Tony Read has over 20 years of international experience in the IT, High Tech, Telecommunications, Retail and Banking industries.  He is President of Read and Associates, a technology consulting firm.  Before founding Read & Associates, Dr. Read was SVP Strategy and Service Excellence, Technology and Operations, at CIBC. Prior to that he was CIO/SVP IT at Convergence Communications, a Telecommunications provider. He has also held several executive positions at Nortel Networks, including: VP Global Customer Relationship Management, CIO/VP IT Caribbean and Latin America, BIO/VP IT Wireless LOB, VP IT Strategy and Information Management.

The IT Value Network

From IT Investment to Stakeholder ValueBy Tony J. Read

John Wiley & Sons

Copyright © 2009 John Wiley & Sons, Ltd
All right reserved.
ISBN: 978-0-470-42279-3

Chapter One

IT Investment

Sticker Shock

Walking through the virtual IT "car lot," it is not hard to see why a CXO would challenge the Chief Information Officer (CIO) with respect to IT costs. Too often an IT Ferrari would be proposed when an IT Volvo could meet the required needs. The daunting task of justifying technology direction and spending variances, let alone the need for investment in the first place, is a challenge unto itself.

IT investments are becoming more than just business enablers or assets on the books; they are indeed a capability that can drive the business. IT thought leadership should transition from a traditional technology investment model to an information investment approach, getting a bigger bang for the buck from the "I" in IT and from the "I" in CIO. In today's world, the business impact of effective IT investments is potentially exponential and needs to be governed accordingly, not just as cost savings enablers.

IT costs typically constitute 2 percent of a company's revenue, but they can be as large as 12 percent, perhaps the single most manageable cost after labor. According to Gartner, this culminates in a global 2008 IT investment of some $2.6 to $3.0 trillion, with half spent on telecommunications and the rest on IT hardware, software, and services. Such annual spending is comparable to the gross national product (GNP) of the United Kingdom or France, or nearly thrice that of India. In other words, globally we spend on IT nearly three times what India's 1,135 million people (20 percent of the world's population) spend on consumption, gross investment, government expenditure, and exports less imports. But the value of information is invariably unknown.

This chapter focuses on IT investment growth and trends. Six decades of IT investment are considered, from early computing to the World Wide Web. IT investments are classified according to a four "S" category model, which will be useful for IT evaluation further on in the book. Finally, future IT investment considerations are explored, which sets the context for IT value network measurement and management.

Six Decades of IT Investment

IT investment has consistently grown from the modern computing era in the early 1940s to the present information age. Spending on IT has expanded from fundamental computing and telecommunications infrastructure to enterprise application systems and to information and service management. Within just 60 years, IT investment went from a select few to the masses, from large organizational spending to individual spending.

Sixty Years of Growth

The modern computing era started more than 60 years ago with the advent of early digital technology. There is no one inventor who can lay claim to the first modern computer, as many contributed to today's foundation of basic computing. In 1941, the German technologist Konrad Zuse developed the Z3, which become the first functional program-controlled, all-purpose, digital computer. Subsequently, the British Colossus was created in 1943; considered the first electronic computing device, it was used in decrypting German World War II messages. A series of computing advancements then occurred in America, with the advent of the ABC, Harvard Mark I, and ENIAC I computers. The latter, designed by John Presper Eckert and John W. Mauchly, became the first all-purpose electronic computer in 1945. The design was based on John Von Neumann's report on unified storage of data and programs.

Arguably the first modern computer, evolved from the collective, was Federic Williams's and Tom Kilburn's Baby computer, built in Manchester, England. In 1948, 60 years ago, the components or characteristics of the basic computer were complete, memory had been added, and programs could be stored. With a random access memory of 32 words (128 bytes) and a computer speed of just over one millisecond per instruction, it may not have been fast, but it could perform many applications. It was a far cry from today's fastest supercomputer, IBM's BlueGene/L, which can process 360 trillion transactions per second or a 1GB DRAM chip, which can store 8 billion bits.

The Baby or Manchester Mark I eventually became the first commercial general-purpose computer, named the Ferranti Mark I. In 1951, the UNIVAC (Universal Automatic Computer), a derivative of the ENIAC 1, became the first mass-produced computer, providing a memory of 1,000 words for a sizable $1 million investment. IBM entered the arena in 1953 with the 701 Electronic Data Processing Machine (EDPM)-the first mainframe. Then IBM developed Fortran, the first high-level computer programming language. The first generation of computing started to gain momentum. IT investment started to grow, moving from university and government institutions to commerce. But at $10,000 per megabyte for an IBM magnetic disk system (currently, one-fiftieth of a cent per megabyte), it was an expensive proposition. Many thought computing was for the limited few.

