The "digitalization" of the enterprise & why traditional sourcing fails

A few weeks ago Gartner published a research report titled, "Taming the Digital Dragon: The 2014 CIO Agenda". Effectively the report says that CIOs have spent the last decade focused on how to keep the lights running with more and more efficiency, but now need to start focusing on building innovative digital products and services (as well as keeping the lights running as efficiently as possible). Gartner calls this duality a bimodal future and points out to a few key things CIOs need to do to succeed, including:

  • increased migration to the public cloud.
  • changes to legacy technology and sourcing relationships.
  • implementation of agile methodologies and beyond (e.g., creation of multidisciplinary teams and alternative sourcing models).

It was interesting to note that the words "sourcing" and "talent" appeared a total of 6 times in under a 1,000 words. So why is sourcing so important, and why are current sourcing models not well equipped to handle the "digitalization" process?

Why is sourcing important? 

What the Gartner article does not get into (as it probably assumes its readers are already aware of this), is how IT services are delivered today. It's been over a decade since IT was delivered by IT. Through the "noughties" IT services have largely been sourced through external vendors, and companies spend a lot of money on this. Below is a break down global IT spend across various key categories:

Credit: Gartner

Credit: Gartner

Approaching $1T globally, IT services spend by companies represents the second largest spend item by most enterprise IT organizations. In addition to this, when you consider that telecom spend is also services spend, and that both software and hardware spend is increasingly becoming services spend (via. PaaS, SaaS, and IaaS), you very quickly realize that the modern IT organization's #1 focus is generally vendor sourcing and management.

How does the current sourcing model work?

Let's assume you are an enterprise that is looking for a vendor to come in and perform a $10M network refresh, how do you go about sourcing the appropriate vendor to handle this? A well managed procurement process would look something like this:

RFP Process Flow.png

The above process represents an ideal scenario where the IT organization has the skills in-house to develop the RFP and manage the vendor selection process. In many cases this turns out not to be the case, and a process similar to that depicted above needs to be undertaken to source a vendor to manage the vendor selection process for the network refresh. This could easily take two months by itself, and extend out the above vendor selection process into a six month long process.

What is the "digitalization" of IT?

Gartner sees IT entering its third era - the era of "digitaliztion". The first era was marked by automation of hitherto manual processes, and the second era was marked by the industrialization of IT. This is roughly similar to our depiction (shown below) of the eras of personal productivity (the PC era) and organizational productivity (the client-server era).

What Gartner refers to as the era of "digitialization", we refer to as the era of "collaborative engagement". Additionally, as we pointed out in another post, this era is significantly different from the previous two eras (both of which focused on driving internal efficiencies) in a few key ways, the most important of which is its focus on building consumer facing, revenue generating products and services. The most successful IT (or digital) organizations in this era will not be the ones that successfully deploy Microsoft office on 200,000 PCs worldwide, or implement SAP R/3 across 5 business units, but the ones that help their companies quickly and cost-effectively test new ideas and iteratively build high quality products and services.

Why does the current sourcing model fail?

It is this success criteria that is the Achilles' heel of the sourcing model in play across IT organizations today. To be successful in this new era of "digitalization" IT has to deliver in a fast, cost-effective, and high-quality manner. The current sourcing model fails on all three of these fronts. Why is that?

  • Speed: It cannot take 4-6 months to select a vendor. While that might work for a network refresh that happens once every 5-10 years, it doesn't work when speed to market can be the differentiator between you and your competition.
  • Cost:  The average consumer facing mobile app costs less than a $250K to develop. A six-month vendor sourcing process, involving an external consulting firm to help with vendor selection, can cost multiples of that by itself. Again, this may be OK when selecting a vendor to execute a $100M ERP transformation, but doesn't work when building out a $100K mobile application.
  • Quality: The vendors that build the best consumer facing products and services are quite different, and significantly more numerous, than the vendors that can successfully implement a CRM system. There only a handful of world-class vendors that can effectively execute $100M+ projects, and they well known to most IT organizations. There are lot more high-quality vendors that can deliver a $100K project, but they are not as easy to identify in the extremely fragmented ecosystem that exists at this price point.

