Tag Archives: Marketing

Malls are the casinos of middle class suburbia

The department stores are empty but the malls (or at least the malls here in Australia and nearby in China and South-East Asia) are full. Why is there such a difference when department stores and malls seemingly offer shoppers the same thing: Chanel, Yves Saint Laurent, Prada, Vivienne Westwood and Alexander McQueen (and a bunch of lower status retailers) all under one roof?

While department stores have been in decline for at least the last thirty years{{1}} many malls have never seemed busier. The crowds we expect at the mall during Christmas are popping up every other weekend, forcing us to park at the far corner of the back parking lot before running through the rain only to arrive at the mall proper just in time to catch our film.

[[1]]Winners and Losers in Retail @ PEG[[1]]

As I pointed out in The Destruction of Traditional Retail{{2}}:

[[2]]The Destruction of Traditional Retail @ PEG[[2]]

Department stores [bring] together a collection of departments, each selling a different type of product, where a department could be a small to mid-sized store on it’s own.

Department stores traditionally offered the aspirational suburbanite or rural visitor an opulent setting where they could while away the day drifting from shoes to cosmetics with a stop for a light lunch and a visit to the bookstore, florist or hairdresser. They would make the long trip to the centre of town (or to the city even) for that much needed pair of shoes and formal dress, only to find themselves spending the entire day there.

Malls, though (again from The Destruction of Traditional Retail):

… took this model to the logical extreme by collecting together a large number of separate stores to create a shopping destination.

Ironically, many malls were often built around a department store playing the role of anchor tenant. The department store provided that critical mass of products that would convince shoppers to try their luck at the mall rather than head somewhere else.

If malls and department stores so similar then why is one succeeding while the other fails?

The first difference is the Gruen transfer.

The invention of the classic indoor mall is generally credited to Vienna-born architect Victor Gruen. Gruen first outlined his vision for malls in a 1952 article in the US magazine Progressive Architecture. Most Americans were moving out to suburbia but still shopping downtown. Gruen considered suburbia soulless and heartless. The mall, he thought, could remedy these problems by recreating the town marketplace or public square and providing the suburbs with a cultural focus.

Gruen’s malls were extremely effective both at luring customers and holding them captive. The later effect was named the Gruen Transfer, much to Gruen’s chagrin as it was one aspect of the his invention that he disavowed.

From the FAQ on The Gruen Transfer’s{{3}} web site{{4}}:

[[3]]The Gruen Transfer is also the name of a television program on Australia’s ABC1 network. The show discusses the methods, science and psychology behind advertising.[[3]]

[[4]] What does ‘The Gruen Transfer’ mean? from the The Gruen Transfer FAQ[[4]]

The Gruen Transfer refers to the moment when we as consumers unwittingly respond to cues in the shopping environment that are designed to disorientate. Factors such as the lighting, sounds, temperature and the spatial arrangements of stores and displays interact, leading the customer to lose control of their critical decision making processes. Our eyes glaze over, our jaws slacken, we forget what we came for and become impulse buyers. So if you go into a mall to buy a mop and walk out with a toaster, a block of cheese and a badminton set, then the Gruen Transfer has probably played a role. Or maybe you just really like cheese.

The second difference is in the portfolio nature of a mall.

A department store is a single business that operates a number of departments. While it might include a merry-go-round and large man in a red suit at Christmas, the focus is firmly on shifting product. The department store is a shopping destination: it’s somewhere you go when you have a need to be filled.

Malls, on the other hand, operates a portfolio of businesses. While the portfolio might include retailers (or, as has been the case to date, dominated by retailers) the focus of the mall is keeping punters in the mall and keeping them circulating. As along as the punters are circulating they’re spending money, and the mall will be taking their percentage.

The mall is less concerned with shifting product than keeping you at the mall bouncing between stores, as the more time you spend there the more money you’re likely to spend. Turn up for a movie, end up having a meal, get a foot massage and have your toenails painted, and you might even buy a pair of shoes.

