The 2nd economy and the implications for software companies

Last week I wrote of Brian Arthur's article on what he termed the ‘second economy’ that was, all the electronic transactions that go on in our economy automatically in the back ground without undue human interaction and that this ‘economy’ was growing rapidly. In that blog I canvassed the potential social impact if future productivity growth comes predominantly from this sector rather than the traditional economy where productivity means job creation.

There is a second area of interest with the second economy and this the impact on software pricing for the software industry. Traditionally pricing has been based on a ‘per-seat’ basis, this is easy to calculate, usually on a ‘named-user’ or concurrent user basis. But what if your software does not have any physical users, or more typically your software if a successful greatly reduces the number of people an organisation needs thereby reducing your revenue base? While companies such as Oracle who own the database technology have long used ‘processor’ metrics in their processing it has been fraught with difficulty (processor technology is evolving rapidly) and would be much more difficult for a pure application company to administer and police. The answer would seem to be some form of transaction pricing as used by some of the EDI vendors (per-user models make no sense in their industry). Are the software vendors and their customers up to it?

Robots may not take over the world but automated processes might

How is technology changing society and will it be for the better? Science fiction writers have long predicted a society of robotic automation, in the utopian version humans are freed from daily chores by a multitude of robots, the darker versions including nightmares of robots taking control from humans. From the cartoon Jetsons to 2001 A Space Odyssey thru Bladerunner (Do Electric Sheep Sleep) to the animated Wall-e movie it is a recurring theme.

Fortunately it does not look like robots are going to challenge our authority anytime soon, however something just as compelling may be happening right under our noses according to Brain Arthur a visiting researcher at Palo Alto Research Centre (PARC). Arthur posits that there is a vast and rapidly growing ‘second economy’ that is totally automated (without human interference unless it breaks), he give the example of freight transactions where electronic systems linking companies and government departments across multiple countries share data and communicate with each other unseen and untouched by humans.

Arthur raises concerns that this second economy is not only growing rapidly but is the source of the majority of current productivity growth. The implications of this are quite serious, if growth does not create more jobs, and automation continues to eliminate jobs, humans may well find they have more leisure time while computers do the work but it may be a poor unemployed leisure time. This would give a whole new meaning to the term ‘digital’ divide which refers to the digital ‘haves’ and ‘have nots’, the current use of this term relates to access to technology, however it could equally refer to those who have lost the ability to earn an income due to technology driven restructuring. What do you think?

Brian Arthurs article can be found in the McKinsey Quarterly 2011 Number 11.

Do you take ‘opportunity’ cost into account in IT investment decisions

TechRepublic blogger Patrick Gray who writes about challenges in IT management recently wrote of the inappropriate use of IT to solve problems http://www.techrepublic.com/blog/tech-manager/dont-try-to-avoid-hard-work-by-automating/6776?tag=nl.e106 one of the stories he told was of a company spending a massive amount on an IT project to automate a $500 problem. 

I have experienced this myself. I was once confronted by a sales manager who wanted a process his PA did automated so that the PA did not need to do it any more, claiming it was a waste of her time. My team had a look at the IT changes needed to replace the manual work and came up with a couple of months work. Concerned that this was going ahead without any ROI analysis I reviewed the actual work that the PA was doing that was to be replaced and discovered it took up around one day of the PA’s time a month. Doing the wage maths that translated to the manual work costing the company about $4k per month. The IT solution was estimated at $40k, on a discounted cash basis that is about 12-13 years to break even. So the project was canned.

There was one additional question that was not asked and that was what the ‘opportunity cost’ of the work the PA was doing. If the 2 days could be replaced by work that exceeded $40k value to the business a year then the company’s hurdle rate of 12 month payback for the IT investment would have been met. This is a brief example of the way IT investments need to be looked at both from an economic and whole of company perspective. Have you had a similar experience?

The peculiar value of “information”

Its seems within corporate IT that the ‘information’ part of IT often plays second fiddle to the ‘technology’ part. This could be because technology is sexier or easier to understand or something that the IT organisation can control. Information however is the fundamental reason for IT in the first place, it is surprising then that ‘information value’ does not play a bigger role in how IT views itself and communicates its value. In a recent thread on a linked-in IT forum the question of the IT elevator pitch (an elevator pitch is your 30 second value proposition) came up for discussion, the thread was well attended with many suggestions especially around IT supporting business and providing tools, the concept of ‘information management’ was almost completely absent in the suggestions.

Before tackling IT’s role in ‘information’ it is worth covering some theory about the ‘value’ of ‘information’. The following comes from a paper in an accounting journal published around 2005 that takes an ‘accountants’ view of information as an asset and contrasts it to ‘normal’ assets such as a piece of machinery. It is instructive because it summarises many of the headaches facing those developing business cases for IT investments.

•          Information is infinitely shareable – a machine has limited capacity whereas information is unlimited to the degree it can be used simultaneously

•          The value of information increases with its use – information is only of value if it is used in some way, this also applies to machinery though the machine will also usually have intrinsic value as well

•          Information is perishable – a lot of information captured by organisations has a short ‘use by date’ for it to influence positively decisions or behavior, a machine can have a life of many years

•          The value of information increases with accuracy

•          The value of information increases when combined with other information

•          More is not necessarily better – someone should tell the data warehouse vendors!

•          Information is not depletable – it does not get ‘used up’ in use, a machine wares out overtime and this fact underpins the accounting concept of asset depreciation

The point of this paper was to show that the typical accounting approaches to valuing and depreciating assets are inappropriate for use with ‘information assets’. This is one reason why it is so hard to do an effective ROI on many IT investments. Funnily enough this analysis has not found its way into IT value debates. Perhaps it should.

