This is for FEI

1
Innovation and the Value of ITEd TrainorMarch
31, 2004Portland Oregon
2
Harvard Business Review

• IT Doesnt Matter
• The Smartest Way to Invest in IT Today?
• Less May Be More.
• By Nicholas G. Carr

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IT Has Become A Commodity.
The Commodization of IT

• Assumption As ITs potency and ubiquity have
  increased so has its strategic value.
• Mistake Competitive advantage comes from
  scarcity not ubiquity.
• Conclusion IT is affordable and accessible to
  everyone and therefore no longer offers strategic
  advantage to anyone.
• - Carr (HBR)

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Avoid Over-Investing in IT

• Now that IT is ubiquitous we must focus on risks
  more than potential strategic advantage.
• The arrival of the Internet has accelerated the
  commoditization of IT by providing a perfect
  delivery channel for generic applications.
• The greatest IT risk is overspending, putting
  your company at a cost disadvantage.
• - Carr (HBR)

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The Lesson Move from Offense to Defense

• Spend Less. Separate essential investments from
  discretionary, unnecessary or counterproductive
  ones.
• Explore simple and cheap alternatives, and
  eliminate waste.
• Follow, dont lead. Delay IT investments to
  significantly cut costs and decrease risk.
• Focus on risks, not opportunities. Prepare for
  potential disruptions and not on deploying IT in
  radical new ways.
• - Carr (HBR)

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CIO Magazine Cover Story - October, 2003

• The Incredible Shrinking CIO
• The Dumbing Down of the CIO Role
• By Stephanie Overby

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From Back Room to Boardroom and Back?

• Percent of CIOs reporting to CFOs has doubled
  just this past year
• Compensation for CIOs at large companies has
  decreased 16 from 2001 to 2003
• IT spending continues to be flat or in decline
• Outsourcing and shrink-wrapped technology
  strategies are of increasing interest to CEOs
• - Overby (CIO)

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Frequently Asked Questions

• How do I determine IT priorities and proactively
  manage stakeholder expectations within an
  environment of diminishing budgets?
• How do I allocate IT resources to satisfy
  unbounded demand for IT services?
• How do I maintain consistent operations while
  focusing IT resources on high value, growth
  initiatives that enable the business strategy?

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The Real Question Innovation and the Value of IT

• How can we measure it?
• How can we communicate it?
• How can we achieve it?
• Are these new questions?

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Information Economics 1988

• Tried to measure and justify the value of IT
  investments.
• Expanded concept of value beyond ROI
• Enhanced ROI
• Strategic Match
• Competitive Advantage
• Management Information
• Competitive Response
• Strategic IT Architecture
• Attempted to quantify intangible benefits and
  risks.

Source Information Economics, Parker, Benson and
Trainor, Prentice-Hall, 1988.
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Recent Literature on Question of Value

• Gartner IT Efficiency vs. IT Effectiveness
• Information Week The Technology Customer
  Disconnect
• CFO.com ROI Results Often Immeasurable
• CIO Magazine Applying EVA to IT
• META Group Return on Value
• Giga Measure Business Value Created by IT
  Spending

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Gartner IT Effectiveness vs. IT Efficiency

• IT effectiveness is qualitative, thus difficult
  to measure.
• IT efficiency is measured through cost
  comparisons.

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Information Week The Technology/ Customer
Disconnect

• Research found no discernable link between the
  level of IT investment and customer satisfaction.
• Managing IT investments is an age-old challenge.
• The need to demonstrate the connection between IT
  spending and business results is critical.
• There is a disconnect between IT and line
  managers about ITs role and potential
  contribution.
• IT infrastructures are under leveraged.

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CFO.com RIO Results Often Immeasurable

• ROI analysis seemed like panacea for the
  cost/complexities of IT projects.
• Now morphing into the central question for
  executives involved in IT strategy How to
  create a solid framework in which IT spending can
  be analyzed and capital deployed.

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CIO Magazine Applying EVA to IT

• Economic Value Analysis (EVA) subjects every
  investment to an internal cost-of-capital charge.
• Problem Age-old difficulty of quantifying
  returns from IT investments.
• Benefit EVA speaks the language of the CFO, and
  can help CIOs struggling with demonstrating the
  value of IT investments.

