Web services have enormous promise, but not a single company today is yet fully tapping their potential.

Indeed, early adopters are experimenting through carefully controlled pilots that take advantage of the evolutionary nature of the technology, and CIOs and IT organizations - fatigued by yet another "new new thing" - are adopting a show-me attitude that requires Web services companies to prove that their offering works...and will create measurable value.

Nevertheless, in select verticals for specific applications, numerous innovative companies are already using Web services to execute real business processes with partners and deliver value to customers. These pioneering companies are gaining valuable experience, allowing them to create a new business architecture that will position them for long-term growth.

Moving Beyond the First Phase
So much has been written about the promise of Web services that more words on the topic are not only unnecessary, but potentially counterproductive. The good news is that most CIOs and IT organizations have now heard about Web services; the bad news is that they are skeptical about all the hype. As recently as six months ago, a great deal of effort was being expended by early Web services providers like Grand Central Networks and Cape Clear on educating potential buyers on the benefits of Web services. Today, that's no longer necessary - thanks to the marketing machines at IBM, BEA, Microsoft, and Sun. Instead, Web services providers must focus their sales efforts on addressing concerns from large enterprises about security, return on investment (ROI), and the long-term viability of small companies in this adverse economic environment.

It's still very early in the adoption cycle; the chasm to broad penetration across most vertical markets will probably be crossed only over the next two years.

That said, the reality of Web services adoption - while not broad - is surprisingly deep in select verticals for some specific applications. If you've tracked Web services over the last 18 months, you may remember that the consensus a year ago was that early adopters would be small and medium enterprises several tiers down in the supply chain who would prefer open standards and couldn't afford expensive, time-consuming EAI software. Instead, it's now clear that the early adopters are larger enterprises in search of more cost-effective demand chain solutions, in verticals such as banking, insurance, travel, and manufacturing. While there are hundreds of companies across many verticals conducting simple Web services pilots behind the firewall, thanks to the ease with which Web services can be created on the latest versions of application servers, there are dozens of companies in these select verticals using Web services for mission- critical applications that integrate one or more players outside the firewall.

This article will analyze the early adopting verticals, describe the most common use cases, and detail examples of real companies using Web services to execute actual business processes.

Early Adopting Verticals
Who is using Web services for real business applications today - and why? In today's challenging environment of shrinking IT budgets and scarce resources, deciding where in the organization to first deploy Web services is an issue for all IT managers. Who are the companies thinking about using Web services today? They're typically innovative market leaders who want to gain experience with a more loosely coupled architecture that has the promise of quickly delivering measurable cost reductions. More specifically, they tend to be companies that need to integrate multiple partners or customers who are on heterogeneous technology platforms.

In banking, this means companies such as Merrill Lynch, Charles Schwab, Fidelity Investments, Thomas Weisel Partners, Robertson Stephens, ABN Amro, Thompson Financial, and Wachovia. In insurance, it's companies such as Blue Cross/ Blue Shield, Mega Life & Health, Storebrand, and several smaller companies with strong positions in local markets. In travel, early adopters include companies like Dollar and Galileo. In manufacturing, it's companies such as Dell, Ford, GM, Osram Sylvania, VendQuest, and Eastman Chemical.

Why are these the verticals using or assessing Web services to execute real business processes with partners and customers? In short, it's because these industries are relatively data-intensive, and because the need to cost effectively meet their customer needs requires them to collaborate with multiple parties. For example, banking consumes expensive external data feeds and produces research reports and analyses that must be distributed to a wide variety of clients with very specific individual needs. Similarly, as any traveling professional knows who rents cars or checks into hotels, travel requires detailed customer profiles and inventory data. There are large economic benefits - to customer and company alike - to be gained from being able to fill in data only once, then have it move across service providers, with automatic notification of cancelled or delayed arrivals so that car/hotel inventory can be optimized.

Common Applications of Web Services
A complete explanation of why these verticals are early adopters requires understanding the common use cases, with examples of how actual companies are using Web services.