The second generation, triggered by transistors, started a wider commercial interest in more affordable computing. The vacuum tube was dead. Between 1960 and 1964, the IBM 1401 captured one-third of the world market, selling over 100,000 computers. The third generation, driven by integrated circuits or the "chip," further transformed computing application. Jack Kilby and Robert Noyce independently created the microchip, in 1958. Into the mid- to late 1960s, IBM introduced the System/360 mainframe, and Data General started selling one of the first 16-bit minicomputers, the Nova, for $8,000.

The fourth generation exploded onto the market with the advent of the microprocessor, invented in 1971 by Ted Hoff, Federico Faggin, and Stanley Mazor at Intel. From the late 1960s, competition grew, with mainframe and minicomputer offerings from IBM, Data General, Hewlett-Packard, Sperry Univac, Olivetti, Burroughs Machines, and ICL. In the background, the ARPAnet and the original Internet were born in 1969. These were quickly followed by Robert Metcalfe's and Xerox's Ethernet computer networking in 1973. Packet switching and internetworking, using standard communication protocols, provided computing power across boundaries.

The personal computer revolution followed, from the early Scelbi and Mark-8 Altair, in 1974-1975, to the Apple I and II, TRS-80, and Commodore Pet in 1976-1977, followed by the IBM PC in 1981. Add Microsoft's MS-DOS operating system and Windows, and from the early 1980s computing became a commodity for the masses. The more recent exponential computing and telecommunication utility is, of course, associated with the growth of the World Wide Web. The introduction of the Mosaic Web browser in 1993 by a University of Illinois team, led by Marc Andreessen, sparked the networking revolution. Today, voice and date have been successfully merged over the network. New all-in-one handset devices are enabling mobile commerce and social networking (e.g., Facebook). Commercial applications are going virtual, through software as a service (SaaS) and managed services. The next generation is around the corner.

IT investment grew exponentially from the late 1950s as technology significantly advanced from the first computing generation. Global IT investment grew from tens of millions in 1950 to $2.6 to $3.0 trillion in 2008, as depicted in Exhibit 1.1 (nonlinear). Between the 1950s and the 1990s, annual global spending growth was averaging in the double digits. This changed with the Internet crash in 2001; subsequent growth in the 2000s has been modest, stabilizing around 2.5 to 5 percent, but with an increasing pace in developing countries. However, this still means that in absolute dollar terms, global IT investment grew from just under $2 trillion at the end of the 1990s to $2.6 to $3 trillion in 2008. According to Gartner, nearly one-third of all global IT spending is now outside North America, Western Europe, and Japan. This continued growth will provide new capability and innovation within developing markets, and more competition to developed markets.

Importance of IT Investment

IT spending consists of existing and new technology investments. Costs associated with technology hardware and software (e.g., support and services) should be included within IT investment management. Certainly from a capitalization perspective, labor costs that add value to the implementation of a technology asset can be booked and depreciated. Although ongoing operational support and services are not normally seen as an investment, our argument is that human (intellectual) capital is more important than the physical asset and should accordingly be treated as an IT investment. Therefore, in this book, all IT spending is considered as an investment in an organization, differentiating between existing and new.

IT investments increase both the tangible and the intangible asset value of a company. Traditionally, IT investment has been based on tangible costs and benefits. However, it is intangible assets that now create some 85 to 90 percent of shareholder value from IT investments, focusing on knowledge-based strategies, including business intelligence and database applications. This claim is supported by empirical evidence that up to nine-tenths of the costs and benefits of computer capital are embedded in unseen intangible assets. Intangible assets, generated by IT, can provide an explanation for excess returns, producing higher market valuation. But the tools for managing and measuring strategies have not kept up with the vision to create value.

Intuitively, we understand the importance of information, but investing in information is another matter. Where does a knowledge management system stack up against operational systems? The challenge is that data is underutilized with latent potential, often not transformed into information or knowledge creation. The past 60 years should therefore be called the data age and not the information age, as data remains unlocked in terms of realizable value. Data can be aligned to business processes through informational maps and can then be optimized or rationalized through relational database integration, but who's the owner and sponsor of the investment? Better information behaviors will lead to improved business performance, creating visible intellectual capital and valued intangible assets.

