A Process-oriented Approach to Business Networking

Elgar Fleisch, Hubert sterle

Institute for Information Management at the University St. Gallen, CH-9000 St. Gallen, Switzerland
Elgar.Fleisch@unisg.ch, Hubert.Oesterle@unisg.ch
9/1999 submitted to the The Electronic Journal of Organizational Virtualness (e-JOV)
Revised 3/2000

Abstract
The goal of this paper is to develop a model which helps companies in the networked economy to design and
manage its cross-company business processes (Business Networking). Based on some case examples we recognize
the importance of the process view when it comes to design business networks for implementation. We elaborate
an approach which combines findings of network theory and business process re-engineering using results of
coordination theory. To reduce complexity, we split the networking problem into five coordination areas. We
find that describing business networks with the aid of coordination areas allows a networked enterprise to
consistently orient itself towards the processes of its partners, in particular those of its customers and suppliers.

Table of Contents
1

Introduction ..............................................................................................................................................................2
1.1 Research Question ..............................................................................................................................................2
1.2 Five Computerization Phases Towards Business Networking ..........................................................................3

Business Networking Case Examples......................................................................................................................4

2.1 Dell: Supply Chain Management and Customer Relationship Management......................................................5
2.2 SAP: Customer Relationship Management ........................................................................................................6
2.3 UBS: Procurement ..............................................................................................................................................7
2.4 Migros Cooperative: Development.....................................................................................................................8
2.5 Commtech: Procurement, Finance, Real Estate and Taxes.................................................................................9

Networked Business Processes...............................................................................................................................10

3.1 Networking Through Coordination ..................................................................................................................10
3.2 Coordination Areas...........................................................................................................................................11

Model of a Networked Enterprise .........................................................................................................................13

4.1 eServices...........................................................................................................................................................14
4.2 Standards ..........................................................................................................................................................15
4.3 Model................................................................................................................................................................15

Conclusions .............................................................................................................................................................16

A Process-oriented Approach for Business Networking

1 Introduction
1.1

Research Question

"The revolution under way will be driven not by changes in production but by changes in coordination."
[Malone/Rockart 1991, 128]
"The use of IT for coordination is more complex than much of the academic and practitioner literature suggests."[Kling
et al. 1999]
Business Networking - the organization of IT-supported business relationships with internal and external business
partners - ranks amongst the most important capabilities businesses will need in the information age [sterle et al.
2000]. The physical disintegration and networking of business units forms the basis for the division of labor and
specialization [Smith 1776]. IT (Information Technology) drives physical disintegration to global limits, makes new
business relationships possible and leads to new technical and organizational problems [Kling et al. 1999]. Businesses
today seek design models for the engineering, implementation and further development of IT-supported business
relationships.
This article develops an approach which links process orientation and networking. The result is a model of a networked
enterprise for the IT-supported business relationships of a networked enterprise [Sydow 1992], i.e. of an enterprise
which sees itself as a node for several business networks. The article is structured as follows:

Historical development of the problem and its place in the field of Business Engineering (Chapter 1)

Description of the problem in selected case studies (Chapter 2)

Interpretation of business networks as coordinated processes, derivation of coordination areas (Chapter 3)

Summary of findings on the model of the networked enterprise (Chapter 4)

Conclusions

Gap in existing theoretical analysis

Linking up businesses to form networks has been the object of numerous investigations in the fields of economics,
sociology and informatics (cf. [Alstyne 1997], Klein 1996], [Sydow 1992]). These investigations describe network
phenomena and as a rule offer very abstract approaches to network classification and structure (cf. [Williamson 1991],
[Snow et al. 1992]). Neither transaction cost theory, network theory, network economics nor any other of the theories
examined provide comprehensive help in answering practical questions.1
Network theory, for example, describes business networks as an organizational form between market and hierarchy,
provides a comprehensive description model of the design areas of a network and considers the business unit2 or the
networked enterprise as the primary unit of reference. However, a finer degree of granularity is required for describing
and ultimately for designing networks. Practice shows that as a rule businesses participate in several networks
simultaneously. They take part in development and procurement communities at the same time, for instance, enter into
strategic marketing partnerships and are involved in different value chains with different products and/or services. Thus
they can be part of several internal, stable and dynamic networks all at once, and at the same time these networks may
mutually influence one another (cf. Figure 1-1). In the process, they use different information systems and information
technologies, depending on the business processes to be coordinated.

This article attempts to describe new formal findings from the research project within the very limited space available. For this reason it has not
been possible to look at existing theories or description and explanation models. A detailed description of this analysis and further findings in
respect of coordination technologies is required to make the connection with the ideas outlined here transparent. This is included in [Fleisch
1999].
Business units are economic units, such as e.g. corporations, divisions, national subsidiaries, profit centers or small and medium-sized enterprises.

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A Process-oriented Approach for Business Networking

e.g. Development Partner

in Dynamic Network

Networked
Enterprise
e.g. Customer
in Market

e.g. Supplier in
Stable Network

e.g. Sister Division in

Internal Network

Figure 1-1: Networked Enterprise as Part of Various Networks

Theoretical Question
The theoretical question closes the gap between existing theoretical tools and practical issues, and thus includes the
definition of a description model of an IT-supported business relationship. This paper looks at the theoretical question
through coordination theory glasses. This choice was primarily motivated by its process orientation, its interdisciplinary
nature (in this case the connection between organization and informatics in particular) and its practical focus.
Research Design and Method
The character of the research question determines the concrete research method to be applied [cf. Krcmar 1997, 4]). The
question of procedural instructions for designing business unit networkability [Fleisch 1999], in the context of the most
recent developments in IT can be described using the attributes problem-oriented, concrete, situational and broad. The
action research method is appropriate for answering the question posed. This article is the result of action research after
[Checkland/Holwell 1998].
The research topics covered questions in relation to networking within and across company boundaries. They were
investigated within the framework of the Competence Centers Electronic Business Networking and Inter-Business
Networking of the research program Business Engineering HSG at the University of St. Gallen. The questions were
derived from the problems of businesses which were working with a team of researchers headed by the authors. The
methods employed by the researchers in real-world problem situations included e.g. reviews of documents on project
work performed in the companies to date, partial assistance with the project work, particularly in respect of preparations
for decision-making, structured interviews with project members and stakeholders plus evaluation of the procedural
instructions developed by the team.

