Transcript Financial Services Technology Trends: Global Update

Welcome to the
2009 Executive CIO
Roundtable
Technology Economics and the
Current Economic Crisis:
The “IT Bailout” (of Business)
Dr. Howard Rubin
CEO Rubin Systems/Rubin Worldwide
MIT CISR Research Associate
Gartner Senior Advisor
+1 914 420 8568
[email protected]
www.rubinworldwide.com
Fairfield/Westchester SIM’s
2008 CIO Executive Leadership Summit
October 28, 2008
2
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.
3
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 noncompetitive 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.
4
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.
5
The Economic Climate
•Global economy
• Predictions of global recession
• Revenue pressure on all sectors/geographies
• GDP growth projections being revised downward
IMF: World economy to slow sharply, led by US
Selected 2008 National GDP Forecasts:
Different Growth Rates Around The World
World Bank
Forecast
+7.0%
+1.8%
+1.9%
+1.6%
+1.4%
% Equals
Change Over
2007
+2.6%
+6.4%
+5.4%
+6.6%
2008 World GDP
9
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6
+6.0% +9.9%
+8.0%
+1.5%
+3.6%
+3.2%
2.7%
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
7
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 Greenspan
Technology and the economy
Before the Economic Club of New York, New York, New York
8
The Technology Economic Climate
Technology 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!
9
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
$11,000,000
$1,000,000
$10,000,000
$900,000
$800,000
$9,000,000
$700,000
$8,000,000
$600,000
$7,000,000
$500,000
$6,000,000
$400,000
$5,000,000
$300,000
$4,000,000
$200,000
2001
2002
2003
2004
2005
Year
Tech Spend
10
Revenue
Operating Expense
2006
Tech Spend $M
Revenue or Operating Expense $M
Fortune 500 Totals 2001-2006
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.
Internet/Pervasive
Computing
Distributed Computing
Mainframe Computing
11
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
Value Relative to 1960
9.00
8.00
Internet/Pervasive
Computing
7.00
6.00
Distributed
Computing
Mainframe
Computing
5.00
4.00
3.00
2.00
1.00
GDP Relative to 1960
12
DJIA Relative to 1960
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
0.00
IT Spend % of Revenue Relative to 1960
Technology Economics: Historical Perspective
National productivity has accelerated through the “technology era”
Percent Change Over Period
US Non Farm Business Productivity Change
3.00
2.50
2.00
1.50
1.00
0.50
1960-1980
The Mainframe Era
1981-1990
1991-2000
2001-Current
The Client
The PC/Emerging
Server/Distributed Era
Internet Era
The Pervasive
Computing/Pervasive
Access Era
Non Farm
Productivity
Change
Correlation Between Non Farm Productivity Change and IT Investment Change
3.00
2.50
2.00
1.50
1.00
0.50
-
y = 0.6633x + 0.337
R2 = 0.9835
-
1.00
2.00
3.00
IT Investment Change
13
4.00
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
(Banking) Banks
Pre Tax Margin
Vs.
Technology
Intensity – Intensity
Top 10 Investment
41%
Top 10 Investment Banks
Marg In
39%
37%
35%
Tax
31%
Pre
33%
29%
IT as % of OpEx
27%
25%
1.25
IT as % of
Revenue
1.35
1.45
1.55
1.65
Technology
14
1.75
IntensIty
1.85
1.95
2.05
Technology Economics: Historical Perspective
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….
$11,000,000
$1,000,000
$10,000,000
$900,000
$800,000
$9,000,000
$700,000
$8,000,000
$600,000
$7,000,000
$500,000
$6,000,000
$400,000
$5,000,000
$300,000
$4,000,000
$200,000
2001
2002
2003
2004
2005
Year
Tech Spend
15
Revenue
Operating Expense
2006
Tech Spend $M
Revenue or Operating Expense $M
Fortune 500 Totals 2001-2006
Technology Economics: Historical Perspective
At the same time the IT Cost of Goods has continued to rise as all sectors have become
more technology intense.
