IT experience among business leaders urgently needed ...

When looking at the leadership teams of successful organisations one may conclude: “better stick to your knitting”. Across many industries IT becomes part of the core proposition and upends business models that have persisted for decades. What if “software is eating your world” and IT isn't “your knitting”?

The Washington Post newspaper provides an inspiring and practical example: hire experience. This newspaper -a 140-year-old icon of an entire industry that has been disrupted- has quickly turned into a successful media and technology company!

If you look at great CEO's in the automotive industry, you find engineers with passion for building cars. Notable examples are Karl Benz, Ferdinand Porsche, Henry Ford and Ferdinand Piëch.

Similarly,  if you look at the leadership teams of very successful IT companies, you find either engineers or individuals who are deeply engaged with the guts of their IT operations. Think of Larry Page, Mark Zuckerberg, Jeff Bezos, Steve Jobs. The list goes on and on.

You would think that the morale of the story is “stick to your knitting”.  There is one large anomaly in all this, and that is IT. “Software is eating the world”, to quote Marc Andreessen. Across many industries IT becomes part of the core proposition of a product or service and upends business models that have persisted for decades. Think of how IT changed the media industry fundamentally, disrupted previously successful business models and companies and has become a standard key ingredient of every media product and service.

If IT hasn't been “your knitting”, what to do and where to start? The Washington Post newspaper provides an inspiring and practical example: hire experience! 

In 2013 The Post was a 140-years-old newspaper in decline when Don Graham, its owner, asked Jeff Bezos for help. In an interview given to The Washington Post executive editor Martin Baron, Jeff Bezos says:

“My biggest question quickly became to Don: ‘Are you sure I can help? Why me? I don't know anything about the news business’, and Don said, ‘Look, we don't need anybody that knows about the news business. We got lots of people here who know about the news business. We need somebody who knows about the internet’.” (38:30 into the interview)

In 2013 Jeff Bezos acquired the newspaper and three years later, his influence on The Washington Post is already being felt. The newspaper surpassed The New York Times in unique monthly US visitors in 2015 and is turning into a media and technology company.

Bezos didn't get involved in managing the editorial direction of the newspaper. Rather he took a very hands-on approach on the business and technology aspects to transform it and create a real media and technology company. With its own engineering team that “rivals any team in Silicon Valley”. Today, technology is put to use to generate analytics, improve on-line commercial effectiveness and generate revenues, increase (social) media reach and exposure, improve the user experience (e.g., on mobile devices) and seek input from readers about their preferences and behaviour.

If we look at the boards and management teams of many organisations, IT experience is sorely lacking. This paucity will either get addressed or will become a large liability.

Consumer IT encroaches the SAP ecosystem

Apple and SAP recently announced a partnership agreement. Such a deal makes sense, given the popularity of the ipad and iphone in enterprise and Apple's wish to grow its enterprise business. But SAP's motives go much further than the creation of “hip” apps...

The deal between SAP and Apple would have been unthinkable a few years ago. With consumer IT companies increasingly focussing on the enterprise and enterprise vendors adapting to the new realities many more unthinkable changes await us.

Apple and SAP recently announced a partnership agreement. Given the popularity of the ipad and iphone in the enterprise and the wish of Apple to grow its enterprise business such a deal makes sense for both companies. SAP has invested heavily in its UI (SAP Fiori) and has already won praise and prestigious awards for it. This underscores that SAP's motives for this deal go much further than the creation of “hip” ipad apps. 

Techcrunch, “SAP announces new partnership with Apple to expand iOS in the enterprise”:

“SAP has announced several programs to help push iOS to its customers starting with a new set of apps for the iPad and iPhone that take advantage of data stored in SAP tools. It’s also providing an iOS SDK for SAP HANA, its in-memory database product, allowing organisations to not only use the apps that SAP is building, but also giving them the opportunity to build their own custom apps using data stored in HANA.

“We are approaching the building out of these apps entirely differently, largely due to the way Apple thinks about app design. I believe firmly they will fulfil the mission of revolutionising work on iPad on iPhone,” Lucas told TechCrunch.”

The Apple press release also states:

“These native apps will provide access to core data and business processes on SAP S/4HANA, while taking full advantage of iPhone and iPad features like Touch ID®, Location Services and Notifications.

A new SAP Fiori for iOS design language will take the award-winning SAP Fiori user experience to the next level by combining it with a consumer-grade iOS experience to deliver on the robust user needs in the enterprise and enable developers to build next-generation apps.”

Enterprise and consumer IT do mix but with difficulty; just like the waters of the Amazon river and the Rio Negro.

Enterprise and consumer IT do mix but with difficulty; just like the waters of the Amazon river and the Rio Negro.

