dr. howard rubin gartner senior advisor founder rubin worldwide mit cisr associate...
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Dr. Howard RubinGartner Senior AdvisorFounder Rubin WorldwideMIT CISR Associate
IT Does Matter
Charting, Calibrating, and Taking Charge of Your Technology Economy
“My argument is not that you don't need IT or that it's not important, but that it doesn't matter strategically and doesn't provide one company with a way to distinguish itself in any meaningful way from its competition”
-Nicholas Carr
“My argument is not that you don't need IT or that it's not important, but that it doesn't matter strategically and doesn't provide one company with a way to distinguish itself in any meaningful way from its competition”
-Nicholas Carr
Dr. Howard RubinGartner Senior AdvisorFounder Rubin WorldwideMIT CISR Associate
Charting, Calibrating, and Taking Charge of Your Technology Economy
IT Does Matter
Global Technology SpendingGlobal Technology Spending
$701 per person $701 per person
One PC per person per year One PC per person per year
Bigger than the GDP of 182 countries Bigger than the GDP of 182 countries
National Technology SpendingNational Technology Spending
$3,258$3,258
Annual Spending per CitizenAnnual Spending per Citizen
$5,152$5,152
$3,574
$2,942$2,942
$3,028$3,028
$21$21Switzerland
US
England, Scotland
Australia
Japan
Zimbabwe
Technology Balance of TradeTechnology Balance of Trade
Technology Services Exported per $1 ImportedTechnology Services Exported per $1 Imported
$1.00$8.86$1.00$8.86
$1.00$1.70$1.00$1.70
$1.00$0.84$1.00$0.84
Technology Investment Rate of ChangeTechnology Investment Rate of Change
2011 Versus 2009 Technology Investment per Worker
Ukraine
Brazil
China
U.S.
India
95%95%
77%77%
60%60%
55%55%
10%10%
The Pace of Change is AcceleratingThe Pace of Change is Accelerating
$800B$800B
$3,200B$3,200B
$4,200B$4,200BGlobal Technology Spending for 2009 alone is greater than all of the 1980’s and 1990’s
1980 1990 20002009
AgendaAgenda
ChartingCharting
• What is Technology Economics and why is it important?
• What is Technology Economics and why is it important?
CalibratingCalibrating
• The Economy:
What are we measuring? What are we missing? What should we be measuring?
• The Technology Economy:
What are we measuring? What are we missing? What should we be measuring? What do we know about the dynamics?
• The Economy:
What are we measuring? What are we missing? What should we be measuring?
• The Technology Economy:
What are we measuring? What are we missing? What should we be measuring? What do we know about the dynamics?
Taking ChargeTaking Charge
• How you can use your
knowledge of your
Technology Economy
– within your business,
in markets, and across
the global economy
– to gain insurmountable
competitive advantage?
• How you can use your
knowledge of your
Technology Economy
– within your business,
in markets, and across
the global economy
– to gain insurmountable
competitive advantage?
What is Technology Economics?What is Technology Economics?
The study of the dynamics, measurement,
and strategic use of IT investment as a
critical lever and source of competitive
advantage for nations, industries,
and individual companies.
Tabulating Machine Company 1896
First “Computer” 1942
Mainframes in Business 1960
Economics Vs Technology Economics?Economics Vs Technology Economics?
1500 AD
1600 AD
1700 AD
1800 AD 2000 AD
Industrial Revolution
Aristotle 322 BC
1900 AD
Adam Smith: Wealth of Nations 1776
1000 AD0 AD
Current economic indices are from the Industrial Age. They deliver limited insights, place emphasis on an aging set of drivers, and don’t acknowledge the impact of technology on the global economy
Why is Technology Economics Important?Why is Technology Economics Important?
We need to create a new view that integrates the interaction of technology
Primary EffectPrimary Effect Secondary EffectSecondary Effect
0-6 months0-6 months 6-12 months6-12 months
Stock MarketStock Market ProfitsProfits EmploymentEmployment
IndustrialProduction & Services
IndustrialProduction & Services
Real Capital Spending
Real Capital Spending
Real Consumer Spending
What do We Measure Today?What do We Measure Today?
Today’s measures have their origin in the industrial age.Today’s measures have their origin in the industrial age.
DailyDaily
• Dow Jones, NASDAQ, S&P
• Dow Jones, NASDAQ, S&P
MonthlyMonthly
• Housing starts
• GDP
• Unemployment
• Consumer confidence
• Manufacturing indices
• Housing starts
• GDP
• Unemployment
• Consumer confidence
• Manufacturing indices
QuarterlyQuarterly
• Corporate performance (10Q, 10K)
• Brown Book
• Corporate performance (10Q, 10K)
• Brown Book
Why do Today’s Economic Measures Fail?Why do Today’s Economic Measures Fail?
