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Internet Centric Business Modeling: The Power of Virtualization

Posted on November 20, 2010 | Filed in Articles

Often, when making a pitch to a prospective client for web services, the question of where one’s offices are located tends to surface. Usually, the prospective client is attempting to ascertain whether a company is real and stable or a start-up that may or may not exist the next year.

While the question is legitimate, it has no real relevance when applied to a web services firm. For example, for a business in London or New York, all that an office with a certain number of workers at a particular location indicates is that a company is carrying what appears to be a substantial overhead. And that a large amount of client facing business is conducted from the location under consideration.

In certain situations, we mistake people for employees. Take a real estate company for example. Most employees in a real estate company are freelance and do not get any payouts unless they make a sale. So does having a large number of people at one location indicate anything? Actually in the case of real estate agents, only a company with a large number of listings would consider having a large roster of agents. So in certain situations, maybe having a large number of agents does serve as some indicator to a company’s size and success.

But in other service sector industries the more employees one sees at an office location, the more you can be assured are the overheads for the company. It is also a certainty that the cost is being passed on to the consumer.

In the networked world today, having a large office and large overheads is a bad idea and unless absolutely necessary, is a sure path out of profitability and existence. The reason is that there is someone out there who is competing with you and operating with a smaller cost structure than you are. And if this competitor’s quality of service is equal to or better than your services, how can you compete?

Enter Virtualization
A few years ago, a software development company that wished to maintain a few different servers running different operating systems for testing or deployment purposes, had to invest in multiple servers. With the advent of virtualization software, most notably from VMware, where one powerful server running virtualization software can emulate the services and operating environments of multiple discrete systems simultaneously, companies now had a cost saving tool that produced immediate results. And without any downside.

This concept of virtualization can be expanded to create highly nimble companies that supply niche services. For example, one can create a virtualized company with small sales forces in key cities and back-office operations in countries like Ukraine or India. Depending on the skills required to accomplish tasks, talent can be located anywhere. While using Ukraine or India as an example is probably obvious for reducing manpower costs, having a talented programmer or graphic artist anywhere in the USA as a virtual part of a company is a very real and worthwhile idea. Often having access to the right talent is worth more than the cost savings.

To unify geographically dispersed teams, all that is really required is a unified communication and knowledge sharing mechanism. This can be achieved by VoIP phones that allow one to network people all across the world onto a single phone system. For example extension 100 may be for a project manager in California and extension 101 may be a network engineer in Belgium and 102 may be a programming team in India. All of this is easily done these days (For example check out products from Talkswitch or Packet 8 or Fonality). In addition, having a few shared corporate resources like a centralized project management software system, a file sharing system, several staging servers and a corporate email and messaging system make such an arrangement as effective as a traditional brick and mortar company.

In reality, this arrangement reduces costs, increases productivity by reducing commute times, ensures productivity round the clock exploiting different time zones, reduces manpower costs and also gives employees more time for themselves by not having to visit an office everyday.

More importantly it brings the best global talent to an employer.

Virtualization is also a very practical solution. Today web services is a huge and very fragmented field with a considerable amount of new technologies on the verge of branching out into a distinct category of service such as mobile applications. A web services company may get a few mobile application development orders in a year. These orders may be on different mobile phone platforms such as the Android and the iPhone that require specialized expertise.

The volumes of such orders may not justify retaining a full-time staff. In this situation a contract employee is the best bet and easily accomplished with a virtualized communications setup which enables a company to make a number of niche alliances with individuals with specialized skills without the overhead.

The bottom line of such a setup is reduced cost to the consumer. A virtualized company can be 1/3rd the cost of traditional companies who often tend to lose their employees to other companies or just downsize and let people go. The people who tend to suffer the greatest are customers who depend on services rendered by these companies and are usually left with systems that are unmanageable.

Virtualized companies are ideal towards highly professional services such as high tech and programming services where niche talent plays a key role in accomplishing a task. This method of work opens up a global talent pool that otherwise may have been restricted to a geographical location. While the role of traditional brick and mortar office setups cannot be totally replaced, the future will see a substantial chunk of market share being taken away from these companies by nimbler counterparts.

All things being equal such as the quality of the service, the only thing that matters in the end is price. And that’s a fact.