What should CIOs do about this transformation?
Chou: Three things: Embrace, verify and extend the models. CIOs should first understand each of these business models as they become available. Some CIOs have already made the decision to only buy software delivered as a service; only if there is no on-demand service available will they choose the traditional route.
This may be more practical for some companies than others, but we all know there are more valuable uses of IT's time than running backups of CRM data and ensuring that the upgrade goes smoothly. That's better left to the company that produces the software.
Verify means to figure out whether a software company is just marketing around the message of software services or really doing it. For example, ask how many times they've executed the upgrade process successfully, or how long it is from the time a security patch is available until it's in the production system.
Here's what I mean by extend: You probably have some software that's unique to your business. As we all move to become information businesses, these systems could be made available to others in your industry. Perhaps the best example of this is the Sabre airline reservation system. Once it was an internal system to American Airlines; today, Sabre, which was acquired in 2006 for $5 billion, is one of only a handful of airline reservation systems on the planet.
A less well-known example is AltiusPAR, a spinout of Posadas, the largest hotel chain in Latin America. Posadas built a modern hotel reservation system, deployed it internally, and now is calling on the largest hotel chains in the world with the same kind of story Sabre told many years ago.
Some people think that if the United Airlines loyalty system could be spun out, it would be worth more than the airline. And the world's best logistics system might be buried in FedEx or UPS. What if those systems could be extended so everyone could use them? As a CIO, you have mastered the R&D and operations challenges of delivering your software as a service, but your challenge in the new world will be how to market, sell, price and create contracts for those services.
What's the role of software in a service economy?
Chou: Eighty percent of the U.S. economy is in services. Whether you're in financial services, health care, professional services, software or high tech, you're in the service business: Service is information; the more personal, the better. Amazon.com proves this daily. The company is using personal information to deliver a more targeted and useful experience than traditional bookstores could ever provide.
Does that mean that IT and CIOs are merely providing a service to the business, like HR or accounting, or is there a more strategic role they can play?
Chou: The CIO sits at the crux of the new business model. My experience has been that few executives outside of the CEO have as complete a picture of the business. Ask any CIO who has completed an ERP implementation, and he or she will tell you more about how the business really runs than any-one on the executive staff.
As the hub of the business, the CIO has two strategic roles. First, inside every business today is an Internet's worth of information. The surface Web [the part of the Web indexed by search engines such as Google and Yahoo], is estimated to be 100 terabytes. Anyone reading this article is likely in a company with many more times that much information. So, given that every business is both a service business and an information business, the way in which you choose to connect people and information is what every business is about.
The second strategic role for the CIO centers on people. A service business relies on information in computers, but it's also about the knowledge and specializations of the people in the business.
Gone are the days when any manager could manage just by walking around. The strategic challenge today is how to provide the tools and the infrastructure to manage in a world where my R&D team is in the Ukraine, my support team is in India and my headquarters is in Boston.
What new challenges do CIOs face as they move to on-demand service models?
Chou: Why should a company manage transactional HR or CRM systems? CIOs know that is not the most efficient use of resources. The biggest cost for most businesses is human labor, and going through a major software upgrade is a vastly inefficient waste of money.
You are doing it for the first time, but the software company delivering its software on demand has done it a hundred times. Which company do you think will do it quicker, better and at a lower cost? Many people think you have to pay more for reliability, but the opposite is true. If you want to buy the most reliable car, don't pick the $1 million handcrafted sports car; find a Toyota that's been produced a million times.
As author Geoffrey Moore says, know what's core and what's context to your business. A lot of software is all contextual: You don't need it to differentiate your business. You don't have to be your own power company to run a network. Once you realize this, you can turn attention--and dollars--to your real business: the information and people that differentiate you.
At that point, you can ask what new systems you need to build to bring together people and information. What do you do uniquely, and how do you monetize that? That is your business and its value--not transactional systems.