10 Habits of Digitally Native Enterprises
Over the next 10 years, half of the S&P 500 is expected to be replaced. Digital transformation in today's economy is a requirement for survival. Winner's in today's economy are primarily tech companies, with four out of the top five in the S&P 500 index being tech companies. Non-tech companies like General Electric, Walmart and General Motors are re-inventing themselves through multi-billion dollar digital transformations.
As Marc Andreessen foretold in 2011:
More and more major businesses and industries are being run on software and delivered as online services—from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.
Clearly, digital transformation is an imperative for survival. But how do you know how far along you are? Especially if you've spent your career within a big enterprise, it's hard to tell how much progress you're making.
Here's a 10 point checklist you can grade your enterprise against to see how much progress you've made.
1) Is Bottom Line Savings or Top Line Growth Valued?
Bottom line savings is essentially cost cutting - can I get next year's IT spend down by 5%? Top line growth is growing the revenue of the business. Most enterprises claim to support both but in many cases the beancounters (with all due respect to my friends and colleagues in finance) are rewarded and empowered to reduce costs at the expense of growth.
Clearly an enterprise's R&D budget can't be unlimited, but teams on the leading edge of innovation within an enterprise need freedom to spend money to find the next big idea that'll generate revenue for years to come.
If you approach IT as a cost that must be minimized, you'll get by for a few years but long-term you'll disadvantage your organization by reducing innovation.
2) How Often Do You Release to Production?
Innovation is only possible through iteration. Many enterprises have a culture of releasing applications to production on a monthly or quarterly basis. I've even seen annual releases.
Successful digitally native enterprises release apps to production with every commit. Amazon released to production 50 million times in 2015. Maybe every commit isn't realistic but daily releases to production are a good target to aim for.
Frequent releases are incredibly important to innovation because features often take many iterations before they're perfected. If a feature takes four iterations to perfect and you're releasing quarterly, it'll be a year before that feature is generating profit. If you release daily, it could take as few as four days before that feature is generating profit.
3) Can Developers Consume Cloud Resources Independently?
Many enterprises see IT spend as a cost that must be minimized. They set up large centrally managed IT groups that must provision all physical and software resources. Provisioning a new development environment often takes weeks if not months, with the whole process being a waterfall of activity across numerous teams.
Digitally native organizations allow developers to consume cloud resources as they need them. If a developer wants to use DynamoDB from AWS, he or she can provision some capacity without further approvals. Traditional enterprises would never allow this, but to succeed developers need freedom to make bottom-up technology purchasing decisions. Innovation requires freedom.
4) Is IT Governance Able to Differentiate Between Different Types of Software?
Not all software is the same yet most enterprises apply the same governance model to everything.
Gartner defines three broad categories of software:
- Systems of Record - Software that "keeps the lights on." Think payroll, timekeeping, finance, etc
- Systems of Differentiation - Software that powers the current business. Your CRM software, your ERP software, etc
- Systems of Innovation - Find your next business idea through rapid prototyping
It's a continuum from systems of record to systems of innovation. The first IT many enterprises had were systems of record and later systems of differentiation. That software is managed by IT, doesn't change much, and can't have many bugs. Those who manage it seek to minimize costs. A culture can build up over time where all software is treated like that.
Systems of innovation are completely different and must be managed very different. They're focused on growing top-line revenue, they're close to business, the failure rate is high, etc.
Enterprises that can successfully apply different models of governance to different types of software are well on their way to being digitally native.
5) Are Teams Organized Vertically or Horizontally?
Employees within enterprises are grouped by what they do. There's a finance department, with a sub-team of cost accountants. There's a legal department. Similarly, many enterprises grouped technical staff by what they do - there's a team that's responsible for ops. There's another team that's responsible for back-end development. And so on.
While grouping by job function works well for the rest of an organization, IT doesn't work that way because most software development impacts multiple teams. With the interface between teams mostly being ticketing systems, even implementing simple changes can turn into entire projects because team boundaries must be so frequently crossed and coordinated. Enterprises that cling to that model are setting themselves up for slow software development.
