it does matter: the new technology economics dr. howard rubin ceo rubin systems/rubin worldwide mit...

IT DOES Matter:The New Technology Economics

Dr. Howard RubinCEO Rubin Systems/Rubin Worldwide www.rubinworldwide.comMIT CISR Research AssociateProfessor Emeritus City University of NYSenior Gartner [email protected] 16, 2009Version 5.0

http://www.rubinworldwide.com/

mailto:[email protected]

2 All Rights Reserved. Dr. Howard Rubin www.rubinworldwide.com

Prologue

“My argument is not that you don't need IT or that it's not important, but that it doesn't matter strategically and doesn't provide one company with

a way to distinguish itself in any meaningful way from its competition”

-Nicholas Carr

“Those companies that have optimal Technology Intensity (the best mix of IT investment to grow and protect revenue while reducing and avoiding costs at a managed level of risk) outperform their peers by 3-5% of pre-

tax margin.

The most opportunistic time for technology investment is during an economic downturn; it is the only area in which investment can change the operating profile of an organization – doing so effectively can create

an insurmountable competitive gap. Bad IT economics will put you on the wrong side of this gap and may even be creating advantage for your

competitors.

IT DOES Matter – It is strategic and meaningful if managed wisely.”

-Howard Rubin


Prologue: When IT DOESN’T Matter

• When there is no differentiation among competitors with regard to IT Cost of Goods (or if there is, it doesn’t impact Total Cost of Goods)

• Where there is no leverage or return from IT investments to Grow Revenue, Protect Revenue, Reduce Cost/Avoid Cost (Operational Efficiency) or Manage Risk.

• When the Technology Spending Tsunami overtakes growth in Revenue and Profitability (see above)

• When your IT investment portfolio underperforms – a cluster of peers with the same technology intensity and no profitability differentiation


Prologue: When IT DOES Matter

• When there is a major spread in IT Cost of Goods and business performance is enhanced and the gap goes right to the bottom line

• When ROIT is a multiplier that shows up in revenue growth/protection or operational efficiency or risk management or all of these

• When your Tsunami swamps the competition

• When your IT investment portfolio outperforms the market – at your level of technology intensity you outperform peers.


Prologue: Key Points to Follow

1. Technology spending has collided with current economic conditions as IT organizations have failed to enact agile IT economics. The pressure is on to cut IT.

2. In 2009, the U.S. Fortune 500 for example will have perhaps $10T of Operating Expense and $500B of Tech Expense. Operating Expense dwarfs the cost of IT.

3. The single biggest opportunity for organizations is to reduce Operating Expense is through targeted technology investment. If IT was “free” it would barely provide the needed lift for the global economy.

4. Business consolidation driven by current economic conditions is resulting in a new scale of business. Companies that can attain the new scale economics of IT will gain insurmountable competitive advantage. IT DOES matter.


Topics

•Why IT DOES Matter

•The IT Economic Climate

•IT Spending Trends

•The Impact of Industry Consolidation on Scale: Infrastructure and Business Process

•The Importance of IT Economics: IT Cost of Goods and Profitability

•The New IT “Value” Meal

•The IT Management Mandate

•Conclusions


Why IT DOES Matter1. The current global economic environment has driven significant merger/consolidation activities in the financial services sector.

2. As a consequence, enterprises of new scale are being created.

3. The largest of these organizations will have access to information technology (and business process) economies of scale that have never been experienced in the industry.

4. The scale gap between firms will become a competitive lever for those that can harness such benefits.

5. This scale gap is most apparent and can be most quickly leveraged in the area of IT infrastructure.

6. Current analyses indicate that scale-economic cost reduction by 2010 for IT infrastructure may be as much as 40%-60% overall (relative to 2007 baseline costs).

7. This level of cost take-out has the potential to reshape the technology cost of goods for business products in the financial services sector. (e.g. cost per trade, cost per ATM transaction, cost per customer, etc,)

8. Those firms that do not have access to such economics will inherently be non-competitive unless they can develop ways to access the economics of their largest competitors.

9. The impact of scale economics will be further amplified with effective demand management and heightened virtualization which will enable new levels of IT infrastructure efficiency (supporting even larger enterprises with less physical resources.

10. Overall, in an industry where infrastructure costs typically were ~ 3% of Net Revenue in 2007 we are looking toward a future where the operating model may be ~2% or less. Similar reductions are expected in business process costs.


The IT Economic Climate

• Current high fixed cost of IT in most companies is preventing required economic agility to respond to business revenue volatility

• Conventional IT cost cutting models have “hit the wall” under the new pressures of spending reduction• Current high fixed capacity IT in most companies is preventing required “plant” agility to respond to business volume volatility• Conventional capacity management and sizing models have “hit the wall” in the face of unprecedented downward business

volatility• Current IT spending is viewed as high an in most companies and is in the process of being cut• Conventional wisdom is to cut IT in times of business stress – in fact IT is the only lever left where investment can decrease

operating costs.

Current consolidations are creating new scale economies – the formerly tactical task of infrastructure and business process consolidation now has intense strategic value!


The “IT Bailout” (of Business)Targeted investment in IT can have a major impact during current economic conditions• Fact: Overall IT costs are only 5.9% of Operating Expense which

means that 94.1% of Operating Expense is the greater opportunity area.

