“Under the Buzz”

Insights into B2B Net Markets

November 2000 - Vol. 1, Number 7

Under the Buzz is an electronic “viewsletter” authored by Philip Lay, managing director at the
Chasm Group, a Silicon Valley strategy consulting firm. It is published each month, and
delivered free to subscribers via e-mail. It is also posted on the Chasm Group website at:
http://www.chasmgroup.com. Back issues can be downloaded from the site at:
http://www.chasmgroup.com/underthebuzz_archives.htm.

In this month’s issue:

1. Core vs. Context: Crafting Service Level Agreements for the Internet Era
2. Critical Success Factors: Strategic Alignment in Internet Startups

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Preface: This issue is dedicated to key management priorities associated with succeeding in the
new economic environment. From time to time, we shall focus on similar challenges.

1. Core vs. Context: Crafting Service Level Agreements for the Internet Era

One of the key themes in Living on the Fault Line, the new book authored by my colleague
Geoffrey Moore, is one referred to as “Core versus Context”. The book addresses challenges
faced by businesses that have to deal with disruptive change equivalent to shifts in the earth’s
surface, hence the “Fault Line” metaphor. Companies not experiencing any level of disruptive
change to their business model or technology platforms can probably ignore the lessons contained
in this book – though the number of organizations in this category are few and far between in
today’s internet-impacted economy.

The basic definition of core vs. context is simple. Activities that differentiate the company in the
marketplace are defined as core. All other activities, including many mission-critical operations,
are context. Context tasks and projects steal precious resources - time, talent, and management
attention - from core. In order to be sure of allocating these scarce resources where they count
most (i.e., building dominant or leading share in target markets) plentiful resources such as
capital (including stock), software packages, and outsourced service providers, should be
consumed in essential context activities. The internet now provides us with a platform on which a
huge number of companies are able to offer cost-effective services. Thus, operations that are
context for one company are core for another company, and can be outsourced to the latter. As
you will see toward the end of this section, this new model provides B2B service providers with a
powerful marketing argument to promote their services.

Continuing the definition of core - as opposed to context - operations, on the market-facing side,
core activities focus on differentiating the company in its primary target markets, where the
objective is to achieve market leadership - preferably becoming number one or two in its
category. Thus, market development activities that fall under the definition of context might

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include efforts in primary markets where your company cannot achieve any leading market share,
or alternatively marketing, sales and support in secondary or maturing markets, where business is
more opportunistic, growth is slower, and there is limited reward for your efforts to differentiate.

Inside organizations, context activities include core tasks that are surrounded by context
behaviors, such as strategic decision-making that is hindered by turf battles, decisions being
constantly revisited, excessive concern for the welfare of the “inmates” over that of customers,
and so on. Besides these activities, operations that were recently defined (correctly) as core, may
now have become context. A good example in IT might be client-server ERP applications,
email/messaging systems, and HR-focused programs. Early users of these applications may have
rightfully claimed some measurable competitive differentiation by deploying them before their
competitors. A good example of this might be ERP in the early nineties, when the first
multinational corporations to use ERP to consolidate financial results worldwide increased their
profitability faster than their competitors. Nowadays, the picture has changed, as virtually every
major and mid-size company has implemented some form of ERP. Though still critically
important to the company’s smooth functioning, who could state that such applications continue
to produce competitive advantage for the company, in terms of superior profitability?

Therefore, all the Time, IT Talent and Management Attention allocated to implementing and
maintaining the ERP system means that these same precious resources are not focused on core
projects, such as a new e-commerce marketplace aimed at increasing the company’s sales and
profits. The key lesson here is that just because it’s mission-critical, it doesn’t mean we should
be managing or performing the task ourselves. On the contrary, today our first instinct should be
to find a way to have an external provider take care of it. Then, only if this is clearly not possible,
should we revert to managing it ourselves.

When you decide that your organization must shed a given context task or activity, you
essentially have four main options: (a) de-activate the activity, (b) spin it out or sell it, (c) partner
with a third party in a joint venture, and (d) outsource it. Assuming you have determined that de-
activation or spin-out is not the right solution, you face one of the last two options. Partnering
and outsourcing are not identical. In the former case, you have to allocate your own management
attention, alongside that of your partner, to make sure that the task is executed satisfactorily.
Outsourcing, as defined within the core versus context framework, is quite different: it requires
that you hand over to the outsource service provider the full responsibility for resolving the
problem, within clearly defined service management guidelines.

