A period of frenzied growth is turning into a potential extinction event for those companies that do not learn how to connect business operations to software delivery. Those who master digital business models and software at scale will thrive. Unfortunately, many more will not. These are the predictions that I made in my 2018 book, Project to Product, based on Prof. Carlota Perez’s 2002 theories summarized in Technological Revolutions and Financial Capital. Over the past two years, I have been advising organizations to plan for the coming Turning Point, and to expect it to be the magnitude of the one triggered by the stock market crash of 1929. In February, Perez and I both became convinced that COVID-19 had catalyzed the Turning Point of the Age of Software. Since then, we have been discussing the massive social and economic impact of this pandemic. In this post, I will summarize the historical context and provide advice for business leaders wanting to help their organizations and staff survive and thrive through the most turbulent economic event of our lifetime.
Figure 1.3 from Project to Product (based on Perez 2017)
Perez’s models break each of the five technological revolutions into three distinct phases. The first is the Installation Period, when a new technological approach and financial capital combine to create a “Cambrian explosion” of startups, disrupting companies and entire industries in the process. This ends in a bubble and a crash, followed by a large recession that can be very long, such as the Great Depression in the 1930s. That is the Turning Point, in the sense that the societal problems and bubbles created by the new technological revolution are brought to the surface. The Turning Point is a messy and difficult period that comes after the collapse of a long period of prosperity. It is when the state changes the economic context and when businesses need to rapidly adapt their behavior to the new conditions. The end of the Turning Point marks the start of the Deployment Period, when the production capital of that age’s innovators starts taking over, and new lifestyles create demand for new products and services, new jobs and new skills.
Figure 0.1 from Project to Product (based on Perez 2017) showing the technological revolutions, with added overlay to show the events that initiated each of the Turning Points
These cycles and bubbles of innovation happen every several decades. We are now 50 years into the Age of Software & Digital, which has already seen two smaller crashes and potential Turning Points. The last two snapped back to the Installation Period, and growth continued. But this one is different. The scope of the economic consequences of the COVID-19 pandemic suggests that it will trigger the final Turning Point for the Age of Software. After the collapses of 2000 and 2008, governments acted narrowly to save finance, allowing the installation mode and investment mentality to return. This time, the effect on the entire global economy is much broader, making it difficult or impossible to smooth the bursting of the bubbles created during this technological revolution. As such, with the coming fallout of COVID-19, the conditions for the conclusion of the Turning Point in this Technological Revolution have been met. Governments, economies, society and business will have to be reshaped to fit the Age of Software and move ahead together. The sooner organizations accept this, the sooner we will be on a path to what Perez calls the “Golden Ages” that have followed each of the previous Turning Points.
To appreciate the gravity of a Turning Point, we need to stop pattern-matching using models that we have learned during our careers, and start pattern-matching with models that span lifetimes. A key pattern that is understood by the tech giants, who have mastered the Age of Software, is that of network effects and exponential growth. Heeding the early warnings of exponential spread, big U.S. tech companies moved quickly to get staff working from home at the beginning of March. However, the leaders of Europe and North America’s governments were too slow to understand and act on the data that made this pattern clear, and did not move to stop the exponential spread of COVID-19 until it was too late. The effects on both the supply and the demand side are resulting in an economic contraction the likes of which we have not seen since the Great Depression, which triggered the Turning Point in the Age of Oil & Mass Production. While hope for a more positive path should remain, the leaders and organizations that are best prepared to weather the full brunt of the Turning Point will be the most likely to survive, and then to thrive in the prosperity of the Deployment Period that is to come.
Two years ago, it was the pattern-matching of Perez’s models that made me decide to write a book to guide enterprise organizations through the Turning Point. For those who haven’t read Project to Product, spoiler alert: The tech giants will do just fine. Amazon and Alibaba will grow their business, as households shift even faster to online consumption of household goods. Microsoft will do well in the long run as B2B and work infrastructure becomes digital at an accelerated pace. Cloud software will become more central to both social and professional connectivity. It will provide the critical infrastructure needed for economic expansion in the Deployment Period. Every tech giant has already mastered cloud and software delivery at scale, and is ready for what is to come. Many are gearing up right now to hire your best staff. It is the rest of the economy, and everyone else’s jobs, that we need to secure. While not all of those can be saved by spreading the wealth of digital innovation to more organizations, many can.
