State of Change, Chapter 6: Realigning Your Organization to Face the Future
The inspiration that information systems could radically revolutionize the way we worked, was reached by people observing the way businesses were structured in the 1970s. Before many organizations could even take the first step in evolving their strategies — the way they thought about IS — their business structures had already changed.
Salesforce speaks of the advent of the “social enterprise,” as if the notion of people in an organization talking with one another was something discovered in 2008. What we’re coming to learn is how true this may actually be. The structure of many organizations, especially those founded in the twentieth century, consists of the partitions that stifle communication, buttressed with decades of bureaucratic barricades intended to keep things secret... and undermined with decades of subterfuges designed for clandestinely sharing those secrets. Only when such institutions have reached the brink of failure, and have been bailed out by the grace of governments, was it revealed that corporations organically evolved operating units for the express purpose of working against each other.
In the 1980s, when many information systems were first adopted by enterprises for the first time, replacing the data processing systems in place, they were not expected to evolve into communications systems. But the adoption of Internet protocols for the networking stack brought that change upon them, quite often by complete surprise. Of the four trends that analysts say are converging today to produce change in business technology — cloud dynamics, social architecture, Web services, and mobile deployment — all four constitute characteristics of existing systems that planners had not realized they already had in their possession.
It’s as though a crowded public park suddenly realized there was an outdoor play going on in front of them, even though workmen behind the scenes had been setting the stage all week. Or, more accurately, for decades.
This is what makes it seem like change is so rapid, when in fact, it isn’t: perception. The first experiments with the concepts of running applications over a network, with parallel processing, and even with virtualization took place while men were walking on the moon. Never mind that the apps were primitive and the networks were practically smoke signals; the concepts have been present since the beginning of computing, waiting for the inflection point where all the facilitating resources evolved just enough to make them feasible. The existence of new ways of working sneaked up on us when we weren’t looking. Information systems were communications systems. And now, the curtain has lifted and the truth is revealed.
The impetus for businesses transitioning to cloud services is usually cost reduction. Sure, there are cases where cloud deployments increase resource utilization, encourage greater collaboration, and help employees to concentrate upon the goals of business rather than IT. But the extent to which those deployments are successful in doing these things, is measurable in dollars.
In an interview, Ric Telford, IBM’s vice president for cloud services, states:
The early days of cloud have been around optimizing IT and reducing costs. But most of the conversations we’re having now are around how to leverage this more flexible delivery model for business differentiation, because it can allow companies to do things they couldn’t do before.
The most profound change in business technology that we must face today is with us: How do we make adjustments to our own perspective, so that what we perceive aligns with the way things actually are? And once we’ve done that, how can we put that improved perception to use in conceiving a more efficient and more competitive information systems strategy?
Value Add
When you start out conceiving a philosophy for the first time, you don’t always come to realize that even basic terminology should be grounded in definition. Michael Porter’s first works don’t really define “value,” even though it was the essential currency for all of his theoretical models. “Market value” and “economic value” were easily assumed concepts, things that “go without saying.” But later in 1985, with Victor Millar’s help, Porter sketched a basic definition:
The value a company creates is measured by the amount that buyers are willing to pay for a product or service. A business is profitable if the value it creates exceeds the cost of performing the value activities. To gain competitive advantage over its rivals, a company must either perform these activities at a lower cost or perform them in a way that leads to differentiation and a premium price (more value).
Over the years up until today, Porter has been more open and gracious with the definitions of basic concepts, including in 1996 the penning of an article entitled simply enough, “What Is Strategy?” But you can imagine the pains he must have stifled three decades ago, probably as he begrudgingly responded to some editor’s sticky-note gummed to the side of his manuscript, reading, “Michael: Care to define ‘value?’”
What Porter probably did not foresee at the time, but would certainly acknowledge today, is that IT has changed more than just business models but also basic concepts. The simplistic presentation of “value” as synonymous with “margin” is a relic of the largely introspective days of business analysis, when an organization was defined by its own departments and their own activities, and its value to the outside world was represented by its stock trading value and its relative position on the Fortune magazine scale.
Since that time, value has attained more sociological significance. Stanford University Professor Timothy Chou served for six years as a senior executive at Oracle, leading one of the industry’s first true cloud services as far back as 1999. One of his books, The End of Software (Salesforce loves it for its title alone), speaks of a transformation of the IT industry away from packaged applications and monolithic platforms, and more toward the old model of language platforms, time-sharing, and specialization — now that the latter has reached the inflection point and become more cost-effective.
