BankerVision

Computerisation leads to higher costs

At least in healthcare. Look at this study, which found that although there can be marginal improvements in service quality in some cases, increasing computerisation often results in higher costs.

That is an interesting result, and one that I’ve wondered about for big system processes myself. Almost two years ago I wrote on this subject, suggesting that for some big systems, paper could be a good alternative to large systems development.

This study is evidence that computerisation isn’t always the best answer.

This, of course, leads to questions about the characteristics of systems that should not be computerised. It is an important question, because technologists, left to their own devices, will always build systems, whether it makes sense or not to do so.

Here are the times I think it doesn’t make sense to build a big system:

1. When the prospective process is very low scale, in terms of throughput. The economics of big system development don’t work very well when you don’t have volume. Upfront costs are massive, and you rarely get payback in short time periods. Sometimes, the process has changed or ended before the system even arrives. End user computing has a chance of changing that, but don’t let big IT anywhere near something little if you want an economic result.

2. When the prospective process is at scale, but is extremely complicated. The economics of big IT don’t work for very complicated. You have to have too many people trying understand the system, then too many coders trying to make it work, then too many users trying to change things because the analysts didn’t understand the system correctly in the first place. The costs mount up, and sooner or later your business case that authorised the development in the first place collapses.

This latter case is the one that I think is exemplified by the healthcare study. The more complicated a system, the more expensive it is to build, maintain and operate. That’s if you can get it to work at all, of course. For healthcare, most systems are more expensive than the paper they replace.

So big IT can do simple processes if they are at volume, but not extremely complex systems regardless of scale.

There is an answer of course, and that is that you have to simplify complex processes before you start doing the computer bit. Its obvious, really. But I do wonder how many project failures could have been avoided if some Lean practices were applied to things before the technologists were let in.

We’re lucky that here at the Department that we have a big Lean initiative that does just this. We had a  Lean initiative at Lloyds Banking Group as well, though it was on a much smaller scale.

The trick is making sure that the Lean Machine gets to something before the IT Machine has a go at it. That’s a feat that’s way more complicated that spooling up a Lean or IT project on its own.

You can imagine the response if a technologist were to suggest it. “What? You want to change my business before you’ll computerise it for me? You think you know enough about it to change it? Not hardly”.

Unfortunately, in most organisation, IT hasn’t gained the right to tell business people that they might actually know something about their businesses. The irony is that after you’ve built a few systems that computerise a particular process, you almost certainly do know more about it than the business owners.

I see this changing rapidly, by the way, but will leave my thoughts on the evaporation of the business/IT divide for another post.

The task worker divide

I’m sitting here in London Heathrow airport, and scrolling through all last night’s Tweets on my Twitter client. I notice that, in addition to the Tweets I put up from #sdthinks, where I was speaking last night, there are lots of people I follow who were also at conferences doing live updates.

There are lots of people who are at airports in work time and clearly do their work mobile, whilst keeping in touch with everyone else.

They are lots who are arguing about Enterprise Architecture, or other professional stuff, in real-time.

There are lots who, in time-zones opposite mine, are working out whether they should, or should not, go out for Friday night cocktails with colleagues, or go home to families.

There are none at all who are process workers, or, the new term of today, task workers.

This makes me wonder: am I particularly discriminatory in who is in my list of people I follow? Or is something else at play here?

I then log into my newsreader, latch onto a presentation of technology trends, and come across the quote “In the next 10 years, everyone except task workers will be equipped with a notebook, which they will probably provide for themselves. Task workers will have fixed location PCs, stripped down to be optimised for the task at hand”.

It makes me realise something: practically everything we do today in tech is optimised for the knowledge worker. Task workers are getting shut out.

In the Department, we worry about Digital Inclusion a lot. There are many people who don’t have access to computers and the internet, so providing services to them online is difficult. The Digital Divide can be very real.

But what about the new divide? On the one hand, the whole tech industry is occupying itself in making knowledge workers more productive, more able to promote themselves, and more able to access the information and data that will make them successful. The best of them are self publishing constantly. They’re on twitter, and they have personal brands. Their future is their network.

On the other, though, there are the task workers. For task workers the normal approach is to take radical steps to make sure they can’t participate in the conversation by turning off their tools at work. Monitor their working patterns to get the maximum number of work units out of them in a given time, making sure the cost to serve are as low as possible! Deny them every opportunity to be digitally engaged, to build their own brands during the working week.