Consumer behaviour, as I’ve said before, is changing though. We used to head out the door to find some product we needed: soap, some nails, or a suit for the wedding next weekend. Now we head out to be entertained: to see a movie, meet friends at the food court, or even just to hide from the heat in the mall’s air-conditioning (that foot massage sounds good too).

Department stores are contracting because we don’t head out the door on a shopping mission as much as we used to. Their addressable market – people who want to spend the afternoon wandering between racks of products while they pick up a few things they need (or even things they don’t need) – has shrunk.

Malls, though, are having no problem attracting punters.

Victor Gruen was right: we do need a place that we can gather as a community. What he got wrong is that we don’t want a market place or public square. What we’ve ended up with is a casino; somewhere exciting and entertaining where we can bounce between activities or even just catch up with friends in amongst the hustle and bustle. Malls have become the casinos of middle class suburbia.

The challenge malls have is to find the mix of business that provide us, the consumers, with the most engaging visit possible. Revenues might be down a little at the moment{{5}} but it’s not a long term trend (as with department stores), the malls are still full and there’s lots of possibilities to explore.

[[5]]Sarah Danckert (18 October 2013), Mall growth plans reined in, The Australian.[[5]]

Image source: Alpha.

Three questions you need to ask

There's three questions you need to ask yourself before you invest a large chunk of cash in some enterprise application:

  • Can I use something, rather than configuring something, rather than customising something?
  • How will the solution support the (social) community who will use it?
  • Is there a reason why I can't buy the solution ‘on-demand’ via SaaS?

Continue reading Three questions you need to ask

Is the market for IT services and solutions shrinking or growing?

Here’s an interesting and topical question: is the market for enterprise IT services (SI, BPO, advisory et al) growing or shrinking? I’m doing the rounds at the moment to see where the market is going (a side effect of moving on), and different folk seems to have quite different views.

  • 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.

Inside vs. Outside

As Andy Mullholland pointed out in a recent post, all too often we manage our businesses by looking out the rear window to see where we’ve been, rather than looking forward to see where we’re going. How we use information too drive informed business decisions has a significant impact on our competitiveness.

I’ve made the point previously (which Andy built on) that not all information is of equal value. Success in today’s rapidly changing and uncertain business environment rests on our ability to make timely, appropriate and decisive action in response to new insights. Execution speed or organizational intelligence are not enough on their own: we need an intimate connection to the environment we operate in. Simply collecting more historical data will not solve the problem. If we want to look out the front window and see where we’re going, then we need to consider external market information, and not just internal historical information, or predictions derived from this information.

A little while ago I wrote about the value of information. My main point was that we tend to think of most information in one of two modes—either transactionally, with the information part of current business operations; or historically, when the information represents past business performance—where it’s more productive to think of an information age continuum.

The value of information
The value of information

Andy Mulholland posted an interesting build on this idea on the Capgemini CTO blog, adding the idea that information from our external environment provides mixed and weak signals, while internal, historical information provides focused and strong signals.

The value of information and internal vs. external drivers
The value of information and internal vs. external drivers

Andy’s major point was that traditional approaches to Business Intelligence (BI) focus on these strong, historical signals, which is much like driving a car by looking out the back window. While this works in a (relatively) unchanging environment (if the road was curving right, then keep turning right), it’s less useful in a rapidly changing environment as we won’t see the unexpected speed bump until we hit it. As Andy commented:

Unfortunately stability and lack of change are two elements that are conspicuously lacking in the global markets of today. Added to which, social and technology changes are creating new ideas, waves, and markets – almost overnight in some cases. These are the ‘opportunities’ to achieve ‘stretch targets’, or even to adjust positioning and the current business plan and budget. But the information is difficult to understand and use, as it is comprised of ‘mixed and weak signals’. As an example, we can look to what signals did the rise of the iPod and iTunes send to the music industry. There were definite signals in the market that change was occurring, but the BI of the music industry was monitoring its sales of CDs and didn’t react until these were impacted, by which point it was probably too late. Too late meaning the market had chosen to change and the new arrival had the strength to fight off the late actions of the previous established players.