At the heart of Chou’s thesis is a transformation of the definition of service as it pertains to IT. Basically enough, a service is something that provides value to a user or customer, so this volatile concept of value is the substance of service itself. At a CommNexus conference in San Diego in early 2013, Chou touched on some major and minor corporations that have already changed their fundamental business models, enabling them to take advantage of cloud services through specialization. He gave one unique example:
The poultry industry — chickens, not turkey — is a $100 billion-per-year industry. Let’s just do the trivial math that we’ve all been taught, which is, they should spend one percent on IT. That means a billion dollars a year. So why is there not a poultry management software company? And the answer is, there will be.
I think what we’re going to start to see again is specialization by application within domains — more and more and more of this. And the challenge is going to be, by the way, how are we going to marry the guys who understand stuff about technology to the guys who understand stuff about domains? There’s a huge challenge, believe me, at a university level as well as an industry level. But the opportunity is there.
The age-old problem of alignment still besieges us. Chou closed his talk by relating a figure from The Economist showing the recent rise of the services economy in China, relative to its gross domestic product. “The services industry is growing by leaps and bounds,” he said. “So the question you should ask yourself is, ‘So what the hell is a service industry? Is it flipping burgers at In ‘n’ Out? Is it answering the phone nicely from the Philippines?’ I’m gonna say no. Service is a delivery of information that is personal and relevant to you.” He then repeated that last sentence.
From Chou’s perspective, it is the customer who defines value. The metrics which the customer uses to that end, as implied by his repeated sentence, are relevance, specificity, and directness. These measurements are more psychological than transactional. Feeling plays a role.
Nothing more resolutely illustrates the complete reversal of perspective on the popular definition of value than this excerpt from an article by C. K. Prahalad. As we saw in an earlier article in this series, the book Prahalad co-authored, The New Age of Innovation, has already single-handedly sparked businesses to replace their business models to incorporate cloud dynamics: In an article entitled, “Co-Creation Experiences: The Next Practice in Value Creation,” Prahalad and co-creator Venkat Ramaswamy write:
Consumers today have more choices of products and services than ever before, but they seem dissatisfied. Firms invest in greater product variety but are less able to differentiate themselves. Growth and value creation have become the dominant themes for managers. In this paper, we explain this paradox. The meaning of value and the process of value creation are rapidly shifting from a product- and firm-centric view to personalized consumer experiences. Informed, networked, empowered, and active consumers are increasingly co-creating value with the firm. The interaction between the firm and the consumer is becoming the locus of value creation and value extraction. As value shifts to experiences, the market is becoming a forum for conversation and interactions between consumers, consumer communities, and firms. It is this dialogue, access, transparency, and understanding of risk-benefits that is central to the next practice in value creation.
The phrase “personalized consumer experiences” may make it seem the only industry in existence is building theme park rides. At a time in our history (hopefully brief) when IT dominates business conference keynotes, there is often no other source of fresh language, English being so bereft of words. At any rate, the focus on “experiences” demonstrates this reversal of perspective over the decades, from an almost narcissistic concentration on the internal organization as the source of all value, to an almost nihilistic abandonment of the organization as a responsible party.
The truth, as it is with everything else, is somewhere in-between. Not everything a business does is produce content for customers to experience. We’re not all software companies or media publishers. But information is the critical element of all transactions, whether we’re dealing in durable goods or contextual knowledge. All business is information technology. The model of IT is the model of business. So while Porter is not wrong in his view that businesses produce competitive value on an objective scale, and Prahalad is not wrong in asserting that value is a subjective judgment on the part of the customer, neither perspective is exclusively conclusive. For one to be right, the other must also be right.
This is Chou’s challenge in a nutshell: You can’t align these apparent contradictions. But as with quantum physics, you must simultaneously acknowledge them.
Value in business is a contributive virtue. It does establish the competitive position of the organization that produces it. But that position exists within a geometry of the customer’s mind. Indeed, the price that a customer is willing to pay establishes value in one sense. But the loyalty that is built through positive transactions and affirmative support must have value as well, even before that value is monetized through future transactions. And the ability for that loyalty to become contagious and spread to other potential customers, can certainly be measured in terms of human-hours or salary that would otherwise been expended by the marketing department to achieve the same result — which is why the social media phenomenon is so important.
