technology economics and the importance of software process
DESCRIPTION
Technology Economics and the Importance of Software Process. Dr. Howard Rubin Professor Emeritus Hunter College of CUNY MIT CISR Research Associate Gartner Senior Advisor [email protected] +1 914 420 8568. Key Points. - PowerPoint PPT PresentationTRANSCRIPT
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Technology Economics and Technology Economics and the Importance of Software the Importance of Software
ProcessProcessDr. Howard RubinDr. Howard Rubin
Professor Emeritus Hunter College of CUNYProfessor Emeritus Hunter College of CUNYMIT CISR Research AssociateMIT CISR Research Associate
Gartner Senior AdvisorGartner Senior [email protected][email protected]
+1 914 420 8568+1 914 420 8568
22
Key PointsKey Points
0
1
2
3
4
5
6
7
8
9
Val
ue
Rel
ativ
e to
196
0
IT Spend % ofRevenueRelative to1960
GDP Relativeto 1960
DJIA Relativeto 1960
As information technology evolved, business costs and investment in As information technology evolved, business costs and investment in technology increased and added a new component to the cost of doing technology increased and added a new component to the cost of doing
business. business.
The % spend on IT has increased 7 fold since 1960.
Base = all industry sectors
Mainframe Computing
Distributed Computing
Internet/Pervasive Computing
GDP, DJIA, and IT Spend as a Percent of Revenue Relative to 1960
GDP
33
Key Points….Key Points….
We are entering an era in which We are entering an era in which technology economics in business can be technology economics in business can be understoodunderstoodCompanies that can master technology Companies that can master technology economics will likely have extreme economics will likely have extreme competitive advantage in the short termcompetitive advantage in the short termTechnology economics provides a Technology economics provides a powerful backdrop to understand the powerful backdrop to understand the importance of software processimportance of software process
44
And More….And More….
About 40%+ of every Tech $ is spent on About 40%+ of every Tech $ is spent on Application Development and Maintenance Application Development and Maintenance activitiesactivities
The ability to focus Tech $ on Application The ability to focus Tech $ on Application Development and Maintenance is being Development and Maintenance is being “squeezed” by data center build out demands in “squeezed” by data center build out demands in most sectorsmost sectors
Strategically it is more critical than ever in the Strategically it is more critical than ever in the applications are to produce and support “more applications are to produce and support “more for less” – software process is a critical enablerfor less” – software process is a critical enabler
55
Even More…Even More…Infrastructure spending has grown 30% since 2002 and the distribution of spending has Infrastructure spending has grown 30% since 2002 and the distribution of spending has shiftedshifted
Absolute Spending Growth 2002-2006 with a $1B Base in 2002
$70 $52 $54 $46 $74
$170 $227 $216 $251 $185
$160
$237 $227 $217 $246$90
$52 $76 $57 $62$140
$134 $119$183 $148$70
$62 $87
$91$86$120
$103 $87
$103$136
$180$165
$216
$194$296
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
2002 2003 2004 2005 2006
Finance, Mgt, Admin App Devel Data Network Desktop App Support Help Desk Voice Network Data Center
$1B
$1.3B
$M’s
66
And Some MoreAnd Some More
Absolute Spending Growth 2006 Vs 2002
6%
9%
54%
-32%
6%
23%
13%
64%
-40% -20% 0% 20% 40% 60% 80%
Finance, Mgt, Admin
App Devel
Data Network
Desktop
App Support
Help Desk
Voice Network
Data Center
Data Centers, Data Network, and the Help Desk are the biggest growth areas (not by choice) as the desktop becomes
commoditized
77
My BackgroundMy Background
Milestones in Technology EconomicsMilestones in Technology Economics
Economic Patterns and ObservationsEconomic Patterns and Observations
Technology Optimization & Software ProcessTechnology Optimization & Software Process