If they want to do that, they can do it on their own time, managers reason. Of course, that’s all very well when most of the influentials they might choose to connect with are at home or in bed.

Here is the problem I see. By making sure that task workers don’t have the same access to resources as knowledge workers, we ensure that they will stay task workers forever. It is a new class system that is only marginally more acceptable than the one we already worry about with the Digital Divide.

I mean, everyone knows that the best jobs go to those that know how to network into them, or have sufficient profiles they get noticed independently of their network.

The thing is, I’m not even sure how you would go about fixing this. Its not enough to say that our task workers need better training, when they aren’t allowed the the liberty to grow and flourish because of the press of work. And, on the other hand, I can’t see a solution which lets the cost of service rise all that dramatically either because of “declining productivity”.

I think there is indeed a new digital divide, and it is not one of the have-technology versus the have-nots. Its worse than that. Its the divide about those who are allowed to use it and those who aren’t.

Evidence of the chip

A week or so ago, I wrote about the “chip” that some Microsoft employees seem to have implanted in their brains.

A couple of people contacted me to tell me the days of the “chip” were long gone.

Apparently that’s not the case, however. And here is the evidence.

Profile Microsoft evangelist Don Dodge was laid off, recently, in the latest round of cuts. As he says on his blog:

Microsoft announced more layoffs today, and I was one of them. This was a total surprise to me, and management offered no explanation. This is pretty standard procedure, mostly for legal reasons, but none the less left me with a cold feeling...but only for a minute or two.

Nice of him to be so level headed about the fact that he was just fired. Obviously, the chip is still inserted tight at this point.

A few days later, he is hired to work as an evangelist for Google. Seconds later, the chip has fallen out, and you get these remarks on his blog:"

Last week started a new personal journey for me. One without Microsoft. So, why not move forward without Microsoft technology, and try the new alternatives? Old habits die hard, but these were actually pretty easy to break…

I made the switch to Gmail last week and it has been awesome! Outlook has been an old familiar friend for years, but it was getting kind of tired…

Hey, isn’t this November of 2009? Why Word 2007? One of the nice things about Google Docs, and all web based products, is that they can be updated continuously with no interruption to you…

OK, now that I am no longer with Microsoft, I can admit I had iPhone envy. My Windows Mobile “Smartphone” didn’t measure up….

Thanks Microsoft Internet Explorer, but I’m moving to Google Chrome. Chrome starts faster, loads pages faster, and is easier to use…

Fake Steve Jobs, one of my favourite blogs on the internet, summarised the whole thing very nicely I thought, in a post where he calls Don a Borgocrat (Fake Steve refers to everything Microsoft as the Borg), and compares previous posts Don has made with his new position on products for the company.

If this isn’t evidence that the “chip” still exists, I don’t know what is.

A window into Microsoft

One of the most interesting things to read on the web these days is the comment stream on a blog from Microsoft insider Mini-Microsoft.

This is a blog based on the premise that Microsoft has grown too big, having hired too many people that don’t do very much except “play Microsoft”. Mini asserts this as the reason that many feel MS is unable to lead the market any more.

Naturally, one takes this insiders perspective with a grain of salt, and even more salt is needed when reading the comment stream: as you’d expect, it attracts the disaffected in the company, those with an axe to grind.

But I’ve noticed something so interesting in the years I’ve been reading it: there are far less people showing up with the “drink the cool-aid” mentality than before. I used to laugh, before, when MS people showed up that had so clearly been “chipped” by Redmond. Even when I worked there, it was a standing joke that we all had to go to Redmond to get our little chips inserted that would make us immune to any criticism of the company or its products.

I think the chip has stopped working.

In fact, when you read the comment stream, it is hard to stop yourself thinking that MS is imploding from within. Stories of terrible managers who are destroying the careers of their people. Product groups that are in permanent spin because they’re so lacking in vision. Management arrogance that fails to accept that the stuff going out the door isn’t really that good.

Most of all, the comment stream is a cry from the front line to save the company which so many have invested many years in.

Anyway, as I say, you have to read it with a grain or two of salt.

