The Pitfalls of IT Commoditization: Why Professional Advice Matters More Than Ever

When I write blog posts, I’m often “writing to find” – i.e. I start with a blank piece of paper and see where I end up. I’m never really sure if I’m writing for people who work in IT, or who don’t work in IT, but I seem to get feedback from equal numbers of people on both sides of the fence. For example, one of my favourite topics to talk about is rent-seeking – the principle that it’s easier to sell a customer a small monthly operational cost than it is to sell a customer on a large up-front operational cost (i.e. opex vs capex). I sell IT solutions for a living, and I can’t stand this sort of rent-seeking behaviour even though it benefits me because it feels vaguely exploitative. If you want to be involved with a customer in the long term, deliver consistent value – don’t just rig the game in favour of your cashflow.

I had a conversation this week where the idea popped into my head that rent seeking and commoditisation might be linked at the hip – is it the case that we in the industry are paying for this lack of equitable behaviour to customers through the fallout of commoditisation?

Commoditisation is the process whereby value becomes interchangeable, making it difficult to differentiate on anything other than price. From the customer’s perspective, they become interested only in price and stop looking at the packaged value. Go back just 10-15 years a typically SME had a physical server, some Microsoft server software (usually Exchange), a (wired) network, some workstations, an internet connection, and a network printer. Going along with that, you would need an IT support bod to keep it all running, because it would go wrong fairly constantly. Nowadays – ignoring the fact that we don’t even appear to need physical offices anymore – all a business needs is Microsoft 365, broadband, and a wireless LAN, and that set-up is usually so reliable that the IT support bod is no longer needed.

Commoditisation of this particular market is a result of Microsoft’s rent seeking – it’s better for their cashflow to hit up every SME in the world for £40/month compared to selling a bigger ticket server license every “n” years. The “tragedy” that happens for the IT support company that used to support that business is that the solution is now sufficiently reliable so as not to require as much IT support – i.e. the value has been snaffled by Microsoft. Although – it’s not quite like that, because the value has disappeared entirely from that part of the market. Not too long ago an IT support business could charge an SME about £60+VAT per user – in the post-Microsoft 365 world, that price is closer to £30+VAT per user.

Within the IT industry, value exists purely in professional services. (From the supplier’s perspective, professional services is where the value is, too.) You can express that value in a different way – you can say that “value comes from advice”, that really the value that IT customers are paying for is advice. Even better, you can describe it as “advice about the best way to do a thing”.

There are certainly ways in which you can express the “best way to do a thing” through software, but what I think is happening is that customers are looking at the commodity solution as the whole solution, not just the central component of a broader solution. This is making it much harder to sell in broader solutions, which necessarily require professional services as it’s only through a proper professional services engagement that the supplier can gauge what the value to the customer is.

There is no doubt that the core offering of hosted email through Exchange delivered via Microsoft 365 is a fantastic solution. It’s almost inconceivable that an organisation will lose service availability, or data, or that email will be breached. If you’re purely concerned with “email in/email out”, that commodity solution works brilliantly. Where commoditisation stops working is on anything the business needs that is weird. And in any business, any business function can be weird.

What gets thrown away with commodity solutions is the relationship. This happens for two reasons. Firstly, commoditisation is a race to the bottom, and as the margin evaporates so does the attention. Secondly, customers get lulled into a sense of false security as the solution looks like it both a) works 100% and b) covers 100% of the need. Commoditised solutions are going to end up being more reliable as consolidation maps to reliability. But that idea that commoditised solutions cover 100% of the need is simply wrong. Commoditised solutions at best cover most of the use case – in order to fully meets the needs of the business, advice has to be given, and that needs something like a consultation engagement (even if you don’t call it that).

The key to do this I guess is that from that customer’s perspective, they have to be aware that the totality of the solution cannot be achieved through a commoditised solution. By all means, buy what everyone else buys and put it in the heart of the delivered work, but the advice you get from outside experts – whether that’s IT, accountancy/finance, marketing, operations – that advice is hugely important.

By Matthew Reynolds