10.30.07

The past couple of weeks I have been busy helping with the roll-out of our new integration offering between the GXS Trading Grid and Microsoft BizTalk 2006 R2, a very exciting collaboration between GXS and Microsoft (and worthy of a blog entry of its own, very soon…).  Having wrapped up a couple of key activities, I started — as is my custom — to wade through a 10 inch stack of magazines (I checked!), and who knows how many emails…

Back in September, CIO Magazine started talking about the balance between outsourcing and innovation, referencing an innovation crisis (this is a blog entry, the print version of CIO had a longer and very interesting piece, but this gives you an idea).  This is the latest of a series of well-written articles on the dangers of leaving innovation to others (another I enjoyed, around manufacturing, back in 2005, is here).  R&D is a topic near and dear to my heart, as it is part of my role here at GXS, and the dangers as I see it fall into two categories:

1. Leaving R&D to outsourcing companies (traditional) may result in no innovation beyond cost-reduction
2. Too much dependence on even innovative partners can dull the innovative edge of your own team

I have a strong belief that every company needs to look for the opportunity to innovate in their core business, and one of the best ways to accomplish this is to free up resources in every other part of the business by partnering with companies who do that as their core business.  While this may address #2, it can put you in jeopardy of the first danger, which brings me to the knock-down, drag-out SaaS versus outsourcing.

What really got me thinking about this was a string of articles/blogs/etc along the lines of SaaS doesn’t matter, business value does…  On the surface this is really hard to argue with, as most generalizations are.  But like most generalizations, taken to extremes this is a dangerous idea.

In the CIO Magazine article, the problem surfaced was that most outsourcing contracts are based on the achievement of SLAs (service level agreements).  Traditional outsourcing companies have an enormous incentive to standardize and drive cost down, and pretty much nothing else.  This is the complete opposite end of the spectrum from commercial software vendors, who live and die by new license revenues, and have an enormous incentive to innovate.  Unfortunately, this innovation can only be realized through upgrades and installations, so customers receive benefits unevenly, only as the upgrade.

So how does this translate into SaaS out-innovating Outsourcing?  SaaS (software as a service), is a service based model like some traditional outsourcing, with the economic incentives of commercial software (if we don’t innovate, we quit winning new business…).  Unlike traditional outsourcers, who contain costs by limiting change in a given client (admittedly to preserve service levels), a SaaS based offering controls costs by applying its innovations to all customers.  If this sounds crazy — it’s not.  Change, in the form of innovation, is much less expensive than variation.  If I add new features and capabilities to my entire customer base, I have a better cost model than a software company supporting 3-5 different versions of their software (which is why most software companies “end-of-life” versions with depressing regularity).

This is the best answer to the conundrum posed in the CIO article about how to leverage the expertise of outside companies without risking loss of innovation — work with organizations that must innovate to survive.  SaaS is a marketplace with many of the cost efficiencies of outsourcing and an incredible pressure to innovate and invent (don’t believe me, look at Salesforce.com, Amazon’s web services, Microsoft’s Live Services, etc). 

And if people tell you that the business model doesn’t matter (SaaS, outsourcing, etc), tell them to talk to the music industry about iTunes, or the CRM industry about Salesforce.com.  Business models matter, they drive behavior and economics.  Innovation will always be strongest where companies need it to win, and that is the team I want to be on.