What can companies do about it? 

While there are no easy answers to this question, a good starting point to begin thinking about "digitialization" is to determine whether to build internally - which requires having the right team with the right set of skills for this new era - or whether to outsource software development. Below is a framework that we presented in a previous post on this subject that is worth revisiting:

Outsourcing Model.png

While this might seem a bit simplistic a first, there are a two things that require some deep thinking. The more obvious of the two is whether the digital product that you are building is a core or non-core product. Lets take the example of airline building its primary app - yes the app is an important part of the overall customer experience that the airline offers, but its not the core product that the airline offers, it is a supporting product. On the other hand if NCR were to build a competing product (they are planning to do just that in partnership with PayPal) to Square Wallet, it would very much be a core product of the company.

The less obvious point to consider in the framework above, is whether or not you are a tech company - again, we wrote a piece on this subject quite recently. This would have been a non-point even a decade ago, when tech companies were primarily software, hardware, and IT services companies. However, isn't this what the "digitalization" of business is all about? Where what were traditionally non-tech companies (Nike for example), are today being considered tech companies? The primary driver behind this is "digitalization" as Gartner puts it, or "collaborative engagement" with the user (customer, employee etc.) that we describe.

The framework above is simply a starting point, albeit a very useful one. Once you have determined what kind of company you are (or the kind of company you want to be when you're all grown up) and the kind of product you are building, you can work on the sourcing strategy that you should adopt. If you are tech company building your core product, then having the right internal team is of paramount importance. In the current competitive environment we find ourselves in, this is not simply about going out and offering creatives and engineers the highest salary possible - if anything the soft incentives are as important, if not more important to the individuals that possess these skills. This particularly holds true for millennials. However, in this uber competitive market for top talent, even if you check of all the boxes, you might still be unable hire or retain the best talent, in which case you might have little choice but to outsource even core product development.

What further complicates the era of "digitalization" is that ideas for "digitalization" can originate from anywhere in an organization. Often the best ideas originate not from management, but from rank and file employees that are digital natives. Mechanisms needs to exist to drive the best of these ideas from concept to execution to market in a manner that maintains a healthy balance between speed, cost, and quality.  How can organizations achieve this? Lets take a quick look:

Speed: Companies can leverage ideation platforms to identify and build support around their best ideas, sourcing platforms to quickly find and source the best teams to build products that bring these ideas to life, and project management and collaboration platforms to track execution and delivery.

Cost: Leveraging SaaS platforms vs. hiring expensive consultants to prioritize ideation and to manage procurement will help reduce sourcing costs in itself. Additionally, working with independent, agile product development teams vs. large, general purpose consulting firms will help further reduce cost by minimizing management overhead and maximizing speed to market.

Quality:  Hiring the right team to do the job can win half the battle in terms of delivering a quality product. To win the other half, organizations should emulate how startups build digital products. Startups don't get everything right from the get-go, however they do get to market quickly, fail-fast, and iterate off those failures to build a better product. 

In Closing:

While this era of "digtitalization" is really very different from the eras that have passed, it is arguably much more exciting than the pervious two eras. If the last two eras were about developing the infrastructure layer of the digital age (PC's, networking, client-server computing, and the early stages of cloud computing), this era will be about building out the application layer that will power the digital age. IT organizations will have to adapt to delivering quality (vs. cost), adopting new sourcing models, and perhaps even look at evolving into a new operating model

Are you a digital, IT or tech company?

In the hiring internally vs. outsourcing development post, we pointed out that knowing if you are an IT company or not is one of the keys to understanding whether a company should outsource development or build products internally. As we thought about this further, we realized that using the phrase "IT company" is somewhat limiting. Over the years, IT has developed a very specific connotation. In particular, in the context of most medium and large enterprises, IT generally refers to the department that keeps your computing infrastructure up and running and not the department that builds your enterprises' most innovative products and services.

