Predictions for the continued growth of the SI market are based on the understanding that companies are consuming more IT today than they were yesterday, and the assumption that increased IT consumption will result in tidy profits for SIs. Predictions are a funny things though, based as they are on historical trends. Guess that the market will continue to rise when you’re in the midst of a bull market and you’ll be right, most of the time. That is until something happens, something you didn’t anticipate, something that catches you unawares. The assumption that SI revenue is tied to IT consumption might no longer be true. New tools such as SaaS and cloud computing are enabling line-of-business leaders to step around the traditional IT department and engage with technology directly, bypassing the SIs traditional relationships in IT and providing them with fewer opportunities to sell their wares. At the same time the shift from on-premises to on-demand solutions – solutions which the business is happy to rent rather than own – is slashing the effort required to install, configure and integrate these new solutions, often by as much as seventy to eighty percent. On-demand solutions also have much lighter support needs relying on self-help wikis, users forums and power users, leaving the SI with little more than a small help desk to manage. With only limited access to this new class of IT buyer, dramatically smaller projects, and lower support revenue, the SIs role as IT enabler seems to be in decline. All good things come to an end though, and you usually only realise that the end has come after it has already passed. IT consumption might be going up, but there’s a good chance that SI revenue could soon be going down at the same time.

SIs are fundamentally sandwich shops[1]. When we don’t have the time or money to maintain our own kitchen or make our own sandwiches it can be more efficient to head over to the local sandwich shop to pick up what we need. Their margins are thin and revenue is largely tied to the size of the sandwich you just bought, so they’d really like you to buy a larger and more expensive sandwich. (Notice how sandwiches have grown so much bigger over the years, and everything is now gourmet?) And, of course, pre-made sandwiches are always a lot cheaper than special orders. This sandwich shop model is something that was established early on in the history of business IT. How else could companies afford to access the rare (and expensive) IT skills they needed to create all the systems they need? This might be a payroll system, or stock management, sales pipeline reporting, or the dreaded enterprise resource planning (ERP). Consuming IT used to mean hiring an SI to build and integrate something for you.

The world has changed since then. Back when I started in the industry my home computer couldn’t hold a candle to the beast I was given at work. Today, however, my shiny new 17″ MacBook Pro makes the locked down Windows XP laptops I’m offered seem like a bit of a joke. A new breed of business manager has crept into the business while the world has changed, these are people who grew up with technology and are comfortable solving their technology problems on their own. They know that there are alternatives to the expensive solutions proposed by the IT department (solutions that IT will engage an SI to deliver), and they’re happy to use these alternatives. Why spend a seven figure sum and wait a year for the IT department’s perfect, enterprise-wide project portfolio management solution when there’s one that is good enough, one you can buy on-demand via a company credit card, and one which you know will be up and running in a couple of weeks? We might argue about the regret cost[2], but the art of business is to make a timely decision and then make it work; it’s not to sit on your hands and wait for the perfect solution which will be delivered sometime in the distant future. While demand for new IT solutions might be growing, every time a business manager steps around IT to engage and on-demand solution SIs have one less opportunity to sell their wares.

At the same time we find that these on-demand solutions – when SIs do get their hands on them – only provide a fraction of the revenue that a tradition on-premisis solution does. Time is money for an SI (literally, as most avoid risk by sticking to time and materials contracts) and fielding a SaaS solution takes only a fraction of the time required for a more traditional solution. There’s no hardware to commission with SaaS or cloud computing, nor are there disks to wait for or backup strategies to create. (You still need to worry about business continuity, but that’s another post.) There’s also little chance for customisation, and integration tends to be via standard APIs or pre-built adaptors. It’s not uncommon for a SaaS project to be eighty percent smaller than the more traditional solution. Fewer resources on ground and fewer billable hours means that that the SI can expect their revenues to head in the same direction: south.

We’re also seeing the erosion of SI support revenues. Support used to encompass both the application – in terms of application maintenance, patching and security – and the users – with training and a help desk. Many SaaS and cloud providers don’t want to provide traditional support services as it erodes their margins, margins based on huge scale and little human contact. One solution is to engage an SI to provide these services for them, either on a client-by-client bases or as part of some sort of alliance. A more attractive solution is to move – as much as possible – to a self support model where clients support each other via user forums or a Google search. We soon find that a much smaller help desk will suffice as it’s only required to be the point of last resort, or to support the more technologically illiterate users.

