OPERATIONAL MODELS

OPERATIONS The activities carried out in an organization related to attaining its goals and objectives.

RESEARCH The process of observation and testing characterized by the scientific method. The steps of the process include
observing the situation and formulating a problem statement, constructing a mathematical model, hypothesizing that
the model represents the important aspects of the situation, and validating the model through experimentation.

ORGANIZATION W
The society in which the problem arises or for which the solution is important. The organization may be a corporation,
h
a branch of government, a department within a firm, a group of employees, or perhaps even a household or individual.
a
t
DECISION MAKER An individual or group in ithe organization capable of proposing and implementing necessary actions.
s
O
p
ANALYST An individual called uponeto aid the decision maker in the problem solving process. The analyst typically has special
skills in modeling, mathematics,
r data gathering, and computer implementation.
TEAM a
A group of individuals bringing various skills and viewpoints to a problem. Historically, operations research has used
t
the team approach in orderi that the solution not be limited by past experience or too narrow a focus. A team also
provides the collection ofospecialized skills that are rarely found in a single individual.
MODEL An abstract representationn of reality. As used here, a representation of a decision problem related to the operations of
s
the organization. The model
R is usually presented in mathematical terms and includes a statement of the assumptions
used in the functional relationships.
e Models can also be physical, narrative, or a set of rules embodied in a computer
program. s
e
SYSTEMS APPROACH An approach to analysis that
a attempts to ascertain and include the broad implications of decisions for the organization.
Both quantitative and qualitative
r factors are included in the analysis.
c
h
OPTIMAL SOLUTION A solution to the model that
? optimizes (maximizes or minimizes) some objective measure of merit over all feasible
solutions -- the best solution amongst all alternatives given the organizational, physical and technological constraints.
Terminology

OPERATIONS A collection of general mathematical models, analytical procedures, and optimization algorithms that have been found
RESEARCH useful in quantitative studies. These include linear programming, integer programming, network programming,
TECHNIQUES nonlinear programming, dynamic programming, statistical analysis, probability theory, queuing theory, stochastic
processes, simulation, inventory theory, reliability, decision analysis, and others. Operations research professionals
have created some of these fields while others derive from allied disciplines.
Evaluating the Operating Model
by SRAVAN ANKARAJU on MARCH 1, 2009
in EXECUTION,OPERATING MODEL
Four common business “events” that most often drive the need for developing, evaluat
1.Cost reduction, Shared Services and Business Simplification challenge
2.Business merger or divestiture event (ex. expansion in new global markets)
3.Fundamental shift in business models or corporate strategy
4.Front-end to a major ERP implementation
When a new Operating Model is designed and
implemented, in most cases Organizational
Structures are redefined. Organizational
structures institutionalize the following:
How people will interact with each other?
How communications will flow?
How rewards are distributed?
How power relationships are defined?
What is important to the organization?
An operating model for a business is a
schematic which shows the operating units for
the business and the relationships between
these operating units. The operating model
can be a product that in great detail describes
how the organization does business today. In
many situations developing the Operating
Model at a very detailed level requires
substantial resources in both the business
units and IT. The following are possible forms
of Organizational structures in the Target
Operating Model -
Most operations research studies involve the construction of a mathematical model.
The model is a collection of logical and mathematical relationships that represents
aspects of the situation under study. Models describe important relationships
between variables, include an objective function with which alternative solutions
are evaluated, and constraints that restrict solutions to feasible values.
Although the analyst would hope to study the
broad implications of the problem using a
systems approach, a model cannot include
every aspect of a situation. A model is always
an abstraction that is of necessity simpler than
the real situation. Elements that are irrelevant
or unimportant to the problem are to be
ignored, hopefully leaving sufficient detail so
that the solution obtained with the model has
value with regard to the original problem.
Models must be both tractable, capable of being solved, and valid,
representative of the original situation. These dual goals are often contradictory
and are not always attainable. It is generally true that the most powerful
solution methods can be applied to the simplest, or most abstract, model.
We provide in this section, a description of the
various types of models used by operations
research analysts. The division is based on the
mathematical form of the model. All the
models described here are solved with Excel
add-ins described in theComputation section
of this site. In some cases, the methods used
to solve a model are described in
the Methods section. Student exercises for
creating models are in the Problems section.
Additional models related to problems arising
in Operations Management and Industrial
Engineering are in the OM/IE section
What is OR? Operations research (OR) is a
discipline explicitly devoted to
aiding decision makers. This
section reviews the
terminology of OR, a process
for addressing practical
decision problems and the
relation between Excel models
and OR.
What is Operations Research?

