The New Instability & The Future of EnterpriseBy
Over Christmas, I discovered a great book recommended on Amazon by Peter Evans-Greenwood, The New Instability. The book coherently brings together a lot of areas I’m interested in, primarily how globalization and new technology are forcing Enterprises to change the way they are organized and function, into a vision of how Enterprises of the future will need to adapt to survive in the ‘new instability’. After reading the book, I combined it with some of my own experience and ideas to do a talk at Unsexy Startups in London back in February, and was invited to do again at a few other start-up events since. Below is a recording of the talk at Unsexy Startups in February:
Everyone knows that it’s no longer ‘business as usual’ anymore. Innovation and disruptions are happening so fast now, that today’s winner could easily be tomorrow’s looser. Taking Alfresco as an example, I compared John Newton’s first company, Documentum, to Alfresco, the company he founded after that, which I now work for after being acquired. Both companies have had a big impact on the Enterprise Content Management (ECM) space the past 23 years, Documentum pretty much created the ECM category. So it’s interesting to see how the pace of innovation has changed in 23 years, and arguably most of that has occurred in the past 8.
So after the PC was launched in 1981 (the year I was born!), there was an explosion of digital content and files that Enterprises needed to find a way to manage, control and integrate into their business processes. Hence 9 years later, John Newton co-founded Documentum to look at the problem of managing unstructured data in the Enterprise. Since then, following a ‘crossing the chasm‘ strategy to verticalise their product and get their new technology into the mainstream market, Documentum grew into the giant of the the new ECM category, going public in 1996, and eventually getting acquired for $1.7billion in December 2003 by EMC.
During Documentum’s 13 years as an independent company, its safe to say there was no real disruption to their core business, they dominated the ECM category and they built their business on the same proprietary business model like they continue to keep trying today. (?!) It wasn’t really until the open-source wave in the 2000’s, which Alfresco has led in the ECM space with John’s current company, that there was any real disruption to the entire ECM space. ECM products were what they were, they were sold the same way, with expensive proprietary licensing. Alfresco essentially disrupted that model, by commoditizing the previously expensive technology, and making it freely available under open-source. The business has since successfully grown to the world’s second largest open-source company after Red Hat, but this time around, it hasn’t been a straight run to the finish line like Documentum.
After Alfresco started, just 2 years later, Microsoft disrupted the entire ECM category with the introduction of SharePoint 2007, which became Microsoft’s fastest growing product ever. While SharePoint isn’t strictly ECM (as many Enterprise are now learning), it provided just enough, but most importantly, focused on collaboration and caught the Enterprise 2.0 trend. Now although Cloud has been around for a while, it was only really in the last 2 years that Cloud really started taking off in Enterprise, particularly in the ECM category, leading the emergence of new ‘old’ start-ups (in the sense they’re the same age as Alfresco) Box and Huddle finally getting some traction and disrupting SharePoint. And the biggest driver for this move to Cloud has been mobile, the launch of the iPad has changed the way end-users want to interact with their content in the workplace. However from what we’ve seen at Alfresco, mobile is more a destination for many Enterprises, step 1 is moving to Cloud, so I put it a little later on my timeline.
So Documentum, 15 years of little or no disruption, versus Alfresco, only 8 years old, and has grown up through 3 disruptions in the ECM space already, and I’m sure there are several more just around the corner that I may discuss in a future blog.
This is just the tale of one industry, but if you look at any other industry today, you can see a similar story. Major innovations and disruptions are occurring in cycles of 2-3 years, not the previous 10-20 years of the 20th century. A ‘Nexus of Forces’ has come together (as Gartner calls it), where new technology (like Cloud, Big Data and Mobile), globalization and a new wave of entrepreneurship (made possible due to the cost of starting a new company having dropped significantly the past 5 years) creating an unprecedented period of innovation and entrepreneurship that has never been seen in human history before.
The bad news for some Enterprises is this is not a brief period in history, where things will settled down afterwards. This ‘new instability’ as Peter Evans-Greenwood calls it, will be business as usual from this point on, and actually, its only going to get faster as 3 billion more people enter the global economy as emerging countries catch up, and today’s innovations fuel tomorrows.
So how will Enterprise’s adapt to this new instability to ensure they can compete and stay relevant in the 21st century, and not go the way of the dodo?
