Acquiring New Technology? Why “Build-versus-Buy” is Dead

Still debating the build-versus-buy decision at your organization for your IT purchases?  If so, you probably aren’t getting the biggest bang for your IT dollar: Build-versus-buy is dead.  For better decision-making when acquiring IT systems, forget build-versus-buy and remember the Technology Acquisition Grid.  You’ll not only save money, you’ll make smarter decisions for your organization long term, increasing your agility and speeding time-to-market.

In this article, I describe Software-as-a-Service (SaaS), application hosting, virtualization and cloud computing for the benefit of CEO’s, CFO’s, VP’s and other organization leaders outside of IT who often need to weigh in on the these key new technologies.  I also describe how these new approaches have changed technology acquisition for the better – from the old build-versus-buy decision, to the Technology Acquisition Grid. Along the way, you’ll learn some of the factors that will help you decide among the various options, saving your organization time and money.

The Old Model: Build-versus-Buy

When I earned my MBA in Information Systems in the mid-1990′s, more than one professor noted that the build-versus-buy decision was a critical one because it represented two often-costly and divergent paths.  In that model, the decision to “build” a new system from scratch gave the advantage of controlling the destiny of the system, including every feature and function.  In contrast, the “buy” decision to purchase a system created by a supplier (vendor) brought the benefit of reduced cost and faster delivery because the supplier built the product in advance for many companies, then shared the development costs across multiple customers.

Back then, we thought of build versus buy as an either-or decision, like an on-off switch, something like this:

In the end, the build-versus-buy decision was so critical because, for the most part, once you made the decision to build or buy, there was no turning back.  The costs of backpedaling were simply too high.

The Advent of Application Hosting, Virtualization, SaaS and Cloud Computing

During the 2000’s, innovations like application hosting, virtualization, software-as-a-service (SaaS) and cloud computing changed IT purchasing entirely, from traditional build-versus-buy, to a myriad of hosting and ownership options that reduce costs and speed time-to-market.  Now, instead of resembling an on-off switch, the acquisition decision started to look more like a sliding dimmer switch on a light, like this:

 

Suddenly, there were more combinations of options, giving organizations better control of their budgets and the timeline for delivering new information systems.

What are each of these technologies and how do they affect IT purchasing?  Here’s a brief description of each:

Application Hosting

During the dot-com era, a plethora of application-service-providers (ASPs) sprung up with a new business model.  They would go out and buy used software licenses, then host the software at their own facilities, leasing the licenses to their customers on a monthly basis.   The customers of ASPs benefit from the lower cost-of-ownership and reduced strain on IT staff to maintain yet another system, while the ASPs made money by pooling licenses across customers and making use of often-idle software licenses.

While the dot-com bust put quite a few ASPs out of business, the application hosting model, where the software runs on hardware supported by a hosting company and customers pay monthly or yearly fees to use the software, still survives today.

Virtualization

One of the first technologies to change the build-versus-buy decision was virtualization. By separating the hardware from the software, virtualization separates the decision to buy from the need for new software.  In virtualization, first, computer hardware is purchased to support the organization’s overall technology needs.  Then, a self-contained version of a machine – a “virtual” machine – is installed on the hardware, along with application software, such as supply chain or human resources software, that the business needs at that point in time.

When the organization needs a new software application that is not compatible with the first application, because it runs on another operating system, they install another virtual machine and another application on the same hardware.  By doing this, the organization not only delivers software applications more quickly because it doesn’t need to buy, install and configure hardware for every application, the organization also spends less on hardware, because it can add virtual machines to take advantage of unused processing power on the hardware.

Even better, virtual machines can be moved from one piece of hardware to another relatively easily, so like a hermit crab outgrowing its shell, applications can be moved to new hardware in hours or days instead of weeks or months.

