Where to start in 2005

Ready for 2005? It's shaping up as a year for innovation -- and uncomfortable decisions. Things are changing. IBM is dropping out of the PC business.

Oracle is swallowing PeopleSoft. Outsourcing, offshore and otherwise, looms large as an option -- or maybe a requirement. Sarbanes-Oxley, grids and Linux, wireless and RFID all require corporate IT to bite the bullet, make choices and then move forward to do new things.

We've put these decisions off for years. We can't any longer. But how to make those choices? Start with the filter IBM used in deciding to sell its PC line: innovations vs commodities.

PCs are commodities. That means it's hard to differentiate products, so competition is fierce and return on investment is low. True, IBM ThinkPad laptops have a reputation for innovation in design. But IBM decided that innovation couldn't add enough to a ThinkPad's price to make the business worth keeping.

So how does an IBM competitor like Dell stay afloat? By pouring the innovation into its manufacturing and marketing processes, not just into its products. That's why Dell will still be in the PC business in 2005 and IBM won't.

The day after IBM said it will sell its PC business to Chinese vendor Lenovo Group, PalmSource Inc -- which makes the operating system for Palm handhelds -- announced it's buying China MobileSoft, which makes a version of Linux for mobile phones. PalmSource also said it will turn Palm OS into a layer on top of Linux. That makes sense. Operating systems are now commodities. PalmSource doesn't want to invest in a low-return commodity business.

But PalmSource does want to keep control of that high-value Palm OS layer. That's where the innovation is. And innovation is where the money is in 2005.

The fact that operating systems are commodities also explains why Microsoft keeps trying to climb up to innovation-oriented layers like business intelligence and Internet search. Monopoly Microsoft may thumb its nose at antitrust regulators, but it can't finesse the relentless pressure of commoditization.

Why has Oracle gone after PeopleSoft? Because relational databases -- still Oracle's core business -- are commodities too. Sure, there's some innovation, but mostly a database is a database. Lots of PeopleSoft customers use databases from IBM, Microsoft and other vendors. Oracle wants those customers. And buying the enterprise application out from under those customers looks to Oracle like a good way to capture them.

Oracle may also genuinely want to leverage the innovation that's in PeopleSoft's applications. Only time will tell whether that's true.

What do we learn from all this? The same things that drive these vendors will drive our decisions in 2005.

What should we outsource? The low-return commodity work, obviously. Unless, like Dell, we can find innovative ways to do that work to create a competitive advantage. If we get a higher return from doing it in-house, then we should keep it in-house.

How do we handle regulatory requirements like Sarbanes-Oxley ? The first step is meeting the deadlines. But after that, what? If cranking out that data is a commodity process, we should find the cheapest way to deal with it. But if we can provide insight to business-siders for boosting the top or bottom lines, we should invest more in that kind of data collection.

On-demand IT provisioning makes sense if computing and storage are commodities to us -- but not if we can find innovative ways to leverage those elements for business advantage. Going with Linux might make sense, but not if there are special, innovative ways that we're using Windows or Unix.

Wireless and RFID may be commodities or innovation points, depending on what we need and how we use them.

Yes, 2005 will be a year for innovation. But deciding what's ripe for innovation and what's a commodity -- that's the decision we'll have to tackle first.

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