Disruptive Technologies
A disruptive technology is a new technology, that radically transforms markets, creates wholly new markets or destroys existing markets for other technologies. It is a technological innovation, product, or service that eventually overturns the existing dominant technological product in the market. Typically, it is introduced by market newcomers rather than current market leaders. The word disruptive is used since the new technology often has a seriously damaging impact on the business models of companies who's product currently dominates a market. This essay will consider 4 past examples of disruptive technologies: broadband, digital photography, shipping containers and DVDs. It will also look at potential disruptive technologies, failed technologies and the Gartner Curve. The term "disruptive technology" was first coined by Clayton M. Christensen in his 1995 article Disruptive Technologies: Catching the Wave.
Here, are some of the disruptive technologies which have “helped” to shape our world as we know it;
Broadband v Dial-Up
Broadband is one of the most recent examples of a disruptive technology, replacing dial-up as a means of connecting to the internet. Broadband outperforms dial-up in almost every area. Whereas dial-up connections could typically only offer connection speeds of around 56Kb per second, broadband companies such as Tiscali can now offer speeds of up to 8Mb per second (tiscali.co.uk). Broadband's considerably faster connection holds many advantages for internet users. Users can take advantage of audio and video streaming with a quality similar to that of television as opposed to a lower quality stop-start, stuttering experience using dial-up. Broadband also allows quicker downloads, for example downloading an entire film could take less than an hour as opposed to entire days using dial-up. This can also be extremely beneficial in a business setting when downloading large files as time is often crucial. Not only is broadband considerably faster than dial-up but it can allow telephone calls using the same phone line simultaneously. Also, broadband is constantly switched on, so users can connect to the internet simply by switching on their PC. Call charges are no longer an issue either as broadband is payed by monthly subscription, monitoring connection time to save money is no longer necessary.
America On-Line (AOL) is the company worst affected by this disruptive technology. AOL was the market leader in the US for dial up receiving 80% of all fees. However, since the development of broadband technology AOL has been slow to react. AOL's dial-up service has lost over 7 million subscribers in the last 3 years and its broadband service has failed to establish itself as a premium internet service. At the end of 2005, US cable group Comcast was the biggest supplier of broadband with 8.5m customers whereas AOL only had around 5m. According to industry estimates, less than 50 per cent of broadband fees will go to AOL(Clark 2006).
Digital Photography v Photographic Film
Digital photography has revolutionised the photographic industry. Digital photography holds a huge number of advantages over film photography, for example:
- Instant review of pictures, with no wait for the film to be developed
- If one already owns a newer computer, permanent storage on digital media is considerably cheaper than film
- Ability to capture and store hundreds of photographs on the same media device within the digital camera; by contrast, a film camera would require regular changing of film (typically after every 24 or 36 shots)
- Minimal ongoing costs for those wishing to capture hundreds of photographs for digital uses, such as computer storage and e-mailing, but not printing
- Digital photography has many features which will improve the actual quality of photographs i.e. smaller sensor format and anti-shake functionality
In 2003 it was expected that U.S. sales of digital cameras on a unit basis would outstrip sales of traditional cameras that use film, according the Photo Marketing Association International in Jackson, Mich. (Bandler 2003). Eastman Kodak Co. was the number one photo film-maker and digital photography proved to be a disruptive technology for them. In 2002, Kodak says, digital cameras shaved three percentage points from the company's average annual growth rates of 4% to 5% for unit sales of film. This year, Kodak estimates, "digital substitution" will take four to five percentage points off its historical growth rates for film. Kodak now finds itself as the number 3 digital camera seller in the US and most analysts are sceptical as to whether Kodak can become number 1(Bandler 2003). This disruptive technology has left the former market leader playing catch up.
Containerization
Despite appearing rather simplistic in its design, container ships and containerisation has had a dramatic effect on our economy and can be attributed to the continual rise of globalisation. It is somewhat surprising that such a basic concept was not implemented to its full potential until 1951. Previously, motor vehicles, trains and occasionally sea vessels were used to transport goods and cranes with slings unloaded crates onto pallets. Longshoremen then muscled the crates into place, and forklifts moved the pallets to warehouses (apl.com). Damage, delays and theft were particularly common.
The global standardisation of containers and container handling equipment has revolutionised international trade and has become one of the most important innovations in 20th century logistics. Today, a parcel can be sent from one side of the world to another within days. Customers around the world are reaping the benefits of a ground-breaking advance that started with a concept as simple as a steel box (apl.com).
As is the case with most new technology, jobs were lost as a result. As mentioned above, labourers were used to handle and transport goods, so containerization rendered their skills useless. Herod (1998) provides an insight not only into the savings in time that containerization has brought, but also of the jobs which were lost. On the other hand, containerisation has reduced waste, cargo cost and increased trade, which has created many more jobs in total.
DVD v VHS
The March 1997 introduction of the DVD format to American consumers was perhaps the greatest blow to the dominance of the Video Home System, or the “VHS” (Washington Post, 2005). The drop in price of DVDs around the millennium proved the catalyst for the demise of the VHS. In addition to being physically smaller than the VHS, the DVD offered other performance benefits.
Firstly, the picture provided on screen by a DVD is of a much higher quality. As is the digital sound which a DVD can offer, the longevity and the durability of a DVD. This is in addition to the fact that a DVD is simply easier to use.
The impact that the introduction of DVDs has had on society is massive. Those who fixed VHS players for a living found themselves out of a job unless they could learn new skills in order to repair DVD players instead. Selling companies (such as Virgin and HMV) and rental companies (such as Global and Blockbuster) had to switch from stocking VHS to DVDs, and DVD players had to be introduced on a massive scale. Nowadays DVD players and recorders are owned by around 60% of people in Western Europe and considerable growth is expected in central and eastern Europe in the future (bbc.co.uk).
In fact Global have been hit particularly hard by the demise of the VHS. The Glasgow based rental chain made losses of £2.5m in 2006. Fiona Moriarty, director of the Scottish Retail Consortium, explained why she was not surprised at such demise; “Videos aren't a treat item anymore. Their sales and their rentals have been replaced by DVDs, which are far more affordable than they were.” (scotsman.com)
Potentially Disruptive Technologies
There are new also technologies currently being developed, which have the potential to to be disruptive. Here, we look at the two which we feel would have the most significant impact.
RSS feeds
RSS (Really Simple Syndication) allows Internet users to subscribe to websites that change or add content regularly. These sites use specialized software that sends out updates whenever the site's content changes. These updates are picked up by software programs called RSS readers, which notify their users whenever a particular site has signaled an update. These RSS readers can be Web-based (e.g., Bloglines, Newsgator) or on a user's desktop (e.g. FeedDemon, Pluck). The RSS subscriptions themselves are invariably free (Ehman 2006).
RSS feeds pose a significant threat to the newspaper industry. Effectively, users can construct their own newspapers by selecting the information they wish to receive, filtering any unwanted information which they have no interest in. The most obvious advantages are that it is more personalised, cheaper and saves a daily trip to a newsagent. Electronic paper is another potentially disruptive technology which could facilitate RSS technology in taking over from the traditional newspaper.
Electronic Paper
Electronic paper, or e-paper, is a generic term for a new class of reflective displays that have some of the characteristics of traditional paper (dupont.com). Unlike traditional displays, e-paper can be crumpled or bent like traditional paper.
While still in the relatively early stages of development, the impact that e-paper could potentially have on our society is massive. Firstly, it could be used in education to replace the classic textbook. Gone would be the stereotypical image of a student lugging countless books from class to class. Instead, a student would be able to upload necessary text and literature onto his/her e-paper as necessary, thus eliminating the heavy burden of textbooks.
Similarly, newspapers again would find demand drop to a considerably lower level as higher quality substitutes would be available. While news contained in a newspaper is generally a day old, news delivered via e-paper could be up-to-date. This is obviously more attractive, a theory which regular readers of the Evening Times, Daily Record PM or users of RSS feeds will subscribe to.
If such a technology was to be successful, it would be to the detriment of some members of society. In the examples provided above, the demand for publishers in particular would drop dramatically, as would the success of book shops. Newspaper companies would have to cut jobs and news agents would also suffer as a result.
