Thursday, May 21, 2015

The Chief Internet of Things Officer

Back in 2006, I gave a talk at EuroOSCON on Making the Web of Things which covered manufacturing methods from 3D printing to devices connected to services over the internet. I had an interest in this field and the consequences of it in every day life and used to describe its effect through a scenario known as "Any Given Tuesday" which gave a comparison of today's life against the future. I was also involved in a number of side projects (you can't learn unless you get your hands dirty) from a paper book with printed electronics (i.e. turning a paper book into an interactive device) to various animatronic experiments.

For Background (general interest) ...

A background on the combination of physical and digital including future languages e.g. Spimescript is provided here. The presentation from EuroFoo is below.



The scenario for Any Given Tuesday is provided here. There is a slidedeck from 2005 for this and at some point I'll post it, however it's not necessary.

For the interactive book (physical + electronics), then the following video from 2008 gives a good enough description.



You'll also find discussion on the future of books along with various reports of mine (from 2002 to 2006) on 3D printing and techniques behind this e.g.



So, back to today ...

These days we call the Web of Things the Internet of Things. We still haven't invented SpimeScript though some are getting close. We're seeing more interaction in physical devices and the continued growth of 3D printing including hybrid forms of physical and electronics. It's all very exciting ... well, some of it is. I'm a bit of an old hand and so parts of this change (especially endless pontifications by consultants / analysts) tend to send me to sleep - it's a bit like the cloud crowd - some good, some "blah, blah, blah".

However, there's something I do want to point out with this change and why everyone who can should attend the O'Reilly Solid conference

Most organisations are terrible at coping with change. You're not designed to cope. You don't exist in adaptive structures that deal with evolution. You have to bolt on new things as a new structure and somehow muddle through the mess it creates. You're probably doing this now by adding a Chief Digital Officer. You're probably adding on Agile or Lean or even worse yo-yoing from one extreme (e.g. six sigma) to another. You might even have done something daft like organising by dual structure in the "hope" that this fixes you p.s. it won't. Yes, we have extremes but the key is how to organise to include the transition between the extremes.

So, what's this got to do with Solid and IoT.

Well, unfortunately IoT requires a different set of practices (from design to construction), a different set of techniques and a mix of attitude from "pioneer" to "settler". The underlying components might be quite commodity but what is being built with these is often a process of discovery and exploration. Though there are common lessons, there's a very different mindset and value chain relationships to IoT which is built from experience. What I'm saying is Physical + Digital is not the same as Digital.

Now, if you're one of those very lucky organisations that have a strategic CIO then you're ok, they'll adapt and muddle through. If you're not and you've had to bolt on a Chief Digital Officer then you might have a problem. Digital is not the same as IoT and unfortunately I've met quite a few Chief Digital Officers that are about as un-strategic as the CIOs they were mean't to replace. If you've got one of these (and don't be surprised if you do) then you'll going to need a Chief Internet of Things Officer (CITO). As Venture Beat says 'The most important CxO you haven't hired'  and they're spot on, until the next change of this type and the next bolt on.

So, get yourself along to Solid and start scouting. Learn a little about the wonder of the combination of physical & digital and if you're lucky, hire some talent.

Personally, if you want to avoid adding more CxOs then I'd recommend creating an adaptive organisation able to cope with change. But that requires extremely high levels of situational awareness which alone is way beyond most companies. It's also often unnecessary unless you're competing against such adaptive structures (which in the commercial world seems rare). Hence it's usually easier to simply bolt on and deal with some of the conflict that this will create. Cue endless bunfights between CIO vs CDO vs CMO vs CITO and proclamations of death of one over the other.

Of course that means we're going to get endless Chief Internet of Things Officer societies, institutes, awards, proclamations of greatness, the CITO is the new CIO or CDO or whatever along with  blah, blah, blah. That's life.

Tuesday, May 19, 2015

The probable problem with Watson

I like IBM Watson. It seems likely to be a roaring success. But there is a future problem in my opinion.

The issue with such 'reasoning' and interpretive capabilities (unlike machine learning through patterns) is that they are relatively novel and we're still in a mode of discovery. During this time Watson will grow, it will become more refined and IBM will build a successful product and rental business.

However, around 2030 (see figure 1) then such 'intelligent' agents will be on the cusp of industrialisation (the 'war' phase of economic change, the shift from product to commodity). New entrants not encumbered by an existing business will launch a range of highly industrialised services (most likely Amazon - and yes, I see no reason why they won't be around by then, bigger than ever). In the following 10-15 years the previous players all encumbered by existing and successful businesses will be taken out of the game unless they adapt.

Figure 1 - The Wars


This pattern (known as the peace, war and wonder cycle) occurs relentlessly throughout history. Those who develop and build the field rarely reap the rewards of industrialisation. IBM is no different. As has happened to it in the past, IBM tends to develop the field, grow a successful business and then is forced to reinvent itself.

The timeframe today for this process (which is affected by commoditisation of means of communication) is currently around 20-30 years from genesis to point of industrialisation (the onset of war) and 10-15 years for the previous industry to be taken down.

