So you have crafted a new business strategy. This is going to be the good one, the one that will double revenues within three years. If you’re going to grow that quickly then there must be something potent under the hood. Let me take a guess as to what it might be.
It can’t be ‘low cost’ or ‘cost control’. You’re using the same suppliers as all your competitors so you’re working from the same cost base. If you do decide to invest in establishing your own operations then you’ll find that the experience curve is pretty steep these days, the race to the bottom will be a short one, and it’s more than likely that someone reached the end before you.
It can’t be some asset: a factory or tool. I don’t know if you’ve heard, but in China it’s only taking nine months to build a factory from a standing start, and to begin manufacturing goods. Tools and machinery are rapidly heading in the same direction as low cost manufacturers in China and elsewhere are getting better and faster at copying new technologies developed elsewhere.
It can’t be IP, intellectual property. Books and recordings are returning to the days of minstrels and ‘pay for performance’. Ideas are rapidly heading in the same direction, caught between flexible manufacturing, 3D printing and Chinese cultural norms on sharing (and copying) information.
It can’t be a capability, some business process or method. Anything that has been systematised will be copied with ex-staff, consultants and the industrial certification,-training-and-education complex spreading it far and wide. If you can do it, then someone else can too.
We also forget – in our lemming like rush for the new-new thing – that methods such as Design Thinking fail as often as they succeed. A capability might help you succeed, but it won’t make you succeed. They’re nothing more than tools.
It can’t be your people, the individuals on your payroll. You’re hiring from the same pool as everyone else and it seems like staff will only stay two years before moving on these days. At any point in time you have roughly the same mix of staff as your competitors. Plus, as Scott McNealy says, ‘statistically the smartest people work for someone else’.
Even your brand is of dubious worth. While, in the past, it might have been as asset you controlled, the emergence of social media means that you brand’s future is firmly in the hands of the customers who consume it.
The only thing left is culture. What are the the social norms of your organisation? How do individuals and teams react to change: threats and opportunities? How do you go about solving the problems that confront you? What is it that your culture cares about? And this is a culture that ropes in not just your own people, but those of your partners, suppliers and even customers.
So if your strategy is going to double revenues in three years, then it’s your culture that is going to do it for you. ‘We just make products we’d love to own’, worked for Apple. What’s yours?
The old approaches – based on cost, assets, IP or capabilities – aren’t working anymore. At best they provide a transient advantage. At worst, they’re a distraction.
When the environment is changing as rapidly as ours is today, a strategy built around some asset (infrastructure, machinery, IP, or even capabilities) takes too long to exectute. Inertia will carry you along for a while, but when the market shifts you’ll find yourself like Wile E Coyote having run off the edge of the cliff, with the ground a long way below you. You culture is the only thing that will save you.
Deloitte were kind enough to invite me to present last week at the Melbourne leg of their regular CIO forum. The topic was innovation in IT.
The Innovative CIO: taking the core to the edge
Innovation strikes both dread and elation into the heart of the CIO. How does the CIO embrace and deploy rapid technology changes without falling into the trap of project plans and corporate regulation?
Innovation is always a fun topic because – as I’ve mentioned before[1] – I find trying to define innovation futile. My argument is that innovation (and creativity in general) is the result of pursuing a solution to a problem, not worrying about how new or original your solution is, and allowing yourself to steal the tools and ideas you need wherever you find them. Innovation is journey, rather than a destination.
Anyway, you can find my run sheet on scribed[2], and inline below. (Given that the slides don’t have a lot on them, it didn’t make any sense to put them up on their own.)
The global financial crisis hit nearly four years ago in 2008 but America and Europe appear to still be stuck in the mud. Even the Asian market has softened. But is this a recession? Or are we seeing a reconfiguration of the economy as the technological seeds laid over the last few generations finally germinated and bear fruit? Prices for made goods are collapsing as the cost of manufacturing has plummeted, while the cost of sourcing and distribution has crashed, caught between globalisation and the Internet. Even innovation, the source of all those sexy new products, has been democratised with the investment required to development new products taking a nosedive. Our existing business models were not designed to thrive, or even survive, this this environment. While the current market is a challenge to navigate, a lot of the problems we’re seeing could be result of a collapse of antiquated business models rather than the collapse in demand that these businesses are intended to service.
