Our Strategy Services:
Background The 1990s In a presentation to Wall Street analysts in 1999 Lou Gerstner described the first wave of internet businesses as “fireflies before the storm: all stirred up, throwing off sparks”. He went on to predict that “the storm that's arriving -- the real disturbance in the Force -- is when the thousands of institutions that exist today seize the power of this global computing and communications infrastructure and use it to transform themselves. That's the real revolution.” The NoughtiesWhat he didn't predict was that, sometimes, instead of transforming existing businesses and business models, the internet would decimate them. In many industries, such as the conventional music business and the proprietary software business this process is already well underway. Internet Economics The internet didn't change the laws of micro economics: the need for real profits in commercial organisations. Page hits were not the same as sales, as many of the first round of internet startups found to their cost (although companies such as Google have now of course more than adequately found ways of monetizing page hits). What the internet did do, however, was so significantly change the cost structures and transparency of organisations and markets that many of the last century's assumptions about the economics of the firm no longer hold true. (cf "The Nature of the Firm" R.H.Coase: http://www.cerna.ensmp.fr/Enseignement/CoursEcoIndus/SupportsdeCours/COASE.pdf and "Coase's Penguin" Yochai Benkler: http://www.yale.edu/yalelj/112/BenklerWEB.pdf) The internet has so radically reduced transaction costs and increased transparency that the high agency costs of the centralised, hierarchical bureaucracies of the twentieth century are no longer sustainable. Reaction The main reaction to the new environment has been a frantic search for cost reductions, usually involving wholesale outsourcing and offshoring of company functions combined with ever more desperate attempts to protect existing monopolies through political lobbying for the extension of stringent “intellectual property” laws. The main effect of such tactics has been to disillusion consumers with the resultant poor service (offshoring) and technical complexity and restrictions (stringent IP protections), storing up the potential for mass customer defections as cheaper and better services become available. New Models The most outstanding example of the new economic models created by the internet is of course free and open source software, where thousands of individuals and companies, both large and small, have formed virtual organisations to collaborate in the development of first class software. Some of the results are well known: - the open source web server Apache claiming between 50% - 70% market share
- IBM basing its commercial Websphere software on the work of the Apache Foundation
- Google running its entire web search business on hundreds of thousands of Linux servers
Some of the results are less well known, but equally striking: - Message Labs the £120 million UK services business using open source software (clamAV and Spamassassin) to run its antispam and antivirus services
- Apple basing its OSX operating system on the open source FreeBSD
- Oracle re-branding open source software applications as its own products (e.g. OpenLDAP / Oracle Directory Server)
The Spread of the Open Source Approach The open source model is now spreading to other industries ranging from graphic design to scientific publishing, architecture to consumer electronics, music to venture finance. An interesting example is provided by the comparison of iStockphoto, a commercial photo library relying on a distributed army of thousands of independent photographers and charging extremely competitive rates, with Corbis, a traditional image library using a very twentieth-century business model:
http://www.wired.com/techbiz/media/multimedia/2007/07/gallery_stockwaves Economic Theory The underlying economics have by now been very thoroughly analysed by academics such as Yochai Benkler (Professor of Entrepreneurial Legal Studies, Harvard Law School in texts such as “The Wealth of Networks” and “Coase's Penguin”)... although it is perhaps surprising how little this knowledge has spread outside specialist circles. See the following video clip of Benkler at Oxford, explaining open source economics:
http://blog.ted.com/2008/04/yochai_benkler_1.php What it means to you The upshot of all this with regard to your IT strategy is, if you are largely or entirely reliant on proprietary packaged software and conventional IT services companies: - you are probably currently overpaying for commodity services and software which do not deliver strategic advantage
- your hardware, dictated by repeated enforced upgrade cycles, is likely to be bloated and energy-inefficient
- your IT projects, if managed hierarchically and by the waterfall method, may not deliver on the promised business cases, or at all...
- you are unlikely to be aware of the enormous wealth of talent and software assets sitting a few mouse clicks away
We can help you remedy all the above in a highly collaborative and agile fashion. | 
