Over next couple of posts, I would like to explore the subject of extracting value from innovation in IT services industry. I believe this is an extremely interesting problem.
In summary:
Unlike pharmaceuticals, biotech, microelectronics, chemicals; IT Services industry structure provides a “weak” appropriability regime for innovation. Patents, copyrights, secrecy etc. do not provide effective models to protect innovation from imitation by clients, competition and/or software application vendors.
In addition IT services firms rarely possess any “special” synergistic superior complementary assets for extracting value, rather it's salesforce that is "partner-led" or high touch account managers have very limited reach and associated overhead costs makes wider selling & marketing very costly & difficult.
Obviously I am ignoring innovations where value extraction can be achieved by spinning of subsidiaries, selling or licensing the innovation. In most cases R&D and innovation plays a critical role of signaling superior capabilities to prospective and current clients, thus playing a critical role in “premium rate justification”
Hence in general I believe IT services firms will move towards an “open innovation” paradigm by leveraging open source based business models to extract value out of technology innovations.
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