Thursday, August 20, 2009

70% / 30%

I heard a quote a few weeks back that took me in a far different direction than I'm sure the speaker had intended. "Only thirty percent of an IT budget is typically spent on new capabilities!". I'm sure this was intended to shock us, that so little was being done to help our business and it simply could not be tolerated. But as I dug deeper into this statistic, a very different picture emerged, and one that helps put many of the struggles IT deals with into perspective.

A 70%/30% ratio of maintenance dollars to new capability dollars, at its simplest, means that if your budget is constant, that next year's additional maintenance cost caused by the new capabilities being created is exactly equal to the improved productivity savings in supporting the existing capabilities. If the ratio stays constant, and the budget stays constant, your business can continue to add new capabilities year-in and year-out, forever.

Neat trick. What other segment of your business can boast so loudly. Could you have a house built, add 30% to it each year and have your maintenance bill stay the same? Of course not.

IT has two things going for it, both pulling to make the equation work.

First, Moore's Law has continued to make the hardware cheaper. Mainframe MIPs (Millions of Instructions per Second) were millions of dollars on the 1960's, reduced to thousands of dollars today. Voice calls have been reduced to less than 10% of their previous levels just a decade or so ago. Just a couple of the amazing changes that have occurred along the path of Moore's insight.

Second, IT continues to innovate, bringing a more connected world, fewer inefficiencies and enabling new business models. Without new innovations, the maintenance budget could stay constant, life would be boring and IT demoted to the least important of professions.

If IT can't keep the equation balanced, then something has to give. Either we no longer can afford the new innovations or we spend ever increasing amounts of money on IT. Neither scenario is good for the overall economy or the IT industry. Maintaining, or even improving, on the 70%/30% is an imperative.

So maintenance spend must continue to decrease. Increasing leverage (e.g. virtualization, cloud computing), using cheaper alternatives (e.g. web mail, open source, offshore programmers) and eliminating under-used or redundant services (e.g. portfolio management) are all levers that are being pulled in today's world.

When SAP announced their maintenance cost increase from 17% to 22%, a huge backlash resulted. Why? They dared to increase our maintenance costs, the very side of the IT equation we're working so hard to decrease. But most companies had to grin and bear that cost; the switching cost was far too high, at least in the short-term.

Microsoft, which for many years has delivered valuable new capabilities to our companies, now finds its cash cows predominantly on the maintenance side of the equation. New Windows operating systems and new Office suites are nice, but so what? The action is happening on the Internet, and how many new features can we really use? Unlike SAP, Microsoft's switching costs are relatively low and the alternatives are "good enough".

Given a choice, which one do you think has got to give? Not a trick question.

And the scenario will play out for every maintenance budget item. Do we need that? Is there a cheaper replacement? How can we avoid getting boxed in with vendors, particularly the ones we write the largest checks to? But understanding the underlying, fundamental forces at work here can turn this from a thankless chore to the most important work we can be involved in. We're keeping the innovation engine going strong!

1 comment:

Logan said...

Paul, a great discussion and very timely given the mind share gain by SaaS solutions. According to a study by Aberdeen Group, 41% of respondents said "High integration costs prevent new investments in needed features".
I would say, a right IT strategy is a blended model where SaaS is used for non-differentiating capability and On-premise expensive solution for processes that provide competitive differentiation to the business.