Platform companies are all the rage, but for most older companies it is enough to rent or build a substantial platform component to stay in the game. For now, as platforms are merely a wave and what matters most is learning to surf.
While the popularity and proliferation of platforms like Android, iOS, Facebook and Amazon is easy to understand, most fail with an average lifespan of less than 5 years. Social network platforms Google+, Friendster, Myspace, Vice and iTune’s Ping came and went. Others, like Facebook, Amazon, Google and Apple became so successful they are now scrutinized for monopolistic behavior.
More importantly, while platform companies are the fastest growing sector of the S&P 500, both in market capitalization and media attention, most listed companies come from a more traditional background. They often produce a physical asset (e.g. chemicals, cars) or require complex customer-supplier interactions (e.g. building cruise ships) and operate in mature and therefore often heavily regulated markets. All indicators the straightforward platform strategy used by ‘born digital’ platform companies like Twitter, Uber and Dropbox won’t work.
Incumbents have to play another game and turn this seeming weakness into their greatest strength.
Platform strategy for incumbents
John Deere began in 1836 as a farm equipment manufacturer until it launched its MyJohnDeere platform in 2012. By connecting both equipment (e.g. crop harvesters, tractors) and stakeholders (e.g. farmers, dealers, third party software companies, consultants), John Deere enabled farmers to lower their operating cost and increase their yields. The Predix platform from General Electric, the HeatlhSuite platform from Philips and Disney’s Disney Plus streaming platform are other examples of old companies which understood that the ability of platforms to concentrate customers, business partners, data and consequently value could not be ignored.
What they also have in common is the time and talent required to turn the companies’ existing strengths into a complementary platform strategy.
Is time on my side?
Blockbuster bought MovieLink for its movie streaming platform in September 2008, eleven years after Netflix initiated the market disruption. It was too late and a halfhearted approach, two fatal mistakes in a market which suddenly flowed at a much faster rate. Blockbuster filed for bankruptcy protection in 2010.
Before anything else incumbents have to embrace that time flows faster in hybrid and digital markets. Employees of Samsung or other smart phone manufacturers are active in a market shaped by the constant fear of falling behind. They closely follow each other’s moves, always seeking that new differentiating feature that will make the next product launch a success. It is a race that never ends as Microsoft found out after winning the ‘browser wars’ in 2004. After capturing a market share of 95%, the product team responsible for Microsoft’s Internet Explorer lost its edge, allowing Firefox and later on Google Chrome to tip the scales in their favor. However, adopting speed-to-market as a strategic metric is by itself no guarantee for success.
While Google got caught off guard when Apple introduced the iPhone and iOS in 2007, it had enough time and financial resources to catch up and eventually even surpassed Apple in number of smartphones running its operating system. Huawei is in a far more awkward position. It leveraged on Google’s Android platform to quickly gain traction in the smartphone market, but every advantage has its disadvantage. Huawei does not own and thus control the Android platform, Google does. For Huawei, the decision to rent platform capabilities instead of building them suddenly became a liability when it got caught up in the middle of the trade war between China and the United States.
While both Samsung and Huawei sensed the strategic risk associated with renting platform capabilities and tried to mitigate it by investing in Tizen OS and Harmony OS respectively, it is yet to be seen whether customers are willing to board a platform which joined the party ten years late. The decision to build or rent platform capabilities is therefore one of the crucial topics for any incumbent defining its platform strategy.
Do I have the talent?
Platform-related technologies themselves are inert. Revolutionary or not, technology needs a compelling relevance to a customers’ life. Talented people understand that a large marketing budget cannot compensate for a lack of need. They possess the capability to turn the inherent value of technology into realized business value. In contrast to born-digital companies, the team driving the platform transformation at an incumbent faces an important additional challenge: combining the opportunities offered by these technologies and the existing strengths of the company.
Established companies already have a customer base and brand, financial resources, deep market knowledge, committed employees, and an operational backbone. Supplemented by company-specific differentiators, these form the foundation upon which to build the desired complementary portfolio of digital products and platform components. However, the older, larger and wealthier the company, the more likely digitalization initiatives face a mismatch in sense of urgency, cultural fit, governance approach and metrics. Mitigating this risk by organizing these initiatives completely outside the existing corporate structure prevent them from utilizing the available deep market knowledge and operational backbone. Hence, the relative ‘looseness’ between the existing operating model and digitalization initiatives should be a key attention point when defining and implementing the platform strategy.
The right digital-savvy leadership team also recognizes something far more important: platform-thinking will eventually be replaced by something else. No one yet knows when or by what, but noting is impervious to the impact of time. More important than defining a solid platform strategy is therefore creating and nurturing the organizational capability to be successful beyond a single wave.
Learning to surf
Every innovative business model or emerging technology commoditizes and eventually fades into the background after being replaced by something new. Even the decision by John Deere, General Electric and Philips to invest in platform components is merely a step in the right direction. Artificial intelligence and distributed ledgers are pushing the value of first-generation platforms towards the next level, promising personalization-at-scale and improved efficiency throughout the whole value chain. Linking brains directly to devices and platforms may be part of the third platform-related wave. That is, if a yet to emerge technology wielded by talented people does not disrupt the direction we are currently heading.
To be successful beyond a single disruptive wave, every member of the company, from the leadership team to the people manning the front lines, has to embrace a permanent state of ‘divine discontent’. Nokia and BlackBerry failed because their leadership teams missed the transition from selling phones to platform-thinking. It is the same intrinsic motivation to continuously improve and challenge the status quo which determines whether Zara, Apple, another incumbent or a yet to emerge new entrant will dominate the convergence of technology and fashion.
Time is a constant source of small, large and occasionally ‘freak’ waves and the future belongs to those companies that learned to surf.
