Author: Michael Francis
A business model describes the rationale of how an organisation creates, delivers, and captures value.1
When I consider the way on-demand services has changed business models, I think of the traditional retail model, which was a bricks-and-mortar store with trained staff to sell the goods. The value proposition—what was really being sold—would be the variety of goods combined with the knowledge of the sales team. For example, a video store of the ’90s provided me with the value of a physical location plus a relatively large assortment of videos that I could either purchase or rent. The value was the physical repository of videos and the selection.
Now consider online retailers and what they are selling—and you might think it’s the goods. But what I think online retailers are selling is the ease of access to goods that are relevant to the consumer, delivered in a consistent and predictable timeframe, at a known cost. The important aspect to this value proposition is that the value is not in the goods themselves. The online retailer has created a marketplace for consumers ready to consume through its procurement and delivery channel.
This business model allows the online retailer to place any product or service into its consumption process and deliver value. Which gives the online retailer the agility to seek out different suppliers to capture more consumers without changing its core value proposition or redeveloping its consumption process.
The value proposition changed between the bricks-and-mortar and the online businesses. And, on-demand services was the enabler of this business model—the ability to easily consume a product or service that is relevant to me with consistent delivery and known costs. And, it has changed the value proposition of the retailer from the goods and trained staff.
The Effect on the IT Department
Similarly the internal IT organization has a B2C relationship with the business side of the organization. The value proposition offered to the consumer (the business) by the IT organization has historically been the skillset as an integrator/developer of required technologies and the foundational compute services provided. With a largely captive market in the past, IT has operated like a traditional B2C retailer.
As we know, the captive market is no longer captive—IT’s consumer can now access a broad range of services, including many that previously have only been available through their internal IT organization. However, just as the retail consumer doesn’t necessarily want a relationship with hundreds of suppliers, the business consumer also doesn’t want to manage hundreds of suppliers to get the IT services they need. Business consumers want the ability to easily access services that are relevant to them in a timely manner and at a known cost —ideally from a single point. These requirements now provide more value to the business consumer than highly customized, perfectly-fitting IT solutions that involve extensive integration and development and have varying delivery times and costs.
The business consumer has changed what’s important to them. As a result, the internal IT department is being challenged to align with this change in their consumers’ requirements and value proposition and provide known outcomes, known delivery times, and known costs. Failure to do so will likely increase the use of “shadow IT” and potentially relegate IT to a diminished tactical role.
IT needs to operate a business model similar to an online retailer. The value is not in the compute good or service itself—the value is ease of access to many suppliers through a single store front, with known delivery time and known cost. This requires a significant change inside the IT department to a mindset of understanding the consumer to ensure that relevant goods are offered, and in doing so, leverage external suppliers and defer the risk to them when introducing those goods. This is especially important while the demand for an offering is being evaluated.
If used effectively, the pay-as-you-go finance models and automation offered by established public cloud providers can provide improved delivery times and greater agility to the business, while also deferring up-front costs to provide the goods until the actual demand is fully understood.
My point is that it’s important to understand the rationale behind consuming public services—in this case, to provide capability while evaluating actual demand. Public cloud solutions are not necessarily the most effective means of reducing costs of IT services in every situation. And, to make the most effective use of public cloud requires that an organization understand the services it provides and cost of those services.
In my next blog in this series, I’ll discuss the implementation of an on-demand services business model—an implementation that transforms the IT department from a traditional B2C retailer to the equivalent of the online B2C retailer. To deliver on this requires a transformation within the IT department from organizational structure, technology, and operational perspectives. I’ll also cover the ideal organizational structure, product offerings, associated service definitions and how to leverage public cloud to defer risk and understand your consumers’ demand.
Michael Francis is a principal systems engineer at VMware, based in Brisbane.
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1Alexander Osterwalder and Yves Pigneur, Business Model Generation, Wiley; 1 edition (July 13, 2010)