Digital transformation: the great enterprise unbundling

SUMMARY:

Unbundling is a powerful force that drives digital transformation into the core of entire industries. Marc Andreessen and Geoffrey Moore help explain why.

© Andres Rodriguez - Fotolia.comUnbundling is a fateful concept in the future of every enterprise. Also known as disaggregation or even decomposition, this seemingly innocuous term describes a powerful force that drives digital transformation into the core of entire industries. This post explains why this is, aided by some recent thoughts from influential business writer Geoffrey Moore and high-profile venture investor Marc Andreessen.

In a follow-up post I’ll go on to discuss how the enterprise can harness unbundling for its own goals. This now starts to get to the meat of my ongoing series about digital transformation in the enterprise, leading up to a final post (fifth in the series) that will tie it all together.

Unbundling started out a few years ago as a term that economists were using to describe the onward march of global outsourcing in the new century. The historical context is summarized in Globalisation: the great unbundling(s) (PDF), a document prepared for Finland’s Economic Council during its EU presidency in 2006 by Richard Baldwin of the Graduate Institute of International Studies in Geneva:

Rapidly falling transportation costs — a trend which has been going on since the late nineteenth century — caused the first unbundling, namely the end of the necessity of making goods close to the point of consumption.

More recently, rapidly falling communication and coordination costs have fostered a second unbundling — the end of the need to perform most manufacturing stages near each other. Even more recently, the second unbundling has spread from factories to offices with the result being the offshoring of service-sector jobs.

In a nutshell, the first unbundling allowed the spatial separation of factories and consumers. The second unbundling spatially unpacked the factories and offices themselves.

The unbundling of office work allowed competition in individual tasks, rather than between entire firms, and first became evident in the offshoring of specific job roles such as call center agents or software developers.

The third great unbundling

Today, we are in what I would call a third phase of unbundling, in which the individual jobs and processes themselves are being picked apart with the aid of digital technology.

The totemic example in Baldwin’s paper of a job that is safe against global competition is that of a taxi driver. Yet the third great unbundling removes the barriers that protect even this job against new sources of competition. Whereas taxi drivers used to sign up with a local cab firm to find a steady supply of clients, the rise of  connected, GPS-equipped devices has changed the game.

New digital competitors like Uber and Lyft have tapped into this technology to unbundle and repackage the processes of the traditional cab firm, opening up the trade to new, part-time drivers. But, since this is digital, it doesn’t stop there. These new models ultimately pave the way to the unbundling of long-held conventions of automobile ownership.

Growing awareness of this digitally enabled third wave of unbundling has already given rise to a flurry of infographics showing its effects across various industries, from newspaper publishing to banking. The underlying theme is that all established industries are vulnerable to the depredations of unbundling. Even today’s Internet giants, having themselves unbundled the activities of other firms, must worry today about who will unbundle them.

Unbundling and rebundling

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Marc Andreessen

Of course, this great unbundling leads in turn to an equally massive rebundling at some point in the future. This is how Marc Andreessen recently explained the interplay between unbundling and (re)bundling to Harvard Business Review:

I think music is a great example of that. It made sense in the LP and CD era to put eight or 10 or 12 or 15 songs on a disc and press the disc and ship it out and have it sit in storage until somebody came along and bought it.

But, when you have the ability online to download or stream individual tracks, then all of a sudden that bundle just doesn’t make sense. So it collapsed apart into individual MP3s. And I think now it makes sense that it’s kind of re-bundling into streaming services like Pandora and Spotify.

What is true for products is equally true for the enterprises that make them, he went on:

I think the bundling or unbundling of the product actually directly affects the bundling or unbundling of the business. So one of the other things you see happening in music now is actually the music industry getting reconfigured and being split out. There are now companies that are entirely online record labels that have started from scratch. Or there are companies that are entirely focused on merchandise sales. There are companies entirely focused on touring.

And the old record labels that are still bundled businesses corresponding to a bundled product offering are struggling to adapt to this new world with lots of new competitors that are effectively unbundled.

He explained that this a pattern that his investment firm, Andreessen Horowitz, looks for when considering which ventures to back:

I would say we look actively for the pattern of large incumbent, established industry, bundled product or service offering, coupled with underlying technology change, coupled with idea for unbundled product that the customer might prefer, and then of course coupled with an entrepreneur who can actually build a business around that. I think that’s a fairly common pattern.

Geoffrey Moore weighs in

In my previous posts in this series on digital transformation, I wrote about some of the ways in which enterprises fail to see the bigger picture. They focus on digital customer engagement without linking this up to other processes within the business. Or they embark on a mobile app strategy without overhauling the underlying enterprise IT infrastructure.

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Geoffrey Moore

It’s only natural that their first response should be to invest in what Geoffrey Moore has called Systems of Engagement (SoE) — the digitally connected systems that interact across the enterprise boundary with customers, prospects, partners and outbound staff. But in an era of massively disruptive unbundling of established businesses, this is merely the first step.

As Moore outlined in a recent article posted on LinkedIn, the big deal is not systems of engagement (SoE) but systems of business (SoB):

Whereas SoEs instantiate new operating models — streamlining interactions to make them more effective and efficient — SoBs instantiate new business models — truly disrupting the status quo.

These systems of business, based on new digital technologies and processes, are the agents not only of unbundling but also of the rebundling into completely new configurations that consign the old models to history. Rather than being an add-on to the enterprise core, they completely replace it.

Networked systems of business

Therefore I would suggest Moore has missed off an important qualifier from his new term. These are not like the traditional, stovepiped business systems of old. They disrupt precisely because they connect directly into the digital universe.

So I prefer to call them engaged or networked systems of business, to clearly distinguish them from the old, disconnected and internally focused systems of record that were developed to automate pre-digital enterprises. Ultimately, they will absorb and subsume the functions of both systems of engagement and systems of record, as I discussed earlier this year when writing about The cloudy future of enterprise applications.

In the meantime, Moore recommends that enterprises deploy systems of engagement as their best defense against unbundling and rebundling by digital upstarts:

Your best bet is to deploy next-generation Systems of Engagement in ways that build on your legacy assets to create new user experiences that can compete with the novel business model. This is not a perfect answer either, but it will serve for the middle term.

That’s fine, but what about the long term? That, of course, is where your digital transformation strategy comes into play. What its goal should be is the subject of my next post in this series.

Image credits: Breaking chain © Andres Rodriguez – Fotolia.com