Competitive advantage through software: Contrasting Enterprises & Startups

By Grant Hull

I have an interesting vantage point whereby one portion of my professional life I work in the innovation scene with startups and entrepreneurs, in the other, my company service medium to large enterprises with digital transformation. There are expected differences between these two commercial segments, but in the area of software use and digital strategies, the former is performing considerably better than the latter.

 

As the world increasingly becomes driven by software and algorithms, corporations still find themselves playing the cost optimisation game, where IT is a means to that end. Meanwhile, startups are gaining an advantage by configuring and investing in their own software unique to them. One of the leaders in software development is FortySeven47 at the moment.

Startups and enterprises are often at opposite ends for obvious reasons. On one hand, you have entrepreneurs, aspiring innovators from university or industry-backed incubators, who have (mostly) nothing to lose and everything to gain. They are agile, experiment frequently and can happily pivot when needed.

On the other hand, enterprises with existing – often mature – products to protect, find it hard to adapt their business models. Adding to the common understanding just mentioned, this article explores the contrasting journey between enterprises and startups in how they approach IT, and the new software paradigm.

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“We’re not a tech company”

This is what most enterprises not purely in technology space would say. They think of themselves as technology users, not software companies.

For instance, a manufacturing company naturally thinks about technology as their machinery and equipment, and the multiple systems that run those machines. Hence when considering software, it is natural for them to desire all-encompassing IT systems such as ERP packages, especially those offered by “proven” vendors.

But does this motivation behind buying software or IT systems help or hurt, considering the wake-up call by GE’s then CEO in 2014: “If you went to bed last night as an industrial company, you’re going to wake up today as a software and analytics company”?

Multinational bank ING heeded this when they doubled down on digital and penetrated the Australian market. By being a branchless bank, ING relies on their digital infrastructure being reliable and nimble to serve an increasingly digital-savvy customer base. Instead of implementing cumbersome enterprise-grade system, ING opted for a more modular, pick-and-choose software architecture that allows them to ship new features on a regular basis1. In short, ING doesn’t think of themselves as banks, but as someone who provides banking to customers.

Yet today, many non-tech companies are just embarking on an ERP implementation journey that might or might not end well two years down the track.

 

History of enterprise software

Before jumping to any conclusions about enterprises, let’s try to understand how this mindset came about.

Software started out as single purpose aligned with a single business function such as accounting or inventory management. Over time, more software was created to serve more business capabilities. At the time, software was expensive to buy and maintain as updates required major work and carried risk to the systems’ availability. Keep in mind that software used to be implemented on-premise and wasn’t connected via internet.

These factors made dealing with a single vendor appealing and efficient, which in turn propelled single software vendors to address multiple business functions – a virtuous cycle for enterprise software vendors.

It was only a matter of time before functionally discrete software packages became monoliths intended to do everything. The desire for integration across enterprises was so great that the Enterprise Resource Planning (ERP) system came about as the epitome of enterprise monolith.

Rightfully, ERPs were put in place to increase efficiency through information sharing across business departments and organising this data into a central repository for decision making. Unfortunately ERPs have instead become the ‘ball and chain’ of enterprises.

Why? Monolith software vendors would persuade buyers that they have all things covered in one application, and have little motivate to allow other software to work with it. In preserving their “lunch”, ERP providers put in measures such as packing in more features, putting a wall around their software and make their software so big that businesses become reliant on a limited supply of domain experts.

Hence, enterprises either need to get in line and pay an exorbitant amount for customisation, or employ and maintain dedicated staff. Even when the Internet came around and software started to be installed off-premise, or on the cloud, incumbent software vendors might not be motivated to do it any other way. Their huge existing software asset is likely to induce sunk cost fallacy.

What are other drawbacks of software monoliths?

From a risk management point of view, large scale projects such as ERP implementation carry inherently larger risks as there are just more moving parts to be taken care of over a longer implementation period. Cost overruns are not uncommon here.

As mentioned briefly above, the monolithic system can be too complex for one person to understand. Users might be motivated to find workarounds, such as picking other non-mandated software solution, or sticking with manual processes.

Monolithic software is often built on closed architecture rather than open standards. Thus from a technical standpoint, worsening the lack of talent pool that creates or maintains such software.

 

The desire for integration across enterprises was so great that the Enterprise Resource Planning (ERP) system came about as the epitome of enterprise monolith.

Is ERP dead?

This brings us to the question in the title of this section. Back in 2000, Gartner predicted that by 2018, the concept of using ERPs and monoliths would be “dead.”2 The research group pointed out that enterprises were buying the unwritten mantra of ERP vendors “providing all things to all people,” and that monoliths go against the future direction of more external connectivity.

To reiterate, enterprise IT systems are implemented to solve internal problems and optimise the business according to industry standards and perceived best practices.

That means purchasing off-the-shelf enterprise software will only help enterprises achieve the basic functionality (e.g. accounting, database management) required by their industry. The merits of this software are only to take care of business activities that have no opportunity for competitive advantage.