The numbers are staggering. Depending on the source, millions or even several hundred million jobs will be destroyed and created in the coming years, requiring governments, companies, employees and parents to rethink their employment-related belief sets. Microsoft, Amazon, IBM, Salesforce.com, Oracle, SAP and Google generated an estimated 76 billion in cloud revenue in 2017. In the same year, e-commerce sales fell between $427 billion and $443 billion for the United States according to the National Retail Federation (NRF) while Statista predicts global e-commerce sales to hit $2.8 trillion in 2018 and $4.5 trillion by 2021.
If riding this technology-enabled transformative wave was as easy as investing in Agile, DevOps, serverless computing or another hyped concept, the failure rate of upstart tech companies would be well below the going rate of 70%. Nor would the retail industry have lost 8,053 physical stores in 2017.
Leveraging on the potential value of emerging technologies is hard.
It starts with embracing the fact that there is only one company asset which is truly scarce: open minded, smart, curious and proactive leaders and employees. Capital is superabundant, as is technology and access to all but the most exotic natural resources. Only people possess the capability to create new business models, value propositions, and attractive product designs. Access to the money required to scale a successful idea is no longer an issue with billions of dollars from investors seeking a return. Warren Buffet alone entered 2018 with $80 billion dollar for acquisitions.
Combine the democratization and consumerization of technology with the ability to automate increasingly complex tasks (e.g. software-defined data center) and the convergence of business and technology; and IT as a separate function is at risk. . Only if the internal IT department is able to convince the business of its added value in pursuing business opportunities in digital and hybrid markets, it will not go the way of the dodo.
In other words, the IT leadership team has to invest in the attitude and skills required to lead in digital markets.
Leading is very different from executing, IT’s traditional sweet spot. The ability to field a development team trained in Agile Scrum is part of the latter, as are containerization and the ability to offer daily deploys in AWS or Azure. They are all part of the HOW, while leaders deal with the WHY and WHAT.
According to Simon Sinek, writer of Start with Why, the essential difference between the “Apples” of the world and the rest is that they start with WHY. The why can cover the core belief set of the company (e.g. original mission statement of Google was: “to organize the world’s information and make it universally accessible and useful”) and/or the need or want of a customer segment (“I am willing to pay a premium for delivery within 12 hours”). The why shapes individual value propositions and even the business model as a whole. It also shapes the WHAT.
What physical product, service or experience is required to address the need or want of the customer? What is an acceptable price point and thus maximum cost level of the solution? What are the functional and non-functional requirements? A traditional IT team would ask the business for a Product Owner and expect her/him to provide all the answers. In contrast, an IT team that adds value asks critical questions about the WHY, has a strong opinion and list of suggestions regarding the WHAT, and presents the HOW in a condensed and business-oriented presentation of five slides instead of fifty techno-speak riddled slides.
The business does no longer needs the internal IT department to develop an app or website, there are thousands of external partners with that capability. The ability to develop and support IT solutions effectively and efficiently is a dissatisfier. Only if IT combines these non-differentiating activities with company-specific technology capabilities that allows the business to make a difference in digital and hybrid markets, the outsource-able faithful servant becomes a cherished business partner.
For established companies, the first step is an IT leadership team able and willing to reframe its believe set. Quoting an article from McKinsey:
“Every industry is built around long-standing, often implicit, beliefs about how to make money. […] These governing beliefs reflect widely shared notions about customer preferences, the role of technology, regulation, cost drivers, and the basis of competition and differentiation. They are often considered inviolable—until someone comes along to violate them.”
Well, the consumerization of IT, automation of increasingly complex operational IT tasks and the Cloud did just that with the monopoly position of the internal IT department.
Up to IT leadership team to either move from DevOps, to NoOps and finally NoIT or redefine their raison d’être, reinvent their IT business model and join the business in their hunt for market success.
Let’s think this one through: you committed to the Microsoft stack. Everybody in the office uses Office 365 for their email, word processing, presentations, document storage and collaboration. The sales and operations departments use Dynamics 365 and your custom applications are developed with VisualStudio, using SQL as a database. Everything is hosted in Azure of course.
Even if Microsoft would increase their license prices with 50%, what choice do you have but to stay and pay up?
Unmanaged, cloud-based ecosystems draw companies into the ultimate vendor lock-in.
Inviting open door: the ecosystem
A business ecosystem is a network of seamlessly interconnected functionalities, connecting customers, suppliers (e.g. content creators, app developers), distributors and even competitors. Key enablers of ecosystems include powerful end mobile devices, cheap broadband connections, and cheap storage and processing power. These and other technologies allow companies including Apple, Google, Salesforce, Facebook, Microsoft and Box to provide an ever growing portfolio of closely integrated value propositions.
Apple and Google are the most dominant players in the B2C space. Their ecosystems provide a frictionless environment to communicate, consume media (e.g. music, movies, books), play games and, via apps, do productive work. Other consumer oriented ecosystems focus on information access (e.g. comparing product prices) or exchanging goods, money and labor (‘crowd sourcing’). Hence, ecosystems are a source of convenience and choice. You get what you want, when you want it. No fuzz.
Ecosystems targeting B2B markets offer different, but equally enticing benefits, including:
- Create value propositions that are beyond an individual company. The wings of the Boeing 787 are made in Japan, its center fuselage in Italy, the cargo doors in Sweden, the landing gear in France and the wing tips in South Korea. All parts travel to one of Boeing’s factories in Washington or South Carolina, where they are assembled into planes.