To counter this pattern then you need to have enough situational awareness that you can industrialise yourself before your opponents do. There are two forms of disruption and this type can be anticipated through awareness and weak signals. However such awareness which is created through the use of maps and weak signal detection is rare and normally confined to Government circles.

Mapping of economic landscapes is itself on a journey and is only ten years down the path. It'll be another 10-20 years before maps get to the point of industrialisation in which case businesses built around sharing maps, use of industry maps and changes to the whole field of strategic play may well occur. Those too will take a further 10-15 years to develop.

Unfortunately, at the point IBM will need to industrialise Watson then it will have many of the 16 different forms of inertia to change (including pre-existing business) but in all likelihood it'll lack the situational awareness needed to know when to industrialise. The odds don't appear in its favour here.

If you want a timeline then .... well there isn't one. The future depends upon actors actions, it's an uncertainty barrier we can't see through and you can't pre-determine action but instead only look at possible scenarios.

In one scenario ...

IBM by 2025 should be a very different beast due to the changes in cloud. It'll be a shadow of its former might in infrastructure but still significant in terms of specific application services (e.g. healthcare) and the platform arena of cloud (e.g. Bluemix Cloud Foundry). The idea that IBM built hardware will become a fading memory. The building of an ecosystem around Watson will help it to grow and evolve and you should have no doubt that IBM will create a successful product and rental business in this space. This is why I've said that you shouldn't count them out. However the problem with IBM is its constant reinvention. It's a great company but it fails to learn the game and tends to get industrialised out of a space. It might like to view this as exiting a commoditising space but those commoditising spaces (e.g. cloud) can and do provide huge ecosystem advantages.  

The industrialisation of the intelligent agent space will kick in (around 2030), started by a player like Amazon. In the first instance IBM will dismiss the new approaches. By 8-10 years (2040) then the new player services will be less than 3% of the market. By 2045, they will be 50%+. The game will be over.

Watson will have created new glory but it will now be in decline as industrialised forms take over. Watson is also likely to have sapped strength from the platform effort whilst building inertia to its own industrialisation. IBM will be facing a new crisis of reinvention against much larger and much deadlier foes. It won't be the case of the giant IBM being taken on and losing to the minnow of Amazon ($125 Bn vs $15 Bn, as it was in 2006) but instead the minnow of IBM losing a core revenue stream to the giant of Amazon.

Of course, the future depends upon actors actions and it doesn't have to be like this. 

In another scenario, IBM could play this game to its favour but to do so it would need to capture those industrialised spaces and play fragmentation games against competitors. It will need to exploit constraints and the platform play has to be at the heart of this. To achieve this, it should already be working on how to industrialise Watson into a commodity service. This is more than just providing a rental service but looking at how to use Watson to create that industrialised future. It should be building upon competitors services and using this to cut them out of data flows and diminish their ability to sense the future. This a tough road to travel because success with products and rental services will constantly provide data against making such a move.

So which way will it go?

Alas, the incentive just isn't there for long term play with most commercial companies. Many of us will retire and some of us will have died through old age before this game plays out. However, if we could travel in time then I'd suspect we will see a new group of IBM execs facing a future of reinventing IBM as another pillar gets taken away. Of course, every now and then, you get someone who can play the game to its advantage - a Jeff Bezos, a Tim Cook etc. Every now and then, even companies get lucky.

However, the one thing I've learned after 25 years in business is that companies are singularly bad at long term gameplay and constantly get taken out by changes that can be anticipated and defended against. The only thing I know of which is worse than long term company gameplay is my ability to bet correctly on individual actors' actions. 

That said, if I was a betting man (and no, I'm not) then I'd plummet for a cup of tea on 2040-2045 as when IBM finally expires. For me Watson is not only its future but its doom. Of course, I could be wrong ... I frequently am.

Friday, May 15, 2015

On 61 different forms of gameplay

Over the next year, through a series of 61 posts, I'm going to go through in some detail various forms of gameplay that can be used when you have a map of a business environment

I need to emphasise Sun Tzu's five factors in competition - purpose, climate, landscape, leadership and doctrine - however unfortunately most ignore climate & landscape (a bit like trying to use Boyd's OODA loop but ignoring the observe & orientate bit). The problem with this is that whilst the game plays can help you manipulate the landscape, if you can't see the environment then they can be downright dangerous. It's always a good idea to look where you're shooting before you fire the rifle.

In normal circumstances, you will use your map with multiple of these game plays in concert. Of course, you'll need to have used your map to determine your direction of travel and where you wish to attack first. This is often an iterative process itself known as scenario planning.

The complete set of plays that I'll be covering are provided in figure 1. NB, I've shaded the plays according to how 'evil' or 'good' they are using AD&D terminology. I've provided some basic summary descriptions below and as I post the details then I'll add links to make it easy to navigate.

Figure 1 - The plays.



