welcome to the 2009 executive cio roundtable
DESCRIPTION
Welcome to the 2009 Executive CIO Roundtable. Key Points: Overall. Technology spending has collided with current economic conditions as IT organizations have failed to enact agile IT economics. The pressure is on to cut IT. - PowerPoint PPT PresentationTRANSCRIPT
Welcome to the 2009 Executive CIO
Roundtable
2
Fairfield/Westchester SIM’s2008 CIO Executive Leadership Summit
October 28, 2008
Technology Economics and the Current Economic Crisis:
The “IT Bailout” (of Business)Dr. Howard Rubin
CEO Rubin Systems/Rubin WorldwideMIT CISR Research Associate
Gartner Senior Advisor+1 914 420 8568
3
Key Points: Overall
1. Technology spending has collided with current economic conditions as IT organizations have failed to enact agile IT economics. The pressure is on to cut IT.
2. In 2008, the U.S. Fortune 500 for example will have perhaps $9.4T of Operating Expense and $511B of Tech Expense. Operating Expense dwarfs the cost of IT.
3. The single biggest opportunity for organizations is to reduce Operating Expense is through targeted technology investment. If IT was “free” it would barely provide the needed lift for the global economy.
4. Business consolidation driven by current economic conditions is resulting in a new scale of business. Companies that can attain the new scale economics of IT will gain insurmountable competitive advantage.
4
Key Points: New Scale Economics
The current global economic environment has driven significant merger/consolidation activities in the financial services sector. As a consequence, enterprises of new scale are being created.
The largest of these organizations will have access to information technology (and business process) economies of scale that have never been experienced in the industry.
The scale gap between firms will become a competitive lever for those that can harness such benefits.
Current analyses indicate that scale-economic cost reduction by 2010 for IT infrastructure may be as much as 40%-60% overall (relative to 2007 baseline costs).
Those firms that do not have access to such economics will inherently be non-competitive unless they can develop ways to access the economics of their largest competitors.
The impact of scale economics will be further amplified with effective demand management and heightened virtualization which will enable new levels of IT infrastructure efficiency (supporting even larger enterprises with less physical resources.
5
Key Points: Management Mandate
The new mandate for IT in the context of the new economic situation is to• Optimize, resize, reclaim, reinvest, and target investments for maximum ROI• Rebalance the IT portfolio to Protect Revenue, Reduce Costs, Manage Risk, with minority investments for
Growing Revenue and Avoiding Future Costs• Seek economies of scale beyond the companies boundaries – consider the “Commons” for IT and business process;
Focus on economics of lowest common denominator services – and do not pollute mass services with highest common denominator service levels.
• Leverage the IT Supply Chain• Attain as close to “Zero Population Growth” in servers and other resources as possible• Target discretionary funds for maximum ROIT• Invest where others cant to create competitive gaps• Trade fixed costs for variable costs – engineer this carefully to enable agility.
6
The Economic Climate
•Global economy• Predictions of global recession• Revenue pressure on all sectors/geographies• GDP growth projections being revised downward
9
© 2007 Gartner, Inc. and/or its affiliates. All rights reserved. Gartner is a registered trademark of Gartner, Inc. or its affiliates.
Selected 2008 National GDP Forecasts: Different Growth Rates Around The World
+1.4%+1.4%
+1.9%+1.9%
+2.6%+2.6%
+9.9%+9.9%
+1.8%+1.8%
+1.6%+1.6%
+1.5%+1.5%
+8.0%+8.0%
+3.6%+3.6%
+3.2%+3.2%2008 World GDP 2008 World GDP
% EqualsChange Over
2007
% EqualsChange Over
2007
+5.4%+5.4% +6.6%+6.6%
+6.4%+6.4%
+6.0%+6.0%
+7.0%+7.0%
2.7%
World Bank Forecast
IMF: World economy to slow sharply, led by US IMF: World economy to slow sharply, led by US
7
Recessional Economic Principles
Companies that have had superior performance through recessions have:• Cut the right costs • Migrated to variable costs• Increased automation• Identified and focused on key customers• Marketed to growth areas • Invested when competitors didn’t
Source: Study of 400 companies during the last recession by Diamond Management and Technology Consultants
Plus: Realize you have new scale economics to deal with
8
Technology and The Economy
Information technologies, by improving our real-time understanding of production processes and of the vagaries of consumer demand, are reducing the degree of uncertainty and, hence, risk. In short, information technology raises output per hour in the total economy principally by reducing hours worked on activities…
Not all technologies, information or otherwise, however, increase productivity--that is, output per hour--by reducing the inputs necessary to produce existing products. Some new technologies bring about new goods and services with above average value added per workhour…
At the end of the day, however, the newer technologies obviously can increase outputs or reduce inputs and, hence, increase productivity only if they are embodied in capital investment. Capital investment here is defined in the broadest sense as any outlay that enhances future productive capabilities…
Remarks by Chairman Alan GreenspanTechnology and the economy
Before the Economic Club of New York, New York, New York
9
The Technology Economic ClimateTechnology economy• Current high fixed cost of IT in most companies is preventing required economic agility to respond to business revenue volatility
• Current high fixed capacity IT in most companies is preventing required “plant” agility to respond to business volume volatility
• Current IT spending is viewed as high an in most companies and is in the process of being cut• With fears of the collapse of revenue in many sectors and the lack of IT economic agility, IT costs appear high
(relative to revenue) and hence are the target of reductions --- which drives executive management’s reflexive actions to cut IT spending.