But if there’s one thing that I’ve always noticed about this comment stream over the years, it is an excellent barometer of Microsoft’s capability to execute, and it is counter cyclical to their success. Prior to the Vista bomb, lots of people with chips were around. Now, there are hardly any, so maybe it is reasonable to conclude that Windows 7 will be OK.

Prior to the release of iPhone, everyone in Windows Mobile had a chip. Now all you hear are stories in the comment stream of people who are switching to iPhone internally. Even though the new version of Windows Mobile is apparently terrible, perhaps it is a sign that the version coming next year will actually be decent.

Same with Live Search, which is now Bing. Mind you, there are chipped people starting to show up about that, so perhaps Bing is going downhill.

Pretty big lack of chip on the subject of Azure, the new Microsoft cloud service, so the first release of that might be OK. Or maybe noone knows enough about to have an opinion.

Everyone seems pretty chipped out on Office 10, so suspect that will be terrible.

Anyway, read the comment stream yourself and draw your own conclusion. Mine is that internally, there’s quite a bit of trouble at MS at the moment.

Everything for nothing part 2

I seemed to have caused some heat a few days ago when I suggested the future of corporate IT was “everything for nothing”. My point was that commoditisation of technology inputs would reduce their price to a point where they would, effectively, be “too cheap to meter”.

Since then, many people have written to me privately saying they “don’t get” the argument I’m making, though most have been polite enough to stop short of telling me I’m wrong.

So I thought I’d better explain myself a bit better, perhaps with the aid of some of the public comments on this blog.

Let me start with the basic refutation of free from Anon, who reduces the argument to economics:

…until food, clothing and shelter are free how people who make the free stuff for others to consume can make a living. Nothing is free to make for others to use. The Internet is not 100% free as someone needs to be paid to keep it up and running and they use this payment to buy food, clothing and shelter.

OK, so I admit at this point some dramatic licence when describing the price as “nothing”. Quite clearly, someone is going to pay for stuff, particularly the stuff that uses atoms. Perhaps I’d have been better off using the “too cheap to meter” phrase instead.

Now this is a world we’re already in. I buy an internet connection today, and pay about ten pounds a month. Every year or two, the width of my pipe has doubled without much in the way of a price increase. The trend is obvious, and is the same for the computers I’m using, and everything else in my life that depends on IT. My bandwidth, anyway, is too cheap to meter. So is all the rest of the technology around me.

I mean, there is a CPU in my light switch now. It knows how to do the dimming and switch-on things when I point a remote at it. Those are cycles that are too cheap to meter.

But Thomas Barker, regular commenter here says this:

Focusing on CPU cycles is a red herring. They aren't the bottle-neck in business systems. Most systems spend all their time on I/O, so if anything, you'd expect massive consolidation *within* datacentres to economise on disk activity and storage. Not processing being dynamically relocated across continents. The bandwidth to push the data around is more expensive. CPUs are cheap.

Now, this may be true today. But the inexorable price decline in bandwidth on public networks is irrefutable. Its easy to see when bandwidth will be cheaper than cycles.

Anyway, Thomas has missed the point, I think, when it comes to cycles. Its not the chips which are going to be expensive, its the power. There is going to be an energy shock sooner or later, just like the oil shock on 1973. That had the result of hugely inflating the price of crude, with the result that everyone suddenly had to be concerned about fuel efficiency.

It is not hard to imagine a carbon tax on datacentres in the next decade. What would that do to the price of your processing?

Most countries are inefficient producers of cycles. When you can’t get enough power into your datacentre no matter what you do, you’re going to be forced into running your workloads virtually elsewhere. I’ll not make any predictions about storage, except to say that if you have virtual workloads moving around, I’d expect the storage to move with it. Thomas correctly identifies that having the data with the workload is usually a good thing.

But on to the desktop. Internally, I got an email from someone that reminded me that “the cost of a desktop isn’t the hardware, its the support to make it all go”. I paraphrase, but the point, really, was that bodies have to sit around to fix things that stop working.

The fact of that matter, though, is that there is a growing population of people in enterprises who are able to fix things themselves, and who, actually, have better skills at doing so than the corporate helpdesk. When you let them get on with managing their own tools, they’ll be much more productive that that big lumbering corporate helpdesk would have let them be.

That’s not everyone, today. But it is a growing body of people, and sooner or later, its going to be a majority.

