I spoke with a customer this past week regarding the industrialization of IT services and he shared an opinion that industrialization would lead to the commoditization of IT services. In other words, all managed IT service providers would eventually deliver undifferentiated services at approximately the same price. I’ve heard this theory a number of times over the years, but I don’t see industrialized service providers heading down this road. Let me explain.
I’ve talked about IT industrialization in a number of previous blog articles. IT industrialization represents a new breed of IT services designed in a highly automated, repeatable, and scalable fashion.
Commoditization, according to Wikipedia, is:
“…the process by which goods…end up becoming simple commodities in the eyes of the market or consumers. It is the movement of a market from differentiated to undifferentiated price competition and from monopolistic to perfect competition.”
We can understand the potential relationship between industrialization and commoditization by looking at two different markets: farming and automotive manufacturing. Then, we can compare managed IT services to each of these markets to get a better understanding of the potential impact of IT industrialization.
Industrialization has greatly improved the efficiency of farming processes leading to fewer farms and greater economies of scale in the agricultural industry. Farmers are price takers — they have to accept the price set by the market (i.e., perfectly competitive). When you buy a potato from the grocery store you generally don’t care which farm it came from because potatoes are a commoditized product (we’re ignoring the organic and local food movement for the moment).
Automobile manufacturing is also a heavily industrialized industry. Early hand-crafted automobile manufacturers were supplanted by more efficient and scalable assembly line manufacturers. Today, the automobile industry has few participants and steep barriers to entry in the form of high labor and capital costs (basically an oligopoly). Automobiles from different manufacturers may share many common attributes, but they are still clearly differentiated products. An Audi is different than a Jeep, which is different than a Ford.
The point is that industrialization doesn’t necessarily lead to the commoditization of a product. It really depends on the product and the barriers of entry into the marketplace. Based on this thinking, the question is: will IT industrialization turn managed services into potatoes or Audi’s?
I think it’s clearly the latter, simply because IT industrialization will ultimately require large investments in skilled IT labor and infrastructure. These significant barriers to entry will ensure that industrialized service providers compete in a marketplace dominated by a smaller number of firms. And these firms will need to compete with one another based on price and product differentiation.
Service providers will leverage customer service and operational excellence as key competitive advantages — benefiting all customers that work with managed service providers. Remember: a potato farmer doesn’t need to invest in better customer service to sell more potatoes.