The iPhone is a fascinating product. It was deemed a failure at launch, with analysts claiming that it was under powered and feature poor. It also emerged at roughly half the price the analysts expected. Fed into Apples impressive cross-channel marketing machine, some models were available in store while the full range (including engraving) was only available online. Launched in 2007, the iPhone, however, has become one of the key products that powered Apple to the largest quarter in the company’s history, with US$46 billion in revenue and US$13 billion in profit[1]. A huge success by any measure.
At the same time as Apple was rocketing up the global league tables we’ve been seeing retailers slashing costs and closing stores as revenues collapse. Book shops[2], clothing chains[3] and even electronic retailers[4] are putting their businesses to the knife. Some of this is due to softening demand. However, there appears to be two much larger trends which might have the lion’s share of the blame. Otherwise how do we explain why consumers keep buying all those iPhones?
First, prices for manufactured goods have crashed, driven down by competition and plummeting manufacturing costs. We’ve spent our time since the Industrial Revolution automating production, driving out waste and cost by systematising manufacturing and assembly, and then replacing people with machines. You can see this at the top end, where Apple introduced the iPad for US$500 rather than US$1000 as the analysts expected. At the bottom end we have the discount electronic brands who and providing you with basic but functional electronic goods at astoundingly low prices: DVD or MP3 players for less that $20[5], for example.
Second is the collapse of distribution as a source of business differentiation. A dirty secret of many businesses is that their entire value proposition has built around distribution: finding a product and moving it from source to customer. Thriving businesses were built on the back of this arcane art. Globalisation and the Internet, however, have democratised distribution, enabling anyone with a web browser to find and source the things they need (or just want), regardless of where on the planet these products are located.
We’re seeing a phase shift in the way the market operates. Consumer behaviour is changing as they take to Internet to seek out the best or the cheapest they can find globally[6], creating a vortex in the mid-market which is sucking the life out many well established brands[7]. At the same time many local high street retailers – department stores, clothing retailers and the like – are crumbling[8], squeezed between consumers who are shifting their shopping habits online, on one side, and dropping unit prices on the other, pushing down revenue for those sales that they do manage to capture. Traditional retailers are suffering, and we’ve just had worst Christmas shopping season since 1984[9]. At the same time online retailers are seeing record-breaking sales[10], as are manufacturers such as Apple. Companies which have adapted to this new environment are thriving; others just seem to be withering away.
Industry growth, 2007 to 2011
Most businesses have historically relied on a distribution advantage to carve out their share of the market. Even all the way back to the era of the spice trade, businesses’ fortunes were made (and lost) due to their distribution capability. The Vasco de Gama’s[11] expeditions to the new world were driven by the desire to find a faster and less troublesome trade route — a distribution capability – to steal market share from Arab traders. The railroad robber barons of the 1800s controlled the path between factory and consumer. Hollywood studios were built on the backs of strong distribution networks[12] (though today they’re little more than middle men, having divested themselves of both production and cinemas after antitrust action from the U.S. government). More recently Walmart used an edge in distribution to become the largest retailer in the world. And, closer to home, your local department store, high street retailer or services firm had little to offer than their ability to bring the goods and services you need to a location close to where you live.
Large, multi-regional or multi-national firms were built on the back of strong long distance distribution. Small companies were built on the back of regional distribution; solving the problem of the last mile. Generations of consultants have assiduously applied Michael Porter’s five forces framework and, time and again, come up with a distribution strategy as the right thing to do.
Supplier Power. A strong distribution network destroys supplier power, as suppliers must go through the distributor to sell to the distributor’s customer base
Customer Power. Customers stick with the distributor as it’s to hard for them to find and source products themselves
Threat of New Entrants. The threat of new entrants is diminished, as it’s nearly impossible for a new competitor to build a better distribution network without anyone knowing
Threat of Substitute Products. Products don’t even need to be particularly good, as the challenge of actually getting products in front of customers makes the distributor king
Industry Rivalry. Distribution-based barriers tends to produce equilibriums for the existing players, as any improvement in one network is quickly copied by the others
The Internet changed everything.
