Big surprises can come from smaller vendors

"I told him to go with the biggest company," a father told me. His son was moving from the second-largest to the largest company in his specialty. Though I politely agreed with him, what he said really bothered me.

Company size is one of many factors that his son should have considered. However, there's evidence that smaller companies may be more profitable, and I believe that they're often more innovative.

What bothered me most about what the father said was my fear that many organisations use a similar logic in their IT purchasing decisions.

Buying from the largest company may take the least effort, but it may not ensure that you'll get the products that will contribute most to profitability. Without adequately determining enterprise-wide needs, making such a buying decision won't likely address all of them. And without carefully considering all available products, buyers may be overlooking the innovations that smaller companies may have to offer.

Computerworld columnist Paul Strassmann presented interesting data on the topic. He pointed out that while US high-tech companies took in 55.4 per cent of worldwide IT revenue in 1998 and 1999, they reaped a whopping 95.9 per cent of the profits. He suggests this reason for the disparity: "The US favours a diversified collection of companies consisting of many small and largely profitable" companies while the industry in other countries "is concentrated in large enterprises". I believe that one other reason many smaller companies are more profitable is that they're more innovative.

Strassmann also noted that Microsoft and Oracle made up about 68 per cent of US IT profits in those two years. This might appear to contradict both his suggested explanation and my conjecture that many smaller companies are more innovative. While I must concede that Microsoft has standardised its interfaces and enhanced and integrated its products, it seems that most of its success comes from products that other, smaller companies had already pioneered, such as WordPerfect's word processor, Lotus Development's spreadsheet and collaborative software, Netscape Communications' browser and even Apple Computer's graphical user interface.

So many major products we rely on today originally sprang from smaller firms. The lesson? If you're looking for products that can improve productivity, effectiveness and, ultimately, enterprise profitability, don't overlook smaller companies.

But don't assume that because a company is small that its products are innovative or effective. There are no shortcuts to selecting effective products. You have to know your organization's needs and find products that address them. To be truly objective, you should use measurements to decide. Though this may be a big task for smaller companies, and larger ones may be reluctant to make such an effort, measuring internal pilot tests for each prospective product is the best way. Tests should benchmark a representative sample of employees using the products in their normal work environment. To be relevant, they should measure pertinent business units, such as help desk problems resolved and attained sales volumes, for a period of time long enough to ensure that measured differences aren't due to chance.

Many companies haven't gone to this trouble. When stock prices were still rising in 1999, many CIOs claimed that "productivity-enhancing computerisation" had caused the boom in the economy. But Strassmann testified before the Federal Reserve's Board of Governors that there was no evidence to support that claim. He went on to warn CIOs and others that their management would expect them to prepare verifiable evidence that IT spending supports enterprise profitability. His comments suggest that companies don't know which IT products support profitability and which don't.

Companies may find that the easiest way to make IT purchases is to buy from the largest vendors. But they may not necessarily get what their management expects of them: the best products to support present and future profitability.

(Dan Drake is a concerned IT industry observer who hopes enterprises will take steps to ensure that IT expenditures contribute to profitability. Contact him at dlddons@integrity.com)

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