Technology Economics and the Importance of Software Process

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Technology Economics and the Importance of
Software Process

• Dr. Howard Rubin
• Professor Emeritus Hunter College of CUNY
• MIT CISR Research Associate
• Gartner Senior Advisor
• Howard_rubin_at_compuserve.com
• 1 914 420 8568

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Key Points
As information technology evolved, business costs
and investment in technology increased and added
a new component to the cost of doing business.
GDP, DJIA, and IT Spend as a Percent of Revenue
Relative to 1960
Mainframe Computing
Distributed Computing
Internet/Pervasive Computing
GDP
The spend on IT has increased 7 fold since
1960.
Base all industry sectors
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Key Points.

• We are entering an era in which technology
  economics in business can be understood
• Companies that can master technology economics
  will likely have extreme competitive advantage in
  the short term
• Technology economics provides a powerful backdrop
  to understand the importance of software process

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And More.

• About 40 of every Tech is spent on
  Application Development and Maintenance
  activities
• The ability to focus Tech on Application
  Development and Maintenance is being squeezed
  by data center build out demands in most sectors
• Strategically it is more critical than ever in
  the applications are to produce and support more
  for less software process is a critical enabler

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Even More

• Infrastructure spending has grown 30 since 2002
  and the distribution of spending has shifted

1.3B
1B
Ms
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And Some More
Data Centers, Data Network, and the Help Desk are
the biggest growth areas (not by choice) as the
desktop becomes commoditized
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• My Background
• Milestones in Technology Economics
• Economic Patterns and Observations
• Technology Optimization Software Process

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• Academic
• Business
• Consulting
• Environmental
• Political

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(No Transcript)
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• 11 of US GDP (of 13.2T)
• 120B of IT Spending

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Economics

• 1. The branch of social science that deals with
  the production and distribution and consumption
  of goods and services and their management
• 2. The study of choice and decision-making in a
  world with limited resources

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Technology Economics is Young

• The 10,000 years of accounting history started
  with simple stone "tokens" to count wealth

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In Search of the IT CFO

• IT CFO 711 Hits
• CFO 24,500,000 Hits

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Technology Economics Milestones

• 1976 Equitable Life Software Estimation (Jim
  Johnson, John Gosden)
• 1979 IBM Function Points (Alan Albrecht)
• 1981 Software Engineering Economics (Barry
  Boehm)
• 1985 Nolan Norton Application Portfolio
  Management
• 1987 SEI CMM (Watts Humphrey)
• 1990 The Business Value of Computers (Paul
  Strassmann)
• 1999 Merrill Lynch (John McKinley/Marvin
  Balliet IT CFO)
• 1999 Verizon IT Portfolio and Infrastructure
  Market Basket (Joe Castellano, Gerry Higgins)
• 2003 Altria Self Benchmarking Rate Card (Jim
  Noble)
• 2004/2005 JPMorgan Infrastructure Cost
  Optimization and Rate Model (Charles Costa, Mike
  Sztejnberg)
• 2005 Lehman Brothers Market Basket Model (Jon
  Beyman John Ambrose)
• 2006 Credit Suisse Economic Target Setting
  (David Reilly,Mark Rufeh, Tom Sanzone, Mia
  Peterson, Phil Cushmaro)
• 2006/2007 Citigroup Technology and Operations
  Optimization (Marv Adams, Jeff Nachowitz, Mike
  Roberts, Eric Joosten)

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Technology Economics Financial Services as an
Example
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The Top 12 Financial Services firms in the world
had 2006 Net Revenue of 30B to 90B.Their
Total Technology Spending ranged from 2.5B to
7.5B
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2006 Tech Spend

• Total Tech Spend varies widely when considered on
  Net Revenue, Operating Expense, and Total Tech
  Spend per Employee basis.

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Perspective

• 8B is larger than the GDP of 88 Nations
• 1B is larger than the GDP of 54 Nations

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Patterns, Empiricism, Technology Economics
1. application of observation and experiment the
application of observation and experiment, and
not theory, in determining something2. philosoph
y philosophical belief regarding sense-derived
knowledge the philosophical belief that all
knowledge is derived from the experience of the
senses3. medicine medicine based solely on
experience medicine that is based on practical
experience, and not on theory or scientific proof
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Patterns In Technology Economics

• Take a few thousand companies with Revenue from
  500M to 250B and do a regression..

