For millennia, the world economy grew incrementally and slowly based on population growth and increasing trade across distances. Conversion of raw materials to finished goods was achieved through manual labor and processes – often through trial and error that could take centuries. After nearly 5,000 years of recorded history, the Industrial Revolution changed everything. Businesses that deployed factories and machinery, otherwise known as physical capital, achieved significant leaps forward in production. Productivity and output leapt forward, and the world got a little smaller.
By the 1900s, the explosion of service-based industries meant that for many businesses the measure of corporate performance shifted to people, or human capital. Today, we’re seeing another major leap forward as more and more organizations embark on a digital transformation of their business, and increasingly the value of the modern enterprise resides in its applications and data.
It’s not difficult to argue that applications are, in fact, the most important asset of the digital enterprise. Consider a couple examples: Facebook has no material capital expenses beyond $15 billion a year in computing infrastructure and just under 30,000 employees – but has an application portfolio valued at more than half a trillion dollars. That’s larger than the GDP of all but 26 countries in the world. Netflix has no material capital expenses and roughly 5500 employees – with an application portfolio valued at $175 billion. To put that in context, Disney, among the world’s most iconic brands, operator of massive theme parks, and owner of a vast media empire is valued less at $160 billion.
Prior to F5, I spent 15 years at McKinsey preaching to clients that an organization’s most important asset is its people. No longer. We’re in the era of Application Capital.
Mid-size organizations generally have several hundred applications in their portfolio. Some large banking customers I’ve met with have upwards of 10,000. And yet most companies I ask have only an approximate sense of the number of applications in their portfolio. Ask them who owns those applications, where they are running, and whether they are under threat, and the answers get a little fuzzy. No doubt these same companies have invested heavily in the management of their physical and human capital, but unfortunately the same cannot yet be said for their applications.
The implications of this are staggering. Security, consistent policies, compliance, performance, analytics, and monitoring (to name a few) are each complex, expensive, and competitive issues for an increasing number of companies with apps spread across a dizzying combination of data centers, co-los, and public clouds.
In our latest customer research, nearly nine in ten companies reported using multiple clouds already, with 56% saying their cloud decisions are now made on a per-application basis. If you extrapolate, you can imagine hundreds of permutations in which companies’ apps have widely varying levels of support.
The implications leave many valuable corporate assets poorly supervised at best, and vulnerable to malicious attack at worst. Given the enterprise value attributable to applications, it won’t be long, in my opinion, before more companies finally start devoting a commensurate level of energy and resources to managing and monitoring their application portfolios.
So how do we get there? When I talk to customers, I often focus on three core areas – principles to help them maximize the value of their application capital. These principles are neither unique nor inconsistent with how businesses managed capital in both industrial and services-based economies. The challenge is applying them, in the digital age, to the development and management of our applications. How do we take the rigor and discipline that have been ingrained in us around the management of physical and human capital and apply it to this new context?
Application capital is already the primary driver of differentiation and value creation for modern enterprises. Yet few are devoting the appropriate level of energy and resources to managing and monitoring their application portfolios.
The effective management of this application capital is what will propel the next Amazon, Google, Microsoft, or Netflix. Not how many physical assets they deploy in their infrastructure, warehouses, or showrooms; nor even how many employees they amass. The real competitive differentiator will be found in their applications. Applications will drive the fastest growing revenue streams, creating significant shareholder value. Applications will drive community value as the most sustainable shared service. And most importantly, applications will attract the best talent, representing the most interesting and rewarding of work.