A Scarce Resource

By CIOinsight

Expert Voice: Christopher Meyer on the Accelerating Enterprise

Christopher Meyer once described his job as "shining the headlights a little farther down the road," meaning that, as vice president and director of Cap Gemini Ernst & Young's Center for Business Innovation in Cambridge, Mass., he is focused on what lies ahead for business. His work, informed by research and an international network of leading thinkers, is shared with clients and more than 500 executives who visit the center each year.

Clearly in sight now: the increasing connectedness of the economy, and the implications that has for how companies are organized, operated and managed. Everything moves faster, and companies are inexorably propelled toward "real time"—little if any delay between an event and a response, between a customer order, its shipment and the restocking of inventory, for example.

That's good, but connectivity and speed also introduce volatility. Consider the recent increase in business failures, stock market gyrations and unpredictable corporate results. To survive, companies must learn to adapt and evolve amid uncertainty. So profound is this new order of things that Meyer often invokes nature as a model. Deputy Editor Terry A. Kirkpatrick talked with Meyer about the event-driven enterprise, how it can be beneficial, where it can be scary and why it is unavoidable. An edited version of Meyer's remarks follows.

Look at any trend in business, and the direction is clear: Response times are going down. The response time that an individual will tolerate for a Web page to load. The response time a catalog customer will tolerate for receiving an order. Six weeks to deliver? Don't bother.

Acceleration is a fact of economic life, and the real-time enterprise is unavoidable. Real time means that a company can sense and respond faster than changes in a relevant feature of the environment. The response is just a little faster than is needed. For example, since you never know when you're going to want current financial information, the continuous closing of the books that Cisco Systems talks about is real time in that case. With an airline reservations system, real time means that it's fast enough that nobody reserves a seat that isn't there because the system didn't reflect somebody else's action.

The trends are showing us the way, and we have the choice of letting it happen to us or riding the front of the wave. It's happening because we're making the world more connected and more responsive through autonomous agents—software and other technology that senses an event and is capable of making decisions in response to it. Agents don't have to be fancy; a thermostat is an autonomous agent. The time between some signal being generated—a customer order or a stock achieving a certain price or a seismic register of an earthquake—and the response to it is getting shorter and shorter.

Red Lobster, for example, subscribes to Landsat satellite data, because they want to know the temperature of the Gulf of Mexico. Why? Because the temperature affects the rate at which shrimp breed, which in turn affects the size of the catch, which then affects the price. If they can sense this variable, they can reduce their costs, because they will know when to go into the market and when to stay out. Multiply that on the order of a billion times, and you have businesses all over the economic map sensing and responding in close to real time.

Going to Real Time

Going to Real Time

Does a true real-time corporation exist today? I would say no. I have never seen one. But they do exist in bits and pieces. Progressive Insurance has been experimenting with it. It set up almost real-time claims processing—you have an accident, a Progressive van comes to the scene, takes pictures, gives you an estimate, and gives you a check. The point is the whole thing stays in the system for a couple of hours instead of a couple of weeks or a couple of months. Another thing Progressive did was to say, "All right, we charge you for insurance based on where you live, among other things, but where you live and where you drive aren't really the same thing." So in a pilot program they put a GPS sensor in customers' cars. The idea was to charge more per minute spent in a high-crime neighborhood, for example. The sensor gives them the ability to charge you just for the risk you consume, when you consume it.

Companies like Dell, Cisco and Federal Express absolutely understand real time as an aspiration. I would guess, however, that none of these three would tell you they operate in real time. They would say they want to, and they are taking active steps to get there. They are saying that every time they encounter a lag in a process, they're going to do something about it. Let's look in the supply chain today, and our customer relationship management system tomorrow, and our production processes the day after tomorrow.

Why do I say they aren't there yet? I have a Dell computer. As far as I know, it gives me no way to give Dell feedback. They don't know how I like it, how it could do more for me. There is no feedback loop to Dell from the machine I'm using. Whereas every time Netscape crashes, it launches a little application that asks, "What were you doing when Netscape crashed, and will you send this information to Netscape?" Why shouldn't everything have a feedback loop like this if connectivity is universal? With this real-time information, Dell could update or patch my computer, but it could also learn from my experience and build that into its new computers, improving its product in real time and not waiting until my next purchase in three years to learn that I wasn't happy.

