The Finance Bottleneck

This is a draft excerpt from a book I’m working on, tentatively titled The Business Bottleneck. If you’re interested in the footnotes, leaving a comment, and the further evolution of the book, check out the Google Doc for it.

The Business Bottleneck

All businesses have one core strategy: to stay alive. They do this by constantly offering new reasons for people to buy from them and, crucially, stay with them. Over the last decade, traditional businesses have been freaked by competitors that are figuring out better offerings and stealing those customers. The super-clever among these competitors innovate entirely new business models: hourly car rentals, next day delivery, short term insurance for jackets, paying for that jacket with your phone, banks with only your iPhone as a branch, incorporating real-time weather information into your reinsurance risk analysis. 

Screen Shot 2019-08-07 at 3.28.14 PM.png
Source: Gartner L2, July 2019.

In the majority (maybe all) of these cases, surviving and innovating is done well with small business and software development cycles. The two work hand-in-hand are ineffective without the other. I’d urge you think of them as the same thing. Instead of business development and strategy using PowerPoint and Machiavellian meeting tactics as their tool, they now use software.

You innovate by systematically failing weekly, over and over, until you find the thing people will buy and the best way to deliver it. We’ve known this for a long time and enshrined it in processes like The Lean Startup, Jobs to Be Done, agile development and DevOps, and disruption theory. While these processes are known and proven, they’ve hit several bottlenecks in the rest of the organization. In the past, we had IT bottlenecks. Now we have what I’ve been thinking of as The Business Bottleneck. There’s several of them. Let’s start by looking at the first, and, thus, most pressingly damaging one. The bottleneck that cuts off business health and innovation before it even starts: finance.

Most software development finance is done wrong and damages business. Finance seeks to be accurate, predictable, and works on annual cycles. This is not at all what business and software development is like. 

Business & software development is chaos

Software development is a chaotic, unpredictable activity. We’ve known this for decades but we willfully ignore it like the advice to floss each day. Mark Schwartz has a clever take on the Standish software project failure reports. Since the numbers in these reports stay the same each year, basically, the chart below shows that that software is difficult and that we’re not getting much better at it:

Screen Shot 2019-08-07 at 3.30.26 PM.png
Source: built from excerpts from the 2009 study and 2015 study.

What this implies, though, is something even more wickedly true: it’s not that these project failed, it was that we had false hopes. In fact, the red and yellow in the original chart actually shows that software is performs consistent to its true nature. Let me rework the chart to show this:

Screen Shot 2019-08-07 at 3.32.07 PM.png
Source: built from excerpts from the 2009 study and 2015 study.

What this second version illustrates is that the time and budget it takes to get software software right can’t be predicted with any useful accuracy. The only useful accuracy is that you’ll be wrong in your predictions. We call it software engineering, and even more accurately “development” because it’s not scientific. Science seeks to describe reality, the be precise and correct – to discover truths that can be repeated. Software isn’t like that at all. There’s little science to what software organizations do, there’s just the engineering mentality of what works with what we have time and budget to do.

Source: from Michael Alba.

What’s more, business development is chaotic as well. Who knows what new business idea, what exact feature will work and be valuable to customers? Worse, there is no science behind business innovation – it’s all trial and error, constantly trying to both sense and shape what people and businesses will buy and at what price. Add in competitors doing the same, suppliers gasping for air in their own chaos quicksand, governments regulating, and culture changing people’s tastes, and it’s all a swirling cipher.

In each case, the only hope is rigorously using a system of exploration and refining. In business, you can study all the charts and McKinsey PDFs you want, but until you actually experiment by putting a product other there, seeing what demand and pricing is, and how your competitors will respond, you know nothing. The same is true for software. 

Each domain has tools for this exploration. I’m less familiar with business development, and only know the Jobs to Be Done tool. This tool studies customer behaviors to discover what products they actually will spend money on, to find the “job” they hire your company to solve, and then change the business to profit from that knowledge.

