Archive for the ‘Macro-economic Crisis’ Category
The Urgency of Now – Guest Post by Annie Shum
Failure to learn, failure to anticipate, and failure to adapt are the three generic causes of military disasters. Each one of these three failures is bad enough. In combination, they can be catastrophic. Germany swiftly defeated and conquered France in 1940 due to the utter failure of the French army to grasp the nature of future war, to conceive the probable action of the German forces and to adequately react to the German initiative once it unfolded through the Ardennes. The patterns leading to the catastrophe suffered by the French are similar in some ways to the eco-meltdowns described by Jared Diamond in Collapse: How Societies Choose to Succeed or Fail.
In this guest post, colleague and friend Annie Shum poses disturbing questions with respect to our willingness and ability as IT professionals to learn, anticipate and adapt to the imperatives of Cloud Computing. Between shockingly low (15%) server capacity utilization on the one hand, and dramatic changes in the needs of the business on the other hand, companies who continue to use industrial-era IT models are at peril. Annie weaves theses and other related threads together, and makes a resounding call-to-action to re-think IT.
It is remarkable that Annie’s analysis herein of the root causes of a possible meltdown in IT identifies worrisome patterns similar to those that the Agile movement has pointed out to with respect to arcane methods of software development. The very same core problems that afflict software development manifest themselves in the IT paradigm as well as in the corresponding business design. Painful and wasteful that this repeated manifestation is, it actually creates the opportunity to manage software, IT, and the business in unison. To do so, we need to embrace a data-driven version of the economics of IT, to grasp the true nature of Cloud Computing without the hype that currently surrounds it, and to adapt software development, IT operations and business design accordingly. As the title of this post states, we need to start carrying out these three tasks now.
Here is Annie:
The Urgency of Now: The Edge of Chaos and A “Strategic Inflection Point” for IT
“It was the worst of times. It may be the best of times.” – IBM
Consider the following table. It contains a list of statistics pertaining to the enterprise datacenter index compiled by Peter Mell and Tim Grance, NIST. Overall, the statistics are sobering, perhaps even alarming, and do not bode well for the long-term sustainability of traditional on-premises datacenters. Prudent IT organizations – whether big or small, stalwart or startup – should consider this as a wake-up call. In particular, out of the almost twelve million servers in US datacenters today, the typical server capacity utilization is only around fifteen percent. Although not explicitly shown in this table, the average utilization of the mainframe z/OS servers is typically over eighty percent. However, mainframe z/OS server utilization is only a minor component of the overall average server utilization.
Statistics Enterprise Datacenter Index 11,800,000 Servers in US datacenters 15% Typical server capacity utilization $800,000,000,000/year Purchasing & maintaining enterprise software 80% Software costs spent on maintenance: the “80-20” ratio 100x Power consumption/sq ft compared to office building 4x Increase in server power consumption, 2001 to 2006 2x Increase in number of servers, 2001 to 2006 $21,300,000 Datacenter construction cost, 9000 sq ft $1,000,000/year Annual cost to power the datacenter 1.5% Portion of national power generation 50% Potential power reduction from green technologies 2% Portion of global carbon emissions
Over the years, organizations have accepted such skewed levels of server inefficiency and escalating maintenance costs of IT infrastructure as the norm. Even as organizations continue to express concerns, many seem resigned to the status quo tacitly: akin to what Bob Evans of InfoWeek described as “insurmountable laws of physics.” Looking ahead, however, the status quo may no longer be a viable option for most organizations. Due to soaring electricity/power costs compounded by the recent global financial meltdown with a near collapse of the financial system that triggered a prolonged (and for now, apparently indefinite) credit crunch, these are unparalleled strident and chaotic times for businesses. Pressured by business decision-makers who are under a heightened level of anxiety, enterprise IT is now confronting a transformative dilemma whether to preserve the status quo or to re-think IT.
