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Digital Transformation’s causes & consequences

As stated previously, “Consumerization of IT” (i.e. usages developed in the mass consumer space instill in the enterprise space) and “Commoditization of IT” (i.e. users want the innovation to be generalized quickly and for almost free as an outcome of the Moore’s law) are the megatrends shaping the business model and technical evolution of Microsoft and its competitors.

This is the reason why it all started in the consumer space, and now it is instilled in the Enterprise Customer’s space in which software vendors, cloud service providers try to adapt their consumer’s oriented solutions. Apple’s alliance with IBM is directly aimed at leveraging the strong IBM footprint into the Enterprise segment to sell Apple’s devices with specific enterprise client applications for IBM server solutions. Microsoft has quite a unique position as it has some grounded feet in both spaces, but its new focus on consumer’s space might do some harm to its enterprise customer’s relationship as the latter do lose its landmarks in a fast pace changing world.

This is also the reason why, businesses across the world are in “desperate” need of relevant guidance for their own digital transformation. All these corporations evolving in red oceans of fierce competition with mature products are all searching for new growth drivers, diversification into services:

• Car makers wanting to address the connected car and related “innovative” services to respond to Tesla and Google car nightmare,
• Big Pharmaceutical corporations whose legacy diversification model (I slightly modify my princeps molecule to extend its patent duration) is dead with generic drug makers try to diversify into “innovative” services with “tailored medicine”/translational medicine based on new patient relationship through inbound marketing, self-quantified approach based on Internet of Things, Big data and machine learning,

But at the time being, while they all sense these new growth drivers are likely to be “data driven”, they are still lacking the magical business model to monetize their innovation:

• Car makers are thinking of plenty of innovative services based on connected car… but the ugly truth is consumers do not want to pay for them: they should be provided for free (like the rest of “internet” services),
• Big Pharmas dream about tailored medicine in which genomics can tell if a drug is efficient for patient A, and not for patient B… but do not realize that while it is “elegant” and “smart”, it just means that now their drug will now only be sold to a subset of the initial patient population, i.e. reducing their revenues, while they invested in testing development,

Microsoft as being once a web 1.0 company and being now almost a full web 2.0 company, both from a technological and business model perspective, is in the unique position through its Enterprise Services to assist its Enterprise Customers in that difficult and uncertain digital transformation, because Microsoft has just walked its way through. Competitors like Google, Amazon are web 2.0 companies, they did not have to do this transformation.

This is a profound transformation while it is somehow led by fast pace technology evolution, it is first of all mostly an organizational and a cultural evolution. It is absolutely not about “invoking” buzz words such as “big data”, “machine learning”, “collaboration”, it is about thinking of new business models to leverage technical differentiators which are mostly zeroing marginal costs.

Last big issue is the legal framework in which businesses are doing their operations and executing their corporate strategy. Due to the fast pace of change, legal dimensions, laws, jurisprudence are always far behind but might have huge impact on business operations leveraging digital innovations:

• Data sovereignty activism in Europe (led by Germany mostly) might force cloud service providers to deploy national cloud solutions. Microsoft and others need to deploy non-market strategy to influence the European Commission to “limit” data sovereignty to continental regions (Europe for instance),
• Translational medicine and specifically tailored drug design (i.e. one specific drug for one specific patient) which might be “affordable” through digitalization of proteomics and genomics platforms is not allowed currently because drugs need to go through heavy and expensive clinical assays (one drug to many patients) before they are allowed for market release.

Conclusion

Being “forced” to execute its own “digital transformation” has been mandatory for Microsoft in its attempt to stay relevant in its own industry. It is transforming its business model, its organization, its culture to adapt to fast pace changes in its business environment (competitors, consumer, megatrends). It gained legitimacy through its own digital transformation execution, and now its Enterprise Customers come to visit Microsoft to have feedback and guidance about “how Microsoft did it”, to be inspired and guided with Microsoft Enterprise Services in their own digital transformation.

However, while these changes might have been “positive” leading to a “more agile” corporation… there is still a lot of work to do to achieve this transformation, and the positive impact on revenues is still a major bet for Microsoft. Basically Microsoft transitioned from a high margin & “low volume” (~hundreds of millions “units”) positioning (Enterprise Customer) to a low margin & high volume (billions seats) positioning (Mass consumer market). This has deep impact on its revenue structure. While it is now more predictable with less seasonality, revenues’ growth is yet still to be proven not talking about margins. Furthermore, despite the oligopoly of Cloud Services providers, it is clear that there is no cartel in place but a fierce and tough war on prices in which competitors might burn a lot of cash to establish their market shares: At that deadly game, Microsoft has quite a huge amount of cash and cash equivalent (~95 billions), so has Google, but Amazon despite its dominant position with AWS has less cash available.

Ultimately, as Microsoft’s revenue generation pattern is changing, its cost structure needs to change too. Its previously product oriented sales force need to be “retro fit” into cloud solution oriented sales force (which is quite a challenge). Its Enterprise Services also need to be “retro fit” to embrace cloud services delivery (less infrastructure needs, more development needs). Eventually, Microsoft is likely to shrink its workforce as it will leverage its own cloud infrastructure to increase its productivity. Massive layouts are likely to occur in the coming years to adapt to lower margins (the Moore’s law + war on prices + commoditization) business model. Microsoft Enterprise Services must go upward the business value chain as their legacy infrastructure design business will disappear, and get industry vertical relevancy in order to design new business models for our Enterprise Customer’s which will enable them to turn into cash flows their investments in digital transformation: That is the purpose of the new Enterprise Architecture group. Stay tuned, fasten your seat belt, the digital transformation has just started… and it’s just going to accelerate.

Full article in PDF can be found here :

IE Bown Executive MBA – IT Innovation and Strategy – Individual Report – Jérome Vetillard – Final