Why business models matter

In my lastfew posts (It’sa mixed source world and Afresh approach to tech procurement), I talked about various strategies for sourcingthe right tech solutions to help you meet your goals cost-effectively. Today, Iwant to introduce one more critical factor to consider in the procurementprocess: the business models of your potential tech providers.

Tounderstand the basic differences among the prevalent models, just follow themoney.

  • Some companies, like Microsoft, generate revenueprimarily by selling software, services, and devices to individuals andorganizations. This model is based on clear transactions between the supplierand you, the customer. You pay for a license to use our products and services,and if we don’t live up to your expectations, we lose your business.
  • Others offer free or low-cost open sourcesoftware, then make money on the back end through consulting fees and the customizationthat may be required to tailor their products to your specific needs or to makethem interoperable with your other systems.
  • Other companies profit by providing free onlineservices that fuel advertising sales. Their approach relies on massive dataacquisition—they accumulate as much data as possible about consumers in orderto better target and sell advertising. In this model, the company’s realcustomers are advertisers, not the end users of the software or services.

Thesedistinctions may initially seem tangential to the public official or projectmanager whose bottom line is finding the best solution at the best price. Butit’s important to weigh the motivations driving companies in the tech sectorbecause those motivations can affect the results the public sector gets out ofthe relationship.

My goal hereis not to say that one business model is better than another. Rather, I want toprovide a framework to help you evaluate how tech providers with differentmodels align with your policies and objectives, and let you decide for yourselfwhich is the best fit.

Let’s lookat how this plays out in some key policy issues:

Security

In this eraof cloud computing, security is crucial from the device to the enterprise level.But security takes time and commitment, and it eats into profits—which is whymany companies cut corners. Other companies, including Microsoft, have implementedISO 27001 security controls and have thoroughly embraced security as anon-negotiable design feature in software and devices.

Privacy

Privacy isanother top concern for citizens and governments. What steps does a vendor taketo protect sensitive financial, health, and other personal data, for example,and are those policies spelled out transparently in its contracts? Microsoftadheres to gold standards such as the European Union’s Data ProtectionDirective, and follows strict guidelines for how data are stored andtransferred. Vendors that collect, analyze, and resell consumer data to thirdparties, or use it to target advertising, may have an incentive to dilute thosestandards.  And in some countries wherethere are stricter privacy laws for specific sectors such as education andhealth, there is a clear tension between the success of the business model andobeying those laws.

Intellectual property rights

Microsofthas a strong business incentive not only to innovate but also to make sure ourinnovations are adopted. That’s why we license our technologies and allow othercompanies to share them with their customers as part of their valueproposition. In turn, we license intellectual property from entrepreneurs andother vendors and include those technologies in our products. Companies builton an ad-revenue model, on the other hand, want to gather user data asinexpensively as possible, so they may lack incentive to advocate as vigorouslyfor strong IP rights.

Proprietary, open source, and mixed source support

Consider the implications ofdifferent licensing and development business models on issues like total costof ownership and interoperability. At Microsoft we’ve structured our licensingagreements to eliminate hidden costs, we support OSS and mixed sourceenvironments, and we’ve demonstrated our commitment to out-of-the-box interoperability.By contrast, a business model based on OSS may mask additional costs becausethe company behind the product makes money from their customers in other ways. Andthe interoperability of OSS varies, depending on the vendor’s support for open,well-documented standards and other contributing factors.

No question,tech procurement is a complex responsibility. You—and your constituents—rightlywant to be sure that taxpayer dollars are spent as judiciously as possible. Followingthe money, and understanding what really drives your suppliers, can make that alot easier, helping you to be certain that their interests align with theinterests of your citizens.

Havea comment or opinion on this post? Let me know @Microsoft_Gov. Or e-mail us at ongovernment@microsoft.com.


Scott F. Selby
Director, Global Government Affairs, Microsoft Legal and Corporate Affairs

About the Author

Scott F. Selby | Director, Global Government Affairs, Microsoft Legal and Corporate Affairs

Scott F. Selby, Ph.D., works with colleagues and governments around the world on policies that foster innovation and effective procurement frameworks. Read More