BankerVision

The real-world end of Moore’s

Moore's Law, and Shugarts Law, and a pile of other IT laws which suggest that you get more bang for your buck with each passing year do not account for the reality of large enterprise IT.

If you slavishly follow their dictates, what you'd expect is that the price of IT should tend towards nothing over time. There should be so much processor, network and disk capacity available that the optimal decision is to use the largest amount possible in any situation to minimise the other key input to any particular system: people.

But the economics of this break down in a large enterprise, and here is the reason.

Firstly, IT budgets are expected to contract, year on year. That's because, in theory, the cost of all the hardware and stuff comes down. Its also because we are supposedly getting more efficient. The mantra is "do more with less", and by hook or by crook, most IT organisations manage to do so.

In the meantime, of course, demand for IT resources is increasing. It is increasing at a very, very rapid rate. I know we are in a constant rush to provision more storage, network and processor to keep up with the demand, usually remaining just one step ahead. And a key driver of this demand is end-user computing. Transaction volumes aren't going up so much, but all those end users building little applications that move pictures and videos, OLAP Cubes and large Excel data sets certainly know how to consume resources.

The resource requirements are increasing more quickly than the IT Laws are providing discounts. Couple that with shrinking IT budgets, and what you have is increasing internal scarcity. The demand doesn't just evaporate, however.

The gap between the price to satisfy all this demand, and the discount provided by the IT Laws are a pair of open jaws that are getting wider. And in the past, we've used our IT budgets to subside things to the point where no one noticed. IT budget shrinkage is knocking that on the head, now.

This is going to lead to a pretty big price hike for large corporate IT pretty soon. What else would you expect? Unsatisfied pent up demand for resource coupled with scarcity of supply always leads to price increases.

I know some readers will be thinking that Software as Service and various other new models are the answer to this problem. They're not though. All they do is shift the ever-expanding resource requirement somewhere else. Instead of needing more capacity in disk and processor, now you need it in network.

But there probably is an answer, and its one that's been staring us in the face for decades. Use local resources. Make use of the capabilities that are already in the technology on the desk. Peer to peer at the edge is fantastically more efficient than centralisation of everything.

I think the time is coming when we'll have to accept the end of centralised IT. Bigger is not necessarily better, and this may be one case where scale efficiencies simply don't apply.

The money that killed the innovation programme

At the present time, I'm hearing lots about innovation programmes around the world which have been terminated (or are under severe threat).I suppose that's not surprising given the present conditions facing banks. If innovation is considered a luxury, then of course it makes sense to cut it back right now. Innovation is a luxury whenever it is not connected to the money in some way. You either make new money or take out cost, or, indeed, you are incidental in times of crisis.

But I've found quite a few innovation programmes which have connected themselves to the money – or at least are beginning to do so . They are usually very well funded, and potentially have very senior level leaders who are able to influence at all the right levels.

They are still getting cancelled, even though all the preconditions for success are there.

I have a theory about why, and am trying to find evidence to back it up.

If you consider an innovation programme as a disruptive innovation in its own right, you swiftly come to the nub of the matter. Disruptive innovations always start small, and grow over time. They also usually have microscopic returns compared to mainline business investments.

Now, what this means is that whenever large amounts of money are committed to an innovation programme, it is being compared with mainline business investment like for like. But such comparisons are not like for like by any stretch of the imagination.

My theory is that any innovation programme with too much money will be cancelled because it fails to deliver big enough returns quickly enough to justify its resources.

What I am looking for is examples – stories and cases – from anyone whose seen this effect in action. I'll be writing it up later for everyone to review. So please email me (or comment here) if you have anything that supports – or refutes – this thought.

 

A call to the analyst community

I've said before, here, that I often wonder if IT analysts are little more than glorified journalists.

They ring up all their current customers, then repackage these interviews as some kind of authoritative statement about the industry. This is particularly true in financial services, it seems. I don't even bother to read their reports anymore, even though it is my team and I that control the budgets for at least the IT firms.