88
AcademicAcademic
BusinessBusiness
ConsultingConsulting
EnvironmentalEnvironmental
PoliticalPolitical
99
1010
11% of US GDP (of $13.2T)11% of US GDP (of $13.2T)
$120B of IT Spending$120B of IT Spending
1111
““Economics”Economics”1. The branch of social science that deals with the 1. The branch of social science that deals with the production and distribution and consumption of goods production and distribution and consumption of goods and services and their management and services and their management 2. The study of choice and decision-making in a world 2. The study of choice and decision-making in a world with limited resources with limited resources
1212
Technology Economics is YoungTechnology Economics is YoungThe 10,000 years of accounting history The 10,000 years of accounting history
started with simple stone "tokens" to started with simple stone "tokens" to count wealth count wealth
1313
In Search of the “IT In Search of the “IT CFO”CFO”
IT CFO: 711 HitsIT CFO: 711 Hits
CFO: 24,500,000 HitsCFO: 24,500,000 Hits
1414
Technology Economics MilestonesTechnology Economics Milestones
1976 – Equitable Life Software Estimation (Jim Johnson, John Gosden)1976 – Equitable Life Software Estimation (Jim Johnson, John Gosden)1979 – IBM Function Points (Alan Albrecht)1979 – IBM Function Points (Alan Albrecht)1981 – Software Engineering Economics (Barry Boehm)1981 – Software Engineering Economics (Barry Boehm)1985 – Nolan Norton Application Portfolio Management1985 – Nolan Norton Application Portfolio Management1987 – SEI CMM (Watts Humphrey)1987 – SEI CMM (Watts Humphrey)1990 – The Business Value of Computers (Paul Strassmann)1990 – The Business Value of Computers (Paul Strassmann)1999 – Merrill Lynch (John McKinley/Marvin Balliet – “IT CFO”)1999 – Merrill Lynch (John McKinley/Marvin Balliet – “IT CFO”)1999 – Verizon IT Portfolio and Infrastructure Market Basket (Joe Castellano, Gerry 1999 – Verizon IT Portfolio and Infrastructure Market Basket (Joe Castellano, Gerry Higgins)Higgins)2003 – Altria Self Benchmarking Rate Card (Jim Noble)2003 – Altria Self Benchmarking Rate Card (Jim Noble)2004/2005 – JPMorgan Infrastructure Cost Optimization and Rate Model (Charles 2004/2005 – JPMorgan Infrastructure Cost Optimization and Rate Model (Charles Costa, Mike Sztejnberg)Costa, Mike Sztejnberg)2005 – Lehman Brothers Market Basket Model (Jon Beyman & John Ambrose)2005 – Lehman Brothers Market Basket Model (Jon Beyman & John Ambrose)2006 – Credit Suisse Economic Target Setting (David Reilly,Mark Rufeh, Tom 2006 – Credit Suisse Economic Target Setting (David Reilly,Mark Rufeh, Tom Sanzone, Mia Peterson, Phil Cushmaro)Sanzone, Mia Peterson, Phil Cushmaro)2006/2007 – Citigroup Technology and Operations Optimization (Marv Adams, Jeff 2006/2007 – Citigroup Technology and Operations Optimization (Marv Adams, Jeff Nachowitz, Mike Roberts, Eric Joosten)Nachowitz, Mike Roberts, Eric Joosten)
1515
Technology Economics:Technology Economics: Financial Services as an Financial Services as an
ExampleExample
1616
The Top 12 Financial Services firms in the world The Top 12 Financial Services firms in the world had 2006 Net Revenue of ~$30B to ~$90B.had 2006 Net Revenue of ~$30B to ~$90B.
Their Total Technology Spending ranged from Their Total Technology Spending ranged from ~$2.5B to ~$7.5B~$2.5B to ~$7.5B
Absolute Tech Spend ($B) Trends 2005 to 2007 (Estimated)
$2.5
0
$2.4
4
$5.4
0
$2.4
6
$6.4
8
$2.8
0
$4.6
0
$7.4
0
$2.6
0
$2.5
0
$2.8
8
$2.3
7$3.0
2
$3.0
5
$6.2
5
$3.0
0
$7.4
0
$3.2
0
$5.2
0
$7.0
0
$2.9
0
$2.9
0
$3.2
0
$2.5
2$3.3
2
$3.3
6
$6.6
0
$3.3
0
$8.4
0
$3.5
2
$6.4
0
$6.4
0
$3.2
0
$3.6
0
$3.6
7
$2.5
3
$-
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
A B C D E F G H I J K L
$B
2005
2006
2007
1717
2006 Tech Spend2006 Tech SpendTotal Tech Spend varies widely when considered on Net Revenue, Total Tech Spend varies widely when considered on Net Revenue, Operating Expense, and Total Tech Spend per Employee basis.Operating Expense, and Total Tech Spend per Employee basis.