1.2

Five Computerization Phases Towards Business Networking

To put some light on Business Networking and the role of IT in Business Networking we now briefly discuss the
development phases of computerization. We take the integration area as an indicator of the degree of informatization
of a company. The integration area describes the number of tasks of an enterprise implemented in an integrated
information system [sterle et al. 1993]. In an early phase of informatization, the integration area was rather small. As
technology developed, the integration area grew. In this development, we can distinguish five phases as follows (see
Figure 1-2).3

Phase 1 (1970s): The aim of computerizing single island functions is to automate individual business functions,
such as accounts. Manual operations are generally transferred to the computer without any modification [cf. Alpar

For further models cf. [Venkatraman 1991], [Lane 1998], [Clark 1999] or [Nolan/Croson 1995]. For the technical development of informatization
from mainframe computing in the 1960s to todays electronic business cf. [Schnedl/Schweizer 1999].

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et al. 1998, 29]. The result is isolated solutions, i.e. separate information systems to efficiently support individual
operations.

Phase 2 (1980s): The computerization of functional areas, such as production, financial accounting or distribution,
achieved integration within the most important business function areas [cf. Raffe 1993] and thus improved the
efficiency of whole departments. For the first time, IT made it possible to apply new methods, such as production
or financial planning, which transform business processes and present new challenges for employees.

Phase 3 (1990s): The development of systems for enterprise resource planning (ERP) enabled companies to
implement integrated processes across various departments and/or functions. Hence it was possible to set up
pervasive processes (e.g. order processing) from the customer (e.g. sales, order receipt) and to the customer (e.g.
distribution, invoices, payment receipt). ERP systems soon became the nerve system of enterprises since they
guarantee that every (authorized) employee has real-time access to all operational information.

Phase 4 (1990s): Concurrently with the implementation of ERP systems, some enterprises went for link-ups with
their customers or suppliers. For instance, they would use electronic data interchange (EDI) systems in order to
handle high-volume transactions efficiently. However, what they did was only to set up rather expensive 1:1 or 1:n
relationships. This was one important reason why a broad diffusion of EDI was not taking place as anticipated.4

Phase 5 (ca. 1990-2005): In this phase, the buyers market is calling for a new stage in customer focus. The
processes of a companys customers are forming the starting point for the design of its own services and processes.
New IT systems for supply chain management (SCM) and electronic commerce (EC) satisfy these requirements by
allowing the inter-organizational integration of information and processes, and thus to achieve a step towards the
vision of the boundary-less enterprise along the lines of [Wigand et al. 1997]. This m:n networking of internal and
external business units relies upon a networking infrastructure, the business bus. The networking infrastructure
can be explained using the metaphor of the road network with all its standards (e.g. road width, signs, traffic
regulations), coordination technologies and systems (e.g. traffic lights, GPS systems) and services (e.g. police,
highway maintenance, fees, tolls, automobile clubs). The following cases show companies who compete in the 5th
computerization phase.
Phase 1

Phase 2

Phase 3

Phase 4

Computerization of
individual functions
(support of island
functions such as
invoicing)

Computerization of
functional areas
(integrated functional
areas, such as
financial accounting)

Design of integrated
processes (internally
from customer to
customer, such as e.g.
order processing)

Individual 1 : 1
integration of crossenterprise processes

Supplier

Supplier

Supplier

Customer

Supplier

Finance

Finance

Finance

Finance

Finance

Sales

Sales

Sales

Sales

Procure

Production

Production

Production

Production

Production

...

...

...

...

...

Output

Integration via
computerization
Function / process

Network
infrastructure

Business unit /
Enterprise

Trust

Payment

Transport

...

Phase 5
Consistent m : n integration
of cross-enterprise processes
with the establishment of a
networking infrastructure

Figure 1-2: Development Phases of Computerization

2 Business Networking Case Examples

Every interdependency between the business processes of different business units leads to networking. Based on this
definition, there are a great many examples and variants of networking to the found in the real world. The case
examples taken from business practice and described here help to illustrate the concrete organizational forms of intercompany coordination frequently encountered.
4

Reasons for the disappointing diffusion of EDI can be found in [Kalakota/Whinston 1997], [Christiaanse et al. 1996] and [Alt/Klein 1998].

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The case examples represent part of the empirical basis for derivation of the model of a networked enterprise. They
reflect a special view of the company presented and, as far as this article is concerned, merely represent items of focus.
Further case examples are to be found in [sterle et al. 2000].