Software-as-a-Service (SaaS)

Like virtualization, Software-as-a-Service, or SaaS, reduces the costs and time required to deliver new software applications.  In the most common approach to SaaS, the customer pays a monthly subscription fee to the software supplier based on the number of users on the customer’s staff during a given month.  As an added twist, the supplier hosts the software at their facilities, providing hardware and technical support, all within the monthly fee.  So, as long as a reliable Internet connection can be maintained between the customer and the SaaS supplier, the cost and effort to support and maintain the system are minimal.  The customer spends few resources and worries little about the software (assuming the SaaS supplier holds their side of the bargain), enabling the organization to focus on serving it’s own customers, instead of on information technology.

Cloud Computing

The most recent technology innovation among the three, cloud computing brings together the best qualities of virtualization and SaaS.  Like SaaS, with cloud computing both hardware and software are hosted by the supplier.  However, where the SaaS model is limited to a single supplier’s application, cloud computing uses virtual machines to host many different applications with one (or a few) suppliers.  Using this approach, the software can be owned by the customer, but hosted and maintained by the supplier.  When the customer needs to accommodate more users, the supplier sells the customer more resources and more licenses “on demand”.  Depending upon the terms of the contract, either the customer’s IT staff maintains the hardware, or the supplier.  In addition, in most cases, the customer can customize the software for their own needs, to better represent the needs of their own customers.

Adding Application Hosting, Virtualization and Cloud-Computing to the Mix – The Technology Acquisition Grid

Remember the dimmer switch I showed a few moments ago?  With the addition of application hosting, virtualization, SaaS and cloud computing to the mix, it’s not only possible to choose who owns and controls the future of the software, it’s also possible to decide who hosts the software and hardware – in-house or hosted with a supplier, as well as how easily it can be transferred from one environment to another.  That is, it’s now a true grid, with build-to-buy on the left-right axis, and in-house-to-hosted on the up-down axis.  The diagram below shows the Technology Acquisition Grid, with the four main combinations of options to consider then acquiring technology.

 

Here’s where application hosting, SaaS, virtualization and cloud computing fit into the Technology Acquisition Grid:

 

Making a Decision to Host, Virtualize, go SaaS, or seek the Cloud

If the rules of the game have now changed so much, how do we make the decision to use virtualization, application hosting, SaaS or cloud computing, as opposed to traditional build and buy?  There seem to be a few key factors that drive the decision.

At the most basic level, it comes down to how much control – and responsibility — your organization wants over the development of the software and the maintenance of the system.  Choose an option in the top-left of the Technology Acquisition Grid, and you have greater control of everything; choose an option at the bottom-right, and you have far less control and far less responsibility for the system.

In my own experience advising clients during technology acquisition and leading technology initiatives, decision-makers tend to choose a “control everything” solution because it’s the easiest to understand and poses the least risk.   While this may, in the end, be the best answer, organizations should weigh the other options, as well.  Certainly, more control usually sounds really good, but it almost always comes along with much higher costs, as well as delaying use of the system by months.  Particularly for smaller organizations,  which probably need those IT dollars to serve their own customers more effectively, a “control everything” answer is often the wrong decision.

Which should your organization choose?  Start by making an effort to include software products that take advantage of hosting, virtualization, SaaS and cloud computing among your choices when you start your search.  Then, weigh the benefits and downsides of each option and combination of options, choosing the one that balances cost and time-to-market with your own customer’s needs and your tolerance for risk. A good consulting company like Cedar Point Consulting can help you do this, as can your organization’s IT leadership.  Using this approach, you’re sure to free yourself from the old rules of build-versus-buy, delivering more for your own customers at a much lower cost.

Donald Patti is a Principal Consultant with Cedar Point Consulting, a management consulting practice based in the Washington, DC area, where he advises businesses in technology strategy, project management and process improvement. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

 

Saab Turnaround 2011 – The Struggle and the Pain

In February, I wrote a piece titled “Can Saab Be Turned Around?” in which I pondered the chances of Saab being able to do a herculean amount of work with what little they had to work with, and, in the process, turn themselves around. 

Since that time, Saab has plunged into a financial abyss, been forced to shut down production, and taken on one Chinese investment partner (Hawtie), and then been forced to abandon that deal within two weeks because the Chinese company could not get the required permissions from the Chinese government to do the deal, and then, take on another Chinese business partner (Pangda). 