Now, don't get me wrong, there are some good reports produced by these people. By the superstars, that is. Like any employer, analyst firms have their share of them. But also like any firm, they are the exception rather than the rule.

And here is my problem with analysts: if we are taking strategic advice from such firms, then they'd better have better people than us. Experts, not graduates who have worked their way up the analyst ranks without much experience doing whatever-it-is for real.

It always reminds me of the proverbial food critic. They can eat what the chef prepares and pass judgement, but don't put them in a kitchen if what you want is something edible. There is value in the opinion, of course, but the point is the food.

So much for the quality of the analysis you get.

Much more annoying, however, is the business models many firms adopt. They usually sell their services by number of seats, like a software licence. You have to pay an annual subscription for these seats, and they are associated with specific named individuals.

Apart from this being an administrative nightmare, you then have to make it clear that people named are allowed to read reports, but no one else is allowed to do so. As you'd imagine, that almost never works. People share stuff.

We've had calls from the major firm in the space, actually, telling us we're downloading too many reports. Apparently, they are concerned that we're sharing the information we're buying too widely. Such an excellent business model: put in artificial constraints to limit the value you have to us.

But the ultimate, most annoying thing of all with such firms is how their account teams try to grow their revenue.

They send their account managers in to visit with people who are not named seat holders, and start to sell them the benefits of having access to the research. Then, of course, we get a call from these individuals asking for access. It puts us in the invidious position of having to tell people that their needs are less important than those of others. We have a fixed budget for analyst research, not one that can flex upwards because it is convenient for the account manager.

So here is my call to the analyst community.

What is needed here is a new model. I'll accept that there is some value in analyst research, and that the reports written by the superstars have a value that counteracts the journalistic reporting that is mainly what's provided. We are happy to pay for great insight.

But we need to be able to use that insight broadly in our business. And we don't want named seats. It's too hard to make it work. We also don't want an "enterprise" licence, which amounts to buying a named seat for everyone.

To be honest, I don't have the answer, but would like to hear if anyone does. And here is my message to the top tier IT Analysts firms we currently use: your time with us is limited if you don't make it easy for us to get value from what we buy. There are firms out there who realise that the value of a firm is in how many people put their eyeballs on their data.

You need to catch up.

Update:  Duncan Chapple writes this response from the perspective of an analyst relations firm.

What would happen if...

Last night I was on a panel at the WeBank event at Nesta in London. It was a debate on the future of peer-to-peer lending and social finance. The panellists included Giles Andrews CEO of Zopa, and we had a lively debate, me playing the role of antagonist of course. I always seem to get cast in that role, as I was saying to a few people afterwards, the token banker with an innovation job who "doesn't get it".

I always laugh, of course. Being a bank innovator is quite a different thing to being one in a start-up, or even one in a well running company with some years of history such as Zopa. In exchange for our greater access to resources, we are also subject to far more significant constraints. We have to run what I call the "Can we get it up" test: an assessment of whether we have the political capital to actually make something happen or not. The more unusual and unprecedented something is, the more political capital we need.

In a start-up, by contrast, if you want to do something, you just do it.

Anyway, I was at this panel, and both the other P2P companies (the other was as yet un-launched Kubera Money) said something very interesting: they have cordial relationships with the regulators, and expected that to continue. In other words, they were expecting fairly light touch supervision.

Now, don't forget these are outfits running on fee income. They aren't going to have any fat in their operations, and so it is probably just as well they don't have the compliance load a fully supervised bank would have.

The regulator is also very, very busy, of course, particularly now.

But I can't help but wonder what would happen if one of the big four banks here in the UK rang up the FSA to tell them that they were entering peer to peer in a substantial way.

I simply cannot imagine that a light touch supervisory regime would be the result. Perhaps they'd go even further than the U.S has already gone on this topic.

Now this brings me back to the main point I raised on the panel. P2P is either disruptive to banks or it isn't. In order to be so, it needs to serve customers we can't, at a price lower than we can, or else be more convenient or have some other operational advantage which is unattainable for banks. Credit crunch aside, I don't really see how P2P has any of those things, frankly.

