Filing Information: October 2009, IDC #220285, Volume: 1Technology Financing Strategies: Customer Needs and Strategies

C U S T O M E R N E E D S A N D S T R A T E G I E S

C o p i n g w i t h t h e " N e w N o r m a l " — H o w t h e C h a n g e d E c o n o m y I s S h a p i n g I T P r a c t i c e sJoseph C. Pucciarelli

I D C O P I N I O NAt an extended, three-day conference of 140 CIOs and senior IT professionals held in September 2009, IDC analysts discussed IT business, technology, and acquisition strategies expected for the balance of 2009 and 2010. A wide cross-section of industries were represented, including financial services, discrete manufacturing, hospitality, healthcare, retail, and CPG. The clear consensus among some two-thirds of the participants was that the recent economic turbulence, and the resulting shifts in business and technology models, would echo for several years, creating a "new normal" for IT budgets, capital availability, and technology adoption models. And while IDC defines its mission as an IT market research firm choosing not to publish broader economic measures such as GDP, investment levels, and unemployment, the analysis in this document reflects the clear sentiment of the conference participants and explores how a "new normal" could impact IT organizations, the IT provider ecosystem that supports them, and IT professionals worldwide. Coincidentally, as this document is being prepared at the end of 3Q09, many business leaders and economists have begun publicly forecasting a very modest, multiyear economic recovery. Against this backdrop of "new normal" economic operating practices, the IT industry and technology platforms seem poised for a period of significant change. Arguably, since the last recession in 2001, IT innovation has focused on perfecting and solidifying concepts, platforms, and technologies that were on the table eight years ago. IDC believes that in the next few years, we will witness considerable IT platform change — from next-generation datacenters and ERP software to a wide range of off-premise computing options. In the face of potential platform changes, IDC believes IT organizations and the companies they support will remain very cautious with their investment spending through at least 2010. In addition:

IT equipment strategies will focus on lengthening deployed life and maximizing effectiveness, limiting purchases to spot buys to address specific needs.

IT software strategies will focus on addressing evolving business requirements, achieving one-budget-cycle investment paybacks and minimizing upgrade spending.

IT service strategies, as a percentage of overall IT budgets, will likely increase as companies spend to maintain older equipment, selectively hire technical skills to fix problems, and continue exploring evolving business process outsourcing options.

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I N T H I S S T U D Y

In September 2009, IDC participated at a large CIO conference held in Scottsdale, Arizona. A total of 140 participants from companies with at least $1.5 billion in annual revenue attended. A wide cross-section of industries were represented, including financial services, discrete manufacturing, hospitality, healthcare, retail, and CPG.

During the course of the event, in facilitated group discussions, presentations, and one-on-one discussions, in-depth conversations took place involving the IT issues confronting both individual companies and IT in general.

Much of the discussion centered on the economic outlook and how it would shape future IT budgets, strategies, and platform choices. As the discussions ensued, a consensus emerged. Approximately two-thirds of the CIOs present believed that the changes in business and technology management implemented as a response to the recession have, in fact, become part of the permanent ongoing business framework.

This sense that a "new normal" has emerged and become instantiated, combined with a mediocre three-year economic outlook for most of the world's mature countries, has led us to summarize these insights and predictions.

S I T U A T I O N O V E R V I E W

The world's economies have been struggling since late in 2007 in a period of economic turmoil that has come to be known as the "Great Recession." Beyond being a significant retrenchment in overall economic activity, this period has been marked by an unprecedented contraction in the availability of capital — capital to fuel business operation and capital to fuel business investment. Business and IT leaders have responded to the changed conditions by making a number of tactical changes. As it has become clear that markets will remain turbulent and that organizations will face a prolonged period of changed conditions, there is a clear sense that a "new normal" must be faced.

In Figure 1, IDC summarizes some of the challenges, reactions, and strategies.

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F I G U R E 1

I T M a n a g e m e n t L a n d s c a p e : T h e N e w N o r m a l — R e a c t i o n a n d E f f e c t

Challenges

Reactions

Strategies

IT Management LandscapeThe New Normal: Reaction and Effect

IT Management LandscapeThe New Normal: Reaction and Effect

Lower IT investment budgets Just-in-time IT spending Pressing new requirements

Stretch life cycles Improve utilization Used equipment

IT Equipment IT Software IT Services Highly selective buys One-year payback Open source software

Maintain reliability Improve efficiency Even more outsourcing

Cost and funding

management

Sourcing and platform

strategies

Equipment leasing and

software financing

Life-cycle management

IT financial management

tools

Source: IDC, 2009

T h e N e w N o r m a l : I T E q u i p m e n t

IT organizations, confronted with the requirement to both reduce operating expenses and conserve capital expenditures, have adopted a number of practices to stretch IT resources. The three principal strategies have been to stretch deployed equipment life cycles; improve device utilization — whether it be servers, storage, or network equipment; and selectively leverage resource gaps with the acquisition and deployment of used equipment.

