In the first part of this short series, I focused on aspects of IT that people on the business side typically don’t keep abreast of. That lag creates tension in IT-Business relationships, which in turn slows down innovation. The business often does not know what modern IT is capable of - in terms of applications, speed of delivery or integration. But the same could be said reciprocally - that IT does not always keep up with the language of business. In fact, today we are seeing a new language that only a relatively small group of companies is really on top of.
Why is there an IT-Business divide?
One of the great advantages of startup and early stage companies is that IT expertise and business expertise are generally one and the same thing. Look around the startup scene in Fintech or AI and it is usually possible to say make two consistent observations very confidently:
The first is that these companies are likely to apply the combination of tech and business know-how to changing the business model in their industry. The new generation of currency exchange services, for example, often offer customers the opportunity to trade between themselves and, as a backup, offer an instant exchange for a small, flat fee. That’s in contrast to bank and other currency services that take a large trading commission and a margin on the currencies.
Second, they are changing the process model, that is, changing the way business gets done. They are increasingly acting as platforms that enable other people to do business, like customers to self-serve currency exchange, or decorators and home furnishing companies to be part of a home renewals market, or drivers to become taxi service providers. This is more than just a new business model.
This is process model innovation. Most legacy companies find this very difficult to do and therefore they avoid making the other transition – to more modern business models.
The reason is that in a conventional business structure IT and business are governed by quite separate processes.
Principally, IT removes many operational risks from business decision-making and performance.
For example, in many financial institutions the IT function has created an environment where business is able to take on market risk, free from the concerns of developmental or operational risk. Those are the risks that IT takes on through the acquisition of different vendor platforms and through its IT workflow.
Part of the legacy of many companies is the fact that IT became the essential infrastructure for doing business. What we are seeing in smaller companies now is that these two elements have are being brought back together.
Agile means moving risk centre stage
Part of the reason is that agile techniques mean moving risk centre stage. In an agile, or better still a lean, environment the lines between IT and business are blurred. In fact in the leading companies globally, senior management has grown up with the methods and technologies that are now deployed by startups. They typically have no IT-Business divide. They too (Google, Facebook, Alibaba) are also typically business platforms.
To understand the contrast, think of a bank that has a routine foreign exchange (or FX) business.
The underlying IT platform that supports significant trading volumes is not going to let the bank down. Its traders might make good or bad deals but success will depend on how well or badly they deal with currency volatility. They are highly unlikely to make bad deals because of poor IT infrastructure.
Now consider an example where the new financial services companies such as a TransferWise or Currencyfair deal with FX. In these companies the platform helps customers to trade currencies with each other or with the market.
Introducing core risk
Initially these businesses have been limited in scope. The fact that they help people trade major currencies and that they offer very few services means the risk profile has been limited too. Risk has been easy to contain within a multidisciplinary team of currency experts and developers. But risk is nonetheless there.
As these companies begin dealing with a wider range of currencies and have to deploy new features more quickly to a greater array of end devices, then risk becomes central to what they do.
Interacting with new kinds of wallets or taking on unpredictable consumer demand profiles – what if users are frustrated that they can’t trade BitCoin or Kenyan Shillings or can’t access the service from a legacy mobile browser or need it integrated into a new multiparty procurement platform?
Their currency risk exposure is in fact very limited unless they begin to trade currencies with customer reserves.
The risks relate t customer expectations, customer relationships, customer delivery. For example earlier this year Currency Fair switched infrastructure providers and in the process created delays in client payments. It offered clients a six month fee holiday in exchange for the disruption it caused. It was a fast response and a costly one but it’s likely that customer care will become the defining aspect of competitive advantage going forward. It is important to double down on any reputation risk and that can arise in numerous ways, including IT.
These risks require the company to cooperate internally in a more intense way than legacy companies did – all developer activity is a customer opportunity and risk.
Business become more risk laden when companies become more platform-like:
- They gravitate towards seamless, continuous feature delivery, updating services often daily – great if you can do it at speed but it needs adaptive work processes, new human resources and new business/IT architectures.
- Multiple feature changes – requires strong feature testing to avoid simple dissatisfaction risk.