Old Outsourcing

Unfortunately for many companies, the brand of outsourcing practiced during the past fifteen
years or so, since the “O” word first entered our business vernacular, has had a checkered record.
It began as a cost-savings mechanism, in which companies sought to hand a “hot potato” task or
application to a willing third party. A good example of this was large corporations outsourcing
their data centers and mainframe applications to firms such as EDS, in long-term arrangements
spanning up to ten years. Years later, the same corporate customer might discover that their
mission-critical application was not being adequately enhanced, and they then stripped it from the
contract, leaving EDS to run the data center. In this situation, core (new mission-critical
applications) was outsourced along with context (data center operations), which set up a win/lose
dynamic if/when EDS was unable to maintain the desired level of enhancements to the critical
application.

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Another example, this time regarding the outsourcing of core processes or tasks – which
according to this new definition is a mistake – was the massive outsourcing of sales tasks that
started in the early eighties, principally in high-tech businesses. Conventional wisdom from the
mainframe and minicomputer eras regarding the importance of managing your own relationships
with large corporate customers was overturned, and executives aggressively questioned the “cost”
of every sales call. The new PC hardware and software vendors were among the first to
outsource virtually all their sales activities to specialized channel partners. Years later, some
companies, including many shrink-wrapped software companies, took this a stage further, relying
on indirect channels for most of their revenues.

Among major hardware vendors, HP took this even further, eventually becoming so distanced
from its customers that when Sun and IBM decided to make their assaults on HP’s Unix server
market stronghold among large enterprises, HP soon lost precious ground with key customers.
Today, Sun has supplanted HP as the de facto market leader in Unix servers for mission-critical
applications in large corporations, especially when viewed in terms of revenue growth – so much
so, that Sun’s sales growth today is more than three times that of HP. The lesson of this
experience: outsourcing core is a high-risk strategy that can lose you your leadership position in a
heartbeat – and it is almost impossible to regain positive momentum in such cases.

New Outsourcing

In today’s outsourcing model, companies must make it work, because of the scarcity of time,
talent, and management attention – the new factors that unbalance the former cost-focused
equation. Besides making sure that customer and provider reach a clear understanding of the
business issues driving this decision, a flexible transition process must be built in to allow the
outsource provider to customize their service around the application or business problem. The
service agreement corresponding to this process should accurately reflect these arrangements and,
in particular, the customer’s and the provider’s mutually agreed expectations regarding
performance requirements and commitments. Furthermore, companies need to invest in service-
level agreement (SLA) technology and know-how. In short, this means that (a) managers must be
trained in negotiating approaches and service management techniques oriented by a focus on
value rather than pure cost, and (b) companies should invest in automating the various service-
level arrangements in applications such as ERP, CRM, travel expense management, HRMS, and
operations such as desktop back-up, remote access, customer support, and version management,
so that human resources can cope with the task of managing escalating numbers of SLA
agreements.

Today you can also delegate a number of your IT SLA arrangements to a third party ASP or BSP
“aggregator”, of which Jamcracker(*) is just one example. Founded in mid-1999 by K.B.
Chandrasekhar - who also founded Exodus Communications, the internet data-center operations
outsourcer - Jamcracker’s system permits customers to centralize all their ASP services in one
portal with a single sign-on, single level of support, single billing and, essentially, centrally
managed service-level agreements. Other ASP-type organizations and alliances exist, with
similar value propositions.

The main message here is that companies must now elevate outsourcing to the status of strategic,
rather than tactical, activity. In an economy increasingly crowded with entrepreneurial startups,
new alliances, and new business models, if executives continue to regard outsourcing as merely a
cost saver, they are unlikely to deploy it correctly. As a business saver, it deserves a completely
different ranking in management’s order of priorities. For this very reason, our advice is to avoid
“SLA light-weights” among service providers, and instead qualify providers based on their ability

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to (a) understand your strategic business imperatives and (b) commit to the desired levels of
service performance. Examples of “SLA lightweights” can be found especially in unprofitable or
otherwise problematic sectors, such as ISP’s and other under-equipped web hosting services. In
these sectors, SLA commitments in practice are generally slanted toward the provider’s
limitations as opposed to the customer’s requirements. More than any other consideration, the
critical nature of outsourcing in today’s environment requires that customers and service
providers work together to ensure delivery of value beyond mere cost savings, and this in turn
demands a new, collaborative type of approach by both sides.

Core vs. Context as Powerful Arguments to Support Your Sales Activities

Still unsure about the role of core vs. context in your market development efforts? Well, if you
want to separate your company from the herd and become a trusted, thought-leading ASP
provider, I suggest you initiate dialogues with your prospects around the activities they consider
core vs. context, and seek to help them manage their IT operations with the effectiveness
demanded by today’s economy. Here are a few specific hints:

(1) Ask them to assess the ratio of core versus context IT operations in their organization
(2) Challenge them to identify their 5-10 main applications, isolate the core project that is
critical to their success, and finally name the 1-3 applications that hog resources that
should be going to the core project.
(3) Help them to develop an action plan to outsource the resource hogs, in order to enable
them to focus on their core project.