The discovery cycle in software follows a simple recipe: you reduce your release cycle down to a week and use a theory-driven design process to constantly explore and react to customer preferences. You’re looking to find the best way to implement a specific feature in the UI to maximize revenue and customer satisfaction. That is, to achieve whatever “business value” you’re after. It has many names and diagrams, but I call this process the “small batch cycle.”

THD small batch two up.jpg
The Home Depot illustrates its small batch cycle, Part Vemana and Brooke Creef, 2018. a caption

For example, Orange used this cycle when perfecting its customer billing app. Orange wanted to reduce traffic to call centers, thus lower costs but also driving up customer satisfaction (who wants to call a call center?). By following a small batch cycle, the company found that its customers only wanted to see the last two month’s worth of bills and their employees current data usage. That drove 50% of the customer base to use the app, helping remove their reliance on actual call centers, driving down costly and addressing customer satisfaction.

These business and software tools start with the actual customers, people, who are doing the buying and use these people as the raw materials and lab to run experiments. The results of these experiments are used to validate, more often invalidate theories of what the business should be and do. That’s a whole other story, and the subject of my previous book, Monolithic Transformation.

We were going to talk about finance, though, weren’t we?

The Finance Bottleneck

Finance likes certainly – forecasts, plans, commits, and smooth lines. But if you’re working in the chaos of business and software development, you can’t commit to much. The only certainty is that you’ll know something valuable once you get out there and experiment. At first all you’ll learn is that your idea was wrong. In this process, failure is as valuable as success. Knowing what doesn’t work, a failure, is the path to finding what does work, a success. You keep trying new things until you find success. To finish the absurd truth: failure creates success.

Software organizations can reliably deliver this type of learning each week. The same is true for business development. We’ve known this for decades, and many organizations have used it as their core differentiation engine.

But finance doesn’t work in these clever terms. “What they hell do you mean ‘failure creates success’? How do I put that in a spreadsheet?” we can hear the SVP of Finance saying, “Get the hell out of this conference room. You’re insane.”

Instead, when it comes to software development, finance focuses only on costs. These are easy to know: the costs of staff, the costs of their tools, and the costs of the data centers to run their software. Business development has similar easy to know costs: salary, tools, travel, etc.

When you’re developing new businesses and software, it’s impossible to know the most important number: revenue. Without that number, knowing if costs are good or bad is difficult. You can estimate revenue and, more likely, you can wish-timate it. You can declare that you’re going to have 10% of your total addressable market (TAM). You can just declare – ahem, assume – that you’re chasing a $9bn market opportunity. Over time, once you’ve discovered and developed your business, you can start to use models like consumer spending vs. GDP growth, or the effect of weather and political instability on the global reinsurance market. And, sure, that works as a static model so long as nothing ever changes in your industry.

For software development, things are even worse when it comes to revenue. No one really tells IT what the revenue targets are. When IT is asked to make budgets, they’re rarely involved in, nor given revenue targets. Of course, as laid out here, these targets in new businesses can’t be known with much precision. This pushes IT to just focus on costs. The problem here, as Mark Schwartz points out in all of his books, is that cost is meaningless if you don’t know the “value” you’re trying to achieve. You might try to do something “cheaply,” but without the context of revenue, you have no idea what “cheap” is. If the business ends up making $15m, is $1m cheap? If it ends up making $180m, is $5m cheap? Would it have been better to spend $10m if it meant $50m more in revenue?

 

IT is rarely involved in the strategic conversations that narrow down to a revenue.  Nor are they in meetings about the more useful, but abstract notion of “business value.” So, IT is left with just one number to work with: cost. This means they focus on getting “a good buy” regardless of what’s being bought. Eventually, this just means cutting costs, building up a “debt” of work that should have been done but was “too expensive” at the time. This creates slow moving, or completely stalled out IT. 

A rental car company can’t introduce hourly rentals because the back office systems are a mess and take 12 months to modify – but, boy, you sure got a good buy! A reinsurance company can’t integrate daily weather reports into its analytics to reassess its risk profile and adjust its portfolio because the connection between simple weather APIs and rock-solid mainframe processing is slow – but, sister, we sure did get a good buy on those MIPS! A bank can’t be the first in its market to add Apple Pay support because the payments processing system takes a year to integrate with, not to mention the governance changes needed to work with a new clearinghouse, and then there’s fraud detection – but, hoss, we reduced IT costs by $5m last year – another great buy!

