The Giant Crunching Sound

No, this is not a post about recycling cans. Nor is it about Ross Perot's view on NAFTA.

It is about how CIOs are crunching their "Utility" IT spend and freeing up more and more for their "Innovation" spend. And also reducing their overall IT budgets to keep their CFOs off their backs.

What is "Utility"? Broadly, any Infrastructure product introduced over 18 months ago, and any Software or Services offerings introduced over 3 years ago.  Most vendor  investments in these products should have been recouped. 

What is "Innovation"? See this gallery of innovations. Varies by industry and company, but it is often beta quality implementations of emerging technology, content rationalization or process delivery - somewhat risky, but nothing like the $ 100m write-offs of the past. And those with huge business payback for the buck. Yesterday, it was rolling out RFID tags and PDAs to mobile sales forces and WI-FI campuses. Today, it varies from more sophisticated tools to capture knowledge from aging workforces to predictive data mining to BPO in a number of areas. Tomorrow, biometrics and grid computing. Note - this tactical, but high payback Innovation, not that over-hyped concept - Strategic Advantage through technology.

Most incumbent vendors provide Utility support. They need to find ways to reduce their portion of the budget by 50 to 70% over the next few years

So if you are Oracle, think about annual maintenance at single digit rates, not 22%. CIOs, from their own offshoring experiences, know what Oracle has saved from growing its staff by thousands of employees in low cost markets like India.

If you are SAP as you seek large mySAP upgrade fees, be prepared to price your core FI/CO, MM, SD functionality at $ 300 a production user. You recouped that investment a long time ago.  If not,  you are encouraging CIOs to look closer at  BPO offerings which offer less maintenance/upgrades hassle and a lot lower TCO. 

If you are EDS or Accenture, learn to make money at $ 75 an hour, not $ 200 as you try to sell "transformational" outsourcing.

If you are IBM and serious about  On-Demand make it reflect Utility economics and service levels

If you are Sun, explain why you deserve a premium over Linux pricing

If you are Gartner, discount your research pricing on Utility spend by 75% and move to pay for results if you can help crunch the Utility spend

Internal IT staff - if you expect premiums and bonuses work on Innovation projects.

Yes, even low-cost offshore vendors like Infosys - quit dreaming of 10% annual rate increases if you are primarily delivering Utility support.

On the other hand, it should be great for the industry as a whole as money frees up for Innovation. More money for start-ups and for intrepid incumbents. Remember, though that the CIO is learning how to crunch value so 3 years from now, he/she will have Utility expectations of what is today's Innovation.

Even in the Utility areas, efficient vendors should benefit. As Southwest has shown in the airline industry, at fair, predictable prices traffic increases and you can fill 130 passenger 737s on routes where your competitors were flying 40 person commuter planes.  Well run Offshore vendors have 15 to 20 % better gross margins than US peers even at their much lower rates.

Also, may not technically count as Innovation,  if as a vendor you can crunch Utility spend even quicker - through use of open source, offshoring, blade servers, VoIP, shared services, BPO efficiencies, tier consolidation, magic, whatever - the CIO's door is open.   

Most CIOs are tired of jokes that their title stands for "career is over".  They are pushing to be repositioned as Chief Innovation Officers. Utility vendors - work with CIOs or prepared to get crunched. Innovation vendors - build your economics around dynamic products and controlled risk, not "lock-in" relationships. And yes, IBM, SAP, Oracle, Accenture...you can be both types of vendors if you just try...

Comments

[Rusty Weston]

Your blog entry suggests to me that these
"utility" offerings are in effect commodities, regardless of how innovative they are perceived as by customers. You suggest a number of (what may be perceived as) deflationary price-reductions measures ... it would be surprising to see most of this happen without another serious economic downturn. Of course, if there's adownturn I think a number of IT & service providers will quickly implode.

Editor, InformationWeek Research

[vinnie mrichandani]

Rusty, the average corporation in US makes 20 to 35% gross margins. If the IT industry is truly maturing, it will have to get down to those margins. Right
now, we have 90% margins on Oracle maintenance and similar margins on older SAP R/3 modules or 50% on offshore rates, 65% in Gartner research pricing. All this is fairly public info from their 10-ks.

If a CIO considers SAP financials (which were introduced in R/2 25 years ago) still innovative - they may be in some public sector markets and are willing to pay
the prices SAP wants, he/she is not going to have much left over for Max-FI for cities, egovernment etc. My point is IT budgets will not go up - if anything
CFOs are looking for 5 to 10% reduction a year. Something has to give.

[Neil Ward-Dutton]

Vinnie, I agree absolutely with the overall thrust of this post - but I have a very different perspective on the definition of "utility" which is actually driving change.

You imply that eventually all innovation tech turns into utility tech - in other words that the difference is primarily about what's "new", and what's "legacy". Whereas from my experience I see that the distinction between the two is more about the role that the tech plays in supporting the business. In other words, that "utility tech" supports business activities, processes and functions that may be core, but which are non-differentiating. The reverse for "innovation tech".

One type of tech may transform into the other, but only by the organisation changing its business strategy.

[vinnie mirchandani]

Thanks…I think we are in synch…though my time based distinction is to prod the tech industry to move to higher margins for innovation v/s those for lock-in. As a fashion CFO told me – he marvels at software industry pricing. Products introduced 10 years ago are still priced at similar levels. In his business it is 3 months and off to the discount stores.

It is also to get different layers (early, late adopter etc) of buyers to think differently. A CIO of a local government may consider SAP pretty innovative in his industry but if he does not push for utility type pricing (which is what core SAP functionality should be priced at this point) he/she is taking funds away from Max-FI for whole communities or eGovernment – arguably far more innovative for his vertical.