IT is the Big Consolidator, but SaaS and Cloud Computing Could Be Equalizers
Posted by Bob Warfield on January 5, 2009
After sifting through the blizzard of Monday morning blog posts in Google Reader without finding much of interest (glad to hear Jobs looks to be in reasonable health), I turned to Twitter and immediately vectored onto some more interesting stuff. The best yet was Andrew McAfee’s post on the impact of IT capital spending as a barrier to entry. Conventional B-school wisdom is that industries mature in proportion to their capital spending. Businesses that require a lot of capital spending have a barrier to entry, and so relatively few smaller firms can afford to play in those industries. He gives oil exploration as one example. But apparently IT capital spending runs completely counter to this. The more an industry spends on IT, the more likely more businesses are going to be able to get in:
IT capital, in other words, appears to be unique in that it lowers barriers to entry rather than raising them.
What a great story for IT and our industry! Interestingly, this study specifically excluded companies and industries that make or sell IT hardware or software, so this is the real economy, and not just the High Tech industry. The theory for why this is so is that IT capital spending increases the efficiency of other parts of the business far in excess of the cost of the IT. Hence overall, it makes things easier for the business.
Here is another interesting tidbit from the study: it has been an established maxim that IT evens up the playing field for small companies versus large companies. In other words, the right IT can make a smaller company very competitive with a larger one. But this particular study appears to dispute that. The more IT capital spending there is, the more the concentration of players is shifted towards big companies. Interestingly, other kinds of capital spending favor fragmentation between large and small companies, albeit fewer of either due to the increased barriers to entry.
McAfee’s theory on this is that:
I believe that this is because modern IT increases the scope, the precision, and the fidelity with which a business innovation can be propagated throughout a company. To put it as tersely as possible, good ideas and good execution separate winners from losers, and IT helps companies execute on their good ideas (technology also helps companies generate good ideas, but that’s a subject for other posts).
I would put that another way, which is to say that IT reduces friction in an organization if well implemented, and allows a large organization to “think small” in nimbly and efficiently implementing smart strategies while growing to a larger scale. ERP and other Enterprise Software makes it possible for Big Companys to “bottle” their Best Practices discoveries, and ensure consistent implementation of these practices through business process automation. Another of McAfee’s great posts shows that the variation in profitability for industries that make outsized investments in IT is much greater than industries that don’t. Put another way, there is a bigger spread in lowest to highest profitability where large IT investments are being made. This tends to reinforce the idea that IT spending lowers the friction and enables the winners to rise more quickly over the losers.
If that’s all true, I think I see the problem for smaller companies. Implementing the level of IT available to larger companies still becomes a barrier to entry for companies lacking the scale to undertake such expensive projects. There is still friction there that keeps the little guys from competing effectively. That’s where SaaS and Cloud Computing can still come in as equalizers that give the little guys a chance.
Forrester’s TEI (Total Economic Impact) ROI analysis makes the advantage of SaaS for smaller businesses more apparent. For example, they state that for small business, with 100-249 employees and 50 users, SaaS has a better TEI throughout a 10 year life cycle, as well as lower cumulative costs. Medium businesses with 250-499 employees and 100 users this advantage falls to 7 years, largely due to a need to handle more integration and other more specialized requirements. Somehwat larger businesses with 500-999 employees and 250 users have an advantage for 6 years in SaaS. The largest business category in the report is businesses with 2500 employees and 500 users still show an advantage for SaaS out to 6 years, but it’s a pretty muddled picture where you have to look closely after about year 3 to see that advantage.
I find Forrester’s data to be a pretty convincing reason for why larger businesses have had an advantage in deploying IT technology, but also for why SaaS changes that picture to make it easier for smaller businesses to enjoy some of the same advantages.