With that, I wish you successful selling!

(*) By way of full disclosure, Jamcracker is a client of The Chasm Group.

2. Critical Success Factors: Strategic Alignment in Internet Startups

What are the “three biggest lies” told by high-tech executives, when discussing their company’s
key strengths? According to an executive at one of our recent workshops, they are:

1. We have data
2. We have a strategy
3. We are aligned

With respect to data, it is common knowledge that high-tech markets are characterized by a lack
of reliable, precise data about market potential, customer requirements, and so on. Strategy is a
much-abused term for the brand of near-term, somewhat improvised market development tactics
employed by many high-tech organizations. And, finally, alignment around the company’s vision
and strategy is often assumed, though generally much less complete than it needs to be.

Working with over twenty young B2B-focused companies during the past twelve months, I have
seen a clear pattern developing in my discussions with executive teams. Naturally, market
valuation, competitive advantage and market development strategy are among the initial topics,
because these are our specialty and it is the reason why clients call us. Nonetheless, in every
single case, once we have begun to address business problems, sensitivities and issues around
strategy and alignment begin to surface. Shared visions appear not to be so shared, after all.
Strategy turns out to mean tactics, and all activity is hyper. This is not surprising. After all, since

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we are all on “internet time”, which of us has time to pause five minutes in order to discuss
strategy, much less to figure out if the executive team is really aligned around the company’s
vision? Internet startup executives are so convinced that everything must happen “now”, that
they sometimes appear to feel guilty – and somewhat surprised – that thoughtful discussions
around philosophy, vision, and strategy should even be necessary.

Five Strategic Vulnerabilities

Besides the challenge of whether a company can compete in the marketplace with a compelling
technology or business innovation - or other clearly differentiated offer – there are several
“internal strategy” issues that I encounter every day with my e-business clients. Here is my list of
their five major organizational challenges:

1. “You’re either quick, or you’re dead”: In my view, it all starts with the helter-skelter
approach to growing the company. Ever since the Netscape experience - which
encouraged many entrepreneurs and even investors to believe in instant markets, instant
brand, and eventual revenues – an acute instant-gratification mentality has afflicted the
marketplace. Due to the perceived need to grow unnaturally fast or else lose out to
faster-moving competitors in the B2B land grab, internet companies have been at the
forefront of a high-risk experiment in what I term inorganic growth. This begins with the
race to hire the most qualified and experienced managers and professionals at any cost.
Usually, the founders assume that these seasoned recruits will “hit the ground running”,
and for a while the ensuing chaos can feel like one big, exciting party. Executives have
even eschewed strategic management in favor of frenetic activity, as a way of driving the
business. However, since the organization is normally still in its infancy, basic policies,
procedures, and infrastructure are generally lacking, and the fun soon wears off, leaving
recent recruits disorientated.

2. Unshared vision: Founders assume that everyone in the company buys into the vision,
though before long if they are not careful to keep communicating changes and
developments, everyone else begins to think the opposite. When the company consists of
just five people, it’s not difficult to have a vision shared by the whole team. Pretty soon,
however, there are fifty, then five hundred people in the organization. Although the
founders may be under the impression that they are communicating the unfolding vision
and business plan to employees and partners, people can rapidly become disenchanted,
and before you know it internal politics is rife.

3. Inefficient decision-making: Even the most enlightened founders find it difficult to keep
pace with the need to push decisions lower in the organization. For example, in a recent
strategy review with a client company’s executive team, several members expressed
surprise to hear that the two founders thought they were delegating decisions very
effectively! Without realizing that it is happening, the executive team may suddenly find
itself saddled with low-level operational tasks and decisions, while directors, managers,
and others wait for definitions and approvals to critical investments. The net effect of
this problem is to directly impact speed and quality of execution. Everyone loses in this
situation: executives become deflated by a loss of purpose, and other key employees lose
motivation, wondering if they made the right move in joining the company.

4. Customers … what customers? Often, executive teams have become so focused on

“selling” to VC firms and investment bank analysts that they have forgotten that the most
important funding of all comes from customers buying their products and services. In

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 client workshops, when I ask a roomful of executives how many of them interact
proactively with enterprise customers, it is not uncommon for only one or two hands to
go up. What are the other executives doing? Dealing with the Board, talking to
investment bank analysts, hiring new people, marketing to possible service or channel
partners, conducting internal meetings, responding to email – everything but talking to
potential customers! Well, it may be news to some of these executives, but especially
since the April stock market correction this unfashionable form of “funding” has once
again become a critical source for most B2B companies!