So what are some of the other terms that you can use - excluding IT - to ask yourself the same question - "are you an X company?" A few terms immediately come to mind, in particular digital and tech. Let's looks at the relative merits of each of these terms.

Are you a digital company?  Digital technology has been around for over 50 years, with the move towards digital accelerating in the last three decades as computing power has increased. Today almost everything that companies produce, share, and store are in digital format. While this hold true for all companies, the change has been particularly dramatic for companies that produced products that were once in analog format that are now being converted to the digital format. Publishing companies are a perfect example of where this change has been felt most in the dramatic fashion.

Are you a tech company? Until recently the word "tech" was used to described companies that were either software, computer hardware, or Internet companies. However, as the size of computer hardware components continue to shrink and as software becomes ubiquitous, companies that were not traditionally considered tech companies, are today being referred to as tech companies. This applies to companies in sectors ranging from big box retail to sports and fitness.

So what is our preferred terminology? Honestly, our pick would still be "IT company". The reason for this is that it best describes the type of technology that we are referring to - information technology. However, given the connotation that has increasingly been attached to IT, it is not a term that is widely accepted and hence can confuse people.

Digital, is our least favorite term. Describing a company as a digital company because the primary method by which a company produces, shares and stores information is digital, is akin to calling a company an electric company because electricity is used to keep the companies factories and offices running. 

Tech on the other hand is a term that we can live with. Tech is increasingly being used to describe both traditional IT companies, as well not traditional companies that are increasingly building tech-centric products and services. It is not as descriptive as the words IT, but its not as amorphous as the word digital either.

Lean startup in the enterprise - the era of collaborative engagement (part 3/6)

This is the third entry in our six part series on the era of collaborative engagement that businesses are stepping into. The second entry focused on this being the era of B2C rather than B2B. In this piece we will begin to look at the implications of this shift, particularly as it pertains to how digital products in this new consumer-facing era are conceptualized and developed.

Lean startup:

In an environment where the primary concern is to optimize existing operations, we are generally dealing with a whole lot of knowns, and are building systems and processes to optimize those knowns. On the other hand, when you are developing new consumer facing products and services, the knowns - in particular consumer preferences and user behavior - are a lot less concrete, and what you need to build is not always clear up front. Hypothesis-driven experimentation, as prescribed by the lean startup approach, provides the best mechanism for tackling this problem. 

In his landmark book, The Lean Startup, Eric Ries provides the example of how Intuit uses hypothesis driven validation to build new products and features. Eric cites the example of SnapTax, software developed by Intuit, that initially started with the hypothesis that customers would prefer scanning their W2 to automatically feed the content into their tax returns instead of manually entering the information. However, when they began to test the hypothesis they quickly discovered that scanning could be at least as cumbersome as entering the information manually, and that what customers really wanted was the ability to take a picture of their W2 from their cell phones and have the information automatically populate their returns.

It's not about software:

What's critical to note though is that success of hypothesis driven testing has less to do with developing software than knowing what experiments to run and how to interpret the data collected from those experiments. Consider the example of Dropbox. To test the hypothesis that people were craving a simple to use storage solution that would enable users to synch files across their various devices, Dropbox created a video (see below) to test this hypothesis. Following the release of the video, Dropbox's beta sign ups shot up from a few thousand to almost 75K overnight, which immediately validated the core hypothesis surrounding the product. Yes, in Dropbox's case they did write code to actually develop the product in parallel to releasing this video, however technically this same hypothesis could have been tested without writing a single line or product code.