We’ve become quite sophisticated at looking out the back window to manage moving forward. A whole class of enterprise applications, Enterprise Performance Management (EPM), has been created to harvest and analyze this data, aligning it with enterprise strategies and targets. With our own quants, we can create sophisticated models of our business, market, competitors and clients to predict where they’ll go next.

Robert K. Merton: Father of Quants
Robert K. Merton: Father of Quants

Despite EPM’s impressive theories and product sheets, it cannot, on its own, help us leverage these new market opportunities. These tools simply cannot predict where the speed bumps in the market, no matter how sophisticated they are.

There’s a simple thought experiment economists use to show the inherent limitations in using mathematical models to simulate the market. (A topical subject given the recent global financial crisis.) Imagine, for a moment, that you have a perfect model of the market; you can predict when and where the market will move with startling accuracy. However, as Sun likes to point out, statistically, the smartest people in your field do not work for your company; the resources in the general market are too big when compared to your company. If you have a perfect model, then you must assume that your competitors also have a perfect model. Assuming you’ll both use these models as triggers for action, you’ll both act earlier, and in possibly the same way, changing the state of the market. The fact that you’ve invented a tool to predicts the speed bumps causes the speed bumps to move. Scary!

Enterprise Performance Management is firmly in the grasp of the law of diminishing returns. Once you have the critical mass of data required to create a reasonable prediction, collecting additional data will have a negligible impact on the quality of this prediction. The harder your quants work, the more sophisticated your models, the larger the volume of data you collect and trawl, the lower the incremental impact will be on your business.

Andy’s point is a big one. It’s not possible to accurately predict future market disruptions with on historical data alone. Real insight is dependent on data sourced from outside the organization, not inside. This is not to diminish the important role BI and EPM play in modern business management, but to highlight that we need to look outside the organization if we are to deliver the next step change in performance.

Zara, a fashion retailer, is an interesting example of this. Rather than attempt to predict or create demand on a seasonal fashion cycle, and deliver product appropriately (an internally driven approach), Zara tracks customer preferences and trends as they happen in the stores and tries to deliver an appropriate design as rapidly as possible (an externally driven approach). This approach has made Zara the most profitable arm of Inditex, a holding company of eight retail brands, and one of the biggest success stories in Spanish business. You could say that Quants are out, and Blink is in.

At this point we can return to my original goal: creating a simple graphic that captures and communicates what drives the value of information. Building on both my own and Andy’s ideas we can create a new chart. This chart needs to capture how the value of information is effected by age, as well as the impact of externally vs. internally sourced. Using these two factors as dimensions, we can create a heat map capturing information value, as shown below.

Time and distance drive the value of information
Time and distance drive the value of information

Vertically we have the divide between inside and outside: internally created from processes; though information at the surface of our organization, sourced from current customers and partners; to information sourced from the general market and environment outside the organization. Horizontally we have information age, from information we obtain proactively (we think that customer might want a product), through reactively (the customer has indicated that they want a product) to historical (we sold a product to a customer). Highest value, in the top right corner, represents the external market disruption that we can tap into. Lowest value (though still important) represents an internal transactional processes.

As an acid test, I’ve plotted some of the case studies mentioned in to the conversation so far on a copy of this diagram.

  • The maintenance story I used in my original post. Internal, historical data lets us do predictive maintenance on equipment, while  external data enables us to maintain just before (detected) failure. Note: This also applies tasks like vegetation management (trimming trees to avoid power lines), as real time data and be used to determine where vegetation is a problem, rather than simply eyeballing the entire power network.
  • The Walkman and iPod examples from Andy’s follow-up post. Check out Snake Coffee for a discussion on how information driven the evolution of the Walkman.
  • The Walmart Telxon story, using floor staff to capture word of mouth sales.
  • The example from my follow-up (of Andy’s follow-up), of Albert Heijn (a Dutch Supermarket group) lifting the pricing of ice cream and certain drinks when the temperature goes above 25° C.
  • Netflix vs. (traditional) Blockbuster (via. Nigel Walsh in the comments), where Netflix helps you maintain a list of files you would like to see, rather than a more traditional brick-and-morter store which reacts to your desire to see a film.