Worse than shooting yourself in the foot is having someone else shoot you in the foot. As one pharmacy executive put it, taking six months to release competitive features isn’t much use if Amazon can release them in two months. But, hey! Our software development processes cost a third less than the industry averages!

Business development is the same, just with different tools and people who wear wing-tips instead of toe-shoes. Hopefully you’re realizing that the distinction between business and software development is unhelpful – they’re the same thing.

The business case is wrong from the start

So, when finance tries to assign a revenue number, it will be wrong. When you’re innovating, you can’t know that number, and IT certainly isn’t going to know it. No one knows the business value that you’re going to create: you have to first discover it, and then figure out how to deliver it profitably.

As is well known, the problem here is the long cycle that finance follows: at least a year. At that scope, the prediction, discovery, and certainty cycle is sloppy. You learn only once a year, maybe with indicators each quarter of how it’s going. But, you don’t really adjust the finance numbers: they don’t get smarter, more accurate, as you learn more each week. It’s not like you can go get board approval each week for the new numbers. It takes two weeks just to get the colors and alignment of all those slides right. And all that pre-wiring – don’t even get me started!

In business and software development, each week when you release your software you get smarter. While we could tag shipping containers with RFID tags to track them more accurately, we learn that we can’t actually collect and use that data – instead, it’s more practical to have people just enter the tracking information at each port, which means the software needs to be really good. People don’t actually want to use those expensive to create and maintain infotainment screens in cars, they want to use their phones – cars are just really large iPhone accessories. When buying a dishwasher, customers actually want to come to your store to touch and feel them, but first they want to do all their research ahead of time, and then buy the dishwasher on an app in the store instead of talking with a clerk. 

These kinds of results seem obvious in hindsight, but business development people failed their way to those success. And, as you can imagine, strategy and finance assumptions made 12 to 18 months ago that drove businesses cases often seem comical in hindsight.

A smaller cycle means you can fail faster, getting smarter each time. For finance, this means frequently adjusting the numbers instead of sticking to the annual estimates. Your numbers get better, more accurate over time. The goal is to make the numbers adjust to reality as you discover it, as you fail your way to success, getting a better idea of what customers want, what they’ll pay, and how you can defend against competition.

Small batch finance

Some companies are lucky to just ignore finance and business models. They burn venture capital funding as fuel to rocket towards stability and profitability. Uber is a big test of this model – will it become a viable business model (profitable), or will it turn out that all that VC money was just subsidizing a bad business model? Amazon is a positive example here, over the past 20 years cash-as-rocket-fuel launched them to boatloads of profit.

Most organizations prefer a less expensive, less risky methods. In these organizations, what I see are programs that institutionalize these failure driven cycles. They create new governance and financing models that enforce smaller business cycles, allowing business and software development to take work in small batches. Allianz, for example, used 100 day cycles discover and validate new businesses. Instead of one chance every 365 days to get it right, they have three, almost four. As each week goes by, they get smarter, there’s less waste and risk, and finance gets more accurate. If their business theory is validated, the new business is graduated from the lab and integrated back into the relevant line of business. The Home Depot, Thales, Allstate, and many others institutionalize similar practices.

allianz digital factory MVP procerss.jpg
Source: “The Shift to a New Digital Allianz Germany,” Dr. Daniel Poelchau, Allianz, CF Summit EU, Oct 2016.

Each of these cycles gives the business the chance to validate and invalidate assumptions. It gives finance more certainly, more precision, and, thus, less errors and risk when it comes to the numbers. Finance might even be able to come up with a revenue number that’s real. That understanding makes funding business and software development less risky: you have ongoing health checks on the viability of the financial investment. You know when to stop throwing good money after bad when you’ve invalidated your business idea. Or, you can change your assumptions and try again: maybe no one really wants to rent cars by the hour, maybe they want scooters, or maybe they just want a bus pass.