5. Wrong organizational model: In the end, it all comes back to poorly conceived
organizational design. B2B organizations tend to be sophisticated in some areas,
primitive in others. On one hand, your typical B2B e-business executive team is well-
staffed with former McKinsey consultants, seasoned CFOs, vertical market “domain
experts”, marketing and branding professionals, and bizdev managers. On the other
hand, teams are often weak in leadership capability, enterprise-level sales management
and relationship development, business consulting, and field technical support.

Now, as we witness an increasingly dramatic meltdown among internet B2C and B2B companies
we need to think about what it’s going to take to keep things together. Naturally, the best tonic in
the world will be continued rapid business growth as a consequence of the exciting innovations
we all expect to see during this period. However, in the short term, companies must get to grips
with the new reality, and start regarding their operations differently.

How to Eliminate the Five Strategic Vulnerabilities

1. “Quick or dead”: Here, I am reminded of the song lyric of the famous song “Feeling
Groovy”: “slow down, you move too fast!” B2B company executives are beginning to
restore a sense of the key differences between enterprise and consumer businesses,
especially recognizing that business-to-business markets develop very much according to
customer adoption patterns, and in line with the required build-out of technology-based
solutions. While inorganic growth may be inevitable for a period, leadership teams must
understand the need to absorb new recruits by providing ramping guidance. The days
when a new CFO, CTO, and VP of sales, and twenty other people join a recent startup on
the same day – as occurred with one of my clients recently - are certainly over.

2. Shared vision: Not surprisingly, the vision that guides the early development of a
startup’s business is subject to modification during the first few years of its existence.
Early customers and their challenging demands even force changes in the product or
service, business model, or organizational profile of the company. Founders, executives,
and board members must keep in touch with all employees to make sure they really do
feel a part of the overall vision. It is also helpful to consult with them on a regular basis,
in order to hear their ideas and feedback about whether the vision is (a) compelling, (b)
relevant, and (c) accurate, set against what they hear from customers, partners, analysts,
and competitors.

3. Decision-making: Among possible weaknesses afflicting high-tech companies, one of

the most debilitating is centralized decision-making. After all, as we have said, it runs
directly counter to the admitted need to move fast. I strongly recommend that the
company’s leadership move to institutionalize varied types of formal meetings, to ensure
rapid and adequate information and decision flow. It is important to note these
characteristics of effective meetings: (i) agenda set ahead of time, but flexible enough to

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 cater for important ad hoc discussions; (ii) spontaneous or rotating chairperson, or guest
facilitator, (iii) no extraneous participants. Without this happening, informal
communications – and political intrigue – swiftly fill the vacuum. Of course, ineffective
meetings have a demoralizing effect on everyone involved. In contrast, I would argue
that good meetings are vital to a company’s success. Good meetings are those where
decisions are made and not revisited, unless absolutely warranted by changing events.

4. Customers … Oh, Them!: Fortunately, today the picture is already changing: B2B
companies that want to have any chance of future success understand that they need to
staff themselves with executives, managers, and professionals who are capable of
developing and conducting complex “B2B” relationships: in other words, they are
learning to refocus on enterprise-level demand creation – i.e., calling on prospective
corporate customers, building a case based on complex business requirements,
customizing their products and services, and pricing their offers based on value rather
than price – thus putting consumer-style demand creation – i.e., mass web-casts, focus
groups, branding, press releases, direct e-mail – in a more appropriate perspective, more
like a support for the main form of business development.

5. Organizational model: Especially in the early stages of market development, make sure
to allocate most of your funds to build out your technology (R&D and engineering), find
customers willing to pay you to help implement early projects, then complete solutions
(sales, professional services, and field support). Product management, product
marketing, marcom, finance, and HR are functions that should probably be managed
leanly in terms of internal resources, and operationally outsourced as and when needed.
Above all, the executive team cannot afford to become so focused on courting VC firms,
investment bank analysts, and board members as to forget their key role – finding,
closing and managing customer-funded projects. If the executives do not set an early
example of active customer engagement, they risk a slow and/or stuttering start to the
business, which can become a pathological problem before too long.

In upcoming issues:

- More Net Market Maker Case Studies Demonstrating Sustainable Liquidity, Leading to Scale
- Key Fulfillment Areas for B2B Commerce: Finance, Supply Chain/Logistics, CRM
- International Operations for Fast-Growing Startups: When and How to Expand Overseas

Under the Buzz offers a monthly commentary on the business-to-business e-commerce sector.
The goal is to provide provocative and accurate insights into the latest events and thinking
shaping the rapidly evolving business-to-business marketplace. Under the Buzz will focus on
developments and competition in digital markets and e-infrastructure.

© 2000, Philip Lay