sustainabillity and pricing of IT services
There isn't much that has eternal life and IT Services most certainly can not be used untill eternaty. In one of my assignments for a customer I presented the following example:
Looking at the evolution of software for Financial Management for the bigger enterprises, we can see several stages in which the solution is offered by the IT Service provider. This evolution is mainly driven by developments in technology and competition between service providers. The effect of this evolution is in 'company specific functionality' becoming a 'commodity'. A cheap standard service (in the cloud) which is fine for services like 'Financial Administration'. When however the software leads to a competitive advantage in your Market, it is questionable whether this evolution is beneficial to you.
It is common practice in IT to distinguish Live cycle stages of a specific technology based on the usage of that technology. We use the following stages:
- 'bleeding edge' - newtechnologies that are pioneered by very few 'inventors'.
- 'leading edge' - the first users a new technology
- 'mature' - large scale application of a technology
- 'legacy' - outdated technology
In parallel with the technology life cycle there is a Service Life cycle with more or less identical stages:
- 'development' - sevices are being created and tested
- 'introduction' - small scale application of services by 'front running' companies
- 'stable delivery' - large scale usage of services
- 'end of life' - the service and / or its technological base is outdated and there new offerings in the Marketplace
On top of this technological evolution, IT Services are priced just like any other product based on the volume of sales. Looking at the pricing of IT Services we see the following:
- 'development' --> 'value pricing': the price is based on the added value that is generated by the new service for the initial Costomers. Prices are high because they are based on scarce knowledge and competencies and high investments due the R&D effort involved.
- 'introduction' --> 'margin+ pricing': the price is based on the cost + a margin for risk and ROI for the developer.
- 'stable delivery' --> 'cost+ pricing': the price decreases due to the higher volumes of service ('economies of scale'). There will be competition in the Marketplace.
- 'end of life' --> 'margin+ pricing': the price is rising again due to the scarcity of knowledge and competencies on the outdated technology.
We call this evolution 'Service Lifecycle Management (SLM)'. For the various stages mentioned it makes no difference whether you have an internal of external IT Service Provider. When however the software provides for a competitive advantage, there is a difference. We have to deal with large investments in internal development projects, consuming lots of resources. In this case the 'value pricing' results as well as the risk of failure stay in your own company.
