Tuesday, March 29, 2011

Preparing for war

Following on from my post on ecosystem wars, I thought I'd discuss some techniques and tactics to use. However, before I do, I need to first describe the organisation that I hope you work for. If this doesn't describe you and your organisation then the techniques and tactics probably won't make sense and I can save you the trouble of reading the next post.

Once again, my apologies to regular followers or attendees of my presentations, this post is just scene setting and so it runs the danger of teaching grandma to suck eggs.

I'm going to assume you're battle hardened, you realise that business is all about warfare and you've got a keen eye for competition. You've probably done a stint in the typical organisation, scratched your head over some of the practices and ultimately found yourself in a new sort of company (possibly created by you).

You understand what an organisation is. Rather than making the mistakes of the past and simply grouping people, activities and methodologies into generic structures such as IT, Finance, Marketing - you've taken the time to look. You may well have profiled your organisation (see figure 1) and identified those activities you consume, those activities you sell and those activities which act as barriers to entry into your industry.

Figure 1 - Profile (click on image for higher resolution)



You know the importance of ecosystem and how this can both accelerate innovation and reduce your risks. You might be using a model akin to ILC (innovate, leverage and commoditise) to grow and keep a vibrant ecosystem around your products and services (see figure 2).

Figure 2 - ILC model (click on image for higher resolution)

You know full well that methodologies have to change with lifecycle because characteristics do and how activities are interconnected (see figure 3 & 4). One size never fits all isn't effective hence you don't engage in the typical debates of this vs that, agile vs six sigma, push vs pull - you know you need both.

Figure 3 - How Characteristics Change (click on image for higher resolution)



Figure 4 - How Methodologies Change (click on image for higher resolution)


You also recognise that not everyone is the same, you have different types of people :-

  • Your pioneers are feverishly imaginative, often chaotic in nature, constantly exploring and they create the crazy stuff. They work on a cadence of weeks, maybe months and they fail often and miserably but they're never afraid to experiment. They want to push things out there, they're infectious, they can even be hazardous. They're not a "safe" pair of hands but you don't want them to be. Every now and then they create your future source of competitive advantage, though you don't know it until it starts to be adopted by the wider ecosystem. They are your Da Vinci's.

  • Your town planners build the core of your company and the components which your pioneers develop upon. They build the solid, useful and beautiful and they're obsessed with getting things better, faster, more efficient and more reliable. They're meticulous, methodological and geniuses who hide worlds of complexity behind standard interfaces. They're ultra reliable, your "safe" hands and they work on a cadence of months, even years. They provide the operational efficiency which you can use to bury your competitors. They are your rock, they are your Vitruvius'

  • In between, you've got your settlers. They watch the landscape, your competitors and spot the patterns which are going to either disrupt an existing revenue stream or reduce some barrier to entry. They constantly take innovations away from the pioneers and force them to move onto the next thing. They'll drive that innovation into the wider ecosystem, spin it out or fail it fast where necessary. They adapt to the changing environment and adopt what's growing. They've always got their eye on pushing a growing trend towards the town planners. They listen to the ecosystem and whilst they don't create the future or build the cities, they play the games of tactical warfare which are so essential to survival. They are ruthless to your competitors, nurturing to your own ecosystem and you're just glad they work with you. They are your Machiavelli's.

You probably identify yourself with one group and you could probably have read down the list of your employees naming which group they belong to. You didn't have to, they told you.

You've long given up on trying to create departments with a mix of Da Vinci's, Machiavelli's and Vitruvius' and listening to the constant arguments within those departments about how to best run IT or whatever they're assigned to do. You understand they won't agree, they never will.

You understand that outsourcing a department may get rid of the arguments but you'll end up removing sources of competitive advantage. It's better to let the town planners outsource those activities that can be removed.

You've given up making speeches about the need for innovation or efficiency, you know you need both. You've also realised that you need to nurture both pioneers and town planners to do this and you have to let them use the tools they need to get the job done. You understand those tools are different. One size fits all seems a long distant and best forgotten memory.

Hence you've probably decided to structure yourself around change and have groups like pioneers, settlers and town planners - though you'll call them something else. You've probably discovered the alignment issues between your old groups was an artificial construct of how you organised yourself. You've probably also realised the importance of the settlers in managing change and wondered why you didn't do this before.