Basic Operations
These forms are about improving the organisation itself.
  • Focus on user needs
    A key aspect of mapping is to focus the organisation on user needs rather than internal needs. Often this process enables unmet needs (opportunities) to be discovered and friction to be removed from the process of dealing with customers.
  • Situational Awareness
    The act of mapping tends to remove alignment issues between business, IT and other groups by providing a common language. It enables the development of a common purpose and empowers groups to take advantage of their part of the map whilst understanding the whole.
  • Effective & Efficient
    Removal of bias and duplication within an organisation along with the use of appropriate methods for management and purchasing. Do not underestimate the potential savings possible, cost reductions of 90-95% are not uncommon.
  • Structure & Culture
    Implementation of cell based & PST structures along with multiple cultures to deal with aptitude and attitude. Both autonomy and mastery can be enabled by these forms of structure and they avoid the silos and inertia created by traditional structures.
  • Optimising Flow
    Risk, performance, information and financial flow can be analysed and improved through mapping. This is necessary for increasing margin, removing friction and increasing speed.
  • Channel Conflict
    Exploiting new channels and conflict within existing channels to create favourable terms.

User Perception
These forms are about influencing the end user view of the world.
  • Education
    Overcoming user inertia to a change through education. There are 16 different forms of inertia and many can be overcome directly with education. Don't underestimate this.
  • Bundling
    Hiding a disadvantageous change by bundling the change with other needs.
  • Creating artificial needs
    Creating and elevating an artificial need through marketing and behavioural influence. Take a rock and make it a pet etc.
  • Confusion of Choice
    Preventing users from making rational decisions by overwhelming them with choice.
  • FUD
    Creating fear, uncertainty and doubt over a change in order to slow it down.
  • Artificial competition
    Creating two competing bodies to become the focus of competition and in effect driving oxygen out of a market.
  • Lobbying
    Persuading Government of a favourable position.

Accelerators
These enable you to accelerate the process of evolution.
  • Market Enablement
    Encouraging the development of competition in a market
  • Open Approaches
    Encouraging competition through open source, open data, open APIs, open processes by removing barriers to adoption and encouraging a focus for competition.
  • Exploiting Network Effects
    Techniques which increases the marginal value of something with increased number of users.
  • Co-operation
    Working with others. Sounds easy, actually it's not.
  • Industrial Policy
    Government investment in a field.

Deaccelerators
These enable you to slow down the process of evolution
  • Exploiting existing constraints
    Finding a constraint and reinforcing it through supply or demand manipulation.
  • Patents & IPR
    Preventing competitors from developing a space including ring fencing a competitor.
  • Creating constraints
    Supply chain manipulation with a view of creating a new constraint where none existed.
  • Limitation of competition
    Through regulatory or other means including erecting barriers to prevent or limit competitors.

Dealing with toxicity
Elements of your value chain will be irrelevant with evolution over time, there's numerous ways of dealing with this especially as the inertia created can become toxic.
  • Disposal of liability
    Overcoming the internal inertia to disposal. Your own organisation is likely to fight you even when you're trying to get rid of the toxic.
  • Sweat & Dump
    Exploiting a 3rd party to take over operating the toxic asset whilst you prepare to remove yourself.
  • Pig in a poke
    Creating a situation where others believe the toxic asset has long term value and disposing of it through sale before the toxicity reveals itself.

Market
Standard ways of playing in the market
  • Differentiation
    Creating a visible difference through user needs.
  • Pricing policy
    Exploiting supply and demand effects including price elasticity, Jevons paradox and constraints including fragmentation plays.
  • Exploiting buyer / supplier power
    Creating a position of strength for yourself.
  • Harvesting
    Allowing others to develop upon your offerings and harvesting those that are successful. Techniques for ensuring harvesting creates positive signals rather than creating an environment others avoid.
  • Standards game
    Driving a market to a standard to create a cost of transition for others or remove the ability of others to differentiate.
  • Signal distortion
    Exploiting commonly used signals in the market by manipulation of analysts to create a perception of change.

Defensive
Standard ways of protecting your market position
  • Threat acquisition
    Buying up those companies that may threaten your market.
  • Raising barriers to entry
    Increasing expectations within a market for a range of user needs to be met in order to prevent others entering the market.
  • Procrastination
    Do nothing and allowing competition to drive a system to a more evolved form.
  • Defensive regulation
    Using Government's to create protection for your market and slow down competitors.

Attacking
Standard ways of attacking a market change
  • Directed investment
    VC approach to a specific or identified future change.
  • Experimentation
    Use of specialists groups, hackdays and other mechanisms of experimentation.
  • Creating centres of gravity
    Creating a focus of talent to encourage a market focus on your organisation.
  • Undermining barriers to entry
    Identifying a barrier to entry into a market and reducing it to encourage competition.
  • Fool's mate
    Using a constraint to force industrialisation of a higher order system.

Ecosystem
Using others to help achieve your goals.
  • Alliances
    Working with other companies to drive evolution of a specific activity, practice or data set.
  • Co-creation
    Working with end users to drive evolution of a specific activity, practice or data set.
  • Sensing Engines (ILC)
    Using consumption data to detect future success.
  • Tower and Moat
    Dominating a future position and prevent future competitors from creating any differential.
  • Two factor
    Bringing together consumers and producers and exploiting the relationship between them.
  • Co-opting
    Copying competitors move and undermining any ecosystem advantage by interrupting data flows.
  • Embrace & Extend
    Capturing an existing ecosystem.