- Higher return on investment. Sustainable success requires companies to focus on those capabilities and competencies it excels in. According to C. K. Prahalad and Gary Hamel, a core competency is “a harmonized combination of multiple resources and skills that distinguish a firm in the marketplace”. Large, vertically integrated conglomerates are unable to achieve the effectiveness and efficiency required to compete effectively in today’s dynamic and highly complex markets. When part of an ecosystem, individual companies can focus on those skills and knowledge that deliver the most value to the customer or downstream business partner.
- Reduced transaction costs. When the leading company within the ecosystem shares the necessary processes, standards and tools, both information and financial transactions flow through the network without any friction.
- For ‘junior’ network partners: an ecosystem provides access to the customer base of the leading company and ability to leverage on its technology capabilities (e.g. cloud platform, API’s, tools, standards).
However, there is no upside without a downside. After years of investing in the closed garden of Apple, just imagine the hassle to move your digital life to the Android ecosystem (or vice versa). There is no iMessage app in the Google Play Store and the games, music and apps you paid for on your iPhone cannot be transferred to Android (unless you already used 3rd party apps on iOS). You have to buy the content again. If it is available that is.
When you want to leave, you find out that the owner of the ecosystem has total control and that convenience has a price: a barrier to enter a competing ecosystem.
The same applies to participants of a B2B ecosystem. Depending on the ecosystem and the companies’ dependence, the financial impact can vary from inconvenient to bankruptcy. But before covering that topic, first some words on the Trojan Horse of modern ecosystems: the cloud-based platform.
- Ecosystems can be a source of considerable additional company value
- Ecosystems can be a source of strategic risk
The door lock: the cloud
The engine underpinning all modern eco-systems is the cloud: “a model for enabling ubiquitous, on-demand access to a shared pool of configurable computing resources (e.g., computer networks, servers, storage, applications and services”. On paper, the key benefits of the cloud include flexibility (e.g. Google’s load balancers can scale to 1 million+ users instantly), pay-per-use, service-orientation (e.g. no worrying about underlying infrastructure or updates) and data security (e.g. multiple networked backups).
These benefits are reflected by the market size. According to Gartner, the public cloud services market will grow 18% in 2017 to $246.8 billion. By 2020, the number is expected to reach 383.3 billion.
A key characteristic of the cloud is the use of centralized servers to do the ‘heavy lifting’. Siri (Apple), Cortana (Microsoft) and Google Now (Google) sends our question or command to one of its data centers for processing. It minimizes the workload of our mobile device and allows for more complex interactions. Sony uses a similar mechanism to stream PS3 games to the owners of PS4 game consoles. Google’s Marketplace and Salesforce.com’s AppExchange provide app developers all the resources they need to build, test, deploy, integrate, promote and service their apps. All the developer needs is a broadband internet connection and a moderately spec’d laptop or desktop. In 2016 alone, IBM received 2,700+ patents to cognitive and cloud computing, reflecting the clouds strategic importance to International Business Machines.
As a result, our data and an increasingly large amount of the business logic reside in an anonymous data center located somewhere on this world. On paper, you own the data and company-specific business logic, but the reality is more complex and expensive. For starters, the cloud enjoys both strong economies-of-scale and positive network effects. Similar to Facebook’s domination in social media and Google in search, eventually the majority of the public cloud market will serviced by two or three behemoths.
And at that time it is time to cash in.
Amazon has trucks that can transport up to one hundred petabytes of data in a single trip from your data center to its AWS, where the data is uploaded to Amazon Glacier or Amazon S3. There is no mentioning of trucks driving from AWS to another location nor the practical impossibility to move one hundredth petabytes of data via conventional 10Gbit landlines from AWS to a competing cloud vendor. That would take a full two years. The moment your hundredth petabytes arrive at AWS, you will for the foreseeable future be a customer of Amazon.
- The cloud is a performance multiplier of end user devices
- The cloud is like an addiction. It looks o so convenient and cheap, but it will be very difficult to kick the habit when the dealer decides to change the rules of the game.
From the cloud as an inconvenience
The cloud is not a single value proposition, but a layered portfolio. The first layer consists of provisioning basic infrastructure services (Infrastructure as a Service), followed by additional software and service layers to provide increasingly complex value propositions (e.g. Platform as a Service (PaaS), Software as a Service (SaaS) and Business Process as a Service (BPaaS)). Regardless of the layer, all cloud-based value propositions have the following attention points.
- Single point of failure. For Azure availability levels max out at 99,9% for single virtual machines while Amazon S3 uses a service credit mechanism to compensate for availability below 100%. These number are impressive enough for all but the most demanding applications. Consequently, many companies moved their entire infrastructure to the cloud. However, while the internet itself is designed to reroute around damage, the cloud is not. Due to a scripting error by an Amazon engineer, SoundCloud and Imgur were offline for more than three hours in February 2017 while Pinterest, Airbnb, Netflix, Slack and Spotify experienced slowdowns. According to Dave Bartoletti, a cloud analyst with Forrester, the outage took 148,213 sites down, including three to four trillion pieces of data. When a large Amazon S3, Google, IBM or Azure site goes down, the impact is immense.
- Power imbalance. The business model of the cloud is firmly based on standardization. It is the only way Amazon, Microsoft, Google and others can achieve the required economies of scale and number of customers required to become profitable. In 2015, more than five million organizations were represented in Azure Active Directory and in 2016 Microsoft reported more than 120k new Azure customer subscriptions per month (note: the latter likely includes Office 365 subscriptions). The only way to manage these volumes is through strictly enforced standardized agreements, release frequencies, feature roadmap, API’s et cetera. They are non-negotiable and as a customer, you either take it or leave it. It is this level of control and the accompanying power shift that drives the frenzied investments in cloud solutions (e.g. $30 billion by Google). Other signs include the lackluster support of on-premise versions of software and unfavorable changes in license policies. Take Microsoft SharePoint for example. When introducing SharePoint 2013, SharePoint Server licensing cost increased by 40% while all new shiny features are first added to the cloud version, treating on-premise users as second class citizens.
