Commoditizing Service Provider Dependencies

It’s an increasingly better understood business concept to build high end custom things from commodity parts. For example Google has built some of the most powerful data centers on the planet essentially with commodity parts. One of the main reasons for this principle working is the fact that many commodity parts are so much less expensive than some of the high performance parts. So in many cases one can obtain quite a few commodity parts for the price of one high performance part. For example, if the high performance part is 3 times as expensive as the commodity part it may be worthwhile buying 2 commodity parts (either for higher performance or just in case the first one breaks), rather than the one high performance part. In higher volumes even a 20% price difference can often be offset by buying 10% more of the less expensive part. And in some cases, a 20% higher performance or reliability part costs 3 times the price or more.

Computer hardware is a classic case for this principle, and since more and more machines and devices have computer parts in them, it’s not surprising that this is happening across many industries. Even some space agencies are experimenting with rather having several almost identical missions using commodity parts in the expectation that some of them fail, but the overall price-tag is lower. (Of course this principle isn’t a good one for human space flight, that’s why human space flight will continue to be increasingly disproportionally more expensive than machine based space exploration).

In addition, there’s a bit of a little secret in many industries. Quite often the so-called high performance part is neither particularly higher performing nor significantly more reliable. Since the sales volumes in commodity parts are so much higher, often more of the kinks get worked out sooner. And also since it’s easy to switch between commodity parts, the competition between suppliers is fierce, often leading to identical or better performance specifications for commodity parts compared to so called high performance or high reliability parts.

However, this principle can also be applied for obtaining services, where such services aren’t too hard to switch between and if there is a significant number of suppliers within reach. If it’s web based service the supplier of that service can be pretty much anywhere.

For example, in the case of Web Hosting there are a very wide variety of suppliers with widely varying sales pitches and pricing. Recently I have made some good experiences with rather choosing two or more inexpensive commodity providers, rather than a single higher priced one. Without naming names, some rather popular websites hosted by rather reputable high end providers have gone through significant multi-hour outages because something fundamental to their service provider broke.

If those websites would have had two or more service providers sufficiently far removed from each other and hopefully not with any common components, they likely would have had only very brief or no outages. And quite possibly they would pay less, too.

There’s another increasingly problematic issue in the provisioning of high-end services. It’s just very expensive to provide customized services to just one or a few customers. It’s disproportionally less expensive to provide exactly the same service to many customers. And in the end the customer has to bear that cost.

So I tend to recommend to create and manage one’s relationships with one’s suppliers in such a way, that one uses the supplier’s service in the most mundane way. Don’t be the one customer with special needs or a special implementation. You are very unlikely to be served well in those.

Do the special custom one-off stuff in-house and make that part of your core business and outsource only the stuff that is easy to get two or more suppliers for and is easy to switch.

Again, this can’t always be done, but I believe this will become an increasingly winning business principle. The trick and the benefit is to figure it out faster than one’s competition. And in a tricky economy it may make a difference in business survivability.