The Wild Outside
It’s no secret that the global business environment has changed radically over the last twenty years due to the effects of globalisation, radically increased competition, pervasive regulation and rapid commoditisation. In addition the increasing information content of products and services is leading to a rapid decline in cycle times as their creation, maintenance and suspension is far more rapid than that of physical goods. We’re all therefore continually striving to find more innovative propositions with improved service at lower cost - as a result we’ve never needed to be more responsive. Unfortunately, however, most organisations are hampered by organisational, process and technology practices belonging to a less dynamic age, making them unable to adapt within the time and cost parameters increasingly demanded. These practices make it difficult for us to recognise opportunities in the mass of data with which we’re increasingly being overwhelmed and then frustrate us in any subsequent attempt to adapt, with change being complex, time consuming and hugely expensive.
Whilst these issues have been bubbling away with increasing ferocity under the apparently calm surface of many organisations over the last decade, those people who are continually running ever faster just to keep a lid on things are in increasing trouble – the global environment is set to accelerate further over the next few years. Technology is increasingly enabling the creation of new business models in support of customers and partners who expect continual service on their own terms – where, when and how they want it – and the speed of change enabled by technology innovation on the Internet represents an almost continuous source of change.
In order to succeed in future, we’re going need to find ways of facing these new realities. In particular we’re going to have to address the following major issues:
- The need for greater adaptability: The increasing pace of change will force us to adopt strategies that specifically stress adaptability. Current – mostly dysfunctional – command and control structures that attempt to predict demand and ‘push’ resources will increasingly break down due to the unpredictable nature of the environment. Organisations will thus need to reinvent themselves as a set of modular business capabilities that provide specific, known and costed services that can be reconfigured on a ‘pull’ basis in response to changing demands; and
- Increasing specialisation: New collaborative technologies and interoperability standards will continue to reduce the transaction costs of collaboration with other organisations. These changes will enable organisations to replace mediocre internal capabilities with world class services provided by partners, helping us to concentrate on what’s truly important and combat increasing attention scarcity. We will therefore see increasing specialisation, with organisations who do not outsource non-core concerns finding themselves at an increasing cost and capability disadvantage.
Let’s have a quick look at each of these issues.
The Need For Greater Adaptability
In order to address the need to survive in an increasingly uncertain world organisations need to adopt strategies that specifically stress adaptability – at the end of the day the only way to deal successfully with uncertaintly is to be able to adapt successfully to the changes that occur. In order to achieve adaptability, however, we must first understand what capabilities are needed to deliver to our stakeholders before considering exactly how all of these component parts combine to deliver value. Gaining this higher level view of the organisation requires a systematic approach to enterprise design which emphasises the creation and coordination of shared business capabilities in place of hierarchical silos with cross cutting concerns. Such an approach concentrates on reconceiving the enterprise as a set of collaborating business capabilities which have well understood commitments to the rest of the enterprise and which are firmly placed within the context of the overall value chain. In particular each capability is expressed only in terms of its commitments – there is no external view of the way in which the capability delivers on these commitments in order to ensure loose organisational coupling. These changes deliver a set of abstractions that allow senior management to define what the organisation should do without surfacing the mass of how, delivering greater adaptability at both levels. This brings benefits at a number of levels:
- Organisational leaders are able to concentrate on what they are trying to achieve at the enterprise level by ensuring that they have the correct capabilities and that these capabilities are offering the cost and service levels that the organisation requires. In addition such leaders are able to concentrate on macro level changes, reconfiguring value chains and renegotiating commitments with the capability owners in response to changes in external demands;
- Capability owners – including partners – have clear responsibilities and are empowered to innovate within the bounds set by these commitments. In effect the design of the organisation only constrains the capability owner in terms of required outputs – they are free to produce these outputs in any way they choose as long as they continue to offer competitive services; and
- Organizationally we have much greater adaptability, since change can be understood and managed at multiple levels of abstraction – capability owners can implement changes – for example service improvement or regulatory requirements - without impacting the wider organisation whilst enterprise management have a system of abstractions that allows them to understand the impact of change and to rework the organisation appropriately.
Although these concepts all sound pretty cool, until recently we’ve lacked a consistent set of abstractions with which to define capabilities, the services they offer and the costs and service levels that they conform to. In the last few years, however, the concepts of service orientation have emerged. Service orientation allows us to view complex systems – such as an enterprise – as a group of collaborating services that can be coordinated to deliver value, each with its own purpose, contract and service agreement. These techniques can thus be used – with some extension – to form the basis for the systematic design of the enterprise by helping us to understand and define the business capabilities that are needed whilst deferring their implementation to capability owners. Each business capability can then be delivered using an arbitrary combination of people, physical resources and technology. This removes the artificial boundaries between different kinds of resources by concentrating on how they combine to deliver service commitments rather than splitting them into – for example – ‘business’ and ‘IT’ and thereby losing the necessary value context. From an IT perspective this cuts across the traditional view of ‘Enterprise IT’ since capability owners are free to procure any necessary services – potentially including IT – from anyone.