- Hidden costs. This article covers the story of a web startup that ran hundredths of instances on AWS, depending solely on its cloud-based webservers, micro-services, BI tools, git, monitoring and wiki. The author points out that a dependable base instance could only be achieved by adding service options including provisioned IOPS for databases, local SSD, Premium Support and dedicated instances. Even more interesting considering the topic of this blog is the following quote: “Unfortunately, our infrastructure on AWS is working and migrating is a serious undertaking.” They had no choice but to throw more money at Amazon. More in general, there are several sources of direct hidden cost including: over-provisioning; under-provisioning (e.g. the web startup); spin it up, then forget it; storage choices; free (with strings attached); appliance charges, and last but not least: free to enter, pay to leave. In addition to these direct hidden costs, companies should also take into account indirect cost including integration issues (e.g. data management with multiple SaaS vendors), rogue cloud implementations (e.g. business engaging Amazon for IaaS while IT signed contract with Google), ensuring regulatory compliance, and updating custom applications due to forced updates of the underpinning IaaS of PaaS platform by the vendor. At Microsoft, the Azure team is used to release minor updates every two to three days and major releases every two to three weeks (I). Some (e.g. changes in APIs) require the business application to be patches despite the fact that it does not add any business value.
- Data security. Adobe’s security breach in 2016 exposed 38 million user accounts, allowing the attackers to access Adobe IDs, encrypted customer credit card records and login data access. Besides the sinister work of black hat hackers, there is also the government to consider. Microsoft, Google, Apple and Yahoo all said they did not cooperate with the NSA to share sensitive data. However, secret files leaked by Edward Snowden and others paint a very different picture. Microsoft shared with the NSA, which in turn shared with CIA and FBI. Yahoo scanned all incoming emails for American Intelligence Services while Google and the NSA got close after Chinese hackers breached its network. Combine this with the following quote from former CIA Director Stansfield Turner in 1991, “as we increase emphasis on securing economic intelligence, . . . we will have to spy on the more developed countries—our allies and friends with whom we compete economically.”, and it becomes clear why companies with sensitive IP should be weary of the cloud. The American government will take a peek if European aircraft manufacturer Airbus would store any data in the cloud of an American company. Or get its hands on Airbus’s blueprints via a different route.
- Customer support. Unless you are a Fortune 500 company, you are a number. Getting a person on the line often requires signing up for a premium support contract, adding to the cost. Out-of-the-box, all interaction goes through a website and email. As mentioned, the cloud is based on economies of scale, not customer intimacy. Whether this is an issue depends on the business context the application operates in. You don’t want to be treated as a number when your core banking system is down.
For many use cases, the cloud offers a great value proposition and will continue to do so until the next disruptive wave roles on shore. However, it is not a silver bullet. Despite the tantalizing pitch of all those sales people and marketing flyers, there are several caveats, especially when you want to aggressively scale up or exit. At that point, you find out that the actual costs can be considerably higher than initially thought. For some companies this is merely inconvenient, but for others more is at stake.
- The cloud shifts the power balance from the customer to the vendor.
- Both the short term and long term Total cost of Ownership of cloud computing are elusive.
To bankrupted by the cloud
Knight Capital lost 440 million in forty five minutes after its cloud-based automatic stock-trading software bought several billions of unwanted stock. The error wiped 75 percent of Knight Capital’s equity value and they had to sell their business to GETCO at a fraction of the original market value. Code Space is a former SaaS provider that failed within six months after it got hacked via its AWS control panel. According to SC Magazine, “the hackers erased data, backups, offsite backups, and machine configurations before attempting to extort the business by claiming a “large fee” would resolve their issues.” Imagine your companies’ business model depended on Code Space… Code Space, 37signals, Zendesk, LucidEra, BlinkLogic and Freshbooks are a few names on a long list of cloud vendors that did not make it.
Especially for smaller companies, this single point of failure is a strategic risk as they don’t have the means to adopt a multi-cloud-vendor strategy.
But even for large corporations there is reason for concern. In 2016, Canalys founder Steve Brazier warned the audience of the companies’ Channel Forums in Barcelona that the largest cloud providers may become too big to fail. What if Azure, AWS or Google would not make it due to the fierce competition and fail? Quoting Brazier: “If one of these companies goes down, hundreds of thousands of other companies go down too.” At that point, the client companies are stuck between a rock and a hard place as neither retained the skills to setup and run an on-premise infrastructure nor perform a migration to another cloud vendor. Assuming the data of the client company remains accessible of the cloud provider failed that is. When Cloud storage firm Nirvanix failed, customers were given two weeks to move their data out of its data centers. With companies soon sitting on Petabytes of data, two weeks allows you to safe maybe five percent. Can your company survive without the other 95 percent?
- Companies moving their infrastructure, applications and data into the cloud enter an one-way street.
The cloud enabled a whole new generation of business models, transforming both established business and IT operating models. However, like with everything in life, there is no such thing as a free lunch.
Notes and references
(I) Guthrie, s., Simms, M., Dykstra, T., Anderson, R., Wasson, M., Building Cloud Apps with Microsoft Azure: Best Practices for DevOps, Data Storage, High Availability, and More (Developer Reference), 2014. Page 20.
You can read more on the benefits of online platforms here (Oxera paper for Google titled Benefits of Online Platforms), here (HBR article Three Elements of a Successful Platform) and here (HBR article Pipelines, Platforms and the New Rules of Strategy). A more academic paper from Cambridge on platforms can be found here.
An interesting article from The Wall Street Journal on the ways the cloud changed our lives can be reached via this link.