Competitor
Dealing with the opposition if you can't work with them
  • Tech Drops
    Creating a 'follow me' situation and dropping large technology changes onto the market.
  • Fragmentation
    Exploiting pricing effects, constraints and co-opting to fragment a competitor's market.
  • Reinforcing inertia
    Identifying inertia within a competitor and forcing market changes that reinforce this.
  • Sapping
    Opening up multiple fronts on a competitor to weaken their ability to react.
  • Misdirection
    Sending false signals to competitors or future competitors including investment focused on the wrong direction.
  • Restriction
    Limiting a competitors ability to adapt.
  • Talent Raid
    Removing core talent from a competitor either directly or indirectly.

Positional
General forms of playing with the future market
  • Land grab
    Identifying and position a company to capture a future market space.
  • First mover
    Exploiting first mover advantage especially with industrialisation to component services.
  • Fast follower
    Exploiting fast follower advantage into uncharted spaces.
  • Weak Signal
    Use of common economic patterns to identify where and when to attack.

Poison
General forms of preventing others playing with the future market. If you can't capture then poison it.
  • Licensing
    Use of licensing to prevent future competitor moves.
  • Insertion
    Either through talent or misdirection, encouraging false moves in a competitor.
  • Design to fail
    Removing potential future threats by poisoning a market space before anyone attempts to establish it.

As mentioned above, the techniques are normally used in combination plays e.g. you might be a first mover to industrialise a specific component and use this to establish an ILC type ecosystem whilst exploiting competitors' inertia and misdirecting any would be threats.

These are not the full list of plays but the ones that I think it's reasonable I can cover over a period of one year. There are some other plays but I'll leave that to a future date.

Again, I cannot emphasise the importance of situational awareness before using some of these plays. It is trivially easy to create a disaster e.g. being a first mover to try and build an ILC ecosystem around a relatively novel activity and harvesting aggressively. This will just end up destroying your ability to create an ecosystem leaving you with a bad reputation in a field which might at a later date become suitable for the same sort of play. Some of the plays are also downright evil, so be warned. Understand the environment, learn to play the game and build with experience.

Saturday, May 09, 2015

Dear IBM, HP, ORACLE, SAP, CISCO ... v2.0

Dear IBM, HP, ORACLE, SAP, CISCO ...

Since my last letter, we have heard it is not Oracle or SAP or Microsoft that is interested in buying Salesforce. Maybe that's just bluster, maybe no-one is interested in buying (or merging) or maybe it's one of you or maybe it's someone irrelevant. All of these are good options for you.

However, on the off chance that someone is actually bidding for Salesforce and it's not any of you. Can I kindly suggest you consider getting together in order to buy it between you as a consortium. 

There is one company (Amazon) that you should not want to get their hands on Salesforce no matter how unlikely the possibility is.  You should examine the value chains that Salesforce is involved in, compare this to Amazon and consider how Amazon could bring its ecosystem experience whilst exploiting the enterprise position of Salesforce. You should consider what Amazon already knows about the platform business of Heroku (through consumption data). You should review what combination possibilities exist and WHERE your own inertia can be used against you.

Even if it is highly unlikely, the remote possibility of this pairing should be sending shivers down your spine. You do not want to find yourself in this position. Hence, unless you have information to the contrary, I would consider doing something about it.

Maybe you'll be lucky. Maybe it's someone irrelevant. Maybe it's no-one.

This is a friendly warning.

Kindest

Simon W

P.S. I've been harping on about this threat for many years. I know it's unlikely but if I was Bezos then this is the move that I'd make.

I am Old Labour

I am Old Labour.

I am a social capitalist.

I view that social cohesion, competition and the common interest are of paramount and intertwined importance.

I view that our purpose should be a better and fairer society for all. To create political freedom, I reject the notions of economic and social subservience. I hold to a view of  common interest above self interest. I do not view the market as a source of 'good' or our goal but a tool to be used and exploited to achieve our purpose.

For me, the market is a mechanism to achieve common interests and encourage competition. It is simply an economic tool.

For me, competition is a necessity to progress, to evolve, to adapt and to better our national standing.

For me, social cohesion requires compassion, mobility, opportunity, autonomy and purpose for all. Without social cohesion our future competitive interests are undermined.

I do not care if "the cat is white or black, as long as it catches mice". I reject the ideological for the practical. I would use all tools available to further our common & national interests.

I reject the extremes of Marx and Friedman. The myths of 'trickle down', of small Government, of laissez faire, of centrally planned, of privatisation of infrastructural services to monopolies and nationalisation of that best served by a market.

I hold to the centre ground where market and government are both of importance for competition. I hold to that centre of Adam Smith, Hayek and Keynes.

I take the position that we should exploit fiscal, monetary and industrial policy to our common benefit. We should not fear to change the market to achieve our purpose.

I view that Government waste (of which there is much) should be reduced but Government itself should not be. For every £1 saved through efficiency, I would have £1 invested through Government towards our future including measures of direct investment, R&D and reduction of past debt.

I view that we are capable of dealing with complexity of competition and that our civil service has only be hampered by past management dogma of one size fits all solutions - outsource everything, agile everywhere and the market knows best.