2.1

Dell: Supply Chain Management and Customer Relationship Management

Dell Computer Corporation, Round Rock, TX, USA, is a leading manufacturer of computer systems. With a workforce
of 24,000 employees Dell achieves a sales volume of 18.2 billion USD. Dell sells computer systems to a value of USD
14 million via the Internet on a daily basis. The corporation serves consumers (1/3 of sales) and companies (2/3 of
sales) [cf. Dell 1999].
Dells success is based on the two concepts of direct selling and build to order [Preisig 1999] which have been
consistently incorporated in the sales and supply chain management systems (see Figure 2-1).
Dell uses its sales system to collect experience with each individual customer. The emphasis is on the creation of a 1:1
relationship which is specific to the person or company. This individuality refers both to the products offered and to the
additional services, i.e. to the entire value creation system. Every computer system purchased from Dell is specially
configured and assembled to suit the specific customer. Even in the case of collective orders for e.g. 100 computer
systems of the same kind, each system actually passes through Dells complete supply chain individually as an order in
its own right. Individual additional services, such as product catalogs specially geared to corporate clients (which only
contain products approved by the customer), automatic individual pricing, a single contact point (account management),
a special service arrangement provided locally by the manufacturer direct, or an online or telephone service tailored to
the customers computer system, form the basis for a partnership-oriented business relationship between Dell and its
customers.
The creation of this radical 1:1 relationship is largely dependent on the design of the supply chain and its information
systems. Dell manufactures each system to order and delivers within 12 days. This means that Dell operates with
virtually no warehouse of its own. Its suppliers warehouses are located within 15 minutes drive of the production site.
This allows the corporation to provide the high degree of innovation in its products which is in particularly strong
demand in the computer sector.
Each customer has the possibility of tracking their order status online. This service is used approximately 20,000 times
a day [Preisig 1999]. Dell exchanges supply chain information, such as capacity, inventory levels, cost structures,
quality information, current forecasts, demand, market prices, with its suppliers in real time.
Dell estimates that by the year 2002, 50% of all its customer transactions will operate through the Internet sales system
(www.dell.com). With its Dell Talk Forum the corporation offers its customers a platform for the exchange of
experience. Today, there are already 50,000 registered users who provide each other with mutual assistance in the use of
Dell Computers, thus taking some of the load off Dells personnel.
Scenario Supply Chain for the exchange of simple and complex goods and services
1
:
m
:
Computer
:
Computer
:
Business
:
Business
:

n
Man
Business / Consumer
Consumer 2
Consumer 1

Supplier 1
Supplier 1

Dell
Plan

Supplier 1

Plan
Source
Plan
Source
Make
Source
Make
Deliver
Make
Deliver

Plan
Source

...
Corp. Customer 3
...
Corp. Customer 2
Beschaffung
...
Corp. Customer 1
Beschaffung
...
Beschaffung
...
...

Make
Deliver

Beschaffung
...
Source ...
...

Deliver

...

Figure 2-1: Networking at Dell

Dell coordinates with its corporate clients and consumers via the processes of sales and customer relationship
management, with its suppliers via the process of the supply chain. The information system www.dell.com supports the
processes of sales and customer relationship management while a supply chain management system supports the
processes of the supply chain. The example of Dell shows the relevance of the interaction between networking

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scenarios: here, the potential resulting from networking can only be realized with a combination of supply chain and
customer relationship management.

2.2

SAP: Customer Relationship Management

Dell and Marshall already show examples of the formation of customer communities. The aim of communities is to
achieve a customer relationship by increasing the customers product competence (cf. [Belz et al. 1997],
[Hagel/Amstrong 1997] and [Muther 1999]). Communities generate greater customer loyalty, further tighten the
customer relationship and provide more detailed insight into customer requirements through observation of
communication processes.
SAP, Walldorf, Germany offers an impressive example of community building [cf. Muther 1999]. In addition to a large
number of user groups (SAP user groups) organized according to regions and business areas, SAP offers the following
electronic tools to provide its customers with comprehensive solutions to their problems:

Information on new releases, technical developments, contacts, etc. can be accessed by customers through the SAP
WWW site.

Customers can download software updates via the SAP Net, a web site accessible to a restricted circle of users,
conduct technical discussions with other customers and SAP specialists, order or download brochures and register
for SAP courses.

The online service system offers, amongst other things, the latest information on the status of product development,
an error database and various trouble-shooting services.

In an electronic discussion list run by the Massachusetts Institute of Technology, customers exchange information
on problems, developments and new features of SAP products by e-mail. Customers only receive e-mails
concerning the subjects which interest them. 3,500 users currently benefit from this service [cf. Muther 1999].

With video conferences and remote log-in into the customers SAP system, SAP operates remote consulting and
trouble-shooting. The savings (time savings, reduction in traveling costs) for customers amount to up to 15% of
consulting costs [cf. Muther 1999].

The documentation for implementation, system management, database management, migration and operation of
SAP products is supplied on CD-ROMs.

With its international demonstration and education system (IDES), SAP offers a complete R/3 system for the
purpose of testing and demonstrating R/3 functionality.

25 regional helpdesks, distributed across Europe, the USA and Asia, are available to all customers by telephone and
fax 24 hours a day, 7 days a week.

In Internet newsgroups customers discuss any and all topics related to SAP.

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Scenario CRM for the exchange of simple and complex goods and services
1
:
n
Man
:
Man
Business
:
Business / Consumer

Customer 3

...

Vendor
Relationship
Management
Customer
Relationship
Management

Customer 2
Wartung / Plege
Customer 1
Wartung / Plege
Schulung
Maintenance
Schulung
Beratung
Education
Beratung
Testen
Consulting
Testen
Fehler beheben
Testing
Fehler beheben
Erfa-Austausch
Trouble-shoot.
Erfa-Austausch
Experience Exch.

General and technical information

Software updates
Trouble-shooting services
Discussion list
Remote consulting
Documentation
Testing and demonstration
Helpdesk