Microsoft is becoming an open-source company, sharing 206 packages in February 2017. In 2016, 16,419 contributors affiliated with Microsoft worked on open-source GitHub projects. The company has embraced the view of Jim Zemlin, the Linux Foundation’s executive director: shared development is enabling faster development with higher quality and lower costs. This is causing the software value chain to change.”
It is a 180 degree turn for a company known for aggressively protecting its IP and which head of the security response team argued in 2001 that closed source is more secure because “because nobody’s reviewing open source code for security flaws“.
Why did Microsoft reframe its strategy and what can other technology-driven companies with a traditional business model learn from Microsoft’s radical new view on open source?
Globalization, sustainability, urbanization, digitalization and sharing shape the way we live, work and interact with each other. To thrive, companies have to sense and act on these and other key trends. Sharing, or ‘using instead of owning’, is driven by customers faced by:
- an abundance of choice (read: supply outstrips demand),
- a desire for instant gratification,
- a decline of stable and full-time employment, and consequently
- a decline in purchasing power.
Technology is an important enabler of sharing as its reduces the friction between ‘customers’ and ‘suppliers’. Apps in combination with a scalable backend platform allow for a free flow of information providing the necessary convenience and trust (e.g. via reviews).
Using instead of owning gave rise to a whole new industry, including companies like Uber (car), AirBnB (house), TaskRabbit (labor), Kickstarter (funding), Wallapop (used goods), Udacity (education), Repair Cafe (repair) and Facebook (personal content). Some are mission-driven, but most are profit-driven or at least a hybrid. According to research by PWC, the size of the sharing economy is expected to grow to $335 billion in 2025 from $15 billion in 2014. Hence, sharing does not necessarily means ‘free’.
According to Havas Worldwide, 25-34 year olds are driving the shareconomy, with 51% preferring share over owning. At least as interesting is the observation by JWT intelligence that 40% share to learn new skills or to support good causes. Which brings me to the first reason why it is important for technology-rich companies to look into open source.
Attract and retain Key Personnel
Highly skilled developers and other professionals want to work with peers, using online communities to collaborate and challenge each other. They use sharing to demonstrate their cleverness and use feedback to learn. These developers don’t want to work in a black box, unable to communicate with others due to a classic business model where (I)
“commercial software development is based on the exploitation of the monopoly created by copyright for competitive advantage. It makes sense in that system to avoid any process that would undermine the advantage, such as, for example, the sharing of source code with thousands of potentially competing strangers.”
Why is this relevant you might ask. The demand for highly skilled developers outstrips the supply, shifting the power balance towards the developer. Senior and lead developers can choose from a dozen or more vacancies at any day. In 2016, The App Association estimated there were over 223,000 openings for developers in the United States alone. Quoting a recent report by EY on the market in the UK:
“It’s a particularly salient point given that a recent study by O2 suggests that the UK will need to fill more than 750,000 new digital jobs by 2020 and train almost 2.3 million people to meet the demand for digital skills.”
The automation of increasingly complex knowledge work, the internet of things (IoT), the shift towards the Cloud, advanced robotics and next-generation genomics are some of the trends driving an almost unlimited demand for highly qualified software and data professionals. Quoting Marc Andreessen: “Software is eating the world.” And the end is nowhere in sight.
Many leading companies already adapted their business model and hiring practices, including the aforementioned Microsoft with 16,419 GitHub contributors, Facebook (15,682 contributors), Docker (14,059 contributors), Angular (12,841 contributors) and Google (12,140 contributors).
- Demand for highly skilled developers outstrips supply
- Allowing employees to share positions the company as an attractive employer
Open source as driver of new business models
According to Lerner et al (II), “it will make sense for a commercial company to release proprietary code under an open-source license if the increase in profit in the proprietary complementary segment offsets any profit that would have been made in the primary segment, had it not been converted to open source.” While this statement covers the revenue model of traditional business models, it has at least two shortcomings.
First. by focusing on direct revenue streams, it overlooks the previously mentioned effect of open source on the ability to attract and retain developers, the key driver of profit. No developers, no profit. Closed source or not.
More importantly, the statement does not cover the new generation of platform business models which use open source to:
- quickly boost the size of the ecosystem or platform (e.g. attract developers of apps, games and other source of content that strengthen the customer lock-in)
- establish open standards (e.g. via ISO, IEEE, W3C or OASIS or another organization with a recognized consensus process)
- improve brand awareness (spin-off of the first bullet, creating a positive feedback loop)
- disrupt the competition (e.g. reframe established revenue models within the industry).
Sharing code lowers the entry barrier for developers to build on top of a platform, boosting its overall attractiveness. In 2014, more than 1000 developers contributed to the 107 open source projects initiated by Facebook. By July 2015, Google had released 20 million lines of code and over 900 projects as part of their open source initiative.
Defining open standards is another way to boost a platform business model, like Rackspace and NASA did with their OpenStack project. By being first or at least early in combination with adopting an open source policy, a company can create a community and hence momentum difficult for competitors to catch up with. Quoting Knorr:
“Open source is leading the way in technology development. It’s become the vehicle of choice for startups to gain traction, as customers (mainly developers within companies) take new technologies for a spin, provide feedback, and eventually put them into production. Meanwhile, other developers see what’s hot and start building an ecosystem around a core project, as has occurred with Docker, Hadoop, OpenStack, and others.”
Considering the widespread disruption caused by startups in almost every industry, open instead of closed source should at least be seriously considered. Especially those companies heavily relying on technology.
- Open source and open standards are important enablers of disruptive business models
- Open source allows new business initiatives to scale fast or fail fast
Open source disrupts existing licensing models
Nor Microsoft Office 365 or Google’s G Suite are open source (LibreOffice is), but they provide a clear cut example of changing revenue models within the software industry.
