Exploiting the growing value from information

Streetline, a startup based in Foster City, California, uses mobile sensors, web applications, and analytics to collect, transmit, and analyze data from parking meters and parking spaces. The company is transforming parking operations into digital ecosystems to the benefit of the cities, the drivers, parking lot operators, and local merchants.

At FedEx, an evolving digital operating model allows customers to stay in continuous contact with their packages and to initiate changes to their shipments and other orders previously viewed as strictly internal operations. The operating model also supports the efforts of business partners to create new services using FedEx information.

And AT&T is transforming its network into a permeable digital platform with software interfaces that third-party developers can use to tap into network capabilities to create applications and services that add value for customers, the third parties themselves, and AT&T.

All three examples (detailed later) illustrate how leading companies are capitalizing on digital ecosystems that are expanding due to the confluence of social networks, mobile computing, analytics, and cloud computing (SMAC).¹ SMAC challenges enterprises to take advantage of the positive disruptions it portends, while they operate at the rapid pace of innovation and change that SMAC demands.

What is an API?

SMAC and other emerging technologies create the possibility for new ways to develop products, interact with customers, partner with others, compete, and succeed. More than a strategy for any individual technology trend or for combining more than one of them, companies need a systematic approach to engage with these technologies. Companies that have the most success engaging with SMAC are, in PwC’s view, rethinking their business and enterprise architectures and emphasizing three fundamental changes.

First, they acknowledge the SMAC trends are the strongest signal yet that business ecosystems are becoming more digitized, where information content accounts for a rising proportion of the entire value of any product or service. Second, they understand that successfully tapping the new drivers of value requires a digital operating model, a model attuned to participating in or integrating with expanding digital ecosystems. And third, successful companies are adjusting their business and enterprise architectures to become what PwC calls the permeable enterprise.

Permeable means the use of open software interfaces on modular capabilities to allow easy digital connections with other capabilities, the way web-based companies do. (See Figure 1.) Specifically, leading companies use application programming interfaces (APIs)—especially RESTful, or representational state transfer, APIs (see the sidebar, “What is an API?” on this page)—as interface-oriented abstractions of enterprise capabilities. In doing so, they rethink their assets as platforms for co-creation, maintain persistent digital relationships with customers and partners, and reorganize for speed.

Figure 1
A permeable enterprise exposes modular capabilities with open software interfaces to enable interactions (internally and externally) in digital ecosystems

Permeability and successful engagement with SMAC improves overall performance. PwC’s fourth annual survey of enterprises’ digital IQ—the way companies use digital technology and channels to meet customer needs as well as the needs of employees and business partners—finds that top-performing² US organizations show greater mastery in how they leverage the digital technologies of SMAC to plan, innovate, measure results, interact with customers, and ultimately create value.³

This issue of the Technology Forecast describes ways that enterprises can engage with SMAC trends by using RESTful APIs to become a permeable enterprise and participate in digital ecosystems. The issue details the rise of RESTful API management technology from new vendors (see the article, “Consumerization of APIs,” on page 34) and examines how the CIO should think about permeability as it impacts the IT organization (see the article, “Embracing open IT,” on page 54).

Digital transformation of ecosystems: How bits increasingly complement atoms

The notion of the digital company has been around for years. Gains in operational efficiency can be credited to a more expansive use of IT to make the business run faster and more effectively. That’s a powerful benefit of IT. However, few companies outside the pure web space have become truly digital companies in which information and the ability to act on it creates significant economic and competitive value.

The examples of Streetline, FedEx, and AT&T suggest what a company can do when it starts to realize that information itself is a product or service. Some, including Rob Carter, CIO of FedEx, use bits and atoms as an analogy to highlight the growing value of information (bits) to complement the value of the physical product or human-delivered analog service (atoms).⁴ The confluence of SMAC trends is driving this shift in business value. PwC anticipates that information associated with products and services will increasingly account for a rising share in the customer’s experience of value delivered, as illustrated in Figure 2.

Figure 2
The confluence of SMAC trends creates a shift in value drivers, as the value from bits (information content) grows faster than the value from atoms (the physical product or human-delivered service)

Streetline uses bits to transform a business built on atoms

Parking spaces and parking meters have always been part of the atoms world. One space was available to one car, and a meter was a simple device with a coin slot, a timer, and sometimes a credit card capability. The user and the owner dealt with the meter in a one-to-one relationship and had to be physically present to use or manage it.

