Last week, Bloomberg broke a story about how Microsoft's (NASDAQ:MSFT) Chairman, John Thompson, was pushing company management for a faster transition to cloud products and services. He even recommended changes in spending might be in order.
Really? This is news?
Let's see, how long has the move to mobile been around? It's over a decade since BlackBerry (NASDAQ:BBRY) started the conversion to mobile. It was 10 years ago Amazon (NASDAQ:AMZN) launched AWS. Heck, end of this month, it will be nine years since the iPhone was released - and CEO Steve Ballmer infamously laughed it would be a failure (due to lacking a keyboard.) It's now been two years since Microsoft closed the Nokia acquisition, and just about a year since admitting failure on that one and writing off $7.5B And having failed to achieve even 3% market share with Windows phones, not a single analyst expects Microsoft to be a market player going forward.
So just now, after all this time, the board is waking up to the need to change the resource allocation? That does seem a bit like looking into a barn lock acquisition long after the horses are gone, doesn't it?
The problem is that historically, boards receive almost all their information from management. Meetings are tightly scheduled affairs, and there isn't a lot of time set aside for brainstorming new ideas. Or even for arguing with management assumptions. The work of governance has a lot of procedures related to compliance reporting, compensation, financial filings, senior executive hiring and firing - there's a lot of rote stuff.
And in many cases, surprisingly to many non-directors, the company's strategy may only be a topic once a year. And that is usually the result of a yearlong management controlled planning process, where results are reviewed and few challenges are expected. Board reviews of resource allocation are at the very, very tail end of management's process, and commitments have often already been made - making it very, very hard for the Board to change anything.
And these planning processes are backward-oriented tools, designed to defend and extend existing products and services, not predict changes in markets. These processes originated out of financial planning, which used almost exclusively historical accounting information. In later years, these programs were expanded via ERP (Enterprise Resource Planning) systems (such as SAP and Oracle (NYSE:ORCL)) to include other information from sales, logistics, manufacturing and procurement. But, again, these numbers are almost wholly historical data. Because all the data is historical, the process is fixated on projecting, and thus defending, the old core of historical products sold to historical customers.
Efforts to enhance the process by including extensions to new products or new customers are very, very difficult to implement. The "owners" of the planning processes are inherent skeptics, inclined to base all forecasts on past performance. They have little interest in unproven ideas. Trying to plan for products not yet sold or for sales to customers not yet in the fold, is considered far dicier - and therefore not worthy of planning. Those extensions are considered speculation - unable to be forecasted with any precision - and therefore completely ignored or deeply discounted.
And the more they are discounted, the less likely they receive any resource funding. If you can't plan on it, you can't forecast it, and therefore, you can't really fund it. And heaven help some employee has a really novel idea for a new product sold to entirely new customers. This is so "white space" oriented that it is completely outside the system and impossible to build into any future model for revenue, cost or - therefore - investing.
Take for example Microsoft's recent deal to sell a bunch of patent rights to Xiaomi (Private:XI) in order to have Xiaomi load Office and Skype on all their phones. It's a classic example of taking known products and extending them to very nearby customers. Basically, a deal to sell current software to customers in new markets via a third party. Rather than develop these markets on their own, Microsoft is retrenching out of phones and limiting its investments in China in order to have Xiaomi build the markets - and keeping Microsoft in its safe zone of existing products to known customers.
The result is companies consistently over-invest in their "core" business of current products to current customers. There's a wealth of information on those two groups, and the historical info is unassailable. So it is considered good practice, and prudent business, to invest in defending that core. A few small bets on extensions might be OK - but not many. And as a result, the company's investment portfolio becomes entirely skewed toward defending the old business rather than reaching out for future growth opportunities.
This can be disastrous if the market shifts, collapsing the old core business as customers move to different solutions. Such as, say, customers buying fewer PCs as they shift to mobile devices and fewer servers as they shift to cloud services. These planning systems have no way to integrate trend analysis and therefore no way to forecast major market changes - especially negative ones. And they lack any mechanism for planning on big changes to the product or customer portfolio. All future scenarios are based on business as it has been - a continuation of the status quo primarily - rather than honest scenarios based on trends.
How can you avoid falling into this dilemma and avoiding the Microsoft trap? To break this cycle, reverse the inputs. Rather than basing resource allocation on financial planning and historical performance, resource allocation should be based on trend analysis, scenario planning and forecasts built from the future backward. If more time were spent on these plans, and engaging external experts like board of directors in discussions about the future, then companies would be less likely to become so overly-invested in outdated products and tired customers. Less likely to "stay at the party too long" before finding another market to develop.
If your planning is future-oriented, rather than historically driven, you are far more likely to identify risks to your base business and reduce investments earlier. Simultaneously, you will identify new opportunities worthy of more resources, thus dramatically improving the balance in your investment portfolio. And you will be far less likely to end up like the chairman of a huge, formerly market-leading company who sounds like he slept through the last decade before recognizing that his company's resource allocation just might need some change.