IT leaders reported to IDC that they adopted these practices in an expedient manner, generally without the benefit of detailed financial information to help them quantify the impact of the changes. Essentially, they looked at the cost of the new equipment and compared it with the cost of an additional year of maintenance — without being able to fully quantify the entire cost via a more comprehensive life-cycle management analysis.

T h e N e w N o r m a l : I T S o f t w a r e

CIOs and other IT executives speak quite passionately when discussing IT software provider business practices, and their comments are not always positive. Many speak

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with frustration about the "upgrade treadmill." They express dismay at large price increases enacted by several major providers in the face of the recession.

Conversely, they recognize the opportunity and value of expanding IT service management and automation software to improve operational effectiveness and reduce labor requirements. They talk passionately about deploying business intelligence software to improve their organization's ability to derive business value from the volumes of data coursing through their businesses. Many expressed the opinion that funding invested in improved business analytics was one of the easiest "quick hits" in improving IT business value.

When acquiring new software, many organizations reported that they deducted the value of the benefits expected from their budgets. This dictated software purchases that were quite tactical and made relatively early in their budget year.

Finally, the topic of open source software was discussed at length and in virtually every venue. A principal issue confronting companies considering open source software was their level of risk tolerance. Many financial services companies require their software suppliers to provide liability coverage — often as much as $10 million or more. With open source software, this is not available. Therefore, the organizations choosing to deploy it are underwriting this risk themselves. The challenge to the business status quo has resulted in open source software being deployed within the organization for inward-facing applications that do not directly affect customer data.

T h e N e w N o r m a l : I T S e r v i c e s

Capital constraints limiting the acquisition of new equipment or software have resulted in many organizations shifting spend to their IT services. For example, as equipment useful lives are pushed to four years and beyond, there are heightened concerns about maintaining availability. As a result, most organizations maintain tier 1 levels of coverage.

Another area where IT executives are continuing to invest/spend is in technical consulting services that can help improve operational efficiency and effectiveness. Typically, they are bringing in external service organizations with skills that they do not have. A number of examples were cited, including improved server configurations, storage management strategies, security, and ediscovery.

On the last point, ediscovery, many voices echoed the complexity, cost, and sheer frustration that experiences have brought upon their IT shops. Many said that going forward they would attempt to use external service companies because they did not have the discretionary resources to underwrite these often painful projects.

Finally, we addressed the issue of outsourcing — a topic never far from anyone's mind. While many leaders were quite clear that IT outsourcing has many challenges, many were experimenting with different types of outsourcing. Rather than simply seeking labor arbitrage opportunities, outsourcing specific business processes had met with better outcomes — higher service levels and more predictable cost profiles.

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C a p i t a l I n v e s t m e n t S p e n d i n g

Business leaders have already begun to selectively increase IT spending. During 2Q09, an analysis of companies within the Standard and Poor's 500 (S&P500) disclosed that IT-intensive companies in the telecommunications, financial services, and healthcare industries all increased capital investment by at least 6% compared with the preceding quarter, as highlighted in Figure 2.

F I G U R E 2

S & P 5 0 0 C a p i t a l I n v e s t m e n t G r o w t h b y I n d u s t r y , 1 Q 0 9 – 2 Q 0 9

-15 -10 -5 0 5 10 15 20

Total S&P 500

Energy

Industrials

IT

Utilities

Materials

Healthcare

Financial

Telecom

(%)

Source: Thomson Reuters and BusinessWeek Magazine, August 2009

IDC believes that this modest recovery in capital spending is consistent with a modest, multiyear recovery and IT organizations' selective buying practices. Overall, capital spending decreased by 3%, but in selective industries confronted with new opportunities and requirements, investment has accelerated modestly.

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F U T U R E O U T L O O K

The macroeconomic outlook for the next 36 months is more variable than at most points in the past 75 years. A likely outcome is that the world's mature economies will see a slow, modest recovery — slower than the norm. Given the problems with the financial sector, it is also likely that capital — to sustain IT operational and investment budgets — will remain at a premium. Given this outlook, tempered with the concerns and strategies outlined by many IT executives at the September conference, IDC believes that five management practices will be at the core of IT organization initiatives for the foreseeable future.

