Zero cost IT – only...

1999-11-25

The current debate about costs of IT equipment and services illustrates the stage we have reached in the technology revolution. Microsoft, for example, have been accused of price fixing; Oracle of abusing their position when setting license fees. Now, on Silicon News, it is claimed that IT services companies are overcharging their customers. So – what is going on?

What we have here is the simplest value equation. In the past there has been a huge perceived value attached to IT. Relative to the manual systems and processes that mainframe processing represented, it was possible to justify spending vast amounts on such facilities. Similarly, new markets developed (and continue to develop) in parallel with technology advances – in the early stages, the price premium is set based on what the end customer is prepared to pay, and in order to recoup the costs of research and development by the vendor. Alongside all of this has developed a need for services, experts in the new technologies or people with past experience of making the necessary changes to organisational and technical infrastructures. Companies have been spurred on by the carrot of reaching new markets or the stick of keeping up with the competition. The internet has resulted in a new wave of this phenomenon, new products at premium costs and newly trained “experts” in the field.

Each new leap of technology will cause organisations to reappraise how they operate and what products and services they offer. Where product and service suppliers have come unstuck is down to one of two reasons. Either they failed to deliver, or they maintained the price premium long after the perception of delivered value had changed.

Failure to deliver is perhaps the most obvious and hence the easiest to describe and comment upon. Products may fail for a variety of reasons, from low quality to over-hyped functionality. Services may also fail, for largely the same reasons. At the earlier stages of a new technology adoption, partial failure matters less as anything is better than missing out on the race. Later, though, the picture is different: late adopters rarely stand for shoddy products or performance.

Price maintenance is harder to judge because it is based on perception. The competition in the hardware market has forced manufacturers to push the bangs per buck ratio ever higher. The copybook of many software vendors is not quite so clean: the price of Microsoft operating systems for example, have gone up rather than down over the past five years. Competition in the hardware space is not matched among software vendors who are often rightly accused of being less innovative and more grasping than their hardware counterparts. Initial demand for point services (for example, how to tune financial packages for best results) has commanded staggering rates, but this is to be expected. Services vendors often justify the maintenance of high prices based on the principle that “it was expensive, therefore it must have been right”. However there is little or no proof of any correlation between the two.

There will be several technology leaps over the next few years, in particular the current eBusiness movement, the revolution in broadband communications, device-based computing and Application Service Provision (ASPs). The costs and benefits of each of these are currently still being understood but it is to be expected that the costs of products and services will be pitched relative to the perceived value of the prospective user base. Older technologies, already perceived as commodities and whose R&D costs have already been recouped, should be priced at a substantially lower level.

(First published 25 November 1999)