Conquering the perception problem may be as simple as coming to terms with reality not fitting on a single sheet of paper.
Realignment
Michael Porter, N. Venkatraman, and Michael Scott Morton each struggled with a different aspect of duality, and particularly with the problem of alignment (or as Timothy Chou characterized it, “marriage”) — the part that Venkatraman believed were critical to any cohesive strategy, also known as “making everyone see eye-to-eye.” And yet nowhere is it clear from the history of the world’s most successful business ventures, that at any time during the period of their greatest success, everyone — or even anyone — was on the same page.
Cooperation between all the departments of an organization requires a common vision and, to some degree, a coordinated strategy. Surveys of business leaders for the last several decades have consistently revealed a lack of consensus over who should drive business strategy, as well as the role that the IT department should play. (Some results imply a lack of consensus over which floor the IT department presently occupies.)
Like Porter with “value,” everyone wrestling with the alignment problem eventually learned that they each needed to define “alignment.” Slowly, they came to the realization that no single definition existed for any one perspective. So attempts were made to draw a supplemental diagram for Venkatraman’s model, depicting the shifts in perspective in such a way that they might be compartmentalized. In 1996, Dr. Jerry N. Luftman had come up with four possible perspectives:
Strategy execution – the belief that all IT infrastructure choices have been, and should continue to be, driven by top-down management decisions;
Technology potential – the belief that strategic decisions are made in a concerted effort to respond to the perceived potential for technology to make potentially revolutionary, beneficial changes;
Competitive potential – the notion that the role of IT is to create new business functions, leading to new products and services, and that management should respond to this potential by crafting new strategies to exploit them;
Service level – the emerging notion that the whole point of the company is to create what will later be called “personalized customer experiences,” and that expediting their creation requires upper management to delegate a special czar called a “prioritizer” to whom IT must look to for guidance and direction.
Luftman drew a four-quadrant graph, with the top half representing strategy and the bottom half infrastructure, then the left half representing “business” and the right half “IT.” Each of Luftman’s four alignment perspectives could be described by one quadrant being the catalyst for the idea or the driving force for it (the anchor), an adjacent quadrant being the “problem area” that the catalyst would change or improve (the pivot), and the resulting domain of change and improvement would be the next quadrant to the pivot’s left or right (the impact). (The fourth, open box was left open to future consideration.)
While Luftman’s illustration was limited to four scenarios, inevitably successors imagined more, adding new trick shots to the proverbial billiards table. In 2007, Tampa University Professor Raymond Papp demonstrated eight possible perspectives, which is as many as the model will physically allow, though others have implied the hidden presence of more still.
One soon gets the idea that each of these business methodology leaders had a firm handle on his exclusive segment of the proverbial elephant, but none of them could quite identify the whole thing.
Each model they constructed focused on a certain duality, a single dimension of business. Porter distinguished “primary” from “support” activities in his original value chain. Venkatraman focused on external and internal business functions in his effort to characterize a model for strategic alignment. Scott Morton perceived a thin envelope separating evolutionary from revolutionary business change. And Luftman struggled to achieve a kind of vector — even if it bent 90 degrees each time — for isolating cause and effect.
What organizations should perhaps come to realize as they begin to face the fundamental questions brought to the surface by cloud dynamics in IT, is that differing perspectives are each uniquely valuable. Only in one-dimensional models does the problem of strategic direction seem so indeterminate. Assemble all of these dimensions together, and the differences that in multiple models looked like misalignment, actually come into balance.
“Service is a delivery of information that is personal and relevant to you.”
Perceptivity
Consider a 21st century model of business where all of the accurate perceptions of the various professors and experts are converged, where each dimension is validated, but in which the faded edges of those 1970s observations are cropped off and replaced with modern-day realizations. I call this the 3D Value Chain (3DVC).
It starts with Porter’s planar construction of the value chain of a business. What isn’t always obvious is that the right-pointing arrow that frames Porter’s value chain model actually represents a link in the broader chain of a product or service passing through its distribution channel. It’s the passing through this channel where, at least symbolically, value is generated. The broad stream of these chain connections forms the value system, which could theoretically also be called an “economy.”
