Falling Transaction Costs: The Force of Disruption!
Here’s the question:
Is it new technologies that are disruptive or is it new business models that are disruptive?
Clearly it must be new business models that do the disrupting, because new technologies are available to everyone. So technology is an accessory after the fact. It just enables or supports the disruption.
In the typical case, disruption occurs because some company disturbs a relatively quiescent market with a compelling value proposition, based on a lower price or increased value for money.
So:
- Why does this seem to happen so often?
- How does it happen?
Why?
The “why” is falling IT transaction costs. From a technical perspective, transaction costs fall on a regular basis by something in the area of 20% per year. They fall for lots of reasons. Moore’s Law pushes them down. Metcalfe’s Law pushes them down. Many technology innovations push them down, because many technology innovations reduce costs.
If the downward pressure transaction costs is 20% per year then after 8 years the reduction in transaction costs is 90% – which you can think of as “an order of magnitude”.
We are focusing on IT transaction costs here and with many business processes, such as, say, hiring someone, the IT element is small. So the costs of these business processes do not fall precipitously. However some business transactions, such as paying for something or customer support have a high IT element and these costs do tumble.
How?
So, given this reality, how does disruption happen?
Every company in a given market sector can take advantage of the falling transaction costs. So the decline in transaction costs itself is not disruptive, but the decline in transaction costs often brings with it two other effects:
- The barriers to entry into the market sector fall.
- It becomes possible to introduce a new business model into the market, which is disruptive and which existing companies cannot imitate.
Most disruptive new companies make their entry into the market this way. Think of Amazon in the books market or (in the UK) First Direct in the banking market. Both plays were technology based, but it was the business model that did the disrupting.
Note: This is a key IT Trends posting that I will probably refer back to, to discuss various business events as they occur in the IT market. A list of such postings can be found here:
I think these insights are great and right on ‘but’ new business models should not = rip & replace of current IT so how do you build on 30 years of complexity to implment new business models (Amazon) in old companies (General Motors)?
Of course that’s the million (or possibly billion) dollar question. Clearly there is only so much that can be done. The judicious adoption of standards (whether from standard bodies or from market-leading vendors) is clearly something that can help. The adoption of architectural standards across the enterprise will also help. Ultimately you have to adopt a modular architecture to have any chance at all. Then at least you can contain proprietary lock-in to some degree.
Making commodity purchasing decisions can help too. Thinking in 6 year times frames architecturally, also helps. Plan for the reality that architectural imperatives will change every 6 years. Actually I could write a whole posting and more on this, so I probably will, in time.