Innovation Is Compounding Interest:

How Legacy Companies Can Compete and Deliver Innovation Like the Cloud-Native Giants

There is little doubt that mastering software at scale produces a competitive advantage. The fact that Amazon is now using former J.C Penney and Sears stores as fulfillment centers tells you everything you need to know. Or does it? Amazon’s developers are not 30x better and faster developers than others. However, they treat continuous improvement and digital innovation like interest, recognizing that it’s a compounding game.

Amazon and other tech giants are able to iterate and improve during every development cycle and over potentially hundreds of products. With a product-first focus, combined with the latest processes to accelerate product development from request to delivery and less legacy baggage, these companies are pulling ahead and fast — as shown in Figure 1. It’s clear to see that if you haven’t mastered software at scale to become as responsive and adaptive to customer needs as the digital-natives, then your bottom line is trouble.

Figure 1

The gains made by digital-natives have been gradually increasing, creating a chasm that hasn’t been noticed by traditional industry market leaders until it is too late to catch up. Consider the simple example of saving money. Why can young investors invest less but end up having more money saved for retirement? It’s the concept of compounding (Chart 2a). If you start early, the money earned in interest is leveraged to produce more.

Chart 2a

Anyone who has tried to start saving for retirement at age 40 knows this, and the same concept applies to businesses. Forget winning the developer lottery and miraculously becoming as efficient as Amazon this year by just investing in developers, tools and methodologies. However, if you accelerate your software delivery via these investments, even in small increments, those benefits compound over time and lead to the large chasm between innovative companies and others (Chart 2b). There is a huge cost to delay, but traditional businesses can catch up by measuring success from a business perspective. It is easy when you can see your money accumulating, but harder when you look at software flow and how it correlates to business outcomes (such as faster time-to-market, revenue and customer retention).

Chart 2b

How to Apply Business Value in a Practical Sense

In his recent article for AWS entitled “Cloud for CEOs: Measure Innovation with One Metric,” 2 Adrian Cockcroft writes the following: “The most critical metric is how long it takes for an innovative idea to reach a customer. If it takes your company months, how can you compete with an organization that delivers in days? This is why it’s critically important to know the time-to-value for each of your product teams … As a leader, showing that you care about reducing time-to-value provides clear guidance to your organization.” You cannot fix or change what you cannot measure.

The well-documented trials and tribulations of Tesla in 2018 help us understand the ramifications of inefficient software development flow. Due to problems with automation tools in production, the car manufacturer was behind by 3,000 Model 3 cars per week. On April 17, they halted production on the Model 3 to address bottlenecks in the manufacturing assembly and Tesla lost $702M of stock value in a single quarter due to the Model 3’s delay (washingtonpost.com). Now, imagine if Elon Musk asked his executives how much Tesla lost. If you said it was the cost of the assembly line tools, you would be laughed out of the room or fired on the spot. The loss is clearly the value of the 3,000 cars per week, and the stock value, not to mention the brand damage. It was in the 9–10 decimal range based on stock value and reputation. It was such a focus that Elon Musk slept at the factory until the issues were fixed and the company recovered.

This reframing of ROI and business value, and seeking to increase efficiency by 2%-5%, can help legacy company’s level the digital playing field. There are two simple ways to get started.

Your Backlog is your Model 3 Tesla

Software development work that contributes to the creation and protection of business value can be broken down into four items:

• Features (new business value)
• Defects (quality)
• Technical debt (removal of impediments to future delivery)
• Risk (security, governance, compliance)

This distribution and backlog of work represents a mutually exclusive and comprehensively exhaustive view of the elements that make up value. If processes break down and you have to limit the amount of work done in a product cycle, it is not just the developer time or DevOps time that is underutilized; you have lost the opportunity value in your backlog that a competitor (who has no process break down) does not lose.

Figure 3

As depicted in Figure 3, only so much of your distribution can be included in each sprint or program increment (as per the Scaled Agile Framework®). If you could regularly address more features or debt work, for example, then this benefit begins to compound over time.

Executives should not look at ROI only through the lens of hours lost, but also all the projects in their backlog, and how they can continue to innovate and increase flow of features, defects, risk and debt and that is the value to the organization. These are what innovators do successfully over and over again. This product backlog is like the thousands of Teslas that were back ordered due to a slow production line. They are the true value and differentiator for your company or organization. This is the true cost of delay.

So what is the value of those backlogged items? Pulling forward your backlog more rapidly creates competitive advantage, customer satisfaction, market presence, operational efficiency, revenue, risk reduction and software sustainability over time due to technical debt retirement. It sustains market dominance over time.