01.17.07

I don’t intend to shamelessly plug popular business authors this year, but I am a big fan of Geoffrey A. Moore.  He is probably most famous for his book Crossing the Chasm, but lately I’ve been reading his latest, Dealing with Darwin.  Where Crossing the Chasm dealt in a compelling way with introducing new technology that could define whole new markets, Darwin deals with evolution strategies for all kinds of companies, even ones with existing markets.

What I find particularly interesting is the notion of innovating in mature markets.  Mature markets are not “cash cows”, or markets the sun is setting on — they are simply established markets where competition is fierce, buyers are savvy, and the broad requirements have been met.  For the record, Moore defines the telephone market as mature, and it is definitely not a dull place!  Specifically, Moore suggests a mantra for this world:

Add value on the surface; extract resources from the base.

This struck me as interesting, because it helped me better explain why so many companies that are good with technology are embracing the software as a service model for many core IT functions…

Basically, software as a service allows companies — even highly skilled technology companies — to expend less time and money on the commodity business processes (this is the BPO, or business process outsourcing side), which frees up resources for deployment in adding value to the surface that results in competitive advantage.  This is why companies that have always been successful with IT projects still use SaaS providers; because they want to use their expertise somewhere else.  (For more “myth-busting” regarding SaaS, check out BusinessWeek’s Software as a Service Myths).

In my discussions with people around Software as a Service (in my case usually for electronic commerce, but the principles are the same), it usually comes down to a combination of admitting to what Moore is discussing, and understanding the principle of competitive advantage. 

Moore’s contribution is that in markets that are past the “explosive growth” stage — even healthy growing markets, the ability to raise prices in support of increased expenditure on both products and infrastructure is close to non-existent.  This is why successful, profitable companies are continually wringing cost out of operations, even as they invest those dollars elsewhere.  Fair enough, but what does that have to do with competitive advantage?

Competitive advantage, and the pursuit of it, is where the investment goes — the trick is in determining how to separate the core from the surface, or the things we should be wringing dollars out of from the places you should be investing it.  This is why strategic management of enterprises is difficult, and always will be — but one easy rule of thumb is that standards do not provide competitive advantage unless you are:

1. A standards body
2. there is no 2 over the long haul

Integration as a service generally, and B2B specifically, are a major player in the SaaS movement because you cannot be “better” at a standard than the next guy (from a customer happiness standpoint), so you might as well be more efficient — and efficiency comes with scale.  But when a customer contemplates using on-demand services for “critical” business functions, there is a lot of fear and confusion.

The confusion stems from confusing “source of competive advantage” with “important to my business”.  Electricity is really, really important to most businesses, but it is not a source of competitive advantage to anyone but the local utility (and not even them in some locales).  On the other hand, the ability to design really cool consumer electronics products and then produce them through a network of partners (think Xbox 360, or the house brands of Target), can be.  So why do companies withhold resources from product designers to generate electricity instead of buying it from a utility?

They don’t of course, that would be stupid.  Now get out of here so I can go operate my CRM system, run my email server, and operate a set of e-commerce communicaitons protocols identical to those of my competitor — so I can beat them…

We may not be quite there yet in all areas, but enterprises are definitely beginning to leverage BPO and SaaS to “extract resources from the core” that they can use to invest.  And that is why some of the very best companies are using SaaS and BPO, not because they don’t value their IT and business people — but because they value them too much to use for anything other than “adding value at the surface”.