I reject the extremes of social ideology within the Conservatives but agree with many of their fiscal policies. For me, they don't go far enough.

I reject the extremes of financial imprudence within New Labour but agree with many of their social policies. For me, they don't go far enough.

I am more Red than Red, more Blue than Blue.

My party passed into history in May 1994. One day, it might return. Until such time, I have no-one to vote for.

I am a social capitalist.

I am Old Labour.

Monday, May 04, 2015

Five key indicators for success

When competing in business, there are five key indicators for success that I'm aware of.

1) Purpose : That which causes others to desire to follow you without fear and to have harmony with your goal.

2) Climate : The interaction of  the business with the economic climate and common economic patterns. The conduct of operations with this in mind.

3) Situational Awareness : Understanding of the landscape and the exploitations of this to your advantage through strategic play.

4) Leadership : The ability to set a direction of travel and be followed. These include the virtues of leadership - sincerity, humanity, courage, firmness and wisdom.

5) Doctrine : The organisation itself, the mechanisms of control, the level of appropriate autonomy, the structures used, the mechanisms of governance, the different cultural forms and the methods applied. 

I have yet to discover five indicators that are better. The above indicators were written about by Sun Tzu, approximately 2,500 years ago. They were called moral influence, weather, terrain, command and doctrine. I've been asked for a list of top 100 strategy books that I recommend reading. After careful consideration, I've now updated my list.

@swardley's top 100 management strategy books

1. Sun Tzu, The Art of War.
2. Read another translation of The Art of War.
3. Read another translation of The Art of War.
4. Read another translation of The Art of War.
5. Re-read any of the above again paying even closer attention to it.
6. Read another translation of The Art of War.
7. Read another translation of The Art of War.
8. Read another translation of The Art of War.
9. Re-read any of the above again paying even closer attention to it.
....
100. Everything else.

Seriously, I do recommend reading & re-reading multiple translations of the Art of War / Warfare.

Friday, May 01, 2015

Things which come for free with a map

When you map, you get certain things for free (other than the technique being creative commons).  These "free" things are provided in the figure and they include :-


1. User Needs. Key to mapping is to focus on user needs.

2. Components. Maps are built from components (covering activities, practices, data and knowledge) along with interfaces. People talk about building a composable enterprises, a map will take you a long way towards it. They're also extremely useful for organising contract structures.

3. Flows. Maps contain chains of needs through which money, risk and work flows. Maps are great for examining flows, fault tree analysis, optimising revenue flow and increasing stability.

4. Context. Critical to mapping is the context provided by the evolution axis. You can use this to determine appropriate methods and techniques (e.g. agile, lean and six sigma or insource and outsource etc) and avoid all the one size fits all pitfalls. You learn how to explore the uncharted and plan for the industrialised. If you want to be composable but you want each component to have the right context then use a map.

5. Cells. With maps, organising into cell based structures is relatively trivial. Even better you can organise into cell based structures with the right context. In such an environment you can give people not only purpose (i.e. the map and the strategic play) but also autonomy (the cell) and mastery (the context). You also learn how you need multiple cultures not one.

6. Strategy. Key to strategy is situational awareness and that requires position and movement. Maps give you the ability to identify where you should attack, why you should attack one space over another and determine direction of travel. You can also use maps to learn and building an arsenal of tactical game plays along with learning common economic patterns, how there's multiple of disruption, how to anticipate change with weak signals and how to use and exploit ecosystems.

7. Communication. Maps are excellent tools for communication between groups - all the business / IT / purchasing alignment stuff is just an artefact of existing methods. They also provide learning environments (i.e. you can learn what works, what doesn't) along with mechanisms to remove silos, duplication & bias, increase collaboration and deal with inertia.

When people talk to me about composable, context, user needs, cell based structure, strategy, communication, alignment, contract management, risk management, financial flows, appropriate methods, efficiency, exploration, weak signals, disruption, ecosystems, culture, organisational learning ... actually lots of things ... I normally ask for a map. If they don't have one then I prepare myself for a delightful session of blah, blah, blah on subjects they barely know anything about. This is why I tend to only work in interesting organisations where competition is really important.

You can tell, I've just had to listen to another one of those ... blah, blah, strategy, blah, blah, disruption, blah, blah, innovation, blah, blah, story .... sessions without an ounce of situational awareness to be seen.

Dear IBM, HP, ORACLE, SAP, CISCO ...

Dear IBM, HP, ORACLE, SAP, CISCO ...

On the off chance that someone is actually bidding for Salesforce and it's not any of you. Can I kindly suggest you get together and buy it between you as a consortium. There is one company (you already know who) that you should not want to get their hands on Salesforce. Even if it is unlikely, the remote possibility of this should be sending shivers down your spine unless you've got inside info. 

kthxbye

PS. Check your value chains, take a good look at inertia.

The Horror of Hybrid Cloud and the real reason why you needed a Chief Digital Officer.

In the previous post I talked about Evolution, Maps and Bad Choices. I wanted to express the importance of understanding evolution (i.e. movement) in order to anticipate change. In this post I want to explore that subject more.

Let us start again with that first map from 2005 which was of a single line of business for an organisation I ran (Figure 1).