C o s t a n d F u n d i n g M a n a g e m e n t

The harsh reality is that most IT organizations do not have a comprehensive handle on their delivery costs. Most do not have the internal systems and processes to systematically track the cost per person of major applications (i.e., the cost of ERP per user). The cost profile of necessary and integral functions such as security or business continuity correlated to business process generally do not exist. Finally, most IT organizations have no way to impute business value from their IT solutions. The net result of this situation is that IT funding remains uncoupled from a deep understanding of IT cost profiles.

IDC believes that cloud computing, or the use of off-premise compute resources, will expand dramatically over the next 36–48 months. For a variety of reasons, this technology (as it matures) will become a viable alternative to traditional IT delivery. The challenge for IT organizations will come when aggressive third-party providers approach their executives and propose to shift the compute loads from the company's datacenter to their facilities. The company executives will ask IT to prepare an analysis of the proposal.

Just as total-cost-of-ownership (TCO) analysis was all the rage during the go-go days of IT outsourcing, increasingly, IT organizations will find they are being asked to document their costs. And it will not be an easy or pleasant task.

S o u r c i n g a n d P l a t f o r m S t r a t e g i e s

A number of CIOs present at the conference operated virtual IT organizations. These companies, either by choice or because they had been "spun out" of a larger organization, were challenged to create a fully functional IT capability in months. One CIO had a total of three full-time employees in his department — everything else was sourced from a variety of outsourcing suppliers. His staff monitored quality of service, cost, and change management. Other CIOs spoke about shifting their email from traditional in-house platforms to cloud providers or new-generation providers such as Google. Yet others wondered aloud about the security and business continuity risks their colleagues were undertaking.

The discussion around cloud or off-premise computing can be summarized into three major points:

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CIOs and IT leaders are skeptical about the technical maturity of cloud computing options and their applicability to real-world commercial IT compute loads. Issues of data privacy, security, recoverability, and liability remain largely open questions — from their perspective.

The attractiveness of the potential business model, shifting from capital investment to a reasonably predictable stream of operating expenses, is extremely compelling to both IT and business leaders.

The likelihood that cloud computing will spark a burst of commercial IT innovation similar to that witnessed by the Apple iTunes App Center, with its unbelievable two-year record of 75,000 applications and 2 billion downloads, intrigues IT professionals and will likely be the most effective reason to try the cloud.

The point is not to argue pro or con for one platform or another. At issue is that IT organizations will have an increasing number of options to choose from to achieve their objectives. Whether it is modernizing COBOL programs and moving them to a new platform, shifting select business processes such as software testing or business continuity to off-premise compute resources (the "cloud"), or taking a fresh approach to the business value inherent in mission-critical back-office IT computing, the choices are multiplying — rapidly — heralding a period of experimentation, innovation, and change.

Most IT leaders IDC spoke with concur. What is less clear is an informed decision framework to answer conclusively to the board of directors — "Yes, we have an optimal platform strategy now, are watching the right things, and understand what needs to evolve before we consider changing."

E q u i p m e n t L e a s i n g a n d S o f t w a r e F i n a n c i n g

It can be forecast with a reasonable degree of certainty that worldwide capital markets will be more constrained in the next three years than they have been for the past three years.

The leasing and financing business is a countercyclic industry. It tends to thrive in a period of constrained capital, higher interest rates, and economic volatility. At the end of 2008, IDC estimated that about 10% of IT spending in the United States and about 8% of IT spending worldwide was leased or financed. Compared with other types of commercial capital investments such as industrial equipment, aircraft, or high-tech medical equipment, the percentage of IT equipment that is leased/financed is quite low.

IDC believes that commercial organizations will return to IT leasing and financing as a means of bolstering their access to IT resources. Most IT organizations have not emphasized the internal process management required to achieve successful outcomes from their IT leasing activities. In addition to changes in the absolute amount of IT leasing and financing, increased focus on process management, both in the form of focused human resources and tools, is also expected.

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L i f e - C y c l e M a n a g e m e n t

Most IT organizations plan the deployment and retirement of their major IT resources — equipment, software, and applications. Yet, most IT organizations lack the real-time tools and processes to systematically test whether they should fix or scrap IT resources. As IT equipment continues to decline in price, this becomes more and more problematic.

Imagine a circumstance where an IT operations employee invests 1.5 days configuring a problematic blade server — a three-year-old server that might have a market value of $1,000. Is it a prudent investment? These are the types of questions we each answer individually when confronted with a repair bill for a car or a refrigerator. We consider the cost to repair, estimate the incremental useful life, and then weigh that against the cost of a new device. In IT, most organizations typically employ a service management framework — one that encourages the timely restoration of devices but often lacks the financial elements to readily weigh the decision from all viewpoints. This happens based on the good judgment of the many fine professionals within IT — but not as a systematic process.