Now, Streetline⁵ digitally manages parking spaces and meters in Los Angeles, Indianapolis, and several other cities. It embeds sensors in parking spaces on the street and in municipal and privately owned garages to collect information about availability and wirelessly transmit the data via a mesh network to Streetline’s servers. “We use this information to create a smart parking ecosystem,” says Mark Noworolski, CTO of Streetline.

Figure 3
The Parker app from Streetline helps customers navigate to open parking spots.

The bits bring new value to a formerly atoms-only parking ecosystem. Drivers can use Parker, a mobile application available from app stores, to identify and navigate to an open spot, get alerts on meter expiration, or reserve spaces. (See Figure 3.) Parking enforcement officers no longer need to patrol for violations; they can go directly to the spot of an expired meter. Cities can implement demand-responsive pricing⁶ and establish federated payment systems across jurisdictions.

Because the information is no longer trapped in the meter, local businesses can become value-added partners by paying to give their customers priority access to nearby meters or by subscribing to the meter data for inclusion in navigation services. The app also reduces traffic and pollution as fewer drivers need to circle for parking. All this new value emanates from the world of bits made possible by digitally transforming the parking ecosystem and liberating analog information from the atoms world.

Today, many everyday products and services, such as shoes, wristbands, golf clubs, appliances, and cars, include sensors to collect and transmit information that can enhance the user experience in a digital ecosystem. For example, Nike augments select running shoes with an embedded sensor—called the Nike+ system⁷—that allows athletes to track running habits, assess progress against personal goals, collaborate with other runners, and improve performance, thereby enhancing the running experience. A wristband from Basis⁸ has multiple sensors to track heart rate, physical activity, sleep patterns, and galvanic skin response (through perspiration) for personalized tracking and feedback on physical conditioning.

Why new value will be increasingly driven from bits

Figure 4
The emerging domains of value are driven more by bits (information content) than atoms (physical product)

Where should a company look to create value from information? Figure 4 shows a high-level taxonomy of potential sources of value spanning atoms and bits. A general way to think about information value-add is that it directly engages the customer’s experience of the product or service by surfacing data about that experience. Once data has been collected, it can be used for multiple purposes by the customer, the vendor, or other interested parties.

There are many reasons why emerging domains of value are based more on bits than on atoms. Some reasons include the following:

Bits are increasing—With a phenomenon such as the Internet of Things,⁹ products become smarter through embedded sensors, which produce digital representations of the analog activities. Sensors convert any type of analog signal, such as temperature, pressure, or acceleration, into electrical signals that digitize that information. These sensors are increasingly ubiquitous, and their usage grows as they continue to become cheaper and smaller. According to the Semiconductor Industry Association, sensors and actuators are the smallest semiconductor market segment but showed the highest year-to-year growth of any segment, at 15.5 percent to $8 billion in 2011.¹⁰ Today, sensors are in a wide range of devices and environments, including wristbands, toothbrushes, appliances, cars, homes, and parking meters. This increasing instrumentation, connectivity, and digitization deliver more and more bits into the value system.¹¹

Bits are fungible and limitless—They can be repurposed, reused, duplicated, or deployed in any number of use cases without being “used up.” This flexibility multiplies the options created by bits for ongoing innovation and value extraction. The value of the bits increases the more that multiple parties exploit them, as demonstrated by Streetline.

Bits can be linked—As RESTful API technologies gain wider adoption, an information network made of information nodes likely will develop internally and externally to an enterprise, much like the network of devices on the Internet. (See Figure 5.) ProgrammableWeb, which tracks externally published APIs, already reports more than 6,000 APIs, and the number is quickly increasing. (See Figure 6.) Such growth manifests the advantage of Metcalfe’s Law,¹² which recognizes that the value of a network is proportional to the square of the entities in the network.

Figure 5
The ability to link information nodes (bits) in an information network means value rises quickly as the number of nodes increases (Metcalfe’s Law)

Figure 6
Use of APIs to interact in digital ecosystems has been growing and has accelerated in the past few years)

Bits persist over time—Whereas a consumer eventually replaces a car or shoes, the information accumulated around that product will persist beyond the life of the atoms. As new hardware endpoints arrive, bits can be adapted to new values and new endpoints. The value accumulates over time.

