LEADINGedgeforum

Building your Firm from the Outside-in

David Moschella

January 2014

Executive Summary

Germany, Austria and Switzerland Römerstrasse 11D-82049 PullachGermany+49(0)89.793.00.79

United Kingdom, Ireland, Iberia, Italy, The Nordic Region and South AfricaVintners’ Place68 Upper Thames StreetLondon EC4V 3BJUnited Kingdom+44(0)20.7015.6000

United States and Canada3170 Fairview Park DriveFalls ChurchVirginia 22042United States+1.703.641.3479

BUILDING YOUR FIRM FROM THE OUTSIDE-IN

In 1937, the British economist Ronald Coase (who recently died at the age of 102) wrote ‘The Nature of the Firm’, which is now widely viewed as a seminal article. Coase argued that the reason large fi rms exist is that their internal transaction costs – for people, planning, producing, etc – are lower than they would be if the fi rm acquired similar services from external individuals or fi rms. He went on to suggest that companies should become ever-larger until this ceases to be the case.

More than 75 years later, Coase’s work has never been more relevant. Information technology is now fundamentally altering business transaction economics. External transaction costs – for people, services, innovation and computing resources – are falling rapidly, while internal costs – such as infl exible assets, organizational inertia and resource obsolescence – are rising. As a consequence, the balance between internal and external dynamics is shifting. In today’s highly inter-connected markets, the most important new business forces are taking shape outside the walls of the fi rm.

Responding effectively to these changes requires a shift in mindset – from inside-out to outside-in. In this Executive Summary, we will defi ne what we mean by outside-in, and show how today’s outside-in dynamics are transforming business competition and Enterprise IT alike. Clients are encouraged to read our full report at www.lef.csc.com/publications/outside-in for further examples, analysis and recommendations.

Inside-out

• Company/supplier-centric

• Marketing collateral

• Market intelligence

• Internal know-how

• Intellectual property

• Fixed, internal company IT

• Management/control

Outside-in

• Customer-centricity

• Community-generated content

• Real-time analytics

• Ecosystems, open innovation

• Open source collaboration

• Scalable cloud, public IT

• Leadership/infl uence

As shown in the fi gure above, the differences between traditional inside-out and emerging outside-in strategies are both fundamental and multi-faceted. The practices on the left have defi ned the successful global business operations of the 20th century, and these long-standing inside-out approaches are not going away. Apple proves every day that internal vision and execution can still lead to extraordinary success.

What’s different now is that the dynamics in the right-hand column are becoming the new pillars of 21st-century business competition. To adjust to this shift, companies must fi nd a way to blend the best of their existing in-house capabilities with an ever-deeper engagement with emerging outside-in forces and possibilities. We use the two-headed image of the ancient Roman god Janus to express this need for fi rms to see equally clearly into the internal and external worlds.

Outside-in affects virtually every part of the fi rm

BUILDING YOUR FIRM FROM THE OUTSIDE-IN

Given that the practices shown in each column are essentially polar opposites, it’s not surprising that many companies are struggling to reconcile their inside-out and outside-in challenges. But in the end, outside-in should define the dominant culture of the firm. Consider the powerful trends and pressures listed in the figure and described below:

• Customer-centricity. Customers are demanding an engaging, app-like User Experience (UX) tailored to their needs and behaviour. Increasingly, they want to co-create value by suggesting ideas, developing new applications and personalizing their usage. There are tremendous new business opportunities.

• Community content. Company brands and product reputations are now being shaped from the outside-in, as customers increasingly interact with one another. For example, customer ratings and reviews are now the most influential part of the buying process in many product and service industries. Similarly, community expertise is becoming essential to customer training, support and education.

• Real-time analytics. While internal business intelligence systems often have important benefits, many of the most powerful new analytical and Big Data applications will be based on the external information and pattern recognition capabilities of Google, Twitter, Bitly and other more specialized players.

• Ecosystem innovation. Breakthrough innovations increasingly begin outside the walls of the firm – through customers, suppliers, partners, crowd-sourcing and rapidly improving internet of things ‘edge’ technologies. Companies must effectively identify, leverage and influence these important ecosystem dynamics.

• Open collaboration. As software pervades every industry sector, the open meme is spreading into entirely new environments. Exciting open source, open science and open data movements are emerging in sectors as diverse as manufacturing, financial services, health care, education and government.

• Cloud-based IT. Arguably, the defining feature of cloud computing is the shift away from owning/operating dedicated IT systems towards scalable utility/rental services. These changes will be described in more detail later in this summary.

• Digital leadership. Companies can’t directly control the outside world. Rather, they must learn to steer their external ecosystems toward their firm’s ends. For many executives in traditional industries, this is a difficult cultural shift.

Understanding these forces is only half of the task. To keep pace with rapidly changing digital possibilities, firms also need an agile business operating model that is ready for whatever outside-in opportunities and challenges emerge. The pursuit of this agility will have major implications for the future of the traditional Enterprise IT function.

