Wednesday, November 4, 2009

Scalable services

IT enabled scalable services such as Google and other SaaS vendors are quite different from the millennia-old model of labor-intensive services. This was the point I made in an open innovation talk earlier this week — a point I have been mulling over ever since.

Near the end of and near the end I discussed business models and the general shift away from mass production towards services. Below is a slightly expanded version of one of my slides.

Personal servicesBlacksmith, barberPersonal skill, locaiton
Mass productionCotton gin, Springfield rifle, Model TDesign cost, manufacturing, economies of scale, cost of goods
Information goodsContent: article, iTunes song†Design cost, economies of scale, cost of license
Automated servicesSaaS: Google map, search, mailDesign cost, economies of scale
† excluding information goods delivered in tangible form.

I won’t claim it’s terribly profound, but the act of making the table forced me to think about some implications.

One point was an old one — there are “services” gurus who confound information goods and services to make their area of interest seem more important than it is (even though it would be very important even without exaggeration). Stamping out an identical information good over and over again is not delivering a service — it’s selling an intangible product as is well discussed by the book Information Rules. (Normally we’d think of this as $0 COGS product, but certainly an important class of information goods are sold based on royalties.)

Also, in this intuitive taxonomy I want to hold aside “services” involving the selling and renting of tangible goods, since much (or all) of the value comes from the good and not the customized personal experience. Services involving money also seem very different, even though they’re an important recent area of open innovation research.

Some businesses include a combination of products and services. With my MBA students Wednesday night — talking about disruptive innovation — I noted that for some low-priced commodity products, the cost of providing any personalized service (such as a tech support call) will destroy all the product margins from the product.

In my talk, I also briefly mentioned the “Pharma 2010” view of systems biology by PwC Consulting (now part of IBM). If I’d had time to track down the PDF, I would have put up the opening paragraph of the PwC study (instead of paraphrasing it):
In 2010, the pharmaceutical industry (Pharma) will not only make white powders; it will sell a variety of products and therapeutic healthcare packages that include diagnostic tests, drugs and monitoring devices and mechanisms, as well as a wide range of services to support patients. Companies that learn how to make “targeted treatment solutions”, as we call them, will deliver bigger shareholder returns than they have ever delivered before.
Even this hastily drawn, over-simplified taxonomy communicated the point that I thought was important for the middle managers to understand: don’t think of services the way we used to do — or perhaps the way Accenture or EDS or IBM Global Services does — as labor-intensive, low-margin businesses. Instead, think of them the way Google does — high up front cost, positive returns to scale, that are scaleable indefinitely. These sorts of 21st century business models are completely different than the Bronze Age services model that we normally consider, and are quite feasible for companies that have access to unique and valuable knowledge that can be delivered electronically.

In making this argument, I was dimly recalling (but had no time to look up) what Randy Stross said in the talk he gave last year about his book Planet Google. The oral presentation emphasized that the ideal pursued by Sergei and Larry — in their zealous embrace of algorithmic solutions — that humans shouldn’t touch anything, but instead everything important should be delivered by the computer and not by manual labor.

By using the index and browsing my paper copy of Randy’s book (now in paperback), I was unable to find the relevant passage (which I thought would come in Chapter 3, “The Algorithm.”). However, thanks to Google Books — I did find a discussion of Sergei and Larry’s scalable business model in Chapter 2 (on pp. 48-49).

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