Send me any examples that you know of (or think of) and I’ll add them to the acid test chart.

An acid test for our chart
An acid test for our chart

An interesting exercise left to the reader is to map Peter Drucker’s Seven Drivers for change onto the same figure.

Update: A discussion with a different take on the value of information is happening over at the Information Architects.

Update: The latest instalment in this thread is Working from the outside in.

Update: MIT Sloan Management Review weighs in with an interesting article on How to make sense of weak signals.

Accelerate along the road to happiness

Our ability to effectively manage time is central to success in today’s hype-competitive business environment. The streamlined and high velocity value-chains we’ve created are designed to invest as little time (and money) as possible in unproductive business activities. However, being fast, being good at optimizing our day-to-day operations, is no longer enough. We’ve reached a point where managing the acceleration of our business—the ability to change direction, redeploy resources to meet new opportunities more rapidly than our competition—is the driver for best in category performance. If we can react faster than our competition then we can capitalize on a business opportunity (or disruption, as they are often the same) and harvest any value the opportunity created.

Time is our overarching business driver at the moment. We hope to be the first to approve a mortgage, capturing the customer before our competitors have even responded to the original application. We strive to be first to market with a new portable music device (Walkman or iPod), establishing early mover advantage and taking the dominant position in the market. Or we might simply want to quickly restore essential services—power, gas or water—to our customers, as they have become intensely dependent upon them. Globalization has leveled the playing field, as we’re all working from the same play book and leveraging the same resources. The most significant factor for success in this environment is the ability to execute faster than our competition—harvesting the value in an opportunity before they can.

This focus on time is a recent phenomena. Not long ago, no further back than the early nineties, we were more concerned with mass. The challenge was too get the job done. Keep the wheels turning in the factories. Keep the workers busy in their cubicles. Time is money, so we’re told, and we need to ensure that we don’t waste money by laying idle. Mass was the key to success—ensuring that we had enough work to do, enough raw materials to work on, to keep our business busy and productive.

When mass is the focus, then bigger is better. This is a world where global conglomerates rule, as size is the driver for success. Supply chains were designed so that enough stuff was available right next to the factory, where supply can be ensured, that the factory would never run out of raw materials and grind to a halt. Whether shuffling paperwork or shifting widgets, the ability to move more stuff around the business was always seen as an improvement.

This is also the world that created a pile of shipping containers too behold in the Persian Gulf, during the Gulf War in the early nineties. With no known destination, some containers couldn’t be delivered. Without a clear understanding of where they came from, others couldn’t be returned. A few of these orphaned containers were opened in an attempt to determine their destination or origin; however the sweltering Arabian sun was not kind to their contents, which included items such as raw poultry, so a stop was soon put to that. The containers just kept piling up. 22,000 of 50,000 containers simply became invisible, collecting in a pile that went by the jaunty name of Iron Mountain.

Iron Mountain: 22,000 containers that became invisible
Iron Mountain: 22,000 containers that became invisible

Our answer was to stop focusing on mass, on having enough stuff on hand to keep the wheels of industry turning. We have to admit that Iron Mountain proves that we could move sufficient mass. The next challenge was to ensure that materials arrived at just the right time for them to be consumed by the business. We moved from worrying about mass, to managing velocity.

Total quality management and process improvement efforts finally found their niche. LEAN and Six Sigma rolled through the business landscape ripping cost out businesses where-ever they went. Equipped with books on Toyota’s Production System and kanban cards, we ripped excess material from the supply chain. Raw materials arrive just-in-time, and we avoid the costs associated with storing and handling vast warehouses of material, as well as the working capital tied up in the stored material itself. Quality went up, process cycle times shrunk, and the pace of business accelerated. Much like the tea clippers from China in the 1800s, with the annual race to get the first crop back to London for the maximum profit (with skipper paid a profit share as an incentive along with their salary), we’re focused on cranking the handle of business as fast as possible.