• Current consolidations are creating new scale economies – the formerly tactical task of infrastructure consolidation is now strategic!
10
The “IT Bailout” (of Business)Targeted investment in IT can have a major impact during current economic conditions• Fact: Overall IT costs are only 5.9% of Operating Expense which
means that 94.1% of Operating Expense is the greater opportunity area.
• Fact: Each $1 of new investment in IT between 2003 and 2005 had helped drive $1.47 of Gross Profit in 2006
Fortune 500 Totals 2001-2006
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
$9,000,000
$10,000,000
$11,000,000
2001 2002 2003 2004 2005 2006
Year
Rev
enu
e o
r O
per
atin
g E
xpen
se $
M
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
Tec
h S
pen
d $
M
Tech Spend Revenue Operating Expense
11
Technology and the Economy: Technology Eras and the GDP
Historically ( a short history ), there appears to be a linkage between technology eras and GDP trends.
US GDP and DJIA 1929-2004
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
GD
P (
$T
) D
JIA
($)
GDP in 2000 Dollars DJIA in 2000 Dollars
Mainframe Computing
Distributed Computing
Internet/Pervasive Computing
12
Technology and the Economy: Tech Spend and GDP
There appears to be a linkage between technology spending and market trends.
GDP, DJIA, and IT Spend as a Percent of Revenue Relative to 1960
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
Va
lue
Re
lati
ve
to
19
60
GDP Relative to 1960 DJIA Relative to 1960 IT Spend % of Revenue Relative to 1960
Mainframe Computing
Distributed Computing
Internet/Pervasive Computing
13
Technology Economics: Historical PerspectiveNational productivity has accelerated through the “technology era”
US Non Farm Business Productivity Change
-
0.50
1.00
1.50
2.00
2.50
3.00
1960-1980 The Mainframe Era
1981-1990 The Client
Server/Distributed Era
1991-2000The PC/Emerging
Internet Era
2001-Current The Pervasive
Computing/Pervasive Access Era
Per
cen
t C
han
ge
Ove
r P
erio
d
Correlation Between Non Farm Productivity Change and IT Investment Change
-0.501.001.502.002.503.00
- 1.00 2.00 3.00 4.00I T I n v e s t m e n t C h a n g e
No
n
Far
m
P
rod
uct
ivit
yC
ha
ng
e
y = 0.6633x + 0.3372R = 0.9835
14
Technology Economics: Historical Performance Superior technology investment strategies have enabled superior business results. Top performers have driven higher pre tax margin for a given level of technology investment.
Pre Tax Margin Vs. Technology Intensity – Top 10 Investment Banks
T e c h n o l o g y I n t e n s I t y
Top 10 Investment Banks
25%
27%
29%
31%
33%
35%
37%
39%
41%
1.25 1.35 1.45 1.55 1.65 1.75 1.85 1.95 2.05
P r
e
T
a x
M a
r g
I
n
IT as % of Revenue
IT as % of OpEx
Tech
nolo
gy In
tens
ity
Pre Tax Margin Vs Technology Intensity (Banking)
15
By 2006, a 26% increase in cumulative absolute Tech Spend in the U.S. had helped drive a 114% in absolute Gross Profit; The 13% increase in relative Tech Spend had helped drive a 60% increase in relative Gross Profit
Each $1 of new investment in IT between 2003 and 2005 had helped drive $1.47 of Gross Profit in 2006
The opportunity to continue this trend and increase IT business value through IT cost optimization (economies of scale and focus via sourcing) is still apparent….
Fortune 500 Totals 2001-2006
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
$9,000,000
$10,000,000
$11,000,000
2001 2002 2003 2004 2005 2006
Year
Rev
enu
e o
r O
per
atin
g E
xpen
se $
M
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
Tec
h S
pen
d $
M
Tech Spend Revenue Operating Expense
Technology Economics: Historical Perspective
16
At the same time the IT Cost of Goods has continued to rise as all sectors have become more technology intense.
Technology Economics: Historical Perspective
Industry Measure IT Cost of GoodsAirlines Per Passenger Mile 0.007$ Automotive Per Vehicle 333.424$ Chemicals Per Patent 57,717.471$ Consulting Per Consultant 53,059.985$ Hospitals Per Bed per Day 64.30$ Railroads Per Ton Mile 0.001$ Retail Per Store (Dorr) 494,817.989$ Web Sites Per Search 0.042$ Trucking Per Road Mile 0.177$ Armed Service Per Person 8,036.000$ Utilities Per MegaWatt Hour 2.630$ Oil & Gas Per Barrel of Oil 1.780$ Banking
Retail Bank - Deposits Per Transaction 0.02$ Retail Bank - Deposits Per Account 2.73$
Retail Bank - Consumer Lending Per Consumer Loan 29.00$ Retail Bank - ATM Per ATM 984.00$ Retail Bank - ATM Per ATM Transaction 0.04$
Retail Bank - Branch Per Branch per Year 54,014.00$ Retail Bank - Branch Per Branch Transaction 0.32$
Retail Bank - Call Center: Deposits Per IVR Contact 0.65$ Retail Bank - Call Center: Deposits Per Agent Handled Contact 0.90$
Retail Bank - Call Center: Consumer Lending Per Contact 0.75$ Retail Bank - Online Per Online User 18.00$
Retail Bank - Credit Card Per Account 3.00$ Retail Bank - Credit Card Per Credit Card Transaction 0.16$
Increase in IT Cost of Goods 2008 Vs 2001
22.0%
13.2%
107.4%
12.4%
64.4%
0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0%
Automotive
Chemical
Hospital
Oil
Utilities
17
Technology Economics: Current State
Technology Spend has collided with current economic conditions as IT organizations have failed to enact agile IT economics and make their value proposition transparent.