Operations research (OR) is a discipline explicitly devoted to aiding decision makers. A number of closely related fields are management science, decision science, operations management, and systems engineering. OR is most often taught in
undergraduate engineering and business programs. It is often a component in industrial engineering curricula. There are a number of graduate programs and a few undergraduate programs in OR. The professional society for OR in the United
States is INFORMS, the Institute for Operations Research and the Management Sciences. A definition of OR taken in part from the INFORMS web site is:
OR Professionals aim to provide rational bases for decision making by seeking to understand and structure complex situations and to use this understanding to predict system behavior and improve system performance. Much of this work is
done using analytical and numerical techniques to develop and manipulate mathematical and computer models of organizational systems composed of people, machines, and procedures.
 The Operations
Research Process
The goal of operations research is to provide a
framework for constructing models of decision-making
problems, finding the best solutions with respect to a
given measure of merit, and implementing the
solutions in an attempt to solve the problems. On this
page we review the steps of the OR Process that leads
from a problem to a solution. The problem is a
situation arising in an organizationthat requires some
solution. The decision maker is the individual or group
responsible for making decisions regarding the
solution. The individual or group called upon to aid the
decision maker in the problem solving process is
the analyst.
Decision making begins with a situation in
which a problem is recognized. The problem
may be actual or abstract, it may involve
current operations or proposed expansions or
contractions due to expected market shifts, it
may become apparent through consumer
complaints or through employee suggestions,
it may be a conscious effort to improve
efficiency or a response to an unexpected
crisis. It is impossible to circumscribe the
breadth of circumstances that might be
appropriate for this discussion, for indeed
problem situations that are amenable to
objective analysis arise in every area of human
activity.
At the formulation stage, statements of objectives, constraints on solutions, appropriate
assumptions, descriptions of processes, data requirements, alternatives for action and metrics
for measuring progress are introduced. Because of the ambiguity of the perceived situation, the
process of formulating the problem is extremely important. The analyst is usually not the
decision maker and may not be part of the organization, so care must be taken to get agreement
on the exact character of the problem to be solved from those who perceive it. There is little
value to either a poor solution to a correctly formulated problem or a good solution to one that
has been incorrectly formulated.
We show an arc from the statement directly back to situation because careful examination of a
problem often leads to solutions without complex mathematics. For complex situations or for
problems involving uncertainty, the OR process usually continues to the next step.
 Construct a Model

A mathematical model is a collection of functional relationships by which allowable actions are

delimited and evaluated. Although the analyst would hope to study the broad implications of
the problem using a systems approach, a model cannot include every aspect of a situation. A
model is always an abstraction that is, by necessity, simpler than the reality. Elements that are
irrelevant or unimportant to the problem are to be ignored, hopefully leaving sufficient detail so
that the solution obtained with the model has value with regard to the original problem. The
statements of the abstractions introduced in the construction of the model are called the
assumptions. It is important to observe that assumptions are not necessarily statements of
belief, but are descriptions of the abstractions used to arrive at a model. The appropriateness of
the assumptions can be determined only by subsequent testing of the model’s validity. Models
must be both tractable -- capable of being solved, and valid -- representative of the true
situation. These dual goals are often contradictory and are not always attainable. We have
intentionally represented the model with well-defined boundaries to indicate its relative
simplicity.
 Find a Solution

