Saturday, January 25, 2014

Should I be ‘outside-in’ or ‘inside-out’?

One of the areas of focus for LEF at this moment is the issue of outside-in business models where an organisation places emphasis on co-creation with others and the use of ecosystems. This often leads to the question of should a company be ‘outside-in’ or ‘inside-out’? 

The answer, as with other binary questions from 'should I be agile or ITIL' to  'should I be push or pull marketing' is always both. It's never an absolute but one of relative balance.

Our tendency with companies in the recent past has been more ‘inside-out’ and the current vogue represents a shift to a more balanced form and is part of the normal process of organizational evolution. 

In our 2011 study on 'Learning from web 2.0', we tested a model of how new organisational forms emerge via the interplay of evolution with existing activities, co-evolution of practice and inertia to change.  As with past examples - the rise of the American system, Fordism and web 2.0 - the current industrialisation of a range of IT activities from product to utility (nee cloud) has not only caused co-evolution of practice (and the emergence of devops) but also a new organisational form with different practices, activities and focus. A list of these characteristics are provided in figure 1.

Figure 1 – Traditional versus Next Generation

This 'next generation' of companies use ecosystems extensively, are driven by big data (as opposed to simply using it), have cell based structures (e.g. like Amazon's two pizza model), use open approaches as a weapon and demonstrate high level of situational awareness and strategic gameplay. They also show a shift in project management practices from the extremes (e.g. agile or six sigma) to a more balance approach of using mixed methodologies.

The different characteristics of 'next generation' are not independent but highly connected. For example, the use of mixed methodologies requires an ability to break down (deconstruct) large complex environments into components and this in turn requires and enables high levels of situational awareness (see mapping). An example of this is provided in figure 2 and the deconstruction of various aspects of HS2 IT.

Figure 2 – Mapping of HS2 IT

This high level of situational awareness is essential for new forms of gameplay such as the use of an open approach as competitive weapon in order to change a market. It was through mapping the competitive landscape, understanding the basics of economic change and a deep understanding of gameplay that Ubuntu was able to successful steal a march on the future against Red Hat (see figure 3)

Figure 3 – Gameplay of Ubuntu

It's the highly strategic gameplay of Canonical which is likely to be behind the recent acqui-hire of CentOS by RedHat. Don't get me wrong, this is a sensible (but somewhat desperate) move by RedHat to gain mindshare in the cloud given Ubuntu's near total dominance (usually estimated as 65%+ of the market) and RedHat's almost complete absence (usually estimated at between 3% to 5%). This is a world apart from the past dominance of RedHat on the server.

Deconstruction is also a necessary step in the creation of cell-based structures. The successful use of ecosystems requires not only deconstruction but also extensive use of big data. Furthermore the use of cloud not only requires but also has enabled the co-evolution of practice (devops) and the rise of big data. All of these things are tightly interconnected. Before you think there is a sudden appearance of these changes, it's worth noting that many of these changes have been diffusing over the last decade. In several cases we have over stretched and retreated to a more balanced view. 

For example, agile development was all the rage in 2002 but by 2005 many software companies had started to learn the lesson that it wasn't suitable for all classes of problems and a more balanced / mixed approach started. Today, using mixed approaches in a single organisation is becoming essential for competition as the one size fits all (either agile vs six sigma or in-house vs outsource) incurs unacceptable costs. Throughout the industry, more balanced approaches of breaking down complex systems into components and using appropriate methods are growing whether it's mapping (see figure 4) to USAF's implementation of FIST. The binary approach is becoming mixed. 

Figure 4 – Mapping and use of methods.

Hence when I talk of 'outside-in' it's not that all will become 'outside-in' but instead there is rebalancing of the 'inside-out' approach that has became commonplace.

Of all the 'outside-in' changes probably the most interesting for me is the use of ecosystems. Alas, the term itself is as much misused with as many different types as there is with 'innovation'. In this post I'll focus on one specific model known as ILC (innovate-leverage-commoditise) because it simultaneously embodies what I consider to be the best of both 'outside-in' and 'inside-out' approaches.

The starting point of the model is a supplier creates a highly industrialised component for other companies to use e.g. utility electricity provision or a compute utility (such as Amazon's EC2). The ecosystem is comprised of those companies that consume the component hence we often call it a component ecosystem.