Porter began in 1985 by listing what he perceived as the nine essential activities of any business. The first problem with that approach, over the long term, is that businesses tend to apply these activities to varying degrees. At the time, the trend was that when a small business grew and became more corporate, it took on a standardized approach to its activities. This is no longer the case, due in some measure to the type of strategic visualization that Porter himself initiated.
What Porter got right from the beginning was an understanding of two classes of activities that ran perpendicular to one another, building the fabric of the organization. He chose not to draw it as the “warp” and “weft” patterns of a woven rug, probably because it’s hard to write lists of business functions inside cross-woven threads. But he drew horizontal and vertical bars, and joined them together in the same frame with a pointer emerging from both halves jointly.
Figure 6.1.
One-half of a remodeled 3D value chain, representing only the internal roles of the organization.
The duality that Porter dealt with was between these “primary” and “support” activities (which would later be misinterpreted as “primary” and “secondary”). Venkatraman’s duality dealt with internal and external business activities — a real duality, but on a completely different axis.
Figure 6.4.
The second half of a 3D value chain model, representing only the external roles of the organization.
3DVC is an effort to picture both axes simultaneously, without implying that internal and external activities constitute separate value chains. Here’s how it works:
The Porter axis
Neither of Porter’s classes is necessarily subordinate to the other. We need to stop thinking of “support” as supplemental or auxiliary to some main function. If you were building a bridge, support would be your critical element. A bridge is grounded on foundations, upon which support is leveraged. Thus Porter’s primary activities become foundation in the 3DVC model, while support carries equal weight.
Roles
Organizations are made up principally of people, not activities. You cannot reach consensus between activities, only with people. Strategies are carried out by people. Value is determined through transactions that involve people. Customers are not activities. To emphasize the personal nature of this model, 3DVC delegates the primary functions of (most) any business among roles. People fulfill these roles, not departments. What’s more, people are not necessarily compartmentalized to their roles. In small organizations especially, fewer people fulfill multiple roles. A business strategy for such conditions would maximize the potential for those roles, and equip those few people to fulfill them as best as possible. Or, one alternative may be to outsource some of those roles.
The Venkatraman axis
All strategic alignment models based on Venkatraman’s original represent internal and external functions of the company. This distinction has never always been clear from model to model, which is perhaps why the number of “pool shots,” if you will, on Luftman’s billiards table has been a variable. Now that we’re clear about company functions being delegated to people, the aspect of polarity for this axis can be more clear-cut: External roles directly face customers. Internal roles directly face management. The key here is who’s making the judgment call. Who decides the relative level of value? Alignment models that look to org charts for their inspiration presume that the judge is always the person to whom departments report. The chain of reporting in an organization follows only the dispensation of funds, not the determination of value. Separating 3DVC from the org chart, and enabling both to serve their exclusive purposes, makes this clear.
V = QM
There is a value determined through price negotiation, as Porter envisions it; and a value determined through customer assessment, as Prahalad envisions it. The internal roles of the company are critical to the quantitative determination of value, which Porter has also called margin. The external roles are critical to customers’ judgments of value, which customers typically call quality. While the two perspectives are different, they are actually two views of the same virtue, which remains value.
Figure 6.3.
A way of visualizing the external and internal components of a 3D value chain model.
The 3DVC model is three-dimensional so that the third dimension may have meaning. I call this third dimension the axis of value. It fulfills the same purpose as Porter intended for his value chain: namely, to represent forward.
IT is the business
In neither the Internal nor the External frame is there a single, exclusive, compartmentalized role for IT. All business is information technology, because value is an informational product, not a unit of currency. Now, there are people assigned to oversee the flow of networked information for the organization. These are the engineers, who have a support role. There are also people assigned to produce informational products (e.g., apps, Web sites, services), which is on the same level as a production role. The development role describes the manufacturing of information and services — which someone once dubbed “software,” as I recall — which all companies make in one form or another, just as the production role describes the manufacturing of goods.
This distinction is critical to business’ ability to use 3DVC in projecting strategies that employ cloud dynamics. Cloud infrastructure is a service factory, whether it resides on- or off-premise. Many corporations own intellectual property for products whose manufacture is outsourced to separate factories; this is how most mobile devices are produced in the world. Corporations that produce services may choose to outsource to “factories” (IaaS) as well. This is the true alternative production strategy — not the “nuclear option” of dispensing with the IT department altogether, but repositioning its infrastructure in a location which may be more cost effective or yield strategic benefit.