What bought on the aforementioned sudden fall, you might ask? 

To put it succinctly, the CEO’s rash actions. Saab had been paying all of their suppliers late for months, trying to conserve their cash flow, more or less “stealing from Peter to pay Paul”, which in this instance meant they were trying to put more money into sales, marketing, research and development; the first two things they desperately need to do to get more cash now (by selling some cars), and from the development perspective, they need to get the next generation of the 9-3 moving along, which is their volume model, and which needs an update. 

What Is Social CRM?

There is a very long definition, and then there is the one I’m going to give you: 

Social CRM is the enterprise version of Web 2.0; it enables businesses to share organizational knowledge easily, it gathers information from various sources on the internet, it allows companies to become more social in terms of how information flows back and forth across the organization, and, is specifically designed to help sales teams and developmental teams. 

That was pretty painless, right? 

But, why Social CRM? Don’t businesses already have CRM systems out the wazoo? What’s wrong with those systems? 

Having led some large sales teams, I can answer that question. 

Departing Waterfall – Next Stop Agile

It’s been more than a year since I penned, “Before Making the Leap to Agile“, an article intended to guide everyone from C-level executives to IT project managers on the adoption of Agile. The goal was to offer up some of the lessons I learned through actual implementations, so that readers could avoid of some of the pitfalls associated with Agile adoption.  While a few saw it as an assault on Agile, many understood that my goal was to assist Agile adopters and thanked me for writing it.

Five-thousand-plus page views later on the last article, and I’ve finally cleared my plate enough to address an equally important topic, why people, and organizations, are making the shift to Agile from the more typical Waterfall. After all, Agile is a revolutionary approach to software development and it continues to grow in popularity, so I think it’s important for those who do not yet use Agile to understand why others have embraced it.

Can Saab Be Turned Around?

There are turnarounds of an average degree of difficulty, and then there are turnarounds that might take a couple of years off of your life.

Bringing Saab, the Swedish automaker, back from near-death, is probably in the latter category.

Just a quick recap, for those unfamiliar with the Saab story:

Saab originally made airplanes (and a subsidiary spun off long ago still does), developed a prototype car in 1949, started selling cars in earnest in the Fifties, entered the U.S. market, and developed what could probably be accurately called a small but fanatical following in America. Saabs were quirky, front-wheel drive when almost nothing else was, extremely safe, very economical, and, last, but hardly least, had design that was truly innovative and different-looking.

Interest In Blogs Among Teens and Young Adults Fades

If your organization or business has young people as a target audience or target customers, here’s hoping that you are reaching them through your Facebook site or your Twitter feed.

Surprising no one that follows social media, the most recent data available shows that fewer young people are keeping blogs, and more importantly for businesses, fewer young people are visiting blogs.

The sentiment driving this behavior seems to be a combination of:

• A feeling that writing a blog takes too long
• Low readership of small blogs
• Facebook and Twitter are meeting whatever needs they have for self-expression

Business Blog Primer

BLOG ME

If you’re a business these days, you’re supposed to have a blog to go along with your company website. The reasons why?

Well, it can keep your customers informed, for one. It can provide a great platform for your customers to interact with the company, for two. Third, it’s a great way to keep talking about the company in a positive way. Fourth, it’s a good way for the company viewpoint on issues to be delineated, if that is important to the business. Fifth, people may actually come to your site just to read your blog, or, some other site may find something interesting on your blog and link to it, thereby driving potential customers to your site. Sixth, each new blog post (and each new comment, if you allow comments) is yet another reason for the search engine bots to crawl your site, thereby moving you up in the search engine rankings, which is always good for business.

Okay, so a lot of good reasons to have a company blog. The problem is, of course, just as with other things, the execution. Apropos of that execution, how do you get a blog, how do you get good, relevant content for the blog, and how do you keep it going?

Things Have Changed

Yes, I am quoting a Bob Dylan song title on a business blog.