Figure 2-2: Networking at SAP

2.3

UBS: Procurement

UBS, Zurich, Switzerland, is Europes biggest bank. Measured in terms of its turnover, UBS ranks amongst the worlds
big five. In 1997, UBS generated 19 billion USD with 27,600 employees at 500 branches in 40 countries [Hoovers
1999b].
Prior to 1999, UBS procured all indirect/MRO products via its legacy and ERP systems, and was thus confronted with
high process and fixed costs in procurement. In the past many industrial corporations, like UBS, paid scant attention to
their relationship with the suppliers of indirect/MRO products, i.e. products which are not used directly in the end
product or, in the case of trading companies, which are not resold directly (cf. [Grieco 1997, 1], [Killen&Associates
1997, 1]). On the procurement side, greater attention was always paid to the direct area which is frequently supported
by supply chain management concepts and EDI links [Dolmetsch 1999]. The average process costs of a procurement
operation for an indirect/MRO product show potential for rationalization, however: for Switzerland, [Dolmetsch 1999,
8] gives process costs of between 80 and 180 CHF, while [Grieco 1997, 15], [Killen&Associates 1997, 13], [Laaper
1998, 6], [Margherito 1998], [Marks 1996] state 80 to 120 USD for US companies.
Today, UBS classifies its indirect/MRO products according to the groups A (1,900 different items of merchandise), B
(approx. 4,200 stocked items) and C (800 consumer goods and 4,000 durable consumers)5.
3,800 authorized staff, referred to as purchase requisition creators, can order 100% of the standard products in the area
of consumer goods in all three categories through a shop system. The shop system has been developed by UBS itself on
the basis of the Internet transaction server, a new product in connection with SAP R/3. For category A products, UBS
regularly receives an electronic catalog from a company called Gate, which is a joint venture between the suppliers
Furer, Waser, Mhlebach and Serlog. The content of the catalog is defined by UBS in dialog with the Gate partners.
UBS maintains the catalog for category B and C products and updates it after every procurement operation.
In the first months after going live in early 1999, some 2,400 items (55% category A, 42% B, and 3% C products) were
handled daily via the shop system. In view of the high level of acceptance and the immediate cost savings of the shop
system, UBS anticipates that the project will have paid for itself in far less than a year. The cost savings include:

Reduction in process costs. UBS now pays invoices for category A products monthly on the basis of electronic bills
which allow automatic allocation to the appropriate cost centers. The costly task of verifying invoices is replaced
by plausibility checks on the part of the cost center manager once the cost center has been debited and/or by
random checks by outsourcing management on the basis of the suppliers records of electronic transactions.

This case is described in detail by [Dolmetsch 1999].

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Reduction in fixed costs. for a large part of the indirect/MRO products, inventory was outsourced to the suppliers
Mhlebach and Serlog. Today, orders and goods movement transactions are exchanged with all business partners
by electronic means.

Major standard software suppliers in the area of desktop purchasing include Ariba Technologies with ORMS,
Commerce One with BuySite / MarketSite, Netscape with the BuyerXpert, SAP with B2B Procurement [cf. Dolmetsch
1999, 141].
Scenario Supply Chain for the exchange of simple goods and services
m
:
1
Man / Computer
:
Man / Computer
Business
:
Business

:
:
:

n
Man
Business

Supplier 2 Cat. C
Supplier 1 Cat. C
Verkauf
Waser Cat. A

Sales
Lager

Bro Frrer Cat. A...

Verkauf
Sales
Serlog Cat. A&B ...

Gate
Catalog
maintenance

Warehouse
...

Cat. B product
procurement
Cat. A product
procurement

...
Mhlebach Cat. A&B
Verkauf ...
Sales
Lager

Cat. C product
procurement

Costing
Individual multi-vendor
catalog of the four Cat. A
product suppliers

...
Simplicity / acceptance of
system
Integration with ERP system
Workflowability
Reduced process costs
Reduced warehousing costs

...

Warehouse service
for Cat. A products

Figure 2-3: Networking at UBS

2.4

Migros Cooperative: Development

The Migros Cooperative (Migros) is Switzerlands largest retailing organization. With its 72,000 employees, Migros
makes a turnover of 11.3 billion USD, almost 80% of that figure through its retail trading activities [Migros 1999].
Migros produces a large part of its own food products. These include bread and cakes, meat, preserved products and
mineral water [cf. Benz 1999].
Migros is very much a decentralized organization. Ten largely independent cooperatives together own the MigrosGenossenschaftsbund (MGB - Migros Federation) which provides a whole series of services for the cooperatives, the
production units and other Migros operations.
A large number of internal and external Migros business units are involved in the creation of food packaging. They
include printers, packaging and multimedia companies, production units, design, translation and food analysis
departments plus graphic designers. The MGB introduced a document flow application to coordinate the creation of
food packaging. This is helping to limit the throughput time for design orders for individual articles to 30 days and for
article groups to 60 days, thus radically reducing the time to market. The first priority was therefore to create regulated
information flows and clear areas of responsibility. The system ensures joint order scheduling and deadline monitoring,
and permits the joint processing of centrally stored order data and documents as well as notification of the next business
unit in line when a task has been completed [cf. Benz 1999].

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Scenario innovation for the exchange of complex services

1
m
:
Man
Man
:
Business
Business
:

:
:
:

n
Man
Business

Production site 3

Supplier 3
Genossenschaftsbund

Printer
Planung
Graphic designer

Coordination

Production site 3
Design
Production site
1

Planung

Design

Design
Verkauf

...

Verkauf

Durchfhrung

Execution
...
...
...

Design
Durchfhrung

Execution
...

Cost savings
Reduction in throughput time
Elimination of duplication
Clear assignment of tasks to
business units

...
...

Figure 2-4: Networking at Migros

2.5

Commtech: Procurement, Finance, Real Estate and Taxes

Commtech6 is a globally active corporation in the communications sector, headquartered in North America. With a
workforce of 130,000 employees, Commtech generates revenues of 23 billion USD. The corporation is divided into four
business units and is spread over 45 countries. Its principal products are enterprise communication solutions,
microelectronics for manufacturers of communications equipment and consumer products.
As a relatively young spin-off enterprise, Commtech had to reorganize its internal business network. Its management
was pursuing two goals. On the one hand, largely autonomous business units were to improve the effectiveness and
flexibility of the business processes in the scenarios innovation and customer relationship management. On the other
hand, shared service centers were to pool services which were similar throughout the company and to exploit synergetic
effects. The business units were thus responsible for the business processes sales, distribution, logistics, controlling,
material management, quality management, service management and production planning. The shared service centers
assigned to corporate management were responsible for the processes used jointly by all business units, such as finance,
real estate, taxes and global procurement.
The CIOs greatest challenge was to design a generally acceptable application architecture which would permit and
implement the new organization. In order to secure the coordination of the business units involved, processes and
master data were standardized and/or homogenized and integration scenarios were defined. The application architecture
made it possible to exploit the following potential:

The implementation of finance as a shared service center had the effect of reducing finance-related costs from 2%
to 1% of Commtechs revenue. Additional savings were made through improved functionality in the areas of
accounts receivable and internal hedging and netting.

