Rising IT costs have caused many companies to search for ways of capitalising on current infrastructure to boost their return on existing investment.
Information technology is all about the new. We live in a wired world where broadband is being used by 60 per cent of UK internet connections according to analyst group Datamonitor and popular TV programmes like Little Britain are aired on the internet first.
Meanwhile IT expenditure by businesses continues to rocket; research carried out in 2005 by the London Business School puts the UK networking equipment market at £2.1 billion and the server market at £1.9bn, with compound annual growth in the next two years of six per cent and four per cent respectively.
And at the same time information technology is all about the old. The US is estimated to have spent £57bn on fixing the so-called ‘Y2K’ millennium bug, chasing down outdated date references in millions of lines of Cobol, PL/1 and other enterprise software code mountains. The UK itself spent £20bn in the three years leading up to the turn of the century. Yet despite all the fresh investment in ERP systems at that time, little of this old computer code was actually ripped out and replaced.
No wonder – those ones and zeros add up to a considerable amount of capital investment. In 2001, market watchers IDC said that the world had spent some $1 trillion on IT since the end of the Second World War; in a 2004 survey by Accenture a higher figure of $2.8 trillion was suggested for global IT and communications spending, or seven per cent of the entire world economy.
Many organisations – public and private sector, enterprise to small to medium business – have databases, applications and packages that have been core to their business and been running for years, but which are not exactly state of the art.
A major case in point: the banking and financial services industry. Jacob Jegher, a senior analyst in the banking group of financial IT analyst organisation Celent, argues:
“Something like 80 per cent of all IT spending is on maintenance costs and only 20 per cent on new development.” Another researcher in a similar organisation, Christine Barry, research director for wholesale banking at Aite Group, notes: “Core banking systems are in many cases some 50 to 60 years old. Y2K just highlighted the problem, How can banks add new functionality to this picture without further complicating it?”
Substitute the word ‘bank’ for any type of organisation reliant on IT – perhaps yours – and a picture of enormous complexity emerges. Companies must balance ongoing delivery of IT service, something that can eat up endless resource and budget, with the need to address ongoing business challenges. These can be in the form of compliance – meeting not just external accounting and regulatory strictures but sector-wide initiatives, like integrating with the systems starting to come on-stream through the National Health Service’s £6bn National Programme for IT (NPfIT): or other external circumstances beyond the control of the agent organisation (satisfying a market demand for a new type of mobile service or financial services product).
"Core banking systems are in many cases some 50 to 60 years old. Y2K just highlighted the problem. How can banks add new functionality to this picture without further complicating it?"
Christine Barry, research director, Aite Group
How much happier we would all be if all the IT spend generated was successful. Yet the reality is, of course, sadly different. No less than 55 per cent of all UK IT projects are unsuccessful, with each failure costing on average £5.8m, claimed the KPMG Survey of Project Management in 2002-03, while in September analyst firm Butler Group published research claiming that 92 per cent of all IT spending “fails to deliver concrete value to the organisation paying for it”.
Then there is the issue of coping with organisational dynamics. User A buys SAP and thinks all its system problems are at an end. Then the firm merges with a company that was a Peoplesoft shop, with some branches running Baan.
Vendor consolidation in the business software space does not actually solve this problem as the suppliers themselves (Oracle, for example) have not as yet unified their product stack; many companies are having to live with multiple accounting, CRM, ERP or finance systems.
Another typical set of drivers is that a company has a tip-top mainframe application that they want to become visible to external suppliers. Many larger firms find themselves with umpteen different ways of holding customer data and want to open up an online self-
The key to these issues is that the solution in nearly all cases revolves around unlocking the information assets contained in the existing systems.
In very few cases would it be appropriate or useful to purchase an additional new system – commonly this would only add another layer, as the new system would in turn need to be fed by data and business logic from already-present IT applications.
In any case, in addition to buying software, most companies develop their own customised applications to support business needs.
This is almost never a cheap process. A recent report by consulting giant McKinsey said: “Developing, deploying, and managing customised applications is ever more expensive, and revising them to meet evolving business needs can be time consuming… Companies in many sectors spend well over half their applications budgets on custom software, used largely to enhance, support, and operate such systems. For large companies in competitive, fast-moving industries such as telecommunications, financial services, high tech, pharmaceuticals and media, those outlays can run into hundreds of millions of dollars.”
Outsourcing the problem seems attractive but can be a ‘false friend’ too. Handing off the need to develop new integrated systems that rely on tight coupling with in-house code that may well have suffered from many years of what Oracle gently terms ‘intrusive customisation’ can be a management nightmare.
"Something like 80 per cent of all IT spending is on maintenance costs and only 20 per cent on new development"
Jacob Jegher, senior analyst, Celent
An April 2005 report from Deloitte Consulting suggested that a backlash against IT outsourcing had begun in some large organisations because contracts have failed to meet expectations. And a depression in the IT jobs market has led to the perverse situation that, as budgets begin to rise again and the need for IT talent re-emerges, it is suddenly a seller’s market, as evinced by recent reports of the ‘£1,000 a day’ City IT freelance project manager (a figure from recent research from the Association of Technology Staffing Companies).
It is a puzzle. Organisations need to spend a large part of their IT budget on maintenance and control of yesterday’s IT purchase, while keeping an eye not only on today’s problem but also tomorrow’s opportunity. IT staffing levels have been under strict control for a long time, meaning resource to lead vital new projects may be scarce or expensive. And the less that is wasted, the better for everyone, of course.
It is at this juncture that users start to wonder if there is a way to craft the new applications out of their existing infrastructure while not needlessly reinventing the wheel. They also, with a view to both the bottom and top lines, want to maximise productivity and control outlay on development. The market is beginning to dub the first issue the integration problem and the second the return on existing investment challenge. The bulk of this supplement is devoted to exploring responses to both these issues and what technology assistance may – or may not – be available.