Inside and Outside
In this configuration, the “organization” does not have to be comprised of all assets and resources that the company owns. As Prahalad and Krishnan maintain (through the symbolic formula R = G), a company no longer needs to own either the resources or the people it needs to produce value.
Now you can see how cloud dynamics applies to all of this: An organization can be a collection of roles that coalesce. Those roles may be outside the company. Think of this not so much as “outsourcing,” which is often characterized as giving away the farm, but instead as leverage. Cloud platforms provide an easily accessible, quickly provisioned foundation upon which information services may be leveraged. You can use someone else’s space. The use of that space is a transaction, and when the cost of that transaction is exceeded by the revenue produced from the service created, that transaction produces value. It’s the same concept as Porter perceived it, only broken free from the bondage of 1980s business models.
Balance of Powers
The problem with previous models was that they insisted upon dividing “business” from “IT” (for instance, in Luftman’s four quadrants). Then when strategists delegated roles to people presuming that they were being divided into two classes, they wondered why the two classes failed to coalesce. Similar clashes have been experienced in hospital cafeterias where health strategists delegated roles to nutritionists and to chefs, and soon wondered why they didn’t just naturally collaborate to produce a menu.
Foundation and support roles are designed to leverage one another, to rely upon each other’s strengths and provide for each other’s needs. You don’t accomplish leverage through alignment. You accomplish it with balance.
Eliminating the requirement that the objectives of “business” be aligned with those of “IT,” when neither is an exclusive role unto itself, alleviates most of the burden on information strategists. Now the CIO can concentrate on which interactions between roles drive value furthest forward. Now the organization can apply cloud dynamics to expedite the exchange of information that business roles require from each other, to produce value.
The goal is no longer alignment, which was perhaps unattainable through the old system. The fact that 3DVC looks like it’s floating in space, helps. The goal is equilibrium.
To understand what I mean requires a bit of a thought experiment: Assume momentarily a fantasy situation where not only N = 1 as in the Prahalad model (the ideal that businesses should only consider its total market space of customers to be 1) but W = 1. The total number of people in the workforce is 1. And in this universe (just momentarily), resources are infinite, time is infinite, and space is infinite. The employee can replicate herself and consume as many human-hours of work are necessary within any defined interval to produce any amount of value.
Of course, this is impossible, so begin re-grounding this universe in a state of reality. One-by-one, re-impose the everyday constraints with which we deal. One person can only be one person, so you add the people you need. Time is not infinite, so you add as many days as you need. Resources are limited, so you requisition just the amount you need. Market size is constrained. Funds are finite. Patience is scarce. People need restrooms. With each constraint you add to the workforce, you compensate with some form of enablement. It’s like running a balance sheet. For every liability, you introduce an asset. By the time your universe has reached optimum reality, you’ve constructed a model of requirements and fulfillments based on leverage, on foundation and support.
Equilibrium is a balance of all influences. In this configuration of a universe, strategic position becomes the unique arrangement of influences in the system that enables your organization to move further forward in the creation of value.
Note that this effectively turns Scott Morton’s scale of revolution upside down. As he perceived things, any IT initiative can achieve marginal changes to simple business processes. Only when it gained enough forward momentum did it attain the privilege of being revolutionary.
In the 3DVC system, you start with a revolution and work back. There’s always the magic reset button. Blowing up the business is pretty easy. Value is your forward momentum, and you begin with that. Your objective, however, is (much) more conservative: A successful business strategy is one that not only achieves the change required for competitive advantage, but which may itself change to defend or perhaps re-invent that advantage when necessary. When you perceive strategy as a leveraging of forces to achieve balance, then your objective is to enable a minimum of change to maximize the sustenance of advantage. You want to maximize the potential for minuscule business process changes. You’re working backward from revolution, to the point where a continuation of advantage — and hopefully a continuum of that competitive state — can be achieved through ordinary, day-to-day, business processes through the foreseeable future.
This is the strategic configuration space where cloud dynamics is best suited, and its potential to be understood as well as utilized, is best optimized. In the remainder of this series, we’ll examine business cases where this concept can be put to use, and perhaps already is.