Business cases focused on growth, not costs

With a steady flow of business development learning, you can start making growth decisions. If validate that you can track a team of nuclear power plant workers better with RFID badges, thus directing them to new jobs more quickly and reducing costly downtime, you can then increase your confidence that spending millions of dollars to do it for all plant workers with payoff. You see similar small experiments leading to massive investments in omnichannel programs at places like Dick’s Sporting Goods and The Home Depot.

Finance has to get involved in this fail-to-success cycle. Otherwise, business and software development will constantly be driven to be the cheapest provider. We saw how this generally works out with the outsourcing craze of my youth. Seeking to be the cheapest, or the synonomic phrase, the “most cost effective,” option ends up saving money, but paralyzing present and future innovation

Screen Shot 2019-08-07 at 3.38.18 PM.png
“Survey Analysis: IT Is Moving Quickly From Projects to Products,” Bill Swanton, Matthew Hotle, Deacon D.K Wan, Gartner, Oct 

The problem isn’t that IT is too expensive, or can’t prove out a business case. As the Gartner study above shows, the problem is that most financing models we use to gate and rate business and software development are a poor fit. That needs to be fixed, finance needs to innovate. I’ve seen some techniques here and there, but nothing that’s widely accepted and used. And, certainly, when I hear about finance pushing back on IT businesses cases, it’s symptomatic of a disconnect between IT investment and corporate finance.

Businesses can certainly survive and even thrive. The small, failure-to-success learning cycles used by business and software developers works, are well known, and can be done by any organization that wills it. Those bottlenecks are broken. Finance is the next bottleneck to solve for.

I don’t really know how to fix it. Maybe you do! 

Crawl into the bottleneck

After finance, for another time, my old friends: corporate strategy. And if you peer past that blizzard of pre-wired slides and pivot tables, you can see just in past the edges of the next bottleneck, that mysterious cabal called “The C-Suite.” Let’s start with strategy first.

🗂 Link: Rich countries must start planning for a cashless future

These problems have three remedies. First, governments need to ensure that central banks’ monopoly over coins and notes is not replaced by private monopolies over digital money. Rather than letting a few credit-card firms have a stranglehold on the electronic pipes for digital payments, as America may yet allow, governments must ensure the payments plumbing is open to a range of digital firms which can build services on top of it. They should urge banks to offer cheap, instant, bank-to-bank digital transfers between deposit accounts, as in Sweden and the Netherlands. Competition should keep prices low so that the poor can afford most services, and it should also mean that if one firm stumbles others can step in, making the system resilient.

Source: Rich countries must start planning for a cashless future

🗂 Link: CIO interview: Simon McNamara, chief administrative officer, RBS Group

Mobile banking is another key area of innovation, including NatWest’s personal finance app Mimo, which uses open banking application programming interfaces (APIs), artificial intelligence and data analytics to create a social feed that helps customers manage their money. Mimo is being beta tested with 5,500 customers. NatWest aims to extend the roll-out later this year.

“These kinds of projects mean the people that work here feel much better about themselves than they did at the outset,” he says.

“I like the fact that our mobile platform is held in high regard by customers, because I see that feedback all the time. And it also irritates me that there are other services we provide that they don’t seem to hold in the same regard. So, that’s an opportunity for us, but also a challenge.”

Source: CIO interview: Simon McNamara, chief administrative officer, RBS Group

Link: IBM fuses its software with Red Hat’s to launch hybrid-cloud juggernaut

The effort has started with IBM bundling Red Hat’s Kubernetes-based OpenShift Container Platform with more than 100 IBM products in what it calls Cloud Paks. OpenShift lets enterprise customers deploy and manage containers on their choice of infrastructure of choice, be it private or public clouds, including AWS, Microsoft Azure, Google Cloud Platform, Alibaba and IBM Cloud.

The prepackaged Cloud Paks include a secured Kubernetes container and containerized IBM middleware designed to let customers quickly spin-up enterprise-ready containers, the company said.