As Giles said yesterday at the panel, though, "we are absolutely going after share from the big banks". So these are not new customers going to P2P, then.

So rather than a disruptive, under the radar insinuation into the business which P2P might win, what we have here is a long drawn out competitive battle for share. That's a pity, in my view.

If they grow too big, banks will respond. The response will trigger a regulatory avalanche which banks are already set up to manage, but smaller P2P companies aren't.

And during all of this, they'll be engaged in a ruinous price war with bankers on fees and other charges. Costs going up, but revenue going down.

Not a pretty picture.

The cost of your first lost customer

Here (behind a paywall, I am afraid) is research that proves something innovation theorists have been saying for ages: the cost of losing one of the first customers to something new is much, much higher than the cost of losing one later.

This is a study that examines the adoption dynamics of internet banking. The result is extremely interesting. When you take word of mouth effects into account, the first customer defection is at least 75% more expensive than the last. An early-adopter who defects is worth more than $800. And a laggard (part of the last 16% who ever try something new), around about $210.

The theoretical underpinning of this is well understood. Those first customers are the ones who are typically opinion leaders. They are the ones that influence others to try whatever-it-is. Their views have a disproportionate effect on everyone else.

Presumably, if you believe this, you'd want to make sure your new product introductions are perfect before you'd ever let anyone try them in the wild.

With this in mind, then, I am interested that so many banks have decided to have their innovation functions create public "labs" websites, where they actively seek to bring customers on board with new things early. By letting them try out things they are working on, I assume, such bankers believe they create the impression they are much more innovative.

This is a concept copied from the Web 2.0 community (and, before that, from packaged software), where a select group of customers are allowed to "beta test" things. The idea is that a company can get the last defects out of its products and have an early taste test of consumer opinion.

The fact of the matter, however, is that the economics here are just plain wrong. If you test things with all these self-selecting early customers, the costs of a mistake make the whole thing far too expensive for any reasonable manager to contemplate.

With such economics, the only reasonable basis for having a "labs" site (or an open beta, as some organisations call it) is as a shadow launch vehicle for new things which are completely ready to go to prime time. A recruitment vehicle for early adopters.

With that in mind, I had a look at some of the "labs" sites I know of at banks. A few are playing with Twitter and other social media tools. One has a couple of trial calculators that do some interesting things. There's a money manager. And some interesting mobile banking demonstrations.

Now, these are not products. They are not fully formed new service initiatives. The institutions involved are playing.

Who would ever have thought it would be the innovators with the most expensive toys on the block?

Declining personal returns in social media

This year, I am going to try to stick to one of my New Year's resolutions: to post here every other day at least, and to respond to comments much more regularly that I have been. As someone who's been blogging for years, I know the basics as well as everyone else. If you participate in the conversation, you get much more out of the blogosphere than otherwise.

But this presents an interesting dilemma, because participation in social media conversations results in exponentially increasing demands on one's time. If I respond to every comment here, and many of the comment that refer to here on blogs elsewhere, I'll be spending a lot of time doing nothing but commenting. Then, of course, I want to comment on other's people's posts, and these are conversations I'll want to track as well, so I can continue to contribute.

I also write a private blog for my staff internally, and I do an update for a circular that goes out to all the people in our programme every week.

On top of that, there's the flow of private emails that arrive from each and every post I write, and though it might take me a week or two, I try to respond to all those as well. Forgive me, by the way if you've written to me and not had your response. Sometimes I have to declare email bankruptcy just to keep up.

This has lead me to consider whether there might be declining marginal returns on my time the more I participate in social media. Might it be the case that the more you do, the less you get out of it?

This is counter to what most commentators are saying about social media, of course. But most of their arguments seem to assume the point of social media is social media. In their world, time is a utopian free resource: it is a public good that is in infinite supply. They can afford to spend all their free time being on blogs and friendfeed and twitter and all the rest.