Failed Technologies
There have been many technologies in the past which have been touted as disruptive technologies but have gone on to fail. A classic example is the betamax video tape format. Sony's Betamax is the 1/2 inch home video cassette tape recording format introduced on April 16th 1975 and derived from the earlier, professional 3/4 inch U-matic video cassette format. Betamax sales dwindled away and VHS emerged as the winner of the format war which had developed — despite being the least sophisticated (Wikipedia.org/wiki/betamax).
The Japanese Fifth Generation Computer System (FGCS) suffered a smiliar fate since its software was not suitable for commercial applications and the proprietary architecture was eventually surpassed in speed by less specialized hardware (for example, Sun Workstations and Intelx86 machines). Other examples of failed technologies include Laser Discs, Cold Fusion, the Digital Audio Tape, the Apple Newton and the Apple Lisa, Sega Dreamcast and the list goes on...
The Cycle of New Technologies
A Hype Cycle is a graphic representation of the maturity, adoption and business application of specific technologies (gartner.com).
In 1995, Gartner Inc (an information and technology research and advisory firm) started using such hype cycles to characterize the over-enthusiasm or "hype" (or too high expectations initially) and subsequent disappointment that typically happens with the introduction of new technologies (or too low expectations in the long-term).
An example is the introduction of iPods and iTunes which caused an explosive growth in what was known as the MP3 market. In 2003 it was thought that it would take the iPod 4 to 5 years for them to reach the plateau of production. However a year later in 2004 they were just beginning to climb out of the trough disillusionment.
"We forecast they would reach the plateau in five to 10 years in 2003, but now, we are saying they will reach plateau in two to five years.” (Laura Behrens, speaking in 2004)
REFERENCES
Bandler 2003
“Technology (A Special Report): Photography --- A New Picture: For photo-film makers, digital advances offer an opportunity -- and a threat”
Wall Street Journal. (Eastern edition). New York, N.Y.: pg. R.17
Clark 2006
“AOL focuses on broadband switch TELECOMS/INTERNET; [USA 2ND EDITION]”
Financial Times. London (UK): pg. 17
Ehman 2006
“Revolutionary, Simple, Sensational”National. Ottawa: Vol. 15, Iss. 2; p. 14 (1 page)
Herod 1998“Transactions of the Institute of British Geographers”,
New Series. Vol. 23, No. 2 (1998), pp. 177-191.
Author Unknown 2005
“Parting Words For VHS Tapes, Soon to Be Gone With the Rewind”
Washington Post, August 28, 2005
Wikipedia.org:
en.wikipedia.org/wiki/Disruptive_technology#Books_and_papers
en.wikipedia.org/wiki/Digital_photography#Comparison_with_film_photography
en.wikipedia.org/wiki/Betamax
en.wikipedia.org/wiki/Containerization
Other websites used:
www.tiscali.co.uk/products/broadband/8mb-unlimited-extra.html?code=NN-HB-0282&srccode=
news.bbc.co.uk/1/hi/entertainment/4719958.stm
business.scotsman.com/index.cfm?id=850022006
www.solutions.dupont.com.au/Displays/en_US/knowledge_center/terms_e.html
www.gartner.com/pages/story.php.id.8795.s.8.jsp
news.bbc.co.uk/1/hi/technology/3577746.stm
www.apl.com/history/topics/innovate/contain.htm
Sunday, 9 March 2008
Sunday, 23 December 2007
Compound
Following a restructuring of the company in 1993, Compound UK introduced Lotus Notes in order to assist with sharing information and improving group working. Lotus Notes is a client-server, collaborative application owned by IBM Software Group. However we believe that there were mistakes made throughout the introduction of the software and its use since.
Firstly, Lotus notes had only been implemented for a short period of time before a measure of staff performance was introduced. We believe that Compound UK should have waited a longer period of time in order for staff to get used to using the new software before introducing measures of performance. We think that in any line of business it is a necessity that staff are fully comfortable within their job before introducing an element of competition. Also, changes within a business generally require the co-operation of staff in order to be successful and we believe Compound would have achieved this had the introduction of performance measures been delayed.
This leads to another mistake Compound UK made, in our opinion. In the case study there is no mention of training for the staff involved. Had a training or development plan been put in place, staff may have felt more at ease using the software and been more open to performance league tables being implemented.
Orlikowski (1992) points out, how users understood Notes was mainly influenced by the kind and amount of information about the product and by the nature and form of training received.
It appears that top level management gave the impression to staff that the introduction of the electronic recording system was for their benefit. However this is in contrast to what most staff felt, who believed that it was introduced simply to increase central surveillance and control. If management had communicated the benefits of such a system to staff in greater detail, staff would have been more amenable and accepting of it. Instead there appears to be a lack of trust within the organisation which cannot be good for staff moral. It is our belief that the higher levels of management within Compound should be placing greater emphasis on the benefits and opportunities that Lotus provides to staff, helping them to see how it really can make their job easier. At present, the emphasis seems to be on the record-keeping aspects of Lotus i.e. a way of 'checking up' on staff. Morris & Empson (1998) provide an example of an accounting firm which has achieved success through the development of a collective knowledge base, this knowledge base enabled 'Sun Accounting' to become one of the most highly leveraged organisational structures in the UK accounting industry. This shows the potential benefits if Compound staff can embrace Lotus Notes in the same manner.
A main concern of staff is how Lotus Notes is being used. At the moment there appears to be an underlying sense of injustice amongst long-term staff, who feel their performance is being undermined by reps who do not see repping as a long-term career, rather a short-term route to climbing the hierarchical ladder. We feel that this problem of unease could have been prevented by Compound UK. Staff meetings should have been called before Lotus was implemented thus providing staff with an opportunity to raise any concerns they may have. Hopefully, Compound would have been able to allay many of these fears before they became a major problem within the organisation.
One way to improve the use of Notes in relation to this could be to alter the way the league tables are formed. For example, some reps are registering a large number if contacts often only for the sake of their own careers and not the benefit of Compound, they are contradicting the ethos which placed emphasis on only recording 'relevant calls'. We propose that league tables should be altered to include a scoring system which gives greater credit to those who are recording only relevant calls. Other complaints from non-career orientated reps are based upon the use of strategic selling accounts and the fact that some reps are at a locational disadvantage. The league tables should also be designed to reflect the differing opportunities provided by differing locations.
One positive aspect seemed to be the discussion databases which were proving popular. Poplar only until the medical director asked if he could take part. Usage of these databases subsequently declined when he was granted permission. It seems clear that changes should be made to allow reps their own private discussion databases where they feel free to express themselves without fear of retribution under the watchful eye of their peers.
We also feel that an opportunity provided by the introduction of Notes has not yet been exploited to its full potential. Senior medical advisor James Black has successfully managed to improve the usage of Notes amongst newer reps i.e. have them use Notes the way in which it was intended, by thorough interaction with them during training periods and often afterwards. After Lotus Notes' introduction many medics were expected to work with other employees on complex sales situations and the development of new products. Black seems to be one of only a few adhering to this but with great success. If more medics are encouraged to follow Black's lead then Compound should be able to get the most out of Notes by using medical staff to encourage reps to use Notes as Compound originally had intended.
REFERENCES
Orlikowski, W.J. (1992). Learning from
Notes: Organizational issues in groupware
implementation. CSCW’92 Proceedings.
ACM, New York :362-369.
Morris, T & Empson, L (1998). Organisation and Expertise: An Exploration of Knowledge Bases and the Management of Accounting and Consulting Firms. Accounting, Organizations and Society. Vol 23 No. 5/6 pp609-624
Firstly, Lotus notes had only been implemented for a short period of time before a measure of staff performance was introduced. We believe that Compound UK should have waited a longer period of time in order for staff to get used to using the new software before introducing measures of performance. We think that in any line of business it is a necessity that staff are fully comfortable within their job before introducing an element of competition. Also, changes within a business generally require the co-operation of staff in order to be successful and we believe Compound would have achieved this had the introduction of performance measures been delayed.
This leads to another mistake Compound UK made, in our opinion. In the case study there is no mention of training for the staff involved. Had a training or development plan been put in place, staff may have felt more at ease using the software and been more open to performance league tables being implemented.
Orlikowski (1992) points out, how users understood Notes was mainly influenced by the kind and amount of information about the product and by the nature and form of training received.