Total Tech Spend per Employee 2006
$55,464
$43,488
$34,128
$54,679
$22,769
$56,746
$121,532
$40,000
$66,139
$45,999
$45,997
$52,925
53,322
$- $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000
A
B
C
D
E
F
G
H
I
J
K
L
Average
Total Tech Spend as Percent of Net Revenue
6.90%7.50%
9.00%
8.00% 8.26% 8.36%7.70%
11.39%
7.59%
9.10%
6.57%
9.01% 8.80%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
A B C D E F G H I J K L Average
Total Tech Spend as Percent of Operating Expense
9.98%
8.00%
15.73%
12.14%
14.23%12.98% 12.55%
18.29%
9.83%
12.27%10.94%
12.10%
15.17%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
A B C D E F G H I J K L Average
1818
PerspectivePerspective$8B is larger than the GDP of 88 Nations$8B is larger than the GDP of 88 Nations
$1B is larger than the GDP of 54 Nations$1B is larger than the GDP of 54 Nations
1919
Patterns, Empiricism, & Patterns, Empiricism, & Technology EconomicsTechnology Economics1. application of observation and experiment: the application of observation and experiment, and not theory, in determining something
2. philosophy philosophical belief regarding sense-derived knowledge: the philosophical belief that all knowledge is derived from the experience of the senses
3. medicine medicine based solely on experience: medicine that is based on practical experience, and not on theory or scientific proof
2020
Patterns In Technology EconomicsPatterns In Technology EconomicsTake a few thousand companies with Revenue from $500M to $250B and do a regression…………..Take a few thousand companies with Revenue from $500M to $250B and do a regression…………..
y = 0.0349x + 60.156
R2 = 0.7916
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
$- $50,000 $100,000 $150,000 $200,000 $250,000 $300,000
Revenue $M
Te
ch
Sp
en
din
g $
M
Tech Spend Versus Revenue
Financial Services
Investment Banking
Cross Sector
2121
Financial Services InstitutionsFinancial Services InstitutionsIT Spend Per Employee VS Net Revenue and Income per Employee
y = 5.1953x - 65468
R2 = 0.7806
y = 13.518x - 54637
R2 = 0.9398
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
$- $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000
IT Spend per Employee
Net
Rev
enu
e o
r In
com
e p
er E
mp
loye
e
Net Revenue Per Employee Net Income Per Employee Linear (Net Income Per Employee) Linear (Net Revenue Per Employee)
Patterns and Business PerformancePatterns and Business Performance
2222
2006 Net Revenue and Gross Income per Employee Vs Total Tech Spend per Employee
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$50,000 $60,000 $70,000 $80,000 $90,000 $100,000 $110,000 $120,000 $130,000
Total Tech Spend per Employee
Rev Per Empl Inc per Emp Linear (Inc per Emp) Linear (Rev Per Empl)
Patterns and Business PerformancePatterns and Business Performance
Investment Investment BanksBanks
2323