For 2008, the F500 will have perhaps $9.4T of Operating Expense (exclusive of IT) and $511B of Tech Expense. The BIG opportunity is to reduce Operating Expense through targeted technology investment.
Fortune 500 Totals 2001-2008
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
$9,000,000
$10,000,000
$11,000,000
$12,000,000
2001 2002 2003 2004 2005 2006 2007 2008
Year
Rev
enu
e o
r O
per
atin
g E
xpen
se $
M
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
Tec
hn
olo
gy
Sp
end
$M
Tech Spend Revenue Operating Expense
18
By the end of 2007 the majority of F500 sectors were experiencing revenue pressure, expense pressure, and major changes in profitability and unmanaged technology economics. For 2008 and 2009 the outlook is far worse and there is an across the board focus on IT cost reduction.
2007 Vs 2006 2006 Vs 2005 2005 Vs 2004 2004 Vs 2003Banking & Finance 56% 94% 89% 106%Chemicals 109% 96% 101% 181%Construction & Engineering -55% 61% 113% 136%Consumer Products 123% 97% 91% 133%Electronics 74% 125% 157% 249%Energy 91% 119% 146% 154%Food & Beverage Processing 118% 85% 95% 213%Health Care 109% 84% 138% 85%Hospitality & Travel 96% 121% 108% 119%Information Technology 112% 104% 123% 143%Insurance 89% 117% 106% 104%Manufacturing 64% 2113% 8% 153%Media 92% 285% -56% -76%Metals & Natural Resources 36% 86% 118% 264%Pharmaceuticals 98% 84% 113% 92%Professional Services 80% 134% 89% 214%Retail 99% 88% 124% 118%Telecommunications -180% 31% -49% -314%Transportation 216% 112% 649% 19%Utilities 107% 145% 82% 212%Grand Total 84% 112% 118% 110%
F500 Change in Sector Profitabiliy
Technology Economics: Current State
19
Technology Economics: Current State
Technology Intensity
varies across
sectors
IT Intensity by Sector (2006 Data)
0.29
0.30
0.33
0.33
0.37
0.40
0.42
0.45
0.54
0.55
0.58
0.59
0.63
0.67
0.68
0.71
0.72
0.77
0.79
0.81
1.19
- 0.20 0.40 0.60 0.80 1.00 1.20 1.40
Construction & Engineering Average
Metals/Natural Resources Average
Food/Beverage Processing Average
Retail Average
Chemicals Average
Consumer Products Average
Energy Average
Health Care Average
Transportation Average
Manufacturing Average
Insurance Average
Pharmaceuticals Average
Utilities Average
Overall
Hospitality & Travel Average
Electronics Average
Telecommunications Average
Professional Services Average
Information Technology Average
Media Average
Banking & Financial Services
IT I
nte
nsi
ty
20
Cross Industry Overview: Current State
Computing needs in support of revenue vary widely by industry
MIPS per $1M
Revenue
Servers per $1M
RevenueBanking Average 0.98 0.39Consumer Products Average 0.19 0.16Education Average 0.13 0.05Electronics Average 0.25 0.11Financial Services Average 1.07 0.46Food & Beverage Processing Average 0.18 0.12Government - Federal Average 0.49 0.115Government - State & Local Average 0.38 0.09Health Care Average 0.19 0.13Insurance Average 0.33 0.16Manufacturing Average 0.21 0.12Metals & Natural Resources Average 0.16 0.12Professional Services Average 0.14 0.08Telecommunications Average 0.85 0.25Transportation Average 0.23 0.21
21
Cross Industry Overview: Current State
Cost of Mainframe and Server resources per $1M revenue
Compute Cost per
$1M Revenue Rank
Compute Cost
Relative to Average
Financial Services Average 13,320$ 1 Financial Services Average 2.83 Banking Average 11,730$ 2 Banking Average 2.49 Telecommunications Average 8,850$ 3 Telecommunications Average 1.88 Government - Federal Average 4,665$ 4 Government - Federal Average 0.99 Transportation Average 4,530$ 5 Transportation Average 0.96 Insurance Average 4,380$ 6 Insurance Average 0.93 Government - State & Local Average 3,630$ 7 Government - State & Local Average 0.77 Consumer Products Average 3,540$ 8 Consumer Products Average 0.75 Electronics Average 3,150$ 9 Electronics Average 0.67 Health Care Average 3,090$ 10 Health Care Average 0.66 Manufacturing Average 3,060$ 11 Manufacturing Average 0.65 Food & Beverage Processing Average 2,880$ 12 Food & Beverage Processing Average 0.61 Metals & Natural Resources Average 2,760$ 13 Metals & Natural Resources Average 0.59 Utilities Average 2,160$ 14 Utilities Average 0.46 Professional Services Average 2,040$ 15 Professional Services Average 0.43 Education Average 1,530$ 16 Education Average 0.33 Averages 4,707$ Averages 1.00
22
Technology Economics: Key Sector View
Financial Services
• Catastrophic collapse of revenue
• Unable to shed and reallocate IT costs
• Increased regulation and risk management requires more automation
Energy
• Mixed impact of global economic downturn (exploration versus refining versus distribution
• Major impact on materials and transportation costs because of oil costs
• Seeking operating leverage with IT
Manufacturing
• Mixed impact of global economic downturn (market growth is regionally dependent and dependent of markets served)
• Major impact on materials and transportation costs because of oil costs
• Seeking operating leverage with IT
Media
