SAP NetWeaver Magazine: How should IT organizations allocate resources for competitive advantage?
Geoffrey Moore: There are two zones for investing in IT. One I refer to as “core,” and the other is “context.” Core processes are the unique competencies that give your organization its competitive advantage. These are the innovations that drive differentiation and lead to customer preference. Next-generation product releases, new service offerings, branding campaigns, and marketing launches are all likely candidates for core. The caveat here is that any process — literally — can be made core if you use it to create competitive advantage. That said, most work — especially in mature categories and industries — is context: work that must get done but is not going to set you apart from your direct competition. For example, most processes that your readers associate with their ERP systems — finance, control, payroll, logistics, HR, order management, and so on — generally fall into the context zone.
The key to sustained competitive advantage is strong, ongoing investment in core, or differentiating, processes. Most organizations, however, shortchange core investments. They have too many resources tied up in context processes because so many of these activities, while not differentiating, are mission-critical. Order-management processes, for example, do not confer a competitive advantage but would result in significant material exposure if they were to fail.
There are a large number of context processes that are mission-critical, and the natural inclination is to safeguard their operation with large investments of time, money, and the organization’s very best talent. But invest in mission-critical, context processes at the expense of core processes and you will see your competitive advantage deteriorate over time.
Does the investment strategy you’re proposing for IT organizations require a new approach to budgeting?
It does. You have to fund core processes before you fund context processes. IT organizations need to set a standard for how much they are going to invest in differentiation. That’s the key to this strategy. This isn’t merely about budget, however. I think it’s more important to allocate headcount than budget — and I mean critical head count, not just bodies.
The problem with most budgeting and staffing exercises is that the people who drive them hand out last year’s figures and start their deliberations from there. Even if last year’s planning activities optimized investments in core, what constituted core last year may no longer be a differentiating activity. Core isn’t stagnant. Competitors catch up. Those once innovative and differentiating processes become mainstream and move into the context category. So it’s important that you fund core processes first. IT organizations need to understand where their company is trying to go to make itself different and invest accordingly. If it’s not core, don’t enhance it. Improve its productivity, but do not invest in differentiating features. You only want to differentiate when you’re going to get competitive advantage.
Where does outsourcing fit into this approach to investing in IT?
Outsourcing is the ultimate way of extricating headcount from non-differentiating processes. It’s the ultimate way to extract talent from context — from the processes that are not core.
Weaning IT resources from mission-critical context processes (which monopolize a great deal of valuable resources, talent, and management attention) is a chilling thought, but a necessary discipline. The initial reaction is often, “I can’t do that.” But you’re going to find out that too many processes are mission-critical and you have to figure out a way to become productive enough to safeguard their operations and free up resources to work on the next generation of innovation. I advocate a six-phase approach to modeling mission-critical context processes for greater productivity and at the same time, with a view toward extracting resources — particularly extracting the top talent.
The best candidates to undergo this transformation are the ones that are currently holding captive your most valuable resources. If you look at what ultimately determines the success of your company, it is your talent leaders. They are your single-most important resource, and what you find is that a lot of your talent leaders are stuck in mission-critical context.
A lot of companies have gone to line-of-business (LOB) funded IT budgets. How do you reconcile that approach with the core-vs-context investing principles you’ve just outlined?
Under that approach, LOBs feel entitled to dictate how IT funds are spent. The interests of each department trump the interests of the company and its shareholders. It is not, for example, in the interest of shareholders to give an HR executive a better-looking report. Enhancing the look and feel of existing HR reports won’t confer competitive advantage. This is not a core activity.
Are there HR processes that could help enable differentiation? You bet! Every department, in fact, can and should have a way of contributing to core processes. There’s always something that every department can do to enhance differentiation once the company has set its strategy.
With LOBs feeling entitled to direct spending to promote their parochial interests, you wind up with IT landscapes that are costly and inflexible. IT executives should look at proposed expenditures and resource allocations and say, “If this is not core, should we be investing this way?” Where an IT activity is not enhancing the company’s differentiation, be frugal with the budget. The IT function cannot allow itself to become more and more burdened with requests that are not material to the company’s competitive advantage.
