Software is the New On Base Percentage

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One of the most common misperceptions about Michael Lewis’ book Moneyball is that it’s a book about baseball. In reality, sport is just the backdrop for a story about the search for inefficiencies in a given market. With an asymmetric appreciation for an asset’s value, Billy Beane’s Oakland A’s were able to outperform their payroll because they had to spend less than their competitors. It is, in other words, a book about the search for a competitive advantage.

For decades, baseball teams were built on the idea that batting average was a metric that accurately reflected ability. But given that the most important thing a hitter can do is not make an out, Bill James, among others, was one of the first to challenge this orthodoxy as early as the 1970’s. His view was that batting average was a narrow metric, less important, in fact, than on base percentage (OBP). A metric which reflects nothing more or less than a hitter’s ability to not make an out.

Thirty years after Bill James’ research was published, this simple idea was still considered revolutionary. Which was why it constituted a major competitive advantage for the Moneyball era A’s. With the value of on base percentage not widely understood, Oakland could acquire on base skills for pennies on the dollar, and thus construct their roster more efficiently than competitors.

A decade later, and virtually every club understands the importance of OBP. And with the skill now properly valued, it no longer represents a competitive advantage for clubs. Today, as the New York Times documents, baseball is an industry that’s in constant search for the new OBP, a new competitive edge, a new asymmetrically understood and appreciated skill.

In many respects, software is the new OBP.

Time was that software represented a competitive advantage. The first CRM implementers, for example, could reasonably expect to sell and service their customers better than competitors who’d strayed from their core competencies to build and maintain their own homegrown systems. Today, the penetration of packaged CRM implementations make it extremely unlikely that they will in any way be competitively differentiating. When everyone has Salesforce, what’s the competitive advantage to Salesforce usage? Even more recent technical developments such as Hadoop represent less of a competitive advantage than the people who run them, because their open source nature makes accessibility symmetrical. From CRM to ERP to operating systems to web servers to relational databases to virtualization, there are fewer and fewer software categories that offer a true competitive advantage.

The technology industry is a lot like major league baseball circa 2000: it shares widely held, but fundamentally incorrect, ideas about valuation. Vendors and buyers alike, for example, behave as if software were a competitive advantage, when this is only rarely the case. As GitHub’s Tom Preston-Werner writes, there are pieces of software that represent “core business value,” and these are assets worth seeking and protecting. But those are, in general, a fraction of an organization’s overall software investments. Most software simply does not represent a competitive advantage. Attitudes towards the value of software appear to be roughly generational in nature, as we’ve seen, but with a half trillion dollar industry built on assertions and assumptions of software’s value, the conventional wisdom is unlikely to change materially in the near future.

Like OBP, software is a necessary component to every organization. And like OBP, it is in most cases no longer a differentiator.

One comment

  1. […] O’Grady has a piece today, Software is the New On Base Percentage, which proposes that effective use of software is no longer a way for a business to gain a […]

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