It appears that top level management gave the impression to staff that the introduction of the electronic recording system was for their benefit. However this is in contrast to what most staff felt, who believed that it was introduced simply to increase central surveillance and control. If management had communicated the benefits of such a system to staff in greater detail, staff would have been more amenable and accepting of it. Instead there appears to be a lack of trust within the organisation which cannot be good for staff moral. It is our belief that the higher levels of management within Compound should be placing greater emphasis on the benefits and opportunities that Lotus provides to staff, helping them to see how it really can make their job easier. At present, the emphasis seems to be on the record-keeping aspects of Lotus i.e. a way of 'checking up' on staff. Morris & Empson (1998) provide an example of an accounting firm which has achieved success through the development of a collective knowledge base, this knowledge base enabled 'Sun Accounting' to become one of the most highly leveraged organisational structures in the UK accounting industry. This shows the potential benefits if Compound staff can embrace Lotus Notes in the same manner.
A main concern of staff is how Lotus Notes is being used. At the moment there appears to be an underlying sense of injustice amongst long-term staff, who feel their performance is being undermined by reps who do not see repping as a long-term career, rather a short-term route to climbing the hierarchical ladder. We feel that this problem of unease could have been prevented by Compound UK. Staff meetings should have been called before Lotus was implemented thus providing staff with an opportunity to raise any concerns they may have. Hopefully, Compound would have been able to allay many of these fears before they became a major problem within the organisation.
One way to improve the use of Notes in relation to this could be to alter the way the league tables are formed. For example, some reps are registering a large number if contacts often only for the sake of their own careers and not the benefit of Compound, they are contradicting the ethos which placed emphasis on only recording 'relevant calls'. We propose that league tables should be altered to include a scoring system which gives greater credit to those who are recording only relevant calls. Other complaints from non-career orientated reps are based upon the use of strategic selling accounts and the fact that some reps are at a locational disadvantage. The league tables should also be designed to reflect the differing opportunities provided by differing locations.
One positive aspect seemed to be the discussion databases which were proving popular. Poplar only until the medical director asked if he could take part. Usage of these databases subsequently declined when he was granted permission. It seems clear that changes should be made to allow reps their own private discussion databases where they feel free to express themselves without fear of retribution under the watchful eye of their peers.
We also feel that an opportunity provided by the introduction of Notes has not yet been exploited to its full potential. Senior medical advisor James Black has successfully managed to improve the usage of Notes amongst newer reps i.e. have them use Notes the way in which it was intended, by thorough interaction with them during training periods and often afterwards. After Lotus Notes' introduction many medics were expected to work with other employees on complex sales situations and the development of new products. Black seems to be one of only a few adhering to this but with great success. If more medics are encouraged to follow Black's lead then Compound should be able to get the most out of Notes by using medical staff to encourage reps to use Notes as Compound originally had intended.
REFERENCES
Orlikowski, W.J. (1992). Learning from
Notes: Organizational issues in groupware
implementation. CSCW’92 Proceedings.
ACM, New York :362-369.
Morris, T & Empson, L (1998). Organisation and Expertise: An Exploration of Knowledge Bases and the Management of Accounting and Consulting Firms. Accounting, Organizations and Society. Vol 23 No. 5/6 pp609-624
Creating Auctionwire Case Study
Auctionwire believe they provide a service which enables customers to obtain a greater income from auctioning items online than they would have been able to achieve by themselves. Primarily this service is their expertise which will lead to higher bids. Like any new company, an innovative and effective business plan is obviously desirable and would increase their chances of success. In general, I believe that the company’s business has been the latter, without being particularly innovative. The business plan, put simply, appears to be a larger version of eBay drop-off shops, where items are bought then sold on at a higher price. Failures such as iSoldit in America is an indication that such a business model is not necessarily set for success (franchisepick.com). However the fact that Auctionwire can now boast high-profile customers such as BMW, MasterCard, Virgin and MTV tends to suggest their business model was in fact effective (canadian business.com).
To entice custom Auctionwire only charged commission on successful auctions. This is an appealing offer to customers who pay a basic fee for listing an item on eBay for example, whether the items sells or not. Similar selling points have been successful in other industries (e.g. “no win, no fee” law firms) and in my opinion there is no reason why it would not be successful in this one.
Auctionwire appear to have found a market niche in the form of corporate and charity customers. They would liquidate excess equipment for corporate clients and out-of-season stock for retailers. For smaller companies I think this would be particularly appealing. Firstly, some might not have thought of the idea, and for those who have, handing responsibility to Auctionwire may be more profitable. However larger companies may be able to set up a team in house, making Auctionwire’s business plan susceptible to imitation. The fact that IBM are currently the highest sellers on eBay highlights this fact (Wilson, A 2007).
Items which are handed into charity shops are very often of nominal value. This conflicts with what Auctionwire sees as an “ideal customer” whose items would be desirable. Also I know volunteers who auction items for charity online and do not charge commission. As a result of this I am sceptical as to whether this area of the business plan would prove fruitful.
The Commission which Auctionwire intend to charge is significantly higher (5% - 20%) than if customers were to use an online auction themselves. EBay for example charge 5% – 5.25% plus the basic listing fee. In essence Auctionwire’s business plan makes the company appealing to those customers who will make a greater net profit from sales despite the higher commission charge.
The software requirements which are outlined in the case study are, in my opinion, fairly comprehensive. However there is no mention of the software meeting any security needs, although perhaps it could be assumed that this would be included. It seems that a new case of fraud is appearing on the news every night and so security should be a primary concern to Auctionwire, particularly as the software will be online.
From the case study it appears that no software which is currently available off the shelf perfectly meets the needs of Auctionwire. Because of this is it possible that developing their own software from scratch would be the most suitable idea. Providing that such software could be designed to meet every need of Auctionwire and the cost was not prohibitive, this would be my recommendation. However the case study is particularly vague regarding the particular details involved in taking on such a project (e.g. costs involved, availability of good developers). Therefore I will recommend the best software solution out of the options provided in the case study.
It should also be noted that there are downsides to such a decision. If software is developed, Auctionwire would be the first company to use it. As a result, all teething problems and unforeseen bugs would have to be rectified and paid for by them. Similarly, it is unlikely that the software would be suitable for other companies as it would be custom made for Auctionwire, meaning they could not even make money from selling the new software. Also, very few repairers would have knowledge of the system and so Auctionwire could possibly become tied to certain repairers who would be able to charge over the odds.
The first two software solutions I ruled out were those of Canauction and Blackthorne Pro. Auctionwire specifically outline that the overall stability of the company and good customer support are of particular concern to them. Canauction falls down on both these fronts. Firstly, it is a brand new software provider with no reputable customers and by entering into an agreement with them Auctionwire would be taking a substantial risk which is not necessary. Secondly the customer service is not up to scratch and certain bugs have to be ironed out. I discounted Blackthorne Pro for a similar reason: a lack of experience. While I feel the software has potential, it is still at the testing stage and it is offline software. As a result I would imagine much of the data would have to be manually fed into the system, thus increasing the number of “touch points” In addition, it is not even compatible with the Canadian eBay, which I imagine would be the main market Auctionwire would be dealing in.
Clear-bid have substantial financial backing, thus providing Auctionwire with the stability they require. However I feel there are too many weaknesses of the software which would cost the company dearly. For example, down time was an issue of concern, as was poor customer service. While Clear-bid did offer the option to add multiple client module (at a cost), even with this I did not think the software was as suitable as SuperAuction.
SuperAuction meets most of Auctionwire’s needs, and the software could be adapted to rectify the majority of any shortcomings. The 24/7 customer support which is offered would be particularly appealing to Auctionwire as they admit to having had little experience in the area. In addition the company can offer a certain degree of experience in the field to Auctionwire. Therefore, if Auctionwire were to decide against developing their own software, this would be my recommendation.