Industry
Airlines
Automotive
Chemicals
Consulting
Hospitals
Railroads
Retail
Web Sites
Trucking
Armed Service
Utilities
Oil & Gas
Banking
Retail Bank - Deposits
Retail Bank - Deposits
Retail Bank - Consumer Lending
Retail Bank - ATM
Retail Bank - ATM
Retail Bank - Branch
Retail Bank - Branch
Retail Bank - Call Center: Deposits
Retail Bank - Call Center: Deposits
Retail Bank - Call Center: Consumer Lending
Retail Bank - Online
Retail Bank - Credit Card
Retail Bank - Credit Card
16
Measure
Per Passenger Mile
Per Vehicle
Per Patent
Per Consultant
Per Bed per Day
Per Ton Mile
Per Store (Dorr)
Per Search
Per Road Mile
Per Person
Per MegaWatt Hour
Per Barrel of Oil
$
$
$
$
$
$
$
$
$
$
$
$
IT Cost of Goods
0.007
333.424
57,717.471
53,059.985
64.30
0.001
494,817.989
0.042
0.177
8,036.000
2.630
1.780
Per Transaction
Per Account
Per Consumer Loan
Per ATM
Per ATM Transaction
Per Branch per Year
Per Branch Transaction
Per IVR Contact
Per Agent Handled Contact
Per Contact
Per Online User
Per Account
Per Credit Card Transaction
$
$
$
$
$
$
$
$
$
$
$
$
$
0.02
2.73
29.00
984.00
0.04
54,014.00
0.32
0.65
0.90
0.75
18.00
3.00
0.16
Increase in IT Cost of Goods 2008 Vs 2001
Utilities
Oil
64.4%
12.4%
Hospital
Chemical
Automotive
0.0%
107.4%
13.2%
22.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
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.
$12,000,000
$1,000,000
$11,000,000
$900,000
$10,000,000
$800,000
$9,000,000
$700,000
$8,000,000
$600,000
$7,000,000
$500,000
$6,000,000
$400,000
$5,000,000
$300,000
$4,000,000
$200,000
2001
2002
2003
2004
2005
2006
Year
Tech Spend
17
Revenue
Operating Expense
2007
2008
Technology Spend $M
Revenue or Operating Expense $M
Fortune 500 Totals 2001-2008
Technology Economics: Current State
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.
18
F500 Change in Sector Profitabiliy
Banking & Finance
Chemicals
Construction & Engineering
Consumer Products
Electronics
Energy
Food & Beverage Processing
Health Care
Hospitality & Travel
Information Technology
Insurance
Manufacturing
Media
Metals & Natural Resources
Pharmaceuticals
Professional Services
Retail
Telecommunications
Transportation
Utilities
Grand Total
2007 Vs 2006
56%
109%
-55%
123%
74%
91%
118%
109%
96%
112%
89%
64%
92%
36%
98%
80%
99%
-180%
216%
107%
84%
2006 Vs 2005
94%
96%
61%
97%
125%
119%
85%
84%
121%
104%
117%
2113%
285%
86%
84%
134%
88%
31%
112%
145%
112%
2005 Vs 2004
89%
101%
113%
91%
157%
146%
95%
138%
108%
123%
106%
8%
-56%
118%
113%
89%
124%
-49%
649%
82%
118%
2004 Vs 2003
106%
181%
136%
133%
249%
154%
213%
85%
119%
143%
104%
153%
-76%
264%
92%
214%
118%
-314%
19%
212%
110%
Technology Economics: Current State
IT Intensity by Sector (2006 Data)
Banking & Financial Services
1.19
Media Average
0.81
Information Technology Average
0.79
Professional Services Average
0.77
Telecommunications Average
0.72
Electronics Average
0.68
Overall
0.67
Utilities Average
IT Intensity
Technology
Intensity
varies
across
sectors
0.71
Hospitality & Travel Average
0.63
Pharmaceuticals Average
0.59
Insurance Average
0.58
Manufacturing Average
0.55
Transportation Average
0.54
Health Care Average
0.45
Energy Average
0.42
Consumer Products Average
0.40
Chemicals Average
0.37
Retail Average
0.33
Food/Beverage Processing Average
0.33
Metals/Natural Resources Average
0.30
Construction & Engineering Average
0.29
-
19
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Cross Industry Overview: Current State
Computing needs in support of revenue vary widely by industry
Banking Average
Consumer Products Average
Education Average
Electronics Average
Financial Services Average
Food & Beverage Processing Average
Government - Federal Average
Government - State & Local Average
Health Care Average
Insurance Average
Manufacturing Average
Metals & Natural Resources Average
Professional Services Average
Telecommunications Average
Transportation Average
20
MIPS per Servers per
$1M
$1M
Revenue
Revenue
0.98
0.39
0.19
0.16
0.13
0.05
0.25
0.11
1.07
0.46
0.18
0.12
0.49
0.115
0.38
0.09
0.19
0.13
0.33
0.16
0.21
0.12
0.16
0.12
0.14
0.08
0.85
0.25
0.23
0.21
Cross Industry Overview: Current State
Cost of Mainframe and Server resources per $1M revenue
Financial Services Average
Banking Average
Telecommunications Average
Government - Federal Average
Transportation Average
Insurance Average
Government - State & Local Average