Revenue and PreTax Profit Per Employee Vs IT Spend per Employee
y = 0.9745x + 98877
R2 = 0.1515
y = 19.32x + 74820
R2 = 0.9287
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$- $20,000 $40,000 $60,000 $80,000 $100,000 $120,000
IT Spend per Employee
Rev
enu
e o
r P
reT
ax P
rofi
t p
er E
mp
loye
e
Revenue per Employee PreTax Income Per Employee Linear (PreTax Income Per Employee) Linear (Revenue per Employee)
Patterns and Business PerformancePatterns and Business Performance
Insurance CompaniesInsurance Companies
2424
ProfitabilityProfitability8-Apr-07
CompanyCurrency Shown
Net Revenue
Operating Expense
Operating Profit-ability C/I Ratio
Net Revenue
Operating Expense
Operating Profit-ability C/I Ratio
Profit-ability 2
Year Average
C/I Ratio 2 Year
AverageNet
RevenueOperating Expense
Operating Profit-ability C/I Ratio
Profitability 3 Year
Average
C/I Ratio 3 Year
AverageABN Amro Euro 27,641 20,713 25.1% 74.9% 22,334 16,301 27.0% 73.0% 26.0% 74.0% 18,791 14,573 22.4% 77.6% 24.8% 75.2%Bank of America Dollar 73,023 35,597 51.3% 48.7% 56,091 28,681 48.9% 51.1% 50.1% 49.9% 48,965 27,012 44.8% 55.2% 48.3% 51.7%Barclays Pounds 19,441 12,674 34.8% 65.2% 15,762 10,527 33.2% 66.8% 34.0% 66.0% 13,015 8,536 34.4% 65.6% 34.1% 65.9%BNP Paribas Euro 27,943 17,065 38.9% 61.1% 21,854 13,369 38.8% 61.2% 38.9% 61.1% 19,369 12,043 37.8% 62.2% 38.5% 61.5%Citigroup Dollar 89,615 52,021 42.0% 58.0% 83,642 45,163 46.0% 54.0% 44.0% 56.0% 79,035 49,782 37.0% 63.0% 41.7% 58.3%Credit Suisse CHF 38,603 24,414 36.8% 63.2% 30,489 23,232 23.8% 76.2% 30.3% 69.7% 27,033 19,581 27.6% 72.4% 29.4% 70.6%Deutsche Bank Euro 28,008 19,883 29.0% 71.0% 25,266 19,154 24.2% 75.8% 26.6% 73.4% 21,546 17,157 20.4% 79.6% 24.5% 75.5%HSBC Dollar 54,793 33,553 38.8% 61.2% 49,836 29,514 40.8% 59.2% 39.8% 60.2% 45,162 26,487 41.4% 58.6% 40.3% 59.7%JPMChase Dollar 61,437 38,281 37.7% 62.3% 53,749 38,426 28.5% 71.5% 33.1% 66.9% 42,372 33,972 19.8% 80.2% 28.7% 71.3%Merrill Lynch Dollar 34,659 24,233 30.1% 69.9% 26,022 18,791 27.8% 72.2% 28.9% 71.1% 22,059 16,223 26.5% 73.5% 28.1% 71.9%Morgan Stanley Dollar 33,858 22,858 32.5% 67.5% 26,778 19,417 27.5% 72.5% 30.0% 70.0% 23,708 16,890 28.8% 71.2% 29.6% 70.4%UBS CHF 48,165 33,498 30.5% 69.5% 41,132 28,455 30.8% 69.2% 30.6% 69.4% 36,886 26,844 27.2% 72.8% 29.5% 70.5%
Note: All Net Revenue, Operating Expense, and Income data is shown in MillionsNote: All numbers shown are taken from 2006 Annual Reports and 10k Reports from Company Investor Relations websites
2005-2006 2004-200620042006 2005
Patterns and Business PerformancePatterns and Business Performance
2525
The correlation between Tech The correlation between Tech Spend as measured versus Spend as measured versus Operating Expense and Operating Expense and Profitability is higher than that as Profitability is higher than that as measured versus Net Revenue.measured versus Net Revenue.