Supplier Power. Suppliers can approach customers directly, and now play distributors off against each other to push margins down
Customer Power. Customers can access a large number of alternatives, some of which are free
Threat of New Entrants. Content costs, and not distribution costs, are now the barrier to entry
Threat of Substitute Products. Finding superior content products is easy
Industry Rivalry. Suppliers have become rivals, with companies such as Apple now engaging consumers directly
Louis CK, an American comedian, conducted a distribution experiment recently. He offered a self-produced video of live stand-up as a download on his website for the low price of US$5[13]. Handing over $5 provided you with a login allowing you to download a DRM-free video file. The video cost US$170,000 to produce (largely paid for by ticket sales at the shows which were recorded), with another US$32,000 going into the development of the web site. Twelve hours after the video was announced 50,000 people had bought it, earning Louis $250,000. Four days in it was 110,000 copies, over $500,000. After twelve days sales had hit one million dollars. This is quite a contrast to a traditional Hollywood distribution model, which would have seen the show commissioned, physical DVD (or even video cassettes) printed and shipped and a marketing campaign run. The middle men – the studios and their distribution networks – had been cut out, putting the creator of the content in control
New distribution models are emerging, and these models are not simply cheaper and more efficient versions of the models of the past. They’re different, and they require a new approach to how we package and price our products. Valve, a video game company, has developed a new distribution platform called Steam. Steam has been called the iTune of video games, as it allows customers to create an account, buy games, and then download these games to any computer associated with the account. What’s interesting is that Valve have been using Steam to experiment with the economics of video games[14], and they’ve discovered a few interesting things.
First they discovered that piracy is not a pricing issue. It’s a service issue. As Gabe Newell said in a recent interview:
The easiest way to stop piracy is not by putting antipiracy technology to work. It’s by giving those people a service that’s better than what they’re receiving from the pirates. For example, Russia. You say, oh, we’re going to enter Russia, people say, you’re doomed, they’ll pirate everything in Russia. Russia now outside of Germany is our largest continental European market. … But the point was, the people who are telling you that Russians pirate everything are the people who wait six months to localize their product into Russia. So that, as far as we’re concerned, is asked and answered. It doesn’t take much in terms of providing a better service to make pirates a non-issue.
—Gabe Newell, Valve co-founder
Next they start to experiment with price elasticity. Some initial trials were carried out where prices were varied without any announcements, and Steam enabling them to watch user behaviour in real time. After a baseline was established, and they throught they understood the dynamics of the market, they decided to try a highly promoted sale for a major title.
We do a 75 percent price reduction, our Counter-Strike experience tells us that our gross revenue would remain constant. Instead what we saw was our gross revenue increased by a factor of 40. Not 40 percent, but a factor of 40. Which is completely not predicted by our previous experience with silent price variation. …
—Gabe Newell, Valve co-founder
There’s a new dynamic at work here, one driven by global reach and low cost distribution, greased by social media.
Those new distribution platforms are allowing blockbuster games like Call of Duty to rack up one billion in global sales in sixteen days (that’s one day faster than it took James Cameron’s Avatar to reach the same goal), while games retailers are selling off or shuttering stores[15]. Most of the major video game developers are launching their own distribution platforms – such as Origin[16] by EA, and the AppStore from Apple – as there is no significant barrier to entry.
We’re starting to see similar stories with physical goods. BookDepository[17] is using cheap and efficient global logistics networks to make it more convenient to buy a book from the other side of the planet than to walk to the local book shop. Kogan[18], an online electronics retailer, has made this into an art from by combining low cost distribution with cheap manufacturing to create an agile, low cost model that might be a signpost of the future.
Kogan offers customer extremely low cost own-brand televisions, DVD players, digital camera, mobile phones, laptops, etc., delivered direct to the the doorstep. This uses a pull model, where insights from real time Internet search data are used to drive product development. In one instance the company saw a spike in searches for netbooks roughly six weeks before Christmas. Thinking they were onto something, a netbook was quickly specified in collaboration with their suppliers in China. Five weeks before Christmas, one week after they had noticed the spike, the product was complete and sent to testing, as well as being put up on the web site and added to the company’s current advertising campaigns. That same product went on to become their biggest seller for the Christmas season.
At the same time traditional electronics retailers are struggling. The shift to online is part of the problem, but dropping retail prices are pushing down revenues and making the situation worse; customers who shop on the high street are handing over less cash for the same goods. Harvey Norman, an Australian department store, is tying to combat the problem by moving away from goods who’s price is shrinking, reducing floor space for electronics and trying to shift more durable goods, such as fridges and lounge suites, who’s prices are holding up better. Other retailers are experimenting with smaller store which require less floor space (with consequentially lower rents), but struggle to stock a broad enough range to products to satisfy many customers. Even the luxury brands are in trouble, with low production and distribution costs allowing unscrupulous individuals to flood the market with cheap counterfeits of well known, and highly desirable brands.
