I just read this blog post referring to a recent study by Microsoft about small businesses using hosted IT services. The study contains a few interesting statistics:

• 40% of companies that used cloud computing services saw a 30% increase in revenue.
• 90% of companies that didn’t use hosted services saw a decrease in revenues.

Those are pretty dramatic numbers. But drawing the conclusion that using hosted IT services or cloud computing makes you profitable would be incorrect. It isn’t the act of using hosted services that makes you more profitable. It is the thinking behind the decision to use hosted services that really makes the difference.

Companies that use hosted services understand two important concepts:

1. Running lean is not the same as being cheap.
2. Any tool that helps you spend more time focusing on your core competency is a good thing to have.

Lean is Not the Same as Cheap

All small businesses should run as lean as possible. You shouldn’t have an office until you need an office. You shouldn’t have a PR firm until you need a PR firm. You shouldn’t have a $10,000 office chair ever.

But running lean isn’t the same as being cheap. Being cheap is stupid and can kill your business.

A cheap organization doesn’t want to pay for anything. They would rather do everything themselves for free. In essence, their time is worth less than their money.

On the other hand, lean and smart organizations understand that time can be just as, or even more valuable, than money. With this in mind they carefully evaluate each new expense based on the following criteria:

• Will this service make us money?
• Will this service save us money?
• Will this service save us enough time that we can better focus on our core competencies?

If the answer is yes to any of the questions above then they purchase the service.

Hosted Services Let You Hire “Specialists” At a Very Affordable Price

The best thing about hosted services is that you get to hire a specialist for each aspect of your business. For example, we currently use Zendesk, Basecamp, Mailchimp and Batchbook among other hosted services.

Now, we like to think that we are a pretty smart group of people here. Could we build our own help desk solution? Probably. Would it be as good as Zendesk? No. Not because we can’t but because we don’t live and breathe “help desk”. We live and breathe “documentation“. That is what we think about all day. How to make it easier to create and distribute software documentation. We’re never going to give “help desk” software the same level of attention that Zendesk does. I know Zendesk is thinking every day about how to make a better help desk. And I get all of the benefits from that which gives me more time to think about how to improve software documentation.

The same applies to project management with Basecamp, email marketing with Mailchimp and CRM solutions with Batchbook.

Another huge plus is that if these services ever go down it is their job to fix it, not mine.

It’s All About the Mindset

Will using hosted services make you more profitable? Maybe. But being lean instead of cheap and focusing on your core strengths will definitely help make you more profitable. For many small businesses, hosted solutions can help in both areas.

Charlie Wood at Moonwatcher has a post asking “Why Doesn’t Apple Face the Innovator’s Dilemma?”. Looking at the success of the iPhone with the Innovator’s Dilemma/Solution outlined in Clayton Christensen’s excellent books doesn’t really tell the story of the iPhone. The Innovator’s Dilemma/Solution is a framework for analyzing market reactions to technology innovation. The idea of the framework is that entrenched market/technology leaders are unable to react to new entrants because the new entrants are able to innovate not only on technology, but also price and business model. Basically, the theory is, a company can start with a product that is “good enough” in key areas that are important to a certain subset of users. In addition that company will start with a price that is much lower than the entrenched market leaders are willing to charge because of their business model. The new entrant peels off the lowest tier of the market (those who are most price sensitive and who don’t need all of the “features” of the market leaders) and then eventually improves their product, gradually taking more and more customers away from the market leader.

This framework works great for analyzing many market successes and failures. Christensen specifically looks at the hard drive and steel mill industries. But it doesn’t really describe what Apple has done with the iPhone. First, while Apple is innovating the business model for mobile phones (they get a piece of the service agreement), they certainly aren’t innovating by creating a lower price. That seems to be a key component of Christensen’s framework. Also, Christensen talks about new companies targeting “over served” customers. That doesn’t really seem to be the case with the iPhone either. People aren’t buying the iPhone because their current phone did too much. For most people it is because their phone didn’t do nearly enough things that were actually useful.

??????

A better framework to use when analyzing Apple’s success with the iPhone is the Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne. To sum up, the Blue Ocean Strategy is all about eliminating competitors by creating a product that has no direct competition. When you think about it, you are either in the market for an iPhone, a smart phone or a mobile phone. They are three separate categories. That is the key. I don’t ask myself if I want a Blackberry, a Treo or an iPhone. I ask myself if I want an iPhone or not. If the answer is no then I will decide if I want a Blackberry, Treo or Windows Mobile device.

The iPhone has no direct competitors. How did Apple do this? They did exactly what Chan and Mouborgne describe in Blue Ocean: they combined aspects from several different product types to create a new product class. When you have a new product class you have no direct competition. This gives you the “Blue Ocean” to swim in where you have broad pricing control and little influence from competitors. Apple has always followed this strategy. I don’t decide if I am buying a Mac, a Dell or an HP. I ask myself, am I buying a Mac or not? If the answer is no then I move onto Dell or HP or one of the many other PC manufacturers swimming in the red ocean.

The iPhone combines: - The tight integration of iTunes/iPod - A nearly fully functional mobile web browser - The most important features of a mobile phone - The most important features of a smart phone (email, calendar, etc.)

What they basically did was combine a few features from a desktop computer with those of a smart phone. So, while the phone features may not be extremely robust (no voice dialing, etc.) I, as a user am willing to sacrifice that because of the “closer to desktop” experience I get when using the iPhone.

In Blue Ocean, Chen and Mauborgne compare Cirque de Soleil to traditional circuses. People don’t decide if they are going to the circus or to Cirque de Soleil. They are either going to Cirque de Soleil or they aren’t. That seems like a better comparison to what is happening with the iPhone and other mobile phone manufacturers.

Will this situation last forever? No. Other manufacturers will start to make products that more directly compete with the iPhone. Then the Innovator’s Dilemma/Solution will come into play. But until then, Apple is free to swim in the Blue Ocean it has created with the iPhone.