Here tools available to the analyst are used to obtain a solution to the mathematical model.
Some methods can prescribe optimal solutions while other only evaluate candidates, thus
requiring a trial and error approach to finding an acceptable course of action. To carry out this
task the analyst must have a broad knowledge of available solution methodologies. It may be
necessary to develop new techniques specifically tailored to the problem at hand. A model that
is impossible to solve may have been formulated incorrectly or burdened with too much detail.
Such a case signals the return to the previous step for simplification or perhaps the
postponement of the study if no acceptable, tractable model can be found
Establish the Procedure

Once a solution is accepted a procedure must

be designed to retain control of the
implementation effort. Problems are usually
ongoing rather than unique. Solutions are
implemented as procedures to be used
repeatedly in an almost automatic fashion
under perhaps changing conditions. Control
may be achieved with a set of operating rules,
a job description, laws or regulations
promulgated by a government body, or
computer programs that accept current data
and prescribe actions.
Implement the Solution

A solution to a problem usually implies

changes for some individuals in the
organization. Because resistance to change is
common, the implementation of solutions is
perhaps the most difficult part of a problem
solving exercise. Some say it is the most
important part. Although not strictly the
responsibility of the analyst, the solution
process itself can be designed to smooth the
way for implementation. The persons who are
likely to be affected by the changes brought
about by a solution should take part, or at least
be consulted, during the various stages
involving problem formulation, solution
testing, and the establishment of the
procedure.
The OR Process

Combining the steps we obtain the complete OR process. In practice,

the process may not be well defined and the steps may not be
executed in a strict order. Rather there are many loops in the process,
with experimentation and observation at each step suggesting
modifications to decisions made earlier. The process rarely terminates
with all the loose ends tied up. Work continues after a solution is
proposed and implemented. Parameters and conditions change over
time requiring a constant review of the solution and a continuing
repetition of portions of the process.
There are a number of ways to to test a solution. The simplest determines whether the solution
makes sense to the decision maker. Solutions obtained by quantitative studies may not be
predictable but they are often not too surprising. Other testing procedures include sensitivity
analysis, the use of the model under a variety of conjectured conditions including a range of
parameter values, and the use of the model with historical data.
If the testing determines that the solution or model is inappropriate, the process may return to
the formulation step to derive a more complex model embodying details of the problem
formerly eliminated through abstractions. This may, of course, render the model intractable, and
it may be necessary to conclude that an acceptable quantitative analysis is out of reach. It may
also be possible to construct a less abstract model and accept less powerful solution methods.
In many cases, finding a good or an acceptable solution is almost as satisfactory as obtaining an
optimal one. This is particularly true when the quality of the input data is low or when
important parameters cannot be specified with certainty.
Different organizations have different ways of approaching a problem, and many do not admit
quantitative techniques or analysts as part of the process. It is important to note, however, that
in today’s world problems do arise and decisions are made (even inaction is a decision made by
default). Many problems are solved in the first step of our process, but there will be cases when
complexity, variability or uncertainty suggest that further analysis is necessary. In these cases,
the Operations Research process will assist problem solving and decision making
Business Modelling