• Major margin issues with decline of the economy
• Need to transform radically with technology with digital products and customer driven content
• Convergence pressures
• Need both operating leverage with IT but must transform with IT investments; IT and business technology is a blur
23
Technology Economics: Key Sector View
Telecommunications
• Technology is the “product”
• Convergence requires technology investment
• Commoditization is minimizing margins
• Consolidation of IT across businesses (broadband, wireless, “dial tone”
• Massive capital investment needed at the same time
Transportation
• Margins destroyed by fuel costs
• Shifting transportation options due to relative efficiencies (rail, air, trucking, shipping)
• Need for operating leverage
• Need to reduce costs
24
Technology Economics: Key Issues Today
•Need to reduce costs – 2008 exit rate is big issue
•Need to raise capital – about 50% of firms are in a “crunch”
•Need to deal with space – both too little and too much
•Need to manage risk – all understand this; IT risk spend increasing
•Need to be agile – economics and capacity
•Need to transform/innovate computing – shift balance to build the business
•Need to be “greener” – power consumption issue looms large
•Need to deal with leadership changes – across the C-suite
25
Technology Economics: Observed IT Strategies/Tactics
1. Reduce headcount/freeze hiring2. Curtail data center expansion/“Virtualize”/Sell assets and lease
them back3. Renegotiate with vendors4. Consolidate functions to drive economies of scale5. Outsource commodity services – shift to variable cost basis where
possible6. Leverage offshore resources7. Investment reclamation (shut down any investments not aligned
with current business strategy)8. Investment prioritization (realign investments with current
business strategy)9. “Mothball” businesses/products10.Change leadership/New IT management structure and power base:
CIO vs. COO vs. CAO vs. CFO
26
Technology Economics: Inability to Cope with Current Needs
Strategies and tactics are hitting a wall. Headcount reductions and vendor renegotiation and postponing projects don’t do the job. Model Company Tech Spend $M Percent of Spend Action Reduction Action Reduction
Total Tech Spend 3,000.00$
Compensation Employee Mix 85% onshore; 15% offshore (Headcount of 9,000) 1,140.00$ 38.0% Reduce Staff 15% 119.70$
Realign remaining staff to 65% onshore 35% offshore -- extra 15% of staff offshore has 40% cost reduction 44.44$
Contractors 360.00$ 12.0% Eliminate 33% of contractors 118.80$
Convert remaining contractors to 50% offshore at .67 onshore rate 39.80$
Hardware Depreciation 360.00$ 12.0%Change to 5 Year Depreciation from 4 72.00$
Maintenance 240.00$ 8.0%
Renegotiate and reduce 10%; Eliminate licenses not needed (2% of cost) 28.80$
Software Expense 300.00$ 10.0%Telecommunications 330.00$ 11.0% Renegotiate and reduce 5% 16.50$
T&E Recruiting etc 30.00$ 1.0% Reduce travel etc 2.40$
Facilities/Rent 240.00$ 8.0%Consolidate; release space if possible (5%) 12.00$
3,000.00$ 100.0% Round 1 Reductions 370.20$
Outsource MF assuming in house cost was $300M with 90M of salaries and 36M of depreciation and vendor price is 75% of inhouse cost and vendor assumes assets 75.00$ Round 2 Reductions 159.24$
Round 1 + Round 2 Saves 529.44$
Other reductionsOptions Not Inlcuded; Asset Purchase Leaseback; Telecomm Outsourcing; Sale of Space; Market Data Cost Reductions Outsource Desktop (55,000
@ $360 per year savings -- vendor buys assets) 19.80$ Outsource email (55,000 *$240 per year savings) 13.20$ Renegotiate Co-Loc deals
Cancel non critical projects (as much as 40% of all applications development and maintenance work) ?Reduce market data expense ?
Total 562.44$
Adjusted Total Annual 2,437.56$
27
Technology Economics: The New Mandate
The new technology economic mandate is to:
Optimize, Resize, and “Give it up”
Leverage the marketplace and take advantage of the rapid commoditization IT services of non strategic core business functions; “Give it up” if a provider can do it better/more efficiently; Engage in transformation sourcing (virtualization, re-hosting; virtual desktop; “cloud”)
Remove “poison pill” service levels that undermine your mass cost structure
Own less; build less
Zero population growth – Servers/People/Other resources
Consider “The Commons”.. Internal and with external firms to provide new scale economies
Realign, reclaim, and reinvest – rethink the RTB/CTB model and portfolio strategy – while managing risk
Enable agility -- fixed versus variable costs and capacity;
Leverage the supply chain -shift costs to vendors with new supply chain management models
Fund IT forward and “follow the money” – the business money that is.
Strategically engage the business and become an IT Savvy enterprise
28
Technology Economics: Create Competitive Advantage “Low cost/cheap IT” is not necessarily good IT economics.
The cost of “catch up” is 2x the cost of doing the investment the right way at the right time.
