For perhaps the first time, small and midsize businesses (SMBs) are in a position to lead IT use. Historically, these businesses have trailed big companies in the innovative use of IT. But thanks to the emergence of several new technologies and business models, SMBs are actually driving the industry. What's more, they're poised to change the way even the largest corporations use IT.
Until recently, nearly every major implementation of business IT was initiated by large companies—as you would expect given their size and resources. Think of time-sharing in the 1960s, mainframes in the '70s, PCs in the '80s, and data-center outsourcing in the '90s.
These and other technologies achieved their widest market acceptance only after being adopted and successfully implemented by large, often multinational corporations. SMBs were the IT laggards, picking and choosing affordable technologies from those already implemented and proven by large corporations. The path of IT innovation was strictly one-way, from large companies to SMBs.
Now, the situation has reversed itself. SMBs lead IT, and large corporations struggle to keep pace. The situation is reminiscent of telephone use in China, India, and other developing nations. For many years, highly developed Western nations led the world in telephony. But with the emergence of mobile-phone technology, India and other developing countries find themselves in a leading role. It was precisely because these nations had so little in the way of legacy systems—specifically, wired telephony infrastructures—that they could leapfrog the west with the rapid spread of mobile networks.
In a similar way, SMBs, unencumbered by massive legacy IT architectures, can leapfrog the big companies. Specifically, SMBs are seizing on three emerging technologies and business models: software as a service, open source, and offshoring. Together, these IT innovations level the playing field, allowing smaller businesses to gain greater computing power quickly and affordably. Here's a closer look at each of these.
Software as a service lets any SMB with an Internet connection take advantage of complete sets of applications never made available to them before—and at an affordable price. Suddenly, an SMB can operate like a leading-edge company without adding any of the IT infrastructure that would be required through traditional systems. For growing SMBs, scaling is easier, too, since the task of adding capacity falls to the service provider, not the user company.
Software as a service is still relatively new, but should become a seriously disruptive technology over the next five years. SMBs will begin to use such on-demand enterprise applications as supply-chain management (SCM), customer relationship management (CRM), and E-commerce. These and other applications will let them get close to their customers, take orders from them, update those orders, and make the supply chain more efficient. Best of all, these solutions—including services from vendors such as Ariba, NetSuite, RightNow Technologies, Salesforce.com, and Softscape—are already available to SMBs.
Open source means SMBs can take advantage of software that's free to obtain, evaluate, and use. The company need pay only for support, and even that's optional. Companies also have the option of hiring or training their own open-source expert, or relying on free help and advice from open-source forums and other community features. These solutions now include many mainstream applications and tools, including the Apache Web server, Eclipse development platform and application frameworks, JBoss application server, Linux operating system, MySQL database, Thunderbird E-mail client, and Firefox browser.
Offshoring isn't only for big companies. Currently, there are enough mechanisms of collaboration to let SMBs do offshoring, too: Web-conferencing technology, instant messaging, and mobile E-mail, to name just three. To give just one example, Ramco Systems, a company I advise, plans to offer ERP software as an on-demand service to U.S. companies from an offshore location. As recently as five years ago, a company like this would have needed to base itself in Silicon Valley, not—as Ramco has done—in Chennai, India. For SMBs, the ability to leverage offshoring means they can enjoy the same cost savings as big companies.
The collective impact of these IT developments on SMBs should be enormous. For one, they let smaller players leverage the same technologies that large corporations have used to acquire and support customers, sell products, and distribute products and services. Also, these new technologies help entrepreneurs start new businesses. A company founder can now start a business with a very sound technology architecture from day one. As recently as a decade ago, this was simply impossible. An enterprising SMB owner can have an entire CRM system, Web and E-commerce site, and supply-chain connections in place before opening for business, and with relatively little up-front investment. These services can be implemented via software as a service, open source, and/or offshoring. The end result is that a business can be started for far less money.
That's not to say incorporating these new technologies will always be simple. Training, education, and incorporation into the business culture will be ongoing issues. Similarly, as SMBs adopt on-demand software, their CIOs could face new power struggles with line-of-business managers. That's because the new on-demand applications are tightly focused on a specific business process or function, as opposed to enterprise applications that cover an entire company. For example, a company implementing an enterprise ERP solution must involve the entire company; clearly, that's a job for the CIO. But a company implementing a CRM solution may need to involve only sales and marketing. Here, the CIO plays a supporting role. The job of aligning IT with the business—typically a CIO's most important task—essentially disappears.
Another challenge to SMBs will likely come from the need to integrate on-demand applications. For example, if a company uses a CRM app from one on-demand supplier, and an HR system from another, how does the CIO integrate them? So-called mash-up solutions—back-end systems that can take data from multiple on-demand applications to create another application—can help.
Despite these and other challenges, the overwhelming impact of these three new approaches on SMBs should be beneficial. While implementation issues won't disappear, overall implementation time should be much quicker. For example, a traditional ERP implementation that would now take six to 12 months should, when replaced by an ERP service, take less than three months. To be sure, implementing the service-based ERP application is still a challenge. An SMB could still get it wrong. But with the shorter implementation time, the company's ability to react and recover is greatly improved. Overall, SMBs that use these technologies will flourish. They could even give large companies a run for their money (see chart above).