Figure 1 - A map of Fotango


From the map we had users needs (step 1), the value chain expressed as chains of needs (step 2) and we understood (and could anticipate) that compute was going to evolve from product to utility (i.e. cloud). We could use weak signals analysis to determine this was going to happen soon - in fact AWS launched EC2 the following year. The map gave us position (i.e. relationship of components) and movement (i.e. how things are evolving).

Now let us explore more. In figure 2, I've focused on the compute aspect. We knew that compute (an activity or what we do) had associated practices for architecture (i.e. how we did stuff) - see step 5. Those practices were best practices for the industry including N+1, Scale Up and Disaster recovery. 

Now, practices evolve in an identical manner to activities (driven by the same competitive forces) we just call them novel, emerging, good and best. We also had applications (step 6) built on those best practice (step 5) for the product world.  However, compute was evolving (step 3).

Figure 2 - Practice and Activity



As compute evolved then the architectural practices co-evolved (see figure 3). Novel architectural practices appeared (design for failure, chaos engines, scale - out) based upon the concept of a more evolved form of compute. We happened to call those architectural practices DevOps (step 7) and applications were built on them. Those practices themselves evolved becoming emerging then good and heading towards best practice for the utility world (Step 8).

Figure 3 - Co-evolution of Practices.


This created a situation, show in figure 4 below. Part of the application estate was based upon best practice (traditional) for a product world. We call this LEGACY but I prefer TOXIC IT (see step 9)

At the same time part of the estate was built on good and evolving practices (DevOps) for the utility world. We call this the FUTURE estate (step 10).

Figure 4 - Legacy and Future.


Now, what will happen is that eventually the estate will consolidate on the future estate i.e. applications will be rewritten or replaced and built on the best practice of "DevOps" (see figure 5).

Figure 5 - The Future.


We knew this in 2005. I used this knowledge in part of the gameplay of Ubuntu in 2008. What we didn't know was what it would be called, what exactly those practices would be and who would lead the charge. 

We knew that some companies would resist the change (i.e. have inertia). There are 16 common forms of inertia from political capital, cost of acquiring skills to cost of changing governance of the current estate (including re-architecting) but we also knew that competition means no-one would have a choice. There are some very specific impacts of evolution which creates an effect known as the Red Queen. You never had a choice about cloud, it was never a question of "if".

However, we also knew that some people would try and somehow have this future world but without changing the past. The first attempts were private and enterprise cloud. As that lost ground, the latest efforts are combining these with public cloud in order to create a hybrid (see figure 6) and step 12.

Figure 6 - Hybrid.


The reality is that private and hybrid was always a transitional play. The speed of change however is exponential (known as a punctuated equilibrium). We can clearly see this happening from Amazon's AWS figures. By today, you should already be in the process of (or at least planning) decommissioning your private cloud environments having sweated and dumped much of your legacy. You should be starting your path towards data centre zero. You've had at least ten years to prepare for this and the game has been in play for eight of those. Fortunately I do see this happening with some very large and "traditional" looking organisations (finance, pharma etc). In other cases, well ... this brings me to my last point.

There are 16 different forms of inertia including social relationships with past vendor, political capital and existing practices. If you're still building out a private cloud or embarking on a private cloud effort today then chances are you've got a very operational CIO. With a few exceptions, these people aren't thinking about gameplay, the impact of future pricing differentials and they probably lack the skills necessary to understand effective use of supply chains.

Don't get me wrong, there are very strategic CIOs out there but these aren't the problem, in those companies you see adaptation happening already. However if you had found yourself lumbered with a non strategic CIO then these are the people you should have been planning to replace with a more strategic CIO - which after all was the real reason we hired CDOs (Chief Digital Officers). 

Assuming you didn't do something crass and get lumbered with a non strategic CDO (i.e. constantly waffling on about innovation, disruption and story telling without any clear understanding of the landscape) then now is probably the time to be considering that change. If, however you only hired a CDO because every other company did then heaven help you. Just pray your competitors are in the same boat and your industry isn't interesting enough or has large enough regulatory barriers or cost barriers to prevent anyone else taking a pop at you.

Your CDO should by now be embedded in the organisation, the costs of acquiring skill sets is only going to increase, there'll be a crunch in demand as enterprises all try to head towards public cloud, the toxic element of legacy will start to show up in your P&L, your cost of trying to keep up with adapted competitors will escalate and somehow you're going to need to be able to navigate this landscape safely. In the next few years then things will really heat up. You should be well prepared and motoring by now and if this isn't happening then it's time to start thinking about pulling that lever and making that switch.

On Evolution, Maps and Bad Choices

It took me about ten years of thinking about strategy before I stumbled on the issue of situational awareness in business and drew my first map (2005).  When it comes to competition there are a number of key factors involved in success. These include :-

1) Purpose : That which causes others to desire to follow you without fear and to have harmony with your goal.

2) Situational Awareness : Understanding your landscape, the prevailing economic climate & patterns and exploiting this to your advantage. This is the core underpinning of strategic play.

3) Leadership : your ability to command and be followed. These include the virtues of leadership - sincerity, humanity, courage, firmness and wisdom.