I want to close with another point from Thomas’s comment:

As for people hacking their own business programs, it can help, it is how most useful things start, but scaling, or integrating, stuff like that... eeek!

I know you all know my argument here is going to be obvious: Open Source does all of these things perfectly well. Software that evolves from the bottom up works, even in a business context. Having your end users do it rather than coders is a question of waiting for the right tools, not any lack of motivation or capability.

I cannot imagine that end-user computing tools a decade from now won’t routinely be capable of doing big systems.

I have one final point to make. Most of the communication I got on this post came from IT professionals, all of whom said that none of this could happen for various reasons. The discussion I got from non-IT colleagues, though, was along the lines of “but isn’t this obvious?”

What conclusions would you draw from that? Here are mine: big IT will be over in the next decade or so, and all those professionals who manage the commodity inputs had better get themselves up the foodchain quick smart. Those that fail to recognise that they’re not that special any more will be out.

And if you sell the commodity inputs, be prepared for your nice premiums to crash. Our needs aren’t so special that you can charge us over the odds. You too, will be out unless you can dream up something that makes you special again.

Everything for nothing

I was once in Egypt, and got harangued by all these street vendors selling stuff. “Everything for nothing!” one cried, in an attempt to get me to approach his stall. Highly humorous, and I laughed with the vendor and bought something I-don’t-even-know-what-it-is just because I liked his approach

“Everything for nothing” is clearly a joke in the real world of atoms, but it isn’t in the IT world of bits.  Sooner or later, all the commodity technology stuff we use is going to be free, or so nearly so it won’t matter.

The question going through my brain now, though, is whether the enterprise IT folk really believe it.

Most people I know believe their organisations are so special, so unique, that they can’t rely on free stuff. No, they have to have proprietary systems, dedicated networks, and piles and piles of hardware devoted to their super-special workloads.

But in the next decade or so, I can’t see why you would build a private corporate network at all. The internet will be way cheaper and more reliable as well as ubiquitous. Why not just use that instead? Oh, I know all the network specialists will be going on right now about latency blah blah, reliability more blah, and oh yes, security big blah blah blah.

These are all problems which future technology generations will resolve. Its impossible to imagine, for example, that applications won’t protect their own data and users robustly rather than relying on the network to do it for them. They’ll need to do so, because they won’t be able to predict what network they’ll be running on.

Why do I think that? Because they’ll be running in virtualised systems, on hardware that won’t belong to anyone that’s vetted them in advance. I’m seeing that as pretty much inevitable, really. The thing is, datacentres are such hungry beasts, gobbling up all that power and wasting most of it to do cooling. I think it will take one small island nation to drown - which could happen in the next decade, I believe - before real economic measures will be taken to expose the costs of all these cycles in countries not well suited to producing cycles.

That’s every country, by the way, that doesn’t have renewable energy supplying most of its needs and lacking environments where nature can cool the servers rather than aircon.

Countries well suited to cycle production will export them, the price will fluctuate with supply and demand, and large organisations will secure compute capacity on a futures exchange to guarantee their future costs.  As more countries become net exporters of cycles, and they get better at producing those cycles for less money, the cost of compute for corporations will tend towards nothing.

So organisations will be out of the network business, and they’ll be out of the datacentre business, and this will happen whether their IT folk like it or not. Its hard to justify any other  position when the competition is free and the CIO is expected to produce year on year cost reductions.

By the way, if that continues - the cost reductions I mean - the CIO will be needing to get to a price of nothing way sooner than a decade.

But I digress, because there are other parts of the IT estate that are certainly not free right now. What about all those end user devices that employees have to have, for example?

Well, consumerisation is well and truly king these days, and those employees will be bringing their own devices and using them. Walk around your staff and count how many people have their own laptops at work besides the one the IT folk have issued. You’ll be surprised at the percentage.What most people have at home is better than what they have at work.

If there is a way to use their at home-better stuff at work, employees will find it. Whether or not it is sanctioned.

Organisations are going to get this soon, and make it easier for this to happen. Then we’ll be seeing allowances being paid to employees to help them get the technology they want, and finally, employees will just be expected to show up with their own stuff if they want to work at all.

Tradesmen and women have been in this world for some time. They bring their own tools. Knowledge workers are about to be doing the same.