Implications for Enterprise ITMore than any other part of the firm, Enterprise IT has grown up with an inside-out mindset based on internal systems, processes and requirements. Just think about the language of the IT profession: many IT professionals still refer to their own firm as ‘our customer’, and their firm’s employees as ‘users’. Similarly, IT often talks about the need to work with ‘the business’. What does that make Enterprise IT – the non-business?

BUILDING YOUR FIRM FROM THE OUTSIDE-IN

This inside-out orientation must change. As the centre of gravity of the IT industry moves outside of the walls of the fi rm, Enterprise IT organizations must either move with it or be left behind. This will require an architecture and culture that helps the fi rm to change at the speed of its customers, its markets, and technology itself. IT must anticipate the business change agenda, and use this knowledge to shape its priorities.

Fortunately, modern technology – with its scalability, interoperability and variable costs – is inherently much more agile than previous computing approaches. (Formal defi nitions of the internet, the web and the cloud are different, but most of us use these terms interchangeably when talking about today’s online environment.)

Our conceptual view of the operating model of an outside-in strategy is shown in the fi gure below. The key idea is that fi rms need to live on the web (the blue circle). Reliance on internal systems (the red zone) is receding, and often only makes sense where the fi rm’s intellectual property, confi dential data, high-performance systems and other crown jewels are involved. These secure internal systems can connect to the outside world when necessary via various security/authentication processes – the ‘DMZ’ (demilitarized zone) shown by the yellow circle.

Outside-in fi rms ‘live on the web’

Given their legacy and other constraints, most large fi rms can’t move to this outside-in approach quickly or completely, living on the web should be seen as an overall goal and direction. Most small businesses (and virtually all consumers) already work this way. In the full report, we discuss how outside-in Enterprise IT is evolving in the fi ve areas below.

• Servers and storage. The speed, agility and low initial cost of virtual public cloud servers and storage have made Amazon the dominant force in cloud computing today. As hardware becomes commoditized, it is naturally evolving into more of an external utility/rental service.

• SaaS and software development. Traditional applications such as email, HR, CRM, travel and expenses are becoming standardized business services. Internal software development should focus on truly differentiating capabilities.

BUILDING YOUR FIRM FROM THE OUTSIDE-IN

• Public networks. As fibre optics, 4G, wifi and other network technologies improve, businesses will increasingly rely on the public internet. Firms are already taking small offices and country operations off their private networks.

• Bring Your Own Technology. Enterprise IT is getting out of the business of employee device provisioning and support. Eventually, employee PCs, smart phones, tablets and apps will be treated as if they are outside the company firewall.

• Social media management. In most firms today, Marketing owns external social media strategies, while internal social media is run by some combination of IT, HR and Knowledge Management. But let’s be clear: in the great majority of firms, external social media initiatives will be significantly more important.

Taken together, these developments are creating an environment in which many standard business infrastructure and applications are delivered via the cloud, with internal IT efforts focused primarily on differentiation and integration that is fully aligned with the company’s overall business priorities. It’s an enormous change compared to the way Enterprise IT works in most firms today.

While shifts of this scale can seem daunting, a simple way to start is to make the cloud the default strategy for new projects. If this principle is adhered to, firms will steadily migrate toward a more outside-in organization. The history of the IT business has shown repeatedly that radical change is less about moving existing work from an older technological platform to a more modern one. It is much more about new work being done in new ways, and the cumulative effects this approach has over time.

In this sense, most businesses will eventually move toward an outside-in operating model, but some will get there much faster than others. The early adopters can expect to gain significant speed and agility advantages, and be well positioned to take advantage of today’s dizzying range of emerging technological possibilities.

The potential of outside-in information securityWhenever we suggest these changes, the first question we get is usually about information security. While moving to an outside-in approach does create new security challenges, on balance we think the outside-in movement will prove to be more part of the solution than part of the problem. Today, every firm is vulnerable to a wide range of cyber threats, and new approaches are clearly required. Outside-in security strategies will be one of the main paths forward.

We often say that effective security is a matter of people, processes and technology, in roughly that order of priority. We are particularly interested in the evolution of company gatekeepers – the traditional management control points within the firm, such as finance, compliance, procurement, legal, auditing, HR and risk management. These groups can either accelerate or delay the necessary outside-in changes, and will in many ways come to embody the true operating culture of the firm.

From a technology perspective, we look forward to the next generation of identity management. To improve innovation, customer convenience and system security, the market will eventually move away from company

BUILDING YOUR FIRM FROM THE OUTSIDE-IN

and website-specific passwords/user IDs by leveraging individual identities based on mobile phones, email addresses, social media profiles, agents, biometrics, and even government certification. Once new approaches become widely deployed, they will likely be used inside the firm as well. We see this as the consumerization of identity management.