Scaling integrations requires a digital operating model

Table 1
The interdependent and complementary roles of SMAC in doing work

While each SMAC technology has its own unique impact, the technologies are complementary in support of work getting done. The cloud increasingly contains more of the information and applications that people use. Mobile devices give people access to the cloud, to other data sources, and to each other. Analytics help them make actionable sense of all that data. Social media helps people find colleagues with whom to collaborate and co-create. The collective impact of SMAC on the enterprise operating model is so broad that it helps to think about the SMAC technologies as an integrated whole from a strategic viewpoint. (See Table 1.)

But as a collective whole they also represent an unusual, perhaps unprecedented challenge: how to embrace the comprehensive challenge they create at a technological level without being overwhelmed. Leading companies are overcoming this challenge by adopting what PwC calls a digital operating model. This model is inspired by the open linking tradition evident in the web marketplace that is accelerating, driven by SMAC trends. To be successful, web companies had to solve a fundamental problem: linking to and being linked by other web properties at scale. The solution was open, self-describing APIs communicating over standard HTTP¹³ protocols—in short, RESTful APIs.

Despite decades of technology investments, most companies do not have a digital operating model today. Many feel overwhelmed by the demands from SMAC trends. The problem for most companies is that they cannot scale their existing integration architecture and methods to the demands created by a digital ecosystem. (See the sidebar, “Scalable integration strategy,” on page 14.)

So far, companies that have acted on the digital ecosystem in a big way tend to be web-native enterprises, such as Facebook, Google, and several other companies offering mobile or social apps. Web-native companies extend their capabilities and their reach almost as a matter of course by exposing their capabilities via APIs to others. In many ways, the web is the genesis of the SMAC trends. The web marketplace has become known for constant, unpredictable change, robust innovation, agility, modular capabilities, and co-creation of value. The web is inherently digital and organized around an architecture that facilitates these dynamics. With RESTful APIs, all companies have the opportunity to bring these capabilities to their operations. And this is the inspiration for a digital operating model, which should have the following key characteristics:

Scalable integration strategy: Why most companies don’t have a digital operating model—yet

Scalable integration strategy: Why most companies don’t have a digital operating model—yet

When talking to colleagues in the IT organization or to technology providers about ways to participate in the digital ecosystem, you’ll hear the term API. It is the acronym for application programming interface, a technology term that means the specifications for how software programs are able to exchange information with each other even if designed and run by different organizations.

APIs are everywhere. The Google Maps API, for instance, is an interface used by developers to add content on a map of any region. Businesses can also embed the maps in their applications or services.

There are several types of APIs, but the one worth noting to a business audience today is a RESTful API, which stands for representational state transfer API. Although not appropriate in all use cases, RESTful APIs have changed the economics of performing software integrations by sharply reducing the associated cost and complexity. This change creates the potential to rethink IT architectures for scaling integrations and pursuing strategies that take advantage of them.

Today, web companies and social networking providers are heavy providers and users of RESTful APIs, which is how they quickly connect to so many data sources and services and let others rely on the data and services they provide. Google, Facebook, and Twitter are examples of companies that quickly became providers beyond their own services through the use of RESTful APIs.

By using and offering APIs, you do not forgo the ability to control or manage users of them. An API may be exposed internally or externally, and designed so only those with valid credentials can transact through them.

Having adopted IT solutions to drive automation and efficiencies for decades, many companies will argue that they are already digital. Their back-office processes, in particular, are likely to be highly digital, and they pay increasing attention to digitizing information about customers and suppliers. However, at most companies the digital footprint is uneven.

Extending digitization depends on making connections digital, which in turn depends on integrating tasks, activities, and processes. Therefore, the central issue that keeps IT from meeting the demands of social, mobile, analytics, and cloud (SMAC) or having a digital operating model is the long lead time and high cost of integrating one piece of software with another. IT investments of the past did not anticipate the need for scaling integrations.

For this reason, lessons from web companies are relevant. With business motivations to integrate with as many other web companies as possible—and with limited resources—web companies have naturally moved to a low-maintenance, self-describing, open communication style of integration facilitated by RESTful APIs, which are a scalable way to integrate.