Sources
Mark, K & Comisarow, M.B “Creating Auctionwire” 2007. Richard Ivey School of Business, The University of Western Ontario
Wilson, A “Accounting Information Systems” 2007. Class lecture, Strathclyde University
www.canadianbusiness.com/rankings/hot50/list.jsp?pageID=profile&profile=7&year=2007&type=profile&listType=HOT50
http://www.franchisepick.com/owner-of-failed-isold-it-ebay-drop-off-franchise-leaves-apology
To entice custom Auctionwire only charged commission on successful auctions. This is an appealing offer to customers who pay a basic fee for listing an item on eBay for example, whether the items sells or not. Similar selling points have been successful in other industries (e.g. “no win, no fee” law firms) and in my opinion there is no reason why it would not be successful in this one.
Auctionwire appear to have found a market niche in the form of corporate and charity customers. They would liquidate excess equipment for corporate clients and out-of-season stock for retailers. For smaller companies I think this would be particularly appealing. Firstly, some might not have thought of the idea, and for those who have, handing responsibility to Auctionwire may be more profitable. However larger companies may be able to set up a team in house, making Auctionwire’s business plan susceptible to imitation. The fact that IBM are currently the highest sellers on eBay highlights this fact (Wilson, A 2007).
Items which are handed into charity shops are very often of nominal value. This conflicts with what Auctionwire sees as an “ideal customer” whose items would be desirable. Also I know volunteers who auction items for charity online and do not charge commission. As a result of this I am sceptical as to whether this area of the business plan would prove fruitful.
The Commission which Auctionwire intend to charge is significantly higher (5% - 20%) than if customers were to use an online auction themselves. EBay for example charge 5% – 5.25% plus the basic listing fee. In essence Auctionwire’s business plan makes the company appealing to those customers who will make a greater net profit from sales despite the higher commission charge.
The software requirements which are outlined in the case study are, in my opinion, fairly comprehensive. However there is no mention of the software meeting any security needs, although perhaps it could be assumed that this would be included. It seems that a new case of fraud is appearing on the news every night and so security should be a primary concern to Auctionwire, particularly as the software will be online.
From the case study it appears that no software which is currently available off the shelf perfectly meets the needs of Auctionwire. Because of this is it possible that developing their own software from scratch would be the most suitable idea. Providing that such software could be designed to meet every need of Auctionwire and the cost was not prohibitive, this would be my recommendation. However the case study is particularly vague regarding the particular details involved in taking on such a project (e.g. costs involved, availability of good developers). Therefore I will recommend the best software solution out of the options provided in the case study.
It should also be noted that there are downsides to such a decision. If software is developed, Auctionwire would be the first company to use it. As a result, all teething problems and unforeseen bugs would have to be rectified and paid for by them. Similarly, it is unlikely that the software would be suitable for other companies as it would be custom made for Auctionwire, meaning they could not even make money from selling the new software. Also, very few repairers would have knowledge of the system and so Auctionwire could possibly become tied to certain repairers who would be able to charge over the odds.
The first two software solutions I ruled out were those of Canauction and Blackthorne Pro. Auctionwire specifically outline that the overall stability of the company and good customer support are of particular concern to them. Canauction falls down on both these fronts. Firstly, it is a brand new software provider with no reputable customers and by entering into an agreement with them Auctionwire would be taking a substantial risk which is not necessary. Secondly the customer service is not up to scratch and certain bugs have to be ironed out. I discounted Blackthorne Pro for a similar reason: a lack of experience. While I feel the software has potential, it is still at the testing stage and it is offline software. As a result I would imagine much of the data would have to be manually fed into the system, thus increasing the number of “touch points” In addition, it is not even compatible with the Canadian eBay, which I imagine would be the main market Auctionwire would be dealing in.
Clear-bid have substantial financial backing, thus providing Auctionwire with the stability they require. However I feel there are too many weaknesses of the software which would cost the company dearly. For example, down time was an issue of concern, as was poor customer service. While Clear-bid did offer the option to add multiple client module (at a cost), even with this I did not think the software was as suitable as SuperAuction.
SuperAuction meets most of Auctionwire’s needs, and the software could be adapted to rectify the majority of any shortcomings. The 24/7 customer support which is offered would be particularly appealing to Auctionwire as they admit to having had little experience in the area. In addition the company can offer a certain degree of experience in the field to Auctionwire. Therefore, if Auctionwire were to decide against developing their own software, this would be my recommendation.
Sources
Mark, K & Comisarow, M.B “Creating Auctionwire” 2007. Richard Ivey School of Business, The University of Western Ontario
Wilson, A “Accounting Information Systems” 2007. Class lecture, Strathclyde University
www.canadianbusiness.com/rankings/hot50/list.jsp?pageID=profile&profile=7&year=2007&type=profile&listType=HOT50
http://www.franchisepick.com/owner-of-failed-isold-it-ebay-drop-off-franchise-leaves-apology
Sunday, 16 December 2007
Mars Incorporated: Online Procurement
As the internet continues to play a major role in globalisation, companies are striving to use the resource to its full potential. Just as millions of individuals use eBay in the hope of snatching a bargain, global corporations are now getting in on the act.
Following the lead of companies such as John Deere, Ford and PetroVantage, Mars Inc are the latest company looking to online auctions as a way to lower costs and increase profitability. These “reverse auctions” involve suppliers bidding for contracts, with the lowest bid winning. There are numerous advantages of such a process which prompted Mars to investigate the option.
Looking at other major firms which had implemented such systems, it was apparent that there were cost savings to be made. For example, BAE systems claim cost savings of 15-20% as a direct result of their online procurement system, Exostar (Flynn, 2003). Other research suggests savings to be around five percent. While this may not sound a great deal, to a company annually purchasing materials to the tune of $4 billion, this represents a significant saving.
Online auctions would also eliminate many of the inefficiencies of procurement processes based on one-to-one negotiations have. Firstly, the auction would be readily accessible worldwide to any company wanting to bid. As a result, competition is increased and the probability of Mars obtaining materials at the cheapest price is increased. Infact, the case study highlights that a problem of the current purchasing system leads to situations where one supplier found out that a competitor had been awarded a contract under terms it would have been prepared to better.
Also, conventional methods of purchasing involve a disproportionate amount of time negotiating prices and quantities. Such a problem is immediately solved using online auctions. Online auctions would also allow Mars to meet its objective of obtaining “the needed materials from the list of approved fairly and at minimum (monetary) cost.”
However at what theoretical cost?
In my opinion two other objectives of Mars could be compromised were online auctions to be used. Mars believe they offer “outstanding quality” and “mutual benefit.” However, selecting suppliers based purely on price may well lead to a decrease in quality, as suppliers strive to cut costs in order to be the lowest bidder. If suppliers refrain from lowering quality and simply cannot cut costs any further, then the profit that suppliers make will simply be reduced. While this may make financial sense to Mars, it contradicts their principles that success should “mutually beneficial to all parties involved” and that suppliers should not be squeezed “to the point of no return.”
Mars continually state that the relationship with their suppliers is extremely important to them and this has been a significant influence on the success that the company has had. However such relations would not be maintained were internet auctions to be used in the future. Two of the most outspoken critics of reverse auctions are David Stec and Bob Emiliani from the Centre for Lean Business Management at Rensselaer Polytechnic Institute (bostonapartments.com). They believe that online auctions do not teach buyers and sellers how to solve problems jointly and conclude that reverse auctions are toxic for buyer-supplier relationships.
As mentioned above, the reason for companies looking into online auctions is simple; to cut costs. However, Stec and Emiliani believe the cost savings which are reported are often inflated and not a true representation of the facts.
Their research paper, published in 2006, revealed that that 50 percent of the savings from using reverse auctions disappear because of factors such as errors in supplier data, post auction negotiation, and changes in specifications or quantities. Such problems would not be incurred as frequently were online auctions not used. In addition it can be the case that a company does not account for extra expenses resulting from problems such as poor quality, late deliveries and supplier non-performance. If this is indeed the case, when these losses are added up, the five percent savings that companies have reported are in fact closer to 2.5 percent and thus less appealing to Mars.
Hohner et al (2003) believe that online auctions are inappropriate when the firm wants to control business volumes or the number of suppliers, as is the case with Mars, who outline stipulations they would want added to a contemporary online auction. The company want to enforce a minimum number of winning bidders in any auction, do not want too many suppliers, want to limit the monetary amount won by any one supplier (presumably to reduce risk) and also to put in place a minimum total amount of business one supplier receieves from auctions. For Mars to successfully implement an auction system which would gain wide acceptance, it would have to customise such a system.
