A Tale of Two Outcomes: Cyclical Versus Structural Change

After more than two years of this protracted technology recession, its easy to assume that it will never be the same. But while severe, this downturn, like every other, is largely cyclicalspending will pick up again and we will again see a new project-based technology economy. In 10 years we will look back at the technology we use today and laugh at how primitive it was (I didnt have a cell phone, e-mail address, PDA, or laptop in 1993was I lucky or what?). This says that businesses and consumers will spend enormous sums on technology in the next decade. Nonetheless, significant structural (permanent) changes will stem from this downturn and need to be understood. There are two in particular:

The emergence of line-of-business decision-makers: IT decisions are more intertwined with business decisions than ever before, and line-of-business (LOB) leaders are playing a larger role in pushing IT strategies and budgets. This is a permanent change and will greatly affect the future of the technology industry.

The basis of competition in technology markets will forever change The Internet revolution was supposed to change everything overnight, as was the promise of technologies like wireless and service-based architectures. Although the revolution didnt happen as many expected, the rules of the game are slowly but surely changing. Were just at the beginning of this investment cycle, but it will be evolutionary and driven by large companies realizing new levels of competitive advantage.

Emergence of the LOB manager in IT decision-making

In Lou Gerstners farewell letter to IBM employees and shareholders, published as the Chairmans letter of IBMs 2001 Annual Report, he says:

“Approximately half of the investments that customers make in IT are now driven by line-of-business managers, not chief information officers. This is a remarkable shift in just five or six years. Not that CIOs have become unimportant. They now sit at the table where technology is translated into business value. And their traditional bailiwick of infrastructure, too, has been transformed by the networked world. But theres no question that business strategy now sets the technology agenda, not the other way around.”

Our work with users corroborates this. Through the 1990s we worked on more than a thousand Enterprise Resource Planning (ERP), supply chain, and other enterprise application software selections. In almost all cases, IT led the decisions. There were always business people on the team, but they tended to be lower-level representatives of the business units.

Thats not the case anymore software selection teams have changed significantly in the past three years. We are still working with IT, but we are now also interacting with the CFO, chief procurement officer, vice president of engineering, VP of logistics or supply chain, VP of sales, or whoever the appropriate LOB manager may be.

To see if this is more than anecdotal, we recently surveyed more than 100 large organizations to gauge the role of executives in the IT decision-making process. Interestingly, 70% of the executives surveyed are either directly participating in the process or leading it. Five years ago, this was clearly not the case.

The changing basis of competition

We are entering the third era of technology evolution:

The Hardware Era (1960s-1980s) Integrated hardware vendors, led by IBM, owned the technology market and had clear account control. IT organizations defined themselves by their hardware vendor strategies (IBM shops.) and this vendor dictated most third-party vendor decisions.

Client/Server Era (1990s) Client/server commoditized hardware and disaggregated the market, making it possible to buy servers, desktops, operating systems, databases, networks, storage systems, and the like all from different companies (leading hardware vendors like Dell are more assemblers than integrated manufacturers). Hardware infrastructure thus became interchangeable and power shifted to enterprise applications (ERP vendors led by SAP). Underlying technology decisions were made according to what best optimizes the performance of the enterprise applications. Companies went from being IBM shops to SAP shops.

Internet Era (present) We are in a new Internet-based era, and like the client/server era before it, it has the potential to commoditize the application software market. Service-based architectures will likely yield an opportunity for application software to become more componentized, making it possible for users to buy systems incrementally. This opens the door for software system assemblers to take account control.

This structural shift supports the power shift outlined above to LOB leaders working in partnership with IT for technology decisions. Initiatives that are tied to creating business value will propel the next wave. This gives power and potential account control power to those companies that advise LOB leaders on strategy and can support IT in the implementation of business-led technology.

Accenture and IBM Global Services are especially well positioned (and represent the motivation behind IBM’s acquisition of PWC Consulting).

Conclusions: What does this mean?

The structural changes are good for technology users and for the future of the technology industry, and they have game-changing implications for technology suppliers.

Line-of-business leadership is essential

I cant tell you how many of the more than 1,000 enterprise application projects AMR Research was involved in fell short of expectations after meeting a target go-live date. It wasn’t because the technology failed, but rather because the necessary business executives did not have skin in the game.

These systems are only as good as the data that resides within them. The real users have to make these systems part of how they do their jobs, or they will be cleansing bad data and re-implementing the systems forever. Acceptance only happens if the appropriate line-of-business manager is taking charge of the implementation and responsibility for its success. If the VP of sales or chief procurement office is not leading Customer Relationship Management (CRM) or e-sourcing initiatives, respectively (and a piece of their annual bonus is not tied to successful implementation), the projects probably wont thrive.

Big bang is dead; small pops will make a bigger noise

Gone are the days of committing tens of millions of dollars upfront to software projects. Users need to take a more component-oriented approach to buying and implementing software. Over time, it will benefit end users and technology suppliers. In the past, too many companies committed to large implementations upfront only to find that three years later these projects were still not up and running. There was more shelfware than working systems, and Return on Investment (ROI) was a topic to be avoided.

Instead, it is in everyone’s interest to commit to small implementations that can be rolled out and deliver returns quickly. Small successes yield ongoing incremental investments and could equate to much bigger implementations in a three- to five-year period, but without the risks of big-bang approaches. Users win, IT wins, the business executives leading the projects win, and, interestingly, the technology vendors win: they get happier customers and potentially more lifecycle revenue than the big-bang scenario.