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Name: John McDowall
Location: Redwood City, California, US

Thursday, June 02, 2005

Economics for inside and outside

The drivers for using services and whether they should be inside the enterprise or outside the enterprise are partially rooted in the economics of fixed and variable costs. The fixed costs we all have are for our workstation, this cost has reduced dramatically from when it was a significant portion of an employees annual salary to the point where it is less than some monthly health insurance payments. Every employee now needs a workstation, an operating system, office software, and a communications suite - these are fixed costs ( this also includes in support and training). Whether you use Linux or Windows for large companies the costs are about the same as the biggest variable is usually support and training. A hard working CFO/CIO can shave maybe a few percent off these costs but in general they follow a fairly fix price model.

Enterprise software and services on the other hand have both potential for significant cost and for significant competitive advantage. The ability to turn these from fixed capital costs to variable utility model changes the way a company spends money. It shifts the capital expenses to the service provider and reduces large multi-year projects to simple connections. This has been touched on by Stefan Tilkov in The Same for Both Worlds and Tim Ewald looking at why inside and outside are different. I do not think they should be the fact they are largely different today is that the inside has not caught up with the fast evolution of the outside. The internet is much more loosely coupled than the enterprise and hence evolves faster. The goal of CIO's should be to move the internet model in house such that the enterprise becomes truly loosely coupled and can take advantage of services.

The other is the the wall between the enterprise and the internet is becoming increasingly porous and more irrelevant as services are delivered faster and better than enterprise software. It is no longer a competitive advantage to have enterprise software installed and managed internally it is both an unnecessary capital cost and an impediment to flexibility and moving the enterprise architecture to a variable cost model that tracks with the corporate performance.


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