Here's another version of creating feedback loops. Imagine a driver is spinning his wheels on an icy road. He hits the Onstar satellite link button, and you see a technician looking at a computer screen with telemetry data from the car. The BMW 5 series has something like 148 microprocessors, and a lot of them are receiving sensor data. A moisture sensor tells the windshield wiper how fast to go, and ABS sensors show how the wheels are spinning. So with all this data, the technician hits a button and downloads via the satellite link a patch to the traction control software, and off the driver goes.

We can go a step further. You can get rid of the people and download the patch automatically. A really smart software agent looks for the right solution and breeds a new piece of software that suits the situation of the wheels spinning. Then another step: If we find something wrong with the Boeing 737 tail assembly, we don't fix one plane, we fix the whole fleet, right? Well, if we find a way to improve this one BMW, why not, since they're all connected, fix them all? So the company uses the satellite link to upgrade the software of every BMW. The company benefits because the product is upgrading itself continually. BMWs keep getting better from their experience in the real world, and the company doesn't have to go out and do a focus group to find out what happens on a slick road, then meet and plan and change its engineering.

Get the Drag Out

Get the Drag Out

Moving to real time is a competitive necessity. Is there any way to avoid it? I don't think so, because if the other guy does it, he's got a better cost position than you do. Imagine a real-time supply chain. It senses that a carton of inventory in the logistics system is going to customer A's back-up stocks, whereas customer B is completely out of stock. The system responds by rerouting the carton to customer B. And what have we done? We've seen to it that both customers have our product, instead of one sitting there without it. So rather than someone at the factory putting a label on a package and sending it off through a preplanned set of transportation steps—that's the current way—you think about your package as a packet in a data network. Every time it gets to a node, it looks around and asks, what's the best next step? First, it could route itself around any bottlenecks in the transportation system. Second, it could react to real-time information about where it was most valuable—the customer without inventory—and go there on its own. You therefore have more "face to the market"—more potential sales—with the same amount of inventory. Real-time resource reallocation is one of the ways we're going to get drag out of our economic system.

As a real-time enterprise, you can operate better, faster, cheaper. Your assets will work harder for you, because you can make real-time decisions about the best ways to deploy them or the best price to charge an individual customer online. Second, the more you build sense-and-respond and learn-and-adapt into the way your business works, the less you're going to have to change the infrastructure of the business, because it will be changing itself. Look at Amazon. Its philosophy is to do everything on the Web. Every phone call from a customer is a failure, because it indicates the customer couldn't do something on the Web. So every phone call from a customer is a chance to make the system better. Amazon is continually upgrading its capability based on the continual input from customers, and its site evolves quite rapidly with new features and approaches.

This kind of adaptability is how companies can cope with rapid change. Our research shows it doesn't just feel like change has accelerated, it has accelerated. So if the challenge is to keep up with accelerated change in the environment, then becoming more adaptive is the answer. The more information you're taking in and incorporating into how your product works, how your processes work, how your relationships with your economic system work, the more the business will be changing itself rather than requiring you to change it. Otherwise you're constantly rolling out the next system, and you're always shooting behind the duck.

Of course, this is not easy to do today, and trying to do it everywhere is neither possible nor desirable. The customer isn't always going to be willing to pay for it, or the business case just isn't there. This introduces the question of what constitutes real time. What's the decision being made, and what is an effective decision-making cycle? If you're a monthly magazine, how fast should your change-of-address system work? Real time for you is before the customer gets the next issue, so maybe you only have to run your change-of-address system once a month.

Organizations will have to work differently. They will have to learn to love surprise. In a real-time environment, the thing you thought you knew isn't true anymore. You have to reduce your estimate of the half-life of knowledge. It's going to be harder to anticipate or control or know everything about the evolution of the system. People are going to be surprised more often, they're going to feel less mastery, and they will need to get comfortable with that.

How should we manage this uncertainty? In essence, the leader's new role is to stop directing people and start directing evolution. Biologists would call that directed evolution, a new technology used to breed a better tomato or a more effective therapeutic. So it is the leader's role to say, "This is what we want—we want faster horses, and how the evolution actually works is up to all of you guys." And they're making a lot of decisions, some of them in real time, about what will get them a faster horse.

Here's an example. Jim Donehey, the former CIO at Capital One, had a conversation with us about anthills. Think of an anthill. You can't teach an anthill to fetch. The anthill somehow feeds itself, but no single ant knows how the whole thing works—each ant is just following a few simple rules that will lead it to food. Donehey realized that from the perspective of his IT shop, there were four rules that fed his anthill: Align IT with business, spend money wisely, be flexible and have empathy for others. So he gave the internal customers of his IT group poker chips of four different colors and asked them to give his guys chips when they successfully furthered any of those principles. Then the IT guys could cash in the chips they earned for bonuses. He said to his people, "You figure out what to do, just get all the chips you can." And that's how he ran his 1,800-person organization. He abandoned command-and-control for rules that would get everyone working toward the same goals—directed evolution.

