While profits saw an uptrend throughout the first two decades of the 21st century, a staggering 95% of global companies experienced negligible growth in productivity, as highlighted by the OECD in 2016. Now, with numerous global crises creating economic uncertainty and posing new, significant challenges for businesses, many enterprises must seek new ways to create shareholder value and invest in productivity to catch up.
The advent of AI-enhanced digital technology can mark the beginning of a surge in productivity. However, to be successfully leveraged, cutting-edge technological capabilities depend on both a high level of skill and knowledge and effective management.
There is certainly an increasing awareness of this, which is why we’re seeing a trend towards insourcing software development capabilities, as digital leaders seek to seize more control over the value delivered. Although such a trend is to be welcomed, it is important to note that managing software development to be impactful is a particularly unique challenge: it isn’t quite the same as organizational management as it is generally understood. This is because software is an intangible asset with high complexity. Subsequently, managers must adopt new ways of leading and organizing knowledge workers to get the most out of their capabilities.
Leverage engineering effectiveness
My colleague Ryan Murray has already explained the Thoughtworks framework for Engineering Effectiveness and how important it is for maximizing your investments. The framework helps organizations to improve their software development capabilities. If applied, you are able to engineer outstanding digital services and create new opportunities for growing your business. The Engineering Effectiveness framework provides a variety of interventions which are grouped into six focus areas:
Platform and engineering capabilities
DevEx and productivity accelerators
Enterprise testing strategy and enablement
Domain-driven and cloud architecture enablement
Scaling knowledge and leadership
Operating model alignment and governance
With digital services now getting an increasing amount of focus within even long-established businesses, it's worth taking a look at how the strategy and economics of these services differ from the more traditional approaches.
In their book Capitalism without Capital, Haskell and Westlake identify four characteristics of "intangible goods": scalability, sunkenness, spillovers, and synergies (the "Four Ss"). These characteristics are substantial levers to your growth. If your organization is able to master them, you will be well positioned to make the most out of digital services.
Let's explore how the engineering effectiveness focus areas can help you benefit from these characteristics.
Scalability: Grow your market share
One of the advantages of intangible goods is that they are scalable. Designing software is an expensive task, but software can be distributed to many customers with less effort. Twenty years ago the scaling of a digital service required new hardware and therefore tangible goods. Today with cloud infrastructure, new computing power is available as a service, meaning you can scale when you need it.
Making digital services available on the cloud requires modern engineering practices to master DevOps and use the cloud natively. Many organizations lack this technical capability. Delivering into an advanced cloud infrastructure requires your organization to master complex platforms and engineering capabilities and to be sufficient in enterprise testing strategy and practices. Both are focus areas of the engineering effectiveness framework. By applying it, businesses will be better placed to deliver for millions of customers, during events such as Black Friday. Growing your market share by using the scalability of digital services therefore depends on effective engineering practices.
Sunkenness: Invest in the right services
If a business makes an investment in a traditional asset like a machine, it can sell this asset when the business closes. Unlike traditional assets it's more difficult to get back the capital sunk into poorly targeted digital products. Investments in the wrong things will be lost. This means that funding development of software should be viewed more like investing in a venture. While large firms are often encouraged to "think like a startup", this is more than a cultural issue: there are clear differences in the engineering approach of startups and those of traditional organizations.
Which digital services reach a decent return of investment depends on what customers really need. Early feedback is crucial to decide whether you can persevere or have to pivot. Getting early insights from customers requires user-centric ways of working and continuous delivery of minimal service increments in front of customers. Focusing on customer outcomes in combination with practicing continuous delivery is a must to build the right services that your customers want. Overall, the framework’s operating model alignment and governance to focus the organization on value delivery will ensure you avoid sunk investments.
Spillovers: Attract the best talent
Intangible assets are harder to protect than traditional assets, with the result that some of the value of the assets we develop will flow beyond our own firm to the broader industry. This can be viewed as a risk, but it's also true that our firm could benefit from ideas in circulation, if we have the capability, culture and operating model to rapidly put new ideas into practice.
To take advantage of spillovers, it's important to be active in external communities. There your team can acquire new knowledge. Another way to learn quickly is partnering with thought leading consultants and co-create with them. And of course, you should also hire the best talents with expertise in this new field. How attractive the tech talents find your company depends also on the engineering culture of the tech team and whether it provides growth and learning opportunities for employees. Scaling knowledge and leadership is one focus area of the engineering effectiveness framework and lays the foundation for good learning conditions. Another one is developer experience and productivity accelerators that will improve the working environment of your teams. Better conditions for productivity are motivators and therefore also an attractor for the best talent.
Synergies: Unlock new business models
Intangible assets are easier to combine than tangible with physical constraints. Software is made of pure knowledge and can be adapted to fit with other pieces of software. Hence the beauty of digital is that you can orchestrate various existing services with less effort to create new services that may result in business innovations. The synergies can emerge inside organizations when teams create services but also across company boundaries. A typical example is a commerce platform that uses a payment service provider and analytics software.
A couple of years ago “composable enterprise” was coined as an organization that leverages technology like cloud and microservices to achieve flexibility. We can already see the composability of businesses developing in areas like commerce and banking. Establishing new partnerships to gain synergies can also create new revenue streams. For example, your business can expose a unique capability as a service to your partners and charge for it. In general, the ability to master the Composable Enterprise depends on a loosely coupled design and how you can engineer with microservices and headless platforms in the cloud. Therefore you must learn how to practice domain-driven design and cloud architecture enablement, another focus area of the engineering effectiveness framework. Again, you must improve your engineering effectiveness to gain an advantage of synergies.
Conclusion
Under the new economic conditions we can expect a growing investment in digital services to close the productivity gap and get back to profitability, especially with the emerging opportunities of AI. This needs to be supported by improving your engineering effectiveness to master state-of-the-art digital technology. So businesses are able to scale, avoid sunkeness of investments, absorb new technology by spillovers and be ready to leverage synergies.
Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.
