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Loosening IT's purse strings

IDG News Service, Information Age

18/02/2001 17:11:40

Gregor Bailar is not the most typical of IT executives. As CIO and executive vice president of operations for Nasdaq, the world's first electronic stock market, Bailar is part of a business built on technology. So it comes as no surprise that Bailar foresees a 20 per cent to 25 per cent increase in technology spending for his company in 2001, compared to last year's expenditures.

Considering that it represents almost half of Nasdaq's total annual expenditures, the figure is quite impressive. It's a much bigger bite out of the total IT pie than is found in most enterprises - something south of 10 per cent is far more "normal", according to analysts.

But Kurt Potter, research director at Gartner Group, says there's no such thing as "normal" when it comes to IT.

"We categorise companies as either leading-edge adopters of technology, mainstream adopters, or conservative," Potter says. "We sampled 510 companies and found that 74 per cent were in the mainstream category. A mainstream company tends to spend 10 per cent or less of the total budget on IT."

Nevertheless, Potter says things are moving toward a new standard. "Many more companies are going to have to begin the transformation in the direction of leading-edge technology users," he says. "This means spending over 10 per cent of revenue on technology."

Australia sets record low

In Australia, Gartner's regional director, IT services market, Rolf Jester agrees with Potter's view.

"In our surveys we find that nearly 60 per cent of CIOs define their company's IT adoption stance as ‘mainstream'. Interestingly, nearly 25 per cent call themselves ‘leading edge' adopters of technology, and only 16 per cent or so as ‘conservative'. Some of that is due to the fact that leading edge IT adoption is fashionable," Jester says.

Gartner's local research shows that nearly half of Australian IT users spend between 1-3 per cent of their company's revenue on IT, 18 per cent spend 3-5 per cent, 6 per cent spend 5-7 per cent, 8 per cent spend 7-10 per cent and 12 per cent say they spend over 10 per cent.

Eight per cent spend less than 1 per cent - far lower expenditure than anywhere else in the Asia/Pacific region.

"An increasing proportion of that expenditure is going to external service providers as organisations find that they need outside help not to save money necessarily (although they may do that too sometimes), but to get access quickly to skilled staff and the latest technology. They also seek to concentrate their own efforts on their core business.

"Hence the IT services market is growing significantly faster than the IT market generally, and outsourcing in particular is growing rapidly and will continue to do so despite the sometimes ill-informed comments of various commentators."

Regardless of classification schemes, the trend is clear: IT budgets can no longer be regarded as simply a cost of doing business. Rather, they represent critical investments in developing and growing the business.

Rob Austin, senior fellow at research company Cutter Consortium, says it is the tension generated by the perception that IT departments are cost centres, rather than revenue-generating units, that has finally come to the forefront.

"In the budgeting process, this tension is a huge part of the picture - an under-appreciated part," he says.

Y2K all over again?

A significant portion of IT money this year, Potter says, will go for something widely regarded as over and done with. But although the Y2K bug has come and gone, Potter says that, in one sense, it will never leave us.

"It is Y2K all over again," Potter says. "The Y2K bug was really just one species of a very large family. New federal regulations, for example, mean that the health insurance industry suddenly has their own new version to wrestle with."

No one knows this better than Nasdaq's Bailar. In 2001 the Nasdaq will move to decimal quotation, scrapping its traditional system of quoting prices in eighths. The shift may not seem critical, but looking closely it is easy to see why it will keep Bailar busy. "This means a tremendous increase in volume," he says. "This is because there are 12.5 decimal places in every eighth of a dollar, which means a theoretical multiplication of volume by a factor of 12.5."

Outsourcing on the rise

Nasdaq has relied primarily on homegrown systems in the past, but this too is changing. "We are now able to use more off-the-shelf products," Bailar says, adding that, for example, the company will be using Tibco's Information Bus as middleware to expand its online trading capabilities. He's even outsourced a mission-critical function. "WorldCom does our trading network. This kind of goes against common wisdom - that you don't outsource your core systems. In this case, however, we think it makes sense," he says.

In fact, Bailar says the key question in turning technology systems over to someone else is, "Does it make sense?"

