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Sooner or later the vendor will start pressurizing to upgrade because of their cost of supporting old version become very high

Getting handcuffed to the current version of EA software is by far the major reason why customizing EA is not a great idea in the long run.

Writing an integrated internal software system:

Pros:

• Decoupled Solution: The core business processes are segregated from the EA. The system can be updated and enhanced several times independent of EA application. That way, the development cycle of internal software system will be decoupled with that of EA development cycle which is notoriously slow.
• Leverage existing capability of IT Department: Writing an internal application can take advantage of existing capability of the IT department. If the current IT department is good in developing .NET applications, then this customized application can be on that platform.

Cons:

• Integration Issues: EA applications do not have a good support for integrating external systems. Although, most of them are beginning to use SOA (Service Oriented Architecture) framework to support integration of external application.

As vendors recognize that they will not be able to force every firm to use plain vanilla business process they will begin to support seamless integration with external applications. The second option will become the only way the corporations can automate their core competencies.

Every organization has gotten to this cross road by trial and error implementing a sound EA Strategy.  I don’t think every vendor is speaking in unison as to how to tackle the issue of automating the core competency for that organization. The organizations that have tried both the above mentioned ways to automate their core competency have been frustrated by the complexity of the implementation. As integration technology changes, and as delivery model adapts we will see continued frustration in the implementation of EA Strategy.

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When an organization starts as a small firm, there is usually no financial bandwidth to implement an elaborate Enterprise Application. The firm is usually functioning on a shoe string budget. The most important resource, capital is extremely scarce and is allocated very carefully to create a steady cash flow. Enterprise Application, though helps set a firm’s foundation on a sound footing for the organization to grow organically, does not initially enable cash flow. So the firm in its infancy builds and runs its business processes with applications that are barebones Excel based or some sort of shareware/open source software systems. Though, building an organization on a strong foundation of Enterprise Application is ideal, small organizations bucket the implementation of Enterprise Application as a ‘nice to have’ category and move on…

As the organization grows, the rudimentary applications grow with the firm and for a long time the firm can survive on these internally built and ‘enhanced’ software systems. These applications are usually written and rewritten by several people with no formal exposure to software development methodology. They do not understand the complexity of maintenance, deployment and testing. These systems do not usually scale easily. Hence large number of employees is needed to be hired to run the organization around these software systems. The human glue keeps this collection of hodge-podge systems in synchronization. When the organization begins to reach a point of disintegration due to ‘fragile’ and ‘rigid’ business processes based on these rudimentary systems, only then the executives feel the need to implement the Enterprise Application. The Executive directive is passed down to the middle management. After selecting a viable vendor for the Enterprise Application which will encompass some combination of ERP, SCM, CRM depending on the organization, the mammoth exercise of implementing the Enterprise Application begins. This implementation process is akin to changing the plumbing of a house after the house has been built.

So for so good, but what the implantation team does not understand is that there needs to be a delicate balance between customization of Enterprise Application to the organization’s business process and adaptation of firms business process to the ‘canned’ business process provided by the vendor for that Enterprise Application. The people in-charge of implantation of the Enterprise Application needs a solid understanding of the core competencies of their firm. All business processes that do not enable core competencies of the organization can and should be changed to map the pre-generated business processes that are part of the Enterprise Application. They could be configured but the temptation to customize these business processes should be avoided. Why? Because these non core or contextual business process simply play a supporting role for that organization. They do not enable differentiation strategy and hence it’s a waste of important resource to customize these business processes. In my opinion these contextual business process can even be outsourced to some degree without having a negative impact on the organization itself.

But, the business processes that enable or is a part of core competency of that organization should not be retrofitted to the existing ‘canned’ business process provided by the Enterprise Application. Why? Because if the firm’s core competency is mapped to plain vanilla business process provide by the third party vendor, it does not give the organization an ability to sustain its competitive advantage. How can ‘someone else’ understand your firm’s differentiation strategy and your competitive environment? There is no way the business process for the core competencies of the organization can be enabled by the Enterprise Application without loosing that competitive edge. Your competitive advantage is the ‘secret sauce’ and you should try to keep it that way by not ‘watering down’ those business processes to plain vanilla third party vendor developed business process. In my view automating the core competencies of the firms should be tackled by using one of the two ways

1. Customizing Enterprise Application
2. Writing an internal software system that can interface with the Enterprise Application.

Each has its own pros and cons which I will write in my future blog.

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The biggest advantage of SaaS CRM is that, very little in house resources are utilized in deploying, maintaining and integrating the CRM application. The vendor does most of the work and thus SaaS delivery model looks tempting from a financial perspective. As it turns out it is not advantageous to have SaaS delivery model for the CRM application in every scenario.  Depending on the type of firm’s competitive strategy, it will be disadvantageous to implement SaaS CRM.  

