“However beautiful the strategy, you should occasionally look at the results.”
Michael Porter’s famous Five Forces Model, shown below, is the basis for our review of the OSS industry today.
The five forces are:
Threat of new entrants:
- There are a large number of incumbent providers of OSS solutions and the market is fragmented
- Some of the world’s biggest ICT tech provider companies provide OSS solutions, so brand equity can be strong. Conversely there are OSS providers with much less brand equity
- Solutions tend to be complex, so capital requirements tend to be high
- Solutions tend to be sticky, meaning that switching costs are high for customers
- Customer loyalty varies on a case-by-case basis, although there are customers aligned with established brands
- Sales cycles tend to be lengthy, so working capital requirements and cost of sale tend to be high
These attributes all point towards an industry where there are strong barriers to entry. The down-side for vendors is that as great as current OSS are, they still have so much room for improvement. This leaves them open to disruptive technologies and / or business models removing many of the aforementioned barriers to new entrants.
Threat of Substitute Products
- Every vendor’s product sets vary substantially from every other vendor’s. TMF’s Application Frameworx (a.k.a. TAM) has made an attempt to standardise applications and functionality sets. However, there is still vast differences in TAM coverage mapping between vendors
- This leads to a perceived level of product differentiation
- Transformation from one vendor to another introduces significant switching costs because of data mapping, integration changes, process change, etc (ie a transformation tax)
Despite these barriers to substitute products / services, vendors often compete in a functionality arms race. However, most OSS customers will only need to use a common sub-set of functionality (eg a CSP will usually only need to use 20% of a product’s total features or less, which will generally be common across all vendors). So, whilst there are no direct substitutes, there are still a number of viable substitutes.
Note that except for the last dot-point, which makes vendor substitution a major undertaking, there are normally multiple alternatives that can meet the customer’s main needs. There are two main phases to consider.
- During vendor selection, viable alternatives will normally exist so there is a threat of substitution
- After implementation, the threat of substitution diminishes significantly due to the transformation tax discussed above
Bargaining Power of Customers
- During vendor selection, the customer has strong buying power
- After implementation, the customer has much less leverage
- Pricing models differ significantly between vendors, so it is often difficult to estimate real cost comparisons
- Projects tend to have relatively high implementation costs and there are relatively few new OSS projects implemented by customers in a given timeframe so there is fierce competition amongst vendors in most cases
- With disruptive technological change forcing revenue mark-downs across many CSPs around the world, these customers tend to have an increasing sensitivity to price
Bargaining power differs significantly depending on which phase (vendor selection or post-implementation), so customers should endeavour to negotiate contracts that consider post-implementation change when their negotiation position is at its strongest (ie the initial vendor selection stage).
Bargaining power of suppliers
- With no direct substitutes, each supplier has distinct uniqueness to bargain with
- On a multi-domain OSS implementation, the customer’s required TAM functionality coverage will normally produce a very small short-list of suitable suppliers
- Incumbent status can give suppliers great bargaining power because of the aforementioned transformation tax
- Equipment vendors can leverage strength in their distribution channel when bidding on network and service management projects
Product and associated service uniqueness can given vendors strong bargaining power although the relative rarity of customer contracts and their relatively high revenues (especially over the term of a product’s life, which can be measured in many years) mean that customers will tend to hold more bargaining power than suppliers during the vendor selection stage. This position of strength reverts to the supplier when they hold a position of incumbency.
- There are fierce competitive rivalries in the OSS industry because there are relatively few available customer contracts and products tend to remain very “sticky” once selected (ie they’re difficult to remove even if the customer wants to due to the transformation tax)
- There are many different levels of competing companies ranging from some of the largest technology companies in the world by market capitalisation through to open-source products developed by community contribution
- Whilst advertising expenses might not be directly attributable to OSS business units, cost of sale can often be quite large
The level of rivalry is likely to increase further in coming years are major IT players such as Amazon, Dell and many others offer software defined networking and cloud services that need management and orchestration. These new players are not inhibited by legacy OSS concepts or sunk intellectual property and other costs.Read the Passionate About OSS Blog for more or Subscribe to the Passionate About OSS Blog by Email