Global CIO: How The Crash Will Affect Corporate IT

As you evaluate disruptive new technologies, challenge every IT truism and so-called best practice used over the last couple of decades to find ideas that work well in today's economy.

March 11, 2009

5 Min Read
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I was reading "urbanologist" Richard Florida's recent article in The Atlantic -- "How the crash will reshape America" and this big "aha!" jumped out at me:

"As homeownership rates have risen, our society has become less nimble: in the 1950s and 1960s, Americans were nearly twice as likely to move in a given year as they are today."

Wow, just a few years ago we were talking in terms of a disposable society. AT&T was talking about our ultra-mobile MLife. Now we are talking boat anchors.

What happened?

It's becoming clearer what happened -- we bought too much house for our needs. We put too much into the house . . . the root-cause analysis is pretty detailed.

And it occurred to me it is also a good metaphor for the state of IT spend.

On the one hand, we have various signs of IT agility. More than 15,000 iPhone applications developed in less than a year. We can swap IE for Mozilla for Chrome for Safari in a matter of minutes. All for free or near-free.

But take a closer look at our core IT budgets:

We spent too much on our houses: Think Italian marble is pricey? Try printer ink priced at $5,000 a gallon. Or how about $40 in roaming data charges for a 3-minute video download if your employees use their PDA overseas? Or $7,000 per support call if you amortize the cost of many software maintenance contracts?

And how do you feel about paying $2.50 per gigabyte of storage per month as per many outsourcing contracts? And then there are the labor rates from even those offshore vendors that are supposedly "cheap": they pay employees between $3 and $5 per hour but charge you a blended rate of 10X that figure.

We bought too much house for our needs: Remember the Holy Grail of "turning fixed IT costs into variable"? Remember IBM announcing "on-demand" back in 2001? Ever try to get them to seriously put together an on-demand proposal? Have you tried to reduce Oracle shelfware and succeeded without the threatof a re-price? Or to exit an Accenture contract without a massive early-termination fee? Virtualization is showing 60%, 70%, even 90% over capacity in servers. Ever try to get HP or Microsoft to take them back without expectation of a trade-up of some sort?

We over-borrowed: Think borrowing 85% of house value was too risky? If you add in all vendor spend -- hardware, software, services and telecom -- the average CIO and internal staff make up less than 15% of IT budget. In many companies it's a lot easier to get a CFO to sign off on external contract staffing than it is to hire a new full-time employee. Even industries with highly sophisticated vendor management like aerospace and autos don't outsource anywhere that much -- but in IT, we have.

We consolidated our debts a little too much: Vendor consolidation, in principle, is ideal: less administrivia, easier management of fewer vendors, more integrated platforms. But in IT it has boomeranged. It has led to vendor lock-in. We gave our procurement folks the high-falutin' title of "strategic sourcing" and then told them to slam the door on smaller vendors from around the world. In most industries, gross margins come in somewhere between 30% and 50%. But in order for us to be able to pay software vendors their 90% gross margins, we have had, on average, to squeeze our other nontech vendors even more.

We are paying twice for services our real-estate taxes were supposed to cover: Like spending on private schools, and not getting any credits for what our real-estate taxes should be covering. The average software vendor spends less than 5% of what you pay it in new product innovation -- try finding the term "research" anywhere in Verizon's annual report. With little innovation from the bigger vendors, we are shifting that onus to internal staff and startups that get only a tiny percentage of our budget. Same with quality -- poor software quality leads to more testing services, and to more-elaborate upgrades. With the already too-high 22% in annual maintenance, we are paying twice for what we paid the original vendor for.

We are afraid to take write-downs: Ask real-estate agents -- part of the standstill in that market is sellers are in denial about the value of their houses. I have seen CFOs turn down proposals to go to less expensive replacement technologies because they are not ready to take write-downs on worthless IT investments. If the SEC were to mandate that companies must take "mark to market" write-downs on our IT assets, there would be carnage similar to what is happening to banking balance sheets.

In my day job and on my blog I help clients look at disruptive trends and vendors. But this scary economy is the mother of all disruptions, so now is the time to challenge every IT truism and so-called best practice we have lived by for the last couple of decades. Now is the time to take a hard look at stuff we may have pooh-poohed a year ago, from SaaS to clouds to telepresence.

But as you start to evaluate disruptive new technologies and vendors, make sure you do not fall into the same trap of old truisms. Hey, home ownership was as American as baseball and apple pie. If we can question the ideal of home ownership, we can definitely question the wisdom of such rigid IT dogma as the sanctity of vendor consolidation, the myth that buying is always better than building, and lots of other ideas that worked very well 10 or 20 years ago but have little relevance in today's global economy.

Vinnie Mirchandani runs Deal Architect, which advises CIOs on software, outsourcing, and other tech negotiations and strategies. He is a former Gartner analyst and PricewaterhouseCoopers (now IBM) outsourcing consultant. He writes two blogs: one on disruption in tech, Deal Architect, and the other on innovation in tech, New Florence. New Renaissance.

This column was updated March 11.

For more Global CIO perspectives, check out Global CIO.

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