- More end terminals to deliver to – people will want to make a payment via an X-Box for example raising the chances of an end-user failure point.
- More user-interfaces – permitting use through Facebook, Google + and many more networks raises failure risk and potentially increases support costs.
- More integration – with payments systems and procurement platforms.
- Velocity of innovation – it is a requirement to be competitive, driving the business into new areas and keeping the employee communities challenged.
All these and more will matter to business continuity and growth. In this new world the features of platform businesses generate their own language. In some cases IT departments are on top of these changes but in other cases they struggle to see the role they can play in developing more highly scaled companies.
On the flip side business people are incentivised to do business the way they always have.
Using the example above, it is very difficult for people on bank trading floors to see a role for themselves in a platform that is designed to allow customers to self-serve their needs. Equally, people in traditional business settings, even in advanced areas like ecommerce, struggle to grasp how they would function if suddenly their company stopped selling things and began instead organising the market around them.
The platform: Many of the competitors nipping at the heels of large enterprise are business platforms. In finance, that means companies like Kabbage, Lending Club, TransferWise, and multipurpose platforms like Apple and Google. In ecommerce it is Alibaba and Alipay, and Amazon. Even in home decor we now see the rise of platforms.
The business platform, as distinct from a pure tech platform, introduces new risk issues – like how to build cooperative structures between companies, how to manage orchestration risk as applications become smaller, how to create processes that allow rapid decision making at low risk, and how to manage interdisciplinary work.
APIs: Business has its own perspective on APIs. Rather than being a technical connection point, APIs are seen as a generic term for business connectivity, to data, to partners, to services.
APIs though are undergoing their own transformation. Internal platforms like CRM and ERP are being forced by market pressures to be less monolithic, hence a platform like SAP has become more of a marketplace supporting apps from a variety of partner vendors, a trend pioneered and defined by Salesforce since 2007. As systems become less monolithic they will rely more on communications between components – via APIs. Business people tend not to see the implications of this for how they deliver services.
Downstream and indirect revenues: Increasingly companies are able to take revenue from the activities of other businesses and people by virtue of being the utility – Uber in taxis, Apple in Apps, Currencyfair from matching complementary currency needs.
Often those revenues are downstream – it makes sense to seek subscription revenues. What if, for example Currencyfair charged a monthly subscription rather than a $4 payment charge? It would be far easier to relate customer savings to a subscription charge and it would open more potential to create a sense of community and membership.
Traction, scale and network effects: New services have proven particularly good at getting market traction – there is now a whole literature and blogging community on how software-as-a-service companies create traction and then get to scale. Take a look at Saastr. There is also a whole new language around the skills that get traction and then propel a service to scale. Know what a Stretch VP is? It’s the marketing hire you take on at high cost to get your numbers rolling – she’ll need her own key hires and together these will stretch any budget but many SaaS platforms aim for the stretch VP because they are worth it.
In general business platforms now target hires that can take them through different thresholds of annual recurring revenue. The person that can do the stretch from $2 – 6 million will not be the one that can scale from $10 – $100 million. Bear in mind too that a strong platform business will have network effects, some stronger than others.
Trust: Trust is a critical element of platform businesses. Often business is being done with someone you don’t know. Think of Alibaba’s global platform or trust at Airbnb. By using these services you do business under set terms and conditions with people you might never meet. Online services like these must develop trust mechanisms.
Ecosystems: Another term that’s bandied around the new business scene is the ecosystem. In fact, like business platforms, the idea of ecosystems dates back to the 1990s. These days there are different types of ecosystems but a useful definition is to see it as the productive relationships that a company generates around its platform, often at scale; or the as a set of third party assets that are leveraged by the platform: the ecosystem of Uber drivers or Apple developers.
Ecosystems are strange organisms. Their members often don’t communicate among themselves. Sometimes they do; they create a whole literature and advocacy around a brand. To get to that though they need investment and management.
These new concepts are powering business innovation and scale. The greater emphasis has been on IT innovation but success lies in acknowledging the need for everyone to change, creating the environment for change to happen with a minimum of blame, and investing in the new skills needed – including the dialogue that helps business and IT speak the same language.