I’ll get to the secret in just a minute, but first an observation about the cost of IT. Forrester has been conducting a cost of IT study for many years with the most recent results published in the 2013 IT Budget Planning Guide for CIOs. The report includes a chart of total IT spending as a percent of revenue by industry and company size. Cost as a percentage of revenue is a key performance indicator for IT efficiency as organizations increase in size. I first noticed a peculiarity in the data in the 2007 study and I was wondering if it had changed over the years – it hasn’t. The observation is this; for many industries, the cost of IT as a percent of revenue increases as organizations get larger. What is going on here? Whatever happened to “economies of scale?” Instead we seem to have “diseconomies of scale!”
Before I get to the secret (i.e. the cause of the phenomenon), let’s dig into the numbers a bit more. Since I don’t have permission to share details from the Forrester report, you’ll have to get the paper yourself to cross-check my findings. Figure 3 in the report shows the cost of IT in 21 industries and for each industry the cost for SMB (Small and Medium Businesses) and Enterprise (large) organizations. If you sort the list by cost, at the top of the list is Financial Services with 7.3% of revenue spent on IT, while at the bottom of the list is Consumer Products with 2.3% of revenue spent on IT. This makes sense since different industries are data-driven to different degrees. Banks don’t move money, they move data.
To continue, I calculated the difference in cost for SMB compared to Enterprise organizations and divided the list into the Top 11 and the Bottom 10. The results are startling!
Table 1: Average Cost of IT as a Percent of Revenue
In the Bottom 10 category, 9 of the industries have a lower IT cost percentage for Enterprise organizations compared to SMB (3.4% for SMB and 3.0% for Enterprise.) This represents roughly a 12% improvement in efficiency for large organizations and is what we would expect in terms of economies of scale.Table 1: Average Cost of IT as a Percent of Revenue
In the Top 11 category however, 9 of the industries have a higher IT cost percentage for Enterprise organizations compared to SMB (5.0% for SMB and 5.4% for Enterprise.) This represents an 8% decrease in efficiency for large organizations as they increase in scale. In other words, diseconomies of scale. The total difference then between the Top 11 and the Bottom 10 is 20%. In summary, as organizations with large IT groups become even larger, they are less efficient by 20% compared to organizations with smaller IT groups. The question is WHY?
Now let’s get to the dirty little secret – which isn’t so secret actually. The problem is the same as the cobblers’ children who have no shoes. IT spends a lot of time helping the organization to automate business processes, but spends almost nothing on automating its own IT processes. IT is largely a manual activity. Requirements are written by hand in MS-Office tools. Software is developed using powerful workstations and IDE’s, but still involves a developer essentially hand-coding the program. Handoffs between teams are through emails. Coordination of work is done in meetings. The list goes on.
The fact is that manual activities don’t scale linearly. Let’s take a simple example – a restaurant kitchen. With one chef, the output of prepared food is X. If you add a second chef, the output is pretty close to 2X. In fact, if the two chefs are smart, they might divide up the work so that each specializes on certain dishes or activities, and as a result becomes more productive overall. Even with 3 or 4 chefs you might see the productivity rise linearly as they start to develop a sort of “assembly line” or factory process. But what happens when you put 10 chefs, or 50, in the same kitchen? At some point they start getting in each other’s way, communications consume more and more time and energy, disagreements start to emerge, staff turnover becomes a productivity detractor, and so on.
The IT industry tried to address the skyrocketing costs by hiring lower cost staff (see my blog Outsourcing Doesn’t Make Sense Anymore) but in the end it is not sustainable. Large banks count the number of IT staff in the 10’s of thousands. If you truly want to scale IT, the solution is not to throw more people at the increasing complexity and the exponential growth in big data, the solution is to standardize the work process, development configurable re-useable components, and automate routine activities using appropriate technologies. In a scalable organization, you should be able to double work output by adding just a small fraction of staff.
So the biggest dirty little secret in IT is that IT doesn’t follow its own advice. It helps the business automate ordering, billing, design activities, manufacturing processes, and even entire supply chain management. Amazon may be the ultimate example by automating the order-to-cash cycle to the point where it happens with 1-click. And it’s not just 1-click to purchase a book or pair of shoes, the Amazon Elastic Compute Cloud (EC2) also supports 1-click server provisioning or software deployment. It’s about time IT applied the same innovation to how we do work.
For example, one Informatica user had to rebuild 800 mappings in order to migrate an application from DB2 to Oracle. The Systems Integrator who bid on the project using the manual-based approach proposed a team of 60 people (mostly off-shore) for 4 months. The winning solution however was a highly automated approach using an Integration Factory approach and Informatica Platform that took one person one month to complete all 800 mappings!
You don’t need to wait. You can do this in your organization today with existing technology. If in doubt, come to Informatica World to talk to leading organizations who are doing this today. Hope to see you there!