Some companies are, however, thriving in this environment. Kogan is an obvious case, as is Apple. While the products Apple makes use the same commodity components as their competitors, as well as being assembled in the same factories and travelling in the same trucks, Apple manages to endow its product range with an aura that keeps customers coming back. Amazon has created a low cost purchasing environment that is crippling publishers while rewarding loyal customers.
At a local level we’re seeing business move from pure retail to focus on building a community that customers identify, and where the financial transactions are an incidental part of being a member of the community rather than an event the business is driving toward. The recent emergence of crowd funding tools such as Pozible[19] and Kickstarter[20] (who just funded their third project over one million dollars inside two weeks[21]) is just the nail in the coffin, as content and product creators realise that they don’t need much more than a good idea and well presented pitch to get going, rather than the backing of a major manufacturing and distribution business. Bookshops are coming back as they realise that they are part of a community, rather than just the endpoint of a low cost distribution chain[22]. Even big ticket items such as cars are coming up for grabs. Delta Motorsport has applied similar thinking to develop the E-4 Coupe, a 150mph (241kph) electric sports car built with a minuscule £750,000 ($1.2m) budget and just ten employees[23]. Delta expect it can put the E-4 Coupe into production for £4.5m, a fraction of the $1 billion or more required via a more conventional approach.
Some businesses are booming, and some are struggling, and there’s a good chance that we have a two speed economy. But this is not two speed in the traditional sense, where resources might be down but retail up. It’s a reconfiguration of the market, a Darwinian process where companies designed around high cost manufacturing and strong distribution die out, replaced by a new generation who don’t make the same assumptions. The market has definitly softened, but how much of the turmoil we seeing is due to a drop in a general consumer demand, and how much is due to a collapse in demand for the services provide by traditional businesses? Consumers have evolved, their behaviour has changed, and business needs to evolve with them.
Update: Recent figures from the Australian Bureau of Statistics show that while retail is down, cafés and restaurants are up 4.3%[24].
Do NFC payments – with their tap-and-go simplicity – herald a revolution of the shopping experience? Or is NFC just an attempt to force more of our daily transactions onto payments platforms where their owners can claim a usage tax? The sales pitch is a promise of simpler, faster and more secure payments, allowing us to grab our goods and quickly get on with what we were doing. The reality is that the payment is only responsible for a small portion of the time wasted during the buying journey. Other trends we’re seeing have much more potential to revolutionise the shopping experience, and they do this by moving the purchase away from the till to allow consumers to transact where and whenever they need. The huge investment in NFC means we can expect to see NFC terminals at most of the shops we frequent. However, at the same time we can expect NFC to be quickly eclipsed by other solutions which do a much better job of streamlining the buying journey.
Vendors are trying to convince us that the future involves NFC, smart phones and e-wallets. You might have seen the adds on TV; a demographically appropriate actor buys something trivial such as a pack of gum or can of soft drink by simply tapping their NFC enabled credit card or phone against a pay point before scampering off to some enriching activity. NFC, we’re told, will make the payment so quick, so easy, that we’ll barely even notice it. No more waiting in queues while the person in front of us fumbles with their purchase. And if we add an e-wallet then we can easily manage all these wonderful transactions via an app of some sort. Life will be good.
The problem with this vision is that it doesn’t align with reality. The next time you’re waiting in a checkout queue somewhere – be it a café, big box retailer or clothing store – spend the time to count how long it takes the people in front of you in the queue to hand over the goods they want, wait for the clerk to tally up their purchases, and to make their payment before they can escape. Was the payment – swiping the card and punching in a PIN – a big part of the time spent? Or was the time dominated by the clerk scanning barcodes into the till to find the total? I’d be surprised if the payment was more than a small fraction of the time spent, as most of the time we waste shopping is sucked up the the need to find the goods we want and tally up their prices; the payment is just an annoyance at the end.