The Core Idea – Cargo Planes vs Fighter Jets
In the 20th century, most Enterprises were built like cargo planes. Huge, monolithic machines that were extremely efficient at delivering products and services to their customers. Initially, Enterprises bought everything in house to mass produce products cheaply and efficiently. For example, Ford Motors even went as far as creating Fordlandia, a whole town with services and jobs (all provided by Ford) in Brazil, to produce rubber for their cars. As technology and globalization took hold in the last half of the 20th century, Enterprises started outsourcing a lot of their supply chain and non-core services to partners around the world. Today, most Enterprises have their manufacturing the in Far East, where its far cheaper to produce goods for markets in the West, and many IT services are being moved to India for similar reasons.
The key driver behind all these trends was efficiency. Enterprises invested in technology and re-organized their businesses to gain competitive advantage through delivering their services cheaper than their competitors through efficiencies. This lead to the mass-production of goods and services that grew the world economy through most of the 20th century.
However, by building these big, monolithic organizations around efficiency, many large Enterprises lost agility. In fact by its very nature, by becoming really efficient at one thing, you become too rigid to do others. Unless the change is an iterative improvement, you have to destroy the old process or business model before you can create the new one. With today’s pace of disruption, iterative improvements are a thing of the past and the idea that a single large organization can adapt and pivot to keep up with that pace is now being tested as large, once successful Enterprises, like Woolworths, Blockbuster, Polaroid, Borders, and many others go out of business.
Today’s successful Enterprises are built to be fighter jets. No one would use a fighter jet to carry a large load, on a fuel/weight ratio they are extremely inefficient when compared to cargo planes. But they give up that efficiency for something more important – agility. Everyone knows that in a dog fight, a fighter jet would kick the arse of a cargo plane! And in the market place today, a new bread of companies, be it the Amazon’s and Googles, or all the new disruptive start-ups that are emerging in almost every market right now, are optimized for agility, not efficiency. That’s not to say that these companies aren’t efficient, Amazon’s thin margins would be killed if they weren’t efficient, but that problem has been solved. The technology and services required today to run an efficient business have been commoditised to the point a new Enterprise can be started on a credit card. However the successful Enterprises, the ones that grow into market leaders out of nothing, focus on agility.
What Does Agility Look Like?
Agility is the ability of an Enterprise to pivot and create entirely new products, services and business models that respond to the current needs of the marketplace quickly. It’s their ability to disrupt themselves from within, before a new Enterprise enters the scene and puts them out of business instead. Unfortunately, anyone who’s worked in a large, traditional Enterprise, will know that many aren’t like that, and getting things done takes ages. To give an example of what agility looks like at a high level I’ve chosen one traditional business and one modern business, Zara and Facebook.
Zara is now the worlds largest fashion chain by revenue ($7.2bil in 2012). Started in Spain in 1975, their founder Amancio Ortega came up with the idea of ‘instant fashion’. For the web start-ups out there, ‘instant fashion’ is essentially Lean Start-up for fashion retailers. Most fashion retailers are optimized for efficiency. They launch new ranges every season, which they design months before, which are sent to low cost factories in the Far East, where they’re manufactured at the lowest cost, and then shipped for 2-3 weeks to stores in the West.
Zara on the other hand optimizes for agility. Instead of launching new ranges every season, they launch new ranges every week. This way they can quickly test which clothing is successful and which is not. For those that are selling fast, instead of having their factories in the Far East, which would take weeks to restock fast selling items, they have their manufacturing close to Europe, where they can restock successful clothing lines in days. This way Zara can test what is working and what isn’t, and let their stores order what the customers are demanding in almost real time, while not having to produce much of failed products. And because their stores launch new ranges weekly, they can respond to new tastes quickly, such as something similar to that nice new dress shown in last weeks Cosmo that everyone wants. What is really interesting as well, is that by launching new ranges weekly, customers return to the store more often, as they don’t want to miss out on something that not may be there next week. Its driven new buying habits with their customers!
