The Mass Customization of Services

A recurring theme in the world of technology over the past few decades has been the potential convergence of the IT and telecommunication industries. 

This all started in the 1980s, when the telecommunications industry began to seriously transition from analog to digital technologies in all their voice equipment, from central office and private switches to the phones themselves.  Given that these digital telecommunications products were essentially special purpose computers, many thought that it would not be long before the telcos would develop versions of their products for the general computer markets, and IT companies would adapt their general purpose computers for the more specialized telecommunication applications.

In the early 1980s, everyone was geared for the marketplace battles between these two industries, and in particular, for the battle of the titans between the original American Telephone & Telegraph and IBM, the undisputed leaders in their respective industries.  Both were planning major market expansions after no longer having to worry about being shackled by the US government, since in 1982, the Justice department settled the major antitrust suit it had brought against ATT, and dropped its antitrust suit altogether against IBM.

Each company was already somewhat involved in the other's business.  At the time, IBM was the leader in data networking with its Systems Network Architecture family of products.  To help it expand into the voice markets, it acquired ROLM in 1984, one of the early leaders in digital voice equipment. 

For its part, ATT had developed the UNIX operating system in its world famous Bell Labs.  In the 1980s, Unix was already widely used to support technical IT applications, and was rapidly expanding into other areas.  ATT had also developed its own family of computers for internal use across its various companies.  Several years later, it also acquired NCR to bolster its position in the IT marketplace.

It was not to be.  The telecommunications industry made a full transition from analog to digital technologies over the next decade, but with few exceptions, the two industries remained quite separate.  Both IBM and ATT’s forays into each other's markets proved to be major failures.  By the early 1990s IBM had gotten out of the digital voice business and sold ROLM.  A few years later, ATT closed down its computer business and spun off NCR as a separate company.

Why is it that there was pretty much a full convergence at the technology layers, but little convergence up the stack, at the market and customer facing layers?  As we know, the last twenty years have seen fierce competition in the telecommunications and IT industries, and many new companies have risen and successfully challenged the leaders.  But, what we have not seen is much cross-over, that is, companies with significant market presence in both the IT and telco industries.

Let me offer some thoughts.  In the early days of a technology-based industry, the core competency of the industry leaders is their ability to develop the key technologies components and products and take them to market.  Over time, as the industry matures, the underlying technologies generally commoditize and standardize across the various players in the industry. 

But, as an industry matures, the critical competencies for leadership move from the lab to the marketplace, that is, to the ability to attract and retain a growing number of customers and offer them a continuing stream of new products and services to meets their needs.  As companies grow, organizational and management competence also become increasingly important, as does the ability to have financially sound business models.

While the telecommunications and IT industries now use similar digital components across their products and systems, they have remained quite different in their customer and market strategies.  From their very beginning, telcos have been built to support a very large number of customers, the vast majority of whom are individuals and small businesses.  They thus developed the required skills to mass customize their products and services, that is, to combine the high volume and low unit costs of mass production processes with the flexibilities of individual customization.

IT companies, on the other hand, have not done well with mass customization.  Their products, especially their systems and applications software, generally include too many different features, are quite complex and require considerable after-sales services and support.  If the key DNA in the culture of telcos is mass customization, the equivalent key DNA in the culture of IT companies is complex software development and support.

I think that this explains why telcos have not done well when trying to move into software-centric, IT markets, but have done quite well in expanding into adjacent mass customized markets like Internet service provider, cable and related content distribution, and cellular phones.  Similarly, many IT companies have done quite well in expanding their software capabilities into complex services offerings of all sorts, such as systems integration, applications development, outsourcing and consulting.

But, two new disruptive innovations are once more mixing things up between telecommunications and IT companies.  One is the advent of smartphones, that is, mobile phones offering PC-like advanced capabilities.  The second and totally intertwined innovation is the advent of cloud computing as the model of computing needed to support all those smartphones and mobile devices, as well as all those smart sensors that are increasingly embedded into just about everything.

Smartphones are rapidly becoming the leading platforms for the development of the most innovative and fastest growing IT applications.  Smartphones are now doing to PCs what PCs did to mainframes twenty years ago - relegating them to the status of venerable and relevant, but legacy platforms.

Mainframes continue to be in wide use, supporting many critical applications even after 45 years since the announcement of the IBM System 360.  I fully expect that many PC-based applications will continue to be in wide use twenty years from now.

But, the innovation mantle has once more been passed, this time to smartphones, smart sensors and other mobile platforms.  And, because smartphones bring together the world of telephony and huge volumes of users with the world of IT platforms and applications, it will be fascinating to see how this witches brew plays out over time.

I think that the key strategic steps to watch out for is how each industry evolves to embrace cloud computing.  I view cloud computing as an emerging model of computing beyond the mainframe-based centralized model and the PC-based client-server model.  The key to cloud computing, in my opinion, is the mass customization or industrialization of services that will permit the support of billions of smartphones and trillions of sensors embedded throughout the physical world.

How will this all play out?  My expectation is that just like both the IT and telco industries converged on digital components but remained separate industries, once more the IT and telco industries will converge on the mass customization of services but remain distinct, each with its own culture skills and market.  The telcos will have to learn how to bring their mass customized skills to more diverse, sophisticated and complex services while remaining true to their culture of supporting huge volumes of customers and services with near mass production efficiency.  The IT companies will have to learn how to continue to bring the engineering disciplines of standards, modular components and highly disciplined methodologies to the world of services and complex applications.

I don't think that we will describe the upcoming competitive landscape as another battle of titans.  Having seen how the previous such battle turned out, it feels more like a struggle for survival and relevance.  Given the complexities of what we are now trying to accomplish, the two industries truly need each other, so hopefully, in the coming years we will read less about struggles for dominance and more about partnerships and collaborative innovation.

Comments

[Chris Ward]

There are maybe more cross-overs than you describe.

Once upon a time, IBM owned and operated a Global Network business; then IBM sold it to ATT, and nowadays you can walk around a number of IBM 'campus' sites and see the network wiring closet rooms bearing an ATT label, and indicating that you need permission from ATT management to open the door.

I know of a number of 'technology outsourcing' contracts, where businesses which sell cell-phone service buy in items from IBM; development of billing solutions, and general 'advanced business technology consultancy', are two specific items.

I think the issue is that it costs IBM $100 to send a bill out. That creates opportunity for any business which can make a profit by billing its customers less than $100 a time; it isn't going to face competition from IBM.

What does it cost Microsoft to send a bill out ? Do they face the same 'problem' as IBM ?

[Paul Richard]

I had many of the same thoughts after watching this video: http://www.youtube.com/watch?v=tahTKdEUAPk&feature=player_embedded

While the video deals with the future of education, it also raises a number of questions about how is this future smartphone enabled business environment supported? How do you update a support model based on the traditional desktop and laptop environment to support a generation of employees that seek instant answers via twitter and will do the majority of their work via the smartphone and the cloud?

[Chris Ward]

Well, the internal 'support model' at IBM is fairly clear. You pick two of the myriad options and offer central support for them; and you tell the users they may use those, or may use anything else that their manager approves of, but they are self-supporting when not using the centrally-supported options.

For example, "Firefox and Microsoft Internet Explorer are supported, but you may use any web browser that meets security standards."

Locking support down to a single option would be cheaper, but would lead to frustration, stagnation, and inability to do the 'best thing' for the variety of customers that a business might hope to have.