Consumer Products Average
Electronics Average
Health Care Average
Manufacturing Average
Food & Beverage Processing Average
Metals & Natural Resources Average
Utilities Average
Professional Services Average
Education Average
Averages
21
Compute
Cost per
$1M
Revenue
$ 13,320
$ 11,730
$
8,850
$
4,665
$
4,530
$
4,380
$
3,630
$
3,540
$
3,150
$
3,090
$
3,060
$
2,880
$
2,760
$
2,160
$
2,040
$
1,530
$
4,707
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Financial Services Average
Banking Average
Telecommunications Average
Government - Federal Average
Transportation Average
Insurance Average
Government - State & Local Average
Consumer Products Average
Electronics Average
Health Care Average
Manufacturing Average
Food & Beverage Processing Average
Metals & Natural Resources Average
Utilities Average
Professional Services Average
Education Average
Averages
Compute
Cost
Relative to
Average
2.83
2.49
1.88
0.99
0.96
0.93
0.77
0.75
0.67
0.66
0.65
0.61
0.59
0.46
0.43
0.33
1.00
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
22
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
23
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
24
Technology Economics: Observed IT Strategies/Tactics
1.
2.
3.
4.
5.
6.
7.
Reduce headcount/freeze hiring
Curtail data center expansion/“Virtualize”/Sell assets and lease them back
Renegotiate with vendors
Consolidate functions to drive economies of scale
Outsource commodity services – shift to variable cost basis where possible
Leverage offshore resources
Investment reclamation (shut down any investments not aligned with current
business strategy)
8. Investment prioritization (realign investments with current business strategy)
9. “Mothball” businesses/products
10. Change leadership/New IT management structure and power base: CIO vs. COO
vs. CAO vs. CFO
25
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
Total Tech Spend
$
$M
3,000.00
Percent of Spend
Action
Reduction
Compensation Employee Mix 85% onshore; 15% offshore
(Headcount of 9,000) $
1,140.00
38.0%
Reduce Staff 15%
Contractors $
360.00
12.0%
Hardware Depreciation $
360.00
12.0%
Maintenance $
Software Expense $
Telecommunications $
240.00
300.00
330.00
8.0%
10.0%
11.0%
Eliminate 33% of contractors
$
Change to 5 Year Depreciation
from 4
$
Renegotiate and reduce 10%;
Eliminate licenses not needed (2%
of cost)
$
T&E Recruiting etc $
30.00
1.0%
Facilities/Rent $
$
240.00
3,000.00
8.0%
100.0%
$
Action
Reduction
Realign remaining staff to
65% onshore 35% offshore - extra 15% of staff offshore
119.70 has 40% cost reduction
$
44.44
Convert remaining
contractors to 50% offshore
118.80 at .67 onshore rate
$
39.80
72.00
28.80
Renegotiate and reduce 5%
$
16.50
Reduce travel etc
Consolidate; release space if
possible (5%)
Round 1 Reductions
$
2.40
$
$
12.00
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 $
Round 2 Reductions
$
75.00
159.24
Round 1 + Round 2 Saves
$
529.44
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
Other reductions
Options Not Inlcuded; Asset Purchase Leaseback; Telecomm
Outsourcing; Sale of Space; Market Data Cost Reductions
26
Outsource Desktop (55,000
@ $360 per year savings -vendor buys assets)
Outsource email (55,000
*$240 per year savings)
Renegotiate Co-Loc deals
$
19.80
$
13.20
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
reclaim, and reinvest – rethink the RTB/CTB model and portfolio strategy – while
managing risk
Realign,
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
27
engage the business and become an IT Savvy enterprise
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.
Projected Tech Spending Required to Close Competitive Gap
Client Total Tech Spend Vs Best In Class Benchmark Investment Levels
$1,800.000
$4,000.00
$1,800.0
0
$1,600.00
$3,900.00
$1,400.00
$4,100.00
$4,000.00
$3,800.00
$M
$M
$1,200.00
$3,700.00
$3,700.00
$1,200.00
$3,600.00
$1,000.00
$800.00
$3,500.00
$3,400.00
$3,400.00
$3,400.00
$400.00
$3,300.00
$300.00 $300.00
$200.00
$3,200.00
$3,100.00
$600.00
$600.00
2006
2007
Client Total Tech Spend
Benchmark Best In Class Total Tech Spend (OpEx Basis)
$-
2006
2007
Gap to Best In Class Spend Level within Year
Projected Spend to Catch Up
Best in Class = Top quartile business performance as measured by 3 year pre tax margin
28
2008
Technology Economics: Spend into the Skid
What are the options to “squeeze” IT?