While I spent those two years planning how to prepare enterprise organizations for the changes coming in the Turning Point, I had no idea that a pandemic and the hardships it is causing would trigger it. However, speaking purely from the historical perspective in every presentation that I gave on Project to Product, I stated that the scenario organizations needed to plan for was that of the Turning Point that we saw with the Great Depression. At that time, the economy shrank by a third and unemployment jumped to one quarter. It was my personal experience working with large organizations that made this coming Turning Point so palpable to me. Over the past decade, I have met with hundreds of Global 2000 IT executives. I grew profoundly concerned watching IT budgets balloon into billions of dollars per year, without metrics in place to measure value delivered. Seeing a top global bank burn through $1B on a digital transformation that delivered no measurable value was my trigger for starting the book. I repeatedly witnessed organizations with thousands of IT staff delivering less than startups a fraction of their size. This is how I became convinced that these were symptoms of a bubble that was unsustainable.
Since September 2018 I have been giving presentations on the Turning Point, my message fueled by my strong belief in digital transformation and my passion to help others understand the opportunity. While I wanted to be sending the message that “the time is now”, a message of “the end is near” got the attention. But as the actions of organizations to reduce waste and deliver stakeholder value continued to move too slowly, I became increasingly concerned. I reallocated my company’s resources to building a product that would help enterprises navigate a recession. In the fall, I ensured that my company raised a round of financing that would allow us to weather a very long downturn and deliver a product that would help other organizations do the same. Mid-February, after re-reading Perez, I communicated to my colleagues and friends that a Turning Point scale downturn was imminent, and planned accordingly. While there is always a big element of chance, in terms of pattern matching, I have found Perez’ models to be predictive enough to drive my own decision making. I realize that there are many critical areas of your business beyond the scope of what is being outlined here. However for many organizations whose success will depend on shifting more quickly to the digital offerings that will drive survival and recovery, I want to help you by providing a framework that can guide faster and more accurate decision making needed for this turbulent time.
Following the 2007-08 financial crisis, Harvard Business School’s Ranjay Gulati and his team analyzed 4,700 public companies to determine which business strategies work for navigating recessions. Only 9% of companies flourished after a recession, and the strategies employed by the post-recession winners were surprising. The companies that thrived were not the ones who cut costs faster and deeper. Nor were they the boldest investors. The data indicated that “companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow do well after recession” (see Roaring out of Recession). The message to industry leaders is clear: Double down on the product value streams that ensure your survival, as well as those that will have you thrive in the recovery. Cut all waste. To do that, you need the ability to measure every single value stream in your organization, to do so quickly, and continually. Calamity lies ahead for companies that still do not know how to measure and optimize the flow of value in a systemic and scalable way. Data-driven allocation of IT and software investment are no longer optional for survival.
As detailed in Project to Product, the problem is that a vast majority of what enterprise organizations and governments spend on IT and software creates little to no value. An even bigger problem is that only costs are measured, because there is no consensus on how to measure the flow of value in software delivery. As a result, firms invest blindly in how they allocate software and IT spend, as well as how they cut. If you do not immediately figure out how to measure value, learning to cut away waste without cutting into bone, your chances of survival are slim. Without shifting your management and decision-making to be based on data and meaningful measurement, any temporary financial fixes will not see you through to the other side of this longer recovery. The previous technological revolutions have proven this time and time again. I see no evidence suggesting it will be any different this time around.
If you buy into this vision, want to execute on it, and know your company needs to act but needs persuading, I want to help. While it cannot solve all of the problems you are facing today, Project to Product introduces the Flow Framework™ to provide large organizations with a concrete and prescriptive way of navigating the Turning Point. It does this by enabling you to define and measure the delivery of business value across your entire software portfolio. That measurement of flow is the critical piece needed to determine where you must address technical debt dead-ends, and where to allocate resources and talent to get through the downturn and then where and how to double down during the recovery. If you are a business leader and want to know more, I have created the Flow Framework Catalyst package, delivered by Tasktop, that will provide you with our software, as well as all of my and our Flow Advisors’ expertise, to help get you through the Turning Point.
If you are an individual who wants to help point your business in the right direction, and see Project to Product as a key part of the blueprint for that, we can help on that front as well. The book has been on the reading list of leaders such as the CEO of Walmart, and is starting to become required reading for the boards of a growing number of tech companies. We will gift 1,000 copies of Project to Product to those who want to give a copy to their CEO, CFO or board to catalyze their leadership toward quick and impactful action. If you are part of a business trying to transform into a tech company, we will send the free copy to help shift the mindset of your leadership in this critical time. While we can’t fight this virus with books or blogs, we can help our organizations survive the Turning Point and thrive in the Age of Software. This is the path for the economy, for jobs, and for rebuilding towards the “Golden Age” that Perez predicts is to come.