Internet business for dummi(C)e(O)s Management consultants explain how the Internet has changed everything -- even management consulting

August  1998

Consultants Larry Downes and Chunka Mui explain the Internet to the managers. The trick, says Bill, is to make your digital strategy distinct from everyday IT, and yet keep the two somehow related. (2,200 words)

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he Internet has been an attractive practice field for management consultants these last few years. Some of them have made fools of themselves trying to fit it into their abstruse strategy models. But now, in Unleashing the Killer App, consultants Larry Downes and Chunka Mui finally say what others have been unwilling to admit: that the Internet is as dangerous to the business of strategy consultants as it is to the corporations that hire them.

Management consultants, especially those in large firms, like to make money with long, drawn-out projects that require lots of people. Their bread-and-butter work is to perform detailed strategic planning exercises and implement complex systems (like SAP) for large corporations. Their value lies in their ability to see the big picture, predict and define the factors that will affect a business's competitiveness in the coming years, and draw on a vast body of expertise where necessary.

Along comes the Internet. Consultants are supposed to know about it and explain its significance to their clients. At first, some were engaged to do ROI (return on investment) studies on Web site profitability. This turned out to be an exercise not only in futility but also -- given the shallowness of most consultants' technical skills -- in utter guesswork. Now they're making statements that come down to this: The Internet is forcing huge, disruptive changes in the way everyone does business, causing companies to rethink their strategies and decide what value they can still provide in the networked world.

Unfortunately, this statement applies as much to strategy consulting as it does to any other business. Consultants, who tend to be smart people, may have realized this, but they weren't admitting it in public -- until now. If Larry Downes and Chunka Mai were in the tobacco industry, Unleashing the Killer App: Digital Strategies for Market Dominance would be their equivalent to the Ligget Group admitting that smoking causes cancer.

Unleashing the Killer App implies that the Internet is threatening some management consultants' meal tickets. But that's not really the purpose of the book. It was written as a primer for senior management at large corporations, explaining just what the networked digital world is, how it affects their businesses, and what they should do about it. Written in terms that managers will believe, understand, and act upon, this book is an Internet for Dummies for Fortune 500 CEOs.

How do you explain the Internet and all its implications to a sixty-something senior executive for whom the word technology means either a big SAP project -- one year late and over budget -- or that Web-gizmo-thingummy that his ten-year-old grandson wants for Christmas? How do you describe what networked digital technology is, let alone explain its impact?

As management consultants, Downes and Mui are well-versed in explaining abstruse concepts to Fortune 500 senior executives with short attention spans. This is the main difference between their book and others (like Nicholas Negroponte's classic Being Digital). They do not attempt to explain the technology in any great detail. They also make liberal use of the standard consultant's trick of capturing the most important ideas in a sound-byte description or simple diagram, and then giving examples of how those concepts have affected existing businesses.

The three laws of high tech economics
The authors focus on three basic principles. Two should be well-known to SunWorld readers: Moore's Law, which says that the power of computer processors doubles every 18 months, and Metcalfe's Law, which states that the power of a computer network is proportional to the square of its number of nodes. The third principle is less well known to folks like us, but is familiar territory to economists and business school professors: the Law of Diminishing Firms, derived from the work of Ronald Coase.

Ronald Coase was an English economist who wrote in the 1930s. He was a self-professed socialist who went to America to study the effects of capitalism. He returned to England convinced that capitalism was actually better than Marxism. As an outside observer, he was able to see certain things about the new large U.S. corporations that others had missed, and he developed some visionary economic theories based on his observations. The most important of these was his idea of transaction costs: how much of the total cost of performing a business transaction is overhead, separable from the actual goods or services being exchanged?

During Coase's time in the U.S., large industrial companies like Standard Oil, Ford Motor, and U.S. Steel were flourishing. Coase looked at them and hypothesized that they existed as large, complex, geographically dispersed behemoths in order to keep transaction costs down. As a mundane example of this, consider why most companies keep supplies of stationery items like staples, paper clips, and manila folders. The cost of inventorying them in-house is much lower than it would be if workers ran off to Staples or OfficeMax every time they needed supplies. This principle applies to many other areas, whether you're manufacturing equipment, operating a product distribution network, or refining gasoline from crude oil.