At the time the case was written it appeared that a formula for meeting the needs of Mars had been devised, but determining the winning bids within a short time frame had not. It appears than a human could not do this in a matter of minutes. However, although I admit to not knowing a great deal on the subject of computer programming, I would have thought that a program could now be written which would be able to meet the company’s needs.
In conclusion, I feel it is obvious that Mars would gain a financial benefit from implementing an online auction process- i.e. cost would be reduced. However, the image Mars currently enjoys may suffer as a result as it appears that it is the suppliers who will lose out. While costs would be cut, so could profitability. Therefore I recommend a cost/benefit analysis should be carried out before such a decision is made. If Mars were to go ahead with the plan, I would think it necessary to amend the key principles they advocate, as such a move would conflict with many of these as I have outlined above.
Sources used
Flynn, T “Doing Your Bidding”, Director, 2003
Hohner, G. J. Rich, E. Ng and G. Reid, “Combinatorial and quantity-discount procurement auctions benefit Mars, Incorporated and its suppliers” Interfaces. Linthicum: Jan/Feb 2003. Vol. 33, Iss. 1; pg. 23, 13 pgs
http://www.bostonapartments.com/business/online_reverse_auction.html
Following the lead of companies such as John Deere, Ford and PetroVantage, Mars Inc are the latest company looking to online auctions as a way to lower costs and increase profitability. These “reverse auctions” involve suppliers bidding for contracts, with the lowest bid winning. There are numerous advantages of such a process which prompted Mars to investigate the option.
Looking at other major firms which had implemented such systems, it was apparent that there were cost savings to be made. For example, BAE systems claim cost savings of 15-20% as a direct result of their online procurement system, Exostar (Flynn, 2003). Other research suggests savings to be around five percent. While this may not sound a great deal, to a company annually purchasing materials to the tune of $4 billion, this represents a significant saving.
Online auctions would also eliminate many of the inefficiencies of procurement processes based on one-to-one negotiations have. Firstly, the auction would be readily accessible worldwide to any company wanting to bid. As a result, competition is increased and the probability of Mars obtaining materials at the cheapest price is increased. Infact, the case study highlights that a problem of the current purchasing system leads to situations where one supplier found out that a competitor had been awarded a contract under terms it would have been prepared to better.
Also, conventional methods of purchasing involve a disproportionate amount of time negotiating prices and quantities. Such a problem is immediately solved using online auctions. Online auctions would also allow Mars to meet its objective of obtaining “the needed materials from the list of approved fairly and at minimum (monetary) cost.”
However at what theoretical cost?
In my opinion two other objectives of Mars could be compromised were online auctions to be used. Mars believe they offer “outstanding quality” and “mutual benefit.” However, selecting suppliers based purely on price may well lead to a decrease in quality, as suppliers strive to cut costs in order to be the lowest bidder. If suppliers refrain from lowering quality and simply cannot cut costs any further, then the profit that suppliers make will simply be reduced. While this may make financial sense to Mars, it contradicts their principles that success should “mutually beneficial to all parties involved” and that suppliers should not be squeezed “to the point of no return.”
Mars continually state that the relationship with their suppliers is extremely important to them and this has been a significant influence on the success that the company has had. However such relations would not be maintained were internet auctions to be used in the future. Two of the most outspoken critics of reverse auctions are David Stec and Bob Emiliani from the Centre for Lean Business Management at Rensselaer Polytechnic Institute (bostonapartments.com). They believe that online auctions do not teach buyers and sellers how to solve problems jointly and conclude that reverse auctions are toxic for buyer-supplier relationships.
As mentioned above, the reason for companies looking into online auctions is simple; to cut costs. However, Stec and Emiliani believe the cost savings which are reported are often inflated and not a true representation of the facts.
Their research paper, published in 2006, revealed that that 50 percent of the savings from using reverse auctions disappear because of factors such as errors in supplier data, post auction negotiation, and changes in specifications or quantities. Such problems would not be incurred as frequently were online auctions not used. In addition it can be the case that a company does not account for extra expenses resulting from problems such as poor quality, late deliveries and supplier non-performance. If this is indeed the case, when these losses are added up, the five percent savings that companies have reported are in fact closer to 2.5 percent and thus less appealing to Mars.
Hohner et al (2003) believe that online auctions are inappropriate when the firm wants to control business volumes or the number of suppliers, as is the case with Mars, who outline stipulations they would want added to a contemporary online auction. The company want to enforce a minimum number of winning bidders in any auction, do not want too many suppliers, want to limit the monetary amount won by any one supplier (presumably to reduce risk) and also to put in place a minimum total amount of business one supplier receieves from auctions. For Mars to successfully implement an auction system which would gain wide acceptance, it would have to customise such a system.
At the time the case was written it appeared that a formula for meeting the needs of Mars had been devised, but determining the winning bids within a short time frame had not. It appears than a human could not do this in a matter of minutes. However, although I admit to not knowing a great deal on the subject of computer programming, I would have thought that a program could now be written which would be able to meet the company’s needs.
In conclusion, I feel it is obvious that Mars would gain a financial benefit from implementing an online auction process- i.e. cost would be reduced. However, the image Mars currently enjoys may suffer as a result as it appears that it is the suppliers who will lose out. While costs would be cut, so could profitability. Therefore I recommend a cost/benefit analysis should be carried out before such a decision is made. If Mars were to go ahead with the plan, I would think it necessary to amend the key principles they advocate, as such a move would conflict with many of these as I have outlined above.
Sources used
Flynn, T “Doing Your Bidding”, Director, 2003
Hohner, G. J. Rich, E. Ng and G. Reid, “Combinatorial and quantity-discount procurement auctions benefit Mars, Incorporated and its suppliers” Interfaces. Linthicum: Jan/Feb 2003. Vol. 33, Iss. 1; pg. 23, 13 pgs
http://www.bostonapartments.com/business/online_reverse_auction.html
Sunday, 9 December 2007
MySQL Open source database in 2006
Open source software is a program in which the source code is available to the general public for use and/or modification from its original design, free of charge (webopedia.com). Open source code is typically created as a collaborative effort in which programmers improve upon the code and share the changes within a community (jahadesign.com).
Those who prefer open source software to that of closed source have outlined many reasons why.
One major advantage of open sourced software is that the core software is free of charge, which can greatly benefit internet-enabled start-up companies. In the case of MySQL, it was such companies which were the first users of their open sourced software, making use of software stacks such as LAMP. It is also possible that the introduction of open sourced software has driven the price of commercial software down (tamingthebeast.net). The case study also suggests this is true, with IBM and Microsoft each lowering their database prices and have both “created low-end bundles aimed at smaller organisations and partners.”
The ability and right to modify the source code is also a major advantage of open source software. Software can be improved upon, ported to a new hardware or adapted to meet individual needs (conecta.it). In a business context, software flexibility is about being able to choose solutions suitable for the needs of the users (open-source.gbdirect.co.uk). MySQL used this advantage as a way to differentiate their product from closed source software within an increasingly competitive market.
The case study highlights that MySQL, despite being small in size and having a small marketing budget, is extremely well known. This is the case because they offer open source software, and as a result the market they can reach is particularly large. It is likely that only rich companies could afford software developed by the likes of Microsoft, Oracle and IBM, whereas distributing open sourced software allows students, small businesses and developing nations to make use of the software and in turn, increasing awareness of the company.
In the case of MySQL, the number of functions and features offered were initially greater than those offered by the closed source software offered by IBM, Microsoft and Oracle. For this reason MySQL were able to grow significantly, as companies looked to “scale out” the superior MySQL product into other departments.
Varner (1999) also claims that the quality of open sourced software is higher than its closed source competitor, mainly due to peer review. Companies can hide security holes and fundamental flaws from the users by not releasing the source code, providing the software vendor with complete control of the product. Varner claims that “with open source, more people see the code and find and stop problems before they hurt anything.”
Depending on circumstances, personal preference and knowledge, support issues with open sourced software can be an advantage or a disadvantage to the user (tamingthebeast.com). As a result it is difficult to determine whether such an issue has helped or hindered MySQL. With closed software, the provider has an obligation to provide help in the event of faults, bugs etc (generally at an additional charge) whereas no particular organization is legally responsible for offering support to users of open sourced software. Instead, forums are often the port of call, which are generally free to use.