Bailar uses the analogy of building a house to make the point. "You would not custom-manufacture each doorknob," he says. "In fact, when you build a home, you outsource most items.

"We are nowhere near being able to do this yet with software components, but the whole ASP [application service provider] phenomenon is exciting in this regard. It indicates we are moving in that direction."

Mainstream means

e-business

Gartner's Potter agrees, saying that outsourcing will definitely take a bigger slice of the IT budget in the future.

"Really, this involves answering two more questions," Potter explains. "If it is both strategically important and also part of your core competency, then you probably don't want to outsource it. In Nasdaq's case, I suspect that the trading network, while strategically important, was not part of the organisation's core competency."

Unlike Nasdaq, Time Warner wasn't built around a computerised system. But technology remains a huge priority. Michael Dunn, the company's CTO, says he can't really divulge its IT budget. But he does characterise his company as "not atypical" of large, mainstream American corporations.

The company's revenues of far more than a billion dollars would then give Dunn a budget in excess of $US50 million, using Potter's estimate that mainstream companies spend about 5 per cent of total revenue on IT.

Dunn says a significant amount of the budget will go to new e-business initiatives, where percentages tend to be much higher.

"There are some things you do in IT that are to support your existing enterprise," he says. "Then there are the things you do to drive new sources of revenue. You can expect to see a lot of action in this latter area from Time Warner in 2001."

Dunn is reluctant to reveal details, due in part to the fledgling merger of Time Warner with America Online. "You can look at what we have done with the CNN Web site to get a taste of what is to come across our other business units," he says.

And these things will probably cost more. "I was CTO at Dell Online before I joined Time Warner," Dunn says. "There, 50 per cent of our gross transactions were over the Web, so our expenditures to support that were not at all typical of traditional IT budgets."

Numbers such as these tend to confirm what Cutter's Austin says. "When you think about IT in terms of revenue enhancement, as opposed to cost reduction, you need a whole new mind-set."

Howard Rubin, an analyst at Meta Group, says IT executives can expect to take part in a significant transformation. "CIOs, CTOs, and their colleagues are repositioning IT in the enterprise, changing it from a cost centre to a value centre," he says.

Spend it to make it

Although this year saw the downfall of many IT enterprises that aspired to value-centre status, Austin thinks it would be a mistake to view the year's dotcom debacle as simply a demonstration of how not to do things. "There are valuable lessons, some of them positive, to be learned there," he says.

"While many of these companies did not do enough to control costs and achieve profitability, we can still learn from their revenue-generating strategies."

But not all of the dotcoms have gone. iEngineer.com is still around, for example. The company offers applications to help mechanical and manufacturing engineers collaborate on design processes.

"We are still in startup mode," says Marc Hansen, CTO of iEngineer. "We are still spending more on IT than we receive in gross revenue."

This goes way beyond Gartner's early adopter category, and few, if any, mainstream IT departments will ever be able to make this claim. But one telling fact about iEngineer may point the way of the future.

"We have about $2 million worth of servers to support our business," Hansen says. "And we spend a lot on basic infrastructure and software licences."

All this hardware, software, and networking infrastructure, however, has nothing to do with what used to be the primary job of IT, namely bookkeeping and other back-office procedures. "We do all our accounting on a PC," Hansen says.

And in 2001, Hansen says, this isn't likely to change. "We are going to be buying more storage, CPUs, and software licences." All of this, he explains, will be to support the revenue-generating side of the business.

Hansen does say that there may be some beefing up of the back office, but it will likely be through outsourcing. "We are evaluating an ASP to handle our HR functions in 2001," he says.

What you don't see

The trends toward revenue generation and outsourcing in IT spending are clear, but IT leaders should never forget hidden costs. It's a fact of life that a large percentage of IT spending is allocated to hardware, software and service purchases that occur outside the auspices of the IT department. And the amount spent in this category is significant.

"You can take all the spending numbers in our reports and add about 39 per cent to them," Gartner's Potter says.

"Fifty per cent of IT spending is usually outside IT departments," Cutter's Austin says. "The reason is simple: technology used to be a prescription drug, (and) now it is over-the-counter.