The right model, especially for the more innovative software, is to have small vertical teams composed of individuals from different disclipines. Vertical teams of 5-15 working on a single product/initiative are vastly more productive (and happy) than multiple horizontally layered teams.
6) Is Failure Encouraged?
Embrace of failure is perhaps the defining characteristic of Silicon Valley-based tech companies. Many traditional enterprises are too conservative to take risks. Failure is seen as a bad thing. New initiatives are launched only after months or years of studying the problem domain. The failure rate even then is still high.
The best digitally native enterprises are able to rapidly prototype ideas, fail often and fail quickly, learning from their experiences along the way. Employees are encouraged to take risks and learn from their mistakes.
7) Is There a Parallel Manager/Individual Contributor Track?
The only way to "succeed" (higher pay, higher status, etc) in most traditional organizations is through advancing up the manager track. This pulls top technical talent out of their roles into roles they didn't necessarily want and aren't especially suited for (also known as the Peter Principle).
Good individual contributors should be allowed to stay in their roles and contribute to the organization through their individual contributions, with pay and status being equal to managers.
This is a fairly common dual-track career structure (courtesy of Gilt):
Have two tracks and make it clear to your best individual contributors that they have a bright future by staying on the individual contributor track.
8) Do You Pay Market Rates for Top Talent?
Google pays an individual contributor $3 million a year, with many top developers earning many hundreds of thousands of dollars per year. Yet many traditional enterprises will balk at that level of pay. A VP of Finance may make $200,000 but a senior cloud architect may demand $300,000. Justifying that discrepancy to a CEO is hard, especially when the organization may be operating on low margins (like retailers) or based in smaller cities with lower cost of living.
Unfortunately for employers, you're not competing with local employers for talent. You're competing with Google. Top contributors expect market rate pay. Yes they're earning a lot but a good developer could single-handedly build an application that contributes many hundreds of millions of dollars to your company's top-line revenue for the next decade.
Also, remember that not as many developers are needed today. A handful of top tier developers can do 10x more work than a similarly sized team 10 years ago. Cloud and a new breed of SaaS vendors make building applications as simple as assembling Lego blocks from different vendors. It's an entirely different model that values technical expertise over manual labor. The people who installed operating systems for $40,000/year are long out of jobs and the lower end of IT will continue to be eroded over the next few decades.
9) Is Software Purchased Bottom Up or Top Down?
Most enterprises buy software like they're buying new real estate or a multi-million dollar piece of manufacturing equipment - from the top down. The CIO will launch an initiative to buy an enterprise-wide license for new database software, for example. An RFP will go out to different vendors and the CIO will ultimately take the decision and then force everyone to use that software until it is fully depreciated.
This model of procurement is completely antithetical to how digitally native enterprises operate.
When your orientation is innovation and time to market, it makes far more sense to allow individual developers to make many of the initial procurement decisions. Software is just so easy to consume with SaaS. A developer can pay a few dollars a month and have access to the exact right type of database for the microservice that's being built. It may make sense to have an enterprise-wide contract with a handful of vendors (AWS, Google, etc) and then let developers pick whatever services they want to use.
If an experiment proves to be successful, it'll probably be rewritten at which time it makes sense to be more deliberative about procurement. But for all of the leading-edge work, it makes more sense to use cloud services that developers are able to choose.
10) Do You Spend > 5% of Profits on R&D?
Tech companies routinely spend > 10% of revenue on R&D, with annual spend well into the billions of dollars.
Retailers more broadly spend an average of 0.39% of revenue on IT, including maintenance of legacy systems. While an average retailer's margins aren't even close to an average tech companie's revenues, that culture of low IT spend is toxic to innovation. IT spend is often treated as an expense that must be minimized rather than a way of growing top-line revenue.
Digitally native enterprises spend far more on R&D/IT than their peers and are often rewarded for it with higher top-line revenue.
Summary
To summarize, digitally native enterprises approach entirely different than their non-digitally native peers. They have small vertical teams of empowered developers who innovate quickly and fail fast.
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