But things have changed with the passage of the 2010 Tax Relief Act two weeks ago, and I thought it would be a good idea to highlight some of the provisions that might hold the greatest interest for small and medium-sized businesses.

So, here we go:

Small Business Investment: Section 760 of the Tax Relief Act amends section 1202 of the Internal Revenue Code (the Code), with the intent of increasing incentives to invest in small businesses. The Code now states that if an investment is made in 2011 in stock of a qualified small business and the stock is held for a minimum of five (5) years the gain is tax free. Prior to passage two weeks ago, the Code section 1202 incentive was a 50% gain. Some details: The investment must be in qualified small business stock. That means the investment must be in new shares of a “C” corporation. The investment must be made as an original issue of stock and can be granted for money, property or services performed, except for service of underwriting. To qualify, a company must be a domestic corporation with a cap of aggregate gross assets of $50,000,000 USD before AND after the issuance of the new shares. And, a minimum of 80% of the total assets must be used in an active trade or business. An active trade or business is defined by the IRS as a trade or business other than a personal service business like law, medicine, engineering, consulting, athletics, financial services, and includes other trades or businesses where the business is dependent on the reputation or skill of 1 or more of its employees.

Small Business Expensing: Businesses will be able to write off 100 percent of their equipment and machinery purchases, up to $500,000, that were placed in service after Sept. 8, 2010 but before Jan. 1, 2012. The cost of the equipment (up to $500,000) reduces the total taxable income of the business.

Estate Tax: The revised estate tax level was set at a $5 million exemption and 35 percent top rate through 2012.

Payroll Tax: Employees will receive a 2 percent reduction in their Social Security (FICA) payroll tax in 2011. The rate for employees will drop from 6.2 percent to 4.2 percent. It is important to note here that employers (no matter what size) will continue to pay the 6.2 percent rate. Self-employed individuals will pay 10.4 percent instead of 12.4 percent. The FICA tax rates for everyone will return to 2010 levels in 2012.

Research Tax Credit: The research tax credit had originally expired as of December 31, 2009. The Tax Relief Act has now extended this for 2010 and 2011.

That wraps it up on this end, and I hope this provides a quick overview of some of the changes in the recent tax legislation. We are not tax accountants (not even close), so if you have questions, it is in your best interests to contact a certified tax accountant, not us.

Brendan Moore is a Principal Consultant with Cedar Point Consulting, a management consulting practice based in the Washington, DC area, where he advises businesses in marketing, sales, front-end operations, and strategy. Cedar Point Consulting can be found at http://cedarpointconsulting.com.

Will Your Business Need A Turnaround Soon?

Four times in my business career I have answered a telephone and someone else on the other end asked if I could help them turn their business around.

I accepted the challenge each time, and have a success rate of 75%. Three of those businesses were turned around successfully; one was not. Each business was at death’s door by the time the call was made to me. Each person in charge of those businesses waited until the last minute of the last hour before deciding that it was time to “do or die”, that it was finally the right time to accept the wrenching changes that would be necessary to give their respective business a fighting chance at survival.

I don’t wish to belabor the obvious here, but it sure would have been easier to bring back the commercial concerns in question if there had been earlier recognition of problems at those businesses, as well as an earlier willingness to act to fix the problems. Believe me, I would have been happy to come on the scene earlier, be given a set of more manageable problems concerning the health of the business, and, spared the client the experience of living inside the pressure cooker of uncertainty regarding the survival of the company, even if it meant far less billable hours.

But, that’s not how it usually works. Business owners are human beings, and human beings tend to develop inertia and be resistant to change. Business tails off, but it’s not off by a lot, and then it gets a little worse, but, you know, things are still okay, and then things are just okay for quite awhile, until they’re not.

I’m reminded of the passage in Hemingway’s The Sun Also Rises, in which one character asks another, “How did you go bankrupt”?

“Two ways”, the other man says. “Gradually, and then suddenly”.