The reorganization of real estate led to better use of the buildings and to a reduction in real estate-related costs from
6% to 3.5% of revenue.

Greater reliability, visibility and real-time drill-down-transactions 7 helped to save taxes amounting to 0.6% of
Commtechs revenue.

Global procurement reduced the purchasing costs for one third of all purchased products and services by 7.5%.
This corresponds to a saving amounting to 0.6% of Commtechs revenue.

6
7

Name changed for the purposes in this book.

Real-time drill-down transactions allow a corporate management operative, for example, to break down a summary entry into its constituent
parts, whereby the detailed entries are called up from the information systems of the business units in real time.

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10

Scenario innovation for the exchange of complex services

1
m
:
Man
Man
:
Business
Business
:

:
:
:

Production site 3

Supplier 3
Genossenschaftsbund

Printer
Planung
Graphic designer

Coordination

Planung
...

Verkauf

Design
Production site
1

Design
Durchfhrung
Durchfhrung

Execution
...
...

Production site 3

Design

Design
Verkauf

...

n
Man
Business

Execution
...

Cost savings
Reduction in throughput time
Elimination of duplication
Clear assignment of tasks to
business units

...
...

Figure 2-5: Networking at Commtech

Processes can be outsourced to external and internal business units or shared service centers [cf. Kris 1998]. Examples
of external business units are companies, such as ADP [cf. ADP 1999], which now already perform payroll accounting
for 10% of all US employees as an external service provider, or outsourcing partners, such as Andersen Consulting [cf.
Barling/Stark 1998b].

3 Networked Business Processes

In literature with an economics slant, design recommendations are usually linked to the business unit as reference
object. For the description of networks on a greater level of detail required for the deduction of concrete procedural
instructions for designing and implementing networks, the granularity of a business unit would appear to be too coarse.
In real-world projects, the business process has proved itself to be a suitable reference object for the purposes of
networking in addition to the business unit. Here, the focus is on the coordination of the cooperating business processes
of different business units. We now introduce the process view in the context of networking business units in order to
permit the subtle differentiation of conclusions required for the implementation.

3.1

Networking Through Coordination

The processes of the coordinating business partners, together with the outputs they produce, form the operative side of
the business relationship. Figure 3-1 shows two business units - two "average" industrial enterprises - along with their
most important business processes. These processes are based on the process models of [SCOR 1998], [Teufel et al.
1999], [Boutellier et al. 1999], [Porter 1992], [SAP 1998] and [GPS 1997]. The networking of processes describes the
organization of dependencies between the processes and/or tasks of the various network partners.
[Malone/Crowston 1994] define coordination as the "management of dependent activities". We define networking as
coordination in networks. Along with his coordination theory [Malone 1988] provides a "set of principles" for
describing and solving dependencies (an up-to-date taxonomy can be found in [Crowston 1994b]). Tasks are then
interdependent if they access the same resources. Tasks are performed by resources (e.g. personnel) on the one hand and
consume resources on the other. According to [Crowston 1994b] resources are all subjects and/or objects which come
into contact with a task. Examples of resources are machines, tools, storage spaces and employees.
The resource information takes on a special role in this article. This is due to the fact that while it obeys the laws of
information processing and thus, unlike raw materials for example, is reusable and divisible, it can also depict all other
resources for coordination purposes. In Figure 3-1 the processes on both sides of the value chain rely on the same
information and are therefore interdependent.
According to [sterle 1995] processes are coordinated exclusively by means of outputs. By virtue of this fact,
coordination must therefore be an output or part of an output in the sense of the above definition. Consequently, the
potential of inter-organizational networking lies in suitable design of the coordination capability (networkability) of
outputs and all associated design areas such as process, IT, people, organization structure and culture [cf. Alt et al.
2000]. Business Process Reengineering and integrated information systems have already shown how potentials arising
from the organization of internal dependencies can be realized.

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Chart of accounts
Accounts receivable
Accounts payable
Marktanalysen
Consolidation
plan
Strategien
und Produkte
Ergebnisse der
limits
vonCredit
Wettbewerbern
Marktforschung
Kundenwnsche
Integrierte
Supply Chain
Conference material
Plne
Forschungsberichte
Beschffungsplne
Contact data
Technologieprognosen
Kostenstelle,
Kostenart
Produktionsplne
Correspondence
undPatentdatenbanken
-Kostentrger
Lieferplne
Market of customer
Konkurrenzprodukte
Leistungsund Erlsart
Infrastrukturplne
Processes of customer
Projektideen
Kostenkalkualation
Cookie
Profit Center
Customer
profile
Bestelltes
Material
Budgets
Lagerbestnde
Project management
Kennzahlen
Materialverfgbarkeit
material
Vergangege
und bei
Lieferanten
Financial
plans
gegenwrtige
Auftrge
Whatever
Einkaufsplne
System architectures
bzw. Kontrakte
Suchas
Plans of models
Verkausmanager
Testplne
ProduktionsProduction
plan und und
Ergebnisse
Auftragsstatus
Terminated
output
Production Verkaufsprognosen
capacity
Product
and process data
Produktdatenbltter
Skills-Daten
Inventory
data
Produkkonfiguration
Bewerberdaten
Bill of material
Laufenden
Mitarbeiterdaten
Product drawings
Forschungsprojekte
Auftragsbuch
Arbeitsplatzdaten
Simulation models
Auftragsprognose
Kosten,
Plne
Machinery
Kundenanforderungen
Vergangene und
Production processes
Terminierte
Lieferungen
gegenwrtige
Probleme
Product description
Hierarchie-Daten
Lieferplne
Lsungen zu diesen
Test procedures / data
Prozedaten
Lagerbestnde
Problemen
Consumer reaction
Stammdaten
Expertenhilfe
Bewegungsdaten
Weiterbildung
Number circles