Based on an analysis of companies applying Web services to business processes today, there seem to be four major application areas:

1. Demand Chain Applications
2. Supply Chain Applications
3. Private Marketplaces
4. Application or Web Service Provider Integrations.

Demand Chain Applications
There are several demand-side applications being implemented today. First, enterprises that want to grow profits by distributing their applications or data to partners and/or customers. These applications of Web services are rapidly penetrating the travel and financial services verticals. Second, companies seeking to grow profits by integrating components of their demand chain itself with distributors, resellers, and/or customers. This is penetrating the financial services and manufacturing verticals.

Supply Chain Applications
There are two potential supply side applications. First, enterprises wanting to integrate more cost effectively with direct materials suppliers to confirm orders, pricing, and ship dates. Second, companies wanting to integrate more cost effectively with suppliers of indirect materials. Web services are beginning to get some traction in the manufacturing vertical.

Private Marketplace/ Collaboration Hub Integrations
Marketplaces and their next generation, "collaboration hubs," use Web services as an infrastructure to enable many-to-many integration. This provides a simple, quick, low-cost way to connect new businesses to the hub using open standards, facilitates the orchestration of business processes between collaborating partners, delivers the right information at the right time to the partner or customer, and enables the management and maintenance of connections with all involved parties. This is rapidly penetrating the insurance and manufacturing verticals.

ASP/WSP Integrations
Companies may seek to reduce costs by transporting select data from or between application service providers (ASPs) or Web service providers (WSPs). This information can be used to trigger events or to trigger other information feeds based on the information in a specific field or fields. This is being used in financial services.

Some Examples of Real Web Services Implementations
Most importantly, there are large companies assessing and already implementing Web services in each of these application areas. These applications of Web services are not the same across all the early adopting vertical markets. I'll talk later about which applications are being used in what verticals, and also indicates where potential applications may arise as adoption deepens over time.

Demand Chain Applications
Demand chain applications of Web services are an important area of early adoption. In banking, both investment banks and data service providers are using Web services to integrate with each other and with customers. For example, both Robertson Stephens and Wachovia are using Web services to consume Thompson Financial data. They then add value to it through their own research analysts, and use Web services to distribute the specific research reports wanted by each customer. Wachovia is also using Web services to download the Thompson Financial data on consensus estimates into Excel, and then monitor how their research recommendations move the consensus estimate by comparing the average before and after their report is issued. Fidelity is using Web services to eliminate the complex web of protocols and transformations required to give customers an integrated view of their accounts across different products. This reduces the demands on their IT organization while lowering the total cost of ownership.

Insurance is another important early-adopting vertical. A leading national life insurance company is using Web services to integrate with customers so the human resources department can directly update any changes in employees' status. This increases value to customers while reducing the costs of investigating claims that were based on obsolete data. Storebrand, Norway's largest insurance company, has been using Web services to replace the manual process by which it was calculating the potential benefits for 390,000 employees at 6,500 different customers under a variety of insurance offerings. They now have an automated process that extracts information directly from the customer's payroll system and transmits it via Web services to Storebrand's mainframe, where the scenarios are run for each customer.

In travel, Dollar Rent-a-Car wants to expose their reservations process on as many travel Web sites as possible. Using Web services, they're able to distribute the code required to link in with their proprietary systems through an architecture that avoids taking eyeballs away from their partners' sites. Galileo is experimenting with Web services to offer travel services and to integrate with their travel suppliers. (Galileo connects 42,000 travel agency locations to 511 airlines, 37 car rental companies, 350 tour operators, and 47,000 hotels.) Another large travel hub has a hotel reservation application that they want to embed on as many individual travel sites as possible to enable customers to make their hotel reservations through a Web service that integrates directly with hotels in their network.