NextGRID Business Units workshop II

Paul Mckee
IT Futures Centre BT
Acknowledgements
 Business Modelling Challenges
• No agreed real world definition of the term “Business
Model”
• Effective evaluation requires confidential information
– The “numbers” and not just the “story”
– Can only be carried out by the owner of the potential
model
• The range of potential business models is unbounded
– If someone finds a good business model they will operate
it but not broadcast it
– Which are of interest?
– Expression of interest may itself be confidential
• Hence our approach focuses on strategies for the
articulation and evaluation of candidate models
 The Approach
• We investigated the concept of business models
– What they actually constitute
– Why they are important
– What factors they should address
• We have defined what we understand by the
term “business model”
– Based on extensive literature survey and NextGRID
experience
• We also provided analysis “tools” that will assist
in the evaluation of a prospective business model
 Definition of Business Model
• Business models themselves are complex and not
well understood – they lack any formal basis that
would facilitate both description and comparison.
– Linder and Cantrell assert that:
• “executives can't even articulate their business models.
Everyone talks about business models but 99 percent have
no clear framework for describing their model.”
• Minimal description
– The business model articulates how the business
makes money
Linder, J.C., Cantrell, S. (2000): "Changing business models: surveying the landscape", White Paper,
Institute for Strategic Change, Accenture
•
Extended definition (1)
Chesborough and Rosenbloom specify that the 6 functions of a
business model are to:
– Articulate the value proposition
– Identify a market segment, i.e. the users to whom the offering is
useful and for what purpose, and specify the revenue generation
mechanism for the firm.
– Define the structure of the value chain within the firm to create and
distribute the offering and determine the complementary assets
needed to support the firm’s assets in this chain.
– Examine the cost structure and profit potential of producing the
offering given the value proposition and value chain structure
chosen.
– Describe the position of the firm within the value network linking
suppliers and customers including identification of potential
complementors and competitors.
– Formulate the competitive strategy by which the innovating firm will
gain and hold advantage over rivals.
Chesborough, Henry; Rosenbloom, Richard: The role of the business model in capturing value from
innovation: evidence from Xerox Corporation’s technology spin-off companies, Industrial and
Corporate Change, Volume 11, Number 3 pp529-555.
 Extended definition (2)
• Magretta identifies 2 key areas in a business
model description
– The story
– The numbers
• Both have to make sense

When business models don't work, it's because they fail

either the narrative test (the story doesn't make
sense) or the numbers test (the P&L [profit and loss]
doesn't add up).
Magretta, J: Why Business Models Matter, Harvard Business Review 2002, Vol 80; Part 5, ISSN
0017-8012, pages 86-93.
 Interesting observations
• The most common format for the business model is a
single page of narrative text
• A business model does not explicitly include
implementation technologies
– it is driven by business requirements and simply enabled
by technology
• Articulation of a business model is no guarantee of its
success
– only implementation will tell if the model works or not
• New business models are increasingly viewed as key
intellectual property, and often attempts are made to
protect them by patent
 Evaluation Tools
• Business model evaluation questionnaire
– Asks a prospective operator of a Grid business model
pertinent questions
– Acts as a checklist for important issues: ensures that they
are considered when creating “The Story”
– A number of candidate business models have been
identified and analysed in detail using the questionnaire
• Risk & Reward “Balance Sheet” analysis
– Risks and rewards represented as assets and liabilities on a
balance sheet: uses standard business accounting practice
– Can identify business decision points, value exchange and
risks
 Business Model Evaluation
Questionnaire
• What is the offering to the customer?
– This is what the customer will pay for. Here there must be enough
value in the eyes of the customer that they will be prepared to pay for
it.
– The business model must provide a description of what the offering is
to the customers, in terms that they will understand and be interested
in.
– Why should customers be interested? There must be a convincing
justification of why the customers will want your offering.
• What value do you add?
– This is essentially: why are you in business? What is the value added
proposition of your model?
– How do you transform the “raw materials” you buy in into products or
services that your customers want?
– Why should customers come to you and not your competitors?
– What is your unique selling point?
– Is the added value you provide clear to your customers?
• What internal motivations for being in business are
there?
– The obvious one of these is to make money, but there may
be more to it – for example, you may have spare capacity
that you wish to make money on.
– List these internal motivations and identify if and where
they conflict or support the delivery of the service
• What are the costs for delivering the offering to the
customer?
– These costs are many and varied, and may not all be
financial.
– Analysis of these costs is an input to the balance sheet
analysis
• What is required to be bought in so as to deliver the
offering?
– What is required to make your offering – i.e. what are your
raw materials?
– Who are the suppliers? What do you purchase from them?
– How much raw materials are required?
– What is your sensitivity to supply disruption?
• How are prices set?
– What are your costs?
– How much profit do you want to make?
– What will the market stand?
• How will customers pay for the service?
– How is the service priced?
– What are the “units of consumption”?
– What payment models?
• Utility computing where customers pay for what they use
• Subscription where customers pay a fixed amount regularly for a
set amount of capacity
• Others?
• How is a service provisioned for?
– If you operate finite resources, how can you determine
which of your customers gets to use them and when?
– How are you sure you can answer the requests made on
your service?
• In what way are relationships important to you?
– What are your relationships with all the actors you need to deal
with?
– Where are you in the value chain? Who are the suppliers? Who
are the customers?
• What are the market characteristics?
– What is the market sector? Is there a specific good or service
type that the market you are targeting is concerned with?
– How big is the market?
– Who is in it? What characterises them?
– How mature is the market?
– How can this determine the prices you can set?
• How will you make customers aware of and want
your offering?
– Who is the target audience?
– How can we reach them?
– How can we make them want to buy our service?
• What are the risks in this business model?
– Describe the risks of this business model. For example:
• Do you have a lot of machines that could potentially be unutilised?
• Are you dependent on one supplier?
• Are there elements of QoS in an SLA beyond your control?
– What are the countermeasures to these risks?
 Outcomes from Candidate Business
Model Questionnaire Analysis
• The value proposition needs to be clear and of
significant value to justify the expense of offering a
Grid service.
– The target market needs to clearly understand the value
proposition.