Profitability Vs Total Tech Spend as % of OpEx
y = 2.7265x - 0.0182
R2 = 0.5191
0%
10%
20%
30%
40%
50%
60%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 20.00%
Total Tech as % of OpEx
Pro
fita
bil
ity
Profitability % Linear (Profitability %)
Profitability vs Total Tech Spend as % of Net Revenue
y = 1.7014x + 0.1846
R2 = 0.0402
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00%
Total Tech Spend as % of Net Revenue
Pro
fita
bil
ity
Profitability Linear (Profitability)
Patterns and Business PerformancePatterns and Business Performance
2626
Putting the Patterns to Putting the Patterns to “Work”“Work”
2727
A Tale of Two BanksA Tale of Two BanksPattern: Tech Spend Profile is Business DependentPattern: Tech Spend Profile is Business Dependent
BusinessNet Revenue
($B)Estimated Tech
Spend ($B)Retail Bank 15.0$ 0.78$ Card 6.0$ 0.26$ Investment Bank 25.0$ 2.15$ Home Loan 7.0$ 0.77$ Retail Brokerage 7.0$ 0.48$
60.0$ 4.44$ Tech Spend a
% of Net Revenue 7.40%
Business
Benchmark Tech Spend as
% of Net Revenue
Retail Bank 5.20%Card 4.40%Investment Bank 8.60%Home Loan 11.00%Retail Brokerage 6.80%
BusinessNet Revenue
($B)Estimated Tech
Spend ($B)Retail Bank 20.0$ 1.04$ Card 15.0$ 0.66$ Investment Bank 12.0$ 1.03$ Home Loan 8.0$ 0.88$ Retail Brokerage 5.0$ 0.34$
60.0$ 3.95Tech Spend a
% of Net Revenue 6.59%
Two $60B Banks -- Two $60B Banks -- $490,000,000 Apart in IT$490,000,000 Apart in IT
2828
Business Performance and Tech SpendBusiness Performance and Tech Spend
The perspective from which “business success” is measured will The perspective from which “business success” is measured will provide different results with regard to benchmark measures of provide different results with regard to benchmark measures of
technology spendingtechnology spending
Success Measure Top Quartile Tech Spend % of Net Revenue
2004-2006 Profitability 8.25%
2006 Profitability 7.76%
2004-2006 Profitability Change 9.70%
Pattern: The Amorphous Linkage Between Tech Spend and Profitability
2929
A New Pattern:A New Pattern:
The Financial Services companies that have been the most The Financial Services companies that have been the most profitable from 2005 through 2007 have kept Tech profitable from 2005 through 2007 have kept Tech
Spend almost flat versus Net RevenueSpend almost flat versus Net RevenueTech Spend as % of Net Revenue Trends 2005 to 2007 (Estimates)
8.3%8.4%
8.2%
8.6%
7.9%7.7%
7.5%
6.9%
7.6%
9.4%
8.2%8.1%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
2005 2006 2007
Benchmark 3 Most Profitable
Benchmark Quartile Breakpoint
Benchmark Low
Benchmark Average
Business Performance and Tech SpendBusiness Performance and Tech Spend
3030
A New Pattern:A New Pattern:
The Financial Services companies that have been the most The Financial Services companies that have been the most profitable from 2005 through 2007 have increased Tech profitable from 2005 through 2007 have increased Tech
Spend versus Operating ExpenseSpend versus Operating Expense
Tech Spend as % of OpEx Trends 2005 to 2007 (Estimates)
13.8%
14.9%
15.5%
13.9%
13.4%
14.1%
11.8%
11.1%
11.6%
14.6%
12.4%
12.9%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
2005 2006 2007
Benchmark 3 Most Profitable
Benchmark Quartile Breakpoint
Benchmark Low
Benchmark Average
Business Performance and Tech SpendBusiness Performance and Tech Spend
3131
A New PatternA New Pattern
The Financial Services companies that have been the most The Financial Services companies that have been the most profitable from 2005 through 2007 have been driving profitable from 2005 through 2007 have been driving
their their Tech Intensity (IT Intensity)Tech Intensity (IT Intensity) upwards upwards
IT Intensity Trends 2005 to 2007 (Estimates)
1.511.55
1.61
2.01
1.73 1.71
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2005 2006 2007
Benchmark 3 Most Profitable
Benchmark Average
Business Performance and Tech SpendBusiness Performance and Tech Spend
New Patterns may need New Metrics
3232
Technology Intensity??Technology Intensity??A new experimental measure that A new experimental measure that