Taken together, these trends – reduced access to buyers, lower project revenues, and lower support revenues – seem to show that the future is not as rosy for the SIs as we first thought. Demand for IT might be growing, but growing demand for IT no longer implies growing demand for the services provided by SIs. The final nail in the coffin is the fairly recent move into SaaS by established IT application vendors. Microsoft has gone on record as wanting to capture a greater percentage of IT spend as license revenues, converting SI installation and customisation costs into licenses by providing clients with prepackaged configurations which can be turned on at the flick of a switch. Rather than pay for a SaaS CRM and then engaging an SI to configure it to your liking, you pay for the SaaS CRM along with a canned sales methodology (Miller Heiman[3]? Holden[4]?) which works out of the box (as it were). Integration between SaaS solutions is also being converted into a configuration option as SaaS vendors sign alliances – just as Google and Saleforce.com did with GoogleForce – enabling these alliances to offer complete application suites which work together out of the box.

Whichever way you look at it, now is not a good time to be a SI.

References

1. Business models for the old rules of IT @ PEG↑
2. The price of regret @ PEG↑
3. Miller Heiman: The Sales Performance Company↑
4. Holden International: Outsell You Competition↑

As always, thoughts and/or comments are greatly appreciated.

• These CIOs go way beyond IT-business alignment [ComputerWorld]
  Some CIOs are breaking with tradition, blurring the distinction between IT and the business with huge success.
• Economics bloggers don’t think much of R&D as a catalyst for innovation [BusinessWeek: NEXT]
  40 economics bloggers from across the political and economic spectrum all agree that innovation is important (whatever innovation is). They also agree that R&D activities from any source, be that university, corporation or government, are not a strong driver for innovation.
• Is Microsoft heading the way of the dinosaur? [The Globe and Mail]
  For a tech company, innovation is key. Innovation is also in short supply at Microsoft despite a significant investment in R&D.
• What Mad Men gets right about innovation [Harvard Business Review: Research Blog]
  Man Men shows us how to reward our employees if we want to foster innovation.

So, what is innovation? This seems to be a common question thats comes up whenever a company wants to innovate. After all, the first step in solving a problem is usually to define our terms.

Innovation is a bit like quantum theory’s spooky action at a distance[1], where stuff we know and understand behaves in a way we don’t expect. It can be easy to spot an innovative outcome (hindsight is a wonderful thing), but it’s hard to predict what will be innovative in the future. Just spend some time browsing Paleo-Future[2] (one of my favourite blogs) to see just how far off the mark we’ve been in the past.

The problem is that as it’s all relative; what’s innovative in one context may (or may not) be innovative in another. You need an environment that brings together a confluence of factors — ideas, skills, the right business and market drivers, the time and space to try something new — before there’s a chance that something innovative might happen.

Unfortunately innovation has been claimed as the engine behind the success of more than a few leading companies, so we all wanted to know what it is (and how to get some). Many books have been written promising to tell you exactly what to do to create innovation, providing you with a twelve step program[3] to a happier and more innovative future. If you just do this, then you too can invent the next iPhone[4].

Initially we were told that we just needed to find the big idea, a concept which will form the basis of our industry shattering innovation. We hired consultants to run ideation[5] workshops for us, or even outsourced ideation to an innovation consultancy asking them to hunt down the big idea for us. A whole industry has sprung up around the quest for the big idea, with TED[6] (which I have mixed feelings about) being the most obvious example.

As I’ve said before, the quest for the new-new thing is pointless[7].

The challenge when managing innovation is not in capturing ideas before they develop into market shaping innovations. If we see an innovative idea outside our organization, then we must assume that we’re not the first to see it, and ideas are easily copied. If innovation is a transferable good, then we’d all have the latest version.

Ideas are a dime a dozen, so real challenge is to execute on an idea (i.e. pick one and do something meaningful with it). If you get involved in that ideas arms race, then you will come last as someone will always have the idea before you. As Scott McNealy at Sun likes to say:

Statistically, most of the smart people work for somebody else.

More recently our focus has shifted from ideas to method. Realising that a good idea is not enough, we’ve tried to find a repeatable method with which we can manufacture innovation. This is what business does after all; formalise and systematise a skill, and then deploy it at huge scale to generate a profit. Think Henry Ford and the creation of that first production line.

