One
highly touted aspect of e-business is its ability to deconstruct value
chains. Deconstruction means separating a product or service chain into
its component parts and realigning those components to maximize overall
value or flexibility. It is roughly akin to the 1980s investment
phenomenon of buying and breaking up companies because the parts were
worth more than the whole. E-business deconstruction applies to the
services market and even to the IT organization itself.
Take, for example, the conception and implementation of a new
warehousing system that will save a given company $100 million over ten
years. The project involves the creation of the initial concept, its
translation into an implementation strategy, development, rollout, and,
finally, maintenance and operation over the ten years. If we were to graph
these steps by new value created, the initial concept creates the highest
value by inventing a method to save the $100 million. The rest of the
steps follow a steeply declining curve, ending at operation which,
although critical for obtaining value, generates no new value.
Paradoxically, the cost of each step increases as we move down the value
chain. The final value of the new warehousing system to the company is the
potential $100 million minus the sum of all the costs. Not surprisingly,
the lower these costs, the greater the value of the system.
The skill set and availability of resources required also changes as we
move through the chain. The rarest and most skilled resources are at the
front of the chain, while the most generic, least expensive skills are
found at its end. These backend resources are a commodity in a highly
competitive services market.
The current IT value chain merges high-value steps with low-value steps
and prices its services on this mixture. Hiring a services firm to develop
and roll out the system combines strategy, management, development, and
rollout into one package. This package is charged at a premium over the
cost of the resources in recognition of the value added. In reality, it
undercharges for the value and overcharges for the resources. In a
deconstructed IT world, separating the value-creating and commodity skills
has enormous implications in terms of service pricing and delivery.
At the high end, management consulting firms are already changing their
pricing models to garner a share of the value they create rather than
receive consulting fees. If an idea is very successful, they and their
client reap enormous benefits. If the idea fails, they get nothing. These
incentives will quickly kill marginal ideas and provide considerable
impetus to reduce costs throughout the rest of the value chain.
At the low end, the pressure will be to obtain implementation and
operational resources at the lowest possible prices on a commodity market.
Constantly changing skill sets and the desire to minimize overhead will
actuate the benefits of "as needed" staffing. Prices will be set
by competition and will favor services firms with very low overhead.
To survive, mid-tier firms will have to decouple their strategic and
project management services from commodity implementation and operational
services. They will most likely serve as general contractors, ensuring the
successful implementation of the project and buying their resources for
the lowest cost as needed from the commodity market.
This deconstruction will have similar effects within IT organizations
themselves, but that is a topic for another day.
