I consult, write, and speak on running better technology businesses (tech firms and IT captives) and the things that make it possible: good governance behaviors (activist investing in IT), what matters most (results, not effort), how we organize (restructure from the technologically abstract to the business concrete), how we execute and manage (replacing industrial with professional), how we plan (debunking the myth of control), and how we pay the bills (capital-intensive financing and budgeting in an agile world). I am increasingly interested in robustness over optimization.

I work for ThoughtWorks, the global leader in software delivery and consulting.

Sunday, November 25, 2007

Market Power Increases Exponentially with IT Velocity

Bernoulli’s Theorem holds that the potential power that can be produced by a turbine or rotor is equal to the cube of the velocity with which the turbine rotates, expressed simply as Power = Velocity3. A basic concept of wind energy systems, it is increasingly relevant in commercial building architecture: specifically, if wind velocity can be increased through building design, the potential power that a building can derive from wind energy is considerably greater. This means that a building can be designed such that it generates a non-trivial portion of its electrical power from wind energy.1

The exponential relationship of power to velocity is similarly evident in the relationship between business competitiveness and IT application development. Specifically, market power should increase exponentially with increases in IT velocity.

We can define velocity as the measure of the rate of delivery, expressed in the time it takes for a finely grained business need to go from idea to implemented solution. Here, we are interested in assessing the rate at which functionality is delivered: a dozen features2 delivered in a 6 month time frame have an average velocity of 6 months, not 0.5 months (12 features delivered in 6 months is not 0.5 months to produce one feature; time to production is 6 months). Restated, we hold time constant to assess the time it takes for new features to go from end to end of the delivery pipeline.

The power derived from this velocity is the ability of the company to exert itself in the marketplace. That is, a company has power in the market if it attracts customers, employees, partners and investors through execution of its strategy; it also has power if it forces competitors react if they are to retain what they have. This could be anything from having a lower cost footprint, features and functionality in solution offerings that competitors simply don’t have, or having the best tools or solution offering that attracts the top talent. The more change that a firm creates in its market, the more influence it exerts over an industry: competitors will be forced to spend resources reacting to somebody else’s strategy, not pursuing their own.

In the aggregate, power is abstract in this definition. An economic model that assesses the extent to which a firm has market power would be substantially an academic exercise. There are, however, tangible indicators of market power that are worthy of mention in the annual report: net customer acquisition, relative cost footprint, and competitive hires and exits are all hard measures of market power. These are real and significant business benefits: indeed, making competitors react by destabelising their agenda is of exponentially greater value than that of the innovations themselves.

Because all of these can be enabled or amplified by IT, velocity is subsequently a key measure of IT effectiveness. It is a particularly critical concept for IT in both Governance and Innovation.

Velocity is a key metric of the first of our two Governance questions: are we getting value for money? Many company's market offerings or cost competitiveness are rooted in applied technology. It stands to reason that the rate at which functionality is delivered increases business competitiveness either by constantly adding capability or by aggressively reducing costs. Sustainable IT velocity maintains market power; an increase in this velocity increases market power. Velocity, then, is a key indicator of the first governance question in that it provides a quantified assessment of IT’s value proposition to an organisation.

It is also an indicator of how effectively IT drives innovation. Business innovation is the consistent, rapid and deliberate maturation of products, services, systems and capabilities. As, again, businesses are increasingly dependent on technology for capability and cost, the rate with which IT delivers functionality will be an indicator of how effective IT is as an enabler of business innovation. While an intangible concept, this allows IT to position itself as a driver of business innovation and not simply a utility of technology services.

This is not simply a question of delivering IT solutions, but of how those solutions are consumed by the business. IT may make frequent deliveries, but if they are not consumed, organisational velocity is reduced. This is not the same as what happens in the market. The opportunities to exploit an innovation or solution delivered may not materialise in the market; in this case, the potential market power achievable by IT velocity will not be realised. If, however, solutions are delivered by IT but not consumed by the business, velocity is never truly maximised. This is an important distinction, because IT is not governed exclusively by how it is delivered; it is governed by how effectively it is consumed. Ignoring the “buy side” makes it too easy for an IT organisation to create false efficiencies or meaningless business results because it is knowingly or otherwise out of alignment with its host organisation. This lack of alignment doesn’t leave power potential unrealised, it undermines velocity.

This is actionable market behaviour with historical precedent. General George S. Patton understood the need to constantly bring the fight to the enemy. “Patton… clearly appreciated the value of speed in the conduct of operations. Speed of movement often enables troops to minimise any advantage the enemy may temporarily gain but, more important, speed makes possible the full exploitation of every favorable opportunity and prevents the enemy from readjusting his forces to meet successive attacks. Thus through speed and determination each successive advantage is more easily and economically gained than the previous one. … [R]elentless and speedy pursuit is the most profitable action.”3 Inciting market change, then, determines whether you follow your strategy or react to another’s.

The ability to disrupt a market by introducing change allows a company to execute its strategy at the expense of its competitors. Business execution, increasingly rooted in technology, thus derives a great deal of its competitive advantage from the rate at which it can change its technology and systems. Velocity, the sustained rate at which business needs mature from expression to implemented solution, is therefore a key IT governance metric. It is, in fact, an expression of ITs value proposition to its host organisation.

1 I am indebted to Roger Frechette for introducing me to this element of Bernoulli’s theorem. There are a number of articles highlighting his work on the Pearl River Tower, which when completed will be a remarkable structural and mechanical engineering achievement.
2 In this context, a feature is the same as an Agile story: "simple, independent expressions of work that are testable, have business value, and can be estimated and prioritised."
3 Eisenhower, Dwight D. Crusade in Europe Doubleday, 1948. p. 176.