- The value of a service in one place depends on the amount of usage elsewhere – the more the better.
- This is especially true of services that offer some form of communication – the value of the service depends partly on the number of other people you can communicate with.
- There is a positive feedback loop – as more people use the service, it may increase in value, thus persuading more people to use the service. This feedback loop may result in a rapid growth curve.
- This leads to the concept of critical mass – the level at which the growth curve becomes self-sustaining.
- The traditional Pareto principle (80% of the value comes from 20% of the cases) assumes a significant proportion of fixed costs. For example, a bricks-and-mortar bookshop must devote shelf space to any book in stock, and there is a cost associated with excess inventory.
- But in a service-based economy, it may be possible to alter the supply-side economics – for example shifting from fixed costs to variable costs – and this means that the rare items (both individually and in aggregate) could be as profitable as the popular items.
- The economic viability of the long tail depends critically on bringing down the fixed costs of servicing the long tail, and shifting to a more flexible variable-cost regime.
Web 2.0 and SOA together can help provide a cost-effective way of accessing these network effects and long-tail benefits.
- Cost reduction – leveraging existing systems through services, helping to cut cost of customization
- Cost mitigation – providing services not solutions, shifting responsibilities to collaborating partners. For example, customer self-service, small communities providing their own solutions. Thus collaboration helps spread the cost.
- Shift from fixed cost to variable cost – for example through “pay-as-you-go” on-demand pricing – thus helping to reduce the risk and the barriers to adoption.
In order to achieve these Web 2.0 benefits, there are some questions that need to be answered:
- What are the implications for IT management? How can I guarantee the continued security of my core systems? How can I provide the necessary quality of service to my existing users as well as the new ones?
- What are the implications for business management? How can I guarantee the continued integrity of my products and services? If third parties are able to mash my services with external services, how can I retain control of my brand and corporate image?
- What are the implications for corporate governance and compliance? Do these external arrangements introduce new risks?
This is an extract from an article Lawrence Wilkes and I wrote in February Extending SOA with Web 2.0. Commissioned by IBM and available free from the CBDI Forum website.