Wednesday, July 27, 2011

The Innovation Conundrum and Why Architecture Matters

A number of items in the financial and business news last week set me thinking about why architecture matters to innovation. Both IBM and Apple announced their second quarter results. IBM's revenue for Q2 2011 was $26.7B, up 12% on the same quarter last year and Apples revenue for the same quarter was  $24.67B, an incredible 83% jump on the same quarter last year. As I'm sure everyone now knows IBM is 100 years old this year whereas Apple is a mere 35 years old. It looks like both Apple and IBM will become $100B companies this year if all goes to plan (IBM having missed joining the $100B club by a mere $0.1B in 2010).

Coincidentally a Forbes article also caught my eye. Forbes listed the top 100 innovative companies. Top of the list was salesforce.com, Apple were number 5 and IBM were, er, not in the top 100! So what's going on here? How can a company that pretty much invented the mainframe and personal computer, helped put a man on the moon, invented the scanning electron microscope and scratched the letters IBM onto a nickel crystal one atom at a time, and, most recently, took artificial intelligence a giant leap forward with Watson not be classed as innovative?

Perhaps the clue is in what the measure of innovation is. The Forbes article measures innovation by an "innovation premium" which it defines as:

"A measure of how much investors have bid up the stock price of a company above the value of its existing business based on expectations of future innovative results (new products, services and markets)".

So it would appear that, going by this definition of innovation, investors don't think IBM is expected to be bringing any innovative products or services to market whereas the world will no doubt be inundated with all sorts of shiny iThingys over the course of the next year or so. But is that really all there is to being innovative? I would venture not.

The final article that caught my eye was about Apples cash reserves. Depending on which source you read this is around $60B and as anyone who has any cash to invest knows, sitting on it is not the best way of getting good returns! Companies generally have a few options with what to do when they amass so much cash, pay out higher dividends to shareholders, buy back their own shares, invest more in R&D or go on a buying spree and buy some companies that fill holes in their portfolio. Whilst this is a good way of quickly entering into markets companies may not be active in it tends to backfire on the innovation premium as mergers and acquisitions (M&A) are not, at least initially, seen as bringing anything new to market. M&A's has been IBM's approach over the last decade or so. As well as the big software brands like Lotus, Rational and Tivoli IBM has more recently bought lots of smaller software companies such as Cast Iron Systems, SPSS Statistics and Netezza.

A potential problem with this approach is that people don't want to buy a "bag of bits" and have to assemble their own solutions Lego style. What they want are business solutions that address the very real and complex (wicked, even) problems they face today. This is where the software architect comes into his or her own. The role of the software architect is to "take existing components and assemble them in interesting and important ways". To that I would add innovative ways as well. Companies no longer want the same old solutions (ERP system, contact management system etc) but new and innovative systems that solve their business problems. This is why we have one of the more interesting jobs there is out there today!

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