I doubt that is true for those people who don't "get" social media though. They, like me, are severely time constrained. Every task one undertakes has to be balanced against the opportunity cost of doing something else.

The opportunity cost of doing social media tends to rise the more I do. For example, I could do so much commenting on blogs that I am no longer doing what I am paid to do by my bank. That will result in me losing my job, of course, which is a very substantive price to pay for participation in social media.

On the other hand, the posts I write here and the comments I manage now are value additive to what I do. In fact, this blog has been one of the most rewarding things I've done. The problem is getting anyone else to quantify the value to my day job.

The basic issue is this: those of us engaged in this kind of activity in addition to our day jobs have faith that there is an economic benefit from doing so. That doesn't cut it when you have to go into your annual review and explain you've written 60 essays on a blog and written 1000 comments in 2008, because the relationship between output and value is inherently unclear.

The fact of the matter is that if it were possible to ascribe such an economic value to this kind of work, bankers the world over would have teams and teams of us doing social media full time. Because then, truly, there would not be declining marginal returns on the effort.

I doubt there is much chance of getting to a reasonable resolution to the problem. In 2009 we'll all still be living on faith that doing this adds real – as in cash – value to our enterprises. And we'll all still be trying to justify our faith to our management.

But I don't want you to think I am complaining. For banks, social media is still quite the bleeding edge. It's very exciting, as long as the edge doesn't turn into a knife.

The war for talent has changed

The argument that the new competitive battleground is hiring the best people has been going on for years. In the past, though, it was thought that best in class people were what was wanted, no matter what area of the business was hiring.

Things are different now, though. The war for talent is still going strong, but the battlefield has changed significantly.

The most obvious place this is occurring is in the technology space.

Pure technology skills are going cheap. Ask for an architect and you get plenty of applications. A database administrator or a coder, and you get lots more. Contractors are far less desirable than permanent staff, simply because the rates are higher. And in any case, temporary staff can be had much more easily when one goes offshore.

These are people who have chosen to specialise in a particular technology set because they thought it sensible to be the best in class at the one thing they do. They thought this would be a sensible career move, surely one that would guarantee their futures. They assumed that any employer would jump at the chance to have them given their wealth of experience and obvious capability.

They were wrong. The battlefield changed. Technical sills – no matter how good –are completely commoditised.

The new war for talent is for people who know how to grow business value and that has little to do with technology. The people you can't easily get are the ones that can spot opportunities, work out how to exploit them, and then, as a bonus, put the gadgets together to make it happen. Theirs is a general knowledge of lots of things, rather than the laser-sharp focus on the specific.

But my comments are equally applicable to the business side as well. The product manager who knows how to twiddle terms and conditions or change interest rates is all very well, but ask them to create a disruptive new product that takes out the competition and you'll likely grow old waiting for a result.

The era of the specialist is over. Specialists you can get by picking up the phone. They're the ones that have all been let go, by the way, as institutions have rationalised their operations, contributing to their own commoditisation.

The generalist, on the other hand, has a very bright future. The fact that so few are available means they'll always command decent salaries. The people who are equally at home on the technology or business side, and who don't really see all that much difference between the two are a rare breed indeed.

In the past, the list of skills on the CV was the most important thing. Now, though, its much more about career achievements: those personal – and unique – contributions individuals have made to their employers' businesses. The ones that make you wonder where your organisation would have been if you'd had the services of that person instead of the competitor down the road.

This new war for talent is as vicious as it ever was. But the battleground is smaller, and the stakes much, much higher.

Forgive my absence

Happy New Year, dear readers.

Its been a few weeks since I've posted here, so I wanted to let you know I am still around, and still blogging. But I won't be posting in earnest until Monday next week. I'm finalising the manuscript for Futureproofing, and it goes to the publishers some time on Friday. Apparently, all this publisher stuff now has to happen (the Production Process, they call it) and the book will be officially available in the first week of June.

It is a considerable relief that it's all pretty much done.

Anyway, till Monday, I hope you are all enjoying 2009. It is certainly shaping up to be as interesting as 2008, that's for sure.