Technology Economics and the Importance of Software Process

11

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)


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)


Insurance CompaniesInsurance Companies

2424

ProfitabilityProfitability8-Apr-07

CompanyCurrency Shown

Net Revenue

Operating Expense

Operating Profit-ability C/I Ratio

Net Revenue

Operating Expense


Profit-ability 2

Year Average

C/I Ratio 2 Year

AverageNet

RevenueOperating Expense


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


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)


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


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 Quartile Breakpoint

Benchmark Low

Benchmark Average


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 Average


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 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


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 S

pen

d a

s %

of

O

per

atin

g E

xpen

se

IT In

tensi

ty

Northwestern


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 S

pen

d a

s %

of

O

per

atin

g E

xpen

se

IT In

tensi

ty

AXA


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 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

Technology Economics and the Importance of Software Process

Documents

total technology spending

short termtechnology

business costs

application development

distribution of spending

financial services firms

rate model charles costa

mike roberts