The Next Wave Of Information Technology

Flexible, Intelligent and Pervasive Infrastructure

By Max Wessel, vice president, Sapphire Ventures

In 1985 Professor Michael Porter — the father of modern strategy — wrote one of his quintessential HBR articles on how information drives competitive advantage. Each of these things has affected me in countless ways. But it’s the latter that I’d like to focus on at the moment.

Porter is famous for coining the term competitive advantage. Competitive advantage, a nod to the economic concept of comparative advantage, is a concept that alludes to the relative strength certain firms (not nations) have in delivering a specific type of good or service. Professor Porter had long claimed that firms who engaged in a complementary set of strategic activities could build and protect this advantage over time. Focus and organization lent itself to profitable differentiation.

But in his 1985 article, Professor Porter argued that IT was about to change everything. In its simplest form, IT was going to enable many seamless linkages inside of our organizations. The way Professor Porter saw it: communications underpinned the entire value chain. Many of our business functions were architected around the movement of information. Since IT was going to automate and simplify the movement and aggregation of that information in near real time, there was going to be a massive opportunity for shifts in the way business operated. Our organizations were going to be able to scale much more effectively, our processes were going to be able to be aligned at global scale and many burdensome parts of industry value chains would be able to be eliminated entirely.

As with many shifts in business, the impact that information technology had on the world reflected a great deal of what Professor Porter envisioned. Big companies got bigger. Costly clerical processes were eliminated. And functions within our value chains could be integrated from across the globe.

But despite its prophecy, the 1985 HBR article didn’t paint a complete picture of the future. In part, the challenge was that no one in 1985 foresaw how pervasive the internet would become. 30 years later, IT has done more than unify and transform individual companies; it’s completely upended industries. The reason for this was just how freely information beganto flow between our organizations. When a purchase order can be routed swiftly and seamlessly from Amazon to any one of its thousands of partners, the lines between Amazon and associated vendors begin to blur. The same phenomenon happens all over. The internet, and the modern wave of connected IT, has begun to knock down the walls of our organizations and replace them with permeable boundaries.

This first era of IT has been characterized by the seamless routing of information. As more and more individuals and businesses were connected to an open internet, droves of marketplaces, networks, and platform companies emerged. Porter’s predictions not only served to transform the way different global businesses went about serving their customers but also enabled droves of virtual conglomerates to be established with one unifying vendor at the center of it all — whether that vendor be Airbnb, Uber, or Amazon.

However, it’s our belief that much of the best is yet to come. Which begs the question of “Why?”

In our minds at Sapphire Ventures, three types of technology have emerged to change how businesses deliver value to their customers. Namely, today IT is becoming more flexible, more intelligent, and more pervasive. Flexibility is the introduction of modular services that seamlessly plug into your value chain. The growth of microservices like PubNub and Twilio represent wonderful examples of this, offering vendors of any kind access to virtual infrastructure of cell networks or data centers. Machine intelligence is emerging in the form of well-trained algorithms. These algorithms, like those offered to us by Google or IBM Watson in applications like driverless cars or healthcare recommendations respectively, will reduce our dependency on costly human experts. Finally, pervasive infrastructure is expanding the reach of software itself — allowing the disruption we saw in retail and communications to extend into previously untouched areas like energy production and transportation.

Each of these changes opens opportunity for disruption. The way Clayton Christensen intended it, disruption was characterized by the introduction of cheaper and more accessible goods and services into our lives. Previously complex and expensive technology, like a DEC minicomputer, could ultimately be displaced by a much more poorly-performing device, like an Apple II, if that new “disruptive” technology could slowly improve over time. Eventually, as Christensen saw it, the toy computer that sat on children’s desks at school would displace even the most competent mainframe in the task of operating a financial ledger if the PC could improve over time while still maintaining a core cost advantage.

On their own, each of the shifts to flexible, intelligent and pervasive infrastructure offers the opportunity for disruption.

Flexibility will allow businesses to be orchestrated instead of constructed from the ground up. No stack technologies, those microservices that provide businesses access to things like production, communication and logistics infrastructure, will allow companies to be created faster than ever with little organizational overhead. Even people are being plugged into value chains via APIs through services offered by Uber and Postmates.

Machine intelligence will remove the need for people in the offering of many services, driving down the cost of service and allowing businesses to open up previously expensive practices like personalized financial advisory services to everyone under the sun. With compute and storage costs plummeting, with research in machine learning growing at a rapid clip, and with the growth of ML libraries like those available within R or Python, we can be certain we’ll see more of this innovation on a regular basis.

Finally, the proliferation of sensing and actuating devices in all walks of life will allow us to reimagine business process from the ground up (again… and recently Professor Porter has written a great article on just this subject). Estimates range across the map. But whether it’s Cisco’s vision of 50 billion connected devices by 2020 or the MIT Technology Review’s more conservative estimate or 30 billion, you can be sure that the explosion of endpoints is destined to change business. With just a 1% improvement in industrial processes, General Electric estimates that the so-called “internet of things” is poised to drive value creation of more than $120 billion annually.

The examples of companies riding this new wave of transformation are many. Businesses like Talkdesk and Venmo have built huge bases of users simply by plugging into microservice vendors and personalizing workflows for their customers. Businesses like Retail Solutions Incorporated and Mint are providing enterprises and consumers alike with strong advisory services, despite little to no reliance on people. And businesses like Nest, Peloton and Fitbit are transforming everything from energy to transportation to healthcare through the deployment of connected infrastructure.

But we’ve only scratched the surface of this disruption. Despite any presence of tumultuous times in VC, we’re more enthusiastic than ever about the opportunity these emerging trends present. Business is going to change. Massive new vendors will emerge. And IT is going to continue to transform business as we know it.

View full presentation here.

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This article is based on a speech given to a group of CIOs at Sapphire Ventures’ inaugural CIO Summit. The full video is available above and supporting information can be found within the SlideShare presentation.

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