Also, the number of people able to offer help is likely to be much higher than if a bug in closed source software was reported to the provider. Linus's Law of Software Engineering states, "Given enough eyeballs, all bugs are shallow," meaning that the more people you have looking at a piece of code, the more likely one of them is to find a bug before it gets to be a major problem (Raymond, 2000). It is then up to the user to weigh up whether the guarantee of professional support is worth paying extra for. It is also worth noting that closed source software generally will tie the user to a particular vendor for support.
However, there are also disadvantages of open sourced software which have faced MySQL. As mentioned above, initially the software offered by MySQL was of a superior standard even to that of the closed software which was available. However, Oracle reacted to this by releasing a new version of their software, highlighting the inferiority of MySQL. This rendered MySQL software insufficient to meeting the demands of SAP, their alliance partner.
MySQL also introduced an upgraded version of their software, at a charge. Along with this strategy, which offers increased functions and features, came unforeseen problems. Marten Mickos alluded to this when he conceded that MySQL saw an increase in complaints when customers were paying a subscription for the software because expectations rose. It appears from the study that MySQL did not have a great deal of experience of the customer service side of a business. As a result I do not feel they were sufficiently equipped to deal with such a change in their business. However, the fact that the financial performance is encouraging suggests these problems have been overcome.
Not only is open source software susceptible to imitation, but such companies are also now vulnerable to take over. IBM initially started this trend in 2005, and other large companies have since followed suit. However the take over which was of particular concern to MySQL was Oracle’s purchase of the Finnish company Innobase. Innobase supplied MySQL with a particular transactional engine which was crucial to many of MySQL’s customers. Fears arose that Oracle would discontinue the engine and as a result sabotage MySQL. However this did not materialise, as in April 2006 Oracle renewed the contract between Innobase and MySQL.
Sources used:
Raymond, E.S “The Cathedral and the Bazaar” (2000) accessed via http://www.catb.org/~esr/writings/cathedral-bazaar/cathedral-bazaar/ on 05/12/2007
Varner, P.E “The Economics of Open Sourced Software” (1999) accessed via http://www.cs.virginia.edu/~pev5b/writing/econ_oss/advantages.html on 05/12/2007
www.jahadesign.com/glossary.htm
www.webopedia.comeu.conecta.it/paper/Advantages_open_source_soft.html
www.tamingthebeast.net/articles5/open-source-software.htm
open-source.gbdirect.co.uk/migration/benefit.html
Those who prefer open source software to that of closed source have outlined many reasons why.
One major advantage of open sourced software is that the core software is free of charge, which can greatly benefit internet-enabled start-up companies. In the case of MySQL, it was such companies which were the first users of their open sourced software, making use of software stacks such as LAMP. It is also possible that the introduction of open sourced software has driven the price of commercial software down (tamingthebeast.net). The case study also suggests this is true, with IBM and Microsoft each lowering their database prices and have both “created low-end bundles aimed at smaller organisations and partners.”
The ability and right to modify the source code is also a major advantage of open source software. Software can be improved upon, ported to a new hardware or adapted to meet individual needs (conecta.it). In a business context, software flexibility is about being able to choose solutions suitable for the needs of the users (open-source.gbdirect.co.uk). MySQL used this advantage as a way to differentiate their product from closed source software within an increasingly competitive market.
The case study highlights that MySQL, despite being small in size and having a small marketing budget, is extremely well known. This is the case because they offer open source software, and as a result the market they can reach is particularly large. It is likely that only rich companies could afford software developed by the likes of Microsoft, Oracle and IBM, whereas distributing open sourced software allows students, small businesses and developing nations to make use of the software and in turn, increasing awareness of the company.
In the case of MySQL, the number of functions and features offered were initially greater than those offered by the closed source software offered by IBM, Microsoft and Oracle. For this reason MySQL were able to grow significantly, as companies looked to “scale out” the superior MySQL product into other departments.
Varner (1999) also claims that the quality of open sourced software is higher than its closed source competitor, mainly due to peer review. Companies can hide security holes and fundamental flaws from the users by not releasing the source code, providing the software vendor with complete control of the product. Varner claims that “with open source, more people see the code and find and stop problems before they hurt anything.”
Depending on circumstances, personal preference and knowledge, support issues with open sourced software can be an advantage or a disadvantage to the user (tamingthebeast.com). As a result it is difficult to determine whether such an issue has helped or hindered MySQL. With closed software, the provider has an obligation to provide help in the event of faults, bugs etc (generally at an additional charge) whereas no particular organization is legally responsible for offering support to users of open sourced software. Instead, forums are often the port of call, which are generally free to use.
Also, the number of people able to offer help is likely to be much higher than if a bug in closed source software was reported to the provider. Linus's Law of Software Engineering states, "Given enough eyeballs, all bugs are shallow," meaning that the more people you have looking at a piece of code, the more likely one of them is to find a bug before it gets to be a major problem (Raymond, 2000). It is then up to the user to weigh up whether the guarantee of professional support is worth paying extra for. It is also worth noting that closed source software generally will tie the user to a particular vendor for support.
However, there are also disadvantages of open sourced software which have faced MySQL. As mentioned above, initially the software offered by MySQL was of a superior standard even to that of the closed software which was available. However, Oracle reacted to this by releasing a new version of their software, highlighting the inferiority of MySQL. This rendered MySQL software insufficient to meeting the demands of SAP, their alliance partner.
MySQL also introduced an upgraded version of their software, at a charge. Along with this strategy, which offers increased functions and features, came unforeseen problems. Marten Mickos alluded to this when he conceded that MySQL saw an increase in complaints when customers were paying a subscription for the software because expectations rose. It appears from the study that MySQL did not have a great deal of experience of the customer service side of a business. As a result I do not feel they were sufficiently equipped to deal with such a change in their business. However, the fact that the financial performance is encouraging suggests these problems have been overcome.
Not only is open source software susceptible to imitation, but such companies are also now vulnerable to take over. IBM initially started this trend in 2005, and other large companies have since followed suit. However the take over which was of particular concern to MySQL was Oracle’s purchase of the Finnish company Innobase. Innobase supplied MySQL with a particular transactional engine which was crucial to many of MySQL’s customers. Fears arose that Oracle would discontinue the engine and as a result sabotage MySQL. However this did not materialise, as in April 2006 Oracle renewed the contract between Innobase and MySQL.
Sources used:
Raymond, E.S “The Cathedral and the Bazaar” (2000) accessed via http://www.catb.org/~esr/writings/cathedral-bazaar/cathedral-bazaar/ on 05/12/2007
Varner, P.E “The Economics of Open Sourced Software” (1999) accessed via http://www.cs.virginia.edu/~pev5b/writing/econ_oss/advantages.html on 05/12/2007
www.jahadesign.com/glossary.htm
www.webopedia.comeu.conecta.it/paper/Advantages_open_source_soft.html
www.tamingthebeast.net/articles5/open-source-software.htm
open-source.gbdirect.co.uk/migration/benefit.html
Sunday, 2 December 2007
Case Study: Information Technology Outsourcing at the BBC
Outsourcing is a practice used by companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally (firstdata.com).
This is exactly what the British Broadcasting Corporation (BBC) did in 2004, when it signed a ten year IT outsourcing contract with Siemens Business Services. The Chief Technology Officer of the BBC, John Varney, claimed that by agreeing such a deal, the BBC could save £20-£30million a year over the course of the contract. It is difficult to argue against such a fact. Outsourcing to another company gave BBC Technology the benefits of being part of a global technology company and brings it the economies of scale and critical mass it needs to bring new applications through very quickly (information-age.com).
There were detractors of the deal though, for example BECTU-the independent union for those working in broadcasting and allied areas (bectu.org.uk). They claimed that it would lead to job losses and there was no guarantee outsourcing would be a success. There was also a general feeling that such cost cuts could be made “in-house” without the privatization of BBC Technology. Varney responded by claiming that such savings could not be realized without redundancies, and by cutting jobs the BBC’s would damage its ability to deliver necessary technological changes.