Model Company Tech Spend
• What if IT was free?
• What if IT labor was free?
Model Company 10K (30% Pre Tax Margin)
Net Revenue
Non Interest Expense
$
$
Compensation $
$M
50,000
35,000
17,500
Comm & Tech (Not Total Tech!) $
Occupancy $
2,500
3,000
Other (Professional Fees, Advertising, Clearing,
Brokerage, etc.) $
Shares Outstanding (M)
EPS (PreTax) $
$M
Total Tech Spend
$ 5,000
Compensation
Contractors
Hardware Depreciation
Hardware Maintenance
Software Expense
$ 1,800
$ 500
$ 600
$ 400
$ 500
Software Capitalization
Telecommunications
T&E
Recruiting
Facilities/Rent
$
$
$
$
$
500
300
50
50
300
EPS
12,000
Current State
3,500
4.29
If "IT was free"
If "IT labor was free"
Take down Tech Spend 10%
Take down Tech Spend 20%
Take down Tech Spend 20% and OpEx 10%
What are the options to invest in
IT to lower Operating Expense?
Add $500M Tech Spend to reduce OpEx 15%
Add $1,000M Tech spend to reduce OpEx 20%
SPEND
29
INTO
THE
SKID
PreTax Margin
$ 4.29
30%
$
$
$
$
$
5.71
4.94
4.43
4.57
5.57
40%
35%
31%
32%
39%
$ 5.64
40%
$ 7.07
43%
Technology Economics: Fixed Vs Variable Cost Conversion
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 Future
State Model
60%
70%
100%
33%
It 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.
50%
50%
50%
60%
50%
100%
33%
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]
Total Tech Spend
$5,000
Compensation
$1,800
Contractors and Sourcing
Hardware Depreciation
$500
$600
36%
50%
100%
0%
Hardware Maintenance
Software Expense
Software Capitalization
Telecommunications
T&E
Recruiting
Facilities/Rent
$400
$500
$500
$300
$50
$50
$300
25%
25%
0%
25%
50%
100%
10%
Soft Vs. Hard Landing Controls
30
Category Captains
% Variable
Today
Technology Economics: Commoditize
Leverage 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
Total Servers (Wintel Linux Unix)
Company
A
B
C
D
E
F
G
Average
2006 Vol
20,959
11,872
37,566
36,000
22,000
24,986
17,000
24,340
2006 Total Cost
$
$
$
$
$
$
$
$
2007 Volume
185,139,000
71,895,753
142,338,705
346,932,000
268,400,000
379,361,000
137,700,000
218,823,780
25,284
12,987
39,318
35,000
25,500
31,117
23,400
27,515
1.68
2007 Total Cost
$
$
$
$
$
$
$
$
200,406,000
69,000,000
111,091,704
297,045,000
272,850,000
464,264,000
182,520,000
228,168,101
2006 UC
$
$
$
$
$
$
$
$
8,833
6,056
3,789
9,637
12,200
15,183
8,100
8,990
2007 UC
$
$
$
$
$
$
$
$
7,926
5,313
2,825
8,487
10,700
14,920
7,800
8,292
Volume
Growth
Total
Cost
Growth
Unit Cost
Growth
Ratio of Volume
Growth/Total Cost
Growth
1.21
1.09
1.05
0.97
1.16
1.25
1.38
1.13
1.08
0.96
0.78
0.86
1.02
1.22
1.33
1.04
0.90
0.88
0.75
0.88
0.88
0.98
0.96
0.92
1.11
1.14
1.34
1.14
1.14
1.02
1.04
1.08
Volume
Growth
Total
Cost
Growth
Unit Cost
Growth
Ratio of Volume
Growth/Total Cost
Growth
1.73
1.11
1.24
1.13
1.17
1.21
1.38
1.28
1.17
1.05
1.14
1.04
1.13
1.12
1.10
1.06
0.68
0.95
0.92
0.92
0.97
0.93
0.80
0.82
1.48
1.06
1.09
1.09
1.03
1.07
1.26
1.21
Volume
Growth
Total
Cost
Growth
Unit Cost
Growth
Ratio of Volume
Growth/Total Cost
Growth
1.35
1.45
1.35
1.26
1.39
1.22
1.33
1.34
1.15
1.38
1.16