In the age of networked digital technology, it costs almost nothing to send information. As a result, many transaction costs have plummeted, making it unnecessary for companies to do various things in-house, and rendering some large firms obsolete. Downes and Mui suggest that the downsizing of the 1980s, rationalized at the time as "focusing on core competencies," was simply a matter of lowering transaction costs by outsourcing non-essential business functions to those who could perform them cheaply. The drop in communication costs made the difference; networked digital technology made it happen.

Downes and Mui use Moore's Law, Metcalfe's Law, and the Coase-derived Law of Diminishing Firms as sound-byte themes throughout Unleashing the Killer App; in fact, they go a bit overboard, bringing them up over and over again.

Event horizon
This book makes much of the speed of change in the networked digital era, and its impact on corporate strategy and planning. The classic source for strategic planners is Harvard Business School Professor Michael Porter's Competitive Advantage, a great inspiration to both consulting firms and in-house planning departments. Strategic planning, according to Porter, typically assumes a three-to-five-year time horizon during which a given strategy will continually evolve.

Downes and Mui suggest that this timeline is at least two times longer than necessary, and that organizations should plan for more discontinuous change, spawned by the emergence of new technologies. They call this new type of planning "digital strategy." Presumably this term is derived from not only the technological sense of the word digital, but also from the idea that digital implies discontinuous. The authors are also fairly crass in mentioning -- in case you couldn't figure it out -- that their own consulting firm practices digital strategy and that they have many high-profile clients.

Digital strategy depends on an organization's ability to stay on top of new technologies and creatively discover ways of incorporating them into business plans. Downes and Mui say that, so far, organizations tend to stumble upon successful digital strategies by accident. Implementations of digital strategy come from the fringes of the organization -- as skunk-works projects that are often hidden from senior corporate management. As an example, they cite British Petroleum (BP) and its multimedia retail kiosks in Germany. The local BP manager there built these into a successful business before informing headquarters. If he had asked permission first, of course, he would have been shot down.

Digital strategy is to strategic planning as Ed Yourdon's Death March is to software development methodologies: It's Old Way practitioners telling us all that the Old Way no longer applies.

The authors go on to describe work they've done to get their own clients to adopt digital strategy. Two clients they mention in particular are the McDonald's restaurant chain and a large German industrial firm. Unfortunately, Downes and Mui's results aren't very convincing: they held a workshop, got senior executives excited, produced a report, and... not much else seems to have happened. To be fair, digital strategy involves profound cultural change, which takes a long time to affect a large organization.

Digital strategy is to the accepted process of strategic planning as Ed Yourdon's Death March is to software development methodologies: It's Old Way practitioners telling us all that the Old Way no longer applies. Accordingly, Downes and Mui have enough strategy consulting credentials (including McKinsey, the dean of strategy firms) and digerati connections (Negroponte wrote the book's foreword) to be convincing.

The great schism
A more interesting and amusing (albeit subsidiary) conclusion that Downes and Mui draw has to do with the role of a corporation's IT department in digital strategy. The problem, as they see it, is twofold: First, IT departments are too focused on tactical project and operations management and not focused enough on integrating strategic new technologies. Second, they don't feel involved in overall business strategy.

Surprise, surprise.

I'm sure many of you corporate IT types have experienced this great schism yourselves; I certainly have. Companies often employ people whose titles include "Advanced Technology," "Emerging Technologies," "Technology Strategy," and "R&D." These individuals sit in either the IT organization or the strategic development group. I had the former position two jobs ago at a Wall Street firm. I sat in a disenfranchised limbo between the IT department's deadline-and-fire-drill daily life and the strategic directions of the company. Someone in strategic development, on the other hand, is involved in interesting discussions about business strategy, but is kept at arm's length from anyone who can actually build a system.

