I hear a lot lately about cloud as a means to “transformation,” and when I hear that word my personal value-meter kicks in, especially since so many people use the word “transformation” in ways that conflict with its definition in IT portfolio management (from whence the run-grow-transform model emerged in the early 2000s). In this post, I’m going to lay out what “run”, “grow”, and “transform” mean in this context, and how they relate to value.
By definition, to “transform” means to enter new markets with new value propositions for new customer segments. To “grow” means to enhance business performance in established markets serving established customer segments with established value propositions; to “run” means to carry out essential enterprise activities that do not connect directly to a particular customer segment (or, to put it another way, to a particular revenue stream).
When Apple entered the iTunes business, or IBM went full-tilt into the services business, those were transformations. When Apple brings out the iPhone 5, or IBM brings out a new mainframe, that’s growth, because the market, the customer segment(s), and the value proposition are well-established. When Apple or IBM add capacity to data centers that support a wide range of enterprise activities, that’s running the business.
Lots of enterprise and vendors use the word “transformation” to mean a big change, but extent of change isn’t what defines a transformation. It’s not a “transformation” when a supply chain’s costs are dramatically reduced. That’s “growth” in the run-grow-transform model unless a new market is being addressed with a new value proposition. So for example, if Wal-Mart goes into the logistics business, taking advantage of its supply chain capabilities to offer supply chain services to other businesses, that’s transformation (new market, new value prop, new customer segment); if Wal-Mart restructures its supply chain to deliver lower cost, even drastically lower cost, that’s growth (lower cost of doing business/higher margins/more capability in established markets). The value of both growth and transformation investment is ultimately expressed in terms of ROI, which is feasible because we can connect the investment in change to a paying customer (and so have actual returns for the investment).
The value of run-the-business stuff is expressed in terms of price-for-performance, not ROI, in particular because there is no revenue stream (returns) to which run-the-business services can be connected. In that sense, email in the cloud, which some enterprises think of as “transformational,” is anything but—it’s simply about achieving competitive price-for-performance for an essential enterprise service that can’t be tied to a particular revenue stream, which is a classic run-the-business value proposition.
As my colleague Matt Cain has pointed out in his research, the price-for-performance ratio for cloud-based email may not really be all that superior, depending on how “performance” is defined. Low prices for cloud services currently may reflect low levels of provider investment in security/availability/reliability/upgradeability/etc. Enterprises pay for that lower performance over time, by supplying mechanisms to fill the gaps in the performance that their own IT team used to provide. Internal IT organizations have long ago priced the costs of high performance into their services, and cloud providers will sooner or later, meaning that at some point cloud pricing for run-the-business services will approach internal provider unit costs.
Until that happens, remember to focus first on performance in any negotiation on services, because performance drives price–and if performance requirements can’t be met, price is completely irrelevant.