Yes, that’s how it usually happens. Businesses almost never explode and fail, a la the CFO running off to Bolivia with the company’s working capital, or an ugly public relations fiasco, or the CEO and founder perishing in a plane crash. Nope, most companies that die simply wither away slowly.

Will this happen to your business?

It’s possible; many businesses fold, and disappear under the waves of commerce every year. But, if you’re paying attention to the basics, your chances of sticking around get much, much better.

The basics include, but are not limited to:

•Paying attention to what your competitors are doing – not only does this give you a way to match/exceed their offerings, there might be something they have that you want to emulate.

•Paying attention to market trends – even if you’re not first with the product your customers desire most, a fast second will usually save the day (and sometimes rule the day).

•Being cognizant of overall economic trends – if all you sell is trucks that get 10 mpg and gasoline climbs up to $5 a gallon, there is trouble on the horizon.

•Making it as easy as possible for customers to buy what you’re selling – Example 1: Client had the national distribution rights to a product (machinery) that the target market definitely wants and needs, but the acquisition cost was high and many customers could not afford the one-time expense. The solution was to find a small-ticket lessor that would offer lease financing to prospective buyers on a private-label basis (leasing branded with the client’s name). The client not only moved more product at higher margins, they also made fee income from the leases generated through the arrangement. Example 2: Client that does custom web development wanted to sell website templates of their own design to customers that want a different look than most sites, but do not have the budget for custom work. Unfortunately, many of these prospective customers have little or no technological expertise. The solution was to offer different packages with different degrees of required customer involvement at different price points. There was no “take it or leave it” attitude in terms of the product being offered; in fact, our client offered enough different levels of “do it yourself” packages so that it the average prospect found it highly likely that they would find a package that suited their skill/desire level.

•Conducting regular business strategy sessions – If you’re a very small company, this may seem almost laughable to you, but replacing those conversations you have after hours with your three employees over take-out food with a scheduled strategy session led by someone with experience in business strategy can usually produce better results. And, if you’re a large company, and you’re doing okay in the market, and nothing (product, competitors, size of market, etc.) has changed in five years, there probably doesn’t seem to be a pressing need for business strategy at corporate headquarters, but again, it can prove to be quite valuable to put a day aside and sit in a room with your peers and talk about just where you want the business to go in the next couple of years.

•Always thinking about a strategic alliance – it’s a cold, brutal business environment out there, and having another ally when facing off against your competitors always helps.

•Reviewing your marketing assets on a regular basis – there may be value in data or relationships you already have. I had a client that acquired a much larger, poorly-run competitor in order to get their retail locations and their commercial contracts, and ignored the list of 45,000+ consumer customers that came with the acquisition for over two years, despite the fact that it was a higher margin business that that the client was then trying to build up in a separate business unit. I was told, “They’re not our customers. There are some very unhappy campers in that portfolio”. Meanwhile, good money was being spent to send out direct mail pieces to new prospects.

•Constantly improving your business processes – reducing costs, reducing cycle times, increasing profits and increasing customer satisfaction are all very good things that should be done on an ongoing basis, not just when a crisis is looming.

•Having business financing always available – don’t wait until the moment it starts raining to get an umbrella, have one ready. Establish lines of credit before an emergency situation, not as a result of – the terms will be better, and access to the funding is immediate.

Now, all of this may seem pretty basic to all of you. It is. And, as I noted above, this isn’t even a complete list, there are more basic things businesses should do in order to not need a turnaround specialist in the future. But I think you would be surprised at how many businesses, large and small, ignore the basic blocking and tackling that they should be doing on a daily basis. Lethargy creeps in; the living organism that is the business is fat and happy, and habit takes over in terms of day-to-day activities.

Let this serve as your alarm clock if your business is one of the sleepy ones, and your senior managers are conducting their duties in a soporific trance. I’m happy to come over to your place and help you with a turnaround, but really, I think you would be happier if you didn’t need a turnaround in the first place.

Brendan Moore is a Principal Consultant with Cedar Point Consulting, a management consulting practice based in the Washington, DC area, where he advises businesses in marketing, sales, front-end operations, and strategy. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com/.