You've almost certainly realised you want the best Da Vinci's, Machiavelli's and Vitruvius' to compete and hence focus almost religiously on high levels of talent and acquiring the best, no matter where they are in the world. You remove any and all unnecessary vestiges of the old world - expenses, timesheets, standard company laptops and so forth and instead have instilled a culture of respect.

You're going into a war. You want your people fighting and you want them to have the tools they need. if you can't trust your people to fight on your side then you don't want them. Your management reflects this, your organisation reflects this, your people reflect this. It feels vastly different from the old ways you remember.

If this is you, then the next post on tactics will make sense and we can go on to explore some of the actions being taking by the big players in our ecosystems.

Ecosystem wars

Back in 2005, I started to talk publicly about lifecycle concepts and the importance of ecosystems. In the next two posts, I'd like to draw a line in the sand and cover those basics of ecosystem one last final time.

I'll take the liberty of assuming notions such as lifecycle, organisational profile, componentisation and consumerization are universally understood and start with an explication of what a business is.

What is a Business?
A business is a living thing, comprising a network of people, a mass of different activities, and reserves of capital including financial, physical, human and social. It consumes, it produces, it grows and it dies. Like all organisms, any business exists within a number of ecosystems in which it competes and co-operates with others; it’s shaped by and shapes its environment, and hence needs to adapt constantly merely to survive.

People come and go, activities change, and hence all firms are in a constant state of flux. In any industrial ecosystem, new activities (innovations) are a consequence of competition and those that are useful will diffuse throughout the ecosystem becoming more of a commodity. This constant change creates a paradox, identified by Salaman and Storey:

”Survival requires efficient exploration of current competencies and ‘coherence, coordination and stability’; whereas innovation requires discovery and development of new competencies and this requires the loosening and replacement of these erstwhile virtues.”

These two extremes of survival (today and tomorrow) have diametrically opposite concerns, and the techniques, tactics and methods needed to manage each are entirely different. Those who manage organizations are therefore caught on the twin horns of a dilemma: how is it possible to be standardized and efficient as well as innovative and new, without prejudicing your survival - either today or tomorrow?

The effects of this on business can be seen in the constant restructuring to cope with new paradigms, and in the yo-yoing of popular management theories between opposites in a scramble to maintain order. A more effective balance can be found through embracing both goals simultaneously.

How do we balance both goals?
This requires a rethinking of how we organize, and a realization that what really matters is not innovation or efficiency per se, but how we continuously manage the path between the two. To explain why this is the case, let us examine a typical profile of an organisation (see figure 1) and consider how we build systems for the future.

Figure 1 - Using profile to build systems (click on image for higher resolution)


First, let us take those cost of doing business activities which act as underlying components of other business activities such as payroll, computer infrastructure, authentication etc. All of these activities are linear, well defined, ubiquitous and suitable for provision as standard re-usable components through utility services. Such an approach will increase our agility, rate of innovation (componentisation effects) and reduce the cost of gambling for any innovative activities built upon these utility services.

However, it is important to understand that all innovations (i.e. those activities which are uncertain and rare) are a gamble and whilst we can reduce costs we can never eliminate it. The future value of something is inversely proportional to the certainty we have over it, we cannot avoid this information barrier any more than we can reliably predict the future. However, there is a means to maximise our advantage.

By making these utility services accessible through APIs, we not only benefit ourselves but we can open up these components to a wider ecosystem. If we can encourage innovation in that wider ecosystem then we do not incur the cost of gambling & failure for those new activities. Unfortunately, we do not enjoy the rewards of their success either
.
Fortunately, the ecosystem provides an early warning mechanism of success i.e. adoption. Hence by creating a large enough ecosystem, we can not only encourage a rapid rate of innovation but also leverage that ecosystem to identify success and then either copy (a weak ecosystem approach) or acquire (a strong ecosystem approach) that activity. This is how we maximise our advantage.

