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Thursday, October 28, 2004

What commoditization means for IT spending

Ed Sim , the well known venture capitalist writes on this topic -"The numbers are coming out, and it is clear we are moving to a low growth environment for corporate IT spending in terms of dollars spent. Companies spent too much in the 90s and are being cautious about how they spend their hard-earned cash. Total cash and savings for companies in the S&P 500 have doubled since 1999 and is equal to half a trillion dollars which means companies have added almost 300 billion dollars to their balance sheet in the last 5 years. While companies have so much more cash these days versus 5 years ago, they are spending roughly the same amount on IT.. After all there is a ton of cash out there and corporates have to invest the cash or give it back to shareholders. The funny thing is that the commoditization trend means that companies can do more with less. What that means is that companies can keep the same IT budget and accomplish the same amount or more without increasing their capital expenditures. Competitive forces make customer the king in negotitating better prices. Both of these factors obviously work against significant increases in IT spending. In fact, customers have so much power these days (and rightly so) that companies like GM are forcing vendors like Sun and Microsoft and Cisco and Microsoft to work together, to standardize and integrate with one another".
Steve Lohr, writing in the New York Times writes about the IT market having matured and the industry enjoying the benefits of low cost computing. Robert Carter, CIO of fedex, points to that conclusion. "Technology is coming to us in much smaller bundles that cost a lot less," where budget is slightly more than $1 billion. "Our intent is to hold the line on I.T. spending and get more bang for the buck." The flat spending does not suggest any lack of enthusiasm for technology at FedEx, a sophisticated corporate user of technology. Mr. Carter reels off a series of projects for helping customers use the Web, e-mail alerts and wireless messages to track inbound and outbound packages, trim inventories and fine-tune operations. "The global interconnectedness and technology services available are growing at an unbelievable pace," he said. "We are at an inflection point in the adoption of these technologies."
This theme of doing more with less continues to ring aloud with CIOs and technology arhitects. Many corporates are going through a fundamental rearchitecture of their systems to a service-oriented model, one that will take a number of years, but one in which startups will have plenty of opportunities to thrive even with flat to limited growth in IT spending. It would be great if corporations continue to grow their IT budgets. However,the great news is that new architectures and hardware equals lots of new software opportunities. There will be plenty of chances to make great investments in this environment.
Norm Waite, writes,For large IT departments, of which R. Carter's at FedEx has to be a leading example, and for considering "chances to make great investments in this environment", the total spending is not a very interesting number because: (1) Some huge fraction for, say, people and leases, has to continue year after year with relatively little change. (2) The spending on PCs should be strange now because (A) there is not much reason to replace PCs quickly now and (B) replacement costs keep falling quickly. So, total numbers give little view of the opportunities for selling new products and services. Information technology can look like it is achieving "commoditization" if we look only at personal computing for small organizations, but for a large organization personal computing is usually only a small part of the whole and for the rest "commoditization" is not a very appropriate word. E.g., the whole picture would not much change if Dell sold their standard popular desktops and laptops for $10 each.Broadly there is a severe problem with the popular media in their remarks on information technology: Because the writers are users of personal computers, they assume that they have 'fingertip feel' for 'information technology' in large organizations; this assumption is inappropriate. At FedEx, CEO F. Smith's view from the beginning was to be a leader in exploitation of information technology; I doubt that he has changed that view at all. FedEx was a leader in computer-based fleet scheduling, exploitation of wireless (e.g., work of C. Brandon), computer-based package tracking and handling (e.g., work of M. Basch), their corporate digital communications network (e.g., work of R. Carter), and the Internet. The world of information technology moves on; I am sure that Smith will want FedEx to continue to make the best exploitations.Few CEOs are as ambitious about information technology as Smith; in being effective with such ambition, he is close to unique.Still, it is a rash CIO or CEO that will conclude that IT is a 'commodity', seek only to reduce IT spending keeping only the obvious essentials, and turn a deaf ear to solid proposals for high ROI.
Really, the main challenge for all concerned is just good ideas, ones that clearly offer high ROI. With such ideas, anyone involved would be foolish to say "Great idea, but it doesn't fit the budget." There is plenty of cash on the corporation balance sheets, in the VC 'overhang', etc. Again, the main bottleneck is just the good ideas.

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