As discussed in an earlier post, the advantages we take for granted as consumers, start encroaching the enterprise IT space:

  • Use of devices other than traditional PC's.
  • New user input mechanisms like multi-touch.
  • Platform-wide facilities like Location Services and Notifications.
  • Biometric user identification.
  • Choice in the use of apps.

SAP encouraging third party app development signifies they are transitioning from the traditional role of a software vendor of a vertically integrated environment to the role of a platform provider of a back-end server-side software containing business rules and information, combined with a much more fluid front end.

SAP may not be happy to be losing some control over important dimensions such as user authentication, workflow and UI. Nevertheless it has concluded it has much more to win than to lose by adapting with the times. No doubt, other ERP vendors will be following suite in the coming years. 

Like Apple, Google is also strengthening its efforts in the enterprise IT market. Diane Green, industry veteran and co-founder of VMWare, has joined Google last year and is now responsible for all of Google's cloud businesses (Google for Work, Cloud Platform, and Google Apps). 

The deal between SAP and Apple would have been unthinkable a few years ago. With consumer IT companies increasingly focussing on the enterprise and enterprise vendors adapting to the new realities many more unthinkable changes await us.

Enterprise can capture more benefits from consumer IT innovations

The emergence of companies such as Google, Amazon, Facebook and Apple offering consumer services on a massive scale is having a deep influence on hardware and software enterprise IT vendors. This influence is also being felt in enterprise IT departments. Nevertheless, enterprises are not capturing all the opportunities made available to them by consumer IT innovations.

Early on in their development, the web 2.0 companies -such as Google, Amazon, Facebook and Apple- realised that they could not base their infrastructure on the systems of traditional enterprise vendors for various reasons beyond cost:

  • Lack of performance scalability; even the largest enterprise had users numbering in the hundreds of thousands; the consumer companies had the ambition to build infrastructures for the planet’s population. No enterprise vendor had ever considered such scales.
  • Lack of maintenance scalability; enterprise IT systems do not scale linearly with size. At some point complexity kicks in and your maintenance effort per “unit” infrastructure increases.

The new entrants developed robust hardware infrastructures, software components and applications where scalability and robustness are guaranteed in a different fashion to the traditional enterprise approach where the probability of failure in a single unit such as a server or a storage array is minimised by building redundancy of components within the unit (an approach typically seen in so called scale-up systems). In the new approach, cheap units with single points of failure are combined and the software is designed assuming that any such component may fail at any time (the term scale out is often used to describe such systems). It sounds simple, our brains also work this way; we do not turn deaf if a few neurons die in our auditory cortex. 

Developing such a radically new hardware and software infrastructure in the mere course of a decade is a massive feat of engineering. If we are to draw a parallel to biological evolution, the emergence of this new IT stack is as significant as the emergence of multicellular organisms.

The first direct effect that enterprise vendors felt when the new IT stack was being deployed was a missed growth opportunity; wouldn’t it have been great to sell their wares to infrastructures serving hundreds of millions of users? This was just the beginning of the trouble. To make things worse, some of the new companies started offering their spare capacity as a service. And to add insult to injury, these companies often open sourced their hardware and software designs expecting that a community approach will further improve the robustness of their infrastructure (hardware and software). This is a classical example of disruption where new entrants have a different base of competition to the incumbents.

What the new entrants did not outsource were the areas offering them competitive advantage: algorithms and user experience (networking effects form another competitive advantage but this cannot be copied in any case). Competition in the area of user experience has led into an explosion of experimentation in user terminals and software interfaces: PC’s, tablets, mobile phones, VR headsets, web apps, mobile apps using touch, AI agents and now bots. 

It is abundantly clear to any observer of the IT industry that the majority of hardware and software innovations originate from the consumer space in the last 15-20 years. Organisations have woken to the fact that they can use the cloud infrastructure as a service (in the various flavours SAAS, IAAS, PAAS) and the cloud is an important agenda item for the corporate CxO. Even the enterprise IT vendors try to remain relevant by appending the word “cloud” to most of their products even if the product has little to do with the cloud. 

Nevertheless many innovations in the consumer IT industry remain under-utilised in the enterprise:

  • You cannot capture all the benefits of the cloud infrastructure (that was built to run scale out applications) if you do not do something about your legacy apps. The expectation of many IT managers that by moving their existing application stack to the cloud they will resolve most of their problems is alas nothing but a dream; in reality your operational problems may be exacerbated if you move to the cloud and do not hold a firm grip over key processes and procedures.
  • The emergence of this new class of IT infrastructure sucks the oxygen out of the enterprise IT vendor ecosystem. Organisations get more leverage towards their vendors but also face higher risks as vendors merge, go private, change focus and sometimes go out of business.
  • User experience is increasingly important to consumers and all your users, customers and suppliers are also consumers when they are off work. Millennials and increasingly older people as well will not be enthusiastic about having to work with a heavy laptop running legacy apps on a legacy OS. If you wish to remain attractive, you need to learn the lessons about ease of use and multi-platform support that consumer services offer.
  • Security is of paramount importance to cloud services companies (they cannot afford a large scale security breach) and in many respects they are doing better than traditional companies. There are many lessons to be learned about the way you can offer security without degrading the user experience and killing convenience.