Most software vendors will provide a little more customisation towards the needs of a specific industry, e.g. CRM for hospitals, inventory management for heavy industry.

At the top of the pyramid is competitive advantage. Trying to achieve this section by configuring out of the box software is very expensive and complex. Most of the risk in budget blowouts and project overruns originate with this activity.

In short, by thinking of themselves as merely users of software and operating with the “optimisation” mindset, enterprises might run into these risks:

Using the industry standard which make them standard in the industry

Following what is considered ‘best practices’ may only mean watering down their competitive advantage

Why? Because everyone in the industry is doing the same thing. Similar cycles have happened in the past. For instance, enterprises used to buy a mainframe to better manage their business, and so did their competitor.

This means enterprises cannot create a point of difference for their customers amid shifts in customer preferences and behaviours.

 

Unencumbered by industry best practices, startups start with a clean slate, develop their solution around a small set of problems and optimise to solve them really well.

The new software paradigm

In contrast to enterprises, successful startups don’t immediately think about putting in IT systems to support their business. Rather, they focus on customer problems that can be tackled through any means they have, which is usually software.

Unencumbered by industry best practices, startups start with a clean slate, develop their solution around a small set of problems and optimise to solve them really well.

It used to be expensive to build software. But things have changed as software started to “eat” the world3. Software building tools and Internet-based services which we will touch on below, have become more powerful and cheaper over time.

As mentioned previously, when Gartner predicted the “death of ERP”, they also proposed a change in business strategy to enable more open and collaborative processes. In line with Gartner’s predictions, there has been a visible shift to the cloud architecture – pioneered by innovative tech companies.

But they did not simply shift a software monolith to the cloud as it only meant the same ball and chain on a different computer. Those companies decided to abandon massive teams building software monoliths in favour of having smaller teams focused on building smaller, limited purpose software elements called Microservices.

Microservices started as a software architectural style whereby a specific, well-encapsulated business capability or domain area is developed as a suite of small services. The idea is the microservice dedicated to that capability is the best it could be.

The microservices are independently deployable, i.e. not dependent on each other. To make sure the whole software package works in a coherent manner, there is a well-defined “contract” between these microservices that specify how they should communicate to each other. These agreements are called Application Programming Interfaces (APIs).

To give an example, the Uber app consists of a bunch of microservices, each dedicated to a specific function such as payments, trips, vehicles or background checks.

 

How innovative businesses innovate with Microservices

Equipped with the tools in the new software paradigm, startups assemble software to serve customer needs at affordable costs, in less time while being able to reiterate on it frequently.

Microservices-oriented software allows incremental enhancement without fear of breaking the whole system. As mentioned above, microservices are independently replaceable, thus upgrades or repairs to the modular components can be done in an agile manner.

Unlike monoliths, microservices carry less risk of downtime as functionality is dispersed across multiple services, hence less likelihood of a single point of failure.

Ticking the boxes for efficiency and incremental improvement, microservices are also the enabler of experimentation, which can lead to new product or service innovation that better serves customers.

For instance, WeChat – China’s equivalent of Facebook – is constantly innovating and adding new services to help users manage more life aspects, e.g. payment, ecommerce, taxi hailing. Their architecture of more than two thousand microservices allows them to build, test and reiterate new features without having to make changes to the whole system. Imagine how long this would take if they had a cumbersome ERP to navigate.

 

To sum up the two contrasting approaches to IT: enterprises solve internal problems, startups solve customers’ problems.

What enterprises can learn from startups

To sum up the two contrasting approaches to IT: enterprises solve internal problems, startups solve customers’ problems. Enterprises deploy industry-standard ERP or system and have a point of parity. Startups build their own software with high velocity deployment using innovative architecture and create a point of difference.

It is worth noting ERP is not a piece of software, but an activity or objective. When Gartner predicted the death of the ERP concept, they introduced ERP II. Enterprises can still conduct ERP activities but not with a software monolith, rather, with a different strategy that involves a “loosely coupled and federated microservices ERP environment.”

This environment gives enterprises the chance to think outside of the cost optimisation domain and more on delivering customer value. Using the same tools as startups, enterprises can combine best of breed software products with their own microservices, configured to their unique business model and processes.

Now enterprises can win with software, rather than be eaten by it.        

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About the Author

Grant Hull, CEO and Director at Enabled Apart from guiding Enabled, Grant is also a popular presenter and speaker in the digital space. He has delivered innovation courses at several Australian universities and masterclasses to executive groups. Grant is also appreciated across the tech innovation scene, where he acts as mentor on developing new business models and designing great user experiences.

 

References

1. What Banks Can Learn from Australia’s Oldest Fintech ING http://blog.enabled.com.au/fintech-banks-australia/

2. ERP Is Dead – Long Live ERP II http://www.sunlike.com.cn/ internet / onlineerp / images /Long%20live%20ERPII%20By%20Gartner%20Group.pdf

3. Why software is eating the world https://a16z .com/ 2016/08/20/why-software-is-eating-the-world/

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