Best in Class = Top quartile business performance as measured by 3 year pre tax margin
Client Total Tech Spend Vs Best In Class Benchmark Investment Levels
$3,400.00 $3,400.00
$3,700.00
$4,000.00
2006 2007$3,100.00
$3,200.00
$3,300.00
$3,400.00
$3,500.00
$3,600.00
$3,700.00
$3,800.00
$3,900.00
$4,000.00
$4,100.00
$ M
Client Total Tech SpendBenchmark Best In Class Total Tech Spend (OpEx Basis)
Gap to Best In Class Spend Level within YearProjected Spend to Catch Up
$-
$200.00
$400.00
$600.00
$800.00
$1,000.00
$1,200.00
$1,400.00
$1,600.00
$1,800.00
Projected Tech Spending Required to Close Competitive Gap
$ M
$300.00 $300.00
2006
$600.00
$1,200.00
2007
$1,800.000
2008
29
Technology Economics: Spend into the SkidWhat are the options to “squeeze” IT?
• What if IT was free?
• What if IT labor was free?
What are the options to invest in IT to lower Operating Expense?
S P E N D I N T O T H E S K I D
Model Company Tech Spend $M
Total Tech Spend 5,000$
Compensation 1,800$
Contractors 500$
Hardware Depreciation 600$
Hardware Maintenance 400$
Software Expense 500$
Software Capitalization 500$
Telecommunications 300$
T&E 50$
Recruiting 50$
Facilities/Rent 300$
EPS PreTax Margin
Current State 4.29$ 30%
If "IT was free" 5.71$ 40%
If "IT labor was free" 4.94$ 35%
Take down Tech Spend 10% 4.43$ 31%
Take down Tech Spend 20% 4.57$ 32%
Take down Tech Spend 20% and OpEx 10% 5.57$ 39%
Add $500M Tech Spend to reduce OpEx 15% 5.64$ 40%
Add $1,000M Tech spend to reduce OpEx 20% 7.07$ 43%
$MNet Revenue 50,000$ Non Interest Expense 35,000$
Compensation 17,500$
Comm & Tech (Not Total Tech!) 2,500$ Occupancy 3,000$
Other (Professional Fees, Advertising, Clearing, Brokerage, etc.) 12,000$
Shares Outstanding (M) 3,500 EPS (PreTax) 4.29$
Model Company 10K (30% Pre Tax Margin)
30
Technology Economics: Fixed Vs Variable Cost Conversion
Category CaptainsIt is commonplace for one particular supplier into a category to be nominated by the retailer as a Category Captain. The Category Captain will be expected to have the closest and most regular contact with the retailer and will also be expected to invest time, effort, and often financial investment into the strategic development of the category within the retailer.
In return for this, the supplier will gain a more influential voice with the retailer but must be careful never to abuse this or fall foul of any antitrust laws. The Category Captain is often - but not always! - the supplier with the largest turnover in the category. Traditionally the job of Category Captain is given to a brand supplier but in recent times the role has also gone to particularly switched-on Private label suppliers.[13]
Soft Vs. Hard Landing Controls
Enabling “Agility”: Using a “model” company today only 36% of IT expense is variable (can be “shed” within 90 days). By changing the IT operating model, perhaps up to 60% can be made truly variable (though there may be some premium to pay for this conversion).
Model Company Tech Spend $M % Variable Today
% Variable Future State Model
Total Tech Spend $5,000 36% 60%
Compensation $1,800 50% 70%
Contractors and Sourcing $500 100% 100%Hardware Depreciation $600 0% 33%
Hardware Maintenance $400 25% 50%
Software Expense $500 25% 50%
Software Capitalization $500 0% 50%
Telecommunications $300 25% 60%
T&E $50 50% 50%Recruiting $50 100% 100%
Facilities/Rent $300 10% 33%
31
Technology Economics: CommoditizeLeverage the marketplace for scale economics and service quality.
The typical enterprise of scale exhibits year over year unit cost reductions of 7% to 18% in key areas – the marketplace “does it better”
Unit Cost Changes for In House Computing
Company 2006 Vol 2006 Total Cost 2007 Volume 2007 Total Cost 2006 UC 2007 UCVolume Growth
Total Cost
GrowthUnit Cost Growth
Ratio of Volume Growth/Total Cost
Growth
A 20,959 185,139,000$ 25,284 200,406,000$ 8,833$ 7,926$ 1.21 1.08 0.90 1.11 B 11,872 71,895,753$ 12,987 69,000,000$ 6,056$ 5,313$ 1.09 0.96 0.88 1.14 C 37,566 142,338,705$ 39,318 111,091,704$ 3,789$ 2,825$ 1.05 0.78 0.75 1.34 D 36,000 346,932,000$ 35,000 297,045,000$ 9,637$ 8,487$ 0.97 0.86 0.88 1.14 E 22,000 268,400,000$ 25,500 272,850,000$ 12,200$ 10,700$ 1.16 1.02 0.88 1.14 F 24,986 379,361,000$ 31,117 464,264,000$ 15,183$ 14,920$ 1.25 1.22 0.98 1.02 G 17,000 137,700,000$ 23,400 182,520,000$ 8,100$ 7,800$ 1.38 1.33 0.96 1.04
Average 24,340 218,823,780$ 27,515 228,168,101$ 8,990$ 8,292$ 1.13 1.04 0.92 1.08 1.68
MIPS Model 2006 Vol 2006 Total Cost 2007 Volume 2007 Total Cost 2006 UC 2007 UCVolume Growth