1.21
1.33
1.20
1.25
1.24
0.85
0.95
0.86
0.96
0.96
0.99
0.94
0.93
1.18
1.05
1.17
1.05
1.04
1.01
1.07
1.08
Mainframe MIPS
MIPS Model
A
B
C
D
E
F
G
Average
2006 Vol
38,039
11,000
49,000
22,585
22,600
97,000
35,783
40,037
2006 Total Cost
$
$
$
$
$
$
$
2007 Volume
218,077,587
24,200,000
174,489,000
86,048,850
89,270,000
377,330,000
185,326,000
172,638,589
65,939
12,200
61,000
25,586
26,442
117,000
49,440
51,361
2007 Total Cost
$
$
$
$
$
$
$
255,401,349
25,428,000
198,921,000
89,806,860
101,061,324
423,540,000
203,684,167
182,359,756
2006 UC
$
$
$
$
$
$
$
$
5,733
2,200
3,561
3,810
3,950
3,890
5,179
4,312
2007 UC
$
$
$
$
$
$
$
$
3,873
2,084
3,261
3,510
3,822
3,620
4,120
3,551
Distributed Storage (TB)
Storage Model
A
B
C
D
E
F
G
Average
31
2006 Vol
2,616
2,216
1,170
8,240
7,920
1,860
2,978
4,004
2006 Total Cost
$
$
$
$
$
$
$
$
46,180,000
40,165,000
30,300,000
127,720,000
114,048,000
30,094,800
140,444,000
64,751,300
2007 Volume
3,536
3,213
1,580
10,390
11,009
2,264
4,563
5,332
2007 Total Cost
$
$
$
$
$
$
$
$
53,090,000
55,434,126
35,100,230
154,000,000
152,196,660
36,201,360
173,048,000
81,003,729
2006 UC
$
$
$
$
$
$
$
$
17,653
18,125
25,897
15,500
14,400
16,180
18,010
17,959
2007 UC
$
$
$
$
$
$
$
$
15,014
17,252
22,222
14,822
13,825
15,990
16,772
16,521
Technology Economics: The New Scale of Business
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.
Installed MIPS: 2007 Equivalents Without Growth
Physical Servers: 2007 Equivalents Without Growth and
Virtualization
250,000
70,000
60,000
200,000
50,000
150,000
40,000
30,000
100,000
20,000
50,000
10,000
-
2006
32
2007
2008
2009
2010
2006
2007
2008
2009
2010
Technology Economics: The New Scale of Business
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
Installed MIPS Scale Econom ies
Physical Servers (20% UNIX/80%Wintel/Linux) Scale Economies
$10,000
$30,000
$9,000
X
Y
$25,000
X
Fully Loaded Cost per Server
$5,000
$4,000
Y
Y
X
XX
$2,000
YY
X X
$3,000
$20,000
$15,000
Y
$10,000
Y
Y
Y
X
$6,000
XXX
XXX
X
$7,000
X
Fully Loaded Cost per MIPS
$8,000
Y
Y Y
$5,000
$1,000
$-
50,000
100,000
150,000
200,000
Installed MIPS
250,000
300,000
350,000
$-
20,000
40,000
60,000
80,000
100,000
120,000
X = 2007 Competitors and Y = 2009 Competitors in terms of placement on the scale economics curve and do not represent actual competitor unit costs
33
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
Server Cost Vs Scale
$9,000
$45,000
$8,000
$40,000
$7,000
$35,000
$30,000
Annual Cost per Server
Annual Cost per MIPS
$6,000
$5,000
$4,000
$3,000
$20,000
$15,000
$2,000
$10,000
$1,000
$5,000
$-
$-
-
20,000
40,000
60,000
80,000
Size in MIPS
34
$25,000
100,000
120,000
140,000
-
10,000
20,000
30,000
40,000
Total Server Count
50,000
60,000
70,000
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”
Line of Business Based
Highly Specialized Niche Services
Commons Based
Lowest Common Denominator “Mass Services”
35
Technology Economics: Rethink the Portfolio
There are 5 identified key technology levers that can “bend” the performance
curve and drive ROIT.
