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.

Saturday, July 31, 2021

What Can You Do With Less?

In the heady days of the dot-com boom, it became common for investors to challenge would-be entrepreneurs with the question, “what can you do with more?” To the aspirant (and typically struggling) startup, the question was profound, if for no other reason than they were buried in the realities of trying to keep their own narrow universe from imploding on itself.

The question is still asked today, just in different ways. For example, the Wall Street Journal recently profiled the relationship between Masayoshi Son of Softbank and Adam Newmann of WeWork, specifically how Mr. Son prodded Mr. Newmann to pursue ever more ambitious goals in 2018. That ambition culminated in a goal for WeWork to grow revenue from $2b to over $350b in 5 years (making it larger than Apple), a mooted valuation of $10t (making it equal to about 1/3rd the total market valuation of all US equities), and a pitch for $70b in financing. It was certainly more; although, what actually followed was certainly less.

While the question remains the same, the question behind the question is not. A quarter of a century ago, it wasn’t clear what tech companies would succeed, and what success would look like, if in fact any would succeed at all. Spending more in the pursuit of success was a way to have less dependency on serendipitous technology and market phenomenon in the pursuit of what everybody knew was the future. Owning more of the value chain, spending more on marketing and awareness campaigns, signing up more partners, and so forth were ways to project influence over the things out of one company’s direct control. From a finance perspective, this was small beer: the price to try everything and fail wasn’t a whole lot more than the price to try a few things and fail.

Today, if every business must be a digital business, the question of success or even survival is not what is being put to the test. Instead, it is a test of one’s of ambition: if the future of [insert your industry name here] is digital, the question isn’t whether [insert your digital strategy here] has the potential to succeed or not, but whether it will become the dominant digital path in its industry or just an also ran that becomes a footnote in history. You must think bigger than a digital strategy: what are you going to do to impose your vision of the future on the commercial and non-commercial ecosystems relevant to your future? “What could you do with more?”

In rapidly growing markets, there is some wisdom in this. Industry lifecycles are characterized by relatively short periods of rapid growth pursued by hundreds of equity financed competitors that are followed by long periods of slow growth dominated by a handful of oligopolistic market participants sucking cash flow from operations to service debt, finance buybacks and pay dividends. An overwhelming majority of the small competitors that exist during the rapid growth phase won’t survive and the small ones that do won’t matter much. As Larry Ellison pointed out years ago, “The No. 1 software company in every segment makes all the money. We never buy anything where it doesn‟t put us in the No. 1 position or get us in such a strong No. 2 position that we think we can get to No. 1 very quickly.” When a clear market opportunity emerges, the stakes are very high indeed.

Of course, not all tech is about potential for world domination. Sometimes it is about utility. Utilities - think electricity, water, and the like - are taxes on a business. As we saw a couple of months ago, one of the overriding questions that dogs utility tech investments is, “do we have to do it now?” Another is, “what could you do with less?”

This latter question can be responded to as an appeal to value more than to cost. Even within the most mundane of utility tech opportunities are innovations, sometimes small, but innovations nonetheless that are legitimate sources of value. While many (if not most) utility tech investments will never have a comprehensive value proposition, often they can be unpacked so that the utility investment can lead with value realization. Decoupling legacy technologies through APIs and abstraction layers allows for creativity not just in how utility tech is delivered, but how fundamental business problems can be solved. When successful, a utility tech investment can be reframed from a single all-in commitment to a series of investment tranches that deliver both near-term value and long-term utility. When we do this type of analysis, we very often find there is quite a lot that can be done with less.

This draws a great deal of ire, of course. Enterprise IT doesn’t much like requesting a little more funding for the same initiative year after year after year, much less the specter of a long-lived hybrid tech landscape resulting from only partial modernization. Tech vendors prefer large commitments from their customers before they will offer discounts or commit top people. And, this appears to legitimize the lack of confidence that corporate capital allocators have in an IT function’s competency.

But when the relationship between enterprise IT and the rest of the business is characterized by low trust - still all too common to this day - it behooves IT to meet the trust deficit head on. Doing so demonstrates good stewardship of capital and provides transparency into why and how IT spends that capital. It also makes utility tech spend far less self-referential (I still see “we’re moving to the cloud because the cloud is better” as a business case justification) and far more aligned with business goals. And leading with value while asking for tranches of “less” is not an acknowledgement that IT isn’t trustworthy as much as it insists on a high-trust partnership with business and IT on achieving the outcomes. IT doesn’t get a blank check to do tech things, but then neither does the business get anything it might ever want. Both are equal partners in shared outcomes, and partnerships cannot function without trust.

“What can we do with less?” is a good question to ask. Because sometimes, less really is more.