Five Cloud Paks exist today: Cloud Pak for Data, Application, Integration, Automation and Multicloud Management. The Paks will ultimately include IBM’s DB2, WebSphere, API Connect, Watson Studio, Cognos Analytics and more

Source: IBM fuses its software with Red Hat’s to launch hybrid-cloud juggernaut

Link: Digital is helping Millennials shop around for auto coverage

That’s according to TransUnion’s “Auto Insurance Shopping Index,” which found that 21.7% of consumers shopped for personal auto insurance in 2018, versus 20% in 2017. With 44% of their cohorts shopping, Millennials and Generation Z consumers shopped for auto insurance than other ages.

The reason? Digital distribution and marketing seem to be huge drivers to increase shopping for Millennials. According to David Drotos, VP of insurance solutions at TransUnion, “Technology is fueling the experimentation and development of new business models for insurance that cater to the Millennial lifestyle.”

Source: Digital is helping Millennials shop around for auto coverage

Link: How Booking.com A/B Tests Ten Novenonagintillion Versions of its Site

“According to research by Evercore Group L.L.C., Booking.com’s “testing drives conversions across the whole platform at 2–3 times the industry average.” That means massive increases to their revenue and bottom line.”

How Booking.com A/B Tests Ten Novenonagintillion Versions of its Site
https://blog.usejournal.com/how-booking-com-a-b-tests-ten-novenonagintillion-versions-of-its-site-25fc3a9e875b
via Instapaper

Source: How Booking.com A/B Tests Ten Novenonagintillion Versions of its Site

Link: Starbucks teases coffee traceability app feature, compostable cup trial

This focus on the people behind the coffee beans could strengthen positive consumer sentiment around Starbucks’ brand and give it more of a human element as it continues to stretch its global reach. The move could also drive other coffee chains to make their supply chain journeys accessible to their customers. Investing in traceability isn’t unusual in the coffee space — Philz Coffee, for example, provides a breakdown of the steps of the coffee journey it has access to, but leveraging that information for interactive marketing purposes is still a ripe opportunity.

Source: Starbucks teases coffee traceability app feature, compostable cup trial

Link: How the subscription paradigm flips the cloud financials market

In the subscription world, you must understand the lifetime relationship with the customer – all the upsells and renewals and how they all build on one another. You also must understand the revenue, billings, and cash derived from those-again, over the entire lifetime of the customer relationship.

In an ASC-606 world, you must track all performance obligations, which is a fancy term for your promises – both the ones explicitly written in your customer agreement and all those pesky side terms that your sales rep slipped into the free-text field on the quote. You must also know all the implicit promises that people make in the deal or that have become ingrained in your business processes.

Source: How the subscription paradigm flips the cloud financials market

Link: Google debuts migration tool for its Anthos hybrid cloud platform

Anthos applications are deployed in software containers, which are used to host the individual components of each app and make them easier to work with. The main benefit is that developers get to use a single set of tools to build and deploy their apps, and push through updates as necessary, no matter what infrastructure those apps are hosted on. Kubernetes makes it easier to manage large clusters of containerized apps.

Source: Google debuts migration tool for its Anthos hybrid cloud platform

Link: Free Solo

Other women have rebelled in smaller, more quotidian ways. “They expect you to get married,” Whoopi Goldberg said in a recent interview in The New York Times Magazine. “Then one day I thought: I don’t have to do this.” Goldberg is an EGOT winner, remember. No woman should feel pressured to adhere to conservative standards, but it is a testament to the intractability of these gendered expectations that a woman as accomplished as Goldberg, someone who in theory has earned the power to do what she wants, would still feel beholden to them. It reminds me of Pulitzer Prize–winning journalist Brigid Schulte publishing an op-ed for The Guardian entitled, “A woman’s greatest enemy? A lack of time to herself.” These are extraordinarily accomplished women who still have to fight for the right to solitude, a state which men in the same position no doubt take for granted. Of course it was a man who authored a recent book that went viral for stating that the happiest demographic was unmarried and childless women, as though the record low number of marriages levels somehow required explanation. In fact, the data this behavioral scientist cited indicated that marriage benefited men more than it benefited women. Another survey found that one of the top reasons women cited for not having children was wanting more time for themselves. In other words, choice, not just to reject what they don’t want, but to choose what they do — now and in the future. As Rebecca Traister wrote, “Wherever you find increasing numbers of single women in history, you find change.”