Anyway, this consumerisation is already happening in some organisations. And for those where it isn’t, it is happening underground, From a corporate perspective then, the desktop estate is going to be practically free.

What’s left?

Oh yes development. The biggest cost of any IT project. The people stuff, the code writing and so forth. Well, clearly the costs of that are in decline as well, driven mainly by the ease one can now contract labour offshore. That’s not free though.

Free development comes from your employees at the edge of organisations, however. Just as they’ll bring their own tools to work to get the job done, they’ll make new tools to help themselves get more productive. They’ll share their tools, and sooner or later you have pretty big systems that do real work.

Now, these systems may evolved without a substantive design, but if they do the job, does it really matter? I can assure you it won’t matter to the people that are doing the real work, only to the IT people whose jobs evolving systems displaces.

What’s left? Oh. Nothing.

Which brings me back to my initial question. If all this comes to pass - and it seems to me there’s every economic indication that it will - the vision needs to be sketched out now.

Planning to do more of the same for the next decade isn’t going to cut it, because that stuff is going to be over. Technological objections won’t fly, because, considering the historical pace of improvement, can anyone really think progress is going to stop in the next 10 years?

The problem here is not one of technology. It is of planners that won’t plan for anything they can’t see and touch right now. My argument is that what we need is a bit of faith in IT. Faith which is completely justified, given the track record, by the way.

We also need some acceptance of the fact that if your solution costs more than nothing, your customers will find a solution that does cost nothing. The next decade will truly bring “everything for nothing”, but not unless we get cracking now.

Or, more particularly, not unless the IT folk get cracking now. If they fail to do so, the only thing that will be free is the headcount they used to occupy before free displaced them.

Corporate bloggers are boring (especially new ones)

Why are so many business and corporate blogs so boring?

I started to wonder this the other day when I was trying to clear out my reader. I looked at the list of feeds I get, and started to examine my reading behaviour. There are blogs I immediately select whenever there is a new post available. And there are ones where I let the posts build up, until, in the end, I feel duty bound to read and clear them.

It is the blogs in this latter category, I noticed, which are boring.

So when I started to look more closely at this, I noticed something. Almost all are business or corporate blogs, and almost all are relatively new writers. And, boringly, they’re all comprised of statements of facts easily deducible either from the writings of others, or the corporate line their organisations are taking.

The common characteristic of boring blogs is - for me - that they don’t give you any insight into the mind of the author. They’re always about the minds of others.

New bloggers, apparently, fail to get that the purpose of blogging is not to demonstrate what you know - since all knowledge is highly commoditised these days anyway - but to show others what you think.

What you think is unique, and valuable. What you know is not. There are, anyway, very few experts around who know things that noone else knows, and of course, the minute they share whatever-it-is, its commodity.

Real experts, in my view, have interesting blogs when they create new thoughts. The reason they are experts is they take existing knowledge and ratchet it up a notch.

But most people aren’t interesting experts, and therefore must rely on the quality of their thinking about things already known.

I was put in mind of this the other day when I heard a story (through backchannels) that some people in the architecture profession here in the Department were horrified that I was joining because of this piece I wrote a few months ago. You see, part of my directorate is an architecture team, and the question everyone was asking was “Does he get architecture? Look what he thinks of architects!”

Of course, many architects I know are very savvy people indeed, and that particular post was deliberately aimed at architects and their cronies in various banks around town. I was letting them know what my opinion was. A tongue in cheek approach, perhaps, but I think, interesting reading.

Now, when I read most new bloggers, you’d never get a post like this. They are still trapped in the idea that blogging is about what you know, not what you think. They make statements of fact you could just as easily have Googled to get. Or else they reinterpret authorised messages from their organisations, perhaps with a little personal spin.

Or, my favourite, they have been told by their comms peope they need to do more communication, so they issue wonderfully crafted pieces which have quite clearly been written by someone else.

As I said, boring.

So here’s my challenge to all new bloggers out there: give us your mind. Share your thought processes, and your unique perspective of things that are happening. Tell us the way you see things, not the way things are.

And don’t tell us things we already know or can find out for ourselves. You’ll be interesting if you stimulate and challenge. But not if you are a dusty encyclopedia about things we don’t really care about all that much.