Google’s productivity apps (‘G Suite’) and Microsoft’s Office 365 offer comparable functionalities. Both suites offer email, storage, a word processor, a spreadsheet, a presentation program, and the ability to create webpages to share documents and other types of content. Where Googles offering targets everyday use, focuses Microsoft on doing everything imaginable. Their revenue models reflect this.
Everybody can use Google apps for free due to ad generated revenue. For those power users or companies that want an ad-free environment, support and more storage, a paid premium model is available. In 2015, Google Apps passed 2 million paying companies, demonstrating the viability of the business model and potential to disrupt the de facto monopoly of Microsoft’s Office.
IBM followed a similar path when it was unable to compete with Microsoft in the server space. It adopted open source Linux in order to undercut the license prices of its competitor and regain lost market share. RedHat’s business model is also build on open source. Red Hat shares all its code with the community, relying on value adding support services for its revenue streams.
More generally, business models based on open source software are based on offering:
- value-added services (e.g. consultancy, training, implementation, optimizations)
- software as a service (e.g. including service desk, maintenance, hosting)
- advertising or another cross-subsidy model
- dual licensing model (e.g. commercial companies have to pay)
- freemium (e.g. paid optional proprietary extensions)
WordPress is open source and by far the most popular content management system (CMS) with around 15,886,000 websites in January 2017 (50-60% market share). According to Sketch Themes, WordPress was the most requested skill in the world in 2014, with developers charging an average $50 an hour. By January 2015, Freelancer.com had closed 243,161 WordPress projects at a total value of $60,571,205. That is serious money.
- Disrupt or be disrupted. Traditional business models have an expiry date
- Done right, open source can be a money printing machine
Open source as driver of productivity
Productivity is “a measure of the efficiency of a person, machine, factory, system, etc., in converting inputs into useful outputs.” Productivity can be increased by reducing the input for a given output (e.g. initiative to consolidate datacenters to better leverage scale) or increase the output for a given input (e.g. use the same team to create higher added value services). Open source can improve the companies’ productivity by:
- providing innovative processes to improve operations (e.g. Facebook reporting a 24 percent decrease in cost and 38 percent increase in energy efficiency after switching to open source hardware designs).
- creating, technology-rich, high value-added value propositions (e.g. The Open Bank Project is an open source API for banks allowing them an secure ecosystem of 3rd party applications and services).
More generally: “It is common for people working for a technology company to suffer, at least a little, from the belief that all the really innovative people in their particular technology happen to work at that company. This can cause such a company to work too hard to produce every last bit of related technology, which is often not the best competitive approach” (III). With Github reporting 19.4 million active repositories written in 316 unique programming languages, smart companies combine externally sourced open source components with their own capabilities to create a distinctive value proposition.
Many companies already found the pot of gold at the end of the rainbow. With Github reporting 331k+ active organization, including 44% of Fortune 50 companies in 2016, these companies understand the value of being part of a distributed network whereby the sum of parts create more than all the individual parts can (e.g. one bee versus the hive as a whole).
Only laggards think they can keep up with the relentless increase in complexity and uncertainty by acting like a clamp.
Notes and references
(I) Andrew M. St. Laurent, Understanding Open Source and Free Software Licensing: Guide to Navigating Licensing Issues in Existing & New Software, 2006.
(II) Josh Lerner, Parag Pathak, Jean Tirole, The Dynamics of Open-Source Contributors, 2006. In: The Roots of Innovation, Vol. 96 No. 2.
(III) Ron Goldman, Richard P. Gabriel, Innovation Happens Elsewhere: Open Source as Business Strategy, 2005.
More on business models used to monetize on sharing can be found here.
More on why and how Microsoft transformed itself from a traditional software vendor struggling to keep up with the competition into a leader here.
When a static analogue business model evolves into a dynamic digital business model, the leadership style has to evolve with it. Similarly, when a native digital startup matures and starts to diversify, the leadership team has to be infused with new skill sets. This last part covers the transition from the current leadership style to one optimized for dominating hybrid and digital markets.
Team members expect a lot from their leaders. They are considered a source of innovation, passion, vision, personal development and trust. Compared with leaders, managers have a fairly easy job as they are expected to focus on maintaining the status quo, improving efficiency, achieving short-term goals and day-to-day control. Nevertheless, a leader is still a human, as pointed out by Maddock and Fulton (I):
“They put their pants on just like the rest of us do. They have both good and bad traits. From time to time, when things are going badly, their old character traits slip through and they become irritable, angry, irrational and capricious. They behave in immature ways. They exhibit traits that amaze us and we say, “I always thought of him/her as a leader! What’s going on?” They disappoint us.”
Disappointment is also all but inevitable when we expect a leader to excel in every situation. Everybody has her/his strengths and weaknesses, a fact often overlooked when a company is faced with the disruption of its market. When the current CEO has a strong track record in brick-and-mortar retail expansion, she/he likely struggles to a) sense and b) act decisive and effective when customers shift towards mobile-first shopping.
Evolving leadership 101
Regardless of the technology-density of the companies’ business model, every manager should strive to become a leader as they are far more valuable to a company. Today’s highly educated employees no longer need somebody to tell them what to do next while several industries are actively substituting employees with either robots or contract workers. Combined with the ability to automate increasingly complex management tasks, the traditional manager is quickly turning into an endangered species.
The most differentiating capability of a leader is the ability to build trust. Trust that you as a leader:
- balance the interests of the company, employees and your personal objectives
- provide clear and inspiring goals and a strategy to achieve them
- empower and coach individual team members to make decisions and learn from them
- involve team members in conversations early in the decision-making process
From personal experience, I know that the third and fourth bullets look good on paper, but are difficult to translate into day-to-day practice. As everybody is blessed with a unique set of strengths and development points, a leader has to determine the willingness and ability of every individual team member to perform a certain task (‘situational leadership‘). There is no single “best” style of leadership.