Using a loose taxonomy of back-office, front-office, and middle-office systems and applications, Figure A depicts how, as integration scales, digitization can spread in an enterprise. Historically, the integration technologies were entirely point to point, as shown in Figure A1. These integration points grew organically without concerns or considerations for reuse, consistent architecture, or agility. They also required external documentation, demanded a deep understanding of data types and logic on both sides of the connection, and moved data in binary form unreadable to programmers. As the integrations proliferated to number in the hundreds, a new approach became necessary.

This need led to the emergence of an approach to internal integration that adopts architectural principles, usually referred to as a service-oriented architecture (SOA). (See Figure A2.) Adoption of SOA can address many of the issues surfaced in Figure A1 by conforming to its principles of loose coupling, abstraction of services, modularity, and reusability. While this approach has greatly reduced the unintended complexity of the early days of integration, scaling for and coordinating with a digitizing business ecosystem remains burdensome as SOA has largely remained internally focused.

RESTful APIs, an architectural and programming model that sharply reduces the cost and complexity of integrations, deliver a scalable approach for both internal and external use. (See Figure A3.) Many companies will start by exposing data and services using RESTful APIs to their external digital ecosystem of partners and customers. But a RESTful API approach for internal integration creates many of the same benefits of highly scalable linking and coordinating of business processes at very low cost.

Figure A
Despite decades of IT investments, most companies do not have a digital operating model because they could not scale integrations easily, an opportunity possible today with RESTful APIs.

• Instrumentation to digitize operations—The use of sensors transforms analog activities into digital representations to surface and use valuable information.
• Loosely coupled modular capabilities—Internal capabilities and processes are broken into modular service components that have standard open interfaces. Loose coupling makes it possible to change the components without affecting the system, as long as the interface is kept stable.
• Addressable platform with low interaction costs—The capabilities are available for others to use by means of stable interfaces that have a low or no barrier to usage. Enabling technologies, including RESTful APIs and API management platforms, make addressability efficient.
• The ability to co-create in a digital ecosystem—A co-creation strategy treats customers, channel partners, suppliers, and industry ecosystem participants as active agents who have permission to combine the modular capabilities exposed in a platform to create new experiences.

There are other characteristics, and Table 2 contrasts the prevalent traditional operating model to a digital operating model. Companies embracing a digital operating model organize themselves around atoms plus bits as the source of new value.

Table 2
Key characteristics of the digital operating model contrasted with the way many companies typically operate

A culture of valuing information gives FedEx a digital operating model

FedEx has organized around information from its inception. “In the late 1970s, our founder and CEO Fred Smith said, ‘The information about the package is just as important as the package itself,’” says David Zanca, senior vice president of IT, customer access, and revenue systems at FedEx Services. “It’s a vision that has given our company a culture that values information, and that uses it in all we do.”

FedEx’s journey to a digital operating model is decades old. “Information about the package helps us run our business better. That comes from a digital operating model where all our assets are connected and surface information to increase overall value to us and the customer,” Zanca says. “Almost every piece of our business is instrumented; it has some degree of intelligence and automation on it. Our planes are all intelligent, and they tell us where they are. The trucks, the couriers, the knowledge workers, the hubs—almost everything has technology embedded in it and tells us where it is or what its state is.”

FedEx has used a transportation logistics information system called COSMOS (Customer, Operations, Service Master On-line System) since 1979 to keep track of all packages. While it used the information to allow dynamic management of its delivery system, it also innovated many times to present an interface to its customers and bring them into the FedEx digital ecosystem.

In 1984, before the web, FedEx released PowerShip (now part of FedEx Ship), which used modems over circuit-switched telephone lines to allow high-volume customers to link with COSMOS, so they could place shipping orders electronically and print air bills. In 1994, fedex.com was the first site to give customers the ability to monitor shipments on the web.

FedEx also maintains a website for developers (FedEx Developer Resource Center¹⁴), where third parties can tap into FedEx capabilities offered as modular web services for shipping, office and print services, and other tasks.

FedEx layers the customer experience services on top of the enterprise services with the help of RESTful APIs.

With its new SenseAware product line, FedEx has recently driven the digital operating model deeper into the customer’s context. “Not only do our customers want more information about the packages, but they also now want more interaction with FedEx and expect us to react to changes and resolve problems if they occur, ” says Thomas Wicinski, vice president of digital access marketing for FedEx Services. Customers can request operational actions such as return shipment, reroute, reship, and repackage. Its digital operating model gives FedEx the flexibility to adapt to these requests.

