Sun & The Nobel Prize

Back about 15 years ago, an economist named Ronald Coase won the Nobel Prize based on some very interesting ideas that we're just starting to see drive serious considerations and behavior in the the world of IT. Sun is well aware of this and responding with initiatives (that I can't talk about here). Like the "perfect storm", our industry is at an inflection point driven by the confluence of various trends and developments. These all add up to an environment that is ripe for Coase's Law to be enforced with prejudice.

Coase's Law states that: firms should only do what they can do more efficiently than others, and should outsource what others can do more efficiently, after considering the transaction costs involved in working with the outside suppliers.

There is nothing earth shattering about that simple and intuitive statement. However, back in the 90's, when this idea was explored in theoretical circles by bean counters, the "escape clause" related to transactional costs rendered the idea impotent, or at least limited, in the IT world. A captive internal service (eg: payroll) might not be highly efficient, but the thought of outsourcing a business function was quickly evaporated under the heat of a financial impact analysis. It just cost too much per transaction to realize a worthwhile return. And the incredible growth and prosperity of the "bubble years" leading up to Y2K was not a climate that drove consideration of the business value of outsourcing.

But all that is changing. You are familiar with many of the various "laws" that describe trends in IT, such as:

  • Moore's Law (fab process trends that underpin cheap powerful compute infrastructures)
  • Gilder's Law (the ubiquity of high-bandwidth network fabrics interconnecting businesses and consumers)

You are also familiar with concept of Web Services that leverage standard interfaces and protocols and languages to facilitate secure B2B and B2C transactions over these networks.

Taken together, the cost of an outsourced transaction is now dramatically lower than it was pre-bubble. Today, outsourcing is not only a viable consideration for certain business functions, but a necessary competitive reality. Here's the way I interpret and apply Coase's Law... Every business has a strategy to capture value and translate that value into revenue and profit. But the realities of running a business require common support functions. Every company had to build their own network of these supporting services (think: Payroll, HR, PR, Legal, Marketing, Manufacturing, etc, etc, etc). Think of these as chapters tucked away in the back of a company's Business Process handbook... necessary ingredients to implement the Business Design, but not part basic value capture. Many of these necessary support functions operate with limited efficiency and effectiveness, because delivering these services is not part of the company's DNA.

But there are provides that live on Gilder's external network fabric, operating grids of Moore's compute capability, offering highly efficient Web Services based business functions. These providers specialize in specific support services and can drive efficiency (and lowered cost) by aggregating demand. Their core competency is delivering secure reliable business functions at contracted service levels at a highly competitive transactional cost point. Wow! Think about that.

And moving forward, as we begin to explore the implications of Service-Oriented Architectures, as we implement business processes by orchestrating applications that are built from loosely coupled networked "services", it is not unreasonable to expect some or many of these SOA-based business components to be supplied from one (or more) outsourced suppliers.

Some people believe that targeted outsourcing will drive massive deconstruction and reconstruction, and that this will be THE major disruptive catalyst in business designs over the next several years. If so, IT will play a major part in this transformation. Sun needs to aggressively tap into this oppty (and we are). To do so will require building B2B/B2C services (and the underlying distributed service delivery platform) that integrates & optimizes business processes beyond the four walls to include the external value chain.

In his 1997 book, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, Harvard business professor Clayton Christensen posited that, thanks to the Internet, companies are becoming more vulnerable than ever to a competitor wielding a disruptive technology - a technical process or business model so transformative that it could shake a Fortune 500-sized corporation, or even an entire industry, to its foundation. The lesson is that companies must structure themselves so they can rapidly build a new business around a disruptive technology even as they sustain their core competency.

IBM's OnDemand Enterprise is described as: "An Enterprise whose business process – integrated end-to-end across the company and with key partners, suppliers and customers – can respond with speed to any customer demand, market oppty or external threat".

Like Coase's Law, the expression of IBM's OnDemand vision is really common sense. It is the confluence of technology and economics today that has caused these ideas to become very interesting. Now it all comes down, as it always does, to execution.

And one of the initiatives we're driving at Sun that I can talk about is the Service Optimized Data Center (SODC).  The Sun Service Optimized Data Center program is comprised of an extensive set of services and technologies. Sun creates a comprehensive roadmap, which is used to transform your data center into an efficient, risk-averse, and agile service-driven environment that emphasizes IT operation as a strategic business driver and competitive weapon.


Are you familiar with the work Jochai Benkler has done to develop on Coase's ideas in the context of open source? He has a paper called "Coase's Penguin" which explores the effect of collaborative communities and suggests that "commons-based peer production" is a valid and alternative model to outsourcing. Worth a read!

Posted by Simon Phipps on January 27, 2005 at 02:18 AM EST #

I've studied economics for two years as a subdiary course. It's such a nice and interesting subject. I really wanted to take for specialization but I could have not.

Posted by Sheldon on February 02, 2006 at 07:00 AM EST #

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