On one hand, the current global recessionary down cycle is a particularly powerful (albeit rooted in fear) and instinctive deterrent to challenging the status quo. For risk-adverse organizations, it is only understandable why status quo, fundamental flaws notwithstanding, may trump disruptive change during these challenging times. On the other hand, forward-thinking decision-makers may make the bold but disruptive (radical) choice to view status quo as the fundamental problem: acknowledge the growing “urgency of now” by resolving to overcome and correct the entrenched shortcomings of enterprise IT.
“You never want a serious crisis to go to waste”. That quote (or its many variations) has been attributed alike to economists and politicians. The same could be said for IT. Indeed a growing number of IT industry observers believe the profound impact of the on-going economic crisis could offer a rare window of opportunity for organizations to rethink traditional capital-intensive, command-control, on-premises IT operations and invest in new and more flexible self-service IT delivery/deployment models. Think of this defining moment as what Andy Grove, co-founder of Intel, described as the “strategic inflection point”. He was referring to the point in the dynamic when the fundamentals of a business are about to change and “that change can mean an opportunity to rise to new heights.” Nonetheless, the choices will be hard decisions because the options are stark: either counter-intuitively invest in a down cycle by focusing on a more sustainable but disruptive trajectory or hunker down and risk irreversible shrinking business.
As one considers how to address the challenges of today’s enterprise IT, perhaps the following two observations should be taken into account. First, despite the quantum leap in technology advancements, generally the basic design and delivery models of existing IT applications/services are variations of traditionally insular, back-office automation business tools. Second, the organizational structure and business models of most companies are deeply rooted in models of yesteryear, in many instances dating back to the Industrial Revolution. In theory, adhering to the traditional organizational model of top-down command-control can maximize predictability, efficiency and order. Heretofore, this has been the modus operandi for most organizations that Umair Haque succinctly characterized as “ industrial-era companies that make industrial-era stuff — and play by industrial-era rules.” In today’s exponential times, however, the velocity of change and the rapidly growing need of interconnecting to other organizations and automating value chains inevitably lead to an increase in uncertainty and disorder. Strategically, forward-thinking organizations should consider seeking alternative models to address the interdependent and shifting new world order.
In their book, “Presence – Human Purpose and the Field of the Future”, authors Peter Senge, Otto Schramer, Joe Jaworski and Betty Sue Flower observe that many of the practices of the Industrial Age appear to be largely unaffected by the changing reality of today’s society and continue to expand in today’s business organizations. They conclude with this advice: “As long as our thinking is governed by industrial ‘machine age’ metaphors such as control, predictability, and faster is better, we will continue to re-create organizations as we have had – for the last 100 years – despite their increasing disharmony with the world and the science of the 21st century.” Likewise, the traditional top-down command-control modus operandi of enterprise IT today does not reflect adequately and hence likely is unable to accommodate fully the transformational shift of business from silo organizations to “all thing’s digital all the time”, hyper-interconnected and hyper-interdependent ecosystems.
The Hole in the Soul and the Legitimacy of Capitalism
In a January 13, 2010 post entitled The Hole in the Soul of Business, Gary Hamel offers the following perspective on success, happiness and business:
I believe that long-lasting success, both personal and corporate, stems from an allegiance to the sublime and the majestic… Viktor Frankl, the Austrian neurologist, held a similar view, which he expressed forcefully in “Man’s Search for Meaning:” “For success, like happiness, cannot be pursued; it must ensue, and it only does so as the unintended consequence of one’s personal dedication to a cause greater than oneself . . ..”
Which brings me back to my worry. Given all this, why is the language of business so sterile, so uninspiring and so relentlessly banal? Is it because business is the province of engineers and economists rather than artists and theologians? Is it because the emphasis on rationality and pragmatism squashes idealism? I’m not sure. But I know this—customers, investors, taxpayers and policymakers believe there’s a hole in the soul of business. The only way for managers to change this fact, and regain the moral high ground, is to embrace what Socrates called the good, the just and the beautiful.So, dear reader, a couple of questions for you: Why do you believe the language of beauty, love, justice and service is so notably absent in the corporate realm? And what would you do to remedy that fact?
