Co-authored with James Allworth & Aaron Levie
This post was originally published by the Harvard Business Review in April of 2015
Ask anyone in technology. Sometime soon, the world around us will be smart. Everything frommugs to mailboxes will be context-aware. Our email inboxes will guide us to the highest priority action items. Online investment portals will automatically advise us to optimize our tax returns with the accuracy of the best financial advisor.
Despite the inevitability of this “smart” future, today only a small portion of businesses regularly merge data and physical products. Most large companies struggle to get the most out of the vast amounts of data they’ve collected. That’s because even after they determine the right ways to use information to delight their customers, managers must address one equally important challenge.
They must update decades-old management systems so they can embrace new digital opportunities.
In this article we will present three ways that information-based competition is challenging existing management practices. We’ll also offer some examples of how digitally native businesses have addressed these challenges. But the solutions described won’t be comprehensive. What’s important is that your management team is aware of these issues and can use that understanding to develop a solution that fits your business and allows you to deliver the most value to your customers.
The Challenge of Investing in Digital Assets
Almost any business school professor will explain to her students that there are differences between managing organizations that are capital-intensive and those that are not. That fact becomes apparent when you juxtapose the balance sheet of a company like Microsoft with the balance sheet of a company like Siemens. To adjust for these differences, managers of capital-intensive businesses have developed all sorts of tools and heuristics to help ensure that they’re building their balance sheets in the right way. If they accomplish the task, their businesses will pay dividends for years to come.
Unlike their industrial peers, managers of asset-light businesses focus little on the balance sheet. Instead, they’re taught to focus on their income statement and optimize their operations around preserving profitability. It’s as simple as that.
The challenge? While we have tools and financial statements that help us manage investments in physical assets, we don’t have the same for digital assets and information. There’s no line item for information on your company’s balance sheet — despite the fact that we know information can be extremely valuable. There’s no depreciation schedule for data — despite the fact that we know data can become obsolete over time. And there are certainly no “digital ratios” to help your shareholders value your business’s future earnings potential.
Combine all of those missing managerial components together and the natural reaction is for executives to under-invest in information. On a short-term basis, the only thing they can expect in return for focusing on data is the headaches that follow from explaining, justifying, and evaluating their operations to colleagues and investors.
Yet, we know there is also clear value in information. Consider the 2.4 billion dollars invested in Facebook during its growth phase. Where did that investment impact its traditional financial statements? It didn’t acquire factories, milling machines, or property. It didn’t generate profits or preserve margins…just losses. The most significant asset it did acquire was user data. And today, the nearly two billion user profiles it captured serve as the backbone for one of the largest advertising businesses ever created. But before those records were converted into advertising revenue, there was no spot for them in any financial statement. Even today, with more than $200B in market capitalization largely derived from that same data, investors struggle to value the company’s information.
Where we land is firmly in the face of a management paradox. We know that information can be used to create value. But the tools we have to evaluate and reward managers point them away from the strategies that leverage information. So we’re left in a situation where information-based strategies rarely get the attention they deserve (or require).
What our teams need are the same sorts of techniques that we use in capital-intensive businesses to monitor and evaluate our asset value. We need to mark our information assets to market or depreciate them as they become obsolete. We need to have an ongoing understanding of what’s being used and what’s not. We need to have investment plans put against different types of information and also run pilot programs to test the usefulness of newly targeted information. Just like procurement specialists will make sure that expensive CNC machines
are tested by factory managers before they’re rolled out across a manufacturing organization, we need the same rigor applied to investments in information infrastructure.
Often, venture capitalists help young, digitally native businesses achieve this rigor by identifying key metrics surrounding user activity, registration, and engagement that will help approximate the value of data over time. Things like lifetime customer value are closely monitored so data can be appropriately re-evaluated over time. As such, you rarely see lengthy discussions of traditional financial statements in board meetings. Instead, there is a new focus on the acquisition of return on digital assets. It’s this type of focus on information that needs to become more common inside established businesses.
The Challenge of Determining What’s Core
For years, management consultants have encouraged executives to understand and focus on what’s core to their business. Often, the last thing managers are encouraged to do is think outside of their industry. They’re reminded that conglomerates with diverse industry focus tend to underperform in their markets (at least in industrialized nations) as compared with focused firms. However, determining what’s core and what’s not core is getting more difficult in an era where information is serving as a basis for competition.
Take FedEx for example. Everyone knows FedEx as a logistics behemoth. Its global scale and distribution makes it a critical service vendor for businesses around the world. But since FedEx also has records of its customers’ shipments, it knows how order volumes change based on the date, the weather, and past growth patterns. It’s not far-fetched to imagine this data allowing FedEx to deliver compelling sales forecasting software to its customers.