4) Doctrine : The organisation, the mechanisms of control and governance, its cultural forms, the methods applied.

All are necessary components. Often you find them lacking in business. The one area I find to be almost void of substance is situational awareness and strategic play hence my constant focus on mapping. One thing that does slightly peeve me, is having spent ten years looking for a way to map a business and then giving it away creative commons that people insist of changing the axis for NO GOOD REASON. By all means experiment but think about why. Those axis were based upon many many thousands of data points, it's not randomly plucked from the air.

To show you the problem, let us take a map  from 2005 (see figure 1). The map has position and movement (critical parts of situational awareness). It starts with user need (point 1) contains multiple chains of needs (point 2) and even allows you to anticipate change caused by competition (point 3 and 4). 

Figure 1 - A Map.


The most common way people want to change the map is by changing evolution to either time, diffusion, technology maturity or some form of hype cycle. These are all flawed because you lose any concept of movement and hence any ability to anticipate change.

For example, let us take the compute component from the above map and put it into a map based upon Gartner's hype cycle (see figure 2). Now certainly you can create a value chain (i.e. position) but compute as a product (i.e. servers) were in the plateau of productivity long ago. With the above Wardley map then you can anticipate the development of "cloud" far in advance because it's based upon evolution. With the below HypeCycle map, the hype axis measures hype of an activity and not evolution. There is no way to anticipate evolution. Instead what happens is a more evolved form (i.e. Cloud or IaaS) appears in the "Technology Trigger".

Figure 2 - Hype Cycle "Map"


It doesn't matter whether you use hype cycles, diffusion curves or time. You cannot anticipate evolution and hence change (i.e. movement) without an evolution axis. Without position and movement you will never gain better situational awareness and losing this is a bad choice.

Does it really matter though? Take the map below on the battle Thermopylae. The map (like a chessboard, like a Wardley map) allows you to see position and movement. In this case the map is based upon two geographical axis - North to South, East to West.

Figure 3 - Battle of Thermopylae.


Now despite the map giving us position, movement and proving useful -  let's change the axis!  Let's pluck two out of the air, say distance from coast and landscape (i.e. type of terrain). Let us now draw that.

Figure 4 - A modified Map.


Can you really tell me that by looking at the above X's which have no positional or movement information then it is obvious we should follow the red lines and block of the straits of Artemisian and force the Persians into Thermoplyae? If you were a solider in Thebes and had been given this map, could you work out where to go? Which direction Thermopylae is in? The modified map by losing position and movement is practically useless. 

About ten years of thinking went into finding that first map. Thousands of data points helped to build those axis. Ten years of practice since then has improved it from that first map in 2005.  I know, I know you're a "strategy consultant" but do think about position and movement and whether you know what the hell you're talking about.

You can guess, someone gave me an "improved map" which is improved to the point of rendering it useless.

Understanding mapping and why "NO consultants"

Wardley "value chain" Mapping is a technique for understanding your business (including technology) landscape. It's based upon two important principles of situational awareness - position of things and movement and it starts with user needs. Situational awareness is critical from operations to strategic play but "Why No Consultants?"

1) Mapping requires an understanding of the environment which means you need people working within the environment to described the landscape.

2) Mapping is a communication tool. It empowers people to take control of their environment and through sharing remove bias, duplication and silos.

3) Mapping is a learning tool, it enables you to discover what patterns work and helps improve your gameplay.

Now, unless you intend to hand over understanding of your landscape, communication, empowerment, strategy and learning to a consultancy (i.e. basically become totally dependent upon them) then you need to learn to map yourself within the organisation. I'm sure many consultants would like you to become dependent as they can gouge fees from you from now to the end of your business.

In UK Gov, there are now several departments mapping, sharing maps, learning and teaching each other.  There's a reason why I made mapping creative commons. It was to give every organisation a means to communicate, learn and improve situational awareness and not to help consultants flog more stuff. Don't squander the gift.

Wednesday, April 29, 2015

AWS and Gross Margin.

AWS has now reported and there is a lot of noise over margins including ample confusion over operating margin vs gross margin.

A couple of things to begin with. Back in my Canonical days I plotted a forward run rate for revenue of AWS. This was based upon lots of horrendous assumptions and to be honest, I'm more interested in the direction of travel rather than the actual figures. A copy of the output of that model is provided in figure 1.

Figure 1 - forward rate.


Now, what the model says is that after 2014, the revenue for AWS should exceed $8Bn in each subsequent year. After 2015, the revenue for AWS should exceed $16Bn in each subsequent year and so forth. Don't ask me what the actual revenue will be - I don't care. I'm more interested in the speed of change of the punctuated equilibrium that is occurring.

A couple of things to note. Compute is price elastic (it has been for 30 odd years). What this means is that as prices drop then volume increases. Today, I can buy a million times more compute than I could in the 1980s for $1,000. This doesn't mean my IT budget has reduced a million fold in that time, quite the opposite. What has happened is I've ended up doing vastly more stuff.

