Explaining the Enterprise IT Industry Landscape (for those who care)

I want to explain my second business idea, the niche services firm roll-up play. Catchy name, no? However, to do it justice requires some understanding of how I see the IT market landscape shaping up these days, so today I'll delve into that.



The over-riding theme in IT has been and stil is the "alignment of IT with business process." There are innumerable variations on that phrasing, but it all means basically the same thing: that IT is shifting from being a parallel activity supporting the business model to an integrated activity that instantiates the business model. Sounds complex and in a way it is, since there are so many facets to the trend. However, at its core it really just means the shift of IT from something exotic to something commonplace.



The best way to explain may be with an analogy. In the late nineteenth century during the early days of electricity, it was an exotic, high price toy of the rich. Individual homes would have a generator in the basement with its very own electrical engineer and crew to keep it running. Obviously in the ensuing hundred-odd years it has become a perfect commodity, delivered remotely in a consistent form and used in a myriad of ways. These are the two extremes of the scale.



While IT is not electricity in that it can never be reduced to a single uniform product, it nonetheless is undergoing a similar type of transition, from exotic to commonplace. In fact the transition has been occurring since its very inception, with the early computers filling entire floors of buildings and requiring specialized technicians to care and feed them around the clock and modern computers almost at the point of being given away for free in cereal boxes. Of course, hardware is only one part of the IT equation, the yin to software's yang, and software is still more exotic and specialized than hardware, and therefore not as far down the commoditization curve.



Software represents the specific way in which a business will use IT in order to enhance or create value for itself. It is designed according to an algorithm that both describes its goals and how those goals will be achieved, or to state it slightly differently, the problem it seeks to solve and the chosen solution to that problem. This is not that different than the specific characteristics of a given firm - its people and physical assets and the business processes that they play out represent the specific way the firm uses capital to create or capture additional value. The counterpart to the algorithm is the business plan. The infinite flexibility and fuzzy-edged quality of activities that center on humans means that a firm's business plan is not usually as precise as a software algorithm, and its businesss processes are not as crisply defined and rational as software.



The primary indicator of the commoditization of software is the rise of open source. The skills are more common in a larger population of students, hobbyists, enthusiasts etc. and the activity of writing code has been streamlined and disseminated (thanks to the Internet) across loose global communities. They have produced increasingly sophisticated code that is extremely high quality and available for anyone to use in any way. Open source software now threatens the business models of the most successful firms in IT, those who build and sell proprietary software to businesses, often with a gross profit margin of 80-90%. It is increasingly difficult to justify the enormous price tags these IT firms demand for their software licenses and maintenance agreement when one can download and use virtually the same thing for free from an open source community.



Open source software doesn't install, configure, customize and maintain itself, however. It still requires some level of specialized technological skills which most firms lack. It is equivalent now to any other piece of business technology - a cash register or a fork lift - which is acquired from a vendor along with installation and training services to integrate the business technology into the firm. That role in IT is played by the "Systems Integrator" (SI), a supplier of IT services. Where the software business has enjoyed the highest profit margins in the IT industry, the services business has generated the largest revenues. The margin is pretty slim in services because revenue generation requires a constant amount of human capital. Hire a skilled worker for X dollars per hour, put her/him on the customer's problem billed out at some multiple of X per hour. Subtract the substantial overhead required to run a large people-intensive business and you get your margin. Contrast that to software, where you hire a programmer for X per hour, she/he writes a piece of code that you market as a product for some multiple of X and sell to as many customers as you can. It is the equivalent of assigning a single skilled practioner to hundreds of customer's accounts simultaneously.



The stage is now set for my business idea, but the idea itself will have to wait for tomorrow.