considers Tech Spend in the context considers Tech Spend in the context Net Revenue and Operating Expense Net Revenue and Operating Expense
simultaneouslysimultaneously
3333
Tech IntensityTech Intensity
Tech Spend as % of Net Revenue
Tech Spend as % of Operating Expense
Tech Intensity
3434
Tech Intensity IllustrationTech Intensity IllustrationUsing 2006 10K data for adjusted Net Revenue and Operating Expense along with estimating Tech Spend as a multiplier of Communications &
Technology expense as publicly stated, the chart below shows the relationship between Tech Intensity (IT Intensity) and Gross Profitability
IT Spend as % of Net Revenue
IT S
pen
d a
s %
of
O
per
atin
g E
xpen
se
IT In
tensi
ty
AXA
IT Intensity developed by Dr. Howard Rubin, Patent Pending
Profitability Vs IT Intensity
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1 1.2 1.4 1.6 1.8 2 2.2 2.4
IT Intensity
Pro
fita
bil
ity
Fin Services Profitability Poly. (Fin Services Profitability)
IT Spend as % of Net Revenue
IT S
pen
d a
s %
of
O
per
atin
g E
xpen
se
IT In
tensi
ty
3535
HypothesisHypothesisIf you are too far to left – you may be under investing in TechnologyIf you are too far to left – you may be under investing in Technology
If you are too far to the right – you may be over investing in If you are too far to the right – you may be over investing in TechnologyTechnology
If you are below the performance frontier curve your “quality of spend” If you are below the performance frontier curve your “quality of spend” is likely below the optimumis likely below the optimum
2006 Gross Profitability Vs Tech Intensity
20.0%
22.0%
24.0%
26.0%
28.0%
30.0%
32.0%
34.0%
36.0%
38.0%
40.0%
1.20 1.30 1.40 1.50 1.60 1.70 1.80 1.90
Tech Intenisty
Gro
ss P
rofi
tab
ilit
y
3636
2006 Gross Profitability Vs Tech Intensity
20.0%
22.0%
24.0%
26.0%
28.0%
30.0%
32.0%
34.0%
36.0%
38.0%
40.0%
1.20 1.30 1.40 1.50 1.60 1.70 1.80 1.90
Tech Intenisty
Gro
ss P
rofi
tab
ilit
y
IT Intensity developed by Dr. Howard Rubin, Patent Pending
Using 2006 10K data for adjusted Net Revenue and Operating Expense along with estimating Tech Spend as a multiplier of Communications & Technology
expense as publicly stated, the chart below shows the relationship between Tech Intensity (IT Intensity) and Gross Profitability
Tech Intensity IllustrationTech Intensity Illustration Investment Bank Businesses OnlyInvestment Bank Businesses Only
3737
IT Intensity Vs Profitability Insurance Industry
y = -0.0349x2 + 0.1684x
R2 = -0.4578
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
IT Intensity
Pro
fitab
ility
Insurance Co Profitability Poly. (Insurance Co Profitability)
IT Spend as % of Net Revenue
IT S
pen
d a
s %
of
O
per
atin
g E
xpen
se
IT In
tensi
ty
Northwestern
IT Intensity developed by Dr. Howard Rubin, Patent Pending
Tech Intensity IllustrationTech Intensity Illustration Insurance Insurance
3838
Technology Intensity Varies by SectorTechnology Intensity Varies by SectorIT Intensity by Sector (2006 Data)
0.292
0.302
0.326
0.326
0.371
0.401
0.423
0.448
0.537
0.552
0.582
0.592
0.633
0.672
0.677
0.710
0.718
0.766
0.792
0.810
1.186
0.000 0.200 0.400 0.600 0.800 1.000 1.200 1.400
Construction & Engineering Average
Metals/Natural Resources Average
Food/Beverage Processing Average
Retail Average
Chemicals Average
Consumer Products Average
Energy Average
Health Care Average
Transportation Average
Manufacturing Average
Insurance Average
Pharmaceuticals Average
Utilities Average
Overall
Hospitality & Travel Average
Electronics Average
Telecommunications Average
Professional Services Average
Information Technology Average
Media Average
Banking & Financial Services
IT I
nte
nsi
ty
3939
Technology Intensity and Technology Intensity and Software ProcessSoftware Process
4040
The Impact of Software ProcessThe Impact of Software ProcessOrganizations that have focused on software process appear to have superior IT cost Organizations that have focused on software process appear to have superior IT cost structures and quality.structures and quality.