Partner
Idea Generation
Conceptualisation
Development
Marketing
Sales
Plan
Source
Make
Deliver
Service
Accounting
Personal

Partner
Idea Generation
Conceptualisation
Development
Marketing
Sales
Plan
Source
Make
Deliver
Service
Accounting
Personal

Figure 3-1: Coordination of Business Partners Through Shared Information

3.2

Coordination Areas

Figure 3-1 illustrates the wide variety and great complexity of inter-organizational networking. However, network
design requires a level of complexity which is manageable. In order to reduce complexity, areas are sought which show
high dependencies. Based on the concept of integration areas [sterle et al. 1993], we refer to processes (of different
business units) which are characterized by high dependency and therefore require a high degree of coordination as
coordination areas. Areas are usefully delimited if the sum of all dependencies between the areas is low and the sum
of all dependencies within the areas is high.
e.g. Development Partner in
Dynamic Network
Organizational
Development

Relationship
Management

e.g. Supplier in
Stable Network

Supply Chain
Management

Innovation

e.g. Customer
in Market

Infrastructure

e.g. Sister Division in

Internal Network

Figure 3-2: Coordination Areas

Integration areas and coordination areas both refer to processes and their tasks. The integration area pursues integration
through integrated information processing, the coordination area pursues integration through the organization of
dependencies. In addition to integrated information processing this includes for instance the modularization of outputs
and the design of new incentive systems for employees. The criteria used for delimiting coordination areas include goal,
culture, partners, form of coordination, coordinated processes, resources and information systems. By applying these

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criteria to the case studies we arrive at the five coordination areas Supply Chain Management, Relationship
Management, Innovation, Infrastructure and Organization Development (see Figure 3-2 and Table 3-1).

The goal of supply chain management is to handle operative planning and execution processes as efficiently as
possible. Unlike innovation, supply chain management does not redesign anything but multiplies clearly defined
outputs and tries to utilize the effects of economies of scale in order to achieve profit. As a rule, supply chain
management realizes its attempts to achieve efficiency through a large integration depth in the coordination of its
well-structured processes. High repeat numbers and integration depths require stable structures. Supply chain
management prefers the forms of coordination of an internal and/or stable network.

The goal of relationship management is to win customers and/or suppliers and to gain their loyalty. Based on the
ideas of the (cooperative) output system [Schgel et al. 1999], relationship management tries to cover as wide a
spectrum of customer requirements as possible in order to utilize the effects of economies of scope. Partners in this
area are above all customers with whom a market-like relationship exists.

The goal of the coordination area innovation is the rapid creation of new products. In accordance with the "loosetight" hypothesis [Gassmann, 1997], innovation requires a dynamic environment in the early phases. As a project
advances in maturity so the streamlining of the organization increases. In the case of innovation, a business unit
will thus coordinate with a large number of different partners and, depending on the task in question, follow the
rules of different forms of coordination.

The area infrastructure distinguishes itself from supply chain management in terms of content (e.g. payroll
accounting). In addition, this content does not necessarily show a high degree of repetition (e.g. preparation of a
corporate balance sheet), and its transactions may be complex in nature (e.g. outsourcing of IT). As a rule, there is a
high level of dependency between the infrastructure partners which calls for the relationship to be stable.

Organization development secures the willingness of own employees and those of partners to cooperate. It employs
special procedures for assessing and honoring performance, developing partnerships and winning partners [Hilb
1997].

Every business unit is always linked to other business units across all the coordination areas described in Table 3-1. The
sector and the position in the network determine the priority with which business units approach the task of consistent
network design.
Coordination Area

Goal / Culture

Coordinated Processes

Main Form of
Coordination
(according to [Snow et
al. 1992])

Main Coordination
Technology

Supply Chain
Management

Efficiency through
utilization of
"economies of scale",
large integration depth

Planning, procurement,
production, distribution

Stable network

Supply chain planningand transactionoriented electronic

commerce-systems

Relationship
Management

Effectiveness through
utilization of
"economies of scope"

Marketing, sales,
service

Market

Customer relationship
management- and
document-oriented
electronic commercesystems

Innovation

Rapid development of
successful products,
dynamic

Idea creation, concepts,

development

Dynamic network

Information systems for

distributed innovation
[Boutellier et al. 1999]

Infrastructure

Efficiency through
service culture

Accounts, asset
management, master
data management

Internal and stable

network

Distributed enterprise
resource planningsystems

Organization
Development

Network-capable
employees and partners

All forms of
coordination

Table 3-1: Coordination Areas

The (inter-organizational) dependencies within areas are contrasted by the (intra-organizational) dependencies across
areas. Both play a decisive role in the networkability structure of businesses (cf. Figure 3-3).

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The goal of relationship management is to create a relationship with business partners such as customers or key
suppliers which is as close, long-term and thus profitable as possible. The success of relationship management is
dependent on the quality of supply chain management and vice versa. In the context of relationship management,
businesses make information and capabilities available to their customers for example, which are generated in the
area of supply chain management. This information includes things like availability checks or track & trace
information in real time, capabilities include things like mass customizing.

On the other hand, supply chain management relies on relationship management information and capabilities.
Examples here are correctly configured customer orders or current detailed information on payment terms and the
customers delivery address. A further indication of the interdependency of these two areas is provided by
numerous case studies: as a rule, companies which consistently apply relationship management implement the
complementary supply chain management at the same time.

