Any new business should review its business model and look for ways to replace fixed costs with marginal costs. One way to achieve this is to outsource as many functions as possible, which allows you to convert upfront investment into pay as you go monthly charges. Examples of available outsourced services include the online version of QuickBooks, the enterprise version of Gmail, salesforce.com and ADP payroll services, to name just a few. All of these services eliminate the investment in people, overhead, IT and computer support. I think concerns about the security and privacy of data stored on the web are overrated. Most of these companies referenced know more about data security than anybody you are likely to hire. Also, I assume the U.S. government is capturing every voice and data communication in the U.S. (if not the world), so concerns about privacy are somewhat mute.
At this point you are probably thinking that Hacker's outsource model may work for a small business, but not for a fast growing business such as an Internet application or social network. To achieve fast growth, typically the biggest challenge is learning to scale the business whether it be adding stores for a retailer, adding data storage for a website, training staff for a call center or addings POPs for a telecom company. Only 1.7% of startups achieve sales in excess of $5 million by the fifth year. A large part of the reason is that the entrepreneurs can not manage scaling the business.
Increasingly, the inability to manage IT and the related services is becoming a primary reason for the failure to successfully scale. Large customers expect their smaller suppliers to be fully integrated electronically. Customers expect their sales person to have complete information about their order, complaints, disputes, etc. 24/7/365. On top of all this, employees are finding better, free applications on the Internet than their employers make available and are surreptitiously introducing them into the corporate IT environment.
The good news is that Amazon is providing a solution to some of these issues through its Amazon Web Services (AWS) offering which began in 2006. I have been following AWS for awhile and a couple of weeks ago I read in a blog that AWS uses more broadband capacity than the Amazon website for books and merchandise. To use this much broadband capacity, AWS must already be serving a large customer base with large data requirements. Today in a blog called Amazon Web Services they describe a project by AWS for the New York Times. Through AWS the NYT processed "4TB of raw image TIFF data (stored in S3) into 1.1 million finished PDFs in the space of 24 hours at a computation cost of just $240". (TB are terabytes or 1024 gigabytes; huge amounts of data.) I believe this may be part of the recently announced project where the NYT converted its entire historical archive into a searchable, web-accessed database. For AWS to have handled this project, we are talking about serious outsourcing resources.
AWS includes three major services--EC2,S3 and Hadoop (maybe these names make sense to someone more geeky than me :)).
- EC2 provides resizable computing capacity or more specifically "EC2 presents a true virtual computing environment, allowing you to use web service interfaces to requisition machines for use, load them with your custom application environment, manage your network's access permissions, and run your image using as many or few systems as you desire".
- S3 is expandable online storage or more specifically "S3 provides any developer access to the same highly scalable, reliable, fast, inexpensive data storage infrastructure that Amazon uses to run its own global network of web sites".
- Hadoop provides distributed data processing (on a large scale) or more specifically "Hadoop distributes the data and processing across clusters of commonly available computers" for parallel processing.
In summary, through AWS one now can dynamically resize the data, applications and processing resources of their company and pay only the marginal cost for the resources used. Effectively, everything but applications development can be outsourced. Very, very cool!
There is one other important point about strategy that should be noted from the AWS example. In developing a strategy one should focus on using the company's core competencies. Many companies do not do this and many more do not even know what their core competencies are. Amazon ran a large distributed IT infrastructure for many years to support its books and merchandise business. Very few organizations run a bigger infrastructure--maybe Google, NSA and a few others. AWS grew out of Amazon's recognition that they had a core competency in distributed IT infrastructure on a very large scale and there were few potential competitors. Build your business by focusing on your core competencies and when the competency is unique you have something special.
Note: I think AWS is going to be a special company that we should all follow (think Google) and an easy way to do it may be to read their blog.