A Volatile World

A Volatile World

We'll also have to get comfortable with volatility. The more richly connected a system is, the more potential it has for volatility, because a signal can propagate through a system very rapidly. If the system has a large number of things connected richly, it has so many potential states that traditional analysis will not reveal everything that might happen. One sign of increased volatility today: Over the past decade, the number of times the stock market has moved more than 3 percent in a day has quadrupled. Another: The number of companies in the S&P 500 declaring negative special items in their earning reports—meaning they were caught off-guard by events—has grown from 68 in 1982 to 233 in 2000. In 1978, about 10,000 businesses failed; by the late-1990s, that had gone up to about 75,000 annually.

We can deal with volatility in three ways. First, we can build simulators, and we can try to identify the sources of volatility in a system we care about. What can we do to damp out that volatility? Where is it coming from? Is it suppliers, is it the market, is it technological change? When we identify that volatility, how can we sense it and build a response? Red Lobster realized that the volatile temperature of the Gulf of Mexico affected its business, and so it set up a procedure to manage it.

The biggest organizational change we will need is the mindset that says, "Let's look at what we're getting out of that sense-and-respond loop, ask what we can learn from it, and ask how we can adapt what we do to reflect that." It's a shift from "if it ain't broke, don't fix it" to "how can we do this better the next time?"

What are the first steps toward real time? First, identify what is driving the volatility in your business. Can you identify the things that expose you to risk and change and, therefore, what you need to be able to sense early, respond to rapidly, and adapt to continually?

Second, don't put up boundaries to information flow. A corporate habit is to put up boundaries to keep safe inside. But that creates the risk of not learning. It's like raising a kid in a bubble. If you take that kid and put him in the outside world, he dies of a common cold because he has no immunity. Rely on your judgment to determine what you want to investigate, where you want to be open and where you don't, rather than making rules about what you disclose and what you don't. To manage all this new information, however, we'll need software filters that get smarter and smarter, and tell us where to focus our attention.

Third, shift from directing people to directing evolution. Give people more responsibility for making decisions, not less, and give them feedback on how they're doing. Don't command and control. I don't see how people have time to micromanage. To me, micromanagement comes from having too much time, not from having too much data.

A Scarce Resource

A Scarce Resource

We still haven't worked through the idea of time as the scarce resource. When the costs of what we sold were mainly raw materials and labor, we became efficient about consuming those things. But now all our costs are fixed costs with regard to time. We build software systems and factories that cost the same whether we use them or not. Therefore, the more efficiently we use the time of those expensive resources, the less they cost.

If the scarce resource is time, we need a management system that measures return on time, for people and for capital. Michael Rothschild invented an accounting system for manufacturing that, instead of doing normal activity-based costing, allocates costs according to the degree to which an activity uses up our bottleneck capability. So if painting is the bottleneck in your automobile factory, allocate cost based on the percent of the paint capacity you use, because that's what your gating factor is. If management time is the gating factor, then we need to assess return on that asset and use it to allocate time.

In the industrial era, financial capital was a scarce resource, so return on equity became the measurement of success. But if you think a little more broadly about life, the scarce resource is time. That's true of the consumer, it's true of everybody in all their roles, it's true of a lifetime, and it's true of a business.

Christopher Meyer is vice president and director of the Cap Gemini Ernst & Young Center for Business Innovation in Cambridge, Mass., which identifies and defines responses to issues that challenge business. His personal research interests include complexity, self-organizing systems and the development of the "connected economy."

Time Out

Time Out

How business process velocity has increased, on average, across industries due to information technology during the past three to four years.

Trading analytics: from 30 minutes to 5 seconds

Airline operations: from 20 minutes to 30 seconds

Call center inquires: from 8 hours to 10 seconds

Tracking finances: from 1 day to 5 minutes

Supply chain updates: from 1 day to 15 minutes

Phone activation: from 3 days to 1 hour

Document transfer: from 3 days to 45 seconds

Trade settlement: from 5 days to 1 day

Build-to-order PCs: from 6 weeks to 1 day

Source: Gartner research

This article was originally published on 11-02-2002