To capitalise on this, we simply drive our newly acquired activity towards utility service provision and create the next wave of innovation through further componentisation effects. In this manner we create a virtuous circle of encouraging innovation in the ecosystem, leveraging the ecosystem to identify the next pattern and commoditising the pattern to utility services in order to encourage the next wave.

In effect, by being at the heart of this ecosystem we manage to create the simultaneous appearance of being highly innovative (as others in the ecosystem do this for us), highly customer focused (by leveraging the ecosystem to identify rapid diffusion) and highly efficient (as we focus on commodity provision). Tom Peter's old adage of choose one is a busted flush in this brave new world.

I've summarised these concepts in figure 2

Figure 2 - ILC model (click on image for higher resolution)


What is critically important to note, is that in essence both innovation of new activities and efficiency of commodity provision can be outsourced. The innovation of activities can be outsourced to a surrounding ecosystem building upon our services, whilst those commodity activities we consume can be outsourced to a marketplace of utility providers. There are benefits to retaining some element of control in those areas but the critical area to focus on is the transitional phase and how you leverage the ecosystem. Our ability to exploit the link between innovation and commodity depends upon the size, composition, engagement, speed of information and overall level of activity within that ecosystem.

Whilst each company comes with its own personal ecosystem (its staff, its partners) growing an extended ecosystem and using that to manage change is a powerful tool and a competitive weapon. It's not businesses but ecosystems that collide in the commercial world and woe betide that organisation which has the weaker. We've seen this story repeated many times before at many different levels through all the usual examples of BetaMax vs VHS or TCP/IP vs IPX/SPX.

It's imperative to understand that a well formed and large ecosystem leads to lower costs of innovation, creates higher rates of innovation, improves the rates of successful adoption, encourages greater efficiencies and can be mined to detect future successes. However, there are cost to this especially in the form of data collection which is why utility based ecosystems (where information is derived from consumption of APIs) have an advantage over product based ecosystems (where information is derived from market research). 

If it is just you and your employees then you'll find it difficult to survive a direct onslaught from any of the modern day monsters with well developed and extended API driven ecosystems (such as Google, Amazon etc). Not impossible, just damn difficult.

For more details, my OSCON '10 talk provides a useful overview of these concepts. However this is enough of a base to begin with.

In the next few posts, I'll cover some of the consequences of this and the strategies which are commonly deployed. Again, I realise this is nothing new and apologies to all readers who've had to endure me harping on about this over the last five years but I'm just scene setting for much later posts.

Monday, March 28, 2011

Consumerization

The evolution of any business activity is complicated by the existence of multiple ecosystems such as the enterprise and consumers. Activities can exist in, transfer between and commoditise within any of these ecosystem.

For example, whilst CRM has mainly commoditised in the enterprise space, email has crossed over to the consumer space in which it has been more aggressively commoditised. Today, these heavily commoditised mail services (such as Google Mail) create adoption pressure for the enterprise. These concepts are summarised in the figure below.

Figure 1 - Consumerization & Lifecycle Across Ecosystems (click on image for higher resolution)



When discussing an activity, a key issue to consider is in which ecosystem the evolution of that activity is governed i.e. is it being driven by competition in the enterprise or the consumer space. Back in 2001, Douglas Neal and John Taylor described the process by which governance transfers from the enterprise to the consumer ecosystem as Consumerization.

The consumerization of technology and its subsequent commoditisation in that consumer ecosystem can have a profound effect on the operation of any enterprise using that technology. It should be noted:
  • Not everything transfers. Some activities find meaningful use within only one ecosystem and hence tend to develop only in that environment. For example, CRM.

  • Barriers to entry can erode quickly. The impact on the media industry of the commoditisation of the means of mass communication occurred primarily in the consumer space over a single decade. Originally, the principal means of mass communication was provided through printing presses and supply & distribution chains. These acted as a major barrier to entry into those industries. The internet and digitization of content brought new means of mass communication into the consumer ecosystem and subsequently were aggressively commoditised resulting in widespread use of blogs, wiki and social media tools such as twitter. A consequence of this is that the barriers to entry into the media industry have been completely eroded. Anyone can become a digital newspaper.

  • Ecosystems are not isolated. People are part of multiple ecosystems, hence activities in the enterprise (which may be provided through products) tend to start with custom-built solutions and hobbyist equivalents in the consumer space.