• Value-add is mainly based on the provision of service

– using the definition that a “service” is work done for the
benefit of another party
– as opposed to more commoditised resources such as low-
level computing
• The greater the level of added value in the eyes
of the customer, the greater the chances of
success.

• There is considerably more customer value in

application codes than CPU cycles alone
– Application codes are a means of solving customers’
problems, and gives the customers clearest value.
– Licensing of application codes and enforcement of
licensing terms is critical to achieving this value-add.
 Risk and Reward “Balance Sheet”
Analysis
• Represent risks as liabilities and rewards quantified as assets on
a balance sheet
– Use standard business accounting practice
– Identify business decision points
– Identify value exchange and risks
• Risks and rewards should balance for
– Service providers
– Consumers
– Third parties (application vendors, etc)
• Role of SLAs
– Define commitments, rewards and penalties
– Relate QoS to business risk and value
– Support business decision processes
 Value Exchange
Service Service
Consumer Provider

Value of Cost of
Service > Price > Resources
 Business Value Exchange: Use Cases
Assets Liabilities Comments
Event
Cash Debtors Resources Ret profits Creditors Promises

Purchase Spend to acquire resources. Zero sum: asset

Gain Incur = cost
equipment

Agree Gain/ Incurs a promise – customer may agree pay a

Gain Incur fee just for that
SLA Lose

Provide Lose Fulfils a promise using resources – customer

Gain Gain Reduce normally agrees to pay
service (used)

Breach Breaks a promise – provider may outsource or

SLA
FINANCIAL
Lose VALUE (X) Lose Incur Reduce pay a penalty

Cancel Gain/ Cancels an outstanding promise –customer

Gain Reduce may pay a penalty
SLA Lose

Provider
Lose RESOURCE (Y)
Reduce
Zero sum: both sides agreed the price ahead
of time
settles
[ACQUISITION COST]
Customer Zero sum: both sides agreed the price ahead
Gain Lose of time
settles

Customer SERVICE (Z)

Nasty, but it happens. This is why we need to
Lose Lose check customer credit
defaults
[DELIVERY LIABILITY]
Equipment Lose Remaining life of kit goes down whether or not
depreciates Lose it is used
(unused)

Equipment Costs money to maintain and operate

maintenance Lose Lose equipment
 Service Provider Risks
Assets Liabilities Comments
Event
Cash Debtors Resources Ret profits Creditors Promises

Purchase 1).Risk of investing in kit that won’t be needed

Gain Incur
equipment

Agree Gain/ 2).Risk of committing/delivering service the

Gain (1) Incur customer won’t pay for
SLA Lose

Provide Lose
Gain Gain Reduce
service (used) (3)
Breach 3) Risk of promising services that can’t be
Lose Lose Incur Reduce provided
SLA