To improve the ability and consequently self-esteem of junior team members, many leaders launched apprenticeship programs as they focus on solving real life problem, learning from people of different ages, applicable know how and socialization into the company. Investing in coaching and mentoring programs is another powerful way to help team members to grow as a leader or professional.
When discussing the future of long-term team members faced by the imminent transformation of their business processes, leaders focus on the potential of that individual. The pink slip is considered a last resort. Managers react differently. Most are unable to look beyond the current tasks and responsibilities, using the pink slips an easy way out.
More importantly: true leaders prevent the company from ending up with its back against the wall in the first place.
Evolving from analogue to digital
As late as 2012, CIO.com reported that:
“There’s a dangerous lack of confidence in the board’s digital literacy, revealed in our exclusive survey of 250 IT leaders. Sixty-four percent say the board “doesn’t do its homework” about technology matters and 57 percent say directors rely heavily on what they read in the press to evaluate IT strategy. Some 40 percent say board members “don’t really care about IT.”
Due to the ongoing shakeout in many industries, boards had no choice but change their tactics, hiring 30- and 40- somethings to help them make sense of digitalization. These technology-savvy high-potentials are able to translate technology into business value by linking a new technology to an emerging market need. They are individuals who understand that no technology can transform a market without a solid business model (II).
Besides these IQ-related skills, leaders score high on Emotional Quotient (EQ) and get out of their functional silos as digitalization requires an end-to-end approach. In other words,
“a leadership model that is less autocratic but more of an authoritative and networking nature.” (III)
Last but not least, effective leadership starts with self-reflection and understanding one’s personal strengths and weaknesses. Shorter product and technology life cycles, culturally and geographically dispersed virtual teams and less predictable customer demand are only some of the forces at work today. Only leaders who sense the impact of these and other forces and adjust their long-established intuitions will be able to emerge on the winning side.
This blog only activates the left side of the brain, the IQ part. From an intellectual perspective, it is fairly easy to identify the traits that make a good leader. However, managing and especially leading is truly a profession in a sense that it requires the mastery of a complex set of soft and hard skills through practical experience, mentoring and being blessed with talent.
Reading books, articles, blogs or even formal education cannot create effective managers, let alone leaders. Teal expressed it as follows in his article The Human Side of Management:
“And still the troublesome fact is that mediocre management is the norm. This is not because some people are born without the management gene or because the wrong people get promoted or because the system can be manipulated—although all these things happen all the time. The overwhelmingly most common explanation is much simpler: capable management is so extraordinarily difficult that few people look good no matter how hard they try. Most of those lackluster managers we all complain about are doing their best to manage well.”
Hence, leading in the digital is first and foremost about identifying, attracting, nurturing and retaining those unicorns that score high on both IQ and EQ. They in turn can identify, attract, nurture and retain the rest of the winning team.
Notes and references
(I) Maddock, R., Fulton, R., Motivation, Emotions, and Leadership, 1998.
(II) In their article The Transformative Business Model, Kavadias, Ladas and Loch argue that new technologies alone cannot transform an industry. Nicholas Carr made a similar observation in his famous article IT Doesn’t Matter in 2003: the ubiquity of information technology prevents it from being a source of sustainable advantage. In time, every new technology commoditizes or is replaced by a more capable substitute.
Leaders are considered a source of innovation, passion, vision, personal development and trust. Leaders enable the other team members to turn technology into a source of value.
Compared to more traditional markets and business models, the digital age favors leaders who score high on emotional intelligence and the ability to translate uncertainty into opportunity.
You can find the first part of this blog on leadership here.
The most valuable trait of leaders is their ability to remove the natural tendency of people to resist change. Resistance occurs when people feel they have lost control, and/or pride, feel insecure about their competency, are confronted with excessive uncertainty, surprises, or new routines (I). However, it is exactly what happens when an analogue business model has to reinvent itself. Leading a team faced by this challenge requires somebody with both a high intelligence quotient (IQ) and emotional intelligence (EQ). The IQ is used to formulate a tantalizing vision and strategy to get there, while people with a high EQ score high on self-awareness, self-regulation, motivation, empathy, and social skill (II).
Traditionally, IT is considered a suitable career path for students with large brains, so the importance of EQ may at first sight seem overrated. But consider the following trends:
- more emphasis on user experience and habit-forming technologies
- convergence of business and IT domains
- automation of increasingly complex standard tasks, and
- the emphasis of the business on innovation and speed-to-market.
These trends can only be dealt with effectively by business-savvy, assertive, highly skilled, adaptable and creative people. It is the type of employees every company wants and they know it. To lure and retain them, the company needs to inspire and support them in their self-actualization and personal development. Hence, employees who expect a leader who cores high on IQ and EQ. Quoting Angela Ahrendts, senior vice president at Apple,
‘Everyone talks about building a relationship with your customer. I think you build one with your employees first.’
Leadership in a digital world
Before a leader can channel the right inspiration and knowledge to the right person at the right moment, she or he first has to define the future direction and key objectives. Hale mentions two key skills to point the team in the right direction (III):
- Focus on results. This aspect includes clearly stating the goals and strategy; what the ground rules are to achieve them; what is open for discussion and what is not; the translation of team goals into personal objectives; and defining how benefits and success are measured.
- Consistency of focus. The communication message of the leader has to be consistent and she or he has to ‘walk the talk’. Too much change leads to distraction, confusion, and frustration while people change their behavior based on observable acts by their leaders. The visible rules have to match the invisible ones.
