Tapping underexploited capabilities
Capabilities—the ability to perform specific tasks over and over again—are the third set of hidden assets. A typical business unit operates with 80 to 200 significant capabilities, but just a small number of these are truly core, allowing the organization to create economic value for customers and providing a source of differentiation from competitors. Therein lay the problem for Instinet: its core IT capabilities that had powered the company's rise were based on proprietary applications, but were no longer what Instinet needed to ensure its success in the new open—standards Internet environment.
In our experience, sometimes the best way to obtain a set of missing capabilities is to acquire them, especially if the industry is evolving rapidly. The new capabilities that would power Instinet's renewal were assets hidden in plain sight at its Island division, a nimble electronic trading competitor, which Instinet acquired in 2002. One stark measure of the capability gap that separated Instinet from Island was headcount. Instinet, which added new functions and people with each link to a new trading exchange, had swollen its IT payroll to 1,000 at its peak. Island, by contrast, was able to serve nearly the same volume of trades with fewer than 100 IT staffers.
Instinet managers recognized that inertia had set in: years of profitable growth had blunted the drive to rebuild the technology which was the company's core capability. Instinet simply added on more IT to fuel its growth, no matter how awkward the fit. Using Island as its roadmap, Instinet's managers committed to fundamentally rethink its systems. By leapfrogging from the old IT platform designed for an obsolete minicomputer environment all the way to industry standard Linux systems, the company would be able to improve cost, reliability, scale, and speed to market in a single stroke. For customers, the move meant that Instinet could now roll out more functionality faster and at lower cost.
Educating the Inexperienced
Instinet had also built its IT architecture so that less experienced IT people could understand and maintain the systems. Now, Instinet adopted the same approach used at Island: Hire top—flight financial IT specialists who had grown up in the IT industry and understood how IT and the trading business are related. That allowed the company to invest in financial technologists capable of working alongside their business counterparts, truly aligning IT and business goals for the first time.
Adapting Island's capabilities also led Instinet to rethink how best to deploy its IT—support functions. Under Instinet's old model, the company bought large amounts of expensive hardware and supported installations in lots of locations. The costs had to be amortized over each trade Instinet handled. But as the footprints for its data centers grew smaller and more efficient, those fixed costs melted away. Exploiting capabilities adapted from Island, the company's systems were able to conduct more transactions with a footprint just one—tenth the size of its predecessor, relying on customers' technical staffers to service their own desk—top PCs.
At the same time, Instinet adjusted its outsourcing strategy. Following conventional wisdom, Instinet had formerly tried to hold down costs simply by outsourcing to low—cost vendors. But as the company began building high—performing systems, it discovered that outsourcing was less cost—effective and far riskier than keeping support in—house and paying a small, highly skilled team to continuously simplify its systems.