Hamel’s call for action is echoed in the analysis of the double bubble at the turn of the century by Carlota Perez:
The current generation of political and business leaders has to face the task of reconstituting finance and bringing the world out of recession. It is crucial that they widen their lens and include in their focus a much greater and loftier task: bringing about the structural shift within nations and in the world economy. Civil society through its many new organisations and communications networks is likely to have a much greater role to play in the outcome on this occasion. Creating favourable conditions for a sustainable global knowledge society is a task waiting to be realized. When – or if – it is done we should no longer measure growth and prosperity by stock market indices but by real GDP, employment and well being, and by the rate of global growth and reduction of poverty (and violence) across and within countries.
As if these words were not arousing enough, Perez adds one final piercing observation:
The legitimacy of capitalism rests upon its capacity to turn individual quest for profit into collective benefit.
IMHO Hamel and Perez identified the very same phenomenon (“hole in the soul”). The only difference is at the level they discuss the phenomenon. Hamel makes his observation at the business/corporate level; Perez at the socio-economic level.
Prosperity without Growth
Readers of this blog might recall the ‘secret sauce’ proposed in The Mindset for talking about Agile with executives:
Success, however, depends on a certain kind of mindset of the executive you are talking to. This mindset is nicely described in H. Thomas Johnson‘s article Manage a Living System, Not a Ledger:
…a business organization cannot improve its long-run financial results by working to improve its financial results. But the only way to ensure satisfactory and stable long-term financial results is to work on improving the system from which those results emerge.
In a perceptive CQI article on the recently reported problems at Toyota, Johnson offers the following analysis:
Toyota avoided this fate until the last decade because it did not regard results as outcomes that a business achieves by requiring managers to drive people to meet financial targets. It saw that results emerge from a process in which people carefully nurture a web of relationships. These relationships, strikingly enough, emulate the behaviour in natural living systems.
The reversal of Toyota’s fortunes in the past decade suggests that many of its top managers lost the habit of thought that had previously shaped the company’s policies and actions. They lost the habit of thought that caused the company, perhaps unconsciously, to act like a living system. Toyota adopted the finance-oriented mechanistic thinking that had spawned the inferior management practices and the poor performance shown by most of its competitors after the 1970s. And because it abandoned living-system thinking for mechanistic thinking, Toyota began to embrace a virtual world of finance, not a concrete world of humans in cooperative relationships.
Johnson concludes his analysis with a broad warning:
Efforts of companies to reduce that waste by “going green” are not likely to be any more effective than efforts to improve performance by “going lean”. In neither case do these efforts change the thinking that produces excess growth. The efforts might reduce the rate of growth for a time, but they will never reverse it as long as companies adhere to the conventional wisdom from the virtual world of finance that says prosperity is not possible without growth. [Highlights by IG]
The hazards of the virtual world of finance have been conclusively demonstrated during the macro-economic crisis of 2008-2009. One must wonder what it would take to learn the applicable lessons at the micro level of individual companies.
Role of the Agile Leader in Reconfiguring the Business
Click here for the slide deck from my Agile 2009 presentation.
Abstract: The presentation applies Agile thinking to critical aspects of strategy and execution at a time of uncertainty and disruption. The essential point is simple and logical: Agile values and principles are indivisible. To succeed, they must be applied not just to R&D, but also to customer and company, simultaneously. This requires reconfiguration of customer relationships, employee policy, software development, and the relationship that binds the three. The resulting paradigm shift could lower the cost of software and produce prosperity similar to the one induced by ultra-cheap oil in the 50’s.
Perspective: In addition to being a ‘think-piece,’ the presentation offers pragmatic recommendations for the Agile champion in three critical areas:
- It explains how the Agile champion can cross three chasms that tend to form in the course of large scale Agile rollouts.
- It explores how to apply Agile priciples to software deployment and operations.
- It shows how earned value management can utilize ‘real time’ customer feedback in companies that embrace end-to-end Agility.