 

A different approach to managing IT-centric projects:

What the lean startup approach does is add a new stage to how IT-centric projects are managed and success measured. In more traditional IT-centric projects project generally evolve through three phases: 

  • requirements gathering
  • build
  • operate

When deploying consumer-facing products with more unknowns than knows, the requirements gathering stage changes to what can be thought of as the "search" stage. In this stage, like startups, enterprise project teams should focus on hypothesis driven testing to find the right product/product features to build or service/service options to provide. With this change, the success criteria and metrics used to quantify each stage start to look something like this:

Success Metrics.png

Our observation: 

Off late, we have spent a tremendous amount of time and energy researching consumer-facing mobile applications deployed by large companies, and the data we have uncovered is clearly pointing to very limited focus by companies on the search phase. For some perspective, consider these stats for Pepsico.

  • # of apps in Google Play across all brands: 25
  • total max global downloads on Google Play: 1.86M
  • total consumers engaged (assuming all unique consumers, and 50% of engaged users are on iOS vs. Android): 3.72M  

For a company with over 25 millions likes on Facebook, and many times that in terms of global consumers, less than 5M downloads across 51 apps (iOS & Android), for an average of less than 75K downloads per app, is a very low number. What's more interesting to note is that what we see with PepsiCo is not an anomaly, brand after brand from companies across verticals show the same trend. 

In conclusion: 

In our view getting the search phase right is absolutely critical when deploying new products and services. Adding the search phase to the traditional project management approach is the critical first step towards reversing this trend.

Enterprise Sponsored Consumer Apps - Development Options

Over the years, the word outsourcing has developed a very negative connotation. However, the reality is that in many scenarios companies do have to consider outsourcing product development. In this blog we examine the various development options available to companies when building consumer facing mobile products. You can use this as a guide to help you think through options that you should consider when developing a new product.

Consumer facing apps within an enterprise are generally sponsored by one of three entities - product or digital, sales and marketing, or customer service. In the table below we look at the type of apps produced by each of these entities, and some examples for each type of app.

 

Sponsoring Entity Description Examples
Product  Core product or service being offered is  digital  Bloomberg for iPadPayPal HereNike+
Sales and Marketing  Application helps drive marketing  campaigns, or maximize sales Iron Man 3 - The Official Game ,Ikea CatalogCoca-Cola Freestyle
Customer Service  Application helps improve customer service  and experience SQ Mobile, Hilton HHonors

I next combined this with the hiring internally vs. outsourcing development framework that I put forth all the way back in our second blog post

Screen Shot 2013-09-29 at 3.51.27 PM.png

The key idea put forth there was that unless you are an information technology company and building your core product, outsourcing development should always be on the table. Based on this I looked at the app examples above, and at the options one should have considered when developing these apps.

Example Company Type Product Type Optimal Strategy
Bloomberg for iPad Finance/Tech Core Develop In--house
PayPal Here Finance/Tech Core Develop In-house
Nike+ Fashion/Apparel & Accesories Core It depends
Iron Man 3 - The Official Game Media & Entertainment/Various Non-Core Outsource
Ikea Catalog Retail/Furniture Non-Core Outsource
Coca-Cola Freestyle CPG/Food & Beverage Non-Core Outsource
SQ Mobile Transportation/Airline Core It depends
Hilton HHonors Accommodation/Hotel & Lodging Core It depends

However, outsourcing is a very broad term, and there are a plethora options to consider when looking to outsource. Below are the primary and secondary options available for the examples mentioned above in scenarios where outsourcing should have been in play.

Example Full Service SI*/Consulting Full Service
Agency
Boutique Consulting/Industry Boutique Consulting/Mobile Licensed
Development
Nike+      
Iron Man 3      
Ikea Catalog      
Coca-Cola Freestyle      
SQ Mobile      
Hilton HHonors      
* = Systems Integrator;  - Primary Option;  ✔ = Secondary Option

Lets consider the rationale for each of the selections above: 