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META Group Return on Value

• ROI studies do not result in successful funding
  approvals.
• The results of ROI studies of IT (and other)
  investments are open to credibility issues.
• Return on Value (ROV) may be more effective tool
• Links IT performance measures to the companys
  specific strategic goals and mission - e.g.,
  increase in market share.
• Provides means to measure economic benefits.
• Creates observable links to LOB - defined metrics
  and benefits.

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Giga Measure Business Value Created by IT
Spending
The problem is not ROI, it is measurement and
communications.
Source Giga Information Group
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The Information/Technology (I/T) Gap
Scenario
I/T
Business Value?
The I/T Gap
Infrastructure ArchitectureData
Access Systems eBusiness
CEO
CIO
Better business information

• Wants high business performance from good
  information use.
• Talks about people being able to use good
  information to do business.

• Wants good business results.
• Attempts to achieve this through IT often leaving
  peoples information management and behaviors for
  the business units to address.
• Talks and invests in IT and manages the IT
  function.

Result? Confusion in language and mindsets.
Source SIM Advanced Practices Council
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The Message from Top Management to CIOs

• Mixed messages
• Reduce Costs
• Add Value
• Real message
• Do more with less

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Carr (HBR) and the Others Make Good Points

• Explore simple and cheap alternatives, reduce
  risk, eliminate waste, spend less, outsource
  commodity functions,etc.
• Improve delivery of IT projects time, cost and
  benefits.
• Find better ways to measure the value of IT
  investments.
• Improve communications with senior management.
• Who can argue that there is not room for
  improvement?

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At the Same Time, They Miss Some Points

• IT value comes from innovations in business
  practices e.g., knowledge management, business
  process improvement, customer relationship
  management, performance measurement, etc.
• IT advantages arise from people, not IT -
  innovations and new ideas are enabled by IT, but
  generated by people.
• IT risks only exceed advantages (as Carr
  contends) if the risks are not well understood
  and/or managed.
• Innovation is occurring in each of our businesses
  and IT must embrace the changes while managing
  risks.

Has IT become a commodity as Carr contends?
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Innovation and the Value of IT
The Special Problem ofDigital Intellectual
PropertyA Short Case Study
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Trends in Digital Intellectual Property
Innovation and Movement from - physical to
intangible goods - analog to digital
information - sales to licensing
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Challenges in Digital Intellectual Property (IP)
In an era when IP can be copied perfectly and
widely distributed at little cost... -
Provide appropriate protections for creators of
IP - Recognize societal interests in
innovation in IP - Achieve balance between
these competing objectives
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IT Enabled Change is Creating Dramatic
Opportunities in the Entertainment Business
Technologys Impact on the Entertainment
Production Value Chain
Pre-Production
Capture/Creation
Editorial
Assembly
Promotion, Marketing, Sales
Receivables,Payables,Reporting
GeographicalDispersion
Exhibition/Playback

• Current
• DVD the all-time fastest- adopted consumer
  electronics technology
• Digital multiplexing enabling more channels form
  pay-TV providers
• Game platforms achieving cinematic levels of
  sophistication
• Future
• D-Cinema
• HDTV widespread
• On-demand services ubiquitous
• More interactivity
• New consumer platforms and channels for
  entertainment (e.g., wireless, hand-held)

• Current
• Multi-platform marketing campaigns
• Online ticket sales and far-advance sales leading
  to bigger openings
• Future
• Very precise market segmenting and message
  targeting
• Shift from predominantly indirect to direct
  marketing
• Transaction data contributes to profiling and
  product development

• Current
• VFX add thrills and lower production costs
  through digital sets and characters
• Digital post and digital intermediates increase
  creative options and lower versioning costs
• Future
• VFX improvement to further replace actual with
  virtual elements
• Digital asset management systems to enable re-use
  and re-purposing of digital elements for various
  media and platforms

• Current
• Digital dailies enable faster shoot reviews and
  more managerial inputs
• Digital pre-visualization techniques streamline
  processes for set design, VFX development, shot
  design, and choreography
• Digital capture gaining share of TV production
• Future
• Digital capture for motion pictures will lower
  stock costs

Source McClellan Associates analysis
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IT Enabled Change is Also Creating Great Business
Risks in the Form of Piracy

