Tackling Business Model Innovation

I heard a phrase the other day that resonated with things I’ve been thinking about and talking about on the stump recently, but I had never heard it so succinctly. I was taking a briefing from Zuora, a company involved in providing on-demand billing solutions for companies that deliver on-demand services.

The phrase is “business model innovation,” and it means what you think it does, but that’s particularly hard to do. On the stump, I’ve been talking about how we’ve transitioned within the economy from innovating at the category level to innovating within the category. We are now making many more product line extensions, enhancements and value-engineering additions to existing products than we are developing whole new categories of products.

The Tablet Exception

A classic exception to this rule may be the tablet computer. Tablets are a whole new category of device intended to consume information or content rather than to make it. True enough, tablets have virtual keyboards and can be used more or less like any computing device, but users have bigger fish to fry and are already deploying creative new content consumption applications. For instance, some pharmaceutical companies are giving their reps tablets with the mission of using them to show short videos to doctors and pharmacists. The video is replacing the detailing pitch. That may sound trivial, but there’s more to come.

Interestingly, the tablet is also a product line extension. It is next in a long line of desktop, laptop and PDA devices and is often made by the same companies that make the other devices.

When you get to the point of innovating within the category, everything is up for grabs, including your business model. Rather than simply innovating around the product, you can and often must innovate around what Geoffrey Moore called “whole product,” which can include pricing, contracts, usability, features, ease of deployment and much more. So when I heard about business model innovation, I knew exactly what Zuora meant.

The IT Demand

One of the hardest things a business can do is to change its business model. It’s the secret sauce, the way you make money. Some things are easier than others, and one of the hardest is converting from a license and on-premise model to a SaaS model.

There is a massive shift in demand for IT services underway right now. The shift is moving as much cost as possible from ownership and capital outlay to services and expenses. By comparison, worldwide IT spend hit $3.4 trillion in 2010. That’s comparable to the GDP of some hefty countries — for example Germany, at $3.33 trillion, or China, at $4.9 trillion (both in 2009, estimate from the World Bank).

The Zuora link is instructive. Today the company announced in partnership with Tata Communications — a new cloud service that will use Zuora for pricing and billing. Tata Communications is the $2.4 billion telco arm of the $67.4 billion Tata Group, and they are rolling out cloud computing infrastructure services for a global market.

Tata wanted business model flexibility for itself that it could pass on to its customers. That means having the ability to package and price cloud services in any way that makes sense for the customer and different ways for different customers.

Hidden Hoops

The back-story is that billing systems have been the unseen hoop that many technology companies have had to jump through on their way to business model innovation. As it happens too often in the SaaS space, if you can’t describe a product to your billing system, you can’t produce and sell it. The difficulty comes from billing systems that are product-centric in use by companies trying to sell services — mutable, rapidly changing services. The billing systems are programmed for one-time product billing, not recurring and changing service billing.

If you are Tata Communications and you want to have a business model that supports customers defining almost any configuration, you need a billing system that can follow suit. Without it you have a flexible business model constrained by the billing system. There are a lot of things that can constrain business, but the last one should be any internal system. How ironic if you can imagine and build a product but your billing system won’t let you sell it.

On the stump, I like to say that we’re in an age of customer intimacy. That’s shorthand to explain the need for information about customer needs, wants and biases. It’s only through gathering that information (social media and analytics play a huge role) that companies can consistently deliver right products and right messages at the right time. But just when you might have thought that was enough, you have to confront the possible need for business model innovation. It just doesn’t end.