‘Big Data’ does it have meaning....

I observed two opposing ideas in the press this week. The first was estimates of the growth of data in this information age (known as ‘big data’). The statistics are quite overwhelming www.boardmember.com predicts that in the next 24 months more data will be created than has been created in all history. And according to IDC’s Digital Universe report the data created globally on an annual basis will leap from 1.2 zettabytes this year to 35 zettabytes in 2020 (one zettabyte is equal to one billion terabytes). Now I cannot comprehend just how much data that is, but I suspect it is a lot and IT company’s are lining up to help you mine that data and promising all sorts of new analytics and insights. This is exciting times for the growth of data analytics and may warm the hearts of some CIO’s hoping to regain the IT initiative with the help of big data.

The opposing idea came from a blog by Roger Martin on the Harvard Business Review site titled “you can’t analyse your way to growth”, his argument is that business growth is dependent on opportunities in the future and that analysis of past data is no use in identifying those opportunities. He argues that analysis of growth in most industries would show static or slow growth showing no real future opportunities, however innovative companies who look to the future rather than the past and in his words have a ‘deep appreciation’ of a customers life and what makes their life easier or happy or sad have opportunities to imagine possibilities that do not currently exist. He cites explosive growth in alternative cleaning products as an example of filling a need in a market which historic analytics would have suggested was mature with no prospects of above normal growth.

I suspect both approaches are right and wrong, the moral I take from these two examples is the need for an open mind and willingness to consider other possibilities whenever making a decision and to avoid being obsessed with technology for its own sake. After all humans are the customer. 

Apple and the double edged sword of corporate IT

Following Steve Jobs announcement that he was stepping down as CEO of Apple two weeks ago there has been a great deal of IT industry press about Apple and its future role in corporate IT. This is a market that Apple has previously failed to conquer, while the MacIntosh made in roads into education and the graphics design/architecture niches it failed to gain any real market share in the rest of the corporate world. Apple has long eyed the corporate market as an untapped growth area rivalling the consumer market for potential revenue and profit growth and with the never ending need to grow and exceed analysts expectations and its market dominance of the consumer market it must surely be very tempting. Certainly the iPhone and the iPad are making their way into the corporate landscape in a way Apple has not been able to do since the early days of the Mac, that is through the board rooms and executive suites.

But should Apple be so eager to become a major corporate player, have they considered what it may cost the Apple brand?

As I noted in my blog last week corporate IT is on the nose, it has been responsible for massive job losses, outsourcing, off shoring and untold human misery. And yes I know, executives made these decisions not the technology but there is a deep seated suspicion around any corporate IT project or new IT product that is entirely justified. This suspicion has impacted the major corporate IT vendors such as IBM, Oracle, SAP and Microsoft and there brands have suffered accordingly. The current fad with cloud computing is as much a reaction to perceived problems with existing vendors and corporate IT departments as it is about economics. Apple has never been called the “evil empire” (a phrase coined by Novell’s CEO to describe Microsoft) as it has not been tainted with the poison corporate IT chalice. As one of the IT newsletters pointed out last week Microsoft has changed the world more than Apple, however Apple has gained the moral high ground and consumer perception of being the world changer. 

That is because Apples products have enhanced users lives, not threatened them. Apple has changed the way music is consumed, totally replaced Sony’s walkman, made family photos portable and available anytime anywhere and provided the technology (via the iStore and its web of application providers) for connecting friends and family instantly. This is all perceived as positive to individuals, this brand perception is incredibly valuable to Apple and contracts starkly to perception of corporate IT vendors.  Also Apples products are about personal freedom and individuality, what will Apple need to sacrifice to meet the command and control imperatives of a modern corporation (the industry press have gleefully listed a great many changes that Apples needs to make to be accepted as corporate grade IT)?

The billion dollar question is – can Apple seriously enter the corporate IT market, make money and maintain its brand position of innovation that enhances our lives?

Why corporate IT needs a heart

This bit of marketing wizardry was a glossy multi-page high cost marketing document from Street Technologies, the front page read “How to eliminate half your workforce” the second page read “get the other half to use your software”. Does anyone, spot a problem with this? Oh in case you are wondering, Street Technologies does not exist anymore, I wonder why?

It sums up nicely a major issue for corporate IT, it lacks a heart. IT’s incursion into the corporate landscape over the past 40 years has been filled with replacement of staff by computers, the automation and elimination of many low skilled jobs such as parking attendants and more recently mass retrenchments due to outsourcing and offshoring, all made possible by corporate technology. Now I hear you say, isn’t that a good thing, company’s are more productive and profitable than ever aren’t they? And yes you could be right, evidence is finally showing IT now improves productivity (not a sure thing in the first 20 years of the IT revolution), its effect on profitability is less certain as technology has generally intensified competition in most industries.

However from an individuals point of view corporate IT has been a disaster, with IT leading to retrenchment, family dislocation and competition for employment from countries not previously thought possible. Even CEO’s who have signed off on IT investments, off shoring and mass retrenchments have not been immune from the personal effects. I bet there is not a CEO in office who has not had themselves or a close family member impacted negatively by corporate IT. No wonder corporate IT departments are viewed with suspicion and fear in most organisations. And it will remain that way until corporate IT finds its heart and focuses on enhancing employees lives rather than eroding them.

Many consumer IT companies have greatly enhanced individual wellbeing, Apple Computer and Nintendo come to mind. The challenge for them will be the subject of next weeks blog.