Total Cost
GrowthUnit Cost Growth
Ratio of Volume Growth/Total Cost
Growth
A 38,039 218,077,587$ 65,939 255,401,349$ 5,733$ 3,873$ 1.73 1.17 0.68 1.48 B 11,000 24,200,000$ 12,200 25,428,000$ 2,200$ 2,084$ 1.11 1.05 0.95 1.06 C 49,000 174,489,000$ 61,000 198,921,000$ 3,561$ 3,261$ 1.24 1.14 0.92 1.09 D 22,585 86,048,850$ 25,586 89,806,860$ 3,810$ 3,510$ 1.13 1.04 0.92 1.09 E 22,600 89,270,000$ 26,442 101,061,324$ 3,950$ 3,822$ 1.17 1.13 0.97 1.03 F 97,000 377,330,000$ 117,000 423,540,000$ 3,890$ 3,620$ 1.21 1.12 0.93 1.07 G 35,783 185,326,000$ 49,440 203,684,167$ 5,179$ 4,120$ 1.38 1.10 0.80 1.26
Average 40,037 172,638,589 51,361 182,359,756 4,312$ 3,551$ 1.28 1.06 0.82 1.21
Storage Model 2006 Vol 2006 Total Cost 2007 Volume 2007 Total Cost 2006 UC 2007 UCVolume Growth
Total Cost
GrowthUnit Cost Growth
Ratio of Volume Growth/Total Cost
Growth
A 2,616 46,180,000$ 3,536 53,090,000$ 17,653$ 15,014$ 1.35 1.15 0.85 1.18 B 2,216 40,165,000$ 3,213 55,434,126$ 18,125$ 17,252$ 1.45 1.38 0.95 1.05 C 1,170 30,300,000$ 1,580 35,100,230$ 25,897$ 22,222$ 1.35 1.16 0.86 1.17 D 8,240 127,720,000$ 10,390 154,000,000$ 15,500$ 14,822$ 1.26 1.21 0.96 1.05 E 7,920 114,048,000$ 11,009 152,196,660$ 14,400$ 13,825$ 1.39 1.33 0.96 1.04 F 1,860 30,094,800$ 2,264 36,201,360$ 16,180$ 15,990$ 1.22 1.20 0.99 1.01 G 2,978 140,444,000$ 4,563 173,048,000$ 18,010$ 16,772$ 1.33 1.25 0.94 1.07
Average 4,004 64,751,300$ 5,332 81,003,729$ 17,959$ 16,521$ 1.34 1.24 0.93 1.08
Total Servers (Wintel Linux Unix)
Mainframe MIPS
Distributed Storage (TB)
32
Technology Economics: The New Scale of Business
Installed MIPS: 2007 Equivalents Without Growth
-
50,000
100,000
150,000
200,000
250,000
2006 2007 2008 2009 2010
Physical Servers: 2007 Equivalents Without Growth and Virtualization
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2006 2007 2008 2009 2010
Example: Financial Services 2009 “Size of Plant” Trends:
• Scale is increasing as a result on industry consolidation• By the end of 2009 there will likely be 3-4 companies with scale
of over 100,000 MIPS and 55,000 servers; there will be at least 1 with over 200,000 MIPS and over 80,000 servers.
33
Technology Economics: The New Scale of Business
Installed MIPS Scale Economies
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
- 50,000 100,000 150,000 200,000 250,000 300,000 350,000
Installed MIPS
Fu
lly L
oad
ed C
ost
per
MIP
S
Physical Servers (20% UNIX/80%Wintel/Linux) Scale Economies
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
- 20,000 40,000 60,000 80,000 100,000 120,000
Fu
lly L
oad
ed C
ost
per
Ser
ver
X = 2007 Competitors and Y = 2009 Competitors in terms of placement on the scale economics curve and do not represent actual competitor unit costs
X
XXXX
X
X
X
XXXX
XXX
X
Y
YY
YYY
YY
YY
YY
Example: Financial Services 2009 Scale Economics Trends:• As a consequence of increased scale as a result of consolidation, the
largest firms will have access to never-before-experienced scale economies
• Being an average performer at “scale” or best in class at “scale” will not be competitive
34
Technology Economics: Create a “Commons”
Attain new economies of scale by removing poison pill service levels and consolidating resources internally and hopefully externally. Collaborate for specialized Commons where a common Commons can’t do the job (create bMail from Gmail)
• Infrastructure Commons of scale can reduce participant costs by an average of 31% or more
• Applications Commons of scale can reduce participant costs by an average of 22% or more
• Business Process/Operations of scale can reduce participant costs by an average of 18% or more
Cost per MIPS Vs Scale
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
- 20,000 40,000 60,000 80,000 100,000 120,000 140,000
Size in MIPS
An
nu
al C
ost
per
MIP
S
Server Cost Vs Scale
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
- 10,000 20,000 30,000 40,000 50,000 60,000 70,000
Total Server Count
An
nual
Co
st p
er S
erve
r
35
Technology Economics: Create a “Commons”
Attain new economies of scale by removing poison pill service levels – use a service level “refractory” column and “distill the relevant service levels”
Highly Specialized Niche Services
Lowest Common Denominator “Mass Services”
Line of Business Based
Commons Based
36
Technology Investment and Business Performance
Net Revenue Operating Expense
Technology Economics: Rethink the PortfolioThere are 5 identified key technology levers that can “bend” the performance curve and drive ROIT.