In manufacturing, Eastman Chemical is using Web services to publish a catalog tailored to the needs of each customer, with pricing reflecting their corporate rate, and offering the ability to execute transactions. Large automobile manufacturer is using Web services to integrate ordering and inventory management with their global dealer network. They found it impossible to convince all of their dealers to adopt the same EAI standards, and Web services enables them to quickly and cheaply connect using a PC and the Internet. The economic benefit of reducing inventory creates hundreds of millions in cost reductions. Revenue growth is also anticipated to enable dealers to access each other's inventories so order lead times can be cut...and more customers will maybe buy cars as a result.

Supply Chain Integrations
While there are less diverse use cases for Web services projects in supply chain initiatives, there are proven and valuable applications. As companies such as Ariba and CommerceOne have shown, this area represents an important part of XML adoption. Within Web services applications, there's traction in integrating smaller suppliers of direct materials. For example, a large paper company is using Web services to integrate with suppliers they'd previously fax orders to and confirm delivery dates or pricing with by telephone. This creates real cost savings and has a clear enough value proposition to indicate that adoption is merely a matter of time.

Similarly, technology manufacturers are looking at using Web services to tighten the smaller tiers of their supply chains. These smaller suppliers had resisted integration because they feared having their margins squeezed by greater buyer power, and they shied away from adopting proprietary software standards. Web services enables them to gain the benefits of integration without being locked into their customer's systems.

Private Marketplace/ Collaboration Hub Integrations
Companies often run private marketplaces or collaboration hubs, a next-generation marketplace, to bring together partners to help execute a business process. An insurance service provider has a collaboration hub that aggregates all the sub/processes required to execute an insurance claim. They're using Web services to bring together the assessor, bank, repair shop, or health care provider. Claims can be easily tracked and unusual charges automatically flagged. In manufacturing, a large provider of agricultural equipment uses Web services as the infrastructure to bring together their dealers, equipment loan providers, and other agricultural service providers. GM is doing something similar in automobiles as an inexpensive platform to integrate with their global dealer network.

ASP/WSP Integrations
Finally, Web services are getting some traction as a low-cost integration platform for application and Web services. Putnam Lovell is an investment bank that's using Web services to integrate Salesforce (CRM) and Blue Matrix (research report distribution) with their customers. Putnam keeps their customer profiles in Salesforce.com, and transports the data on the ticker symbols of companies the customer wishes to track. Using Web services, this data is delivered to Blue Matrix, which automatically sends the relevant research reports on the companies of interest directly to the customer. All of this occurs outside the firewall, yet it appears to the customer that everything is done by Putnam.

Conclusions
Innovative large enterprises in select verticals are already using Web services today to create and deliver value to their customers. They're gaining valuable experience in implementing a Web services architecture that reduces costs, increases revenues, and enables greater agility in meeting dynamic customer needs. More importantly, they're learning how their business architecture must change to fully reap the rewards of strategic agility. They're developing loosely coupled business processes that enable them and their partners to be more focused on what each does best in creating value for the customer.

Loosely coupled business processes involve taking a modular approach to designing and managing processes with standard interfaces that allow dynamic swapping of process components to tailor the processes to the needs of individual customers. This is the business analog to the technology architecture shift toward Web services, which involves moving away from hardwired software to modular components based on open standards such as SOAP, WSDL, and UDDI.

Indeed, the full potential of Web services will remain untapped until collaborating companies make the more challenging transition to this new business architecture. This shift will position early adopting companies to develop a "process network" through which they orchestrate a more flexible, tailored value chain that could build a long-term leveraged growth platform. Process networks are an expanding group of select service providers, with one company acting as an orchestrator of all the activities required to deliver value to the customer. They will be ahead of their competitors in creating a virtuous cycle based on recruiting the best partners, developing incentives that ensure each more specialized company is aligned with the customer, and creating more granular feedback loops on performance that generate more and more value over time.

Experience in other industries proves that early movers who create these types of networks capture increasing returns that provide extraordinary profitability and dominant market share. Web services make this possible in a much broader array of industries, and there are bold companies moving in today's difficult environment to gain the experience necessary to win this new game.