According to Porter’s Generic Competitive Strategies, there are 2 types of Competitive Advantages a firm can possess: Cost Leadership or Differentiation. When the organization uses Cost Leadership Strategies, the sole objective is to become the low cost producer in the industry. This is the model where the organization goes after only the ‘price sensitive’ customers. The CRM in this case can be ‘plain vanilla’ application. Hence under this circumstance SaaS CRM can be used successfully. In fact if the number of customers is very large, the organization can focus on streamlining SCM and other internal business process to maximize throughput. CRM in this case can even be outsourced/offshored because now it can be a non-core activity. Firm can get away by having very rudimentary CRM process.

But if the competitive advantage of the firm is based on Differentiation Strategy, then the firm seeks to be unique in its industry along the facet that it thinks its widely valued by the customers. So in this case ability to understand the customers is very vital. Customer Segmentation and Relationship Management is a critical factor in differentiating the product or the service. It is extremely important that the CRM needs to integrate not only with other systems (SCM and ERP) but also with people and processes. SaaS CRMs have very weak integration ability (in most cases additional connector software needs to be purchased or customized connector needs to be created via Web Services). SaaS CRM also cannot be customized for the unique business processes. Now, SaaS CRM begins to loose its advantage for the organization that has unique Customer Relation business processes.

SaaS CRM always works for the organization with Cost Leadership Competitive Strategy but rarely works for the organizations with Differentiation Competitive Strategy.

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Last week I attended a TiE-Arizona networking event. Clate Mask CEO of Infusion told a group of 50 attendees how the company started and how they have been growing. Infusion sells CRM SaaS products. He passionately talked about the future growth and the mission of the company to radically change the way Small businesses do CRM.

When asked how they differentiate themselves from the crowded CRM SaaS market, Clate’s response was that Infusion’s focuses on selling CRM to Small businesses only. There are 41 million Small Businesses (any organization with employees between 2 to100 - According to Infusion’s definition of Small business) and there is no other product that squarely targets for small business. Salesforce.com which is the 800 pound gorilla in the SaaS CRM market mainly targets organizations with more than 100 employees. Infusion recently secured venture capital and is now worth 28 million.

What impressed me was the Infusion’s ability to identify and create a niche. They do have strong competition from companies like Sage software which sells ACT, and it will be interesting to see how it all plays out in the near future.

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Wall Street Journal tech blog, How to Do IT on the Cheap is about the IT strategy at Virgin America. If you have paid access to Wall Street Journal’s Web Site then you can also read about Virgin America flies new IT path. Both these articles discuss how Virgin America is breaking new ground when it comes to IT infrastructure. They are planning on reducing their IT related costs by mainly outsourcing everything including customer support. Instead of mainframes that is used by the other airlines, they are using Linux based servers. Both the articles talk positively about the Virgin America’s IT initiatives.

Before we applaud this move as ‘out of the box’ thinking, let’s evaluate this from the company’s strategic perspective. According to Micheal Porter there are 2 types of competitive advantage which a company can utilize to build ‘economic moat’.

1. Cost Advantage

2. Differentiation Advantage

If Virgin America is planning on using Cost Advantage strategy then they are setting themselves to fail. Guess what; in the overcrowded airline industry especially in the US there is cutthroat competition for being the low cost carrier. Southwest has a proven successful model and it is difficult to beat them on the merits of cost advantage by itself. Many airlines have tried in the past and have failed. Jet blue might be the only exception. I will write more about Jet Blue’s IT strategy in my later blog.

But based on other Virgin products, personally I would like bet that Virgin America is planning on using Differentiation strategy. To start off they have a well known brand ‘Virgin’ that is widely recognized in US. They also intend on using ‘plush’ features on their airplane (like leather seats, entertain system etc.) to make the in-flight experience comfortable. I believe providing superior ‘flying experience’ is the only way they are going to survive this airline industry.

Crowded airports/ runway and long lines at security is making travelers long for a comfortable flying experience and may be willing to pay higher for that experience. Who are these customers? This is where gathering customer related information becomes very vital. Ferreting out intelligence from that information is equally critical. In my opinion Virgin America needs to start investing in CRM, Data Warehousing and BI tools to identify the right customers. They can get away by outsourcing initially. But as the data grows, depending on an outsourced company to provide the infrastructure to gather the intelligence from information is extremely risky proposition. Never outsource your core competency!

Buried in the WSJ blog they do talk about Virgin America’s homemade software (no details available). If that homemade software is specific to Virgin America’s business strategy, they are doing everything right. If the customized software is only about cost savings and nothing to do with understanding ‘customer life time value’, then sorry to say, in a few years they will be Southwest look alike.

Update: Nov 30, 2007

Finally, today I got motivated to blog about Jet Blue’s IT Strategy.

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