  •  Nike+: Here the product is part of a core product or service that company is providing, hence if the company has the ability to develop it in-house then the company should. That said, the development of the app itself could be outsourced to a team that specializes in mobile product development. Alternately, a full service agency can be used, however the company might or might not require the additional services that a full service agency offers, and hence might end up paying a higher margin than is required.
  • Iron Man 3 - The Official Game: The general industry norm here is to license out game development to external entities, which is what Marvel did here, and it remains the recommended strategy. Outside of this, engaging with a company that specializes in game development for media companies can also be a potential option. 
  • Ikea Catalog: A catalog is probably something that the company releases on a periodic (quarterly, semi-annual or annual) basis, and hence the company should have standard templates and forms that it can use to develop the digital collateral internally, however in the case of this particular app, Ikea was rolling out an augmented reality feature. They could have considered a full-service marketing agency for this, but given the degree of specialization required, a mobile development team that specializes in augmented reality should have been the primary option. 
  • Coca-Cola Freestyle: This app was primarily built to support the discovery of Coke's new freestyle machines. Releasing this app should have been part of a wider product marketing campaign, and hence should have been managed by the full service agency responsible for the campaign. This full-service agency would then have the option of developing the application internally, or outsourcing it to a specialized mobile product development team.
  •  SQ Mobile and HIlton HHonors: In both these case the apps have some very deep integration into the back end systems, including hotel and airline reservation systems, real-time flight scheduling systems, CRM systems, and ERP systems. This type of work is best handled internally or by a full-service Systems Integrator (SI), or a boutique consulting firm that specializes in that particular industry. The development of the front end of the mobile app itself could very well have then been outsourced to a mobile product development team to maximize the UX/UI and development expertise offered by the specialized mobile product development team.

In conclusion, while the decision to build internally vs. to outsource is an important one, it is equally as important to consider the options available when outsourcing and to choose the option that makes most sense for a given scenario. 

 

The need for enterprises to disrupt from within

It's been 16 years since Clayton Christensen's landmark book, "The Innovator's Dilemma", was first published. Since then, we have witnessed not just once well established firms, but entire industries, disrupted by digital native companies. This has occurred not just in industries where the end product itself is digital (e.g. media and entertainment), but also industries where the end product is physical (e.g. traditional retail). This has occurred primarily due to two factors that the Internet has enabled:

  • lower fixed costs: consider traditional retail and the impact that Amazon has had on big box retailers viz. Best Buy
  • disintermediation: consider the music industry and the impact that Apple's iTunes has had on record labels

However, as disruptive as the recent past has been, we believe that the disruption that almost every industry is set to experience in the next 10 years, will be far greater and more dramatic. Why? Consider the following cycle:

 

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It is easier than it's ever been to take a concept from an idea to a viable company today. Critically, going back to Christensen's book, several of the examples of disruptive companies offered - Digital Equipment Corporation, Seagate etc., required significant capital to get started. Today, whether it's digital products or physical products, we are entering an era where the scarcest resource to get an idea off the ground is no longer capital, but skill. Platforms ranging from Amazon Web Services to Facebook to Kickstarter, have given the ability to people with the right combination of skills, to very cheaply and quickly prototype a product, obtain user feedback, bring in initial revenue, and rapidly iterate and improve the product. In addition, the ability to raise capital, and the ability to contribute capital, are becoming more democratized than ever before. All of this is creating the perfect storm for unprecedented business disruption. 

This leads us to the critical question, how do incumbents operate in this coming era? It's actually very similar to prescription offered by Christensen - by thinking and executing like a startup, and disrupting themselves. Of course, this is much easier said than done, given that it involves canabalizing existing revenue streams to build new ones. However, does it work? If done right, absolutely! Apple Computer was on life support when Christensen's book was first  released. Since then, following the principle of self-disruption, Apple has seen the most remarkable turnaround in the history of business and created, not accounting for inflation, the most value company in history. 

The era of consumer engagement, and how its different - Part 1/6

Over the past 3 decades business related information technology has experienced three key era's of growth. While the first two era's are somewhat related, in that they both focussed on productivity gains, the third era is clearly a bit different. 