NFC technology might be bling, but all the effort is aimed at the smallest part of the buying problem, the payment. Shaving a second or so off the payment will make little difference to how much of our life is wasted while shopping. The pack-of-gum example is a corner case carefully selected to show tap-and-go in the best possible light. How often do you simply pick up one product next to the till, wave your card near the payment terminal, and then sally forth into the rest of your day? When your at a restaurant? How about when your at the supermarket? Clothes shopping? Or that trip to the big-box hardware store on the weekend? Most of our time is sucked up the the need to find the goods we want and take them to the register (place our order and wait for it to be made), wait while the merchant tallies what we owe them, and then we make the payment. Why worry about slicing another second of an already short payment when there are bigger problems to solve?
The ideal use-case for NFC?
A number of non-payment tools and technologies are emerging which are moving the payment away from the till, allowing us to entirely avoid the need to sign a check, do the chip-and-pin thing, or even tap-and-go. The booming gift card market and and near ubiquitous Internet connected smart phones are allowing us to rethink the buying process.
Amazon's new mobile shopping application, transforming every aisle in every store into an Amazon shopfront
Aisle buying, for example, builds on the consumer habit of checking prices on their smart phones while standing in the aisle[1]. Why just give them the price when, with one more tap on the screen, the consumer could simply pick up the product and walk out of the store, showing a receipt on their smart phone on the way out. No need to visit the register. No NFC required. Amazon realises the potential for aisle buying and has released an app which allows customers to scan a bar code, view the price and place an order, converting every shopping aisle in every retailer into a shopfront for Amazon.
Purchases are moving away from the till, as the relationship between customer and merchant moves from exclusively face-to-face to include online interactions, and interactions mediated via social media and smart phone apps provided by the retailer. Pizza chains already allow you to order via an app – both from home and from within their restaurants – and we’re seeing business-consumer relationships founded on Facebook move into the real world with Facebook Credits and Checkin allowing retailers to interact with their customers wherever they are. Allowing customers to pay via the same channels is only one step further.
Square, for example, provides a till-replacement based on an iPad app. The app allows retailers to do the usual things, effect payments and tally the day’s sales. It also has a nice feature where a merchant can allow an established customer to put a purchase “on account” simply comparing an image of the customer displayed in the app with the person standing in front of them. No money or slivers of plastic pass back-and-forth, there’s no tap-and-go, the transaction is simply noted with the tap on an on screen button. Tesco Korea has taken the idea of aisle buying a step further and created virtual stores in subway stations, taking the store to the people when the people don’t have the time to visit the store. Find what you want, snap a photo of the QR code, and the product is already on its way to your house. It didn’t take long for this idea to catch on, and we’re already seeing virtual shops pop up in other countries, from simple stickers on a shopfront through to the creation of virtual stores in public places.
Woolworths' virtual shop at Flinders Street Station in Melbourne
The problem with all the NFC payment hype is that it wells from a backward looking view of how we use technology. Tomorrow will be the same as yesterday, but with more fins, shinier chrome, and flying cars. NFC requires an huge investment in a new generation of payments technology – technology focused on facilitating traditional face-to-face payments – just when society is starting to move away from this style of transaction.
Our habits are changing, and rather than changing with us payments providers are doubling down on their existing approach, trying to push even more transactions through their existing infrastructure. E-wallets and tap-and-go result in some nice ads, but future of payments lives somewhere else.
Why is it so hard to incent our companies or teams to do anything innovative? Something tangible that makes a difference to the top or bottom line. The vast majority of innovation programmes seem to deliver little more that some nice demos before the programme peters out, with stakeholders often happy to return to their usual duties. The problem is that innovation is neither a product or a process, nor is it a skill; innovation is an artefact of culture, and culture is something that you cannot buy, hire or implement. The reason that most companies fail to innovate – despite significant investment in innovation – is that innovation is a result of culture and their culture actively prevents them from realising anything innovative.
Innovation (whatever that is[1]) has become the Mecca for modern business. In today’s turbulent environment everyone is looking for that new idea or product, that innovation, which will give them an edge. Nowhere is this more obvious than the crowded market places for smartphones and mobile applications, where crowds of companies compete to become the next iPhone, Angry Birds or FarmVille. It’s hard to stand out in a crowded market and you need something unique, something innovative to grab the public’s attention.
In their quest for the next big (innovative) thing, management teams engage innovation consultancies, create innovation functions and programmes, and hire the hot new skills which claim to be the next source of innovation. (Yesterday it was portfolio management; today, Design Thinking, next some are claiming that it’s the skills provided by a liberal arts degree.) The hope it that a tangible investment will result in an intangible outcome, as if innovation is something that can be standardised and transformed into a repeatable process. None of these approaches work reliably.
