by Richard Sykes

The constantly evolving IT industry can learn a lot from more mature fields

Nov 22, 20114 mins
Cloud ComputingIT StrategyManufacturing Industry

Our industry is still very young. Those who follow my columns will know that I worked for 27 years in chemicals, an industry with 150 years experience under its belt. Experience brings greater stability in business models. In contrast business models in today’s IT industry are in a state of major flux, and commercial behaviours are being rewritten, at times quite radically. A recent meeting of the National Outsourcing Association (NOA) with the Outsourcing & Offshoring Group of the high-tech business association Intellect focused on the issue of Outcome-Based Agreements (OBAs). OBAs are a mark of a maturer commerce vendor and client in a partnership designed to deliver desired business outcomes, rather than being focused on the delivery of SLAs. The fast evolving reality of highly automated services that can be directly sourced (the world of the cloud) is clearing the way for the greater adoption of OBAs. The enterprise that can directly source underlying infrastructural requirements and generic back-office needs as standard commoditised services can then re-focus in-house resource on the exploitation of the enterprise’s core competitive competencies. Stripped of the need to consider the back-office stuff, the enterprise can seek technology business partners whose expertise is relevant to delivering success in the front-line competitive battle partners with a real focus on competitive business objectives. For the NOA/Intellect event I sought an analogy that could help explain clearly the developing distinction between the two key vendor business models in play here: one whose focus is on the delivery of generic infrastructural and back-office transactional services, and the other whose focus is on the delivery of specialised front-line expertise and intimacy. I found it in another mature industry food and restaurants. Consider Weetabix. Two cereal biscuits with milk and a little sugar will give you a good breakfast for under 20p. A global standard product, it is manufactured in the UK and in Canada to identical specifications. Weetabix has been owned by private equity since 2004, and has used the time to further rationalise its operations. Turnover per employee is now around £250,000, and profits in 2010 were £20m on a turnover of £450m. For Weetabix read fully standardised infrastructural services from the likes of the Amazon Elastic Cloud or the transactional Google Apps services (both of whose turnover, people productivity and profit margins are much higher). In contrast consider breakfast at The Wolseley, on London’s Piccadilly. Its menu offers 45 different breakfast items and 14 varieties of coffee. Breakfast will cost you over £20, 100 times the Weetabix. Its business model is people-intensive, with highly trained waiters, experienced chefs, ample cleaning staff and highly attentive management this is breakfast tuned to meet your very specific needs, with a sense of intimacy and partnership between The Wolseley and its customers. For The Wolseley read the specialist vendor, expert in the operations of a particular vertical with professional staff intimate with the workings of specific markets, specific customers. What do we learn from this analogy? Firstly, here are two very different business models. The management of Weetabix would be out of their depth attempting to run The Wolseley, and the management of The Wolseley would likely head off course given Weetabix to run. Likewise in our industry we will have vendors specialised in the production and distribution of generic infrastructural and transactional services, and we will have vendors specialised in the front-line detail of particular verticals. Secondly, both business models can be equally profitable if managed with focus. The IT industry’s belief that a business should move up the value chain is a misleading one: the value chain is flat, and reward flows from commitment to operational excellence, relevant customer focus and endless innovation in whatever part of the value chain the vendor chooses to position on. Thirdly, the client enterprise also has a choice in how to best position its resources. It could seek to run its own Weetabix factory, but if it can source each breakfast at 20p a time, is this a wise use of internal resources? Or it could focus its resources on its competitive edge, shaping and delivering its offering in close intimacy with its clients’ requirements. At the sharp end the Wolseley model is most relevant, surely!