Grow RevenueBends the revenue line up faster than your competitor – includes innovation
Protect RevenueHolds the revenue line at its current growth rate
Reduce CostShort term impact to drive costs down through automation and process improvement
Avoid CostAvoidance of future costs that would bend the expense line up – includes innovation on the expense side/process side
Manage RiskEnables risk management from a firm and regulatory perspective
>> Year >>
$
Increase the spread to increase margin
37
Technology Economics: Resize and “Variable-ize”If your business volumes and demand change, should your infrastructure sizing be in step? The “average” diversified financial services company has ~1 MIPS and .47 physical servers per $1M Net Revenue.
Key Issues:
How to manage fixed versus variable capacity and costs?
How to manage demand?
How to optimize and resize the applications portfolio?
How to optimize capacity and unit cost simultaneously
Overall, identifying key drivers
Investment Bank Infrastructure Sizing Curve
0
5000
10000
15000
20000
25000
30000
35000
0 5000 10000 15000 20000
Mainframe MIPS
Ph
ysic
al S
erve
rs
$15B IB $20B IB $12B IB
38
Trends and forces
Capacity growth fueled by demand (business volumes and product evolution/introduction
• Mainframe was 17% per year; now 10% per year• Servers was 28% per year; now 8 to 15%• Storage was 45% per year; now 37%
Infrastructure and Unit Cost Trends (50,000 MIPS; 25,000 Servers; 150,000 Desktops; 5000 Market Data Users)
Technology Economics: Market to Market - Commercialize
Infrastructure Market Basket
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
2005 2006 2007 2008
$ M
A
nn
ual
Mainframe MIPS Distributed/Servers Desktop/End User Communications/Network Market Data
$1,834
$1,541-16%
39
Technology Economics: The Rate of Change is Changing
“New Math” of Infrastructure Cost:
With the new economics of consolidation scale and Moore’s Law at work, the same set of infrastructure services that cost ~$500M+ in 2007 will likely be delivered by the most efficient companies for ~$200M in 2010.
Sample Commidity Costs
Product/ Service 2007 Average 2007 Best in ClassNew Best In Class
(2010)
Average Unit Cost Decline per
YearMainframe MIPS 3,946$ 1,994$ 1,400$ 10%
Mainframe TB 18,650$ 11,806$ 5,500$ 18%UNIX Server 18,200$ 14,680$ 8,600$ 14%
Wintel Server 8,856$ 5,700$ 4,400$ 8%SAN TB 16,500$ 9,000$ 3,300$ 21%NAS TB 15,500$ 6,000$ 1,600$ 24%Desktop 1,440$ 1,008$ 600$ 13%
Email 120$ 99$ 51$ 16%
Sample Market Basket
Product/ Service Model Volume At 2007 Bmk AverageAt 2007 Best in
ClassAt New Best in
Class (2010)
Average Decline per
YearMainframe MIPS 22,000 86,808,333$ 43,868,000$ 30,800,000$ 22%
Mainframe TB 1,200 22,380,000$ 14,167,200$ 6,600,000$ 24%UNIX Server 5,000 91,000,000$ 73,400,000$ 43,000,000$ 18%
Wintel Server 15,000 132,840,000$ 85,500,000$ 66,000,000$ 17%SAN TB 4,000 66,000,000$ 36,000,000$ 13,200,000$ 27%NAS TB 6,000 93,000,000$ 36,000,000$ 9,600,000$ 30%Desktop 50,000 72,000,000$ 50,400,000$ 30,000,000$ 19%
Email 55,000 6,600,000$ 5,445,000$ 2,805,000$ 19%Total Market Basket 570,628,333$ 344,780,200$ 202,005,000$ 22%
Note: See last panel the DataCenter SuperCenter and the IT Value Meal
40
Technology Economics: IT Expense ManagementCreating an IT expense management strategy requires an exploration of all dimensions of expense and its drivers to attain an effective balance:
Total Expense = Sum of
Product 1 Unit Cost x Volume
Product 2 Unit Cost x Volume
Product 3 Unit Cost x Volume
………………………………….
Product n Unit Cost x Volume• Reductions in volume and/or reductions in unit cost will result in cost take outs (assuming also that service quality is managed).
• But unit cost and volume are related so their interactions must be considered concurrently.
• Volume is driven by demand.
• Unit cost is driven by cost components related to personnel costs, support ratios, hardware and software expense (and accounting policies), administrative costs, occupancy, and other factors.
• Nothing is off limits in developing a cost take out strategy.
• And Benchmarking is simply a tool that identifies known bounds of experience.
• Being at the best benchmark levels in the context of unit cost does not imply that cost drivers can’t be tweaked or volumes/demand cant be adjusted.
41
Technology Economics: Invest When Others Can’t
• Step 1: Understand the business strategy (at the segment or within segment levels)
What are the firm’s plans for growing and protecting revenue and profitability?
• Step 2: Assess the IT criticality or “pressure” points that enable this strategy
Perform an overlay on the key strategic areas (revenue growth, closing competitive gaps, entering new markets, etc.).
• Step 3: Determine competitive technology levers For each “pressure point,” determine the competitive IT levers that are the enablers such
as operational efficiency (e.g., lower operational costs, enhanced scalability); information effectiveness (e.g., customer information/intimacy, ability to use lower skilled workforce); and strategic differentiation (e.g., product leadership or uniqueness).
• Step 4: Assess contribution of the IT levers For each competitive IT lever, determine its relative contribution to the strategic goals in
business terms, such as growing revenue, protecting revenue, reducing cost, avoiding cost, managing risk, retaining staff, etc. Make this determination by assessing the differential contribution of IT over base organic growth.