End user computing

If you give a large enough end-user community a tool, sooner or later, it is going to get used. Even if you don’t tell them you’ve given it to them.

In so many large organisations, this has resulted in a very large number – thousands upon thousands in some cases – of specialised little applications that have been built by users for themselves. They might not be very complicated, or do all that much, but they make the job easier. The best of them get shared around, often spreading virally.

The big IT reaction to this, often, is that all this “unauthorised” development is going on which must be contained, controlled, and centralised. Big IT, you see, thinks any system not under its control must be inherently risky. They worry about the potential risks to data, to security, and to the integrity of their business processes. They see end user computing as a problem that must be managed into elimination.

I have a different view. I see it as a huge opportunity. All these employees working around the clock building free IT systems to do their jobs better. Yes, they may not be as robust as the massive IT systems more normally employed, but the fact is they are often good enough. End User Computing, in other words, shifts the burden of systematisation away from the centre and out to the edge where it belongs.

Moving design and implementation tasks away from the centre to the edge is something I’ve talked about before. This is what you do whenever you employ crowds of people and hope you get emergent behaviour.

Crowds have been shown to produce very big, important outcomes without much in the way of centralised control. Linux is a great example. So are the various BarCamp type conferences that have been going on around the world. T-Shirt designs. Encyclopaedias.

Distributing work to the edge and waiting for big outcomes to emerge works. And that’s the real reason to do end-user-computing. It is the opportunity to do harness the power of distributed design and implementation to do far more than you could from the centre.

My observation is that a particular piece of functionality in an EUC environment is quite like social media. It is either popular, in which case it will be used by greater and greater numbers of people, or it is not, in which case it dies.

Now, you may initially get 10 different ways to create a parking space booking tool, but sooner or later, one will emerge which is better than all the others. It swiftly becomes the “one true way” to do parking booking and all the others get dropped by their authors as their audiences dissolve. The best tool “emerges” by itself without anything much in the way of design, other than that dictated by satisfying the greatest number of users.

That’s quite different to the dictates of big IT,which does development at the centre, of course. In that case, what you’re getting is a system that satisfies the needs of system owners, which may be important, but don’t represent  the whole picture. Especially if those system owners are remote from the front line of the business problem they are solving, which is often the case.

End user computing is a big strategic play, actually. It may not be ready for big system prime time right now, but the writing is on the wall. Sooner or later, I believe, all major systems development will be distributed to the edge and will emerge without much in the way of centralised design. People will work with people to build tools to make their jobs easier, and in so doing, will create a framework that helps everyone else.

In the meantime, those entrusted with managing Big IT have a challenge on their hands, because EUC is actually a disruptive innovation. It enables individuals to build systems which are too small for Big IT to bother about initially, which quickly become big enough to be threatening to Big IT the more they are used. The natural reaction – completely understandable - is to try to kill them off. Doing anything truly new always has risks and consequences, and IT people are trained early to take as few as possible.

The big challenge here is to find those IT managers who can read the writing on the wall, and nurture the nascent EUC capability in their organisations. The ones that can see the advantage, and make a measured judgement on the actual level of risk. The ones, actually, that will support emergence as the key principal that makes their IT organisations more, rather than less valuable to their business colleagues.

They will not have an easy time of it though. Big shifts in the dynamics of the ways things are done are never comfortable.

But, as in so many other fields that have already been through such technology driven change, there will be winners and losers. The winners are those invariably who spot the trend and get on the bandwagon early. Even if getting on it initially is painful and results in a few cuts and bruises.

Followup: Zopa isn’t disruptive

My last post has caused some controversy, and an especially vehement reply from Chris Skinner. I suggest you read his post, actually, before you read this one.

Now, the basic premise of my argument was this: Zopa has the potential to be a disruptive player, but isn't because it is behaving exactly like a bank. It is going after exactly the same customers as banks, using the same means of working out whether they are credit worthy or not, and then pricing loans in pretty much the same way a bank would do. Actually, Zopa loans are often more expensive than bank loans, because they have to make deposits attractive to people with money to lend compared to more traditional investment options.

Let me start by clarifying what I mean when I use that charged word "disruption". It is a word that has become much overused and much misunderstood, in my view. I use the Claytonesque definition which is this (thanks to Wikipedia):

disruptive innovation is a term used in business and technology literature to describe innovations that improves a product or service in ways that the market does not expect, typically by being lower priced or designed for a different set of consumers.