Corporate Governance and getting IT right

Corporate governance of IT must evolve as the role of IT is shifting. The Dutch Corporate Governance Monitoring Committee recently proposed to include IT governance and risk management in the responsibilities of the Board's audit committee. This appears as an anachronistic view of the role of IT in the enterprise. Additionally, it can even backfire on the good intentions of the Committee to improve risk management of IT. 

The Committee ought to leave this specific “best practice” provision out when composing the new code. For boards though there’s no excuse: ‘digital’ growth opportunities require a different kind of (IT) governance.

Corporate Governance Codes (CGCs) have emerged in the wake of large scandals that damaged our collective confidence in large enterprises. As a consequence, these first Codes focused on ensuring accuracy in financial reporting and compliance with legislation. When new types of risk surfaced with the financial crisis, the public debate called for a broader perspective on risk in the CGCs. Therefore it’s no surprise that the Dutch Corporate Governance Code Monitoring Committee dedicated a new section to risk management reinforcement when recently tasked with updating the existing code.

Traditionally, the audit committee has been the place in the board to monitor and discuss risks. The Dutch Committee proposed to broaden the duties and responsibilities of the audit committee to include monitoring of the “risk management conducted by the management board”. And it stipulated (amongst others) that, when doing this, the audit committee “should in any event focus on monitoring the management board with regard to [...] the application of information and communication technology of the company.”

This seems to be an anachronistic view of the role of IT in the enterprise. Additionally, it can even backfire on the good intentions of the Committee to improve risk management of IT.

The perspective is increasingly held that IT -and other technologies- can create significant additional value in most industries. Surely there’s risk involved -and potentially even more disruptive in nature- but risk management related to IT is shifting fundamentally from avoiding the (tactical) downsides to capturing the (strategic) upsides. The audit committee is certainly not the best place to govern such a shift effectively.

IT is on the agenda of the audit committee already, but mostly when evaluating the quality of financial systems and controls. The discussions entertained in the audit committee differ greatly from what is required to monitor the organisation’s strategies and steps towards an increasingly digital world. An audit committee’s agenda focuses traditionally as well as formally on the areas of financial control, audit and reporting.

Furthermore, ever increasing and expanding demands are placed on this control and compliance oriented task. As a consequence “most boards are stuck in a time warp” and “directors find themselves in the very role they have long tried to avoid: that of micro-manager”. Quotes from Harvard professors Lorsch and Clark, made already in 2008. And here’s the key concern they voiced: “To us, the irony here is that as directors have become more hands-on in the area of compliance, they’ve become more hands-off in the area of long-range planning, which exposes shareholders to another -potentially greater- kind of risk.”

There is another challenge and it is coming from an unexpected angle. With IT anchored more firmly at the audit committee, the board may consider the CFO to be the most appropriate -practical- reporting line for the CIO. And herein lies a caveat. Research firm Gartner periodically surveys the reporting lines of CIOs and the accompanying rationale from a CEO perspective. In 2014, when asked why the CIOs in their organisations report to the CFOs, the CEOs who chose to do so, label IT as “support and not strategic” for their companies. Quite different from CEOs who label IT as “mission critical” or “strategic” for their organisations - and therefore selected a different reporting line for the CIO.

If IT is framed firmly as part of the risk and control dimension of the organisation, and if it gets discussed primarily with the financial board members and with the auditors, then the risk grows that the attitudes of senior executives towards IT get locked into a mostly “support and not strategic” perspective. To paraphrase Lorsch and Clark: “which exposes stakeholders to a potentially greater kind of risk.”

In conclusion, the Dutch Committee ought to leave this specific “best practice” provision out when composing the new CGC. They can do so without much risk: if organisations do not address IT or technology risks sufficiently at the board level, stakeholders already have opportunities to speak up. And, if justified, they may -and board members are very much aware- get a court to rule in their favour even in the absence of an explicit paragraph on IT risk management in the CGC.

For boards though there’s no excuse. ‘Digital’ growth opportunities require a different kind of (IT) governance. And with the new types of risk (and opportunities!), the organisation should redesign how it governs these.