Zara, a fashion retailer, is the poster child for this generation of business. The fashion industry is built around a value-chain that tries to push out regular product updates, beating up demand via runway shows and media coverage to support a seasonal marketing cycle. Zara takes a different approach, tracking customer preferences and trends as they happen in the stores and trying to deliver an appropriate design as rapidly as possible, allowing customer demand to pull fashion. By focusing on responding to customer demand, wherever it is, Zara has built an organization designed too minimize time from design to marketed product. For example, onshore, high-tech, agile production is preferred to low-tech but low cost, offshore production which involves long production delays. Zara takes two weeks to take a product to market, where the industry average is six months; the lifetime of Zara’s products is measured in weeks, rather than months; and the products offered in each store are tailored to the interests of the community it serves rather than a long term marketing plan.

The change in product life-cycle has created a material change to customer buying habits. Traditionally customers’ will visit a fashion store a few times a year to see what a new season brings. There is no real pressure to buy in any particular visit, as they know they can return to buy the same garment later. Zara, however, with it’s dramatically shortened product cycles, drives different behavior. Customer visit more often, as they can expect to see a new range each visit. They are also more likely too buy, as they know that there is little chance of the same garment being available the next time. This approach has made Zara the most profitable arm of Inditex, a holding company of eight retail brands, and one of the biggest success stories in Spanish business.

The dirty secret of high velocity, lean businesses is that they are fragile: small disturbances can create massive knock-on effects. As we’ve ripped fat from the value chain, we’ve also weakened its ability to react to, and resolve, disruptions. A stockout can now flow all the way back along the supply chain to the literal coal face, stalling the entire business value-chain. Restoring an essential service is delayed while we scramble to procure the vital missing part. Mortgage approvals are deferred while we try reallocate the work load of a valuer dealing with a personal emergency. Or our carefully synchronized product launch falls apart for what seems like a trivial reason somewhere on the other side of the globe.

Our most powerful tools in creating todays high velocity businesses—tools like straight-through processing, LEAN and Six Sigma—worked by removing variation from business processes to increase throughput. The same tools prevent us from effectively responding to these disruptions.

Opportunities today are more frequent, but disruptive and fleeting. An open air festival in the country might represent an opportunity for a tolling operator to manage parking in an adjacent field, if the solution can be deployed as sufficient scale rapidly enough. Or the current trend for pop-up retail stores (if new products rapidly come and go, then why not stores) could be moved from an exceptional, special occasion marketing tool, into the mainstream as a means to optimize sales day-by-day. Responding to these opportunities implies reconfiguring our business on the fly—rapidly integrating business exceptions into the core of our business. This might range from reconfiguring our carefully designed global supply chain, through changing core mortgage approval criteria and processes to modifying category management strategies in (near) real time.

Sam: Waiting while his bank sorts itself out
Sam: Waiting while his bank sorts itself out

We’re entering a time when our ability to change direction, adapting to and leveraging changes in the commercial environment as they occur, will drive our success. If we can react faster than the competition then we can capitalize on a business opportunity and harvest any value the opportunity creates. Our focus will become acceleration: working too build businesses with the flexibility and spare energy required to turn and respond rapidly. These businesses will be the F1 cars of business, providing a massive step in performance over more conventional organizations. And, just like F1, they will also require a new level of performance from our knowledge workers. If acceleration is our focus, then our biggest challenge will be creating time and space required by our knowledge workers to identify these opportunities, turn the steering wheel and leverage them as they occur.

Update: A friend of mine just pointed out that the logical progression of mass → velocity → acceleration naturally leads to jerk, which is an informal unit of measurement for the third derivative.

Why we can’t keep up

We’re struggling to keep up. The pace of business seems to be constantly accelerating. Requirements don’t just slip anymore: they can change completely during the delivery of a solution. And the application we spent the last year nudging over the line into production became instant legacy before we’d even finished. We know intuitively that only a fraction of the benefits written into the business case will be realized. What do we need to do to get back on top of this situation?