Disruptive innovations can be broadly classified into low-end and new-market disruptive innovations. A new-market disruptive innovation is often aimed at non-consumption (i.e., consumers who would not have used the products already on the market), whereas a lower-end disruptive innovation is aimed at mainstream customers for whom price is more important than quality.

Using this definition, Zopa is not disruptive on either count. They are targeting existing customers of banks who want a loan, firstly. To be a new market disruption, they would have to go after customers who wouldn't consider a traditional bank product, or who would not ordinarily be able to get one. And their loan pricing is certainly not that different from banks, and, indeed, cannot be so given they have to attract depositors from banking products to fund their loans.

Ergo, not disruptive. Note that I don't say cannot be disruptive. Only that they aren't right now.

Chris' chief argument against this is:

…most of these new businesses are based upon a model of social connection first, with finance second. This, to my mind, is the same as First Direct and PayPal, both of which are sustainable. First Direct was built upon a model of being a bank without branches built for the telephone channel. They were targeting the same customers as traditional banks but using a new channel for reach.

Chris introduces a new term here: sustainable. By which he means, I think, that these are businesses which have a future beyond the immediate short term. Now, I have to be clear, I have never once said that Zopa wasn't sustainable. I do believe it has a future, and in fact, I believe most of the new technologically driven banking things that are happening have a future.

What Zopa has, however, is a very thin line to walk. It can grow its business to a certain point, after which it will become material to the business of banks. Competitive pressure will force banks to respond, and that response will be on price. With the ability to cross-subsidise products, they will be able to compete on price far longer than the Zopa monoline will be able to do.

The penultimate point of my argument was that Zopa must know this, and therefore their strategy, in going head-to-head with banks, must be to grow to a certain size, and then no further. This, I admit is provocative, and I know no one really expects that Zopa has this in their brains. Actually, what I'm saying here is that Zopa's present strategy is focussed on the short term, and fails the more successful they get.

Chris then points out that Zopa passed the £50 million loans milestone, and that 40% of that has been this year alone. He suggests that this implies that Zopa is "taking off", and that the pace of growth is "quite remarkable".

It is amazing to me that everyone thinks this a remarkable performance when the big banks are turning away customers. Wouldn't you expect decent growth when incumbents stop supplying product? Actually, why isn't Zopa's performance hundreds of percent up from last year? Considering the pent up demand for lending, there surely must be some reason why everyone isn't flocking to Zopa. Could it be – wait for it – that the Zopa deal isn't all that different from a bank deal? If you can't get a loan from a bank, you can't get one from Zopa either.

Anyway, Chris then goes on to introduce another innovation-technical term: critical mass. That's the time, by the way, that a new idea becomes well enough adopted that you don't have to do anything to sustain further adoption. Usually, the evidence is that you get a period of exponential growth in usage, which quickly peaks somewhere short of 100% penetration over a period of years. Because the rate of change continues to accelerate, the number of years until critical mass occurs has tended to reduce.

As an average across categories, critical mass usually occurs when somewhere between 2.5% and 16% of a particular target market have adopted an innovation. Now lets examine again how ludicrous Chris's statements about critical mass are in the light of what Zopa would need to do in order to achieve it, thereby having a chance of damaging the banks in a way that could not be countered simply by competing on price.

Using Bank of England data, I compute that consumer credit excluding credit cards from May 2008 – May 2009 was about £2.5 Billion. Let's take the easiest case for critical mass first, where Zopa achieves just 2.5% of that, or in other words, writes £62.5 million pounds of loans in the last year. Their actual achievement is 80% of that in their whole lifetime. Some time to go before "critical mass" is reached, I think. But Chris hypothesises that Zopa could achieve that in two years, by 2011. The fact is, they haven't, even when being in the centre of a perfect storm for the incumbents making their business the most viable it could ever hope to be.

Now finally, let me finish off this post by clarifying one last thing. No group of banks is going to band together to "kill off" Zopa. But competitively, they will respond, and they'll make the battleground price if they start to lose significant share. This will be an automatic reaction and part of business as usual. Zopa cannot compete on price, because it is a monoline, firstly, and doesn't control the price of the capital it lends to the same degree that a bank does secondly. Therefore, if Zopa is forced into a price war on rates, it will lose.