  • The rate of commoditisation is not uniform between ecosystems.

Numerous activities have undergone this change. The pressure for adoption created through consumerisation has created positive responses such as BYOT (bring your own technology) and negative responses such as shadow IT i.e. when an organisation fails to deliver what its internal consumer need (Joe Baguley gave an excellent presentation on this topic).

All organizations should, as a matter of course, examine both their own and the consumer space for the growth of highly commoditised activities and consider the impacts of these and whether barriers to entry into their own industry will reduce.

For point of reference, computer utilities (i.e.Cloud computing) is expected to reduce the barriers of entry into many industries. In such cases an approach of adoption of the service and creation of higher-order systems can be used to re-establish those barriers.

Equally the impact of consumerization on the means of manufacture is going to hit a wide range of industries. This video is a foretaste of what is going to happen.

Friday, March 18, 2011

Building a private cloud

As we move from a world of infrastructure products to a competitive market of infrastructure services, private clouds have a valid role as part of a hybrid strategy in mitigating transitional risks (such as concerns over data governance, trust, transparency and security of supply).

The key word here is transitional i.e. this is not a permanent solution. Furthermore by using a hybrid strategy you're deliberately sacrificing some element of the benefits of public provision (economies of scale, focus etc) in order to mitigate those risks. It's a trade-off.

However, for this post I'll assume you've decided to make that trade-off. Hence you're going to be using a combination of public and private resources in a hybrid form for the immediate future. So dealing specifically with infrastructure, at what price should you be building a private cloud?

First, you need to recognise that a consequence of a shift to standardised components provided through utility services will be an explosion of innovation in higher order systems - i.e. the competitive landscape is going to become even more competitive. Second, cost efficiency won't result in reduced IT budgets because increased competition, the long tail of unmet demand and co-evolution effects will result in far greater consumption. Lastly, one of the key benefits of cloud is speed and when this is combined with cost efficiency, you'll end up doing more, faster with the same budget.

It's worth noting that there is little correlation between total IT spending and business value but there is strong correlation between speed and business value. How efficient your provision is in terms of speed is critical here. Now assuming you're not planning something daft like a long winded requisition process for new virtual machines, then the speed of provisioning will be minutes whether public or private. Assuming this is uniform, the distinguishing feature becomes cost efficiency - i.e. how much MORE you can do with same level of spending over competitors.

With public provision such as Amazon EC2, a small instance (I'll refer to this as a VM) costs currently $740 per year. Now whilst Amazon doesn't release figures, we believe the cost of provisioning such a VM can be much lower, possibly as low as $220 per VM per year though from the comments possibly much lower. Hence if your private cloud is being designed to cost $1500 per VM per year, you might be forgiven for thinking that this is only twice Amazon pricing and represent good value for a hybrid trade-off. What you're probably discounting is that your private environment will have to exist for three to five or more years and during that time Amazon's pricing could fall rapidly, possibly to the order of $300 per VM per year.

In such circumstances, a competitor with a pure public play would have upto a 5x cost advantage (depending upon how much of your hybrid strategy was private provision) which is an astronomical difference in a world of increasing and more rapid competition. But that's a key point to note, the impact depends upon the type of industry you exist within and your competitor actions.

Assuming you're working in a high tech reliant industry, then in order to give your private cloud a fighting chance, you have to be designing for a target price of between $220-$540 per VM per year.
These figures (and lower) are achievable if done at reasonable scale and with a relentless focus on commodity provision. For reference purposes only, I've provided a hypothetical example (based upon real data from real examples) of a VM farm. I've used the following assumptions:
  1. Base VM: 1.7 Gb RAM, 160 Gb HD, CPU equivalent to a passmark of 420
  2. Target Price (VM per year): $510
  3. Max Utilisation (to determine level of over-provisioning required): 70%
  4. No. of VMs: 100,000
  5. Base Unit: Rack
  6. Focus: Commodity (No multiple PSU, Hot Swap)
  7. Depreciation for hardware: 3 yrs
  8. Current High Interest Rates of: 3%
  9. Networks: All internal equipment and network upto external routers but not external bandwidth.
  10. PUE:1.3
Given this, then figure 1 shows as a rough guide, how your target price per VM per year breaks down into its various components.
Figure 1 - Cost per VM per year.
(click on image for larger size)


Now obviously there are many ways to skin a cat, and pricing is sensitive to various factors such as scale, density of VMs, power consumption, number of units per rack, location etc etc. However, I put this here to start a discussion as I would like to know what's your cost per VM in your private cloud?