Design Thinking[8] is the most popular candidate for method of innovation, due largely to the role of Jonathan Ive[9] and design in Apple’s rise from also-ran to market leader. There’s a lot of good stuff in Design Thinking — concepts and practices anyone with an engineering background[10] would recognise. Understand the context that your product or solution must work in. Build up the ideas used in your solution in an incremental and iterative fashion, testing and prototyping as you go. Teamwork and collaboration. And so on…

The fairly obvious problem with this is that Design Thinking does not guarantee an innovative outcome. For every Apple with their iPhone there’s an Apple with a Newton[12]. Or Microsoft with a Kin[11]. Or a host of other carefully designed and crafted products which failed to have any impact in the market. I’ll let the blog-sphere debate the precise reason for each failure, but we can’t escape the fact the best people with a perfect method cannot guarantee us success.

People make bad decisions. You might have followed the method correctly, but perhaps you didn’t quite identify the right target audience. Or the technology might not quite be where you need it to be. Or something a competitor did might render all your blood sweet and tears irrelevant.

Design Thinking (and innovation) is not chess: a game where all variables are known and we have complete information, allowing us to make perfect decisions. We can’t expect a method like Design Thinking to provide an innovative outcome.

Why then do we try and define innovation in terms of the big idea or perfect methodology? I put this down to the quest for a silver bullet: most people hope that there’s a magic cure for their problems which requires little effort to implement, and they dislike the notion that hard work is key.

This is true in many of life’s facets. We prefer diet pills and magic foods over exercise and eating less. If I pay for this, then it will all come good. If we just can just find that innovative idea in our next facilitated ideation workshop. Or hire more designers and implement Design Thinking across our organisation.

Success with innovation, as with so many things, is more a question of hard work than anything else. We forget that the person behind P&G’s Design Thinking efforts[13], Cindy Tripp, came out of marketing and finance, not design. She chose Design Thinking as the right tool for the problems she needed to solve — Design Thinking didn’t choose her. And she worked hard, pulling in ideas from left, right and centre, to find, test and implement the tools she needed.

So innovation is not the big idea. Nor is it a process like Design Thinking.

For me, innovation is simply:

• working toward a meaningful goal, and
• being empower to use whichever tools will be most beneficial.

If I was to try and define innovation more formally, then I would say that innovation is a combination of two key concepts: obliquity[14] and Jeet Kune Do[15]‘s concept of absorbing what is useful.

Obliquity is the simple idea that the best way to achieve a goal in a complex environment is to take an indirect approach. The fastest and most productive path to the top of the mountain might be to take the path that winds its way around the mountain, rather than to try and walk directly up the steepest face.

Apple is a good example of obliquity in action. Both Steve Jobs and Jonathan Ives are on record as wanting to make “great products that we want to own ourselves,” rather than plotting to build the biggest and most innovative company on the planet. Rather than try and game the financial metrics, they are focusing on making great products.

Bruce Lee[16] came up with the idea of “absorbing what is useful”[17] when he created Jeet Kune Do. He promoted the idea that students should learn a range of methods and doctrines, experiment to learn what works (and what doesn’t work) for them, “absorb what is useful” while discarding the remainder. The critical point of this principle is that the choice of what to keep is based on personal experimentation. It is not based on how a technique may look or feel, or how precisely the artist can mimic tradition. In the final analysis, if the technique is not beneficial, it is discarded. Lee believed that only the individual could come to understand what worked; based on critical self analysis, and by, “honestly expressing oneself, without lying to oneself.”

Cindy Tripp at P&G is a good example of someone absorbing what is useful. Her career has her investigating different topics and domains, more a sun shaped individual than a t-shaped one[18]. Starting from a core passion, she accreted a collection of disciplines, tools and techniques which are beneficial. Design Thinking is one of these techniques (which she uses as a reframing tool).

I suppose you could say that I’ve defined innovation by identifying what it’s not: innovation is the courage to find a different way up the hill, while accepting that there are no silver bullets and that you don’t control all the variables.

Updated: Tweeked the wording in the (lucky) 13th paragraph in line with Bill Buxton’s comment.

For every Apple with their iPhone there’s an Apple with a Newton. Or Microsoft with a Kin.

