Leadership

Alarming IT Data Points

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I am grateful for the plenty of positive coverage my book, The New Polymath, has received. The coverage though, has focused mostly on all the innovators I profile in the book, which isn’t surprising because the vast majority of the book focuses on innovations.

But the small slice of the book that is negative contains alarming IT data points and trends I believe deserve attention on their own. So, I have extracted them (and organized them below for flow) with the hope that even folks who don’t read the whole book get a chance to review and discuss them — and hopefully start to reverse some of the status quo.

A) We are dangerously dependent on IT on an external supply chain.

The research firm Gartner expected global IT and telecom spending to be $3.3 trillion in 2010. Robert Mahowald, a director at IDC, another IT research firm that collects market data by sector — software, telecom, and so on — says there is some cross-selling between sectors, but, in total, it is safe to say that the global spend is in excess of $3 trillion a year. Neither IDC nor Gartner, however, tabulates internal corporate IT costs: salaries, benefits, and internal burdened charges. If they did, it would reveal that most enterprises spend 80 percent to 90 percent of their IT and telecom budget with outside vendors.

Even in automobile and aerospace, which have much more mature supply chain management, companies such as Ford and Boeing get around 70 percent of components from suppliers. In those industries, supplier consolidation and tiering makes sense because Ford and Boeing are dominant customers and can dictate design standards and justifiable economics. IT buyers in contrast have little leverage — even companies as big as Ford and Boeing make up less than 0.5 percent of IBM or Oracle’s revenue.

Many enterprises don’t even realize this external dependence because much of the spending is outside the budget of the CIO. Research and development (R&D) technology is charged to product development, telecom to call centers, and business intelligence to the corporate planning group. Mobile charges come via expense reports and Amazon Web Services via corporate cards and are charged to even more budgets.

B) The IT buyer-vendor equilibrium is way off kilter.

The top 25 global technology vendors, such as HP and AT&T, now make up more than 50 percent of the volume of the IT amount spent externally. The top 25 global technology buyers (dominated by large banks and government entities), however, barely make up 5 percent of the total spend. As a result, buyers have little control over vendor product designs and innovation strategies when they individually control so little of a vendor’s revenue.

C) The bigger IT vendors have not been innovating much.

With a few exceptions, such as Apple, Intel, and Google, the bigger technology vendors have not been innovating much. The three biggest chunks of external technology spend are in telecommunications, outsourcing, and software. Telecommunications vendors invest in capital expenditures (capex), outsourcing vendors in training their people, and software vendors in tweaking older versions. Not much is spent on breakthrough R&D or real innovation. Would you believe Verizon does not use the word “research” anywhere in its 10-K? Why should it invest in R&D when it can just leverage all the cool stuff that Apple and Google are delivering? Even those companies spend only 10 percent or so of revenues on R&D. Outsourcing vendors — by the way, over half of IBM’s revenues are from outsourcing — typically spend less than 2 percent of revenues on R&D, and much of that is on “solution centers”, which are more about marketing than research. They, in turn, conveniently leverage innovation coming out of SalesForce.com and Dell. Software vendors invest somewhat more in R&D than telecom and outsourcing vendors, but parse that spend and you find much of it is going toward version 7, 8, or 12 of their products, some of which were first introduced 10 to 20 years ago. So it is not really impactful innovation. Many software R&D dollars also go toward porting products to new hardware platforms and devices or in “localization” to newer countries. Here’s the irony: Some technology vendors spend more on internal IT than they do on R&D. The attitude toward real innovation is that “It’s somebody else’s job”. When pushed, the stock answer from most technology vendors is that too much R&D spending offers only diminishing returns. In contrast, they do not believe they get diminishing returns from their sales, general, and administrative (SG&A) costs, which make up 25 to 60 percent of their revenues — five to ten times what they spend on R&D.

Even Intel, an acknowledged champion of breakthrough innovation, may be getting away from its legacy. As Fast Company observed, “[Intel itself has been] pushing the Atom mobile chip, in a dogleg pivot from Moore’s Law, the founding axiom behind Intel, that chips get exponentially faster; and [Intel is] embracing new territory, new markets, and new ways of playing with others.”

D) What IT is left in-house is often not strategic.

But let’s not just blame IT vendors. What Ford and Boeing keep in-house in their manufacturing are strategic areas — for example, design of the aircraft or manufacture of the engine. In many IT shops, the thin sliver that stays in house is often not strategic. Many are technicians such as desktop support staff, database administrators, and network managers. They are important, but they mostly provide infrastructure — not innovation — support. Some CIOs keep such staff members in-house because they are the most visible to users and so they give the perception of “better customer care”.

E) The majority of CIOs are focused on control and compliance, not innovation.

In a CIO Magazine Executive Council survey of 600 CIOs, 34 percent were classified as “function heads”. Of those “function heads”, only 4 percent were focused on “driving business innovation” whereas 79 percent of them reported they supported “improving IT operations/systems performance.” This is at the highest level; further down in the IT organization, there is even less of a focus on innovation. Yet these companies still spent 5.1 percent of their revenues on IT.

Another group classified as “transformational” — 45 percent of the CIOs — and 40 percent of the “function heads” group reported that they were “driving business innovation” while spending a bit more — 5.5 percent — of their revenues on IT.

Finally, the third group — 21 percent of the CIOs — was classified as “business strategist”. 70 percent of this group reported they were “driving business innovation”, and they spent 7.2 percent of revenues on IT.

So, across all groups, a bedrock of about 5 percent of revenues is going toward “keeping the lights on” IT, not innovation. Traditionally, IT has been conservative — the old adage used to be, “No one got fired for buying from IBM.” Today, that saying has become a little broader to include IBM, Verizon, Oracle, Accenture and other large vendors. Too many IT executives live in fear of one of their smaller vendors going out of business. And since many CIOs report to the CFO, their mandate is often focused on control and compliance, not on innovation.

F) There are way too many IT line items, which make the $600 military toilet look downright affordable.

Examples abound:

  • You and I can buy a terabyte of storage for less than $100 and it’s a one-time payment. Yet many enterprises are paying $100 or more per gigabyte over a three-year useful life, when you amortize the cost of storage and support for it. Granted that is high-availability, enterprise-grade storage, but is it worth 1,000 times as much? Then, when you look at duplication of storage — multiple backups to meet compliance needs, archived e-mails sent to multiple addresses with the same attachment, and the like — the waste is numbing.
  • If you were to amortize the cost of annual software vendor’s support and maintenance charge over the number of calls made to its support desk, a price of $10,000 per call would not be unusual.
  • What if gas cost $5,000 a gallon and you had a leaky gas tank? That describes the situation with printer ink.
  • A study by Harris Interactive showed that the average U.S. employee spends $693 in international roaming calls on an overseas trip.
  • Another problem in the SI world is consultant travel. That often adds another 15 to 25 percent to base fees, which are already high to begin with.

Vinnie Mirchandani is founder of Deal Architect. Read his blog at www.dealarchitect.typepad.com.

 

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