Keeping digital separate means putting the rest of the business on a path towards decline.It’s easy for organisations in Australia to be complacent about their future – especially when they’ve reached a level of size and success that allows them to become bureaucratised. Sandy Plunkett belled the cat back in 2014 in her piece Board to death: Our fat, dumb corporations are clueless on innovation. Sadly, at the time, few appeared to be listening. Too many organisations dismiss the cautionary tales and are only now beginning to respond to digital change, if at all. “Evolution not revolution” appears to be the preferred strategy. Organisations ignore the disruption in entire industries like retail (Amazon), travel (Expedia), hospitality (Airbnb) or in businesses like Kodak or Blockbuster. For many Australians, changes to the economies in the USA and the UK are things that happened ‘over there’ with limited impact on our economy. In fact, Australian consumers have been beneficiaries of the change. In the USA, UK, Israel, China, Estonia, Singapore and other digital economies, organisations are embracing the new economics of IT. There is a realisation that the old strategies that organisations relied on – outsourcing, heavy governance, incremental evolution towards digital – will not help them be competitive. Organisations in these economies understand they need to embrace radical transformation if they want to survive and thrive in the digital era. In Australia, there remains a belief that there is still time, that we can take a decade to manage change, that digital offerings are not going to have an impact on our businesses. Too many of our largest institutions remain in denial. Nothing could be further from the truth. The Australian retail sector is about to see first hand the devastation that Amazon can have on its industry. Take for instance the impact that online shopping has had on traditional retail in the USA. Recently, it was reported that: “Macy’s has already said that it’s planning to close 100 stores, or about 15% of its fleet, in 2017. Sears is shuttering at least 30 Sears and Kmart stores by April, and additional closures are expected to be announced soon. CVS [a shopping centre owner] also said this month that it’s planning to shut down 70 locations. Mall stores like Aeropostale, which filed for bankruptcy in May, American Eagle, Chicos, Finish Line, Men’s Wearhouse, and The Children’s Place are also in the midst of multi-year plans to close stores.” More.
EVERYTHING HAS CHANGEDThe rise of the digital economy isn’t new, it’s been happening for a while. The economics of IT have fundamentally changed. Take storage costs. In 1980, it cost $438,000 to store a GB of data; in 2000, it cost $11; in 2012, it cost $0.10. Now, you can have your first 15 GB of data stored free on Google Drive. This is the result of a virtuous cycle of cloud computing. Network effects established early leaders, who invested billions in capital that drastically drove down per unit storage and compute costs. This encouraged more users to consume the cloud leading to more investment by the early leaders. Now, there are really only three players, of which Amazon Web Services is dominant, with Google and Microsoft in close pursuit. It is highly unlikely that any other competitors will replicate the success of the early entrants who made the most of network effects with fast and massive continuous investment. The new economics of IT has radical implications for how organisations should think about their business. Every company is becoming a software company. We used to think some industries were not under threat, but look at what’s happened in transport (Uber), storage and compute (Cloud), media (Buzzfeed, Huffington Post and Breitbart), payments (PayPal), car share (goGet), publishing (Kindle), music (Spotify and iTunes), education (Moocs and Khan Academy) and recruitment (LinkedIn) – all of these industries have been impacted by hyper digital competition. Users are demanding more products and services that can be consumed online, anytime. Even businesses with digital offerings are finding they have to continually improve their services to keep competitors at bay. Amazon now has Prime, Fresh and Go. Google is buying, developing, refining and retiring offerings to remain relevant. Everyone is on the same network for the first time in history This means that everyone has access to all available products. Every market is now global. This allows for both rapid growth and scale-up as a result of network effects and the fulfilment of niche user needs which has resulted in the growth of internet subcultures and patterns of consumption. You only need to look at Tumblr, 4chan and YouTube to see the growth of niche subcultures online. Think of Vaporwave as a music genre - it only exists on the internet. The same holds true for blogging, where there are specialised blogs that can reach big audiences because the entire addressable market is global – with this trend being exploited by LinkedIn and Medium. Competition is growing as the barriers to entry fall Cheap cloud computing has flattened barriers to entry, allowing new competitors to challenge incumbents. It’s also opened the door to global digital companies, who no longer obey geographic boundaries: they rapidly acquire market share in new countries. That means for instance, Australian retailers are competing against efficient and low cost providers. Amazon is able to track and respond to demand shifts quickly, because of the data it collects – with extremely efficient processes for payments and delivery. This is competition the likes of which local retailers have never dealt with before. The threat posed by new competitors is even more acute because of the nature of platform economics: the first digital movers – think eBay, Amazon and Uber – have set up rapidly scalable platforms that allowed them to grab huge market share. Companies that wait too long are now being left behind or, worse, are locked out. Soon, analysts will measure the value of a company's share price based on the size, scale and pace of their digital transformation programs and boards will be scrutinised for their success in overseeing radical transformation. The smarter analysts will also be examining the type of investment in digital and quizzing CEOs on the scope, speed and outcomes of their transformation efforts. We’re shifting from CAPEX to OPEX Twenty years ago, when you needed to spend enormous amounts on licences and physical computers just to get started, it made sense to have heavy governance and lengthy contracts with specialised vendors. Today, you can avoid paying for licenses altogether if you elect to use open source software. Startups no longer need physical servers, physical firewalls, physical routers, database management system licences, operating system licences – they don’t need to buy any of the software or the hardware required to run their business. They pay by consumption. This is a radical shift that has levelled the playing field and made it easier for new competitors to enter markets. Institutions can take advantage of the same opportunities. They can begin to act like the very startups trying to disrupt them. They can run experiments, they can do things quickly, they don’t have to go through long CAPEX cycles. Today, they can go onto AWS and quickly experiment to test their ideas. They don’t have to wait for the boxes to arrive before starting, significantly reducing cycle times and cost. Consider the opportunities for large employers who were paying millions for Solaris, Oracle RDMBS, WebSphere, Oracle SOA Suite, Microsoft Windows servers, SQL servers, BizTalk servers, not to mention the physical servers, routers and firewalls. These days, you might lose your job if you do buy proprietary software, or spend money on physical servers and the facilities to host them. With the change to procurement, existing governance structures suited to the age of CAPEX also need to be upgraded.