Monday, March 07, 2011

Componentisation

Herbert Simons showed in the Theory of Hierarchy how the evolution of a system is dependent upon the organisation of its subsystems. In short, as an activity becomes commoditised and provided as ever more standardised components, it not only allows for increasing speed of implementation but also rapid change, diversity and agility with systems that consume the activity as a subsystem.

In other words, the creation of standard sizes of bricks, pipes, utility services and other architectural building blocks led to a faster rate of house building and a wider diversity of housing shapes. It's the same with electronics and every other field you care to look at.

Commoditisation to standard components leads to an explosion of innovation for higher order systems.

The cloud is no different. It's the creation of good enough, standard components which will cause a wide diversity of higher order systems. These will in turn undergo their own evolution to more of a commodity. Without this process we would never have got to a CPU, let alone cloud or the hugely complex systems that will develop from it.

This also doesn't mean that innovation stops with the standard components. Whether it's brick making or electricity provision, there is a huge amount of operational innovation hidden behind the "standard" however the "standard" acts as an abstraction layer to this. Just because my electricity supplier has introduced new sources of power generation (wind turbine, geothermal etc) doesn't mean I wake up one morning to find that we're moving from 240V 50Hz to something else. If that constant operational innovation was not abstracted behind the standard then all the consumer electronics built upon this would need to continuously change - the entire system would collapse in a mess.

Whilst cloud computing is all about commodity provision of computing resources through utility services, these components act as the abstraction layer. We're not quite there yet, we're still in transition from a product to a utility service world. However, even in that utility service world, providers will still innovate in terms of operations but to a consumer that will be abstracted and ultimately reflected in better price and quality of service. To the consumer this will be seen as operational efficiency and the activity itself for all sense of purpose will remain a commodity, just like electricity and every other industry that has undergone this change. Of course, I'll do more things with it, create new and ever more complex higher order systems but my innovation is based upon the activity being provided as a commodity.

I can understand how many people don't relish the prospect that some activities within IT are becoming more of a commodity. They may not realise the benefits this will create in terms of progress but at the same time as they cry this isn't happening they happily consume systems which depend upon this process.

If you really don't like the idea of commoditisation and componentisation then try getting by without using anything which has depended upon it. Try building a computer without a CPU, electronics, electrical power supply or even nuts and bolts.

Sunday, March 06, 2011

The online grocery guide to keeping me happy

There are many things which I find annoying about shopping online, the most irksome generally deal with grocery shopping. Now let's assume you're an online grocer and you've covered all the basics of having stock, delivering what you say you're going to deliver, the produce being in a reasonable condition and it arriving on time (a tall order for some).

Then, my advice to you is to apply what I call the Wardley Happiness Equation of Extreme Exceptionalism (wheee! for short). The equation is trivial to apply and will almost certainly guarantee my happiness with the shopping experience.

Wardley Happiness Equation of Extreme Exceptionalism

If I'm spending over £70 with you, then you can assume that this is part of a weekly shop. Hence when you come to tot up the final prices, simply calculate the delivery time plus 7 days and then for each item discount 15% for every day which the best before date is less than this.

Please don't ask me to check the dates or tell me that lettuce has a shelf life of three days - it's nonsense. There is nothing that annoys me more about online shopping than a week's worthy of grocery turning up with some best before dates of tomorrow.

The confusion of choice

I've been asked many times whether there are any mechanisms to slow down, prevent or reverse commoditisation? Well, there are a long list of techniques which can be employed and to explain them let's just revisit the lifecycle approach.

Figure 1 provides a visible representation of the evolution of an activity from innovation to commodity. It should be noted that what drives the evolution of an activity through its lifecycle is both user competition (the drive for something which is useful i.e. has utility) and supply competition (the drive to provide a better way of meeting users need over competitors).