Relationship management provides the area of innovation first and foremost with market analyses, competitor
strategies and products and concrete customer requirements. At the same time, relationship management relies on
the area of innovation for information on new products, for instance, or ongoing research projects with image
value.

Innovation and supply chain management are connected via product design and the process required to produce it.
Jointly used documents here include parts lists and production process descriptions.

The infrastructure area supplies the operating resource information to all other areas. Relationship management,
supply chain management and innovation rely on information from external and internal accounting as well as from
data management.

Organization development forms the basis for all other coordination areas by ensuring suitable organization
structures and/or cultural and political attitudes on the part of the organization units involved. The success of the
operative coordination areas is dependent on organization development at both the intra-organizational and interorganizational levels.

Organizational
Development(e)

Innovation

Supply Chain
Management

(c)

(b)

Relationship
Management

(d)
(a)

(d)

(d)

Infrastructure

Figure 3-3: Inter-Area Dependencies

4 Model of a Networked Enterprise

Describing and categorizing organizational forms remains a central problem in organization theory. [Crowston 1994a,
2]
We know from the fifth phase of computerization that cross-company business processes rely on a new infrastructure,
also referred to as e-services8, and new standards. Together with the coordination areas they form a basic model of the
networked enterprise.

cf. www.hp.com/e-services/

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14

eServices

Decreasing coordination costs through the use of ERP-, supply chain planning (SCP)-, electronic commerce (EC)- and
enterprise application integration (EAI)-systems are leading on the one hand to the substitution of IT-supported forms
of integration for integration through employees. On the other, we see decreasing coordination costs through demand
elasticity leading to an increasing number of economical transactions (e.g. small lot sizes, micropayments). Both effects
favor the creation of coordination-intensive structures which include eServices (cf. [Malone/Crowston 1994]).
In this context, [Tapscott 1995, 55] expands by saying that: "Every economy needs a national information
infrastructure. This is the utility of the twenty-first century - a broadband highway for a broadband, high-capacity
economy. And every organization needs to plug into this utility with an enterprise information infrastructure. The new
infrastructure will change economic activity as significantly as did electrification. Just as business and wealth creation
would be unthinkable today without electrification, so the new economy would be impossible without the power of
information." Frederick W. Smith, Chairman, President und CEO, FDX Corporation, quoted in [Jones 1998],
summarizes that: "Mastery of logistics is as vital to success in the digital economy as it was to the extraordinary success
of the Roman Empire".
New IT, such as e.g. the n:m trading systems are often the basis for new services. Every enterprise has the strategic
option of offering a new service. The list below gives an overview of the new infrastructure and thus some of the
strategic options. In the classification by [Barling/Stark 1998a, 6] the services refer to the business relationship as a
whole, business processes, applications and communication. Here we have classified the services according to their
outputs [Barling/Stark 1998b]:
Process services perform important tasks for value creation processes (procurement, production, sales, planning) or
complete support processes (e.g. accounts or personnel) of a business unit. Process services always offer comprehensive
business services. Important process services are:

The outsourcing of business processes, such as finance, accounts, internal auditing, taxes, procurement, personnel,
real estate, etc., to consultants or specialist companies, such as e.g. ADP for payroll accounting.

The purchase of indirect, simply structured goods to aggregate demand: a large number of small purchasers with
small purchasing power form a purchasing club which is represented on the market by an intermediary with large
purchasing power. Examples are TPN Register from GEIS and Thomas Register, Harbinger, Commerce One,
Marshall, etc.

The purchase of direct, complex goods (online bidding services): purchasers publicize invitations to bid on the
network of a service provider. Suppliers submit their bids online (cf. TPN Post from GEIS).

Collaborative supply chain services coordinate planning and execution processes of a larger section of a supply
chain (e.g. EQOS from GEIS for supporting retailers).

Support services provide value creation processes with the required resources. Support services always offer a mixture
of technical and specific business services. The most important support services are:

Hosting services support the development, operation and maintenance of applications, from simple web pages to
SAP R/3 installations (e.g. Oracle, IBM, British Telecom/Citrix).

Transport services support the exchange of physical goods between trading partners and may secure integration
with the third party distribution and/or logistics system (e.g. FedEx, UPS).

Customs services support the automatic submission of customs documents (e.g. GEIS).

Services associated with payment transactions support the exchange of payments between trading partners (e.g.
NetTradeFinance from IBM).

Trust services support the management of certificates. Amongst others, they ensure the authenticity of business
partners and shared resources (e.g. CertCo, Swisskey Verisign).

Basic services provide fundamental, very specialized and mostly technical services for conducting business in the
information age.

Directory service management e.g. globally valid coordinates of trading partners at a central point,

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Repository service management e.g. global EDI messages or software components at a central point,

Translation and mapping services for temporary storage and translation of messages, e.g. from EDI messages into
fax,

Security services for the security requirements of the networked business units, and

Network access services for the technical access to value-added networks, the Internet and to virtual private
networks.

