Friday, February 16, 2007

The Long Tail of IT Spend

'The Long Tail' is a 'power law of distribution' used by statisticians to define a expanding market (in any given discipline that is) in terms of the economic and business model of the market. In fact the phrase 'The Long Tail' was coined by Chris Anderson (editor-in-chief) of wired magazine. In simple terms the long tail can be explained with a graph as follows:

This graph compares the total average IT spending of organizations of differing organizational sizes. Notice that the graph has a 'Big Head' with high amplitude but is immediately followed by 'The Long Tail' of lower amplitude (or spending) organizations. Though this graph is not 'explicit' in denoting that given the universe of discourse of all organizations which spends on IT, The top IT spending organizations ('The Big Head' of the curve) will still fall short of the collective 'volume' of IT spend that occurs on The Long Tail. This is seemingly true because the 'number' of organizations with a high IT spend are relatively (significantly) smaller than the overall 'number' of organizations who are spending on IT. In short, the spend volume of small number of high-spend companies is lower than the spend volume of large numbers of low-spend companies (huh).

This theory holds true in other areas as well. Ex. The Amazon business models. Amazon as a service provider over the internet can cater to this long tail of business easily compared to the brick-and-mortar bookstores such as barnes and nobel or borders. The 'easiness' comes by the virtue of offering the 'book store service' over the internet. As amazon does not have to maintain in-store inventory, it can almost have a large warehouse of 'all' kinds of books and deliver it directly (probably from the factory warehouse in some cases) to the consumer. The 'Top Sellers' which are relatively few in number makes the big head, compared to the rest of the non-top-sellers which makes up the Long Tail. In 2005, 50+ percent of Amazon revenues came from the Long Tail. The last I checked (in 2007) this number was at 25+% (percentages are deceiving in the way you read them).

Here is another graph that explains the long tail of music industry that depicts the average number of plays per month for music available in Walmart and Rhapsody.

Coming back to the point of the Long Tail on IT spend, there seems to be a burning question (mostly as i see it) that needs to be answered about

"identifying business models that can be considered to solve the reduction in costs of IT operations in any enterprise (whether its part of the Big Head or the Long Tail)."

Before answering that question, its worth taking a brief look at the SMB (Small and Medium business thats part of the long tail) market which makes up the IT Spend accounting to 150B$ (Yes thats estimated at 150 Billion Dollars as per IDC).

Its also worth reading the article titled 'The IT Market’s $150B SMB Long Tail', published by Frank Gens who is a senior VP of research at IDC.

Seemingly, both in the above article and also mostly elsewhere the answer to the question seems to lie in SaaS (Software as a Service). But can SaaS really answer the question to cater to the SMB long tail?... It remains to be hypothesized...

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