In It to Win It: Investing in Digital Transformation by CDT
“Digital has come of age,” said Dr. Vijay Gurbaxani in his opening keynote at the Center for Digital Transformation’s third annual Road to Reinvention at The Paul Merage School of Business at UC Irvine on March 23. He was talking about Wall Street’s higher valuations of companies competing on software, with Apple, Google, and Microsoft topping the list.[1]
To make his point, Gurbaxani compared several industry incumbents with the startup, Snap Inc., which owns the messaging app Snapchat and went public earlier in March. “Many of us in this room probably don’t even use Snapchat,” said Gurbaxani amid audience laughter, yet Snap Inc.’s numbers are nothing to laugh at. As of April 3rd, Snap had a market cap of nearly $27 billion, with few tangible assets and only 1,859 employees, whereas American Airlines was valued at $22 billion, with its 1,500 some aircraft and 100,000 employees.
“The economic potential that digital platforms make possible” is astounding, he said. They have changed how people listen to music, read books, watch movies, manage finances, drive cars, monitor their homes, and conduct research. The winners—Amazon, Disney, Facebook—are pulling away from the field. What should corporate leaders do to make sure their organizations are not left behind? Gurbaxani laid out a five-point plan.
1. Think like a software company
The magic of software, said Gurbaxani, is that it waves away physical constraints. No company operates solely in the physical world anymore—not even agricultural giant Monsanto. With sensors, GPS, and wireless technology, it turned seeds, soil, and farming equipment into components of a smart network that is throwing off data about the environment in which Monsanto’s customers operate. What it learned from analyzing these data helped it to create a software platform that farmers use to increase crop yields and land use efficiency.
That’s what software companies do: they codify their know-how and then deploy it in a network, leveraging the flywheel effect where more customers mean more money and more data for creating better tools and attracting more customers. New entrants in agriculture would need to dislodge a large installed base of Monsanto’s ClimateFieldview users, and that’s not easy for late comers: network effects lead to winner-take-all models
But it’s not just any know-how. It’s a particular core competence formed by experience, informed by data, and massively scalable through digital technology. Consider Wealthfront. Its founders codified the knowledge of Dr. Burton Malkiel, author of A Random Walk Down Wall Street, to create an automated investment service that works 24/7 in real time for low fees. Customers simply download Wealthfront’s free mobile app to get started. Such platforms dominate the consumer space.
2. Develop a compelling vision
Leaders must think boldly about what they can do with software. Monsanto’s mission is to reimagine the agricultural economy so that farmers around in the world can grow more with less land, water, and energy. Netflix’s is to offer more content on more screens for less around money, no commercials, and no-hassle cancellations. Ridesharing service Lyft’s is to “to improve people’s lives with the world’s best transportation,” creating more green space and serving more people with fewer cars, fewer parking spaces, and far fewer travel hours.[2] The theme of these visions is clear: innovators are deploying software to do more and more with less and less until they can do everything with nothing, said Gurbaxani, paraphrasing Buckminster Fuller.
3. Invest in software talent
In 2000, Goldman Sachs had 600 equity traders. Today, it has two. They work alongside 200 engineers hired to support Goldman’s automated trading system with its complex algorithms and machine-learning capabilities.[3] Goldman has around 9,000 engineers and programmers, about a third of its workforce.[4] According to Gurbaxani, software engineers have a better chance of being hired at Goldman than investment bankers do.
JP Morgan has some 20,000 engineers. Even though it’s a bank, it needs help reviewing complex contracts, and so it has deployed machine learning software that can do in seconds what took lawyers 360,000 hours to do. That’s certainly more for less. Delta, Ford, Target, and Tesla have all been hiring coders and engineers because software is the new master of the universe.
4. Transform the culture
Many companies are still too hierarchical with incentives that discourage working across disciplines, cannibalizing business, and using technology “not invented here.” Digital innovators have adopted a hacker ethos, which rejects top-down autocratic organizations that strive for perfection and stifle innovation. Gurbaxani quoted David Clark’s presentation at a meeting of the Internet Engineering Task Force: “We reject: kings, presidents, and voting. We believe in: rough consensus and running code.”[5] In other words, if someone had a good enough solution, then the organization could go with it because, said Gurbaxani, “being first matters more, being perfect matters less.”
Rather than reinventing the wheel and patenting the result, companies are seek to building on prior art in such repositories as StackOverflow and Github, where NASA has uploaded its software for a SpaceX or Virgin Galactic to use. Apache, Linux, and Swift (for smartphones) are all open source, free platforms for any company in any industry.
5. Upgrade your infrastructure
The computer glitch that forced United Airlines to ground its domestic flights in January was United’s third software hiccup in eight months.[6] “The customer cost for this kind of failure is high,” said Gurbaxani. Trust is essential, and customers’ privacy, security, and peace of mind are sacrosanct. The functionality of a software platform can make or break a company’s reputation in nanoseconds, and companies must remain vigilant.
“Status quo is not an option,” said Gurbaxani. He quoted a recent report by The New York Times: “There are many once-mighty companies that believed their history of success would inevitably protect them from technological change, only to be done in by their complacency.”[7] The time is now for companies to invest in their own digital transformation, and codify their know-how in software. “Get in the ring and slug it out,” he said.