Chris argues that it can win a price war because it has "razor thin margins". That's a stupid argument because it assumes that Zopa makes money through interest income, which it doesn't. It is a fee based business. Consumers care about fees, but firstly they buy on the basis of the interest rate. Zopa has control of fees, whereas banks have control of fees and the interest rates they charge.

Chris makes a few final parting shots at me by suggesting I am a luddite banker, and uses my previous suggestion that "twitter is a stunt for banks", whilst pointing out that I have adopted it personally as evidence that I have to be shown the wood for the trees before I'll support anything. I haven't changed my position on Twitter, by the way.

But I do have this to say, Chris. For someone who is retained regularly as an expert commentator on our industry your failure to see beyond banking-techno-gadgetry to reality is surprising to me. In fact, as you say, it is evidence that "Zopa Zealots and Smartypig Saints caught up in the church of the Internet" are alive and well.

Update: Chris corrects my maths, and I've changed my post to correct the error. But the change in the numbers doesn't have any effect on the argument, in my view.

Zopa’s strategy is to be immaterial to banks

Over at the Zopa blog, Martin says the following:

Could Zopa become the first real competitive pressure banks feel to put their customers more at the centre of what they do? I think so. And that would be good for all of us – even ultimately the banks themselves. Imagine a world in which people liked their bank…

But when I have suggested this to one or two bankers in charge of strategy for a couple of the big banks, they laugh – out loud.

They are amused because in their eyes, peer-to-peer finance is so small, they think it doesn't even warrant thinking about. When I made the point that P2P finance is growing fast and that every new phenomena had to start somewhere (iPods etc) there is a chilling response. In hushed, conspiratorial tones they say, "If Zopa ever gets big enough to matter, we will just undercut it on price for as long as it takes to kill it off, then get back to normal. Simple."

I don't question his statements here, and neither do I question the fact that some strategy people in banks may have made the remarks they're supposed to have made. Indeed, I suspect that the ordinary forces of competition would cause banks to behave in just the way described: the same way they do when anyone attempts to take share. Banking is a commodity business, and the chief battleground is price.

I am not trying to be arrogant here, but the simple fact is this: If Zopa were to have a material effect on bank lending, and its competitive differentiation is price, it will not win. It does not have pockets deep enough to win a price war with a major bank, let along the whole market. This much is simple market forces at play. The only reason this isn't happening now is that, as Martin says, Zopa is not having a material effect on the market at present.

But this, of course, reveals the long term flaw in Zopa strategy: entering an unwinnable battle which brings defeat just at the moment of success.

I have said for some time that Zopa needs to be lending where banks cannot compete in order to be successful. They need to be lending to niches where traditional banking operations prevent bankers from going. Now obviously that includes less prime customers, but really, it is any niche in which the social lending model provides an insight into riskiness that banks can't get themselves. But Zopa rely on credit scoring, just the same as banks do.

Zopa, if it is to be disruptive, needs to be creating lending to new customer segments either underserved or not served by traditional banks. From that bastion, it would have the opportunity to expand its product into more traditional lending and there would be very little banks could do about it. Bankers wouldn't have the infrastructures or the cost bases to compete in the Zopa niche, but Zopa would be able to use its infrastructures and cost base to compete in the banks mainline business.

This is the classic disruptive strategy that PayPal, iPod, and all those other things that people hold out as examples of new entrants upsetting existing ones have used.

However insensitive bank strategists might be about the prospects of a Zopa-Big Bank price war, they are probably calling it correctly. A material impact to mainline lending will be vigorously defended.

But perhaps the Zopa strategy isn't to be material? Maybe they know all the above, and have determined themselves that they'll get big enough to generate decent returns for themselves, but not so big they actually have an impact on the market?

If so, it would be a pity. I return to Martin's first paragraph, because quite clearly, none of the good he mentions will come to pass unless non-traditional lenders actually do become material to big banks.

Update: Chris Skinner posts a relatively scathing attack on this post in which he remarks variously that I am a tooth puller, a luddite, and decended from criminal transportees. It is humouros reading, and I suggest you read it in full. I intend to respond to Chris's substantive points tomorrow.