Encouragingly, eighty companies put themselves forward for the preliminary stage of the process. The BBC went through a particularly rigorous selection process before accepting Siemens’ offer. The fact that over one thousand man hours were spent negotiating with the final three candidates suggests the BBC could not be accused of allocating too little time to the decision. In addition to this, an analytical process was carried out by a sub-group not including Varney. This assessed the suppliers against all the BBC’s criteria using a scoring mechanism. Furthermore, Varney and “one or two others…questioned every decision, just to make sure there were no errors or judgement.”
There were a number of other positive aspects of the BBC’s selection process which can be praised.
In an interview with conspectus.com in 2005, Varney reveals himself in particular to be “passionate about making sure that the end users were involved in the selection process all the way through.” In the same interview he is attributed as saying that he personally answered emails from technology staff regarding any questions they may have had over the process or deal itself. Such personal staff support should be commended.
The selection process was not based purely on the value of money which could be saved. Instead, Varney claims that “the BBC also looked at the supplier’s understanding of a public service organization” by spending time on how the companies viewed and valued staff. While such an attitude would be praised were it to be carried out, it is this area which prompted such a negative attitude from BECTU and its members.
While BECTU claim that employees were promised that they would remain with the BBC after privatization, the final two firms had not came to a decision on the transfer of jobs and redundancies. This begs the question; who made such promises (the BBC or the two final companies) and why when “the winner of the contract was to buy BBC Technology along with all the staff members?”
Most business processes rely heavily on technology and as a result IT outsourcing became a popular option in the 1990s. Companies identified the capital, time and space-savings associated with reductions in staff, training, equipment and work environments as advantages of outsourcing IT (computerweekly.com).
However as with most projects, there are drawbacks also. Firstly, the company loses control over a crucial business service. This is always going to be the case regardless of the success or failure of a project. However, it is the consequences which define whether outsourcing is advantageous to the company or not. In this case SBS are now in control, but if they reduce costs and increase performance then it is obviously not a drawback of outsourcing. If however the IT services provided were to be of a poor standard then this obviously does become a major disadvantage.
The other potential drawback of outsourcing is the one most applicable to this case study; the damage to staff moral or “culture clashes” (Kobayashi-Hillary, 2005). Although all technical staff were to be transferred to SBS, the whole process may have left a “bad taste” in the mouth of other employees, who perhaps saw colleagues treated poorly.
The deal to outsource IT services has undoubtedly been a success for Siemens. As a result of this opportunity, they have earned themselves a good name and become one of the leading IT vendors in the broadcasting industry in Europe. SBS’s senior analyst believes the service they can provide is now second to none in the IT vendor community.
Despite criticism, the BBC have also benefited from the deal, although perhaps not to the extent they hoped to. In a report by parliamentary spending watchdog the Public Accounts Committee (PAC), it has now emerged the savings for the first year fell 38 per cent short of target at just £22m (news.zdnet.co.uk).
Edward Leigh MP, chair of the PAC, summarized most criticisms of the BBC when he said: "The BBC's approach to the contract has been distinctly second-rate. Its estimates of annual savings have fluctuated widely; many parts of the BBC are still using other suppliers; and there was no provision for the BBC to share profits above an agreed level. Indeed, the BBC has chosen not to check on how profitable the contract actually is for Siemens." (news.zdnet.co.uk)
Sources Used
Kobayashi-Hillary, M “Outsourcing to India Second Edition: The Offshore Advantage” Springer Berlin Heidelberg (2005)
news.firstdata.com/glossary.cfm
www.conspectus.com/2005/specialreport/downloads/ViewfromtheTop_Jan05.pdf
www.computerweekly.com/Articles/2007/05/31/224431/it-outsourcing-the-expert-view.htm
www.information-age.com/article/2004/october/the_bbc
www.bectu.org.uk
news.zdnet.co.uk/itmanagement/0,1000000308,39287767,00.htm
This is exactly what the British Broadcasting Corporation (BBC) did in 2004, when it signed a ten year IT outsourcing contract with Siemens Business Services. The Chief Technology Officer of the BBC, John Varney, claimed that by agreeing such a deal, the BBC could save £20-£30million a year over the course of the contract. It is difficult to argue against such a fact. Outsourcing to another company gave BBC Technology the benefits of being part of a global technology company and brings it the economies of scale and critical mass it needs to bring new applications through very quickly (information-age.com).
There were detractors of the deal though, for example BECTU-the independent union for those working in broadcasting and allied areas (bectu.org.uk). They claimed that it would lead to job losses and there was no guarantee outsourcing would be a success. There was also a general feeling that such cost cuts could be made “in-house” without the privatization of BBC Technology. Varney responded by claiming that such savings could not be realized without redundancies, and by cutting jobs the BBC’s would damage its ability to deliver necessary technological changes.
Encouragingly, eighty companies put themselves forward for the preliminary stage of the process. The BBC went through a particularly rigorous selection process before accepting Siemens’ offer. The fact that over one thousand man hours were spent negotiating with the final three candidates suggests the BBC could not be accused of allocating too little time to the decision. In addition to this, an analytical process was carried out by a sub-group not including Varney. This assessed the suppliers against all the BBC’s criteria using a scoring mechanism. Furthermore, Varney and “one or two others…questioned every decision, just to make sure there were no errors or judgement.”
There were a number of other positive aspects of the BBC’s selection process which can be praised.
In an interview with conspectus.com in 2005, Varney reveals himself in particular to be “passionate about making sure that the end users were involved in the selection process all the way through.” In the same interview he is attributed as saying that he personally answered emails from technology staff regarding any questions they may have had over the process or deal itself. Such personal staff support should be commended.
The selection process was not based purely on the value of money which could be saved. Instead, Varney claims that “the BBC also looked at the supplier’s understanding of a public service organization” by spending time on how the companies viewed and valued staff. While such an attitude would be praised were it to be carried out, it is this area which prompted such a negative attitude from BECTU and its members.
While BECTU claim that employees were promised that they would remain with the BBC after privatization, the final two firms had not came to a decision on the transfer of jobs and redundancies. This begs the question; who made such promises (the BBC or the two final companies) and why when “the winner of the contract was to buy BBC Technology along with all the staff members?”
Most business processes rely heavily on technology and as a result IT outsourcing became a popular option in the 1990s. Companies identified the capital, time and space-savings associated with reductions in staff, training, equipment and work environments as advantages of outsourcing IT (computerweekly.com).
However as with most projects, there are drawbacks also. Firstly, the company loses control over a crucial business service. This is always going to be the case regardless of the success or failure of a project. However, it is the consequences which define whether outsourcing is advantageous to the company or not. In this case SBS are now in control, but if they reduce costs and increase performance then it is obviously not a drawback of outsourcing. If however the IT services provided were to be of a poor standard then this obviously does become a major disadvantage.
The other potential drawback of outsourcing is the one most applicable to this case study; the damage to staff moral or “culture clashes” (Kobayashi-Hillary, 2005). Although all technical staff were to be transferred to SBS, the whole process may have left a “bad taste” in the mouth of other employees, who perhaps saw colleagues treated poorly.
The deal to outsource IT services has undoubtedly been a success for Siemens. As a result of this opportunity, they have earned themselves a good name and become one of the leading IT vendors in the broadcasting industry in Europe. SBS’s senior analyst believes the service they can provide is now second to none in the IT vendor community.
Despite criticism, the BBC have also benefited from the deal, although perhaps not to the extent they hoped to. In a report by parliamentary spending watchdog the Public Accounts Committee (PAC), it has now emerged the savings for the first year fell 38 per cent short of target at just £22m (news.zdnet.co.uk).
Edward Leigh MP, chair of the PAC, summarized most criticisms of the BBC when he said: "The BBC's approach to the contract has been distinctly second-rate. Its estimates of annual savings have fluctuated widely; many parts of the BBC are still using other suppliers; and there was no provision for the BBC to share profits above an agreed level. Indeed, the BBC has chosen not to check on how profitable the contract actually is for Siemens." (news.zdnet.co.uk)
Sources Used
Kobayashi-Hillary, M “Outsourcing to India Second Edition: The Offshore Advantage” Springer Berlin Heidelberg (2005)
news.firstdata.com/glossary.cfm
www.conspectus.com/2005/specialreport/downloads/ViewfromtheTop_Jan05.pdf
www.computerweekly.com/Articles/2007/05/31/224431/it-outsourcing-the-expert-view.htm
www.information-age.com/article/2004/october/the_bbc
www.bectu.org.uk
news.zdnet.co.uk/itmanagement/0,1000000308,39287767,00.htm
Sunday, 18 November 2007
How will off-shoring affect UK accountants?