This is the thing about dropping prices in a price elastic market, demand goes up. But if you're already doubling in physical size (or as AMZN has stated increasing 90% per year in capacity) due to a punctuated equilibrium and a shift from one model of products to utility services  then you have to be very careful of constraints. For infrastructure there is a constraint - the time, material and land required to build a data centre. What this means is that it is highly likely that Amazon has to carefully manage price reductions. It would be easy to drop prices causing an increase in demand beyond the ability of Amazon to supply. This 'weakness' was the one I told HP / Dell & IBM to exploit back in 2008 in order to fragment the market. They didn't - silly sods.

However, over time the market will level to a more manageable pace of change i.e. the ravages of the punctuated equilibrium will have passed and we're down to good old price elasticity and operational efficiency. It is really useful therefore to get an idea of how much prices can reduce by. 

The reason for this is rather simple. Cloud is not about saving money - never was. It's about doing more stuff with exactly the same amount of money. That can cause a real headache in competition. For example, let us say your company has an annual revenue of $10 Bn and spends around 1% of its revenue on infrastructure, platforms and related technology - say $100M p.a.

Now, what matters is the efficiency delta between your provision and utility services like AWS. Many people claim they can be price equivalent to AWS for infrastructure but often I find that the majority of the costs (e.g. power, air conditioning & other services, building, cost of money, maintenance, space capacity) are discounted by claiming that it belongs to another budget or just ignored (in the case of capacity cost). This is why I tell companies that they really need to set up their IT services as a separate company and force it to run a P&L. Hardware and software costs usually only account for 20%-30% of the actual cost of the services 'sold'.

Oh, as a hint if you're a CEO / CFO and your CIO says they're building a private cloud comparable to AWS then the first question you should ask when looking at the cost comparison is "What % of the cost is power?" If they bluster or say it's covered elsewhere then you're likely to be building a dud. Start digging into it.

The other problem is that people compare to AWS prices today and ignore future pricing. The problem here is that if there is a high gross margin for AWS then as the constraints become more manageable then prices will drop to compensate and increase demand. When you look at the problem through a lens of future pricing and actual cost then in some cases you can easily reach a 20x differential. 

But what's the big deal? What if your competitor reduces their infrastructure, platforms and related technology costs from $100M to $5M, that's only $95M saving and what is at stake is the whole $10Bn revenue. It sounds risky? Wrong.

Your competitor won't reduce their cost through efficiency, they'll do more stuff. So, they'll spend $100M p.a. but do vastly more with it. In order for you to keep up then using an "old" and inefficient model you'll need to be spending $2 Bn p.a. just to keep up. That's not going to happen. What is going to happen instead is your competitor will be able to differentiate and provide a wealth of new services faster, quicker and more cheaply than you in the market until you are forced to adapt. But by then you'll have lost MaSh and the damage will be done - not least of all because marketing & biz will be at the throats of IT more than ever. You have no choice about cloud unless you can somehow get the actual costs down to match that future pricing. Very few have the scale and capability to do this. 

So, how low can that future pricing go. Looking at AWS report, some are saying they only make 17% Margin. First of all, that's Operating Margin which covers all Operating Expense (i.e. all costs bar tax and interest). This will include, unless US reporting rules are somewhat different to what I remember :-

1) cost of providing Amazon's own estate.
2) cost / capital leases / staffing costs / depreciation for any future build - NB given AMZN is doubling in capacity each year then this will be significant.
3) SG&A costs which tend to be high when building up a business.
4) development costs for introduction of new industrialised services.

Many of these operating income costs are likely to reduce as a percentage as we pass through this punctuated equilibrium (i.e. as we move towards using utility services as a norm). The speed of build up of new data centres and investment in future capacity will become more manageable (controlled by price elasticity alone). The amount spent on sales and marketing to persuade people of the benefit of cloud will reduce (we will just be using it) etc.

To give an idea of what the potential future pricing might be then you need to look at gross margin i.e. revenue - cost of good sold. However, AWS doesn't give you those figures (and for good reasons). Furthermore AWS is made up of many different services - compute, storage etc - and the gross margin is likely to be very different on each of those.

Now, if you simply look at the revenue changes then AWS accounts for 37% of the growth of AMZN in 1Q. By taking the operating expense items covering technology, fulfilment, marketing and SG&A and making an awful assumption that all areas of business are equal (likely to be a huge underestimation) then you get a gross margin figure of around 50% for AWS.

You could get a more accurate picture by profiling the lines of business based upon past reports etc but I can't be bothered to spend more than ten minutes on this as it's not my area of interest. However, I don't think it's unreasonable to expect AWS gross margins to be north of 60% based upon this and experience. This matters because it gives you an idea of how much future pricing cuts could be and that's not even factoring in efficiency in supply, Moore's law etc.

If you're looking at AWS figures and going 17% operating margin is high but there isn't too much scope for price cuts then you're brewing for a shock. Consider yourself warned and put some effort into actually analysing the figures.

NB. I retired from Cloud back in 2010. Don't ask me to put any effort into detailing this more. I have bigger fish to fry and have close to zero interest in this subject. I only put this up because I keep seeing elementary mistakes being made. This stuff doesn't even cover the enormous ecosystem advantage that Amazon creates or the basic benefits of componentisation. Don't underestimate those either - you will get spanked if you're trying to compete without understanding this stuff.