Monday, November 07, 2005

Elephants rarely dance

A recent Business Week article gave a good example of a small software company providing an important solution to retailer Circuit City in the face of competition from industry giants. The dot-com madness made CIOs understandably wary of small software companies bearing gifts, yet it is important for these same CIOs to realize that they do their shareholders no favours by taking an ultra-conservative "buy only from giants policy". For a start, this option is by no means always safe. It also a flawed strategy.

Industry giants rarely produce innovative software. For example the founding executives of both Siebel and were both Oracle executives, but were unable to create what they knew the market wanted at Oracle itself. Large companies become inevitably less fast-moving as they grow, and frequently become more inwardly focused and cease listening to their customers, the very people that made them successful when they were small. In my years as a strategic technology planner I learned that the key to success in software portfolio planning was a twin approach: standardize on commodity infrastructure, yet encourage innovation above this layer. For example, it is pretty clear by now that the major relational databases (Oracle, DB2, SQL Server) are all functionally rich and basically work. Nobody uses more than a fraction of the features they have, and which one you choose is largely a matter of taste. However it is best if you can standardize on one of them, since you then get easy interoperability, and your IT staff build up skills in that technology that transfer when they switch departments. This is an example of a layer of infrastructure that has matured to the extent that the benefits of standardizing outweigh a few features at the edges.

Yet at the application layer this is by no means the case, except perhaps in the area of finance, where no one is really likely to produce a deeply innovative general ledger system any more. Yet this is clearly not the case in marketing, sales and many other business areas, where exciting applications are still popping up, and companies like Salesforce can radically change an existing application area. Here it makes no sense to try and second guess the market, where evolution is still working its magic to see what technologies work best. Trying to standardize too quickly in an area that is evolving will not only most likely make you look foolish when you get it wrong, but also misses real opportunities for companies to take advantage of new and exciting offerings.

Giant software behemoths are not the place where innovation flourishes, and the further they get from their core area of competence, the less likely they are to succeed. As a strategic technology planner, your job is to solidify the core infrastructure but to enable your customers to take advantage of innovation in fast-moving or evolving areas. This state of affairs is not going to change in software, where fairly low barriers to entry enable innovation to be created without massive capital investment. Best of breed software does indeed live!


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