Host Intro (Gene Kim)

Peter Moore is someone that I only met last year, but he immediately struck me as someone who the entire DevOps Enterprise community needs to know better.

He has spent decades in a unique position working with both business leaders and technology leaders, and some of that was enabled by something very unusual about him because he is the brother of the famous Dr. Geoffrey Moore, author of the book, "Crossing the Chasm" and "Zone to Win."

"Zone to Win" is a book that appears very prominently in The Unicorn Project, highlighting the challenges that every modern organization faces, which is that they must balance core versus context, and the danger of letting context starve core. Core being the core competencies of the organization that create lasting, durable business advantage that customers are willing to pay for.

I'm so delighted that Peter will be teaching us about the Three Horizons model and zone management, which I think is an incredibly important concept for anyone doing something as disruptive as the work that we are doing. Please welcome Peter.

Peter D. Moore

Thank you, Gene. It's a pleasure for me to be here and talk to your group at the Enterprise Summit. It would've been nice if we could've all been together in London, but we'll figure out a way to do this remotely as we have in the past, and hopefully we'll be together soon in the future.

What I wanted to share with everyone today is some work that I've been doing over the last several years with CIOs and senior leadership teams, helping them understand how they can maximize the business value of IT across their organizations.

Before I get started into my content for today, I wanted to give you just a little background that sort of shapes the perspective that I've taken on the role of IT and how important it is to have it align completely with the business part of the organization so that you have common outcomes and common accountability.

In the early '80s, and for most of the '80s, I worked at the New York Stock Exchange. I was a senior executive there, worked with a number of our listed companies' CEOs and their senior executives, and saw firsthand how challenging it is for well-established companies to change their behaviors and attitudes about a variety of things.

And this has become much more relevant to me recently, as I have now spent a lot of time working with individual companies like the ones listed here. And the one that was most interesting to me was, starting in 2003, I began working with Rob Carter, the CIO at FedEx. And we worked together over an eight-year period of time, and it was a fascinating opportunity for me to see firsthand the challenges that an IT group in a very successful company, with a very successful CIO, still found challenges and had a very adversarial relationship with the business.

And that has motivated me to do what I can now to help IT teams find ways to align with their business partners and everybody be accountable for the common outcomes that the business wants to achieve.

So I'm going to share with you today some of the frameworks and tools that I use in this work. I have some use cases, and I think hopefully it'll provide you with some practical examples of how you can maximize the business value of IT going forward.

As Gene mentioned, my brother, Geoffrey Moore, the more prolific Moore brother, he's written seven books, I've written one, wrote a book recently called "Zone to Win," and the purpose behind this book was to help established companies figure out how to find the right balance between funding the businesses they had in the performance zone on this chart, and making material new investments in businesses in the transformation zone that could scale and provide material new revenues and profits for the organization.

And as you'll see as I go through this presentation, where those challenges could come and why it's important for organizations to be able to have a framework, a vocabulary, and a toolset to make those kinds of decisions.

But the other interesting thing that happened when I read Geoffrey's book was, I had begun working with CIOs about six years ago, and one of the things I noticed was they had a hard time organizing and prioritizing their work around running the business and growing the business. And I thought, I think the "Zone to Win" framework now provides a great organizational structure and operating model for IT to do that. So that's really what I want to focus on over the next few minutes with you to show you how that plays out.

So the challenge that we find in most discussions that I have with CIOs is how do you begin to change the narrative about IT from a cost center support function to a strategic business partner that enables business outcomes? And I think the way you start that is you begin to have a dialogue, and the dialogue is with a broad group of cross-functional officers in the organization, all of whom have the interest of the organization overall. They're accountable for that and the outcomes through the annual planning and other growth objectives that they have.

And you begin to ask a couple of questions. How does the company create value today? And what could dilute or disrupt that value? And as most of you who are part of this summit know, over the last 10-plus years, there have been enormous numbers of disruptive technologies, unprecedented, whether it's social or mobile or data analytics or smart devices, whatever it is, has created an environment where the traditional barriers to entry to most industries have now been obliterated.

And I think going forward, it's important to redefine the role and value that technology brings in this new environment. Part of that is then, how does the company use digital technology to drive new value creation? And finally, and very importantly, how open is our culture to changing the way we do business?

As you'll see, one of the themes that goes through here that I think is a leadership challenge for everyone in an IT group, and that is how do you free IT's future from the pull of its past? And we'll talk more about that going forward.

