on Business Models

Where the Rubber Meets the Road: the Business Model

‘Business Model’ was such a popular word in the mad, wild days of the Internet boom, that it seems to have gone down into obscurity along with its many exponents of those heady days. Unfortunate. Because a ‘business model’ is really something worth understanding

In the B-schools I am familiar with, they teach strategy, they teach operations, and marketing, and every function useful and not useful, but they don’t teach business models. On the principle that if it is not taught in B-schools it must be containing some rare gem of truth (like TQM, Kaizen, BPR, ToC.. none of which were taught in B schools until the revolution had come and gone..), let us give this ‘business model’ the benefit of the doubt and try to see what it means for us.

Conceptually, the business model fits between strategy and execution. It answers the most basic and most important of all questions: how will we make money doing this (whatever your service or product offering is). An example will make it more clear. Take a company in the pure software services business. Its business model is:
- win business by persuading large companies (mostly abroad) to outsource their software development and/or maintenance to you
- by offering significant cost savings
- while assuring the customer that the quality of the service will be much better than if he had done it in-house
- run large software factories back in India where your basic cost saving comes from paying Indian salaries
- keep the costs down by steadily building economies of scale, and recruiting more and more fresh people to keep the base of the people pyramid broad.

This business model is a familiar one. Now consider another one: Product development outsourcing, (perhaps the next wave of outsourcing to India).

The elements of this business model are:

- persuade software product companies abroad that it makes more sense to get the development done in India (by you).
- Because you can scale up faster than your customer can, and can manage the software development world, especially people, better than he can.
- Set up teams in India who can understand product specifications and, more important, the lifecycle and cadence of a product development cycle
- Focus on rapid release cycles, version control, protection of your customer’s IPR

Observe how different these are from the traditional software services model. In the traditional model, it was cost, large factories, economies of scale, and large-scale recruitment of cheap fresh talent, that mattered. Here it is speed, understanding of the product world, security.
Of course there are common features as well – managing people is a challenge in both worlds, though the specific challenges are different.
Ok, so they are different. So what?

If a company tries to do both businesses with the same people, same organization same management and business processes, it will fail. Because the rhythms of the two businesses are different. If your recruitment engine gears up to raid every college campus to suck up every fresher in sight, it cannot at the same time do a good job of recruiting people who understand what a product is. If your sales engine is busy selling ‘cost arbitrage’ to a customer, it cannot turn around and sell ‘speed, time to market’ etc. in the same breath. No man can serve two masters; no organization can serve two business models.

Well, you will say, are you telling me Wipro, for instance, doesn’t do product outsourcing and conventional services at the same time? My answer is – being big and successful can cover a multitude of inefficiencies. It doesn’t mean it is not an inefficiency.

Isn’t it possible to do them in two different business units? Of course it is, as long as you remember they are two different business units and don’t try to run them the same way (which is what usually happens!).

Most software companies I know are choking as they grow. They are choking on their own complexity. Their complexity comes from the fact that they are trying to execute too many business models at the same time: fixed price and T&M, maintenance services and outsourced product development, body-shopping and high-end consulting, all together. As each begins to make some headway, they demand more and more tradeoffs, until the organization brings itself to a standstill if the current spectacular run of the Indian software industry eventually grinds to a halt, it will be because of complexity, not because of Chinese competition!