So would FedEx’s use of its data be a core or non-core activity?
Today, FedEx has some software offerings — but they all revolve around shipping solutions. FedEx isn’t in the business of optimizing supply chain activities using global benchmarks. But there’s no doubt that FedEx’s data would be valuable in the task. And the type of information that FedEx has in this respect isn’t readily available to any of the major players in the supply chain software business.
Honestly, there is no clear answer as to whether this type of opportunity is close enough to core to pursue, or too far away to try out. Similarly, ten years ago, it would have been impossible to predict or justify Amazon becoming the leader in cloud computing simply as a consequence of its own scale in online retail.
The best response is to recognize that the rules used to determine which activities our organizations should pursue are less relevant these days. Some companies will make thoughtful decisions to monetize their digital assets by simply charging for access to data. Some companies will expand into new industries using the information they naturally collect from their traditional business operations as a foundation.
But to optimize your business, you must acknowledge that your information should change what you consider to be adjacent markets — and your business leaders need to make active decisions about which of these “information adjacent” markets to pursue and how.
The Challenge of Building an Ecosystem
At the beginning of the twentieth century, even basic tasks were fairly complex. Figuring out how to send bars of soap efficiently from Ohio to New York required excellent managers who were well versed in the most modern operational techniques of the day. Over the course of the century, businesses slowly mastered the arts of managing the production of physical things to the point where consumers across the globe were able to find products of all variety with costs kept low due to fierce competition. But in the information age, the world has changed again – in particular for businesses that leverage information as core to their competitive position. Instead of using traditional tools to compete in an environment of clear customers, suppliers, partners, and competitors, we find ourselves in an era of “Co-opetition.”
Every modern business operates in a highly networked economic environment. In this economic environment, managing product becomes a small facet of our overall challenge. Among other things, managers also need to manage the development of ecosystems. Ecosystems that require investment, profit sharing, and ongoing care. Ecosystems that can’t be measured based on traditional unit economics. And ecosystems that often require information to be shared across porous corporate borders.
Information is malleable and scalable — but it’s also defensible. Often, after we finally convince our organizations to capture and experiment with information that is useful for satisfying our customers, we find ourselves wanting to keep that information all to ourselves. We especially don’t want to share it with competitors. But in an era of information, sharing what we have is regularly the only way to get people to join our ecosystems — using, enriching, and growing the value of our products.
Consider Bloomberg. For years, Bloomberg has been been building an empire on the back of its real-time market information. Bloomberg terminals are a staple of financial institutions — their comprehensive market intelligence has been what’s differentiated their performance. However, as information becomes ever more accessible via the Internet, lower performing (but good enough) competitors have started to emerge, innovating around the types of core financial data that has long set Bloomberg apart.
As a forward-thinking institution, Bloomberg embraced this change in 2012 and worked to start opening their information treasure troves to a new wave of partners via the Bloomberg API. Bloomberg realized that the ease of information sharing made innovation in consumption a key form of differentiation in the industry. And even if you have access to the best real-time data, it’s impossible to compete without an ecosystem of partners building around your information. Getting that ecosystem meant sharing the data that had powered the core business. So the media giant took its market information and standardized a programmable interface, allowing others to access and enrich the data with other functionality. Its openness streamlines innovation for its customers, but runs contrary to the “walled-garden” strategy that has dominated the industry for years.
Companies in legacy industries as different as retail and financial services all have major opportunities to take the data that is generated by customers and partners to securely help them build new digital experiences. But these opportunities will require openness in many situations. Alliances between partners and competitors will often need to be struck in order to deliver the most value from data. And while these kinds of partnerships are starting to happen more and more, they’re nowhere near the scale that is possible.
In this era of information-based competition, sometimes sharing today is core to profiting tomorrow. And sharing a critical competitive asset is not something we’re used to doing. Developing the systems to help you determine how to build the case for when to share, what to share, and when to stop sharing is vital for managers trying to win in the information economy.
Information is a challenge for your management team because it’s intangible, difficult to quickly value, and can quickly lead you into adjacent markets. And once you have unique data assets that differentiate your business, it’s often tempting to clutch them too tightly, assuming that the value of monetizing those data directly is more than the returns to sharing it and growing your ecosystem. Sometimes it is — but often it’s not.
Every day, people are finding ways to use information to improve our lives, let our machines know us as we approach them, automate basic decisions in our organizations, and improve our relationships with our customers and employees. But while data offers endless possibilities, it also offers real management challenges. To take advantage of data’s opportunities, managers must get out in front of these problems.