While all this may sound a bit esoteric, the issues are very real. Many IT organizations report they have extended the planned deployment of a major equipment type — from servers to storage and networking equipment. Without the tools and the management discipline to optimize operational decisions, many of these decisions are being made based on informed intuition.

As IT organizations drive IT budgets to 0.35% or 0.65% of revenue, the need for better decisions becomes even more apparent.

I T F i n a n c i a l M a n a g e m e n t T o o l s

Most organizations with annual revenue exceeding $1.5 billion have implemented financial management software from one of the leading providers such as Oracle or SAP. Despite the success, maturity, and capability of these software tools, they do not map well to IT business management requirements. The organizing principles of multiple "corporation" codes, cost centers, and a chart of accounts do not map to IT requirements, which include the ability to track project costs from internal and external teams, a human resource management system that can track and manage contract employees, and system features to track and manage internally capitalized software and projects (including distributing their costs across multiple countries as a way of managing international taxation practices).

Most IT organizations continue to rely upon MS Excel spreadsheets linking together information from disparate systems, including the general ledger, IT project management tools, and the IT service management suite. IDC believes that in both the short term (36 months) and the long term (60 months and beyond), the need to track, manage, and measure IT expense and capital investments in a more systematic manner will emerge.

Current ad hoc systems of existing software with manual MS Excel integration has met requirements when most expenses were internal. As IT platforms and business

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processes move inexorably to third-party providers, the need for IT financial management software, tools, and best practices will crystallize. A recent conversation with an IT organization demonstrates the point: Its IT professionals had reached the breaking point when software-as-a-service feeds into the enterprise firewall exceeded 100 unique feeds.

IDC believes that these issues of managing, integrating, and controlling an increasingly complex mixture of IT resources have created new demands, requirements, and opportunities for IT providers to extend their IT management software suites. These are opportunities some providers have already begun to address with shipping software products.

E S S E N T I A L G U I D A N C E

Against this backdrop of "new normal" economic operating practices, the IT industry and technology platforms seem poised for a period of significant change. Arguably, since the last recession in 2001, IT innovation has focused on perfecting and solidifying concepts, platforms, and technologies already on the table eight years ago. From new, more efficient servers (courtesy of virtualization) to robust networks capable of desktop video and sophisticated storage management tools and software, IT has continued to become more efficient, effective, and reliable. Poised on the horizon are a wide range of disruptive IT technologies and business models — from new datacenter server products from "network company" Cisco to rapidly evolving off-premise compute options (cloud computing) and next-generation ERP software suites that promise flexibility and rapid reconfigurability — IDC believes the next few years will witness considerable IT platform change.

In contrast to a technology cycle poised to introduce disruptive innovation, business and IT leaders confront an economic reality of diminished demand and somewhat uncertain prospects. Regardless of their strategy — selective investment in focused opportunities or retrenchment and caution — overall IT spending will be scrutinized, poked, and prodded. A crystal-clear linkage between business requirements and spending will need to be made and agreed upon by business and IT leaders. Economic payback periods will be shorter and internal capital thresholds higher.

IDC believes the "new normal" will be characterized by a reprioritization of management practices and investment priorities. For IT organizations, IT professionals, and IT providers that recognize the premium placed on economic linkage, enhanced financial management and accountability and an ability to articulate technology requirements in business versus technological terms will be favored.

L E A R N M O R E

R e l a t e d R e s e a r c h

CAPEX vs. OPEX: How Capital & Budget Constraints Are Shaping IT Investment & Platform Strategies (IDC #TB20090827, September 2009)

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Cloud Computing 2010 — An IDC Update (IDC #TB20090929, September 2009)

IDC MarketScape: IT Project and Portfolio Management, 2009 Vendor Analysis (IDC #219087, July 2009)

HP Introduces Financial Planning and Analysis for IT Organizations (IDC #219040, June 2009)

S y n o p s i s

This IDC study examines the changes affecting IT equipment, software and services management, and acquisition practices, including longer life cycles, rising interest in open source software, and services trends such as outsourcing.

"Changes resulting from the recent economic turbulence are resulting in substantial changes to business and technology management models that will echo for several years, creating a "new normal" for IT budgets, capital availability, and technology adoption models," says Joseph Pucciarelli, program director, Technology Financial and Executive Strategies.

C o p y r i g h t N o t i c e

This IDC research document was published as part of an IDC continuous intelligence service, providing written research, analyst interactions, telebriefings, and conferences. Visit www.idc.com to learn more about IDC subscription and consulting services. To view a list of IDC offices worldwide, visit www.idc.com/offices. Please contact the IDC Hotline at 800.343.4952, ext. 7988 (or +1.508.988.7988) or sales@idc.com for information on applying the price of this document toward the purchase of an IDC service or for information on additional copies or Web rights.

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