Source: Free Solo

Link: IT outages in the financial sector: Legacy banks playing tech catch-up risk more outages, UK MPs told

said 65 per cent of outages are in retail banks. She said the regulator received 853 notifications of outages in 2018/19 “that is a huge increase on the previous year”. However, she added some of those incidents were relatively minor, with part of the increase being due to a change in regulatory reporting requirements.

Source: IT outages in the financial sector: Legacy banks playing tech catch-up risk more outages, UK MPs told

Link: What I Learned on Medieval Twitter

Dorothy Kim has argued that Twitter activity, especially during conferences, enables scholars to amplify critical insights that would normally be relegated to the margins, circulating commentary as variously exegetical, irreverent, and dissident as the marginalia in medieval manuscripts: “Twitter can be radically serious in pushing against the ‘authority and control’ of the state, the scholarly-industrial complex, and institutional power. It can also be playful, hysterically funny, irreverent, cute: an utter delight though often also still radically pushing against the ‘authority and control’ of the powers-that-be.”

Source: What I Learned on Medieval Twitter

Link: Low Barr: Don’t give me that crap about security, just put the backdoors in the encryption, roars US Attorney General

Like the Obama administration before it, today’s White House has made backdooring encryption a priority, and legislation is reportedly being prepared to enforce it. Barr promised that FBI Director Chris Wray will give another speech on the topic later this week at the same conference. It looks like the encryption wars are back on.

Source: Low Barr: Don’t give me that crap about security, just put the backdoors in the encryption, roars US Attorney General

Link: Microsoft milestone: Tech giant’s cloud revenue now matches traditional products, analyst says

“We estimate that FY 4Q 19 was the first time MSFT generated as much revenue from running software in its own data centers, including cloud offerings like Azure and Office 365, as well as LinkedIn, Bing, GitHub and Xbox-Live, as it did from software licenses and upgrades, hardware and professional services,” according to the note from CFRA’s John Freeman.

Source: Microsoft milestone: Tech giant’s cloud revenue now matches traditional products, analyst says

Link: Why are large companies so difficult to rescue (regarding bad internal technology)

In terms of the best integration architecture, what seems to me the only long-term solution is something like the unified log architecture that Jay Kreps wrote about back in 2013. All incoming writes need to go into a centralized log, such as Kafka, and then from there the various databases can pull what they need, with each team making its own decisions about what it needs from that central log. However, SuperRentalCorp has retail outlets with POS (point of sale) systems which talk directly to specific databases, and the path of that write (straight from the POS to the database) is hardcoded in ways that will be difficult to change, so it will be a few years before the company can have a single write-point. For now, each database team needs to be accepting writes from multiple sources. But a unified log is the way to go in the long-term. And that represents a large change of process for every one of those 20 teams. Which helps explain why the company has spent 2 years and $25 million trying to build an API, and so far they have failed.

Source: Why are large companies so difficult to rescue (regarding bad internal technology)

Link: We Need to Talk About Mental Health and Travel

Taking some time out of your day to reflect on the good things you have in your life can be very beneficial to your mental health. Sometimes when we get caught in our downward spiral of negative thinking, we forget that there are a lot of great things to be thankful for. Jotting down 10 things, big or small, that you are grateful for each day can be a real help to get you out of that negative mindset that is so prevalent with anxiety and depression. This is not a cure, but it is a small and useful tool to help you manage your mental health on a daily basis.

Source: We Need to Talk About Mental Health and Travel

Link: AT&T’s ‘Public-Cloud First’ Proclamation a Stake in the Ground

For AT&T to now start the process of adopting the public cloud for what are admittedly “non-network applications” is a big move. It shows that even the most stodgy industry verticals are on board with moving to the public cloud. This will provide a significant new revenue stream for those cloud providers but at the same time allow for greater scale that could drive down pricing models.

Source: AT&T’s ‘Public-Cloud First’ Proclamation a Stake in the Ground