To get things sort of started, I wanted to provide three definitions of how I think the business value creation potential of IT has significantly changed and increased.

Historically, IT was basically comprised of systems of record. These are all the operating systems that any company needs to do business, whether it's CRM, supply chain, HR. They all have to be accurate, up-to-date, and secure. And from a governance point of view, the company, and predominantly IT, controls access to it and utilization of it. And that is going to be a continuing source of value.

The challenge, however, is the billions of dollars that have been invested in building and installing and maintaining systems of record. Most of the value from those investments have already been received. So in terms of creating new value, systems of record is not a place that has a lot of opportunity to do that going forward.

However, there are now two other areas. The next area is what we call systems of engagement, and this is where the organization uses different tools and systems and technology to engage with key stakeholders, whether they're customers or employees or supply-chain partners. And the two differences are, one, in this case, it is the customer or the stakeholder who determines what way they want to engage. It could be a mobile phone, it could be their laptop, it could be a smartwatch, it could be whatever it is. And the second thing that's changed is they expect that experience in the enterprise to be just as friction-free and just as seamless as in their consumer life.

And so one, the control goes over to the demand side, if you will, rather than the supply side, and the expectation is significantly ramped up.

And then lastly is the emergence of things what we call systems of intelligence. And these are all the tools and applications and processes that companies use to be able to better understand all the data and analytical information that exists in a variety of different sources, most of which are not connected, so it's very hard to get a single source of truth in an organization.

But being able to harness the development and deployment of systems of engagement and systems of intelligence has now greatly expanded the footprint and the ability of IT to make a huge business value contribution to their organization.

The way this plays out now is we look at the original framework that Geoffrey designed, and the way it plays out for IT is in the performance zone, which is where all the businesses reside in the organization. And I'm going to go into each one of these separately in a minute, and you'll get a clearer picture of them. But here is primarily where IT works with their business partners to develop and deploy systems of engagement to increase customer experience value and utilize systems of intelligence to better understand and deliver new customer value. And again, this is done not in a silo, but collaboratively with their business partners, and that's a big change in how value is brought to the company through the IT group.

The productivity zone is where the systems of record reside. This is where the key goal now, the challenge for most companies is about 80% of their IT resources are still maintaining systems of record, and about 20% are developing and deploying systems of engagement and systems of intelligence. That needs to be rebalanced if you want to increase and maximize the business value of IT, and we'll talk about how that could be done.

The other thing that you can do in the productivity zone that is extremely valuable in any organization is there's an enormous amount of trapped value in systems and applications and all kinds of functions in the systems of record, which are generating little or no value. And we'll talk about how you can use a trapped value recovery program to recover that value and then redistribute it and redeploy it against higher-value, grow-the-business opportunities.

The incubation zone is an area where the organization is identifying and testing and validating new generations of products and services, new technologies. This is where agile, lean, and DevOps are used so that you change the cadence of how work is done, speed to market, time to value. So things like waterfall, which may be relevant in certain circumstances, don't have the same decision cadence and speed that you need to compete today.

And then finally, the transformation zone is where the organization decides that it has an opportunity to scale a new business to 10% or greater of their current revenues and/or use technology to get into adjacent businesses. And we'll look at examples of that going forward.

Each of these zones has its own charter, and it's important to make this point because a lot of companies use not only the operating model of the performance zone, but also the metrics, as you'll see later on in the performance zone, to do everything that the company does. And that's a real mistake. Each one of these zone charters has its own reason, its own set of objectives, its own cadence, and must be adhered to, and if you can do that, you'll get the results that you want. If you can't, there's a good chance that you will fail in getting the outcomes that you're looking for.

So the performance zone is where you have all the operating companies. They drive the revenue, and the margins, and the profits that operate the company, and you use that to invest in how the company performs. Here is where IT can really make a significant business value contribution to developing and deploying systems of engagement and developing and deploying systems of intelligence.

So let me give you a couple of examples to make this point. Monsanto, which is an old-line, very well-established company as most of you know, recently developed and launched a data analytics platform that they called Science at Scale. It's designed to run simulations against millions of data points on seed genetics, climate, water, soil, and nutrients. The platform leverages Amazon Web Services and Google's TensorFlow machine learning application to reduce the time to run simulations from months to minutes, thereby increasing revenue for the company by $17 million.

