It has been interesting to watch Microsoft transition from a company that makes its money via licensing to one that also generates revenue through deployment and consumption of their cloud products. As usual in the technology world, early prognosticators were predicting that 100% of enterprises would be fully in the cloud by now.
The reality is life is much more complicated due to adoption and existing investments. The challenge of running a business with a legacy revenue stream (licensing of products), that will be disrupted over time by a new one (cloud-based products paid for via consumption) is hard for a company.
Microsoft is not alone:
Home Delivery is Undergoing Massive Change Due to Technology
Historically, packages have been delivered to homes when it is convenient for the company – not the consumer. Companies like FedEx, USPS, and UPS have dominated this market for years. Increasing customer expectations include free delivery, instant or same day delivery, and the ability to reschedule (on a mobile app) so it is convenient for me (the customer). Drone delivery and “on-demand” drivers for flexible capacity (think Uber picking up and delivering your product instead of a brown truck) are examples of the model in transition. The CEO of UPS cannot stop buying trucks and hiring drivers since traditional delivery comprises the bulk of their revenue today, but that will be reduced over time by the technology enabled models. How do they do both?
The Auto Industry is at a Remarkable Inflection Point
The convergence of electrification, car sharing, and driverless transportation is creating the potential for huge disruption in transportation. The passion for these technologies by consumers is high – and people are beginning to change behavior. California has recently passed legislation that will prohibit the sale of automobiles with internal combustion engines by 2035. Who at Ford or Toyota would have considered Apple and Google as a competitor 5-10 years ago (let alone Uber)? But selling gasoline-powered cars and trucks is still the dominant way to make money, and it will be for some time. Auto manufacturing CEOs cannot shut down their existing model because of these dynamics (yet), but they will have to figure out how to do both for a very long time as adoption occurs.
The Banking Industry Has a Similar Problem
They have historically served customers through brick-and-mortar branches – that model still generates the bulk of their new clients, revenue, and profitability. However, many customers are now using digital channels to do their banking. Chase reported this month that they have more checks deposited via their mobile app than through their retail branches. How does the CEO do both over a long adoption process?
Do I Lead or Respond?
Here is the quandary: When does a company lead or respond to disruption? We have seen examples of people getting there too early (1999: Now bankrupt Webvan delivered groceries to your door, but customers weren’t yet ready) or too late (now bankrupt Kodak and digital cameras).
In the case of Microsoft, it has not been a choice to go 100% to the cloud and drop their existing (and very profitable) licensing business. The two paths are connected by product. For example, they offer on-premises or cloud versions of the same product – which do you want? Their customer decides, and it has not been an all or nothing decision. Microsoft certainly encourages cloud adoption – but in the end, customers determine the pace of adoption.
Experiment with New Business Models
What are leaders to do when in this bind? We suggest experimenting with new business models and let them earn the right for further investment as they prove their value. Experimentation as new trends start to emerge can be shifted into major areas of investment as the new model starts to prove themselves.
We’re Drinking Our Own Champagne
For example, at Core, we see IoT and augmented reality as technologies with huge potential. But we don’t know the adoption rate of consumers or organizations – which means we don’t know when it scales into a big part of our business. To learn, we are investing in several pilots with our customers, trying to demonstrate value to both parties.
We could have waited and let this be proven out by others and then play catch up. Instead, we are taking prudent risk and providing the technical and business thought leadership from the start. We want to prove the value of our belief in IoT and augmented reality – and then we will invest accordingly.
What’s Really Driving Value in a Disrupted World?
A recent study by CIMA (Chartered Institute of Management Accountants) analyzed hundreds of business models and determined what was really driving shareholder value in a world being disrupted. Out of 15 factors, the top five are as follows:
- Customer Satisfaction
- Quality of Business Processes
- Customer Relationships
- Quality of People
- Reputation of Brand
What was last on the list of 15 factors? Equipment and plants. That’s a complete reversal of historical value drivers.
CFOs today are investing 80% of their capital in technology to improve customer satisfaction, business process, customer relationships, etc., as opposed to 30 years ago when they invested 80% in brick-and-mortar assets. These CFOs are walking the talk on disruption and placing their financial bets accordingly.