At the same time, market realities demand a certain level of flexibility. Technology, customer demand and competitor behavior are in a constant flux, affecting both the present and future market position. Microsoft struggled for years to reinvent itself when mobile and consumeration disrupted its traditional business model. With the appointment of Satya Nadella as CEO, defending existing market spaces was replaced by a strategy based on the ‘cloud-first mobile-first’ principle. While Microsoft’s new direction seems to hit the right mark, CEO’s of Yahoo, Acer, BlackBerry, AMD and HTC are still struggling to revitalize their business models, demonstrating the difficulty of such an undertaking.
Besides focus on results and consistency, digitalization also requires a renaissance of charismatic leadership, reversing its decline due to the “routinization of charisma”. The larger and older the company, the more likely
“ charismatic authority is succeeded by a bureaucracy controlled by a rationally established authority or by a combination of traditional and bureaucratic authority” (IV).
Hybrid and digital markets are too dynamic and complex for finely grained and strictly enforced governance and control frameworks. Providing the team with the future direction and key objectives of the company is not the same as dictating their day-to-day activities. It is not the CxO, but the frontline team and their (informal) leader that understand what the customer wants and where the market and competitors are heading.
In their article Is Your Leadership Style Right for the Digital Age?, Libert, Wind and Beck Fenley make a similar observation. Today’s highly educated employees want to take ownership and expect their manager to focus on results instead monitoring whether they clock in at 9. The authors argue that digitalization requires an open and agile organization, instead of an operating model whereby
“all insight and direction comes from the top. In short, the autocratic Commander, whether brilliant or misguided, just won’t cut it anymore.”
That said, how to infuse more ‘digital leadership’ into an company shaped by decades of ‘analogue leadership’? As mentioned in this blog, there is still a lot of value in the Mature and Decline part of the business product lifecycle and subsequently the accompanying underpinning IT solutions. Firing and hiring the whole leadership team is therefore not the answer. Addressing this challenge is the topic of the third part of this blog.
Notes and references
(I) Kanter, R. M., Ten Reasons People Resist Change, Harvard Business Review, September 2012.
(II) Goleman, D., Emotional intelligence, why it can matter more than IQ, 1995.
(III) Hale, J., Performance-Based Management: What Every Manager Should Do to Get Results, 2004
(IV) Kendall, D., Sociology in our times, 1997
The article How to be a leader in the digital age published by the World Economic Forum covers the impact of digitalization on the society as a whole, citing the following key structural challenges: “(1) rapid and far-reaching technological changes, (2) globalization leading to the dynamic spread of information; (3) a shift from physical attributes toward knowledge and (4) more dispersed, less hierarchical organizational forms of organization.”
The article The Frontline Advantage by Fred Hassan describes the importance of frontline managers, both to motivate and guide the team members and as a feedback loop to the executive leadership team.
Leaders are considered a source of innovation, passion, vision, personal development and trust. They enable the other team members to turn technology into a source of value.
The topic leadership is part of the first principle: less defensive, more defensive.
Technology is abundant, easy to copy and therefore unsuitable as a source of sustainable competitive advantage. It requires creativity, intelligence, perseverance and all those other traits only humans possess to turn technology into a differentiating hybrid or digital value proposition. Brain Solis, principal analyst at Altimeter Group made a similar observation (I):
“We already found that companies that lead digital transformation from a more human center actually bring people together in the organization faster and with greater results.”
Transformation is equal to change and only leaders can effectively influence the behavior of the people surrounding them. Managers and bureaucracy cannot.
This statement is as relevant for the business as it is for IT. Throughout the whole value chain, progressively complex manual tasks are automated, driving down cost and improving agility. What remains are high added-value activities like:
- objective and strategic settings
- spotting and pursuing (un)foreseen opportunities
- spotting and pursuing (un)foreseen risks
- research and development
- business development, marketing, and
- customer service
They are activities that business and IT perform in isolation when the company pursues slow moving analogue markets. In fast-moving hybrid and digital markets, the business and IT teams have no choice but to converge or even fuse their human Key Resources (II). Only together they can effectively transform analogue value propositions, channels, customer relations, and business processes.
One only has to look at Silicon Valley to see the impact of people as a key driver of company value. According to AnnaLee Saxenian, professor at the University of California, Berkeley, the success of Silicon Valley is firmly based on people, culture and connections. In her book Regional Advantage: Culture and Competition in Silicon Valley and Route 128, she explains why other regions aspire but were never able to replicate its success. In Silicon Valley job-hopping, peer-networking and sharing were the norm, fostering innovation and consequently value creation.
In Silicon Valley, companies have to compete and collaborate at the same time. They understand that only as part of an porous interdependent network they can turn complexity and uncertainty into a sustainable business model. Individual persons or companies cannot.
Notes and references
(I) Kapko, M., Enterprise Collaboration Will Drive Digital Transformation, CIO.com, July 2014.
(II) ‘Key Resources’ is one of the building blocks of the Business Model Canvas from Alex Osterwalder. Covered in the book, it provides the foundation for the IT Business Model, a canvas optimized for IT teams that want to converge their operating model with the business more effectively.
(III) Mastenbroek, W., Verandermanagement, Holland Business Publications, 1997. (Dutch language)
Background information and further reading
In literature, people as a key source of corporate success is part of the ‘resource-based view‘ on strategic planning. From a resource-based view, it is a company-specific combination of resources (e.g. skill sets, technology, intellectual property) that allows the company to differentiate itself from the competition. These differentiating combinations of resources are the ‘core competencies’ of the company and should be retained and nurtured.
The article What is the Difference Between Management and Leadership? describes the important difference between leaders and managers. Both are linked and complementary, but not the same thing.