Innovation, of course, extends to more than casual games and mobile phones. Apple seems to have established a track record for innovation across a number of sectors, Amazon has proved itself to be a lot more than a simple web retailer, while 3M has a long history of bringing interesting products to market (PostIt notes, Scotchguard, Goretex…). We’re also seeing success at the bottom end of the market, where companies such as Kogan[2] are finding new (innovative) was to products to waiting customers at a price point radically lower than traditional bricks and mortar retailers.
At the individual level we find the innovator situated in a broader context. The questing of Pablo Picasso, Jimi Hendrix, Laurie Anderson and Miles Davis was woven into and built apon ideas that they found around them as they tried to make sense of the world. Picasso’s desire to draw a picture showing all sides of the subject once built on Cézanne’s abstract shapes and resulted in cubism. Miles Davis wanted to bring the some of the soul from Sly Stone’s work into the world of Jazz, and created fusion and Bitches’ Brew in the process. New work – innovation – is created by cultural accretion, as the artisan pulls in tools, techniques and ideas from the community around them as they search for the best way to express their aspirations. The innovator’s role is to provide the focus, the drive to realise a new idea, that enables these previously disparit threads together. The context that enables them to do this is the culture, the thick soup of ideas that that’s been simmering for generations.
Picasso's Femme en pleurs (1937)
The common thread running through innovators — both businesses and individuals — is cultural. They approach the problem of innovation obliquely, if they approach it at all. Jon Ives, for example, is on record as claiming that Apple “just makes products that we would love to own ourselves”. Innovation is not something discovered, rather than something intentionally designed. “I’ll play it first, and tell you what it is later”, as Miles Davis said. Rather than invest in innovation functions and processes, or hire innovation gurus, and striving to be innovative, they are focused on solving problems. Tools, techniques and skills (such as Design Thinking) are pulled in as needed to solve a problem, instead of being implemented in the hope that they will instil innovation in whatever we’re doing. Sometimes the focus, the drive to realise a new idea, comes from the top-down, as in Apple’s case. Other times it works bottom-up, as with 3M’s more organic approach to innovation that allows individuals to vote with their feet.
Whether organic or structured, innovation is the result of two things. First is a rich and diverse cultural soup full of the ideas and skills that the innovator can draw on. A culture that values the learning and investigation needed to constantly enrich the soup, and one that extends beyond the wall of the organisation or individual to draw on, and appropriate, ideas an needed.
Jim Jarmusch on biting
Second is the imperative, the desire, to follow through on an idea, to realise an idea or find a more elegant solution to a problem. Sometimes is means providing the time and space to develop and idea, but often it means proving constraints to drive the creative process. These constraints might involve time and money, forcing a team to solve a problem faster or more cheaply than a conventional approach would allow. Or the constraints might be written into the requirements, such as Steve Job’s desire to eliminate all but one button to create a more elegant solution.
The failure of many efforts to instil innovation into existing organisations is that they focus on the tools, and forget that innovation is the result of a culture more than it is a process. Without the drive to try something new, and permission to pull in the ideas and tools are most valuable, any investment in innovation will just result in little more than a bright flash followed by silence. Innovation is not something you can buy. It’s the result of the organisational culture you have create, and culture is the hardest thing to change.
Sometimes posts become a tad to long and unwieldily to drop onto the blog. One such post was a thing I put together around some work I’ve been doing over the last few years on outsourcing. A friend suggested that, rather than letting it languish, it could be interesting to clean it up and publish the result as a (short) ebook; which is what I’ve done.
Find the blurb below, and to can grab the complete text from the iBookstore or Lulu (epub) (Amazon is in the pipeline).
Outsourcing in an increasingly complex world
by Peter Evans-Greenwood
Pressure on margins is driving organizations to increasingly rationalize and externalize supporting functions as they search for more efficient and flexible delivery approaches.
Most common approaches to outsourcing center on establishing target service levels and a unit cost, treating the negotiation of an outsourcing engagement in a similar fashion to the procurement of other materials that the business needs.
Outsourcing, however, is becoming more complicated as we move functions closer to the heart of the business into the hands of partners and suppliers. This represents a shift from an approach based on paying invoices for the raw materials we need to run the business, to one based on delegating core, business-critical functions to suppliers, and then requiring them to deliver the outcomes that we need.
