Sustainability – A lesson from the 2008 financial crisis

This week is the anniversary of the fall of the Lehman Brothers and the financial crisis. The media has been giving a lot of coverage on it. One of the most popular topics is about the compensation scheme of the top banking executives in the States. Before the crisis, they were given huge annual bonuses based on the profits earned by their banks for the year. This has encouraged a short term view and risk taking within the industry. Currently, proposals are given to implement the Clawback scheme where the bonus earned in the current year is to be distributed in a number of years.

I think this spirit of the idea is also applicable for the IT industry. For the last few decades, IT improvement initiatives are usually packaged as a transaction between the buyer and the seller. The seller will help the buyer to deliver the required solution based on the requirements provided. At the end of the project, the seller will receive a monetary reward for the services provided. The buyer can optionally choose to continue the thread-thin relationship by signing up for a maintenance contract with the seller.

However, there are some weaknesses with this model to both the buyers and sellers at different stages of the project.  The underlying reason is because of the one-time payment as a transaction.

Beginning of the project

For the buyer, they will need to incur a large sum of money upfront to “invest” in the IT solution that can help the company. This result in a lot of time and effort spent to justify for the “investment” and to manage the project.

For the sellers, they will to ensure the profitability of the business. Therefore their pricing may limit themselves to the bigger players who can afford, and leaving out a large majority of smaller players untapped. They have to spend more time and money on marketing and sales to clinch new projects.

During the project

As the project progresses, we will see more weaknesses showing up with more changes in the requirements popping up.  Because the project is a one-off project, there is a tendency to scope the project as big as possible to enjoy the economy of scale and larger revenue. However this increases the complexity of the project as it is very difficult to gather 100% of the requirements upfront.

Therefore new change requests will definitely arises during the midst of the project. The buyer will try to get the sellers to do more without busting the budget whereas the sellers will try to charge back from the extra work to be done. In an effort to meet the schedule and cost constraints, some projects will suffer from a buggy system or a system that is difficult to use and maintain. In some extreme scenarios, there are a lot of unhappiness generated and losses incurred at both sides.

End of the project

Once the system is implemented, the end users will be sent for the training. However from then on, new end users will be trained on the job basis by those people who have been trained. Little or no additional training will be given for new features added subsequently. As a result, we hear illogical stories from end users like this. “You need to resize this window before you click this button, otherwise the system will crash”. End users will start developing their unorthodox ways of using the systems which limit the benefits of the original design of the system. It is like spending hundreds of thousands buying a sports car and putting it to waste by filling it up with diesels instead of petrol.

And as the world is getting more and more dynamic nowadays, we see more changes in the business rules and processes. The end users will devise new ways of using the system like overloading the original features of the system.

For the buyers, they are losing the productivity due to additional distraction of their staff and system failure due to incorrect usage.  After a few years, they will realize that the system is not delivering its purposes and they have to spend money to invest in another brand new system. In fact this is a common sight in the industry where money is being wasted on migration to new systems every few years.

For the sellers, they are losing the opportunity to provide their assistance to their valued customers for additional revenue. They get bad publicity when people blog or comment their systems are lousy just because the end users are not aware of certain features or correct way of usage.  If their solutions are truly helping their customers to earn more money, I believe it will be much easier to justify for a better reward.

So is there a better way?

I am sure that a lot of IT professionals will agree with the points that I have stated. In fact, some of them have come up with other pricing models to address these weaknesses. One of which is the Software as a Service (SaaS) pricing model that is popularized by Salesforce.com. Rather than to pay a huge sum of money to invest in IT solutions, companies can now enjoy the benefits of the IT solutions immediately by paying for monthly usage fees.  This provides a consistent flow of the revenue to the service providers and lowers the barriers to entry for the IT adoption. We should extend the idea of the SaaS from hosted applications to on-site implementations.

In additional to that, we should create the additional role of the Solution Specialists. These experts will visit the end users on a regular basis to coach them on the best way to use the systems and identify any new needs or changes required. They will also update the management of the companies on the best practices from other companies and latest innovation in the market that might be applicable to them. And because the companies are paying on a subscription model, there is incentive for the service providers to continue to refine the system to retain the customers.

Conclusion

We will be able to create a win-win relationship between the buyers and the sellers by changing the reward model for IT projects. Instead of treating IT solutions as a commodity that can be traded in transaction, we should look at it as a service or utility. In this case, the cost of implementation can be lower. The payment will also be tied to the value and contribution to the business over the long term. This will encourage the sellers to align their solutions to the business. For the sellers, they will be able to have a larger and consistent flow of revenue. This is what a real business partnership should be.

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