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The New Economics of IT and Service Design

The digital economy’s rise has been enormous, and rapid - but it’s not as inexplicable as it might seem. This is because the economics of IT have fundamentally changed, and that’s creating a revolution in how businesses function. Over the last seventy years, massive and continuous improvements in technology have increased user convenience while reducing computer cost - to the point that, in terms of operations per second, an out-of-the box iPhone now substantially outperforms Deep Blue, the supercomputer famed for defeating world chess champion Garry Kasparov in 1997.

This results from a virtuous cycle of computing. The early leaders in computing invested billions in capital into research and development. That, in turn, drove down per unit storage and compute costs, which encouraged further computer usage - which the early leaders responded to with more investment.

The new economics of IT has three far-reaching implications for how organisations think about their business.

1/ The scale of digital markets is unprecedented

The Internet has put over 3 billion individuals on the same network. That’s the largest market in all of human history - and it’s growing rapidly, at approximately 10% each year. What’s more, the scope of services offered digitally is quickly expanding: we once thought the medical profession was safe from online competition, but 40% of millennials now wear wearable devices that provide real-time updates on heart rates and sleep cycles.

More than ever before, companies are able to rapidly grow and scale-up, as they can reach more consumers than was previously feasible. Consider that Walmart took 54 years to serve a customer base of 260 million shoppers per week, while WeChat took just 6 years to reach over 750 million users every day.

Simultaneously, small user niches that previously wouldn’t have been able to sustain their own market have now become profitable, since the entire world is now network addressable. That’s a lesson that Medium and LinkedIn have quickly learned, as they’ve capitalised on the ability of even highly-specialised blogs to reach large global audiences.

That opens up a massive opportunity for companies to increase their market size, or to create new products targeting niches that previously would have been too small to be profitable. But it’s also a challenge for companies, because it means that, as Telstra CEO Andy Penn has warned, consumers’ expectations are being set by the standards of Uber, Netflix and Facebook. Organisations that fail those standards are setting their consumers up to be frustrated - and naively hoping those dissatisfied users will remain loyal, even in an age of digital hypercompetition.

2/ Competition is global and winner-takes-all

The Internet era has allowed global digital companies to rapidly enter and acquire market share in new countries. Amazon isn’t bound by geography - and when it brings its incredible global reach, efficient payment and delivery and automated data collection to Australia next year, it’ll be competition the likes of which local retailers have never seen before.

The threat posed by digital competitors is especially critical because of the nature of platform economics. The first digital movers - think eBay, Amazon and Uber - are setting up rapidly scalable platforms to capture almost the entire market. Network effects - the increase in a product’s value as more people make use of it - established those companies as market leaders. Uber knows its powerful network of drivers and riders will generate massive profit - that’s why it’s been so willing to burn substantial losses over the last eight years. The same is true of Amazon and Twitter. Companies that wait too long risk being locked out of the market entirely.

We’re slowly coming to realise the real threats posed by global digital competitors. Analysts who see the writing on the wall will value companies based on the ambition of their digital transformation programs. Overseeing radical transformation will be an essential responsibility of boards who want to protect their shareholders and employees from disruption.

The digital era is bringing competition of unprecedented scale. But it’s also offering companies a new way to build up their digital offerings, so that they can succeed on a global scale.

3/ Companies can spend time competing to deliver the best product - just like start-ups do

When I worked in financial services twenty years ago, you needed to spend enormous amounts on licenses, software and hardware just to get yourself off the ground. IT investment was a high-cost, high-risk business. It made sense to have heavy governance and lengthy contracts with specialised vendors.

The new economics of IT have changed all that. Today, lengthy CAPEX cycles for IT should be just as obsolete as the hardware of that era. Digital teams can go onto AWS and rapidly experiment with and iterate their ideas, without waiting months for crates of hardware and software to arrive. If they make use of open source software, they can avoid paying for licenses altogether.

That’s the way start-ups have been operating for the last decade. They don’t need to buy masses of software and hardware to run their business. They can pay by consumption.

Brownfields need to be acting like the very start-ups trying to disrupt them, if they want to reduce their cycle times and cost. They can now afford to use a credit card to buy services. That provides a massive opportunity for established businesses to streamline their procurement processes, and to reform their governance structures to suit the age of OPEX investment. Think of the millions large employers used to pay for Solaris, Oracle RDMBS, WebSphere, Oracle SOA Suite, Microsoft Windows servers, SQL servers, BizTalk servers - and data centres, physical servers, routers and firewalls. They can now redistribute that money and effort to designing, building and testing world-class digital services.

The new economics of IT is a massive enabler for great digital services. Cheap IT and agile procurement means experimentation isn’t risky anymore - it’s the only way to manage risk, by getting continuous feedback on how our services really meet user needs.

The pace of change is fast - and getting faster

The new economics of IT have already transformed business processes - and there’s plenty more to come. The low cost of IT is encouraging even more experimentation and automation. We used to think of technology displacing low-skilled jobs, but machine learning and mechanised processes are playing a greater role in white-collar professions like law and accounting. Customers have demonstrated time and time again that they prefer cheap and reliable services from a computer, rather than engaging with human advisers.

Businesses need to acknowledge that the economics of IT have changed, and that their processes and products need to change with it. Digital transformation means:

  • Expanding a product’s market to everyone with access to the Internet, not just people in geographic proximity to shopfronts.
  • Responding in real time to consumer needs, not waiting six months for the next release cycle.
  • Applying cheap, modern technology to build great products, not relying on ancient legacy systems.
  • Delivering faster, simpler, better designed products that meet user needs and increase profitability.

That’s a challenge organisations need to take on if they want to survive, and thrive, in the digital era.

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Paul Shetler is an adviser to governments and organisations around the world who are transforming their business. He is a speaker on digital transformation and organisational change. Paul was the CEO of the Digital Transformation Office and the Chief Digital Officer of the Australian Government’s Digital Transformation Agency. 

You can follow Paul on LinkedIn, on Twitter at @paul_shetler and stay in touch with his work at paulshetler.com