A common misconception is that all off-shoring involves outsourcing. This is not true. It is important to differentiate off-shoring from outsourcing, which involves the migration of management and of services to an external provider (ebstrategy.com). Rather, off-shoring refers to taking advantage of lower-cost labour by transferring the process to another country whilst retaining management.
Significant developments in the communications sector have made the off-shoring of accounting processes cheaper and easier than ever before. Nowadays, all that is required to produce a value added service is a server and an internet connection.
This has resulted in an “off-shoring” boom, or as it has also been referred to as “the new redundancy” (Loxton, 2004). Philip Middleton, financial services partner at Ernst & Young, acknowledges that more accounting service sector and research jobs are going to go offshore. In fact, he says “That is inevitable and probably desirable.” (Loxton, 2004) However who exactly is it desirable to? Obviously it is not the UK accountant who finds himself unemployed.
For years processes, such as manufacturing, have been carried out in foreign countries in order to take advantage of low labour costs. However many developing countries have spent heavily on education and training in recent times (eurospe.org), putting paid to the common impression that white collar jobs were somehow insulated from the risk of off-shoring. Recently such perceptions have changed. India for example, can now offer ready trained professionals who are willing to carry out the same work as a British accountant for a fraction of the wage (Anonymous, 2005).
Action has already been taken due to the fear of such job loss. Barclays announced a deal with the finance union UNIFI, which outlined official measures that would protect staff in the event of offshore-incurred restructuring (Anonymous, 2005). While this goes some way to compensate those who suffer as a result, it does not eliminate the problem that off-shoring causes job losses to UK accountants.
Jon Carson, CEO of Cambridge Mass realized this and tried to combine the benefits of off-shoring with those of keeping the business at home and advertised jobs at the lower rates he would have to pay for staff in India (Anonymous, 2005). While such an approach would keep UK accountants in a job, it would also adversely affect them by reducing the wage an accountant can command within this country.
However it is not all doom and gloom for UK accountants according to Middleton; “If I look around our business and ask what kind of tasks might go to Bangalore, for example, the answer is probably not a great deal. A lot of what we do requires proximity to clients - close client relationships,” he says.
I feel this is an excellent point and one which may in fact prevent the accounting profession from suffering from the off-shoring boom. For example audit and assurance is a major source of revenue for the majority of accounting firms but you could not off-shore an audit to the other side of the world. Similarly, as Middleton acknowledges, “much of the taxation and financial reporting work that makes up the bread and butter of UK practices requires an in-depth knowledge of the UK tax and regulatory climate and infrastructure.” In order to accumulate such knowledge and understanding, surely the accountant would have to live and work in this country. Both these points help construct a barrier which will prevent many accounting services from being off shored.
Having worked in an accounting firm myself, I have also seen first hand the emphasis which is put on the client relationship, and how far that “personal touch” can go. It would be very difficult, if not impossible, to offer such a level customer service from the other side of the world. This is a factor that has seen many non-accounting companies refocus their business processes to within the UK (e.g. Direct Line). Off-shoring accounting activities may allow processes to be completed at a cheaper price, but whether the quality of work will remain the same is a contentious issue. In the light of accounting scandals and the introduction of the Sarbanes-Oxley Act, many may feel “you only get what you pay for” may be the safest attitude to adopt and if that requires paying more, so be it.
As mentioned above labour-intensive, back office tasks and administration may well be off-shored and for the good of the economy, probably should. For such staff off-shoring is definitely “destabilising and uncomfortable for individuals” (Loxton, 2005). However, for the reasons outlined above, I do not envisage off-shoring having the destabilizing and detrimental effect on the accounting profession that some are predicting.
Sources Used
http://www.ebstrategy.com/outsourcing/basics/definition.htm
http://www.articlesbase.com/advice-articles/offshore-accounting-bpo-myths-and-realities-211753.html
www.eurospe.org/education/education_developingcountries
“The Off-shoring Craze” Anonymous, Human Resource Management International Digest. Bradford: 2005. Vol. 13, Iss. 3
“Analysis: Offshoring - Offshore Accounting” Liz Loxton, Accountancy. London: Feb 2004. Vol. 133, Iss. 1326
Significant developments in the communications sector have made the off-shoring of accounting processes cheaper and easier than ever before. Nowadays, all that is required to produce a value added service is a server and an internet connection.
This has resulted in an “off-shoring” boom, or as it has also been referred to as “the new redundancy” (Loxton, 2004). Philip Middleton, financial services partner at Ernst & Young, acknowledges that more accounting service sector and research jobs are going to go offshore. In fact, he says “That is inevitable and probably desirable.” (Loxton, 2004) However who exactly is it desirable to? Obviously it is not the UK accountant who finds himself unemployed.
For years processes, such as manufacturing, have been carried out in foreign countries in order to take advantage of low labour costs. However many developing countries have spent heavily on education and training in recent times (eurospe.org), putting paid to the common impression that white collar jobs were somehow insulated from the risk of off-shoring. Recently such perceptions have changed. India for example, can now offer ready trained professionals who are willing to carry out the same work as a British accountant for a fraction of the wage (Anonymous, 2005).
Action has already been taken due to the fear of such job loss. Barclays announced a deal with the finance union UNIFI, which outlined official measures that would protect staff in the event of offshore-incurred restructuring (Anonymous, 2005). While this goes some way to compensate those who suffer as a result, it does not eliminate the problem that off-shoring causes job losses to UK accountants.
Jon Carson, CEO of Cambridge Mass realized this and tried to combine the benefits of off-shoring with those of keeping the business at home and advertised jobs at the lower rates he would have to pay for staff in India (Anonymous, 2005). While such an approach would keep UK accountants in a job, it would also adversely affect them by reducing the wage an accountant can command within this country.
However it is not all doom and gloom for UK accountants according to Middleton; “If I look around our business and ask what kind of tasks might go to Bangalore, for example, the answer is probably not a great deal. A lot of what we do requires proximity to clients - close client relationships,” he says.
I feel this is an excellent point and one which may in fact prevent the accounting profession from suffering from the off-shoring boom. For example audit and assurance is a major source of revenue for the majority of accounting firms but you could not off-shore an audit to the other side of the world. Similarly, as Middleton acknowledges, “much of the taxation and financial reporting work that makes up the bread and butter of UK practices requires an in-depth knowledge of the UK tax and regulatory climate and infrastructure.” In order to accumulate such knowledge and understanding, surely the accountant would have to live and work in this country. Both these points help construct a barrier which will prevent many accounting services from being off shored.
Having worked in an accounting firm myself, I have also seen first hand the emphasis which is put on the client relationship, and how far that “personal touch” can go. It would be very difficult, if not impossible, to offer such a level customer service from the other side of the world. This is a factor that has seen many non-accounting companies refocus their business processes to within the UK (e.g. Direct Line). Off-shoring accounting activities may allow processes to be completed at a cheaper price, but whether the quality of work will remain the same is a contentious issue. In the light of accounting scandals and the introduction of the Sarbanes-Oxley Act, many may feel “you only get what you pay for” may be the safest attitude to adopt and if that requires paying more, so be it.
As mentioned above labour-intensive, back office tasks and administration may well be off-shored and for the good of the economy, probably should. For such staff off-shoring is definitely “destabilising and uncomfortable for individuals” (Loxton, 2005). However, for the reasons outlined above, I do not envisage off-shoring having the destabilizing and detrimental effect on the accounting profession that some are predicting.
Sources Used
http://www.ebstrategy.com/outsourcing/basics/definition.htm
http://www.articlesbase.com/advice-articles/offshore-accounting-bpo-myths-and-realities-211753.html
www.eurospe.org/education/education_developingcountries
“The Off-shoring Craze” Anonymous, Human Resource Management International Digest. Bradford: 2005. Vol. 13, Iss. 3
“Analysis: Offshoring - Offshore Accounting” Liz Loxton, Accountancy. London: Feb 2004. Vol. 133, Iss. 1326
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