So here again, a lot of people, when I talk about running IT as a profit center, not a cost center, they think that means selling to the internal customer. I'm talking about developing technologies that you used initially, internally, and then commercializing those and selling them externally to customers, and in some cases, competitors.

The other example in the performance zone, as I mentioned before, and the issue that we really were challenged with in FedEx is, how do we move from an adversarial relationship between IT and the business to a collaborative partnership? And the example that I wanted to bring to you is some work I did at Splunk with their business applications division.

And when we first started doing the work together, the head of that division had 140 developers, each of whom were organized around a different software stack. So there was a Salesforce team, a NetSuite team, the old Workday, et cetera. But they had no alignment back to the businesses.

And so what we did was we unbundled, if you will, that structure and created six cross-functional teams and assigned each team, one to the sales and marketing team, one to the cloud business, one to the product team, et cetera.

And then instead of sitting down as IT typically does with internal partners and brings their Excel spreadsheet and looks at where the projects are and who's ahead, is this project on time or behind, or how do we negotiate moving things around and prioritization, we walked in with the head of marketing and the head of sales and just asked one question initially: "What is currently making it difficult for you and your team to achieve the desired business outcomes that you're accountable for in this year's plan?" Totally open-ended question, okay?

Within 10 minutes, what we discovered was, in discussion, that if you were in sales or marketing and you wanted to understand the full range of services and products that a Splunk customer was using, you had to open up five separate applications. And that kicked off something called One Click, One View. In over a nine-month period of time, we collapsed the five applications down into one.

The point being is that that opportunity would never have come up if we hadn't opened up a broad dialogue with them, and then we turned people who were adversarial to people who were advocates. So again, it's an example of how important it is to be aligned with and collaborate with your business partners.

So the charter of the productivity zone, as I said earlier, this is where everything, all the cost centers reside in the organization, including IT. There's an enormous amount of investment here. There's an enormous amount of ongoing need to run a company, all the ERP systems and CRM, et cetera. But the value from those have been pretty much received.

So the challenge here is, how do we optimize the cost of maintaining these systems of record? And what we want to try to do is where there are opportunities to simplify complex, redundant, and siloed systems and processes. To do that, we have developed something called a trapped value recovery exercise.

And the way this goes about is you bring a cross-functional team together, and you start down and you say, "Where in effect is trapped value in our company today?" And as Gene mentioned in the introduction, one of the other constructs that Geoffrey has developed is what we call core and context. Core is any activity or function that directly impacts the performance of the company, and context is all the other things that have to get done.

So the key is that you want to insource and maintain and fund core and outsource context, and that's part of what this exercise is about. So you bring the teams together, and you say, "Can we identify and unlock trapped value context by either eliminating or consolidating systems of record, simplifying systems of record, or replacing systems of record? And then can we redeploy that trapped value against critical new business value investments and priorities, which is core?"

So the key point here is this is not a cost reduction exercise, it's a resource and budget redeployment exercise from context to core.

And a couple of use cases, I think, really make the point very well. AIG deployed five virtual engineers inside its infrastructure to collect and analyze system performance data. A typical network outage would go into the queue and take engineers about three and a half hours to address. Using virtual assistants, most outages were fixed in 10 minutes, and over the first year returned 23,000 hours of trapped value back to the company. So I think that's a really excellent example of how you can recover time spent on things that don't deliver value to be redeployed on things that do deliver value.

One of my favorite use cases, though, is Edmunds. Some of you may know them, they're an online car-buying company. And a number of years ago, the CIO came in, and what he discovered early on is that he and the team had inherited an Oracle ERP license and maintenance contract that was costing them $2 million a year. They went in and analyzed that contract and realized that at best, they were getting about a half a million dollars worth of value.

So they went back to Oracle and said, "We'd like to renegotiate the contract, the license." And Oracle, in those days, said, "Thanks, but no thanks." Probably not quite that politely.

Anyway, instead of taking that and just saying, "Well, there's nothing we can do about it," the CIO went to the CEO and said, "I need a half a million dollars." And the CEO says, "What for?" And the CIO said, "I want to take my very best developers and I want to pay them separately on their own time, and we will develop our own ERP system." "How long is this going to take?" the CEO asks. CIO said, "I don't know. Could take nine months, 12 months." Four months later, they launched 80% of what they needed for an ERP system and went back to Oracle and told them to take a hike.

So I think, as you saw in The Unicorn Project, the Rebellion, the opportunity for the red shirts to take control instead of being sort of under the thumb, if you will, of some of these large providers of ERP systems and other systems of record, is just a great example of you don't have to do that. You can generate your own solutions and, in many cases, provide the value and increased value that you had prior to that.