Outside-in security will be an increasing area of LEF interest and research. We recommend that companies keep an open mind that recognizes the weaknesses of existing security practices, and the potential benefits of new approaches.

Cultural change across the organizationMany businesspeople will say that taking an outside-in view of their company comes naturally. If you are trying to sell something, it only makes sense to put yourself in the customer’s shoes. But the great majority of business leaders need a much better appreciation of the way information technology is changing what it means to listen to the market, as the fundamentals of understanding and communicating with customers are now in a high state of flux. This is why we put so much emphasis on double-deep employees – skilled in both their role and the relevant IT. Individuals who enhance the firm’s digital interactions with the marketplace will continue to be in high demand.

While business leaders face a steep learning curve, the changes required from Enterprise IT are in many ways more fundamental. As discussed earlier, no part of the firm has historically had such a heads-down, inside-out mission and culture. The long recession of recent years has further aggravated the situation in many firms, as IT staff still face many difficult inside-out challenges, but with fewer resources. This has often made it even harder to fully embrace external marketplace changes. There is a real risk in some firms that Enterprise IT will fall so far behind that it can never fully catch up.

Conclusion – the two sides of outside-inAs we have seen, companies must build themselves from the outside-in on two fronts. From a market perspective, new digital capabilities are transforming the way businesses need to think about issues such as innovation, business intelligence and customer co-creation, as the locus of competition moves outside of the walls of the firm. From an IT perspective, modern cloud-based services are making it easier for firms to offload commodity business tasks, improve agility, and focus on technologies and software that add real value to the firm.

In both cases, there is a growing sense of urgency. The business environment of the future – driven by smart products, connected customers, global ecosystems, big data analytics and all manner of specialized services – is being established today. Similarly, the IT organizations of the future must enable their firms to safely live on the web. Companies that sustain a broad-based outside-in approach to both their front- and back-office operations will be best positioned to surf the many exciting but highly uncertain market and technology changes to come.

Designed and produced by CSC’s UK Marketing & Communications department.© 2013 CSC. Printed in U.K. 12/13. All rights reserved.

Evolution 75 Silk is an FSC certifi ed recycled paper and board rangemanufactured using 75% post consumer recycled fi bre and 25% virgin fi bre of which 70% is FSC certifi ed. Evolution 75 Silk carries the FSC Mix label.

Worldwide CSC Headquarters

The Americas3170 Fairview Park Drive Falls Church, VA. 22042 United States +1 703.876.1000

Asia20 Anson Road #11-01Twenty AnsonSingapore 079912Republic of Singapore+65.6221.9095

AustraliaLevel 6/Tower B26 Talavera RoadMacquarie Park, NSW 2113Sydney, Australia+61(0)2.9034.3000

Europe, Middle East, AfricaRoyal PavilionWellesley RoadAldershot, Hampshire GU11 1PZUnited Kingdom+44(0)1252.534000

About CSCThe mission of CSC is to be a global leader in providing technology-enabled business solutions and services.

With the broadest range of capabilities, CSC offers clients the solutions they need to manage complexity, focus on core businesses, collaborate with partners and clients, and improve operations.

CSC makes a special point of understanding its clients and provides experts with real-world experience to work with them. CSC leads with an informed point of view while still offering client choice.

For more than 50 years, clients in industries and governments worldwide have trusted CSC with their business process and information systems outsourcing, systems integration and consulting needs.

The company trades on the New York Stock Exchange under the symbol “CSC.”

Leading Edge Forum

Asia Pacifi c, AustraliaLevel 3/380 Docklands Drive Docklands, VIC 3008Australia +61(0)3.8695.1111

Belgium, Luxembourg and The NetherlandsOrteliuslaan 10043528 BD UtrechtThe Netherlands+31.30.6574.574

FranceImmeuble Le Balzac10 place des Vosges, 92072 Paris La Défense CedexFrance+331.55.70.52.80

Germany, Austria and Switzerland Römerstrasse 11D-82049 PullachGermany+49(0)89.793.00.79

United Kingdom, Ireland, Iberia, Italy, The Nordic Region and South AfricaVintners’ Place68 Upper Thames StreetLondon EC4V 3BJUnited Kingdom+44(0)20.7015.6000

United States and Canada3170 Fairview Park DriveFalls ChurchVirginia 22042United States+1.703.641.3479

About the Leading Edge ForumCSC’s Leading Edge Forum (LEF) is a global research and thought-leadership community dedicated to helping large organizations identify and adopt Next Practices at the growing intersection between business and information technology. We believe that as IT becomes consumerized and pervasive throughout society, new information uses will have profound implications for virtually every aspect of the modern fi rm.

Through an annual membership programme of research, events, onsite workshops and advisory services, we support Chief Information Offi cers and other senior Business/IT leaders in areas such as visioning, strategy, organizational change, executive education, staff development and the future of the Central IT function. Members enjoy personalized, on-demand access to our global network of thought leaders, clients and leading practitioners.

For more information, please visit lef.csc.com.