Crafting a successful outsourcing engagement in this environment requires us to align the supplier’s incentives, and therefore their objectives, with the client’s business drivers. It’s not enough to take a piecemeal approach, imposing additional requirements and constraints in the hope that these will shape supplier behaviour.
It’s a truism that what gets measured is what gets done; outsourcing is no different. Existing approaches to crafting outsourcing agreements attempt to shape supplier behavior by imposing large and inconsistent sets of requirements, with the result that both parties search for loopholes in an attempt to optimize their position.
A successful contract will be based on the customer’s business drivers, aligning supplier incentives with them to ensure that the agreement drives the right behaviors
The more I think about it, the more I feel that we need to rethink what “application” means.
The IT industry – and therefore “application” – has been defined by businesses’ need to acquire IT assets. The roles companies play in the industry have accreted around this need, as I’ve pointed out before[1].
The big shift we’re seeing in the market at the moment is a move from companies wanting to acquire IT, to a need to engage services enabled by IT. I know, for example, one airline that has externalised flight planning and pays per flight plan, rather than worrying about the tools need to support a team of flight planners. It’s a capability and process centric view, rather than a technology centric view.
If we follow this line of thought through then we quickly realise that the future of IT in business will be determined by the need to knit together a fabric of IT enabled services, many of which will be obtained externally. I don’t need a project portfolio management solution, I need a portfolio management capability backed by the tools and skills required to make it work. I don’t need a CRM solution (SaaS or not), I need a sales management and reporting methodology (Holden? Miller Heiman?) supported by technology to enable it to scale. It’s outside in thinking, rather than inside out.
What will the industry that accretes around this new need look like? If we look at many of the current on-demand / SaaS vendors, then they could best be described as enterprise software, but in the cloud!. Take the old model and make it multi-tennanted. We should probably call this Cloud 1.0 (where MySpace was social media 1.0). Cloud 2.0, however, will be something different and might be just over the horizon, rendering the current incumbents obsolete, legacy while they’re still young.
When did you last go on a mission to buy something? Something specific that you had decided you needed. Were you looking for a book to read, heading to a nearest bookstore to browse the shelves? Was it a trip to the local big-box store to stock up on toilet paper and other household odds and ends? Or did you wander around a department store at the local mall looking for something to wear? Our behaviour – consumer behaviour – has changed. Shopping has historically been a search problem: how do we find the products we need need? Today, though, we increasingly buy on impulse, selecting the cheapest – or the best at the most competitive price – from the wealth of products and merchants around the global. The shopping mission is going the way of the dodo. If we see a book we like, then we add it to our list at Amazon or Book Depository and it’s delivered direct to our front door. We’re getting household consumables delivered direct to our homes. And we’re even sourcing clothes online where we can find lower prices and a larger selection. Our behaviour is changing, and the retailers and merchants who don’t adapt are being left behind. A lot of the turmoil we’re seeing in the current economy is likely due to a reconfiguration of business, driven by the changes in consumer behaviour.
We used to engage in a shopping mission, a quest to find the goods we need to solve problems that we know we have. This was a journey that would bring us into contact with quirky in-store marketing displays designed to influence our purchasing decision. Product companies tried to build brand awareness, hoping to create a spark of recognition that, when you found yourselves standing in front of the shelves, would tilt you toward selecting their product over the others. Will be it Heinz tomato sauce? The store’s home brand? Or something gourmet from a boutique manufacturer. Merchants worked hard to ensure that they had the best selection of products they could find – the brands that would pull the customers into their store rather then those of the competition.
Standing before the grocery shelf or clothes rack, we would sort through the brands on offer, trying to find the one that we though to be the best value. This roughly translates into selecting the best quality that we could afford. The only products and information at our disposal was what the retailer chose to present us with, unless we were willing to trudge over to another shop so that we could we see what products it had on offer (and what it was willing to tell us about them). The result was usually a compromise: we’d select the best product we could see in front of us, knowing that it was probably neither the cheapest we might find if we kept searching, nor would it be the best we could find. Finding a better solution to our problem – that pair of jeans with a nicer fit, or the tomato sauce with just a hint of something interesting – was too hard.