Cancel Gain/
Gain Reduce
SLA Lose

Provider
Lose Reduce
settles
(2)
Customer 4) Risk of committing resources the customer
Gain Lose (4) doesn’t actually use
settles

Customer
Lose Lose
defaults

Equipment Lose
depreciates (5) (unused)
Lose

Equipment 5) Risk of failing to utilise resources without

maintenance Lose Lose excessive management
 Business Models

The Story Questionnaire The Numbers Confidential

information
Business
modelling

Tools
Dynamic Orchestrators Higher value
(discovery, workflow, invocation, etc) Business
models

Management Data-centric Dynamic

Systems Functional Trust and
and SLAs Systems Security

Base standards (http, wsdl, soap, naming,

notification, addressing, policy, security…)

NextGRID Architecture
 Conclusions
• Cute technology has a small market place, end
users need solutions to real world business
problems and we need business models to
address this need
• We propose a strategy to evaluate business
models
– Full articulation of the business model –
questionnaire
– Balance of risk and reward – spread sheet analysis
– Simulation to validate performance
 Licensing

NextGRID Business Units workshop II

Paul Mckee
IT Futures Centre BT
 Licensing Challenges in Flexible
Computing Architectures
• Software market has some unique
characteristics
– The buyer gains ownership of nothing, only a right
to use under certain conditions.
– High degree of lock-in
• Little market competition after a purchase
• High cost of switching
– No secondary market in software
• Reduced pressure on original sales
– Single source maintenance, confidential source
code
 License Types
1. Perpetual license
– One off payment
– No maintenance included
– Most preferred license by volume of licenses
sold
2. Term license
– Fixed term license (e.g. yearly)
– Often includes maintenance element
3. Subscription license
– Regular payments
– Includes updates and some technical support
 License Models ( Ovum)
• User based licensing
– Concurrent or named user
• Role based licensing
– Particularly applicable to business applications
• Software as a service
 Changing License Models
• Most popular enterprise model is up front
license + maintenance
• Hosted model is increasingly popular based on
subscription fee
• Usage based or run time pricing (software
tools world)
• Software as a Service (SaaS) increasingly
important
 Maintenance Fees –justify the
value
(Gartner + Forrester)
• Maintenance costs are a big issue
– Rising steadily range from 17%(SAP) to
22%(Oracle) and up to 30%
– Customer effectively re-buys app every 4-5 years
– Value of maintenance depends on customer need
• Maintenance costs will therefore be under
pressure
• Value proposition is access to future products
– High degree of customer lock in
• Key point- software as a service
 Customers Still Find Licensing Overly Complex

January 2008 “Trends 2008: Applications Licensing And Pricing”

 Software Pricing Models: Key
Messages (Ovum)
• Hosting can generate as much revenue as
license sales
– but there are fewer opportunities for
consulting and training
– real losers from hosting could be system
integrators not software vendors
• Success depends on critical mass:
– traditional license + maintenance model
generates earlier revenue but level off
– subscription services grow more slowly but are
more resistant to levelling off
• License based software always suffers a “mid
life crisis”
– “pay as you go disconnect” vendors expect more
revenue
– customers expect reduced costs
– one of them must be wrong
• In mature sectors vendors can afford to
discount license costs steeply
 Conclusions
• The application code provides the means to
solve the customers’ problems and is a key
component of tomorrow’s Grid, but:
– Licensing remains a key barrier to full realisation
of GRID technologies
– Lack of flexible licensing and a secondary market
inhibits potential business models
• Flexible software licensing that permits
application codes to be offered as services is
critical to the success of the Grid
 Thank you

Offices worldwide

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© British Telecommunications plc 2008 & partners of the NextGRID consortium

 Trends 2006 ( Forrester )
• Enterprises a generally dissatisfied with
vendor offerings
– Enterprises reject named user models
– Large corporates prefer site or volume licenses
• Biggest challenges with licensing models
– Maintenance costs too high, too complex, too
rigid,metric miss-match, not aligned with business
goals
• Interest in utility pricing models still low (single
percentages)