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Sunday, January 08, 2006

Technology & Exit Costs

Scott Mcnealy writes about corporate procurement of technology – while experts may know this very well – it makes sense for the ordinary masses to hear it from he CEO of Sun. He says that most businesses have become pretty savvy about the true cost of technology—though not nearly as savvy as they should be. Three things are critical; they have two covered.
- The first thing—cost of acquisition.
- Next up: the ongoing cost of running everything.
- Third one - The barrier to exit, or switching cost(mostly not considered).

Given technology’s faster rate of obsolescence, he argues that the third one may become the most important factor. Pointing out that several enterprises suffers on this account, he explains that enterprises are locked into proprietary file formats, proprietary applications, a proprietary programming environment—all of which create big barriers to exit. But most buyers don't think about how much those barriers can cost them—or they don't think there's anything they can do about it. Switching is always going to cost them.
His solution is to get answers for questions like :
- Is the technology based on industry standards?
- Are all protocols and programming interfaces open, published and royalty-free? Have they been adopted by some or all of the computer industry?
-Are all the data formats open and freely available? (If not, your current vendor essentially owns your data.)
- Is there a community development process (and not just one company) behind the technology?
- Is the sources (not merely the distribution) open? (The ability to buy the exact same technology from different distributors won't change the fact that you're tied to a sole-source supplier.
) etc, and points out that the answers need to be carefully assessed and factored inside the purchase decision. He advocates considering the cost of acquisition, operation and exit in any technology purchase and not just stop at the first two. Several times we may not get direct answers for these when investing in sunrise technologies - particularly on software. There we may have to settle for a judgement based on nearly equivalent answers. Say for example - locking into Netweaver or .net technolgies - in such occassions investments are made hoping that the technology would better reach with passage fo time. There the trackrecord of the company promoting the technology would be am important consideration.A good read.

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