The world has changed a lot since then. Firstly, globalisation means that it is now possible to reach around the global, conducting an extensive search for the cheapest, or the best (at the most competitive price). This is as simple as typing a few words into Google or visiting you favourite comparison shopping site. Secondly, quality is a solved problem. Twenty years ago that store brand ice-cream or tomato sauce, or the no-name t-shirt, were obviously inferior to the brand name product. Twenty years is a long time, and manufacturing’s relentless focus on quality management over that time means the cheapest product in the market is virtually indistinguishable from the brand names. They were probably even made in the same ingredients or components in the same factory by the same people.
Consumers no longer need to compromise. With little difference between products and the ability to source them from around the globe, many consumers opt for the cheapest they can find from the global market. Nor are consumers who are willing to pay a premium restricted to selecting from the products on offer locally, reaching around the globe find to the exact product they want at the best possible price.
“Price comparisons would be between first and second, or fourth and fifth. What we’re seeing now is a consumer who shops either on price, or on quality – the number one premium, or the retail price point. All the middle brands have gone.”
The balance of power has shifted from retailer to consumer, and the shopping mission is collateral damage. A consumer standing in front of the gaggle of tomato sauces offered by a merchant now has enough information to make an informed decision, and a brand means nothing unless it offers something unique. Consumers are buying the cheapest product, or they are buying the most interesting product (to them). The mass-market brands we grew up with, those labels we trusted because they were reliable, are being demolished, caught in a no man’s land between cheap and premium[2].
An avid reader wanting a specific book will source it from an online retailer such as Amazon or Book Depository who can offer lower prices and a larger selection, delivered direct to the front door. The time poor professional at the supermarket will often simply pick the cheapest bottle of tomato sauce they can see in front of them, knowing that it will be as good as any of the other. That teenager interested in those green sneakers with black skulls will try on their friends for size and then use an comparison shopping site on the Internet to find the best deal globally. Now that the consumer is in control, and they have the information and services they need at the tip of their smart phone, they are becoming much more impulsive with their approach to buying the goods they want.
The cost of finding the goods and services has plummeted, and consumers are responding by taking a much more opportunistic approach to purchasing. Rather engaging in a search to find goods we need, we’re deciding to buy them impulsively once a need is recognised. Consumers are building relationships with organisations that provide the premium products they desire, or who can be relied on to provide them with the lowest cost items that can be found. Purchases are made opportunistically, built on the shared social connection that has already been established. Customers skip across channels – both real and virtual – learning more about the company’s products and how they can help them. Eventually they realise that there is something they would like, and purchasing is now simply a matter of acknowledging their desire. They might purchase a TV from a company known for bringing cheap but innovative electronics to market, one more focused on putting all the features the customers want into one box, rather than trying to up sell and cross sell. It might be an expensive meal at a restaurant, triggered by the knowledge that a table had just become free for that night. It could the milk man offering to drop off some veg and a steak with the morning milk and bread, guaranteed to arrive before you leave for work. Or it might be that premium computer or tablet with that carefully designed case that you were playing with at your friend’s house.
Retail is reconfiguring, splitting into the cheapest and the best, with a gap appearing the middle. Apple, for example, seems to be the only consumer IT brand still experiencing robust growth and profits[3], with the majority of PC manufactures struggling to pull slim margins from a declining market. At the other end of the market, Kogan Technologies is rapidly building a profitable business[4] around a low cost, direct to consumer model founded on using a community of low cost manufacturers to rapidly create cheap but functional products target at specific consumer needs. Harvey Norman, a traditional bricks-and-morter retailer, is seeing revenue fall and profits slump[5].
The new generation of companies – the Apples and Kogans, the Zaras and the explosion of boutique fashion houses – are playing to our new tendency to buy impulsively. They build relationships with their customers, allowing them to skip across channels without purchasing, to reduce the resistance to transacting when the time comes. They avoid sales and regular discounting so tht there’s no reason to hold off a purchase. Some, such as Betabrands, are turning this art into a science, using our desire to be seen as original and our tendency to want to grab bargains when we stumble across them to overcome our reluctance to buy something we can’t touch and feel and accelerate their sales cycle[6].
A chasm is opening up under the traditional mass-market brands, brands that rely on the shopping mission, while companies which can establish themselves at one of the two ends of the spectrum are seeing robust growth. Companies caught in the middle, companies built around the traditional shopping mission are seeing their margins decline and revenues fall, unable to compete. The shopping mission is dying, and it appears that many companies might die with it.
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