The solution to this incrementalism, perhaps, may be found in a complete reframing of the IT paradigm to embrace the growing power of the Internet and the step-function possibilities of “cloud computing” as practiced by technology leaders such as Amazon and Google. This new construct moves away from the cost curve of individual integrated circuits, or even storage devices, to a paradigm based on the scale and utilization advantages of distributed and shared IT resources, which are available to users with limited knowledge of the inner workings of the infrastructure.
Consider the case of Bechtel Group Inc. For more than 100 years, the giant construction firm delivered one massive global project after another. As IT became available, it was put to work, and over the years the IT infrastructure that supported the firm became ever larger and more complex. CIO Geir Ramleth realized that even though Bechtel had been successful at continually lowering IT costs, many new technology firms like Google and Amazon were operating on a different cost curve — and as a result were not shackled with the same levels of complexity. Furthermore, Bechtel employees worldwide had come to expect the simple user interfaces offered by these leaders and others, such as YouTube and Facebook, which put internal, homegrown applications to shame.
Ramleth convinced his team that the cost and flexibility benefits of the new approach were so great that it would be worth abandoning the costly legacy systems that the team had developed and supported for years. When the team saw he was serious, they went to work rebuilding the applications that enabled engineering and communication across the globe in a service model, like that used by www.Salesforce.com, where users can employ a familiar Web interface to quickly engage only the needed applications. With development funded by the immediate cost savings, the new network significantly lowered the company’s cost structure — fortunately for Bechtel, just as the current business downturn deepened.
From large to small, firms can radically reduce costs and simplify their services by reframing the traditional IT cost equation. Abandoning the incremental model of legacy applications and embracing new models like “software as a service,” companies can fundamentally shift the cost curve and convert a high-fixed-cost structure into one with lower variable costs more in tune with user needs.
Changing Your Equation
As these examples illustrate, reframing your business equation offers the potential for breakthrough operating strategies. The first step is understanding the equations that drive your industry. Since most such equations are implicit, you will need to probe to uncover them. How? Start with the key metrics used to describe performance in your industry.
Next, think about your customers and whether your industry equation fully captures their needs. Finally, couple this customer insight with the equation metaphor. What variables might be added to or subtracted from your equation? Could you solve for a variable previously assumed to be a given, as Toyota did? What if you pushed a service metric to a new extreme, as Progressive did? Would the old “optimal” balance still hold true?
Stop and think about your business equation. Can you reframe it to create a breakthrough strategy that will differentiate you from competitors? It worked, after all, for Toyota, Southwest, and Progressive. It is also working in the IT industry, as evidenced by industry leaders Amazon and Google, as well as for more traditional companies like Bechtel. The only way to find out if it will work for you is to try.
Reprint No. 09201
- Tim Laseter holds visiting appointments at various leading business schools, including the London Business School, the Darden School at the University of Virginia, and the Tuck School at Dartmouth College. He is the author of Balanced Sourcing (Jossey-Bass, 1998) and coauthor, with Ronald Kerber, of Strategic Product Creation (McGraw-Hill, 2007). Formerly a partner with Booz & Company, he has more than 20 years of experience in operations strategy.
- M. Eric Johnson is professor of operations management at the Tuck School and director of its Glassmeyer/McNamee Center for Digital Strategies. He focuses on the impact of information technology on supply chain management and has published recent articles in the Financial Times, Sloan Management Review, Harvard Business Review, and CIO magazine.