When computers learn to talk

Big investments from the likes of IBM, Microsoft and Sun are convincing some analysts that Web services will soon be a reality. But significant hurdles remain, McKinsey experts say.

4 min read
Anyone made leery by the unfulfilled promises of the dot-com era may feel skeptical, or at least confused, about Web services, the latest wave of innovation on the Internet.

Sky-high expectations and reams of hype are too often the death knell for emerging technologies. Will this one be any different?

At the risk of soliciting conversions to a potentially false creed, we offer a primer on Web services--what they are, what you need to know to be conversant with the underlying technology, and why, in the end, you may decide to pay closer attention as they evolve.

Simply put, Web services are business and consumer applications, delivered over the Internet, that people can select and combine through almost any device from personal computers to mobile phones. By using a set of common protocols and standards, these applications will permit disparate systems to "talk" with one another--that is, to share data and services--without requiring human beings to translate the conversation. The result promises to be "on the fly," or real-time, links among the online processes of different companies. These links could shrink corporate IT departments, foster new interactions among businesses, and create a Web that's easier for consumers to use.

What will it take for this vision to materialize? The substantial investments in Web services that players such as IBM, Microsoft and Sun Microsystems are now making have convinced some observers that this technology will soon be a reality. Others point to the significant remaining hurdles: Key technical standards still haven't been finished; specific services and new service providers have yet to be defined; and, perhaps most important, questions such as consumer privacy and security remain unanswered.

Despite these obstacles, new and potentially powerful innovations are building behind the buzz.

Behind the buzz
The hype around Web services reflects their potential for helping computers talk with one another more easily. These conversations will take place through new Internet standards and protocols that allow computer applications to reach beyond the confines of operating systems, programming languages, and middleware. The lingua franca of this machine-to-machine discourse will be the Extensible Markup Language, or XML, which "tags" digital content in standardized formats. Once computers have been linked in this way, it will be possible for consumers to access a more seamless Web from many different devices. Businesses will be able to connect their operations quickly and cheaply, thereby cutting their transaction costs and improving their ability to serve customers. The hype around Web services reflects their potential for helping computers talk with one another more easily.

Furthermore, although some aspects of the technology--such as security--are still maturing, Web services implement the client-server model over the Web. On the client side, for example, they manage the different screen shapes and sizes and the different connection speeds of desktops, mobile phones and PDAs. On the server side, the different programming languages and middleware technologies at work behind each application or data source become transparent to programmers, thus making it a lot easier to develop applications.

To give people easy access to any number of Web sites and services--through a variety of devices and in a variety of roles (for example, that of a customer or an employee)--passwords and other consumer information will be stored in the form of Universal User Profiles (UUP).

Each of these UUPs probably will be stored with a service provider--such as Microsoft.Net Passport or AOL Magic Carpet. Once consumers have registered with a provider, they would own this "sticky" information, at least nominally, and other Web sites and services would be allowed to interact with them. To succeed, service providers would have to win the trust of consumers and online partners--no easy task.

Web services not only promise consumers a more consistent and uniform experience but also allow them to integrate and personalize data and services from diverse sources. Today, for example, a consumer who wants to research a stock, trade online, and plan the tax strategy for that transaction might have to visit several Web sites. Web services, by contrast, would bring best-of-class offerings direct to the person's desktop. New intermediaries may integrate and deliver these services--some free, some fee-based--from a number of different vendors.

Cutting costs
Web services will cut the amount of time and money needed for systems integration, the single biggest IT expense of most companies. Savings of up to 20 percent are possible, mainly through reductions in the cost of developing interfaces among systems. Systems integration companies may not need to worry, however, since an increase in the volume of integration projects could offset the reduction in unit costs. Web services and the associated development tools are in their infancy and still show more promise than results.

When and if Web services reach their full potential, they will change the way many companies do business. Reduced transaction costs will encourage the outsourcing of noncore functions through electronic links with key partners. The likely result: increased fragmentation of value chains and industries as well as more narrowly focused companies. For online business-to-consumer companies, customer relationships will be affected dramatically. E-tailers, e-mail services, financial-service providers, and other kinds of business-to-consumer companies stand to lose out to Universal User Profile providers, which could control access to customers. As consumers dealt directly with their UUP providers, companies without strong brand names or reputations could be relegated to the virtual backwaters.

Web services and the associated development tools are in their infancy and still show more promise than results. Some key standards--most crucially, those involving the launch of Universal User Profiles--remain unresolved. UUP providers must ensure the privacy and security of the consumer's credit card and other sensitive information, for example, while allowing access to all those businesses that provide requested services. In addition, businesses interacting with each other must be able to specify the appropriate level of service promised to each user.

If past patterns hold, the future of the technology--boom or bust--will become apparent over the next 12 to 18 months.

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