IT Unit Cost Vs Quality Vs Relative A&E Investment
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
0 0.5 1 1.5 2
Unit Cost Index
Qu
alit
y In
dex
High Unit Cost
High Quality
High Unit Cost
Low Quality
Low Unit Cost
High Quality
Low Unit Cost
Low Quality
Circle Size = Process maturity
Unit Cost Index = Unit Cost of Mainframe and Distributed Processing relative to average.
Quality Index = Availability and Customer Satisfaction with Infrastructure relative to average.
Sample size = 7 Financial Services firms with 2006 Net Revenue > $20B
4141
The Impact of Software ProcessThe Impact of Software Process
IT Spend as % of Net Revenue
IT S
pen
d a
s %
of
O
per
atin
g E
xpen
se
IT In
tensi
ty
AXA
IT Intensity developed by Dr. Howard Rubin, Patent Pending
Profitability Vs IT Intensity
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1 1.2 1.4 1.6 1.8 2 2.2 2.4
IT Intensity
Pro
fita
bil
ity
Fin Services Profitability Poly. (Fin Services Profitability)
IT Spend as % of Net Revenue
IT S
pen
d a
s %
of
O
per
atin
g E
xpen
se
IT In
tensi
ty
Organizations that have focused on software process appear to have superior Organizations that have focused on software process appear to have superior business performance due to the business leverage provided by superior software business performance due to the business leverage provided by superior software process maturity – time to market; unit costs; quality; ability to focus more on CTBprocess maturity – time to market; unit costs; quality; ability to focus more on CTB
Effective Process
4242
The Leverage of Software ProcessThe Leverage of Software Process
Effective software process will enable organizations to “add more $$ for Effective software process will enable organizations to “add more $$ for less”less”
IT Intensity Vs Profitability Insurance Industry
y = -0.0349x2 + 0.1684x
R2 = -0.4578
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
IT Intensity
Pro
fitab
ility
Insurance Co Profitability Poly. (Insurance Co Profitability)
4343
The Value of Software ProcessThe Value of Software Process
Beat “Moore’s Flaw” – as unit cost go down demand rises faster and total cost Beat “Moore’s Flaw” – as unit cost go down demand rises faster and total cost increasesincreases
Infrastructure Cost Trends
-
0.50
1.00
1.50
2.00
2.50
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Rat
io t
o 1
997
IT as Pct of Revenue IT as Pct of OpEx
Infrastructure Unit Cost Market Basket Absolute Infrastructure Cost
Absolute Infrastructure Cost with A&E Investment Revenue
System Complexity Index
4444
Technology Economic Technology Economic Optimization and Software Optimization and Software
ProcessProcess
4545
Technology Optimization:Technology Optimization:The Business IT System DynamicThe Business IT System Dynamic
Business Model
Applications
Infrastructure
The Business IT “System”
Source: Citigroup
P R
O C
E S
S
Process is the “Glue”
4646
Technology OptimizationTechnology OptimizationAreas Begging for IntegrationAreas Begging for Integration
Total Tech Spending ViewTotal Tech Spending ViewBusiness Based Sizing ViewBusiness Based Sizing ViewMoore’s Law/Moore’s Flaw ViewMoore’s Law/Moore’s Flaw ViewTotal Tech Governance IT Savvy ViewTotal Tech Governance IT Savvy ViewTechnology Cost of Goods ViewTechnology Cost of Goods ViewFixed Vs Variable Cost View and a P&L Driver ViewFixed Vs Variable Cost View and a P&L Driver ViewOrganizational Leverage ViewOrganizational Leverage ViewPortfolio Placement ViewPortfolio Placement ViewGlobal Leverage ViewGlobal Leverage ViewBusiness Value ViewBusiness Value ViewProcess Value ViewProcess Value View
4747
— Charles Darwin— Charles Darwin
It is not the strongest of the species that survives, nor the most intelligent, but the one that is most responsive to change
The only sustainable competitive advantage is to be able to learn faster than your competitors.
— Peter Senge— Peter Senge
The companies that can understand and manage their technology economics to continually and currently optimize business performance and create business value will have extreme competitive advantage in the near future. Those that have effective software processes will have the best positioning. — Howard Rubin— Howard Rubin
4848
Thank youThank you