They don’t account for or help explain the patterns of performance we observe in the information age
National 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
1991-2000
The PC/Emerging Internet Era
2001-Current
The Pervasive Computing/Pervasive
Access Era
Pe
rce
nt
Ch
an
ge
Ov
er
Pe
rio
d
Why do Today’s Economic Measures Fail?Why do Today’s Economic Measures Fail?
They don’t help us understand key linkages and they mask the new drivers of performance
Correlation of Non Farm Productivity to IT Investment
Change 1960-2009
Correlation of Non Farm Productivity to IT Investment
Change 1960-2009
R-squared = .9835R-squared = .9835
They don’t enable us to detect the leading indicators of global competitiveness
Estimated Growth of Technology Investment per Worker – 2011 vs. 2009
Technology Investment Rate of ChangeTechnology Investment Rate of Change
2011 Versus 2009 Technology Investment per Worker
Ukraine
Brazil
China
U.S.
India
95%95%
77%77%
60%60%
55%55%
10%10%
Why do Today’s Economic Measures Fail?Why do Today’s Economic Measures Fail?
They don’t acknowledge technology trends as a leading indicator of business cycles
Evidence: An index that mirrors the Leading Index of Economic indicators using Technology Measures appears to be a better indicator of future economic
performance
Evidence: An index that mirrors the Leading Index of Economic indicators using Technology Measures appears to
be a better indicator of future economic performance
Evidence: An index that mirrors the Leading Index of Economic indicators using Technology Measures appears to
be a better indicator of future economic performance
They don’t provide visibility into the role of the effective technology in shaping business performance and as a strategic differentiatorThey don’t provide visibility into the role of the effective technology in shaping business performance and as a strategic differentiator
Why do Today’s Economic Measures Fail?Why do Today’s Economic Measures Fail?
An index of market performance of the technology leaders shows them to be more resilient than the F500, Dow Jones, or S&P 500
TLI
F 500
S&P 500
DJIA
Why do Today’s Economic Measures Fail?Why do Today’s Economic Measures Fail?
They don’t even attempt to look at the societal impact of technology on quality of life
• Technology Economy Index
Technology Economic Indices at the national level are better predictors of quality of life as measured by the UN’s Human Development Index.
• UN Human Development Index
• Knowledge Jobs
• Technology Innovation
How do We Measure IT Today?How do We Measure IT Today?
Most commonly used measures are:
• IT as a % of Revenue
• IT as a % of Operating Expense
• IT spending per Employee
• IT Spend Distribution: Development vs. Maintenance vs. Infrastructure
• IT Spend Distribution: Run the Business Grow the Business
• IT Unit Costs: per Server, per MIPS, per Desktop, per GB Storage, per Help Desk Call, per Desktop
How do We Measure IT Today?How do We Measure IT Today?
Why do today’s IT measures fail?
• All input focused – $$ people, etc.
• No output or outcome focus
• False transparency… IT things clearer to IT people…not to the business or constituents
• Most measures are static and not leading indicators
Why do Today’s IT Measures Fail?Why do Today’s IT Measures Fail?
The limitations in our understanding of Technology Economics limits our ability to fully leverage IT
In the current economy – IT has not moved at the “speed of business”.
2009 vs. 2008 Compression2009 vs. 2008 Compression
Revenue Operating Expense IT Spending
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% $5.57 40%
Add $1,000M Tech spend to reduce OpEx 20%
$7.07 43%
Why do Today’s IT Measures Fail?Why do Today’s IT Measures Fail?
IT is viewed as a cost which can be cut versus and area to invest when the “going gets rough” to improve EPS
Spend into the skid
EPS from increasing IT spend is potentially higher than if all IT was cut!!
Why do Today’s IT Measures Fail?Why do Today’s IT Measures Fail?
They don’t connect to outcomes that are critical to the business environment and even mask our ability to explore such interactions
Pre Tax Margin vs.. Technology Intensity
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
IT as % of Revenue
IT as % of OpEx
Tech
nolo
gy In
tens
ity
Pre
Tax
Mar
gin
Technology Intensity
Evidence: Top performers have driven higher pre tax margin for a given level
of technology investment
Evidence: Top performers have driven higher pre tax margin for a given level
of technology investment
Why do Today’s IT Measures Fail?Why do Today’s IT Measures Fail?