We used to operate in a world where applications were delivered on time and on budget. One where the final solution provided a demonstrable competitive advantage to the business. Like SABER, and airline reservation system developed for American Airlines by IBM which was so successful that the rest of the industry was forced to deploy similar solutions (which IBM kindly offered to develop) in response. Or Walmart, who used a data warehouse to drive category leading supply chain excellence, which they leveraged to become the largest retailer in the world. Both of these solutions were billion dollar investments in todays money.

The applications we’ve delivered have revolutionized information distribution both within and between organizations. The wave of data warehouse deployments triggered by Walmart’s success formed the backbone for category management. By providing suppliers with a direct feed from the data warehouse—a view of supply chain state all the way from the factory through to the tills—retailers were able to hand responsibility for transport, shelf-stacking, pricing and even store layout for a product category to their suppliers, resulting in a double digit rises in sales figures.

This ability to rapidly see and act on information has accelerated the pulse of business. What used to take years now takes months. New tools such as Web 2.0 and pervasive mobile communications are starting to convert these months into week.

Take the movie industry for example. Back before the rise of the Internet even bad films could expect a fair run at the box-office, given a star billing and strong PR campaign too attract the punters. However, post Internet, SMS and Twitter, the bad reviews have started flying into punters hands moments after the first screening of a film has started, transmitted directly from the first audience. Where the studios could rely a month or of strong returns, now that run might only last hours.

To compensate, the studios are changing how they take films to market; running more intensive PR campaigns for their lesser offerings, clamping down on leaks, and hoping to make enough money to turn a small profit before word of mouth kicks in. Films are launched, distributed and released to DVD (or even iTunes) in weeks rather than months or years, and studios’ funding, operations and the distribution models are being reconfigured to support the accelerated pace of business.

While the pulse of business has accelerated, enterprise technology’s pulse rate seems to have barely moved. The significant gains we’ve made in technology and methodologies has been traded for the ability to build increasingly complex solutions, the latest being ERP (enterprise resource planning) whose installation in a business is often compared to open heart surgery.

The Diverging Pulse Rates of Business and Technology

This disconnect between the pulse rates of business and enterprise technology is the source of our struggle. John Boyd found his way to the crux of the problem with his work on fighter tactics.

John Boyd—also know as “40 second Boyd”—was a rather interesting bloke. He had a standing bet for 40 dollars that he beat any opponent within 40 seconds in a dog fight. Boyd never lost his bet.

The key to Boyd’s unblemished record was a single insight: that success in rapidly changing environment depends on your ability to orient yourself, decide on, and execute a course of action, faster than the environment (or your competition) is changing. He used his understanding of the current environment—the relative positions, speed and performance envelopes of both planes—to quickly orient himself then select and act on a tactic. By repeatedly taking decisive action faster than his opponent can react, John Boyd’s actions were confusing and unpredictable to his opponent.

We often find ourselves on the back foot, reacting to seemingly chaotic business environment. To overcome this we need to increase the pulse of IT so that we’re operating at a higher pace than the business we support. Tools like LEAN software development have provided us with a partial solution, accelerating the pulse of writing software, but if we want to overcome this challenge then we need to find a new approach to managing IT.

Business, however, doesn’t have a single pulse. Pulse rate varies by industry. It also varies within a business. Back office compliance runs at a slow rate, changing over years as reporting and regulation requirements slowly evolve. Process improvement and operational excellence programs evolve business processes over months or quarters to drive cost out of the business. While customer or knowledge worker facing functionality changes rapidly, possibly even weekly, in response to consumer, marketing or workforce demands.

Aligning technology with business

We can manage each of these pulses separately. Rather than using a single approach to managing technology and treating all business drivers as equals, we can segment the business and select management strategies to match the pulse rate and amplitude of each.

Sales, for example, is often victim of an over zealous CRM (customer relationship management) deployment. In an effort to improve sales performance we’ll decide to role out the latest-greatest CRM solution. The one with the Web 2.0 features and funky cross-sell, up-sell module.