Stodgy Old-Fashioned Dull Obsolete Antique Outdated Sales and Marketing

What I need is a really cool website.

Online marketing is the only kind of marketing I want to do for my company.

Who needs salespeople when you have the web?

Who needs a call center when you have the web?

I hate actually interacting with someone face-to-face and I’m sure all of my customers hate it, too.

Isn’t everyone on the Internet now?

Digital marketing is always cheaper on a cost-per-account basis.

Everyone just throws out direct mail solicitations.

Outdoor media? You mean, like billboards and stuff? Wow, that’s really old-school, isn’t it?

Why would I bother offering sales training to my customer service employees and my other employees? That’s not their job.

Industry conventions seem like a massive waste of time and, plus, they’re a huge pain.

IF you talk to companies about sales and marketing, you’ll frequently hear comments and questions like this, because everyone’s dream these days is to have a virtual organization that does all its sales and marketing over the web, or on mobile phones, or whatever. You know; the kind of organization where you just click on keys, your advertisements go out, customers respond to your website through an online checkout, and you make millions of dollars with less than 10 employees, and very little overhead.

That’s the kind of marketing plan I want, companies will say.

Well, sure.

I want to date Halle Berry, have my own island, and have Warren Buffet asking me for advice about investing, too. The chance of even one of the items in that scenario occurring for me is about the same as all of the pieces falling into place for the kind of company to happen. Yes, occasionally the planets line up and your idea that turns into your product that your company sells is both irresistible and is able to be sold over the internet in such large numbers that you then have articles in The Wall Street Journal and The New York Times business section written about your firm.

But most of the time, the results are less lofty. The internet is merely one small part of all the moving parts that make up a typical successful company, and that’s not how most business comes in the door. Some small companies have less than a dozen employees, but large companies have hundreds, or thousands, of employees. Everyone in the company works hard, because they’re competing with other people at other companies that are working just as hard in the same segment, and that hard work eventually makes for a good living and a good return for the company’s shareholders. It’s not exciting and notable enough so that it’s newsworthy, but it’s a good result. That’s what usually happens.

The reason I’m noting this is because many companies, in their rush to embrace Web 2.0 technology, are now giving short shrift to perfectly good customer acquisition platforms that they’ve successfully used for years, things like a field sales force or radio advertising. Seduced by a younger, more attractive face, these businesses are abandoning their long-time partners for a tempestuous fling with digital marketing. They’re doing this even if that doesn’t make sense in terms of their revenue, profit and strategic goals.

Now, just to be clear, I would not advise any client to eschew a meaningful presence on the web. If you’re in business, your customers need to be able to find you on the web. Much of the work we do for clients is in the area of bolstering their presence on the web, whether that’s through SEO marketing, developing a better website for them, developing a blog component for their corporate site, etc. So we are strong cheerleaders for a healthy web presence.

No, what I’m saying here is that traditional marketing and sales may still be where your company’s bread will be buttered, and there is absolutely no reason to cut back or discard those customer acquisition platforms simply because they’re “not new”.

For many companies, those “old-fashioned” methods are still the most cost-effective, despite all the infrastructure needed, and the blocking and tackling needed to execute, and frankly, with a little tuning up and focused process-improvement work, those old-school platforms can be made even more attractive from a cost-acquisition ratio.

Furthermore, there is absolutely no reason you cannot keep doing what is bringing you good business results currently, and, beef up your profile and capabilities on the internet at the same time. In other words, there isn’t any way to do too much marketing in too many places.

There is an optimum mix of traditional marketing and digital marketing, specific to your company’s needs and goals. Find that mix and your company will prosper. Because, despite what you read in the media about the latest company to set up a website, and 18 months later, launch a $6 billion IPO, most companies still need the combination of traditional marketing and digital marketing to thrive.

Brendan Moore is a Principal Consultant with Cedar Point Consulting, a management consulting practice based in the Washington, DC area, where he advises businesses in marketing, sales, front-end operations, and strategy. Cedar Point Consulting can be found at http://cedarpointconsulting.com