Despite the efficiency benefits of specialisation most firms continue to be generalists, executing non-core capabilities in-house rather than rely on other specialists to execute such services on their behalf. The main reasons for this have been twofold:
- Current organisational structures do not allow for easy outsourcing due to the lack of clarity around discrete business capabilities – it has generally been difficult to untangle consistent threads from the hairball of organisational structure; and
- The transaction costs of collaboration have largely been a barrier to the leverage of external capabilities since such costs have traditionally been sufficiently high as to negate the benefits gained through specialisation.
The former issue will increasingly be resolved through the use of methodologies – such as service orientation – that enable business capability mapping in the search for greater agility. Transaction costs, however, are a different issue. Traditional economic theory suggests that firms exist to maximise efficiency; in order to do this they organise services internally to themselves in order to minimise the costs of transacting business with third parties. These costs consist of the effort required to find, establish, execute, manage and conclude partnerships for the provision of services.
Until recently these issues have been a sufficient barrier to the emergence of a specialised service provider market, with external transaction costs remaining sufficiently high to prevent large scale outsourcing in all but a few areas of broad applicability (e.g. HR or Payroll). The increasing capabilities of the Internet are set to change this pattern, however, with key standards facilitating the exchange of information between organisations in a much simpler way. In particular web service standards – both WS-* and Web 2.0 based - allow documents to be exchanged with partners over the web, forming a basis for a contractual commitment and enabling them to execute some service on our behalf. When we also add in the more human-collaborative aspects of Web 2.0 and the increasing convergence of communications technology we can see that we have a powerful platform for cross-organisational collaboration.
By lowering the costs of information exchange and collaboration these developments are opening the door to a change in the nature of the enterprise. We are headed to a market where organisations will be increasingly virtual - the enterprise will no longer exist to maximise efficiency by minimising transaction costs but to pull together a network of highly efficient, specialised providers in order to deliver an overall proposition. These changes will be complemented by the modularisation of enterprises, since the definition of a business as a set of services enables us to make clearer decisions about how we realise them.
This process will deliver advantage to organisations in three major ways:
- Enabling tighter focus on the provision of differentiating services: Currently organisational attention spans a myriad of business capabilities, most of which – whilst critical to the overall delivery of value – are not key areas of focus. Such non-core capabilities represent a diffusion of attention, increasing the information to be absorbed in order to remain competitive and wasting organisational energy. As we’re increasingly overwhelmed by information about change – whether competitive, technological or sociological - attention will become a highly valuable asset and will need to be focused in the correct areas if we are to have any chance of making a sustained impact in our chosen field;
- Boosting wider performance by replacing mediocre internal capabilities with world class services provided by specialised providers: Non-differentiating services will already suffer from a lack of focus and therefore be less effective than those provided by people whose sole concern is to deliver sustained excellence in those capabilities. As increasing competition and attention scarcity begin to bite we will have even less spare energy within the organisation to devote to these supporting capabilities, leading to rapid degradation. Those organisations that take the opportunity to leverage 3rd party providers, however, will be exponentially better than those that do not - they will benefit from the ability to focus on their own areas of specialisation whilst simultaneously benefiting from the continual improvement of their specialised partners; and
- Maximising learning opportunities by working with other specialised providers to improve the overall value chain: The emergence of extended value chains will see many specialised providers coming together in order to deliver overall propositions to the market. Where these providers come together there will be abundant opportunities to leverage their different perspectives to generate innovation around the way in which the overall value-chain functions – such innovation will be continuous, sustained and generate improvements at a rate that is inconceivable in today’s static organisations. In addition, the fact that each provider works with many other organisations maximises their opportunities for learning, a stark difference to current internally focused capabilities whose horizons are highly limited.
Standing back we can see that the move towards specialised service provision further destroys the notion of enterprise IT; as capabilities are unbundled to other providers the only ‘architecture’ that remains critical is adherence to interoperability standards. Each specialised provider needs to be able to interact with the cloud but can no longer expect to force a unified IT architecture across everyone in the value chain.
In this first post I have considered some of the broad changes that I think are going to have a major impact on enterprises but I’ve really only brushed some of the implications from an IT perspective. I guess the big take away from this initial post is that organisations – and therefore enterprise IT – are entering a period of fragmentation as unbundling occurs. In future posts I’ll look at the potential effects of such fragmentation before going on to talk about the resulting future landscape from a business and IT perspective.