Supplier

Customer
-

Standards

Prozess
Services

Basic
Services

Infrastructure, e.g.
payroll
e.g. ADP

Procurement MRO
goods, e.g. C1s
MarketSite.net

Procurement direct
goods
e.g. GEs TPN Post

Supply Chain
Services
e.g. GEs EQOS

Logistic, e.g.
Transportation
e.g. FedEx, UPS

Payment
e.g.. PayNet,
NetTradeFinance

Trust Services
e.g. VeriSign,
SwissKey

Hosting Services,
e.g. British
Telecom/Citrix

Directory Services
e.g. Dun &
Bradstreet

Repository Services
e.g. XML
Repositories

Translation and
und Mapping
Services

Security
Services

Figure 4-1: Examples for eServices

4.2

Standards

Customers, suppliers and services which link customers with suppliers have to be able to understand each other at
many different levels of their relationship in order to be able to organize their interdependency. Standards make this
understanding possible. We define standards as objects which are accepted and shared within a community (cf.
[sterle et al. 2000, 225], [Cargill 1989], [Buxmann 1996]). Objects are understood to mean hardware, software,
processes, date, function, protocol, etc. Communities are e.g. business units, value chains, sectors or geographical
regions. Bodies or enterprises within these communities commit themselves to disseminating the appropriate standards.
Standards are an integral part of the model of the networked enterprise. Just like the DIN standards in engineering (e.g.
thread size M8, fit H7, steel grade ST37 or test procedure DIN 68858), they make it possible to realize economies of
scale at the same time as individualization, and constitute a central coordination mechanism. Unlike the widely accepted
standards in the engineering field, however, those for communication only apply to the technical and/or syntactical
level. Standards for semantic and pragmatic integration remain a huge challenge for Business Networking.

4.3

Model

"For every problem there is a solution that is simple, neat and wrong", H. L. Mencken, quoted in [Rodin 1999, 60].
The model derives from a process-oriented and enterprise-centered view of the networking of business units. We do not
consider the topology of a network but the networking of partners from the point of view of the individual, selfishly
acting business unit. In Figure 4-2 a company to be analyzed can equally well take on the role of supplier or that of the
customer. It sees itself at the center of its networks and practices networking in order to strengthen its position and/or to
improve its profit ratios.
Splitting networking into the four operative coordination areas of relationship management, supply chain management,
innovation and infrastructure takes into account the complexity inherent in networking which is observable in practice.
These four areas pursue different economic goals, implement different types of network, are characterized by widely
divergent cultures, link different partners, have interdependencies based on different resources and use different

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information systems for coordination purposes. Each business unit must nevertheless be capable of developing all these
relationships in the interests of their own business strategy, i.e. of adapting to the new demands of the information age.
Even if a business unit does not operate its own development or outsources every conceivable support process to
suppliers, it must nevertheless be familiar with and actively maintain its relationships with partners, which according to
[Hagel/Singer 1999] are customers, output integrators, innovators or infrastructure companies. The model of the
networked business unit helps here by bringing together in a single architecture those design areas of a company which
are most important from the networking point of view. On the one hand it provides an indication of how to usefully
break down the networking problem, without neglecting the interdependencies of the delimited areas. On the other
hand, the model serves as reference framework for deriving recommended action while taking into account the central
role of IT, services and standards.
6
1 Networked Enterprise
2 e.g. Customer in market,
networked via coordination
area (CA) relationship
7
management
3 e.g. Sister division in internal network,
networked via CA infrastructure
4 e.g. Supplier in stable network, networked
via CA supply chain management
5 e.g. Development partner in dynamic network,
networked via CA innovation
6 Networking standards
7 Process services
8 Supporting services
9 Basic Services

8
3

Figure 4-2: Networked Enterprise

5 Conclusions
The proposed model of a networked enterprise combines a companys position being part of several business networks
with its needs to organize along cross-company business processes. It helps businesses to identify the importance of
processes in the network and to split the networking problem into five clear areas, each of which is homogeneous in
itself. At the same time, it shows the connection between the individual areas. Describing networking with the aid of
coordination areas allows a networked enterprise to consistently orient itself towards the processes of its partners, in
particular those of its customers. The model of a networked enterprise thus provides:

An orientation aid for potential analysis. Networked enterprises can orient themselves towards the discussed
potentials of the individual coordination areas when evaluating their coordination strategies. This article
distinguishes between potentials derived from (a) process efficiency through networking, (b) enhanced customer
benefits and (c) new business opportunities.

An orientation aid for strategy evaluation. Experience has shown that networked enterprises sometimes have a
tendency not to devote enough attention to dependencies between coordination areas. They try to coordinate sales
processes within an internal network, for example, and neglect the fact that the organization of master data is a
prerequisite for a global process network. The model lists the major dependencies between coordination areas
and can thus serve as the basis for strategy evaluation.

An orientation aid to increase networking manageability. By splitting up the networking problem into coordination
areas, the model of a networked enterprise creates domains which differ in terms of culture, employees, processes
and information systems and which consequently the management of networked enterprises can design and run as
one unit. At the same time, the model identifies the most important dependencies between the coordination areas
and thus creates the right conditions for inter-area management, e.g. for the required calibration of the coordination
areas supply chain management, relationship management and infrastructure.

A means of deriving management tasks for inter-company coordination. The model of a networked enterprise
supports the derivation of management tasks in a networked enterprise. The most important tasks in connection
with networking include (a) strategic positioning of the networked enterprise in the various networks, (b)
organization of the coordination areas relationship management, innovation, supply chain management,
infrastructure and organization development, (c) organization of internal integration of the coordination areas and
(d) organization of IT, standards and services, on which the coordination is built.

Infrastructure positioning from the business point of view. Supply chain management, relationship management
and innovation are immediately dependent on the coordination area infrastructure. While most companies
recognize this connection, the infrastructure area, in particular data management, is underdeveloped. Companies

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usually lack the business arguments to support the time and cost-intensive harmonization and networking projects.
The model of a networked enterprise establishes the link between the supply chain, relationship management and
innovation processes, which are considered to be strategic, and the supporting infrastructure processes, thus
simplifying the business argumentation for infrastructure projects.

Positioning of standards and services. The most powerful elementary goal of networking is the m:n capability. This
permits the automation of new business functions and at the same time makes it possible to exploit the effects of
economies of scope (n customers generate a demand for individual, comprehensive output systems which can be
configured from standardized outputs) and economies of scale (m suppliers specialized in individual outputs).
Standards and services are the central mechanisms which permit an m:n network. The model of a networked
enterprise positions them accordingly and thus shows the increasing significance of and necessity for a wellfounded evaluation process for the selection of standards and services.

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