Only of a fraction of the functionality in the new CRM solution is actually new though—the remainder being no different to the existing solution. The need to support 100% of the investment on the benefits provided by a small fraction of the solution’s features dilutes the business case. Soon we find ourselves on the same old roller-coaster ride, with delivery running late,  scope creeping up, the promised benefits becoming more intangible every minute, and we’re struggling to keep up.

There might be an easier way. Take the drugs industry for example. Sales are based on relationships and made via personal calls on doctors. Sales performance is driven by the number of sales calls a representative can manage in a week, and the ability to answer all of a doctor’s questions during a visit (and avoid the need for a follow-up visit to close the sale). It’s not uncommon for tasks unrelated to CRM—simple tasks such as returning to the office to process expenses or find an answer to a question—to consume a disproportionate amount of time. Time that would be better spent closing sales.

One company came up with an interesting approach. To support the sales reps in the field they provided them with the ability to query the team back in the office, answering a clients question without the need to return to head office and then try to get back in their calendar. The solution was to deploy a corporate version of Twitter, connecting the sales rep into the with the call center and all staff using the company portal via a simple text message.

By separating concerns in this way—by managing each appropriately—we can ensure that we are working at a faster pace than the business driver we supporting. By allocating our resources wisely we can set the amplitude of each pulse. Careful management of the cycles will enable us to bring business and technology into alignment.

The problems we’re facing

Companies are engaged in an arms race. For years they have been rushing to beat competitors to market with applications designed to automate a previously manual area of the business, making them more efficient and thereby creating a competitive advantage.

Today, enterprise applications are so successful that it is impossible to do business without them. The efficiencies they deliver have irrevocably changed the business environment, with an industry developing around them a range of vendors providing products to meet most needs. It is even possible to argue that many applications have become a commodity (as Nicholas Carr did in his HBR article “IT Doesn’t Matter”), and in the last couple of years we have seen consolidation in the market as larger vendors snap up smaller niche players to round out their product portfolio.

This has levelled the playing field, and it’s no longer possible to use an application in the same way to create competitive advantage. Now that applications are ubiquitous, they’re simply part of the fabric of business.

Today, how we manage the operation of a business process is becoming more important that the business process itself. Marco Iansiti brought this into sharp relief through his work at Harvard Business Review when he measured the efficiency of deployment of IT, and not cost, and correlated upper quartile efficiency with upper quartile sales revenue growth. Efficiently dealing with business exceptions, optimizing key decisions and ensuring end-to-end consistency and efficiency will have a greater impact than replacing an existing application.

We are finished the big effort: applications are available from multiple vendors to support the majority of a business’s supporting functionality. The law of diminishing returns has taken effect, and owning or creating new IT asset today will not simply confer a competitive advantage. Competitive advantage now lives in the gaps between our applications. Exception handling is becoming increasingly important as good exception handling can have a dramatic impact on both the bottom- and top-line. If we can deal with stock-outs more efficiently then we can keep less stock on hand and operate a leaner supply chain. Improving how we determine financial adequacy allows us to hold lower capital reserves, freeing up cash that we can put to other more productive uses. Extending our value-chain beyond the confines of our organisation to include partners, suppliers and channels, allows us to optimize end-to-end processes. Providing joined-up support for our mortgage product model allows us to put the model directly in the hands of our clients, letting them configure their own, personal, home loan.

Link to the complete article.

Applications let us differentiate, not!

Being involved in enterprise IT, we tend to think that the applications we build, install and maintain will provide a competitive advantage to the companies we work for.

Take Walmart, for example. During the early 80s, Walmart invested heavily in creating a data warehouse to help it analyze its end-to-end supply chain. The data was used to statically optimize Walmart’s supply chain, creating the most efficient, lowest cost supply chain in the world at the time. Half the savings were passed on to Walmart’s customers, half whet directly to the bottom line, and the rest is history. The IT asset, the data warehouse, enabled Walmart to differentiate, while the investment and time required to develop the data warehouse created a barrier to competition. Unfortunately this approach doesn’t work anymore.