Transformation to a permeable enterprise

The digital operating model enables what PwC calls the permeable enterprise, in which latent capabilities and assets inside the enterprise are permitted to reach outside and be combined with other assets and capabilities. External innovators also can reach into the enterprise and tap into its capabilities to create new value. Both are facilitated by the sharply lower cost of interactions in a digital ecosystem.

A company will need to develop many new capabilities to adopt a digital operating model and become a permeable enterprise. As Figure 7 shows, these new capabilities address partner strategies, assumptions about the frequency and intensity of customer engagement, and a business and enterprise architecture built for speed, all while balancing their use internally and externally.

Figure 7
Enterprises will require a digital operating model to tap into the shift in value drivers that results from SMAC. The digital operating model on the inside will enable the permeable enterprise on the outside

Platform for co-creation: Scaling integrations

Until recently, organizational structures and IT systems were designed to support the enterprise as the sole creator of products and services. In a world of value co-creation, these structures and systems often do not work well. Too much knowledge about how processes work must be acquired before anything can be added. This barrier can be significant for third parties, even if huge latent value is inside the enterprise. Reducing the learning curve requires a new strategy. “If you are going to operate at a pace at which the external market is moving, you have to take capabilities, industry specific or not, and make platforms from them,” says John Donovan, senior executive vice president of technology and network operations at AT&T. By allowing third-party developers to tap into its network capabilities, AT&T has transformed its network into a digital platform. (See the sidebar, “APIs: An architecture for speed,” on page 21.)

The platform approach is a different way of thinking about value. It requires a step back from the product or service’s obvious value and an assessment of how others might add value if they had access to attributes beyond the immediate ones. “The ability to create self-service interactions, enable co-creation, and provide a vehicle where information is flowing from a leaf node to every other leaf node radically transforms our ideas about how to organize production, innovation, and transactions,” says Ted Shelton, managing director in the PwC Advisory practice. Product design, development, and customer service must take into account the growing possibilities for surfacing and using information.

In this context, the word platform means programmable interfaces or APIs. “APIs are the building blocks of the digital economy,” says Laura Merling, senior vice president of the application enablement business unit at Alcatel-Lucent. APIs become the language with which interactions and communication occur in a SMAC-driven digital ecosystem, supporting permeability.

AT&T seeks to expand the value realized from its telecommunications network and associated services. Jacob Feinstein, executive director of new technology at AT&T, says AT&T asked itself, “If we architect our network so that it comprises a number of loosely coupled modules connected through open interfaces, could we expose those interfaces to third parties to foster openness in a broader sense, leading to greater innovation, and ultimately get more apps on more devices on our network?”

For example, because AT&T exposed its Internet Protocol telephony capabilities to web developers, its users can initiate an online phone session from a restaurant review website to make a reservation, potentially driving more business to AT&T’s network. AT&T could provide access to different quality-of-service levels that provide a range of service options for third parties, letting them offer, for example, premium connections for a higher fee, in which AT&T might share the extra revenue.

Rethinking the customer relationship: Persistent digital engagement

Because of SMAC, a new consumer reality is emerging, defined by an any-where/anytime/any device expectation of accessibility and engagement. Consumers have the ability to be online all the time and expect what PwC calls persistent digital engagement with whomever they conduct business. “To address the new consumer state of persistent digital engagement, companies will need to develop fluency in digital product development and social technologies, and they will need to create collaboration across groups that have often worked separately from one another,” PwC’s Shelton advises.

Enterprises must reorganize in a manner that puts customers at the center of the digital operating model, instead of thinking of them only as end-of-the-chain recipients of delivered value. Figure 8 shows this distinction between a product-centric and customer-centric enterprise.

Figure 8
The digital operating model promotes a customer-centric approach over a product-centric one

Customers are already altering the dynamics of their relationships with providers through their rapid adoption of new technologies that move them toward the center. “The customer is able to have a tighter, longer-lasting relationship with the business even though the way they interact with that business might change,” says Sam Ramji, vice president of strategy at API management solution vendor Apigee. Bits allow stickier relationships in the value network because their mutability means they can persist even as they are adapted to new services and use cases.