If IT innovation is shifting to SMBs, what are the implications for CIOs at large companies? They won't simply watch enviously from the sidelines, but neither can they simply emulate the IT activities of SMBs. Most big companies carry legacies of software licenses, information architectures, and enormous staffs and payrolls. As a result, they can't simply switch on software as a service, open source, and offshoring. But with careful, selective implementations, they can take advantage of these innovations.
With software as a service, for example, large companies lag behind SMBs because ongoing software licensing agreements can't easily be broken. In a recent survey of more than 100 CIOs at both large and small companies conducted jointly by management consulting firms McKinsey & Co. and Sand Hill Group, a stark difference in software-spending patterns emerged: While small-company CIOs are planning to invest heavily in software as a service, large-company CIOs are still heavily invested in old-fashioned software licenses.
As a result, perhaps the best way CIOs at large corporations can get started is by benchmarking their companies against the SMBs. CIOs already rely heavily on peers within their industry for information that affects their buying decisions. But too often, big companies only compare themselves with other big companies. In an era where IT innovation is being led by smaller companies, that approach is becoming obsolete.
Benchmarking carries several requirements. For one, there needs to be public data available. That's relatively easy when a CIO wants to benchmark one big company against another; but many smaller companies are privately held, and won't want to disclose data to their bigger competitors. One way around this may be to make an appeal for the good of the industry. When an industry benchmarks companies of different sizes, the results can help the little companies, too.
Big companies also must rethink offshoring. To be sure, they've so far led the charge to move IT and other functions to India and other low-cost labor markets. But now that offshoring is becoming more readily available to SMBs as well, the cost advantages may be erased. In other words, if everyone sends work offshore, then offshoring ceases to be a competitive advantage, and instead begins to be a business requirement.
Open source offers advantages to big enterprises, but it also poses potential hazards. The threat of open source "polluting" a corporation's legacy systems is very real. When a big-company CIO brings in open source code and combines it with the company's internal systems, the company could end up with a problem: Its own software could be viewed as an open source product!
For the most part, large companies have been slow to adopt software as a service. One concern is security. Another is scaling. Probably the most important, is the challenge of integrating on-demand software with older legacy systems. Regulatory concerns matter, too. Big companies must deal with Sarbanes-Oxley, not to mention many industry-specific regulations, some of which may limit companies' ability to take advantage of new IT developments.
For these and other reasons, large-company CIOs can't simply emulate their SMB colleagues. Instead, they should pick and choose innovations carefully, implementing only those that can help the business without creating more problems.
Similarly, SMB CIOs shouldn't get too cocky, automatically assuming that everything a large company is doing is irrelevant or behind the times. Offshoring, a phenomenon led by large companies, is now a viable option for smaller businesses, too. CIOs at SMBs can learn from the offshoring experiences and mistakes of large companies, and can also use them as customer references.
To be sure, the balance of IT leadership has changed and grown more complex. For the past several decades, the situation was simple: Large companies led the IT charge. But now, SMBs lead in several key areas, while large companies lead in others. So all companies, regardless of size, have much to learn from one another. Successful CIOs will be those who identify and adopt best practices from SMBs and large enterprises alike.
M.R. Rangaswami is co-founder of Sand Hill Group, which provides investment and management advice to emerging enterprise technology suppliers.
Tell us how your small company is leading the IT path, or comment on this topic in our blog.
Three IT developments—software as a service, open source, and offshoring—offer CIOs at large, midsize, and small companies new opportunities to transform their businesses. To join the new wave, follow these steps.
For CIOs At SMBs:
Month 1 > Take stock
Working with IT, assess existing IT solutions and infrastructure. Think of this as an internal audit of your total hardware, software, and networks inventory. Calculate your total spending on IT, then figure it as a percentage of annual revenue. Determine not only which solutions you have on hand, but also those that are actually used—and for what purposes.
Month 2 > Look to replace and enhance
Working closely with line-of-business managers, explore both on-demand and open-source software to see if any commercial offerings could either replace or enhance your in-house applications. Look at pricing issues, functionality, and quality. Explore offshoring solutions that could replace or enhance current solutions. Carefully consider issues of quality, support capabilities, and customer references.
Month 3 > Make decisions
Continue the market review begun in Month 2. When completed, make some decisions: Which solutions, if any, will you implement? Your short-term goal is to create a transformation plan that describes which solutions will be replaced, which retained, and what will be outsourced offshore.
For CIOs At Large Companies:
Month 1 > Benchmark
Unlike your SMB counterparts, you likely do an annual IT review and inventory already. Take your inventory data and benchmark your company against others in your industry—not only other large companies, but also SMBs that may be leapfrogging your company with on-demand software, open source, and even offshoring opportunities.
Month 2 > Continue benchmarking
If your industry is like many, creating benchmarks for all your competitors will take some time. Rome wasn't built in a month, either.
Month 3 > Explore licensing options
Continue and complete benchmarking. Begin to explore your software-licensing options. Do your current software contracts lock you in to hard-core licensing or do you have the ability to explore on-demand applications, open source, and offshoring options?
www.optimizemagazine.com