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| Home - Industry Article - Mar 04 Issue |
IT is Dead? Long Live IT! |
By Matt Miller and Steve Eskenazi, General Partners, WaldenVC
We are always amused when the press and investors latch onto a trend or notion and then take it to an extreme. Remember when the “Internet was everything”? Commercials on TV embraced the logic that in the future, “your most important asset will be your email address”. Then, after the bubble burst, and we entered the new millennium, the Internet no longer mattered- it was deemed irrelevant by those same extremists. Now, however, as pragmatism has taken over from extremism, the Internet is “part of everything.”
So we have to chuckle once again when we begin to hear the same types of polarizing statements regarding IT. Much of this silliness stems from Nicholas Carr’s Harvard Business Review article last May titled, “IT Doesn’t Matter.” Now we have even venerable analysts like IDC titling their annual conference “Making IT Matter.” In the late 1990’s, it seemed that IT was all that mattered. CEO’s of the future would be coming from the CIO function; IT would control the majority of corporate purse strings; and success with IT would validate any new technology startup. Then, after the Y2K and Internet bubbles burst, IT appeared irrelevant: IT budgets would never grow again, IT could no longer be trusted to deliver anything on time and on budget, and that startups no longer needed to sell to IT anymore (and ASP’s would take over the world). We’ve even heard of VC’s who’ve said that they will no longer invest in enterprise software because IT will never buy from startups again.
In this article, we take a tempered view of “post-apocalyptic IT”: that IT is in the process of transforming itself into an important, scrutinized business, managing a portfolio of assets. This is in stark contrast to the market (over)reactions and polarizing views of the past 10 years: that IT was the driver behind all businesses, and that IT no longer mattered.
The New Face of IT
While some paint the future of IT as a tag-along services organization with little budget or political power, we submit a different image. First let us point out that the largest capital investment category in most companies is technology. While it is true that technology budgets exist in departments and divisions, it is also the case that the vast majority of the technology budget is held and controlled by the IT organization. The vision of departments spending all the money with Application Service Providers (ASPs) and cutting IT out of the loop is attractive but not realistic today.
While ASPs are making inroads in some areas such as payroll processing, help desk and even sales force automation, these continue to be exceptions. There has been no mass migration away from the in-house ERP systems that run companies. The same is true for most major software categories, whether it is security, database, ERP, CRM or network management. The bottom line is that IT still holds the key cards in the game – budget control and a mandate to enforce standards. That means that IT will be a part of most new tech projects, usually as the decision-maker but sometimes as a gatekeeper and standards enforcer. However, this is not the 1990’s and IT has a new face and a new set of shackles.
There are two key characteristics of the new face of IT: 1) It is run as a business, and 2) its scope is constrained to what is unique or strategic. Each of these offers investment opportunities which we will cover in the next section. First, let us try to elaborate on how IT is being re-formed.
The two authors of this article spent years working as tech vendors selling to corporations in the 80’s and 90’s. We would both tell you that while IT tried hard to look like a business in those years, it was more truly run as a series of urgent science experiments. Yes, we all pitched ROI analyses and budgeted everything out for our prospects. But companies bought new client-server applications because a few “visionary thought leader” CIOs did it and set off a parade of lemmings. Companies bought $60 million dollar systems from SAP or Siebel that were supposed to cost $15 million. All the ROI documents from the sales cycle stayed neatly filed in a drawer and few dared compare reality to plan. I am sure some readers have examples of trend-setters who actually selected IT projects based on financial metrics and held execs responsible for results but this was not the norm.
In the aftermath of the bubble, the lines of business have revolted against IT in the face of a huge rate of project failure and surprising expense allocations they could not control. Ironically, IT has not been carved up and given to the divisions as one might expect. While some have tried this in some measure, many of the largest corporations have re-centralized IT and given it a new mandate and a new set of leaders.
The new IT organization is becoming a regulated, financially rigorous, service organization that is accountable to its internal customers. Driven by a cross-functional steering committee, it selects projects based on fit with corporate objectives and monitors projects in real time. It performs portfolio analysis on projects before, during and after implementation and its budget next year is dependent on its performance this year. Gone are the days of the visionary technologist CIO. Enter the CIO as a portfolio manager….or perhaps even as small businessman. At a recent CIO conference, a Fortune 1000 CIO said it best: “I don’t need the best technology. I need the best product for my customers.” Top priorities in the 90’s focused on aggressive technology investment to drive market share. Today a top priority is wringing more utility out of past investments through server and vendor consolidation. Furthermore, IT is being asked to justify its charge-backs based on usage or value, not just allocations of raw expense dollars. With this, IT is moving from being a cost center to an ROI center and it needs a whole new set of processes and tools to manage itself. Some have called this an ERP system for IT. More on that below.
The second main transformation IT is undertaking is to focus its resources more narrowly. In almost every tech function, you can see IT asking itself “why do I have to do that in-house.” “If we can only embark on 10 new projects this year, then they better be important…what can I throw off my plate that is not strategic.” Some cynics would say that IT in the 90’s was about grabbing as much budget and political clout possible by agreeing to every new project. This resulted in obscene numbers of homegrown systems, which made executives feel very important and provided fun, inventive projects for hard to retain senior developers. Today, it would be unusual to hear of a company writing its own CRM system, but in the 90’s we saw it done over and over again in the name of strategic advantage.
In cases where companies do take on a new internal project, they want to start with an 80% solution and customize 20%. They are not willing to write an app themselves, nor do they believe that one size fits all. This “mass-customization” mindset favors vendors with a verticalized product and handicaps those who expect to sell off the shelf software or a toolset.
Today, we see the scarce IT budget fuelling adoption of certain focused ASPs or outsourcers. The obvious commodity functions went first, such as HR benefits administration and help desk support. Now we are seeing more “integral” functions get “ASP’ed” such as lead management, sales force automation and software distribution. You are seeing fewer huge internal web site development projects and more external development partners. Companies have invented a whole new verb – “offshoring” to describe the mass migration of code and processes to distant partners. You are seeing fewer companies managing their own data centers, content delivery networks and even e-commerce operations. Why? Because they can add more business value in other areas with the same money.
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