IT investments are required both for short-term profitability, supporting the current business operations, and for long-term shareholder value, enabling new business opportunities. The tendency is to focus IT investments on short-term profitability, with a focus on cost containment and tight investment controls on strategic initiatives. Yet successful firms cannot afford to underinvest in valued future business opportunities or long-term growth. The challenge is to reduce IT costs from operational infrastructure and move spending to strategic investments for business growth. For instance, how can networking and computing infrastructure costs be reduced, reinvesting in customer relationship management (CRM) or knowledge management systems? Competitive advantage grows out of company improvement, innovation, and change, where IT is a critical enabler. There is a need to invest in technology regularly, including associated human capital, building net worth through future capability of value, growth options, and competitiveness for shareholder value.

IT Investment Trends

During the next 5 to 10 years, the following IT investment trends will continue to gather momentum and become a priority for the enterprise.

Open and Service-Oriented Architecture

The value of open systems architecture is well understood, providing companies with cheaper and flexible nonproprietary protocols, languages, and operating systems. As governing standard bodies such as the World Wide Web Consortium (W3C) and the Organization for the Advancement of Structured Information Standard (OASIS) drive open access, more companies will be able to exploit standard electronic exchange for information and transactions. Strategic IT investments should include open infrastructure enhancements, alongside business-driven imperatives, considering middleware, standardized Windows, UNIX or Linux platforms, open networks, open database connectivity, Web services, and distributed computing. The importance of integrating open systems, as opposed to stringing together proprietary platforms, is key for business speed to market and agility.

Service-oriented architecture (SOA) and Web 2.0 are still in their infancy, but they are growing in acceptance and commercial application. From the late 1980s to mid-1990s, SOA was focused on application programming interface (API), with J2EE type standards. Since the late 1990s, SOA has become more business focused, applying Web Service messaging (context rich) and registry (UDDI) for business applications. Exhibit 1.2 provides an architectural overview.

In designing an SOA architecture there is considerable debate as to whether to drive an enterprise-wide initiative, based on standard business processes and data schematics, or a bottom-up approach, focused on specific system integration challenges. Perhaps the compromise is to meet in the middle, focusing on an enterprise service bus (ESB), with attention to service definitions, integration, quality of service, service level agreements, security, message processing, modeling, communication, ESB management, and infrastructure intelligence.

The challenge to Web Services is separating the core legacy functionality across multiple tenants or systems to create a service interface that can be reused across multiple platforms. Thus, intermediary or aggregate services become important interfaces to basic business logic or data Web Services. Basic services can then be wrappered together with legacy functionality. Thus, more popular Web Service applications are simple and consumer focused, including blogs, wikis, social networks, and peer-to-peer networking.

The benefits of moving to an open and interoperability service-based model include:

* Improved returns. Reduction of capex and opex investments

* Personalized customer service. Maximized lifetime value, cross-selling, up-selling

* Real-time intelligence across business. Liberating information for improved decision making

* Data reliability and integrity. Best-in-class service levels

* Lower operational and technology integration costs. Pay-as-you-grow utility pricing models and optimized total cost of ownership (TCO)

* Time to market and profit. Speed of system development and deployment, meeting business requirements

* Business agility and flexibility. Affordable, scalable, reliability, and global just-in-time solutions

* System assurance and security. Lower risk/reward trade-offs

* Regulatory compliance. Legislation, audit, and customer protection

* Technology leadership. First to market for competitive advantage, with integrated advanced technologies off the shelf

Virtualizing Everything

From the IT organization to the infrastructure, everything will be virtualized. The IT organization will be globally distributed, connecting competencies and capabilities through the network. Today, outsourcing significant portions of IT infrastructure, including telecommunications, is becoming a norm. As IT becomes more of a commodity or utility, outsourcing becomes a cost-effective option, moving assets off the balance sheet and becoming a predictable operational cost. Total cost of ownership becomes a moot point, as evergreen services replace legacy infrastructure.

System and process outsourcing continues to grow, deploying transaction processing onshore and offshore. While core IT competencies are internally retained, especially in support of company competitive advantage, IT departments are becoming virtual in partnership with outsourced companies such as IBM, HP, and growing offshore outsourcers from India, China, and Romania. External IT spending consumes over 50 percent of total IT within the global financial industry and that is increasing as legacy systems are replaced. (Continues...)

Excerpted from The IT Value Networkby Tony J. Read Copyright © 2009 by John Wiley & Sons, Ltd. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.