14 May 2011
I was recently asked by ABC Radio National in Australia to explain the principles behind my book, Information-Driven Business. The following is extracted from the program or you can listen to the full broadcast online.
I’ve spent more than twenty years looking at how having large quantities of complex information affects every part of our lives. Whether it is your health and welfare, or the approval of your home loan, I cannot overstate how important the recent accumulation of vast quantities of complex data about each of us has been. Just a few years ago, who would have imagined that a company like Google would have a photo of almost every house in major cities in Australia or that so many of us would share large amounts of personal information through Facebook?
I’ve also had a life-long fascination with science and mathematics. I’ve watched the enormous development of ideas in computing and it has often occurred to me that we are particularly bad at learning from other, more mature fields – particularly science. The last few decades of development of information technology has seen new generations of enthusiastic entrepreneurs develop their ideas as if nothing they did had ever been thought of before.
Online shopping sites might offer great new features, but they don’t really change the idea of a traditional store or a mail-order catalogue. Banks may be offering us new forms of credit but the idea of a home loan hasn’t really been challenged. In both cases, businesses have evolved an existing set of business processes without really challenging who holds what information and when they hold it.
To understand the opportunity that business, consumers and societies have today, we need to go right back to the industrial revolution. The changes then triggered an exodus of people from agriculture to manufacturing, from rural to urban settings. Today we are in the midst of an information revolution. This revolution is triggering a move of many jobs across global borders and the removal of many unskilled roles from the workforce.
This revolution has also seen an enormous quantity of personal information move into private hands through social media, marketing databases and also more detailed credit checks. Previously this would have just belonged to government, or if business held it they wouldn’t have been able to compile or analyse it as it would have been written on paper buried in filing cabinets.
If you watched the science fiction movie, Minority Report, in 2002 you might have wondered at the way Tom Cruise was able to sift through data with a wave of his hand and you were probably dazzled by the wall of the store that greeted him by name and knew what his last purchase was. Both of these innovations aren’t the vision of a distant future, rather they are here now with products like the iPad which sweeps in the same way and customised messaging in stores based on our loyalty cards or even a connection with our mobile phone.
Modern business has evolved from the industrial revolution. The problem we face today in navigating the information revolution is that the industrial revolution taught us to use the principles of processes. Two centuries of business has slavishly adhered to the idea that commercial and government enterprises are nothing more than the aggregate output of thousands of individual business processes. Because no-one alive today has experienced any other form of business interaction we can be forgiven for thinking that there is no other alternative.
But we should wonder whether it is the right approach. By learning why we have a process-oriented approach to business, we can then question whether we have really thought deeply about it. The trigger for my doubt is that very few other things that we experience in other fields are oriented around processes.
The telephone network is very efficient at joining two people together by analysing source and destination and finding the shortest path between the two. Social networks are very efficient as evidenced by the small number of steps to required connect anyone with anyone else on the planet and it doesn’t seem to matter what culture or society norms are in place between the two people (just think “six degrees of separation”).
Traditional business, however, relies on processes and is really very inefficient. Just ask anyone who has ever tried to change their utility bill details or arrange a new mortgage.
Most of science and mathematics does not lend itself well to this process paradigm. Having said that, business borrows from the small number of such examples that we do have. Think of terms like “an idea’s half life” (borrowing from nuclear reactions to describe how new concepts need to be implemented quickly to have an impact) or “catalyst for change” (borrowing from chemistry to describe how certain actions in business have an additional and beneficial impact). Hence, if the few examples we find already draw from the real world, then if there were more they would be likely to already appear as common business metaphors.
Of course, fields related to modern business do borrow from science. The field of economics borrows from thermodynamics. Modern fund managers are very familiar with using principles evolved from chaos mathematics which underpin predictive models used to support their investment in securities markets.
I argue though, that such ideas are limited to small aspects of business and by-and-large process-oriented organisations are not borrowing from science or any other field of human endeavour. The information revolution provides the impetus to change.
Allow me to illustrate. Consider a home loan that is written in a bank branch. In years gone by, a paper application would have been provided to a supervisor who would have reviewed it when they had time. If the amounts exceeded their approval threshold, they would have forwarded it upwards for further approval. Today, this is all done electronically – but inevitably that electronic process mimics the paper one – we are continuing to use a paper process metaphor because it is what we know. But an optimised business would have many eyes on the same application with the first available supervisor anywhere in the world being able to approve it if it met their desired criteria.
