From Strategic to Commodity - Managing the Transition

By Mike Scheuerman

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Technologies change constantly. When a technology becomes ubiquitous, i.e., it’s only noticed when it’s not there, it’s become a utility and probably a commodity. What happens when a technology moves from being a strategic direction to being a utility? How can you tell and how do you measure and manage it?

A strategic technology is measured by how well it accomplishes the goals set by your company’s business strategy. A utility is measured on how efficiently and reliably it delivers its product.

Let’s take a look a real world example: A number of years ago if a bank provided its customers with a leading edge, online banking application, it could expand its perceived value to that customer and differentiate itself from other financial institutions. That was strategic. When the bank implemented that online system there were very few competitors providing that kind of service. The bank got enhanced loyalty from the customers because those customers gained a service they couldn’t easily get elsewhere. The bank also got significantly reduced operational costs for those transactions that were performed online. As much as any technology can be strategic, it was a great move.

After a few of years, online banking became a standard service offering among financial institutions. The differentiation that was originally created no longer existed. The customers now expected that service from every financial institution. The technology had crossed the line from strategic to utility.

When a technology crosses the line from strategic to utility it’s time to think about finding a way to deliver that service in a different way. The technology has become a commodity and you have be begin to consider whether there are others whose core competency in that technology is better and more cost effective. You have couple of choices. You can continue to maintain the application or you can outsource it. In either case, the amount of unit resource (money, people, time) devoted to the utility has to decline. If it doesn’t then you either have an operational problem or insufficient mass to force the costs down.

Controlling costs

In the first case, you need to take steps to gain control of the costs of the technology. You might consider deploying a packaged solution instead of a highly customized and costly solution. Examining the way the product or service is delivered and removing the non-value-add steps in the delivery process can also help solve an operational problem.

Outsourcing may be the easier way to solve the commodity application problem. That could be done a couple of different ways. You could develop partnerships with other like-minded organizations to collectively deliver the service or product a la industry service organizations. You can find someone whose business and core competency is to deliver that product efficiently and use that organization as your service delivery surrogate. In either case, an outsourcing arrangement aggregates a number of clients together to gain cost advantages that a lone company can never attain.

Assuming that you decide to outsource, you have three major areas that need to be focused on when evaluating vendors: service levels, vendor management, and costs.

When evaluating service levels you have to look at not only the service levels the vendor says it can deliver, but also your own organization to determine what level of service you can support and are willing to pay for. Your company might believe they want 24x7 service with no downtime. That is an achievable standard, but the cost may be prohibitive. More realistic, might be a standard that provides for 100% uptime with an exception for scheduled maintenance downtime. Then the company and the vendor can determine together what an acceptable level of maintenance downtime might be.

At that point you are beginning to build a partnership that will provide for bonuses or penalties based on deviations from the accepted standard. That way the vendor has some “skin in the game” to meet the standard.

Vendor management is one of the more difficult things to do in outsourcing. It’s an “out of sight, out of mind” problem. Many times organizations are outsourcing a headache and simply want to wash their hands of it. That’s exactly the wrong thing to do. There should always be a manager who works for the company that is responsible for oversight of the vendor and the service levels. That manager should view the outsourcing company as an extension of the company staff that has a specific function and well defined set of goals. Don’t fall into the trap of just letting the vendor do his job without regular review and oversight.

Finally there are costs to consider. When you’re shopping for a commodity, you look for two things, price and service. Many times you can find a low price solution, but the service is not up to your expectations. You might find a vendor that provides great service but at a price you’re unwilling to pay. Finding the appropriate blend of service, product and cost makes the due diligence that you perform critical to a successful outsourcing arrangement.

Remember, technology has a way of continually changing. One of the things that must be done regularly is to review your technology portfolio as well as the products and services they support to see if they’ve crossed the line from competitive advantage to utility. If they have, it's time to begin to measure and manage them as the commodity they’ve become.

Mike Scheuerman is an independent consultant with more than 26 years experience in strategic business planning and implementation. His experience from the computer room to the boardroom provides a broad-spectrum view of how technology can be integrated with and contributes significantly to business strategy. Mike can be reached at mike@scheuerman.org mike@scheuerman.org.