They don’t enable a true business facing view of investment
Technology Investment and Business Performance • Grow Revenue
• Protect Revenue
• Reduce Cost
• Avoid Cost
• Manage RiskIncrease the spread toincrease margin
.
Rev
enue
or
Ope
ratin
g E
xpen
se
Net Revenue Operating Expense
Time
What are the “Right Measures”?What are the “Right Measures”?
Measures that “connect the dots” of your technology economy
Benchmark Audiences:
• CEO
• CFO
• LOB Management
• CIO
• IT Directors – Applicationsand Operations
• Procurement
• Portfolio Managers
• Procurement
• Sourcing Oversight
• HR
Total Technology Spend/FinancialBenchmarks
IT Financial vs. Business Financial/Volume Benchmarks
IT Spend
IT Spend in LOB.
Head Counts
New Measures
Service Delivery and Service Quality Benchmarks
•Availability
•Satisfaction
•Applications/
Components/
Services
Catalog-Based Benchmark
•Unit Costs
•Service
Levels
•Service
Coverage
•Service
Organization
Business Based Benchmarks
•Technology Cost of Goods•Technology Value of Goods•Technology Innovation Value•Technology Agility
Driver-Based (Causal) Benchmarks
•Productivity/Support Ratios•Quality•Reliability•Process
• Process• Procurement/
External
Costs
What is the Right Way to Use Measurement?What is the Right Way to Use Measurement?Measurement models that encourage charting your technology economy and foster an understanding of its dynamics and formulation of hypotheses to enhance performance – a forensic approach
Today’s Performance
Critical Technology Performance Indicators
Thematic Scorecard(s)
• Lagging Indicators• Leading Indicators
Balanced Scorecard(s)
• Finance• Customer• Process • People
“Deep Dive On-Demand Benchmarks”
Tomorrow’s Performance
Critical Technology Performance Indicators
“Market Data Feeds” for Calibration
What are Some of the “New” Measures?What are Some of the “New” Measures?
Measures that make the business-IT connection
The IT Cost of Goods has continued to rise as all sectors have become more technology intense.
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
Increase in IT Cost of Goods 2008 vs. 2001
$250 Per US Citizen
Per Year
$250 Per US Citizen
Per Year
What are Some of the “New” Measures?What are Some of the “New” Measures?
Measures that connect the dots – IT Cost of Goods
$57,717 Per Patent
$57,717 Per Patent
$0.17 Per Mile
$0.17 Per Mile
$0.07 Per Passenger
Mile
$0.07 Per Passenger
Mile
$8,036 Per Year per
Soldier
$8,036 Per Year per
Soldier
$2.63 Per Megawatt
$2.63 Per Megawatt
$65 Per Hospital Bed Per Day
$65 Per Hospital Bed Per Day
What Dynamics Can We Chart?What Dynamics Can We Chart?
• Agility Drivers
• Investment Patterns
• Value Generation
• Financial Models
• Scale Economics
• Unit Costs
Charting and Calibrating: IT IntensityCharting and Calibrating: IT IntensityThere is at least a 4 to 1 variation of the intensity of IT -- cost and impact relative to revenue and operating expense – across key sectors of our economy.
1.40
Telecommunications
Banking & Financial ServicesMedia
Information TechnologyProfessional Services
ElectronicsHospitality & Travel
OverallUtilities
InsuranceManufacturingTransportation
Health CareEnergy
Consumer ProductsChemicals
RetailFood/Beverage Processing
Metal/Natural ResourcesConstruction & Engineering
Pharmaceuticals
0.68
0.810.79
0.77
0.71
0.670.63
0.590.58
0.550.54
0.450.42
0.40
0.370.330.33
0.30
0.72
1.19
0.29
0.20 0.40 0.90 0.80 1.00 1.20
4:14:1
Charting and Calibrating: IT ExpenseCharting and Calibrating: IT ExpenseAverage of IT Spend as % of Revenue - 2008, by Industry
Average of IT Spend per Employee- $US 2008, by Industry
Source: Gartner IT Key Metrics Data 2009
1% 2% 3% 4% 5% 6% 7% 8%
Banking & Finance UtilitiesEnergy
Professionals Services Health Care
Information Technology
Hospitality and Travel
Banking & Finance
Professionals Services Health Care
Information TechnologyHospitability and Travel
UtilitiesEnergy
$24,391
$17,153$13,444
$13,359
$10,498
$10,356
$4,441
$24,391
$17,153
$13,444
$13,359
$10,498
$10,356
$4,441
0%
$ $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 Source: Gartner IT Key Metrics Data 2009
Charting and Calibrating: Management DynamicsCharting and Calibrating: Management Dynamics
• Cut staff
• Use more offshore labor
• Vendor renegotiation
• Cancel discretionary projects
Dilute IT Value
Put the “Squeeze on IT”
Charting and Calibrating: Economies of ScaleCharting and Calibrating: Economies of Scale
X = 2007 Competitors and Y = 2009 Competitors in terms of placement on the scale economics curve and do not represent actual competitor unit costs
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
XX
XXXX
X
X
YY
YY
YY
-12%
-8%
-6%
Charting and Calibrating: Moore’s LawCharting and Calibrating: Moore’s Law
Scale shifts and economics
A “market basket” of infrastructure services that cost ~$500M+ in 2007 will likely be delivered by the most efficient companies for ~$295M in 2010 and for $132M by those who migrate to the “cloud” and “commons” by 2015
Annual Decrease in TCO to Stay Competitive
MIPS Servers Storage
Charting and Calibrating: Total CostCharting and Calibrating: Total Cost
Total Cost = Volume x Unit Cost
CostCo ITCostCo IT
Charting and Calibrating: ROITCharting and Calibrating: ROIT
The most opportunistic time for technology investment is likely during an economic downturn.