The third zone is the incubation zone, and this is where all the new bets, if you will, the new opportunities are explored. You want to be able to figure out what kinds of technologies you can leverage. Could you be a disruptive innovator? And what other potential technologies could come in and disrupt your business as well? So there's a constant flow here, and you'll see in a minute the cadence of this zone is very different.

The other thing that has emerged, though, from this zone is it's now become a staging area for all major projects, not only IT projects, but most corporate projects. And as a result of that, it aligns project prioritization and demand management with resource allocation. And it has really had a huge impact on the ability of particularly the IT group to not only get key projects done on time and within budget, but to do it in a way that aligns directly with the business outcome that the business partner is looking for.

So the way this operates is the staging area is where all the projects go. Most of the organizations I'm working with now is we're reimagining and rebuilding what a project management office would look like and how it would operate. And to do that, we wanted to set up a series of processes and thresholds so that you can't get out of the staging area unless you get over these thresholds.

So the first one is, how are we going to prioritize the number of projects? Most IT teams have much more demand than they have capacity to meet, and they struggle to prioritize where they should allocate that capacity. So the first question we ask is, "Is this a sustaining or a disruptive innovation?" Secondly, "Does this enable a systems productivity or cost optimization outcome?" In which case, it's in service to the productivity zone. "Does it increase business unit performance and revenue growth?" In which case, it's in service to the performance zone. And, "Does it enable a business model transformation or access to an adjacent market?" Which then means it's in service to the transformation zone.

So what you've begun to do now, when you look at the number of projects you have for a given period of time, let's say at an annual planning thing, now you can segment them by zone. And many times when we've done that, we've seen a disproportionate amount of projects in the productivity zone, and you can now begin to rebalance those from a prioritization point of view, depending on the overall goals of the organization.

And then the other three questions we talk about are around demand management. Just because somebody wants something doesn't mean necessarily that we should do it. So the first question is, "Does this align with and support critical business outcomes?" And if it does, great, and if it doesn't, then we probably shouldn't do it. Just because we should do it doesn't mean we can do it. So the next question is, "Do we have the relevant skills, capabilities, and capacity to achieve the outcome?" And finally, "Did we do it? Do we have the right metrics to measure the achieved outcomes versus the desired outcomes so that we can know ahead of time, not after the fact, whether we're on budget and on time?"

And I think that's an important distinction because a lot of projects that have a lot of different processes, three months down the line, they realize they're now two months behind. The way metrics are deployed here, you're tracking performance on a real-time basis.

And finally, there's the transformation zone. And the charter in this zone really says, is there an opportunity to launch and scale a net-new revenue source of earnings, a net-new business? And if so, how would we go about doing that? And primarily, this is not initiated from IT. This is usually initiated from the board and/or the CEO and the C-suite. And so the first question is, is there an opportunity? Maybe it's something we've been working on in the incubation zone. It could be an acquisition. It could be a variety of things. But the threshold that you want to get over is, if we invest in this, and if we commit to this, it's going to generate 10% or greater of the current company overall revenue. If it's anything less than that, as you'll see, there's so much pain that goes into this that you don't want to do that unless you're sure it can make a major contribution to the organization.

And secondly, can you leverage digital technology to enter adjacent markets? So let's look at a couple of examples of how this works. Union Pacific Railroad created and launched something called PS Technology. It was a separate commercial technology business to sell digital technology apps the company originally developed for its own use, to partners and competitors. As a result, they are now one of the largest providers of locomotive simulation systems, and they've generated in excess of $50 million in incremental new revenue for the organization. So again, taking technology, it could have been, in this case, systems of engagement and systems of intelligence, using it internally, and then finding a way to commercialize it externally.

And then finally, Raytheon has moved from using software as a business enabler to treating it as the new business growth opportunity. Starting back in 2007, it began partnering with and acquiring cybersecurity software companies. It created a new business unit with its own P&L called Forcepoint. It is now a significant revenue contributor to the organization.

So once again, I think it's a good example of how when you look at IT as a potential profit center, the commercialization of the technologies that you've been using internally can be realized externally as well.

And finally, let's talk about this challenge of why do companies struggle getting new businesses and getting into significant new investments? And this is an original model called the Three Investment Horizons. Gene mentioned it briefly in the introduction. It was created by McKinsey, and what it basically talks about is in every business, there are activities that go on at three different levels.