Only 10%
Readers of the posts Customer Intimacy and Enterprise Software Innovator’s Dilemma might recall two observations made in this blog:
- The dissatisfactory state of affairs in enterprise software as characterized by Crawford and Mathews in their description of Consumer Underworld relationship between vendor and customer:
Ignore my needs… Be inconsistent, unclear, or misleading in your pricing… Offer me poor quality merchandise and services that I can’t use… Give me a reason to tell my friends and relatives to stay away…
- The potential of Open Source Software to become a disruptive technology in the sense articulated by Christensen:
Open Source Software is becoming ”good enough”. It has already met or will soon be meeting the minimum requirements of the enterprise customer. By so doing, Open Source Software will steadily gain ground from traditional enterprise software vendors
In a Viewpoint published in the July 2 issue of BusinessWeek, former Harvard Business School professor Shoshana Zuboff cites the following statistics:
… only 10% of Americans now saying they trust large corporations, according to the Apr. 8 edition of the Financial Trust Index. Some 77% of Americans say they refuse to buy products or services from a company they distrust, according to the 2009 Edelman Trust Barometer. [Highlights by IG].
The statistics given by Zuboff link the two observations cited above. One might argue that Crawford, Mathews and Zuboff deal primarily with consumer behavior, not with procurement of enterprise software. True that this argument might be, I sincerely doubt that the two worlds can be kept apart. At least some of the folks who license and use enterprise software must be represented in the data given by Zuboff and are likely to act accordingly in their corporate roles. Moreover, her statistics seem to be quite consistent with the recent warning to high-tech issued by Christensen:
If you’re curious to know what lies in store for Seattle and Silicon Valley, spend a day walking around Detroit with the Ghost of Christmas Future.
Recipe for Success in 2009
Colleague Annie Shum sent me the following excerpt from Slate’s Daniel Gross article on P.F. Chang’s spectacular performance in 2009:
The reason: mainstream mall appeal, affordable offerings, and especially good management – based heavily on the principles of “kaizen” or continuous improvement pioneered by Toyota and other Japanese manufacturers. P.F. Chang’s made it to $1 billion in sales by taking cues from successful Asian businesses. Now by focusing on process improvement rather than helter-skelter growth, it seems to be doing so again. Continuous improvement, the philosophy pioneered by Japanese companies such as Toyota in which managers and workers relentlessly seek out small modifications that add up to big profits, seems to be the recipe for success in 2009.
I don’t really know that the excerpt above has any relevance to software engineering. Gross, however, proposes a potential linkage at the end the article:
Low-end standardized service jobs make up more than 40 percent of all U.S. employment. Imagine if more restaurants and service companies started to act like P.F. Chang’s. Innovation and rising productivity are the underpinnings of higher wages, and happy and engaged employees the key to more continuous improvement.
Timing and Duration of the Agile Roll-out
A measure frequently considered by executives these days is the introduction of Agile as part of cost reduction initiatives. To succeed in attaining cost benefits through the higher productivity of Agile, the plan for introducing it needs to take into account the slippery slope that repeated cost cutting measures tend to lead to. In particular, the timing of rolling out Agile and the duration of the roll-out need to be carefully considered to avoid a possible cart-before-horse situations.
A cart-before-horse situation is likely to arise as a result of the following pattern:
- An executive’s budget is under pressure.
- Headcount reduction is carried out. Remaining employees are expected to somehow cope with the load.
- Agile, with its promise of higher productivity and possibly hyper-productivity, is introduced as a counter-measure to the reduced headcount.
- The remaining development resources are expected to acquire a new set of skills, to master the art of Agile.
- The need to acquire Agile skills flies at the teeth of remaining employees needing to regain expertise that was lost by reduction in headcount. In many cases, the remaining development resources are already stretched too thin.
- Staring at the choice between acquiring specific domain expertise in a critical area versus developing less concrete expertise in software methods, more often than not the remaining employees and the system around them will opt to concentrate on acquiring domain expertise. For example, if a product fails to satisfy a new security benchmark introduced by key customers, the need to respond to the security benchmark is likely to take precedence over studying estimation techniques for Agile.
- Goto #1 above.