• Broadband penetration and music downloading
  predict video downloading
• 5 of online consumers have downloaded movies.
• 86 of consumers who have downloaded movies have
  broadband.
• Broadband is steadily penetrating the U.S. market
• 15 of households have broadband in 2002, rising
  to an expected 50 in 2007.
• U.S. broadband users are 4 times more likely to
  download videos than narrowband users.
• Ease of video downloading will improve at a high
  rate, given historical trends for compression,
  storage, encoding, and home broadband speed, so
  that
• Soon it will take less time to download a
  standard definition movie than to watch it, the
  same by 2007 for a high-definition movie.
• By 2006, a single removable disk will be able to
  store 50 high definition movies or 1,200 standard
  definition sitcoms.

Source MPAA white paper, Forrester
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Media Piracy Ecosystem(ver 2.0 10/07/03
Richard Atkinson)
Pirating of the Media
Private Distribution
Power Users
Mainstream Public
Theatrical Film Screencam Telecine Internal
Masters
Posting Listed on VCD Quality.com Auto-scanning
of key iRC sites builds release notice and NFO
sheet
Hospitality Distributed master In-room
recording
UseNet Sites Public news Group servers around the
world used as mass distribution points
Direct Connect (Bit Torrent, etc.)
DVD Internal Production Masters DVD Rip
P2P Networks (FastTrack / Kazaa, Gnutella,
eDonkey, etc.)
Re-Releasing Transcoding to different formats,
resolutions, languages
Pirate
Post Site (Typically hijacked FTP server)
Top Sites (Typically private iRC servers/channels
open only to core pirating group)
iRC Sites (a mix of private and public iRC
servers, where releasing group releases into
Internet)
Results Files DVD-Rs VCDs DVDs
Addtl iRC (FastTrack / Kazaa, Gnutella, eDonkey,
etc.)
Addtl iRC (FastTrack / Kazaa, Gnutella, eDonkey,
etc.)
Pirated Media Manufacturing Plants (where the
pirated versions get mass-produced in physical
form)
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Growth of KaZaA- most common file sharing
program But KaZaA is one of manypiracy
by network of Haunted Mansion
Even with the backdrop of RIAA Litigation, we
have only seen a 30 reduction in KaZaA users,
and the assumption is a number of these have
moved to other networks

• Sept 02 Nov 02 Feb 03 May 03 Sept
  03 Feb 04
• Concurrent Users 2.2M 3.2M 4.2M 4.5M 3.6M 3.
  3M
• KaZaA Downloads 126M 133M 179M 223M 265M 325
  M
• Weekly Downloads 2.6M 3.4M 2.9M 2.6M 2.2M 2.
  1M

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Protecting the Rights of IP Creators(and
Marketers/Distributors)

• Contracts
• Regulation
• Legislation
• Litigation
• Education
• Technology

Source MPAA white paper, Forrester
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Innovation and New IT Value-added Role

• Defending mis-use of internal networks
• Monitoring external P2P protocols and reporting
  pirated IP
• Downloading evidence
• Deploying technical P2P protective measures
• Measuring effectiveness of countermeasures
• Collaborating with others to find balanced
  solutions

Source MPAA white paper, Forrester
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This Doesnt Look Like a Commodity to Me!

• Our businesses continue to innovate in ways we
  could not imagine a short time ago.
• IT in non-traditional forms is at the heart of
  much of the change.
• IT alone does not create either opportunities or
  risks these come from ideas and innovations.

The value of IT comes from innovation through
people and their ideas, and these are not
commodities.
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CIO Nilsson on Value
Many managers only talk about IT, without
thinking of the concept more holistically. They
are looking for a technical solution. But it is
not a technical solution, it is a philosophical
solution, a way of business thinking. IT is not
alive-- it is not thinking, setting the rules,
responding to customer needs. It is the people
who create value in the company. -Kent Nilsson,
CIO
Source SIM Advanced Practices Council
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CFO.com Interview with Futurist James Canton

• Actions for the CFO create a plan to monetize
  the value of information technology, rethink your
  role, create a future plan that is tech-enabled,
  learn to secure the enterprise, embrace the
  real-time enterprise, and get to know the
  blue-haired, body-pierced set that runs the IT
  department. It will make a difference.

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Innovation and the Value of ITEd TrainorMarch
31, 2004Portland Oregon