The low cost of computing means companies can afford to use a credit card to buy services. This provides the single greatest opportunity for established businesses of any size to streamline procurement processes and access the service offerings of lower cost competitors.The pace of change is fast – and getting faster The low cost of IT is encouraging experimentation and rapid learning. That means the rate of automation is intensifying. It’s not just Amazon that’s rapidly increasing its robot workforcefrom 1,000 to 45,000 units in three years. Machine learning and mechanised processes are playing a greater role in white-collar professions like law and accounting. Consumers consistently demonstrate they want cheap and reliable services, and don’t have much interest in engaging with their advisers, with offshoring customer enquiries to call centres being superseded by cognitive interfaces and voice command. The economics of IT have changed Business processes and products need to change with the new economics. Digital transformation means:
- Responding in real time to consumer needs, not waiting six months for the next release cycle
- Expanding the market for a product to everyone with a network address, not just people in geographic proximity to shopfronts
- Applying cheap modern technology to build great products, not relying on ancient legacy systems
- Reducing risk as teams experiment with products to see what works, rather than aiming for perfection at the end of a project, before finding out users don’t want what’s been delivered
- Delivering faster, simpler, better products that meet user needs and create increased profitability.
COPING MECHANISMS AREN'T ENOUGHOrganisations are gradually coming to realise this is a new industrial revolution. It is not a phase. It doesn’t require change management. It does require fundamental and radical change, quickly. A Sloan Management Review survey found that 90% of executives anticipate their industry will be digitally disrupted to either a great or moderate extent. But taking action is much harder; in the same study, only 44% of executives thought their company’s preparation for disruption was adequate. Lord Francis Maude, who drove the transformation of government services in the UK between 2010-2015 recently reflected: “... I was sadly disillusioned by the extent of sheer inertia and obstruction, often passive but sometimes active obstruction in the civil service. The worst thing is when civil servants don’t give advice, saying ‘minister, this is a really stupid thing to do’ and rather go along with it but then don’t do it. That is just intolerable and there was far too much of that. So for me it was a disillusioning experience.” The old strategies for outsourcing, governance, procurement and IT, that organisations think are helping them are in fact often holding them back to the detriment of their shareholders, customers, suppliers and most significantly, to their employees. Applying the old model of outsourcing to the new economics of IT won’t suffice Outsourcing to large vendors made sense in the age of CAPEX, when it was expensive to experiment with IT. Now that organisations are competing against firms iterating thousands of times a day, it doesn’t make sense to wait six months for every release cycle, or to put up with exorbitant fees for changes in scope. Even so, too many organisations still apply the old model of outsourcing to the new economics of IT. This outdated strategy creates an opportunity for new entrants to grab market share from industry leaders. As Jeff Bezos famously observed “your margin is my opportunity”. Companies are being held hostage to the Triangle of Despair I’ve written before about how any bureaucracy holds back digital transformation. When I worked to fix government services in the UK, we used to call it the ‘Triangle of Despair’:
- inappropriate procurement practices that made it impossible to change course
- heavy governance from the era of CAPEX, even when dealing with the novel, user-facing problems that suit Agile
- using ancient, proprietary IT systems with far too much manual processing.
The people running a software company need to know about the software market they are competing within.3/ Demonstrate political will - Transformation can be painful, especially for people in an organisation’s legacy areas. Too often, that’s an excuse for digital leaders to pull back and create the theatre of transformation – halfway-house solutions they hope will be enough. A range of these is described in my earlier post. Transformation requires the political will to see these solutions for what they are: a pretence of digital, that will leave the whole organisation vulnerable to disruption. Instead, leaders need to articulate the need for transformation, and understand that it requires sustained and decisive action, rather than incremental transition. It requires change, not change management. The alternative is to watch the decline of their organisations and plan the transition of workers onto the unemployment queue.