Architecture for speed

Speed is essential in the digital ecosystem to meet the pace with which the business environment is changing. Speed was a driving force in AT&T’s RESTful API program, Donovan says. By exposing RESTful APIs, AT&T has cut the time it takes developers to place new capabilities on the network from months to hours. The API program is a key pillar in AT&T’s broader innovation strategy. (See the sidebar, “APIs: An architecture for speed,” on page 21.)

Establishing a business and IT architecture around RESTful APIs is not just about speed. It is the best way to prepare for future waves of change in technologies, products, and business strategies. “Agility and accessibility will make the successful organization of the future,” Shelton says. “With APIs modularizing every function at the right level of granularity, one can enable more agilitsy and more accessibility.”

Conclusion

The SMAC trends provide strong signals that business ecosystems are moving toward digital ubiquity. As this digital ubiquity evolves, information (bits) will make up a growing proportion of the overall value that customers experience from any product or service (atoms). Successful companies are adjusting their business and enterprise architectures to be more attuned to participating in or integrating with these expanding digital ecosystems. Companies leading in their engagements with SMAC are adopting a digital operating model, which supports the permeable enterprise.

Few enterprises are completely ignoring SMAC developments. However, the demands SMAC creates on IT can overwhelm CIOs and other business executives. In part, that’s because business executives are accustomed to viewing technology opportunities through the old lens of being responsible for all the end-to-end application logic and performance. This approach does not scale when engaging with SMAC, as described in the sidebar “Scalable integration strategy.” They need a new model—one based on lower integration and interaction costs—similar to the one web companies have been using.

A key transformation is to make a company’s value-add capabilities addressable in digital ecosystems. This transformation is possible by understanding and using RESTful APIs and API management technologies. (See the article, “Consumerization of APIs,” on page 34.) Companies that apply modern APIs and PwC’s proposed digital operating model thinking have the opportunity to gain competitive advantage through reduced friction in co-creating new value, building persistent digital engagements, and increased agility.

Leading software companies have long known that being the dominant platform for an ecosystem creates direct and indirect demand for their offerings and long-term competitive advantage. SMAC trends suggest that every company is, in part (or should try to be), like a software company in how it creates and engages with a digital ecosystem.

Establishing a platform in the center of a robust digital ecosystem requires a digital operating model, one that is appropriately permeable to third parties that can co-create new value from what a company and others have to offer. It means taking advantage of the interconnectedness and the rise of empowered customers who will engage actively with a company if it lets them. It’s time for more companies to become like a software company within their habitat of the digital ecosystem. And perhaps in some new habitats.

¹ Our use of the term SMAC includes the four technologies called out here as well as related emerging technologies that take advantage of them, such as the Internet of Things.

² Top-performing organizations are defined as those rated in the highest quartile for annual revenue, growth, profitability, and innovation as well as those that have revenue growth of more than 5 percent in the last 12 months.

³ Raising your digital IQ, PwC’s 4th annual digital IQ survey, 2012, http://www.pwc.com/us/digitalIQ.

⁴ Rob Carter, CIO of FedEx, keynote address at Location and Beyond Summit, 2010, http://www.youtube.com/watch?v=Ljs28Rokwnk.

⁵ http://www.streetline.com/manage-parking/for-cities/.

⁶ http://sfpark.org/how-it-works/pricing/.

⁷ http://nikeplus.nike.com/plus/.

⁸ https://mybasis.com/.

⁹ http://en.wikipedia.org/wiki/Internet_of_Things.

¹⁰ Caroline Kazmierski, “Semiconductor Industry Posts Record-Breaking Revenues Despite 2011 Challenges,” Semiconductor Industry Association, February 6, 2012, http://www.sia-online.org/news/2012/02/06/global-sales-report-2012/semiconductor-industry-posts-record-breaking-revenues-despite-2011-challenges/.

¹¹ See the article, “Consumerization of APIs,” on page 34 for more details on sensors.

¹² Although initially defined in relation to telecommunications networks, Metcalfe’s Law today applies to all networks, and it states that the value of a network is proportional to the square of the number of nodes in the network. See http://en.wikipedia.org/wiki/Metcalfe's_law for more details.

¹³ HyperText Transport Protocol is the standard for transmitting information on the World Wide Web.

¹⁴ http://www.fedex.com/us/developer/