Investment in IT
2003 - 2005
New InvestmentDollars
= $1.47Gross Profit 2006
Each $1
Charting and Calibrating: Variable CostCharting and Calibrating: Variable Cost
Model Company Tech Spend
% Variable Today% Variable Future State Model
Total Tech Spend 36% 60%
Compensation 50% 70%
Contractors and Sourcing 100% 100%
Hardware Depreciation 0% 33%
Hardware Maintenance 25% 50%
Software Expense 25% 50%
Software Capitalization 0% 50%
Telecommunications 25% 60%
T&E 50% 50%
Recruiting 100% 100%
Facilities/Rent 10% 33%
At best companies today can compress IT costs by 36%.. The rest is fixed cost – IT cannot move at the “speed of business”
IT has a high fixed cost and fixed capacity history
Taking ChargeTaking Charge
Use Forensics to Assess and Optimize Performance
= Scientific techniques used for investigation and hypothesis formulation
• Cascades from few strategickey measures to form initial hypotheses to a larger set where opportunities might be evident.
• Cascades from few strategickey measures to form initial hypotheses to a larger set where opportunities might be evident.
• Has a strong focus on a side by side view of technology, operations, and business performance.
• Has a strong focus on a side by side view of technology, operations, and business performance.
• Follows the “evidence”, formulating hypotheses about opportunities and collecting facts to identify the ones that will produce high yield results.
• Follows the “evidence”, formulating hypotheses about opportunities and collecting facts to identify the ones that will produce high yield results.
Taking ChargeTaking Charge
Can you answer these questions?
• Is IT “sized to your business”?
• Are your IT commodity costs competitive?
• Are you moving at the speed of your competitors?
• Are you leveraging the marketplace?
• Can you compete at your scale?
• Does your IT economic model offer the agility you need?
• Are you getting an appropriate return on your technology investment?
• Are you investing in the right new technologies at the right time?
• Are you managing your technology economy or it is managing you?
Make Technology Economics Work For YouMake Technology Economics Work For You
• Optimize and Resize
• Consider “The Commons”
• Realign, reclaim, and reinvest
• Enable agility
• Leverage the supply chain
• Fund IT forward and “follow the money”
• Strategically engage the business and become an IT Savvy enterprise
• Engage in aggressive technology scanning and innovation
More importantly Chart and Calibrate YOUR Technology Economy
Synthesis Synthesis
Technology economic principles
are clearly a critical aspect of the
global economic engine.
An understanding (and foresight)
into technology economics is a
driver of a nation's competitiveness
and ability to enable quality of
life for its citizens.
Synthesis Synthesis
Synthesis Synthesis In the near future the way we look at the economy and forecast its performance will change
Technology Economy Index / IT GDP
Technology Leadership Index
Technology Consumer Confidence Index
Technology CPI / Market Basket Index
Synthesis Synthesis
Companies that are technology leaders – those that
successfully can optimize technology for operational
leverage, technology for growth, technology to
empower its workforce and technology as an
investment for innovation – are the business leaders.
Final WordsFinal Words
The most opportunistic time for technology investment is during
an economic downturn; it is the only area in which investment
can change the operating profile of an organization – 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.
IT Does Matter – It is strategic and meaningful if managed wisely.
- Howard Rubin
Dr. Howard RubinGartner Senior AdvisorFounder Rubin WorldwideMIT CISR Associate
IT Does Matter
Charting, Calibrating, and Taking Charge of Your technology Economy
Thank youThank youThank youThank you