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Microsoft in Government

Why business models matter

21 August 2013 | Scott F. Selby, Director, Global Government Affairs, Microsoft Legal and Corporate Affairs

In my last few posts (It’s a mixed source world and A fresh approach to tech procurement), I talked about various strategies for sourcing the right tech solutions to help you meet your goals cost-effectively. Today, I want to introduce one more critical factor to consider in the procurement process: the business models of your potential tech providers.

To understand the basic differences among the prevalent models, just follow the money.

  • Some companies, like Microsoft, generate revenue primarily by selling software, services, and devices to individuals and organizations. This model is based on clear transactions between the supplier and 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 source software, then make money on the back end through consulting fees and the customization that may be required to tailor their products to your specific needs or to make them interoperable with your other systems.
  • Other companies profit by providing free online services that fuel advertising sales. Their approach relies on massive data acquisition—they accumulate as much data as possible about consumers in order to better target and sell advertising. In this model, the company’s real customers are advertisers, not the end users of the software or services.

These distinctions may initially seem tangential to the public official or project manager whose bottom line is finding the best solution at the best price. But it’s important to weigh the motivations driving companies in the tech sector because those motivations can affect the results the public sector gets out of the relationship.

My goal here is not to say that one business model is better than another. Rather, I want to provide a framework to help you evaluate how tech providers with different models align with your policies and objectives, and let you decide for yourself which is the best fit.

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

Security

In this era of 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 why many companies cut corners. Other companies, including Microsoft, have implemented ISO 27001 security controls and have thoroughly embraced security as a non-negotiable design feature in software and devices.

Privacy

Privacy is another top concern for citizens and governments. What steps does a vendor take to protect sensitive financial, health, and other personal data, for example, and are those policies spelled out transparently in its contracts? Microsoft adheres to gold standards such as the European Union’s Data Protection Directive, and follows strict guidelines for how data are stored and transferred. Vendors that collect, analyze, and resell consumer data to third parties, or use it to target advertising, may have an incentive to dilute those standards.  And in some countries where there are stricter privacy laws for specific sectors such as education and health, there is a clear tension between the success of the business model and obeying those laws.

Intellectual property rights

Microsoft has a strong business incentive not only to innovate but also to make sure our innovations are adopted. That’s why we license our technologies and allow other companies to share them with their customers as part of their value proposition. In turn, we license intellectual property from entrepreneurs and other vendors and include those technologies in our products. Companies built on an ad-revenue model, on the other hand, want to gather user data as inexpensively as possible, so they may lack incentive to advocate as vigorously for strong IP rights.

Proprietary, open source, and mixed source support

Consider the implications of different licensing and development business models on issues like total cost of ownership and interoperability. At Microsoft we’ve structured our licensing agreements to eliminate hidden costs, we support OSS and mixed source environments, and we’ve demonstrated our commitment to out-of-the-box interoperability. By contrast, a business model based on OSS may mask additional costs because the company behind the product makes money from their customers in other ways. And the 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—rightly want to be sure that taxpayer dollars are spent as judiciously as possible. Following the money, and understanding what really drives your suppliers, can make that a lot easier, helping you to be certain that their interests align with the interests of your citizens.

Have a 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

Microsoft on Government Blog posts

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