Technology Investment and Business Performance
 Grow Revenue
Bends the revenue line up faster than
your competitor – includes innovation
 Protect Revenue
Holds the revenue line at its current
growth rate
$
 Reduce Cost
Short term impact to drive costs down
through automation and process
improvement
Increase the spread
to increase margin
>> Year >>
Net Revenue
36
Operating Expense
 Avoid Cost
Avoidance of future costs that would
bend the expense line up – includes
innovation on the expense side/process
side
 Manage Risk
Enables risk management from a firm
and regulatory perspective
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.
Investment Bank Infrastructure Sizing Curve
Key Issues:
 How to manage demand?
 How to optimize and
resize the applications
portfolio?
 How to optimize capacity
and unit cost
simultaneously
35000
Physical Servers
 How to manage fixed
versus variable capacity
and costs?
30000
25000
20000
15000
10000
5000
 Overall, identifying key
drivers
0
0
5000
10000
Mainframe MIPS
$15B IB
37
$20B IB
$12B IB
15000
20000
Technology Economics: Market to Market - Commercialize
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)
Infrastructure Market Basket
$2,000
$1,834
-16%
$1,800
$1,541
$ M Annual
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$-
2005
Mainframe MIPS
38
2006
Distributed/Servers
Desktop/End User
2007
Communications/Network
2008
Market Data
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
Mainframe MIPS
Mainframe TB
UNIX Server
Wintel Server
SAN TB
NAS TB
Desktop
Email
2007 Average
$
$
$
$
$
$
$
$
3,946
18,650
18,200
8,856
16,500
15,500
1,440
120
$
$
$
$
$
$
$
$
2007 Best in Class
1,994
11,806
14,680
5,700
9,000
6,000
1,008
99
New Best In Class
(2010)
$
1,400
$
5,500
$
8,600
$
4,400
$
3,300
$
1,600
$
600
$
51
Average Unit
Cost Decline per
Year
10%
18%
14%
8%
21%
24%
13%
16%
At 2007 Bmk Average
86,808,333
22,380,000
91,000,000
132,840,000
66,000,000
93,000,000
72,000,000
6,600,000
570,628,333
At 2007 Best in
Class
$
43,868,000
$
14,167,200
$
73,400,000
$
85,500,000
$
36,000,000
$
36,000,000
$
50,400,000
$
5,445,000
$
344,780,200
At New Best in
Class (2010)
$
30,800,000
$
6,600,000
$
43,000,000
$
66,000,000
$
13,200,000
$
9,600,000
$
30,000,000
$
2,805,000
$
202,005,000
Sample Market Basket
Product/ Service
Mainframe MIPS
Mainframe TB
UNIX Server
Wintel Server
SAN TB
NAS TB
Desktop
Email
Model Volume
22,000
1,200
5,000
15,000
4,000
6,000
50,000
55,000
Total Market Basket
$
$
$
$
$
$
$
$
$
Note: See last panel the DataCenter SuperCenter and the IT Value Meal
39
Average
Decline per
Year
22%
24%
18%
17%
27%
30%
19%
19%
22%
Technology Economics: IT Expense Management
Creating an IT expense management strategy requires an exploration of all
dimensions of expense and its drivers to attain an effective balance:
Product 1 Unit Cost x Volume
Product 2 Unit Cost x Volume
Total Expense = Sum of
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.
40
Technology Economics: Invest When Others Can’t
How does it work? Business and IT stakeholders will work together to:
• 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.
41
Technology Economics: Invest When Others Can’t
How does it work? Business and IT stakeholders will work together to:
• 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 withinsegment initiatives to assist in guiding the optimization of IT investments across and
within lines of business.
42
Technology Economics: Invest When Others Can’t
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)
Banking & Financial Services
$1.60
$1.39
Insurance
Media
$1.35
$1.32
Info Tech
$1.31
Pharma
Consumer Products
$1.28
$1.26
Manufacturing
Proff Svcs
Telcos
Health Care
$1.25
$1.25
$1.24
$1.22
X Industry
$1.18
Hospitality & Travel
Chemicals
$1.18
$1.14
Energy
Utilities
Retail
Transportation
$1.14
$1.10
$1.10
$1.09
Metals & Nat Resources
$1.07
Electronics
Food & Beverage Processing
$1.04
Construction & Engineering
$1.04
$-
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
ROIT - 3 Year Pre Tax Profit per $1 Technology Investment
43
$1.40
$1.60
$1.80
Technology Economics: Basic Principles
1. 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.
44
Technology Economics: Synthesis
1. 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”.
45
Technology Economics: Synthesis
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
46
Summary on a Page
Technology 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
47