Friday 22 June 2012

Innovation directed at business expansion key to IT survival and growth

Current estimates of support spend as a percentage of total applications spend hover around the two-thirds or 67% mark. General opinion is that this is what the entire industry should focus on since that is where the whack is!

Much as everyone would like to spend more and more time and effort on the support space because it offers the comfort of the known paradigm, this is counter-productive in the longer term given that logically this would end up shrinking the total IT spend and consequently the industry.

Here are some interesting points to ponder…

The average application lifecycle in the era of legacy systems, by popular opinion and analyst research was in the 10 year ballpark. Contrast that with the current era of mobility applications being dumped every 3 months (admittedly a rather extreme example), the average web application being retired in the 5 year ballpark and enterprise applications going through a 7 year revamp cycle. Also taking into account the share of each of these category of applications in the overall pie, and we could realistically run with an average application lifecycle of 6 years. The next variable in this equation is the cost of development compared to the cost of maintenance of an application in its lifecycle and there is a plethora of data gathering and analysis that has happened on this with development to support cost ratios ranging from 1:1 to 1:2, the latter being for longer lifecycles and the former for the shorter ones. The current ratio of support and development spend, as reported by multiple analysts having polled more than a representative sample of buyers each, seems to be in the 2:1 range. If this ratio has to be maintained over two and a half average life-cycles (15 years down the line), all the development effort and costs would only be redirected towards rewriting what already exists!

It is a comfortable state of equilibrium, but one that folks in this business must dread. One can contest any of the numbers above (below, and everywhere in between), have their own take on what the numbers should be, but the trend and consequence does not change with the math.

This also lends itself pretty smoothly to the TCO vs CVC discussion from my previous post. The development spend has to be towards expanding the total pie and not just rearranging spends within the pie. This can happen only when most of the IT discretionary or development spend is focused towards top-line growth and not bottom-line optimization for the business. The former has non-linear and structurally far-higher returns compared to the latter and hence the overall risk is proportionately higher. At the risk of digression, I wanted to touch upon the topic of the hyperbolic reactions of stakeholders when cost optimization projects get delayed. Since these projects do not have a take-to-market element, the primary impact is in the cost reduction being delayed by the same amount of time as the project delay. This should not adversely impact the overall return on investment outlook if the returns were pegged appropriately above the hurdle rate. Anyway, this is a topic I will touch upon at a later date, but for now, suffices to understand that this category of development projects focusing on bottom-line improvement through cost optimization are at relatively lower risk levels and lower returns. In the context of the current discussion, these are spends that have fallen or will soon fall directly into the scope of the ‘law of diminishing returns’.

The world has grown at approximately 6.1% and 5.4% in the past 10 and 5 years respectively, while non-communication IT spending has grown at 5.8% and 4.8%. Gartner’s view of categorizing the spend into what is done to ‘Run’, ‘Grow’ and ‘Transform’ the business reiterates the same fact and the percentage spend in each category, 19-20% and constant for ‘Grow’, ~66% and down a couple of percentage points over the past 5 years for ‘Run’, 14-15% and up a couple of percentage points over the past 5 years for ‘Transform’, reflects an awareness, albeit slow in the IT community that the game will soon need to be changed towards innovating in the business expansion space and embarking on aggressive application development initiatives to fuel growth rather than focusing on TCO and a support optimization and consolidation model that is currently in vogue. There is a temporary blip (at least that is the way I would like to see it!) in the 2010 Capex to Opex ratio, which has come down from 3:7 (steady over 4 years) to 1:4, but I would like to see this as exactly what I called it, a temporary blip, given this was the year immediately post the worst year for the economy in recent times.


In conclusion, the IT community, now more than any other time in the past, needs to focus its energy towards finding ways and means through which business expansion happens on the back of information technology innovation and not the other way round. There are avenues to explore, both charted and uncharted. What is required is organizational resolve to invest and do so in a structured way. There is a lot to learn from the other industries which have seen many such cycles in their lifetimes. The organizations that have survived, in fact thrived, are the ones that spent their time, effort and money investing in innovation to define the future rather than fall in line with changes brought about by someone else.
   
Note: The views expressed here and in any of my posts are my personal views and not to be construed as being shared by any organization or group that I am or have been associated with presently or in the past.

No comments:

Post a Comment