What is the impact you see in having SAP NetWeaver as both a technology platform to develop core differentiating processes and also the business-process platform that supports ERP and other context processes?
SAP customers, with their common services-based infrastructure, will find it is much easier to create the next generation of core processes. Context processes can be readily standardized and modularized to drive greater productivity. They can also be readily integrated and repackaged into new innovative processes (SAP’s terminology for such applications is “xApp” or “composite application”). With the aging client/server architectures that characterize so many IT landscapes today, this type of leverage is very hard to attain. The integration cost of adding novelty is just too painful. It has put a moratorium on experimentation and innovation, except among the boldest IT organizations.
This is why the IT community has agreed for some time that service-oriented architecture (SOA) is indeed the answer. The challenge that confronts them now is how to get there from a client/server enterprise architecture. It’s one thing to adopt SOA in theory and another to actually migrate to it. You need a viable migration path. SAP offers that with SAP NetWeaver and its enterprise services architecture (ESA) strategy.
The move to SOA is critical. Client/server architectures were optimized for intra-enterprise computing, not the inter-enterprise computing activities that drive so much of our current economy. Inter-enterprise computing involves a lot more communication, coordination, and collaboration. The client/server architecture is not well-suited to inter-enterprise computing. So until you make the move, your corporation is going to be stuck playing an intra-enterprise game in a world that wants to play an inter-enterprise game. To be a player in the global economy, you have to have a flexible IT infrastructure. That’s a tall order to implement. SAP has paved the way for its customers. Now it’s up to the IT organizations to make the move.
The Cycle of Innovation
(Source: Geoffrey A. Moore, Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution (Portfolio ©2006)
For European food giant Arla Foods, a merger presented a golden opportunity to consolidate enterprise applications. One of the company’s key challenges was how to align processes, phase out old systems, and maximize data and application availability. Arla Foods, formed in April 2000 by the merger of Danish company MD Foods and the Swedish firm Arla, launched an initiative to improve company efficiency in the fall of 2001. The plan, called Ett Arla (One Arla), had three objectives:
Across the four quadrants of Moore’s Core/Context Analysis model, you find what Moore refers to as the cycle of innovation:
- Non-mission-critical core (quadrant I): Innovations are devised and tested in the lower-left quadrant. Non-mission-critical core is an incubation period. Here, you are working on a new, differentiating initiative but are not quite ready to scale it.
- Mission-critical core (quadrant II): When deemed ready for prime time, innovations move from quadrant I to quadrant II. Here, the innovations are launched to secure a competitive advantage. These activities remain in this quadrant until they cease to yield a distinct competitive advantage.
- Mission-critical context (quadrant III): Here, the competition has caught up, and the processes are no longer differentiating. Now the emphasis is on making activities standard and efficient. According to Moore, the goal is to systematically wring out the risks in these processes so that you can extract resources and apply them to core activities — to the next cycle of innovation.
- Non-mission-critical context (quadrant IV): These activities are prime for outsourcing. Given sound service level agreements, monitoring, and oversight, these are the easy, low-risk outsourcing decisions. Among the most common are the outsourcing of legal and payroll, and the management of cafeterias, real estate, and grounds.
Geoffrey Moore is the managing director and managing partner of TCG Advisors and is a venture partner at Mohr Davidow Ventures. He is the author of several books, including Crossing the Chasm and Living on the Fault Line. His forthcoming book, Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution, is about managing innovation and overcoming inertia in established enterprises. The book’s major thesis is that most companies love to innovate but hate to take risk, the net result being lots of me-too innovations that lack economic impact. Its primary prescription is to pick a single vector of innovation — the book provides 14 — and march so far down it that your competition either cannot or will not follow. SAP NetWeaver Magazine Editor-in-Chief Bonnie Penzias recently interviewed Moore about his theories.