Figure 1 - Lifecycle
(click on image for larger size)

Furthermore as an activity transitions from one phase to another such as custom built to products or products to utility services, a number of factors are required for the transition to occur. The factors include:-
  • Concept : e.g. the idea of providing something in that format such as computing infrastructure through a utility.
  • Attitude: a willingness for consumers to accept the activity in the new format.
  • Technology : the technology to actually achieve this.
  • Suitability : the activity to be widespread and well defined enough to be suitable for provision in that format e.g. a utility format requires a well defined and ubiquitous activity capable of supporting the volume operations needed.

So how do we counter this?

Don't Sell it to Everyone: One of the simplest ways of ensuring that something doesn't become a commodity is to not sell it to everyone i.e. prevent it becoming ubiquitous and well defined. Unfortunately competition applies here, so you have to find a way of preventing others from selling - i.e. patents give a time limited opportunity to do this.

Create Confusion: If you can't prevent everyone selling, then create a confusion of choice. The purpose of this is to reduce certainty over the activity in order to persuade consumers that it is more of an innovation. The most profitable scenario is to have every consumer buying it and believing it is highly innovative to them alone - the "designed for you" meme.

Examples of confusion of choice can be found from light-bulbs to mobile phone contracts. Walk into your average electrical department store, go to the light bulb counter and ask yourself - "Do I really need a choice between 200 lightbulbs and bewildering array of styles, plug formats, power outputs, swirly bits of glass, shapes etc? Didn't we use to have less choice and wasn't it easier to make a decision then?"

This abundance of choice is not designed for your convenience but to prevent you from making comparison. It's the same with the plethora of designed for you mobile phone contracts or insurance instruments or ... the list is long. Why else do you think we now have a vibrant price comparison industry countering this.

Association: one of my favourite examples of manipulation is to try and install a hidden meaning to an activity i.e. to create an association between this particular brand and either a lifestyle choice or some other implied benefit. If you're lucky, turning an ordinary activity into a status symbol can reap huge dividends. This sort of manipulation can be most easily recognised by switching on the TV and watching adverts - most of which rarely discuss the activity itself but imply a consequences of choosing this particular brand. Using this brand of soap will transform you into a glamorous person, whisked away to shower in a tropical forest surrounded by other glamorous people? The use of this deodorant will make you instantly appealing to huge numbers of the opposite sex? The purpose of these acts is not to cause confusion but to fundamentally add a hidden utility to a particular brand of the activity and to disassociate it from the rest.

Complexity: Another tactic is to reduce certainty through the introduction of visible engineering i.e. make the device look more complex than it is. It's actually a combination of confusion of choice, association and complexity which turned the humble vacuum cleaner into a space age construction. It doesn't matter that the activity is ubiquitous, well defined and commodity like nor that the latest range of cleaners may be no better at cleaning. Today, vacuums have new properties such as "doesn't lose suction", they use visible engineering and a bewildering array of choice and associations to lifestyle. All of this is designed to persuade consumers that there's more to a vacuum cleaner than cleaning the floor. Kerching!

Bundling: Another favourite of mine is to bundle many activities together. For example, the iPhone is not a phone but a wide range of activities bundled into a single device - calculator, phone, camera, calendar, alarm clock, browser, email, time recorder, map etc. Bundling provides ample opportunities for confusion and dissociation, i.e. you can't easily compare one smart phone to another and certainly not the pricing tariff of a standard phone to a smart phone. However, through Android, Google has aggressively commoditised most of these bundled activities with the use of open source and open ecosystems and hence cornered Apple into a very high risk, constant innovation game. So as well as tactics to counter commoditisation, you can also use counter tactics to force it and your competitors into tricky positions.

I've always been a big fan of Apple, however this is the second time in my opinion that they've been seriously outmaneuvered and the root causes of this appear to be the same - a poor understanding of change and how to play the game. They're great at innovation but that's only part of the battle. Time will of course tell, but I don't see Apple's future as rosy.

I won't go on as there's a whole mass of techniques and counter techniques in this space. However to the question can you slow or reverse commoditisation - well you can certainly persuade consumers of this.