To preempt such cart-before-horse situation, the following principles need to be adhered to:
- Don’t introduce Agile before “the system” adequately adjusted to a round of headcount reduction.
- Do not carry out layoffs during the assimilation phase of Agile. In addition to cart-before-horse situation as described above, headcount reduction could jeopardize two critical pillars of Agile: empowerment and collaboration.
- Establish a quantified baseline of productivity before starting an Agile roll-out. Measure Agile progress against the baseline.
- Do not bet the Agile roll-out on linear improvement in productivity. A good Agile implementation is likely to improve productivity, but it is quite tricky to predict the shape of the Agile learning curve.
In practical terms, your organization needs to take a strong “medicine” up-front to break the vicious cycle that repeated staff reductions amidst an Agile roll-out are likely to create. The medicine should be strong enough to last through the period of time required for a meaningful assimilation of Agile. A good way to assess how long the period might be is to consider Agile as apprenticeship – one learns by “Agiling” with the masters.
You need to ask yourself the question “Can We Afford the Software We are Developing?” if business circumstances do not allow for reasonable adherence to the principles cited above.
Punching Above Your Weight Class
Authors Hagel, Brown and Davison use an interesting metaphor in a recent Harvard Business Review article on strategy in time of constant change:
Today’s new Digital infrastructure in fact gives relatively small actions and investments an impact disproportionate to their size. To use a boxing metaphor, companies can now punch above their weight class.
Compare the Digital infrastructure with traditional infrastructures such as water canals, railroads or highways. Unlike these classical means of communication and transportation, Software is unique in being integral part of the Digital infrastructure as well as being a major piece of what gets transported over the infrastructure. Best I know no other entity ever played such a dual role in as meaningful a manner.
The metaphorical punch Hagel, Brown and Davison use as an illustration for the leverage provided by the Digital infrastructure is particularly intriguing due to to the malleability of software. Delivery methods for products and services over the Digital infrastructure could evolve the way product feature and functions do. If the product continues to evolve after initial delivery, the opportunity presents itself to do Agile in the deep sense recently proposed in The Lean Startup: iterative customer development alongside Agile product development that includes iterating on the delivery method.
Companies make shoes!
Peter Drucker made an astute observation which is quite relevant to the current business situation during a September 1998 interview with Fortune:
Securities analysts believe that companies make money. Companies make shoes!
Readers of this blog might have said “software” instead of “shoes.” The point would have been similar to Drucker’s. Good financial management is no doubt important for your company’s success. It is no substitute, however, to focusing on the business you are in, the technology(ies) that drives the business and the effectiveness of the underlying systems and processes.
The current macro-economic situation gives you an opportunity to soberly assess the viability of your business design (as distinct from doing a lot of financial engineering). With asset inflation corrected, measuring the effectiveness of your business model in terms of the ratio Market Value/Revenues is much more meaningful now then it used to be prior to September 2008. As pointed out by Slywotzky in Value Migration, a market value to revenues ratio lower than 0.8 indicates value outflow for your company and possibly for your industry.
For software companies, the impact of “good enough” Open Source Software should be assessed in conjunction with close examination of the market value to revenues ratio. Twitting from the recent OSBC conference in San Francisco, colleague Andrew Dailey of MGI Research reported “… ERP/CRM are viewed as least susceptible to open source disruption… due to high transaction volumes and high integration needs.” Conversely, Andrew considers office productivity software as ripe [for the picking by Open Source Software]. I am personally of the opinion numerous Application Life-cycle Management tools could be massacred by Open Source Software.
The confluence of the threads highlighted above poses a fairly unique opportunity for the Agilist to convey a major premise of Agile to his/her executives. Like a thriving Open Source Software community, a hyper-productive Agile team can pick a ripe market faster and cheaper than an old fashioned software company could. Moreover, if a company is in one of the markets that are susceptible to an Open Source Software onslaught, Agile can (up to a point) provide defense against such onslaught. Whether you choose to attack or defend, Agile software gives you the advantages of proprietary software at a fraction of the traditional cost.
The Agile Executive 