Fast forward to the recent past. The market for enterprise applications has grown tremendously since Walmart first brought that data warehouse online. Today, applications providing solutions to most business problems are available from a range of vendors, and at a fraction of the cost required for the first bespoke solutions that blazed the enterprise application trail. Walmart even replaced that original bespoke supply chain data warehouse, which had become something of an expensive albatross, with an off-the-rack solution. How is it possible for enterprise applications to provide a competitive advantage if we’re all buying from the same vendors?

One argument is that differentiation rests in how we use enterprise applications, rather than in the applications themselves. Think of the manufacturing industries (to use a popular analogy at the moment). If two companies have access to identical factories, then they can still make different, and differentiated, products. Now think of enterprise applications as business process factories. Instead of turning out products, we use these factories to turn out business processes. These digital process factories are very flexible. Even if we all start with the same basic functionality, if I’m smarter at configuring the factory, then I’ll get ahead over time and create a competitive advantage.

This analogy is so general that it’s hard to disagree with. Yes, enterprise applications are (mostly) commodities so any differentiation they might provide now rests in how you use them. However, this is not a simple question of configuration and customization. The problem is a bit more nuanced than that.

Many companies make the mistake that customizing (code changes etc) their unique business processes into an application will provide them with a competitive advantage. Unfortunately the economics of the enterprise software market mean that they are more likely to have created an albatross for their enterprise, than provided a competitive advantage.

Applications are typically parameterized bespoke solutions. (Many of the early enterprise applications were bespoke COBOL solutions where some of the static information—from company name through shop floor configuration—has been pushed into databases as configuration parameters. ) The more configuration parameters provided by the vendor, the more you can bend the application to a shape that suits you.

Each of these configuration parameters requires and investment of time and effort to develop and maintain. They complicate the solution, pushing up its maintenance cost. This leads vendors to try and minimize the number of configuration points they provide to a set of points that will meet most, but not all customers’ needs. In practical terms, it is not possible to configure an application to let you differentiate in a meaningful way. The configuration space is simply too small.

Some companies resort to customizing the application—changing its code—to get their “IP” in. While this might give you a solution reflecting how your business runs today, every customization takes you further from a packaged solution (low cost, easy to maintain, relatively straight forward to upgrade …) and closer to a bespoke solution (high cost, expensive to maintain, difficult or impossible to upgrade). I’ve worked with a number of companies where an application is so heavily customized that it is impossible to deploy vendor patches and/or upgrades. The application that was supposed to help them differentiate had become an expensive burden.

Any advantage to be wrung from enterprise IT now comes from the gaps between applications, not from the applications themselves. Take supply chain for example. Most large businesses have deployed planning and supply chain management solutions, and have been on either the LEAN or Six Sigma journey. Configuring your planning solution slightly differently to your competitors is not going to provide much of an edge, as we’re all using the same algorithms, data models and planning drivers to operate our planning process.

Most of the potential for differentiation now lies with the messier parts of the process, such as exception management (the people who deal with stock-outs and lost or delayed shipments). If I can bring together a work environment that makes my exception managers more productive than yours—responding more rapidly and accurately to exceptions—then I’ve created a competitive advantage as my supply chain is now more agile than yours. If I can capture what it is that my exception managers do, their non-linear and creative problem solving process, automate it, and use this to create time and space for my exception managers to continuously improve how supply chain disruptions are handled, then I’ve created a sustainable competitive advantage. (This is why Enterprise 2.0 is so exciting, since a lot of this IP in this space is tacit information or collaboration.)

Simply configuring an application with today’s best practice—how your company currently does stuff—doesn’t cut it. You need to understand the synergies between your business and the technologies available, and find ways to exploit these synergies. The trick is to understand the 5% that really makes your company different, and then reconfiguring both the business and technology to amplify this advantage while commoditizing the other 95%. Rolls-Royce (appears to be) a great example of getting this right. Starting life as an manufacturer of aircraft engines, Rolls Royce has leveraged its deep understanding of how aircraft engines work (from design through operation and maintenance), reifying this knowledge in a business and IT estate that can provide clients with a service to keep their aircraft moving.