References

1. Spooky action at a distance? @ Fact and Fiction↑
2. Paleo-Future↑
3. Twelve step programs @ Wikipedia↑
4. iPhone — the Apple innovation everyone expected @ Fast Company↑
5. Ideation defined at Wikipedia↑
6. TED↑
7. Innovation should not be the quest for the new-new thing @ PEG↑
8. Design Thinking … what is that? @ Fast Company↑
9. Jonathan Ive @ Design Museum↑
10. Sorry,
software engineering doesn’t count.↑
12. The story behind the Apple Newton @ Gizmodo↑
11. Microsoft Said to Blame Low Sales, High Price for Kin’s Failure @ Business Week↑
13. P&G changes it’s game @ Business Week↑
14. Obliquity defined at SearchCRM↑
15. Jeet Kune Do, a martial art discipline developed by Bruce Lee @ Wikipedia↑
16. Bruce Lee: the devine wind↑
17. Absorbing what is useful @ Wikipedia↑
18. T-Shaped + Sun-Shaped People @ Logic + Emotion↑

As always, thoughts and/or comments are greatly appreciated.

• Why has Microsoft seemingly stopped innovating? [Quora]
  Quora answers the question:

  Apple and Google stand for innovation in my mind, where Microsoft represents the hum-drum. I’m particularly interested in Microsoft, which employs so much talent. This is a follow-up question to How should Microsoft respond to Apple’s iPad?.

• Uniquely positioned [The Economist]
  Innovation means doing something other than what the innovators of yesterday are doing, as Uniqlo is doing with Zara and H&M.
• Marico Innovation Foundation [Marico Innovation Foundation]
  An interesting effort to fuel innovation in India.
• On Biting [12ozPROPHET]
  Jim Jarmusch with some excellent advice on what to make of other peoples’ ideas.

• It’s shrinking as the new normal is squeezing budgets and OPEX is the new CAPEX.
• It’s growing as companies are externalising more functions than ever before as they attempt to create a laser like focus on their core business.
• It’s shrinking as the transition from on-premsis applications to SaaS implies a dramatic reduction (some folk are saying around 80-90%) in the effort required to deploy and maintain a solution.
• It’s growing as the mid market is becoming a lot more sophisticated and starting to spend a lot more on enterprise software (witness Microsoft Dynamics huge market share).
• It’s shrinking as SaaS is replacing BPO, in effect replacing people with cheaper software solutions? (Remember when TrueAdvantage, and Indian BPO, laid off all 150 of its workers after being purchased by InsideView?)
• It’s growing as the need for more mobility solutions, and the massive growth in the mobile web, is driving us to create a new generation of enterprise solutions.
• It’s shrinking as cloud computing and netbooks remove what little margin was left in infrastructure services.
• It’s growing as investment in IT is a bit like gas, and tends to expand until it consumes all available funds. (Remember integration? As the cost of integration went down, we just found more integration projects to fill the gap.)

Like of a lot of these questions, it depends.

Update: Gartner finds that the worldwide IT services declined 5.3% last year, while Computer World UK tells us to expect another year of decline. How much of this is cyclic, and how much is due to a definition of “services” which could be more inclusive?

Updated: It appears that some organisations are not happy with the size and dominance of the IT services industry.

• CBA has come out in favour of leaner, more cost effective solutions, and is rumoured to be putting together global syndicate with Bank of America and Deutsche Bank to use their collective buying power to push down prices charged by tech industry heavyweights and encourage take-up of shared applications through the cloud.
• The Victorian state government has also become “gun shy” on big IT projects, prompting the question whether overall IT spending is set to decline, with IT activity being consolidated into the shared services agency CenITex.

As always, thoughts and/or comments are greatly appreciated.

This issue:

• Sex, Science and Profits [The Bookbag]
  Does science drive innovation? Or does technology?
• Angry shareholders say Microsoft squanders billions on pointless R&D projects [Network World]
  Build it and they will come does not seem to apply to innovation. It’s more important to manage execution and outputs, than it is to manage inputs.
• We just aren’t very creative [Innovate on Purpose]
  People don’t lack creativity, but organizations do. How can we leverage the creativity that our team brings to work, rather than stifling it?
• Ten sci-fi devices nearing reality [New Scientist]
  New Scientist’s take on what’s just around the corner. No flying cars, unfortunately (though there is a jet pack).