Facebook has grown from a website in a college dorm to one of the biggest IPOs in history in only 8 years. In many ways they disrupted and took by surprise one of the world’s most innovative companies, Google, itself only a few years older. Many web geeks will have read about Facebook’s culture and ideas, here’s a few of them: Firstly, although Facebook has grown to have 1000’s of engineers, running their software across 1000’s of servers, Facebook not only does daily deployments of the site to its 1 billion users seamlessly behind the scenes, they recently moved to TWO releases a day. Two releases into production, with new features and ideas appearing in the product in almost real time, responding to the demands of their users. Secondly, they have an entire data science team dedicated to processing and analyzing all the data and metrics on the site, looking for new insights and correlations that can drive new product changes and ideas to further improve their business. And thirdly, like Zara, they test everything. At anyone time they have at least 10,000 A/B tests running in production, testing new product changes and features to see what sticks and what doesn’t, and what should be rolled out across the entire site to improve their user retention and revenues.
Both of these examples test new products and services continuously, maximizing the impact and revenue of successful ones while quickly killing off unsuccessful ones. Both of them have the ability to respond to market changes in days or weeks, and both of them focus on agility, to do more faster, while some or most of their competitors struggle to catch up with the pace of their rapid innovation.
The Issue For Existing Enterprises
Now you could argue that other fashion retailers or websites could copy this model, or perhaps take some of the ideas and use them for part of their business. The trouble is how can you compete with companies like this when only some of your business is agile? Agility needs to be built through every layer of the Enterprise. In Zara and Facebook, the culture and processes to run these type of test driven, data driven, agile businesses run all the way from the floor to the CEO at the top. You can’t half compete against this new bread of company, it has to be part of your very core.
The hardest thing for most CEOs and their team will be moving from a top down world, where traditionally the executive team in their wisdom decide on what products and strategies the Enterprise will deliver, to an Enterprise where the people closest to the customer, the employees on the ground, need to be empowered to make bottom up decisions that drive new products and innovations in the marketplace. The fact is the pace of innovation is moving so fast it will become impossible for one executive team to absorb and understand all the data about their marketplace, and determine what everyone on the ground should be doing to best capitalize on that.
This will require a huge culture change, a huge organizational change, throughout the Enterprise, which will take time and most likely fail without strong leadership to drive it through from the top. The executive team will have to open up their data to the entire organization, with tools at every level so employees on the ground are empowered to make decisions fast without a huge chain of bureaucracy to deal with. They will need to figure out new ways of organizing teams so the best people are available for the right projects and sheltered away from existing politics and processes so they have a fighting chance of launching new products and innovations that potentially disrupt the existing core business. Ultimately we’ll see middle management start to disappear as technology and agility needs move executives closer to their employees on the ground. And cloud is inevitable for ALL Enterprise IT. While regulations and compliance issues will slow the transition to Cloud down in some sectors, the case to continue building and managing huge data centers and rigid on-premise systems will erode away, leaving the laggards weighed down with legacy IT and out of date systems, while their competitors adapt their IT and systems to what they need today.
But probably the biggest change will be having employees at all. I have plenty to write on this subject in a future blog post, but the fundamental issue that anyone who’s done change management (as I did a few times at Accenture) will tell you, is the slowest thing to adapt to new technology and processes is people, especially with our out-dated Education system that trains for 20th century jobs and not the new chaos of the 21st century. I believe this will have the biggest impact on everyone as technology replaces jobs so Enterprises can move faster, and full time staff are replaced with freelancers and contractors who can be added and let go as needed based on the needs of the Enterprise at that point.
So What Should You Do?
For me, this is one of the most exciting times to be an Entrepreneur in the Enterprise technology space. As these nexus of forces force Enterprise’s to adapt and change to stay relevant in the 21st century, you can be sure new Enterprise technology companies like Alfresco will replace the large incumbents in the market, who themselves are failing to adapt to the new world. New software categories and products will be required to address the challenges of the agile Enterprise: collaboration and communication tools, adaptive case management, big data, machine learning and Artificial Intelligence to name a few. Tools that help a smaller, remotely distributed, Enterprise work closely with a web of partners and customers and deliver products and new innovations faster.
For those of you who can truly see and understand the changes that are going on in the Enterprise the next 10 years, there is immense opportunity, and in my future blogs I’ll be looking at specific areas of these changes, focusing on Big Data and Machine Learning first.
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A great complimentary presentation from my colleague Jeff Potts on the Alfresco Story:
[…] blog is a follow up to my previous blog on The New Instability and the Future of Enterprise, and was inspired by Daniel Hulme’s General Assembly class on Big Data to Big […]