The purpose of the model is not just volume operations from use of the component but to encourage other companies to ‘innovate’ in creating the novel and new e.g. building big data systems on Amazon EC2.  Those novel activities created are highly uncertain but potentially of huge future reward (they are uncharted) and provision of the subsystem as a utility simply reduces the cost of production and hence encourages development. As these novel activities start to evolve through multiple waves of diffusion of ever improving systems, then the supplier can spot successful growth through consumption of the underlying component. This allows the supplier to leverage the entire ecosystem to identify future change - an exercise that at scale requires big data systems. Once identified, the supplier can commoditise an act to a new component and in effect harvest part of the ecosystem to provide a benefit to all. 

An example of this is provided in figure 5. Of course, we don't know if Amazon is deliberately running such a model and harvesting its ecosystem, we can only observe that the results are similar.

Figure 5 – ILC model

Each time a component is harvested the supplier has to balance accusations of 'eating the ecosystem' against the overall benefit that the component will provide to the entire ecosystem. If you 'harvest' too much then members of your ecosystem might flee elsewhere.  Once harvested, the new component can then be used to repeat the ILC cycle with members of the ecosystem building novel and new components on top of it (whether activities, practices or data).

The success of the ILC model depends upon numerous factors including the scope of the components built (i.e. specific to an industry or widespread), ability to identify and harvest successful change (leveraging the ecosystem, a big data problem), speed of harvesting and ability to manage the ecosystem (e.g. to ensure more benefit is provided than harvested). 

If implemented successfully then the supplier benefits are huge as their apparent rate of successful innovation (the innovation in fact being done by others), customer focus (leveraging the ecosystem to identify successful and useful change) and efficiency (economies of scale) now all depend upon the size of the ecosystem rather than the physical size of the company.  Furthermore all these effects can increase simultaneously. 

Now whilst we don't know if Amazon is running such a model, the signs of ecosystem harvesting and continual increases in innovation, customer focus and efficiency are all there. This is what potentially makes Amazon such a dangerous beast. The power of Amazon is in its ecosystem and its exploitation of such.

So which bits are 'outside-in' and which bits are 'inside-out'?

Encouraging the ecosystem to innovate (and hence build potential futures) and leveraging the ecosystem to spot future success are all examples of 'outside-in' approach. The decision to harvest the ecosystem by commoditising a component is however 'inside-out'.  The latter is an act of active management and enforcement of the will of the supplier on the ecosystem. The former are acts of nurturing and sensing where the ecosystem tells the supplier what is important.

In some respects, the supplier is acting as the gardener of the ecosystem. Nurturing a crop, sensing what works, harvesting when suitable and ensuring the garden doesn't get out of control. The key difference here is the crop can move and hence the gardener has to act as the benevolent dictator of the garden ensuring the benefits of staying in the garden outweigh the threat of being harvested. A similar dilemma has faced many open source projects and the various commercial interests involved. The existence of a benevolent dictator (whether a person, organisation or company) is often a pre-requisite for success.

Learning these techniques is all part of playing the game of chess that is business and competition. Mapping itself is all about situational awareness and is inherently 'outside-in' starting with a focus on user needs to the components that a supplier has to use to meet those needs. However, the act of altering a map through strategic gameplay such as a decision to use an open approach for one component, to outsource, to insource, to erect barriers to entry or to demolish others barriers to entry is inherently 'inside-out'.  So, should I be 'outside-in' or 'inside-out' … alas, the answer is never simple and binary. Over time you'll need to become both. 

However, it's worth noting that the route to greater situational awareness is always with an 'outside-in' focus.  There is more data, more information and more awareness outside the organisation than inside and if you fail to exploit this then don't assume your competitors will return the favour.  For the time being, since many companies are dominated by 'inside-out' thinking then a strong dose of rebalancing is needed.  Hence if you ask me whether a company should have more of an 'outside-in' focus today then in almost all cases I'd strongly agree.

It is essential to understand that at this moment in time the 'centre of gravity' for the firm is shifting from 'inside-out' to 'outside-in'. It's not an absolute but a movement away from the 'inside-out' dominated approach of the past. This is why I take a great interest in our work at the LEF on ‘outside-in’ and the work of @dmoschella.