November 2, 2002
Keeping Pace with the Accelerating Enterprise

CIO Insight

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.

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.

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

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.

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."

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