Tech Spend Versus Revenue
Investment Banking
Financial Services
Cross Sector
Tech Spending M
Revenue M
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Patterns and Business Performance

• Financial Services Institutions

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Patterns and Business Performance

• Investment Banks

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Patterns and Business Performance

• Insurance Companies

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Patterns and Business Performance

• Profitability

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Patterns and Business Performance

• The correlation between Tech Spend as measured
  versus Operating Expense and Profitability is
  higher than that as measured versus Net Revenue.

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Putting the Patterns to Work
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• A Tale of Two Banks
• Pattern Tech Spend Profile is Business Dependent

Two 60B Banks -- 490,000,000 Apart in IT
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Business Performance and Tech Spend
Pattern The Amorphous Linkage Between Tech Spend
and Profitability

• The perspective from which business success is
  measured will provide different results with
  regard to benchmark measures of technology
  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
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Business Performance and Tech Spend

• A New Pattern
• The Financial Services companies that have been
  the most profitable from 2005 through 2007 have
  kept Tech Spend almost flat versus Net Revenue

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Business Performance and Tech Spend

• A New Pattern
• The Financial Services companies that have been
  the most profitable from 2005 through 2007 have
  increased Tech Spend versus Operating Expense

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Business Performance and Tech Spend

• A New Pattern
• The Financial Services companies that have been
  the most profitable from 2005 through 2007 have
  been driving their Tech Intensity (IT Intensity)
  upwards

New Patterns may need New Metrics
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Technology Intensity??

• A new experimental measure that considers Tech
  Spend in the context Net Revenue and Operating
  Expense simultaneously

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Tech Intensity
Tech Intensity
Tech Spend as of Operating Expense
Tech Spend as of Net Revenue
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Tech Intensity Illustration
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
IT Intensity
IT Spend as of Operating Expense
IT Spend as of Net Revenue
AXA
IT Intensity developed by Dr. Howard Rubin,
Patent Pending
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Hypothesis

• If 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 Technology
• If you are below the performance frontier curve
  your quality of spend is likely below the
  optimum

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Tech Intensity Illustration Investment Bank
Businesses Only
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
IT Intensity developed by Dr. Howard Rubin,
Patent Pending
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Tech Intensity Illustration Insurance
IT Intensity
IT Spend as of Operating Expense
Northwestern
IT Spend as of Net Revenue
IT Intensity developed by Dr. Howard Rubin,
Patent Pending
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Technology Intensity Varies by Sector
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Technology Intensity and Software Process
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The Impact of Software Process

• Organizations that have focused on software
  process appear to have superior IT cost
  structures and quality.

Low Unit Cost High Quality
High Unit Cost High Quality
Low Unit Cost Low Quality
High 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 gt 20B
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The Impact of Software Process

• Organizations that have focused on software
  process appear to have superior business
  performance due to the business leverage provided
  by superior software process maturity time to
  market unit costs quality ability to focus
  more on CTB

Effective Process
IT Intensity
IT Spend as of Operating Expense
IT Spend as of Net Revenue
AXA
IT Intensity developed by Dr. Howard Rubin,
Patent Pending
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The Leverage of Software Process

• Effective software process will enable
  organizations to add more for less

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The Value of Software Process

• Beat Moores Flaw as unit cost go down demand
  rises faster and total cost increases

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Technology Economic Optimization and Software
Process
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Technology OptimizationThe Business IT System
Dynamic
The Business IT System
Business Model
Process is the Glue
P R O C E S S
Applications
Infrastructure
Source Citigroup
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Technology OptimizationAreas Begging for
Integration

• Total Tech Spending View
• Business Based Sizing View
• Moores Law/Moores Flaw View
• Total Tech Governance IT Savvy View
• Technology Cost of Goods View
• Fixed Vs Variable Cost View and a PL Driver View
• Organizational Leverage View
• Portfolio Placement View
• Global Leverage View
• Business Value View
• Process Value View

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It is not the strongest of the species that
survives, nor the most intelligent, but the one
that is most responsive to change
Charles Darwin
The only sustainable competitive advantage is to
be able to learn faster than your competitors.
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
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Thank you