and sys tems are in place. Tbe broadest ISO quality standard, ISO 9000, involves the des ign, development, production, installation, and servicing of products. Unlike th e CMM five-level standard, the ISO 9000 standards are binary-an organization eit her passes or it doesn't. The ISO 9000-9003 were created by the Intemationai Org anization for Standardization, a global consortium of national standards bodies. These criteria have been HARVARD BUSINESS REVIEW

The Coming Commoditization of Processes applied and certified in more than 130,000 firms around Once process capabilitie s have become commoditized, the world. The ISO has created more than 14,000 stan providers of process outsourcing services will have to find dards-for manufactur ing everything from screw threads other sources of differentiation. Perhaps they 'll begin to to telephone and bank card formats-since its founding in supply not only the efficient execution of business pro1947. The SEI has been collaboratin g with the ISO to crecesses but ideas, insights, and innovations for how to pera te an intemational standard for software development form them better. It's incr easingly common, for example, quality, called ISO 15504. for IT outsourcers to b e evaluated not just on their CMM level or their costs but on their ability to i dentify and imCertain industries have created tailored versions of plement innov ative IT-enabled business initiatives for these ISO standards. For example, the U.S. automotive their clients. industry has created the QS-9000 standard for the certification of supplier quality. If an automotive supplier wants to sell to G M, Ford, or DaimlerChrysler, it must meet the QS The external market for capabil ities will force standards. Virtually all supplicompanies to ask themselves, Wha t processes ers have qualified, which means greater commoditization of are truly core to our organization? the automotive supply industry. As another example, t he ^^^^m^^im^^^K^m, U.S. Food and Drug Administration requires that makers of me dical devices meet stanThe standardization and commoditization of processes dard s called the Quality System Regulation, which is will also require changes in st rategy. As an increasing numbased on ISO 9000 approaches. ber of processes becom e common within and across inOther standards focus less on the management proces s dustries, executives will need to revisit the basis for comitself and more on the output of the process. The wellpetition in their businesses. They'll have to decide which known Six Sigma standard, for example, focuses on defect oftheir p rocesses need to be distinctive in order to make reduction to a high level of st atistical reliability. Unlike their strategies succeed and which can be performe d in the CMM and the ISO standards, however, organizations a relatively generic and low-cost fashion. Even in today's certify themselves as meeting Six Sigma st andards; there environment, most executives have yet to decide what are no exter nal certifiers. Therefore, Six Sigma is less processes are core and noncore, but doing so will become likely to lead to changes in how organizations buy and sel l much more critical in the future. Process standardization process capabilities to each other. may also mean that it's feasible to combine certain processes wi th competitors'; if these processes offer no competitive advantage, why not? Cre ating shared-services Where Will Process Standards processes across companies ca n offer scale efficiencies. BP Lead Us? and several other oil firms have already combined and outsourced certain finance and accounting processes for Process st andards could revolutionize how businesses their North Sea exploration activitie s. When process stanwork. They could dramatically increase the level and dards t ake off, we're likely to see more collaboration among breadth of outsourcing and reduce the number of procompetitors. cesses that organizations decide to perfor m for themselves. With objective criteria to evaluate whether a comProcess stand ards will also change how information syspany can save money or get better proce ss performance tems are bought and implemented (and not just because of by outso urcing, it's likely that more firms will take advanthe CMM). Today, many systems are custom-built to suptage of extemal capabilities. As the global market for p roport local and idiosyncratic processes. Even when a comcess services matures a nd providers learn what it takes pany buys a packaged system, it often has to cu stomize to succeed with a process according to the standard, the it or adapt its processes to suit the package. In a world of number of providers will undoubted ly increase, and the widespread process activity and flow standards, software pr ices of their services will likely drop. In tum, this extervendors can make avai lable standard packages that supnal market for capabilities will force companies to look port processes that customers have already adopted. Unmore closely at t heir own strategies. What processes are less a process needs to be unique to a c ompany for stratetmly core to our organization? If another firm has been gic rea

sons, it will become much easier to buy and employ certified as doing the work b etter, why not let that firm systems in the future. In fact, it makes a lot of s ense to ask do the work? And if our company can't certify a particukey software vendors to get involved in standard-setting lar capability as being world-class, what is the value of initiatives at an early stage; a process design is far les s that capability to customers? valuable without software to enable it. JUNE 2005 107

The Coming Commoditization of Processes Though I've described several areas of business where process standards are emer ging, many other areas still conspicuously lack them. The growth ofthe business process outsourcing industry has been inhibited by the fact that there are virtu ally no standards for how most business processes should be performed. An organi zation wishing to outsource human resource management, billing and collections, or a call center would like to ensure that providers have well-honed capabilitie s in these domains that exceed their internal capabilities. Yet there is no defi ned approach for evaluating or certifying potential providers of those services. The speed at which some businesses have adopted process standards suggests that many previously unscrutinized areas are ripe for change. Just as the CMM has ma de it possible for organizations needing software services to contract with conf idence from providers all over the world, the development of new process standar ds wil! facilitate-and eventually commoditize-a wide variety of business process outsourcing services. Process standards will undoubtedly proliferate into most domains of business operations. If there isn't one for the processes your organi zation performs, it makes sense to begin working with customers, competitors, so ftware providers, potential providers ofthe processes, and objective researchers and standards-setters to create a new standard. As with the CMM , setting standards is likely to lead to the improvement ofthe process both with in your organization and from extemal providers. If there is a firm or organizat ion that can accelerate the adoption process, such as the Department of Defense in software processes or Wal-Mart in supply chain processes, be sure to get it i nvolved in your standard-setting efforts. If your processes are world-class, you may have an opportunity to begin providing the service to others. Fidelity Inve stments, for example, moved from offering mutual funds to company retirement pla ns to broad outsourcing of benefits administration. If your organization provide s process services, you may have mixed feelings about the development of process standards. Standards will lead to commoditization, more competitors, and lower prices for the services you offer. However, the move to process standards makes so much economic sense that it is probably inexorable-whether or not your compan y gets involved. It's better to help shape a standard than to be put out of busi ness by it ^ Reprint R0506F To order, see page 151. BIRTH OF LUNCH 108 HARVARD BUSINESS REVIEW