The Reason Enterprise Architects Should Study Economics

By | October 26, 2009

Economics is the social science that studies the production, distribution, and consumption of goods and services and aims to explain how economies work and how economic agents interact. The really interesting thing about economics is that getting the right answer requires that you pose the right question. That is, if you choose to make conclusions based on casual observations of explicit cause/effect relationships, then your conclusions will seem logical and sound to most who will review them. However, only by ensuring that the cause/effect relationship holds up in the case where casual variables are changed, can you be sure that you have truly observed a phenomena and that the cause is accurate.

I’ve been reading Freakonomics (looking forward to Super Freakonomics when I’m done), and I’m astounded at how well Steven Levitt’s approach to Economics could fit the needs of Enterprise Architecture. For example, in Freakonomics, Levitt uncovers the truth regarding many long-held beliefs, such as most drug dealers live at the poverty line or how little parenting actually impacts the outcome of a child. What helped to uncover these facts was asking the right question and identifying which variables in the equation needed to remain static to ensure a valid outcome. In many of the cases, Levitt undermines what many other Economists, experts and pundits before him rolled out as proven facts and only due to his keen mind and his approach to formulating the problem domain was he able to uncover that which his peers could not. To keep us focused, I won’t discuss here how he discovered why violent crime rates dropped in the 90’s, but needless to say well-held beliefs as to why were shredded by Levitt’s innate ability to target just the right variables and “run the numbers.”

If we apply Freakonomics-type analysis to current information technology markets, such as Cloud Computing, based on experts and pundits one would readily equate that: a) public Cloud Computing models offer a more cost-effective way to acquire computing resources; b) it’s better to rent software than to own it and; c) in the future, all computing will be paid for based on usage versus ownership. Similarly, if you read the headlines of many tech publications, you would believe that: a) everyone is doing SOA; b) there are many successful SOA deployments and; c) SOA is the only approach to developing systems that you should consider. None of these conclusions are true in all cases, maybe in no cases, and, in fact, the real numbers would probably tell a very different story [I’m leaving this as an exercise to the reader since I want to focus this piece on the approach to EA, not the application of analysis to these issues]. These statements are being made arbitrarily based on extremely small sample sizes and are as valid as looking around you at a large business gathering noting all the iPhones and Blackberries, and concluding that iPhone & Blackberry must outsell all other phones, when in fact, their combined market share is a mere 3.0-3.5% of the overall mobile phone market.

In actuality, I see a lot of IT decisions being made using what, seemingly, is no more exploration than was used to determine that iPhones & Blackberries have a leading market share. It is the Enterprise Architect’s role to ensure that the selection and approaches toward development of systems are sound relative to their business, not just other businesses. Moreover, where decisions are based on the work of other businesses’ success, those successes need to be properly vetted to ensure that there is enough commonality between efforts, such that you could make the leap that your business will see similar results. Finally, assumptions and theories need to be tested by properly identifying the variables that need to remain static and then comparing; in essence normalizing the question to be homogenous in all situations. For example, in Freakonomics, Levitt points out that in order to prove that the numbers behind why violent crimes dropped in the 90’s he needed to review similar trends of violent crimes in areas that had not made the purported changes that led to the large unanticipated decrease. When the trends were normalized to remove noise and anomalies, it was shown that those factors seemed to have relatively little impact on violent crime decrease.

This brings us to the all important question, “how do we demonstrate the value of Enterprise Architecture?” Unfortunately, you cannot demonstrate the value of Enterprise Architecture if you cannot monetize or enumerate the value of all possible choices relative to the choices that are being recommended or those that have been made. Moreover, it’s critical that these analyses are carried out over enough time that short-term wins don’t supersede long-term potential gains. Thus,  it is here that Enterprise Architects, especially those we call Chief Architects, truly show their mettle. It is their experience, coupled with the ability to focus on the right set of variables, understanding the impact of change of those variables and being able to communicate that in a way that allows the business to make effective business decisions, which sets top notch practioners apart from Sr. Software Engineers that the organization placated with a title to keep them happy so they wouldn’t leave.

5 thoughts on “The Reason Enterprise Architects Should Study Economics

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  3. T. Simpo

    Excellent. Many business decisions are made based on emotion rather than fact and on correlations that in fact are not. EAs need to continue asking the right questions (even if at times if we are viewed as trouble makers!) and maintain the long-term focus. Freakonomics IS a terrific read.

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  4. shlomo dallal

    Nice mind intriguing reading.
    What we can learn from economics is the risk of oversimplifying complex systems.
    There are not too economics models that actually works. Once there is a model that can predict something, having it as a common knowledge can change it. We have a lot of experts today that explains the reason for the financial crisis, but very few models predicted it.
    As a first year student in Economics life seems easy, let’s isolate the parameters and see what’s the real impact of each parameter is and what’s the real reason for things to happen, but guess what life is more complicated. You can’t really understand how cat’s legs are working by isolating them from the cat …
    This is where I see the similarity to EA, you need to go with holistic approach, and you can’t isolate parameters. You need to understand the motives of the different stakeholders and difference perspective of the enterprise, and you can’t simply set priorities because once you set them they’ll change. You need to be ready to work in iterative approach and revisit previous decisions, and make small steps toward an “end-state vision” you set.
    You need to have good understanding of the legacy system and map it to business functions, and try to understand why things were done in a specific way – sometime you’ll find it wrong, sometimes you’ll see the reasons for it, and in some cases you’ll probably find it too late and you’ll have to go back few steps. But assuming that people that built the legacy (of economics or legacy systems) just oversaw the real simple reasons can be a fatal mistake.
    I agree SOA in its technical definition wasn’t implemented in many enterprises, and there are hypes and trends and you need to think if they are really necessary.
    I see SOA as a way of thinking, but also a potential for a great risk of making people oversimplify complex problems by breaking them to services.

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  5. Craig

    Aha – the more architects I believe shift their thinking into this paradigm the stronger our discipline gets. Economics is a classic systemic cause and effect discipline. This is the world that the EA occupies as well. The sooner we move out of the linear and methods driven world EA’s currently occupy, the sooner EA will show its true value.

    Warning: Non-PC Paragraph:
    Freakonomics is a great book but I feel he also stopped his research a little too soon. I believe this might have been done intentionally since it touched on a highly charged subject. The cause of crime reduction was not the legalisation of abortion to start introducing wanted babies who felt more loved and hence did not turn to crime. Levitt should have gone a little further back and he might have arrived at some other causal elements such as a society that tolerates promiscuity.
    This is nowhere more evident than in the African nations where crime is rampant because of the very same causal factor that Levitt referred to. The scale of the problem is even greater and is only going to get worse if we follow Levitt’s causal loop. HIV and Aids has decimated entire communities. 7 year old children are raising 1 and 2 year olds and trying to provide for them because their moms, dads, uncles, aunts are all dead from aids.

    If we track back further to add another causal loop to this, it’s because of a society, in Africa and across the world, which sees nothing wrong with promiscuity. We can add yet another causal loop to this to take us further back and it’s because society has turned its back on God, favouring humanistic thinking, well that thinking is not working folks.

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