Mark Tauschek, VP, Distinguished Analyst & Research Fellow, Info-Tech Research Group.
In today’s fast-paced technology world, organizations waste millions of dollars evaluating products that no longer offer meaningful differentiation.
The concept of hyper-change, characterized by the exponential advancement of technology, is driving rapid commoditization in technology markets. Moore’s law led to the law of accelerating returns, which naturally evolved into hyper-change. This means the life cycle from innovation to commodity in most mainstream technology markets is rapidly shrinking. Examples abound from the past 20 years, including cloud computing, smartphones and countless applications.
Implications Of Rapid Commoditization In Technology Markets
This phenomenon makes procurement practices in most organizations look archaic, resulting in wasted time and effort evaluating products in commoditized markets where differentiation is negligible. Big RFPs with every requirement imaginable that don’t elicit responses from vendors, long evaluation processes that don’t engage vendors and a lack of vendor management lead to wasted time and effort. This problem costs organizations a significant amount of money.
For IT leaders, this rapid commoditization means spending an inordinate amount of time and resources evaluating and procuring technology solutions that have become or are rapidly becoming commodities. The time wasted comparing features and functionality in commoditized markets can be measured in person-years in many organizations. For vendors, it means innovative products in markets that not long ago took years to reach commodity are now being commoditized in months.
Historical Context And Exceptions
Commoditization of technology markets is not a new concept. Nicholas Carr’s 2003 Harvard Business Review article, “IT Doesn’t Matter,” hypothesized that the transformation of IT into a commodity would lead to further consolidation of many sectors of the IT industry. While IT as an organizational function has continued to matter and can be a differentiator, many technologies and technology services have become commoditized.
However, there are exceptions. Some markets move from nascent to commodity or oligopoly almost overnight, such as consumer or end-user GenAI. High-barrier markets like cloud IaaS, private enterprise LLM GenAI and enterprise ERP and CRM suites tend to skip commoditization and move directly to oligopoly.
Identify Commodity Markets
Identifying commodity markets quickly is crucial. Technology markets tend to move through six definable stages, progressing from nascent to features arms race to feature parity to consolidation, then commoditization and, finally, oligopoly.
For example, consumer end-user GenAI moved from nascent to commoditized almost immediately after ChatGPT 3.5 was released for free in November 2022. It had the fastest adoption of any technology at the time, gaining 100 million users in just two months. When ChatGPT 4.0 was released in March 2023 with a $20 monthly subscription, Google Bard (now Gemini) and Anthropic Claude were released the same month for free.
On the other hand, enterprise mobility management moved through the phases almost like clockwork and will likely remain commoditized due to the Microsoft effect.
Understanding The Microsoft Effect
Microsoft’s entry into new markets can profoundly change the dynamic and accelerate markets to commoditization and oligopoly. Its bundling strategy outprices and outsimplifies competitors. Taking an iterative product approach allows it to very quickly match competitors’ features when it enters a market. Getting the product to market quickly and then rapidly improving it and adding features allows Microsoft to see what the market wants and needs and then feed that back into product development.
For example, in 1996, Netscape Navigator’s browser usage share was over 80%, while the share of Microsoft’s Internet Explorer was less than 10%. Internet Explorer was then integrated into the Windows operating system, and by the end of 2000, its usage share ballooned to 84%.
It took about four years for Microsoft to become dominant in the browser market, and for many products, the time-to-market shifting is shrinking. If you think about Hyper-V, Azure, Intune or Teams, the strategy of bundling and iterating quickly changes the dynamic of the respective markets.
Adapt Procurement Processes
Many IT leaders and procurement processes haven’t yet adapted to hyper-change and rapid commoditization when evaluating technology markets. It’s possible to categorize technology markets based on product life cycle and market behavior, but most organizations have dated product selection and procurement processes. Many tend to view every product in every market as differentiated, making it a challenge to evaluate broader markets and technology landscapes to identify markets moving to commoditization.
This makes selecting technology solutions a painful experience. Take these three steps to move toward a more nimble and abbreviated procurement process:
• Change your procurement process—from product identification to evaluation to selection to purchasing. It will be necessary to work closely with procurement and finance to adapt processes to a changing technology market.
• Using a standard market evaluation process, IT leaders can save time and resources by changing the way they evaluate products in markets that are rapidly becoming commoditized.
• Quickly identify where a technology market is in the race to commoditization.
Adopt Vendor Management
Developing a vendor management initiative is crucial in an exponential world. Communicating the impact of hyper-change on technology markets can be tricky, but a vendor management initiative that formalizes the five vendor management pillars (financial management, relationship management, performance management, risk management and contract management) is essential. Understanding and managing vendor risk, managing costs, negotiating effectively and monitoring vendor performance are all critical components of this initiative.
Conclusion
To avoid falling behind, IT leaders must streamline procurement processes, develop a proactive vendor management strategy and regularly reassess the market landscape. Historical procurement practices don’t work in an exponential world. A proper vendor management practice is key to navigating the rapid commoditization in technology markets. Leveraging proven methodologies to reduce the selection and purchasing life cycle, as well as rethinking purchasing decisions in markets moving to commodity, are essential steps for IT leaders.
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