The result of the information revolution is a new paradigm. The “information-driven business”, as opposed to the process-driven business. This new form of enterprise is engineered around information without being tied to an individual process or activity. Customer information doesn’t really need to be defined by how it was collected as it usually is today. When you provide your personal details through a call centre for an electricity utility company you shouldn’t need to repeat yourself a year later when you move again and use the internet to request a service at your new address.
Once business has been freed from its process straightjacket, we have the opportunity to create a much more dynamic organization that looks more organic than artificial. Ideas (that is products or services) can be combined or divided at will and to achieve the best possible economic or social outcome. In a world where processes are increasingly outsourced, and physical products are being manufactured en-mass by labour efficient countries, it is incredibly important that we value information more highly than any individual transaction or process that supports the transaction. What is more important to a department store, the completion of the sale of an individual item or the knowledge of the customer that enables the store to service him or her for many years?
My book, Information-Driven Business, takes this concept to the logical conclusion and provides methods for estimating the quantity, usability and value of information that we interact with in all aspects of commercial and government business. These techniques apply the principles of thermodynamics through entropy, mathematics through graph theory and physics through complexity theory. I argue that the value of modern business is largely tied-up in its intangible information. Consider what would happen to the value of any company if you reformatted every hard disk in the organisation.
Fortuitously, at the same time that we are reconsidering the role of information in business, many branches of science are beginning to see information not as a by-product of something physical but rather the important thing in its own right. This should be no surprise when we consider quantum mechanics of the past eighty years where we have realised that the information we retrieve about an experiment means we have adjusted the result. Increasingly information is not a window on our universe, rather it is our universe.
The comparison between physics and business is only valid because the organisations we have built today have become so complex that it is impossible to predict in advance how they will respond to any given event or change. What we can do, though, is predict general behaviours by looking at what information relationships exist.
In my book I provide a technique for determining the information linkages within an organisation –that is how well connected information from one part of the organisation is to information in other parts of the enterprise.
As we get better at using all of the data and information, it has greater value and market forces have naturally encouraged more of these linkages.
This has continued a long-term trend to see business consolidate and continue to get larger. However something has now changed that we need to understand. During the past decade information standards have begun to emerge and gain acceptance. Perhaps the most important is the eXtensible Business Reporting Language, a data standard that is used by businesses and governments around the world – including in Australia.
With information standards we are now seeing businesses decide not to merge but rather form information alliances and to trade information in real-time to provide a customer with an integrated product. Think, for instance, about travel products and the number of individual businesses that are typically now involved in a single transaction but all appearing under the one banner. These can include the airline’s flights, an alliance airline’s connecting flights, rental cars, hotel accommodation, travel insurance and airport valet parking. This example might seem obvious, but it has far reaching implications in the segmentation of the value chain. For the first time in a very long time, agility is likely to drive companies to get smaller without the balancing factor of scale being needed to take an integrated product to market.
The worth of each contributing business is in how it adds information value and how it enhances the product as a whole. With such complex partnering of many organisations, there isn’t time for a waterfall business process to form. There is time, if we’re not careful however, for a chaotic system to form, which by its nature will provide a result which the members of the joint venture cannot predict.
In the travel example, chaos could result from the combination of different accommodation and airline loyalty schemes participating in the same product with different rules. Can I claim hotel points if I’ve paid by redeeming airline points? Does a credit card provider, also providing points, get access to information about the whole transaction? With these different combinations there might be different cost and margin implications which, in-turn, cause participants to add surcharges or provide further discounts. Does each participant need to offer the best price at every point in time, or can they discount to different channels? Even small changes in the rules of information exchange and associated pricing can completely change whether customers are better to go via the airline, hotel or bring their constituent parts together through individual travel websites – reducing the integrated value that businesses participating in the alliance are able to provide.
With such complex relationships, the participants can do well to learn from the synergies of a biological ecosystem rather than try to predict every process pathway that a customer might choose to use. In some cases organisms within an ecosystem can be in competition, offer each other synergies and be “food” for one another all at the same time. Business of the twenty-first century echoes these same biological relationships.
The information revolution provides us a unique opportunity to re-invent business. The techniques we will use to develop new approaches to everything from supermarkets to airlines will borrow less from business processes of the twentieth century and far more from physics, chemistry, biology and mathematics. The people who are going to be best placed to invent this new world of business are the very people who have often felt most alienated from it – science graduates.