Screen Shot 2013-07-23 at 3.35.46 PM.png

Below are what we consider 5 key differentiators between the era of "customer engagement", vs. the eras of "personal productivity" and "organizational productivity:

  • Focus on B2C vs. B2B: Social and mobile have an impact on both B2B and B2C, however the greater impact is on how organizations engage with external constituents, customers or citizens, vs. internal constituents, partners or employees.
  • Lean product development: Build. Measure. Learn. When you are building a product for the consumer, its best to build lean and iterate vs. to build bulky and pray.
  • Centrality of UX: If you cannot impress a consumer in the first 30-60 seconds of interaction with a new mobile app, then you might have lost them forever. In this new world UX is king.
  • Decentralized creativity: Ideas for new and interesting products and services, and improvement suggestions, can come from internal or external constituents, not just top level management.   
  • Driving top line growth: Cost minimization is the primary focus of enhancing personal and organizational productivity. While effective customer engagement can no doubt reduce cost, it's biggest pull lies in driving new revenue. 

Each of the above differences warrants a deeper look, and we will do so in future blog posts, but the bottom line is this - we are leaving the era of back office IT, and entering the era of front office IT.

Hiring internally vs. outsourcing development

After spending time over the last 6 months talking to companies of various shapes and sizes about their hiring preferences, we developed a simple framework to help answer the question "when do I hire full time developers internally vs. outsourcing development?" 

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IT company building a core product:  If you are an IT company building what you consider to be a core product or service, then you should absolutely look at putting together an internal team, since chances are you will need to iterate rapidly, produce bug-fixes, provide customer support etc related to the product or service. Doing all of this in an outsourced, but yet effective manner becomes cost-prohibitive if the product in question is your companies core product. Perhaps even more critically, if your company is not building product, what exactly is it doing?

IT or non-IT company building a non-core product: If you are an IT, or a non-IT company, building a non-core product, then you first preference should always be to outsource. This is for two reasons:

  • A company that specializes in building what you consider "non-core", is more likely going to be better at it than anyone you hire internally
  • Even if you can hire the best, you will need a consistent and interesting enough pipeline of work to keep the best engaged - remember, very rarely do the best at anything make a decision purely based on the money offerred to them

Non-IT company building a core product: This is the most interesting combination, and one that companies are increasingly finding difficult to answer. Why is this? If you read our last blog post, the answer to this might be a little simpler, but effectively as more and more legacy companies start to build digital products and services, they are increasingly building products and services which might be considered core to the company. However, not every core product or service is created equal. Lets consider two hypothetical examples below:

  • NCR Corporation building a competitor to Square Wallet: Here both NCR and Square are in the business of retail checkouts. If Square starts offering a service via. Square Wallet that offers a significantly superior retail checkout experience, than NCR, then all else being equal Square will outmuscle NCR, and win the retail check-out and digital wallet war. In this scenario NCR's existence depends on building check-out related products and services that match that of Square's, and like their digitally native competition, do rapid and continuous product development, which generally requires an internal team.
  • American Airlines building the most elegant check-in application in industry: Lets assume American Airline's mobile check-in app is so far superior to its competitors, that its starts winning awards at UX and industry conferences, and gets rave reviews from its customer base. Additionally check-in's are a part of any airlines core business process, so it can be considered a core part of an end-user facing service that American Airlines provides. However, the truth is regardless of how elegant and simple to use the app is, the check-in process is only a part of the overall end-user experience that American Airlines provides to its customers, and in isolation, will in all-likelihood not make a significant difference to a customers decision to fly American vs. United. 

In summary, unless you are an IT company building your core product, outsourcing development should always be a serious option on the table.   

Note: We realize this framework does not take into account supply and demand imbalances that a company might be operating under. Today macro economic factors in the technology space, have led to a clear imbalance in favor of supply, and hence even if it makes sense for a company to hire full-time, that choice might not represent a realistic option.