Horizon one is all the work, primarily in the performance zone of the existing businesses, which are returning ROI and revenue, margins, and profits within the 12-month annual process. And most companies do pretty well here. The second area is horizon three, which is really the R&D effort in most organizations. This is where, in our vocabulary, it's the incubation zone. And here you have a longer time horizon. It could be three years or longer. And you're not competing for resources in any way. You have your own sort of separate. And companies do that pretty well.

Where they get in trouble and where the challenges become is when you find a very promising opportunity in horizon three that you think can scale to a material new business, 10% or greater of your organization, that's when you move it into horizon two and prioritize it. The problem is, and the reason that they get stuck here, is that you need to call on resources and budget from horizon one in order to fund horizon two with the understanding that you may not get an ROI for two or three years.

And so those discussions get very challenging, and I think the best way I could make that point is to give you the Microsoft example, which I think is just so compelling that it really makes the point.

When Steve Ballmer took over from Bill Gates as the CEO of Microsoft in 2000, the company stock was trading at $40 a share. When he stepped down in 2014, the stock was trading at $40 a share. During the entire 14-year tenure of Steve Ballmer's CEO position, the stock of Microsoft never traded over $40 a share.

Now, you say, "How is that possible? This is a company that generated free cash flow like there was no tomorrow." The problem was, when they went into their annual planning and budgeting and resource allocation meetings and discussions, they went and had those discussions, and before they were done, 90% to 95% of all the resources and budget were allocated to Windows or Office. And there wasn't enough money to put behind and enough support to put behind to scale. So they never scaled a net-new business in those entire 14 years.

When Satya Nadella came in in 2014, he used the Zone to Win framework, and he pivoted Microsoft from an on-premise, on-desktop business model to a cloud-first, mobile-first model, and the stock today is trading at $189. The point being was, he was able to free Microsoft's future from the pull of its past. He was able to find a way to have a balance between funding the businesses that they had, investing in the new businesses that they wanted to have going forward.

And so finally, that brings me down to the metrics we use to measure the work in each of the zones. And as each zone has its own charter, each zone has its own metrics. And it's important here to remember that you do not want to use a metric in the performance zone, for example, to measure the performance of an activity in the incubation zone. I'll talk about that more in a second.

So the performance zone is really where, as I said, this is where all the operating businesses are. This is primarily the short-term returns that companies are accountable for. And so there's a whole host of investor metrics and companies, could be EBITDA, could be a number of things, but those are all relevant to the performance zone.

Productivity zone metrics are more process-oriented. We're talking about cost optimization, regulatory compliance, technical debt reduction, et cetera. And again, these are important for this zone and should not be used for the performance zone.

The incubation zone is what we call venture metrics. As I said before, the cadence here is very different. This is get in there, minimum viable product, test it, iterate it, come back. If we want to make improvements, we will. But we need to move much faster, and we need to have metrics that'll enable that kind of cadence as opposed to having it slowed down by other types of metrics.

And then finally, in the transformation zone, you have hypergrowth. The key here is it's got to be worth the sacrifice. You've got to be able to get at least 10% or greater in overall revenues because you have to pull revenues and resources from other parts of the organization in order to achieve that outcome. When you do that, and you do it well, then this framework is very, very helpful, as the Microsoft example. Salesforce, Marc Benioff, the CEO, has used it there to be the disruptive innovator and scale his business over a number of different new businesses. So it's had some very big impact in a very short period of time.

And let me close my presentation by saying I still think there are a couple of major obstacles to overcome. And part of what excites me about being part of Gene's group and all of you that are participating in the summit is this is a group of people that like to lean in and work together to solve obstacles.

And let me just leave you with the two that I think are most challenging still for IT. The first is freeing IT's future from the pull of its past. As long as we look at IT budgets and we see that there's still 80% of the budget and resources and time allocated to running the business instead of the growing the business, we're not going to have the impact and not bring the business value to the organization that we can. And so that's a challenge that all of us have to accept and all of us have to work very, very hard to change.

And lastly, and secondly, is I believe that IT should be run as a profit center, not a cost center. Technology is such an integral part of every organization and how it competes, how it brings value, how it engages with all of its key stakeholders, that there's no reason that IT shouldn't be run with its own P&L. And I think in order to do both of these things, we need leaders who understand and are committed to what I call reimagining what's possible.

Thank you very much.