How does it work? Business and IT stakeholders will work together to:
42
• Step 5: Determine ROIT Compute ROIT by contribution category by computing Contribution versus IT
investment Overlay risk profile – IT and business – with regard to outcomes Consider ROIT at business and firm level
• Step 6: Determine optimum IT investment mix (at the segment or within segment level)
Perform scenario analyses
• Step 7: Implement investment strategy, track, integrate with new strategies, refine (essentially go to Step 1); Test competitiveness via benchmarking
Is ROIT used for projects?
• No. The ROIT method is intended to be applied to segment investments and within-segment initiatives to assist in guiding the optimization of IT investments across and within lines of business.
How does it work? Business and IT stakeholders will work together to:
Technology Economics: Invest When Others Can’t
43
Interestingly enough, the financial services sector shows the highest average return historically for technology investment when considered in the context of support for revenue generation – as a consequence of product leadership, differentiation, and innovation -- operating efficiency, and informational effectiveness.
ROIT by Sector (Average)
$1.04
$1.04
$1.07
$1.09
$1.10
$1.10
$1.14
$1.14
$1.18
$1.18
$1.22
$1.24
$1.25
$1.25
$1.26
$1.28
$1.31
$1.32
$1.35
$1.39
$1.60
$- $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 $1.40 $1.60 $1.80
Construction & Engineering
Food & Beverage Processing
Electronics
Metals & Nat Resources
Transportation
Retail
Utilities
Energy
Chemicals
Hospitality & Travel
X Industry
Health Care
Telcos
Proff Svcs
Manufacturing
Consumer Products
Pharma
Info Tech
Media
Insurance
Banking & Financial Services
ROIT - 3 Year Pre Tax Profit per $1 Technology Investment
Technology Economics: Invest When Others Can’t
44
Technology Economics: Basic Principles1.Technology is a competitive lever – a driver of operating efficiency,
product leadership and differentiation, effective customer/market intimacy and information, and agility
2.Manage technology actively to create business value (follow the levers)– optimize the technology cost to “run the business” and maximize the yield of technology investments to “change the business” concurrently.
3.Engineer your technology economy – your mix of fixed and variable costs -- to create agility (and avoid “hard landings”)
4.Measure technology on the basis on business outcomes and not technology resource inputs and assets
The most opportunistic time for technology investment is during a technology recession (or depression) – doing so effectively can create an insurmountable competitive gap. Bad IT economics will put you on the wrong side of this gap and may even be creating advantage for your competitors.
45
Technology Economics: Synthesis1. Technology Economics is about creating IT value in the form of enterprise operating leverage. It is not about IT cost – there is little to
no business value in IT cost reduction alone. With the average financial services company spending 13% of Operating Expense on IT… The big expense leverage is on the Non-IT side where 87% of costs “live”
2. Technology Economics is about managing and dynamically balancing a portfolio of IT investments --- and hedging them in distribution and cost structure – in a business facing/business meaning manner. It is about holding the line on revenue or bending it up; it is about bending the expense curve down; it is about increasing the spread; it is about managing risk. It is not about Run the Business/Change the Business –It is about Growing Revenue, Protecting Revenue, Reducing Cost, Avoiding Cost, and Managing Risk. It is about investing at the right time on the right things and avoiding the “cost of catch up” which can be 2x the cost of start up.
3. Benchmarks can be a powerful tool. Perform competitive calibration using stable metrics – watch the right and meaningful numbers. It is not about being the “lowest”… it is about being “best”; knowing what best means; it may be about redefining best! Comparing IT Spend to Revenue and Operating Expense may be risky in current market conditions. In essence the GPS has been turning off; longitude and latitude are gone. Your challenge is to establish new navigational measures and waypoints and develop a strategy to “fund it forward”.
46
4. Making technology competitiveness “happen” will require commitment, critical thinking, cross tower/cross business cooperation, surgically precise investment management, continuous and high-bandwidth internal/external communication + precise messaging, and innovation to “blow past” the limits defined by current models.
5. Technology is likely to offer the greatest promise to reduce costs and to create extreme value in absolute alignment with the needs of the financial services industry today and in the foreseeable future
6. Use the Basic Principles as your guide and be prepared to Spend into the Skid
Technology Economics: Synthesis
47
Summary on a PageTechnology spending has collided with current economic conditions as IT organizations have failed to enact agile IT economics and make their value proposition transparent. The pressure is on to cut IT
In 2008, the U.S. Fortune 500 for example will have perhaps $9.4T of Operating Expense and $511B of Tech Expense. Operating Expense dwarfs the cost of IT.
The single biggest opportunity for organizations is to reduce Operating Expense is through targeted technology investment. If IT was “free” it would barely provide the needed lift for the global economy.
The new mandate for IT in the context of the new economic situation is to• Optimize, resize, reclaim, reinvest, and target investments for maximum ROI• Rebalance the IT portfolio to Protect Revenue, Reduce Costs, Manage Risk, with minority investments for Growing Revenue and Avoiding Future Costs• Seek economies of scale beyond the companies boundaries – consider the “Commons” for IT and business process; Focus on economics of lowest common denominator
services – and do not pollute mass services with highest common denominator service levels.• Leverage the IT Supply Chain• Attain as close to “Zero Population Growth” in servers and other resources as possible• Target discretionary funds for maximum ROIT• Invest where others cant to create competitive gaps• Trade fixed costs for variable costs – engineer this carefully to enable agility.
There is a New IT “Value Meal” for the New Economy