Unfortunately, Downes and Mui don't do much more than suggest either of these two schemes as starting points for successful digital strategies. They say the CEO has to take personal ownership for the process of creative discovery -- presumably by hiring their firm to lead offsite workshops. This is fine, but it has one major problem, and it's the same problem we see from all of these management consultant types: this process does not involve anyone who really understands technology. It is all too easy to show a CEO some new technology and get him all excited, whether the technology is real or vaporware. (I'm reminded of two famous examples of snowed CEOs: one involving a Pepsi executive, a handheld computer, and automatic handwriting recognition; the other involving a U.S. president, some credulous military officers, and a technology called Star Wars.)

It is important, as Downes and Mui suggest, to consider digital strategy as distinct from the IT department's everyday tasks (such as maintaining Windows desktops or rolling out SAP), yet the two must be related. Only technology people know how to make technology work, and only organizations that live with technology -- as opposed to those that buy it off the shelf like a stapler or file cabinet -- have a prayer of using it to their long-term advantage.

Only technology people know how to make technology work, and only organizations that live with technology have a prayer of using it to their long-term advantage.

The obvious organizational solution is to have IT report directly to the CEO, instead of to some operations or finance manager. This happens only in certain industries (like Wall Street, though not at the firm I worked for) where a hard, demonstrable link exists between technology and revenue. The CIO of a major media company put it thusly: "At first, we used technology to track the business, then we used it to run the business, now, technology is the business." As long as CEOs think of technology as a back-office function akin to accounting or facilities management, this will not happen; companies will get the expertise they deserve, and suffer accordingly. Technologists like Nicholas Negroponte and Michael Dertouzos can articulate this message, but only a management consultant has enough credibility to deliver it. Unfortunately, I have yet to meet a strategy consultant who really understands technology -- including Downes and Mui.

Even though Unleashing the Killer App does not go far enough in its recommendations, it does a creditable job of reaching a well-defined target audience with the right message about how the corporate process impedes the kind of change that's necessary to compete in the Internet age. In particular, it's a more compelling work than Hagel and Armstrong's Net Gain, which by comparison is an overly intellectual exercise that doth protest too much about how "We at McKinsey understand the Web." It will be interesting to see how (or if) this book affects the strategy practices of the major consulting firms -- the McKinseys and Booz-Allens of the world.

Meanwhile, Unleashing the Killer App would make a fine gift for any frustrated corporate technologist to help out a CEO who just doesn't get it.

Title: Unleashing the Killer App: Digital Strategies for Market Dominance
Authors: Larry Downes, Chunka Mui
Publisher: Harvard Business School Press
ISBN: 087584801X
List price: $25.00

Resources

• Larry Downes and Chunka Mui's Unleashing the Killer App: Digital Strategies for Market Dominance http://www.amazon.com/exec/obidos/ASIN/087584801X/SunworldonlineA
• Unleashing the Killer App Web site http://www.killer-apps.com
• Last month's review of Barbarians Led by Bill Gates and Speeding the Net http://www.sunworld.com/swol-07-1998/swol-07-bookshelf.html
• Bill's review of Ed Yourdon's Death March http://www.sunworld.com/swol-07-1997/swol-07-bookshelf.html
• Bill's review of John Hagel and Arthur Armstrong's Net Gain http://www.sunworld.com/swol-04-1997/swol-04-bookshelf.html
• Full listing of Bookshelf columns in SunWorld http://www.sunworld.com/common/swol-backissues-columns.html#bookshelf
• Bill Rosenblatt's Client/Server columns in SunWorld http://www.sunworld.com/common/swol-backissues-columns.html#cs

About the author
Bill Rosenblatt is market development manager for media and publishing industries at Sun Microsystems Inc. Reach Bill at bill.rosenblatt@sunworld.com.

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URL: http://www.sunworld.com/swol-08-1998/swol-08-bookshelf.html
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