• Fact: Each $1 of new investment in IT between 2003 and 2005 had helped drive $1.47 of Gross Profit in 2006

Fortune 500 Totals 2001-2006

$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

$9,000,000

$10,000,000

$11,000,000

2001 2002 2003 2004 2005 2006

Year

Rev

enu

e o

r O

per

atin

g E

xpen

se $

M

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

Tec

h S

pen

d $

M

Tech Spend Revenue Operating Expense


Technology and the Economy: Technology Eras and the GDP

Historically ( a short history ), there appears to be a linkage between technology eras and GDP trends.

US GDP and DJIA 1929-2004

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

GD

P (

$T

) D

JIA

($)

GDP in 2000 Dollars DJIA in 2000 Dollars

Mainframe Computing

Distributed Computing

Internet/Pervasive Computing


Technology and the Economy: Tech Spend and GDP

There appears to be a linkage between technology spending and market trends.

GDP, DJIA, and IT Spend as a Percent of Revenue Relative to 1960

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

19

60

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

Va

lue

Re

lati

ve

to

19

60

GDP Relative to 1960 DJIA Relative to 1960 IT Spend % of Revenue Relative to 1960

Mainframe Computing

Distributed Computing

Internet/Pervasive Computing


Technology Economics: Historical PerspectiveNational productivity has accelerated through the “technology era”

US Non Farm Business Productivity Change

-

0.50

1.00

1.50

2.00

2.50

3.00

1960-1980 The Mainframe Era

1981-1990 The Client

Server/Distributed Era

1991-2000The PC/Emerging

Internet Era

2001-Current The Pervasive

Computing/Pervasive Access Era

Per

cen

t C

han

ge

Ove

r P

erio

d

Correlation Between Non Farm Productivity Change and IT Investment Change

-0.501.001.502.002.503.00

- 1.00 2.00 3.00 4.00I T I n v e s t m e n t C h a n g e

No

n

Far

m

P

rod

uct

ivit

yC

ha

ng

e

y = 0.6633x + 0.3372R = 0.9835


Technology Economics: Historical Performance Superior technology investment strategies have enabled superior business results. Top performers have driven higher pre tax margin for a given level of technology investment.

Pre Tax Margin Vs. Technology Intensity – Top 10 Investment Banks

T e c h n o l o g y I n t e n s I t y

Top 10 Investment Banks

25%

27%

29%

31%

33%

35%

37%

39%

41%

1.25 1.35 1.45 1.55 1.65 1.75 1.85 1.95 2.05

P r

e

T

a x

M a

r g

I

n

IT as % of Revenue

IT as % of OpEx

Tech

nolo

gy In

tens

ity

Pre Tax Margin Vs Technology Intensity (Banking)


By 2006, a 26% increase in cumulative absolute Tech Spend in the U.S. had helped drive a 114% in absolute Gross Profit; The 13% increase in relative Tech Spend had helped drive a 60% increase in relative Gross Profit

Each $1 of new investment in IT between 2003 and 2005 had helped drive $1.47 of Gross Profit in 2006

The opportunity to continue this trend and increase IT business value through IT cost optimization (economies of scale and focus via sourcing) is still apparent….


$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

$9,000,000

$10,000,000

$11,000,000

2001 2002 2003 2004 2005 2006

Year

Rev

enu

e o

r O

per

atin

g E

xpen

se $

M

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

Tec

h S

pen

d $

M


Technology Economics: Historical Perspective


At the same time the IT Cost of Goods has continued to rise as all sectors have become more technology intense.

Technology Economics: Historical Perspective

Industry Measure IT Cost of GoodsAirlines Per Passenger Mile 0.007$ Automotive Per Vehicle 333.424$ Chemicals Per Patent 57,717.471$ Consulting Per Consultant 53,059.985$ Hospitals Per Bed per Day 64.30$ Railroads Per Ton Mile 0.001$ Retail Per Store (Dorr) 494,817.989$ Web Sites Per Search 0.042$ Trucking Per Road Mile 0.177$ Armed Service Per Person 8,036.000$ Utilities Per MegaWatt Hour 2.630$ Oil & Gas Per Barrel of Oil 1.780$ Banking

Retail Bank - Deposits Per Transaction 0.02$ Retail Bank - Deposits Per Account 2.73$

Retail Bank - Consumer Lending Per Consumer Loan 29.00$ Retail Bank - ATM Per ATM 984.00$ Retail Bank - ATM Per ATM Transaction 0.04$

Retail Bank - Branch Per Branch per Year 54,014.00$ Retail Bank - Branch Per Branch Transaction 0.32$

Retail Bank - Call Center: Deposits Per IVR Contact 0.65$ Retail Bank - Call Center: Deposits Per Agent Handled Contact 0.90$

Retail Bank - Call Center: Consumer Lending Per Contact 0.75$ Retail Bank - Online Per Online User 18.00$

Retail Bank - Credit Card Per Account 3.00$ Retail Bank - Credit Card Per Credit Card Transaction 0.16$

Increase in IT Cost of Goods 2008 Vs 2001

22.0%

13.2%

107.4%

12.4%

64.4%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0%

Automotive

Chemical

Hospital

Oil

Utilities


Technology Economics: Current State

Technology Spend has collided with current economic conditions as IT organizations have failed to enact agile IT economics and make their value proposition transparent.

For 2009, the F500 will have perhaps $10T of Operating Expense (exclusive of IT) and $511B of Tech Expense. The BIG opportunity is to reduce Operating Expense through targeted technology investment.


$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

$9,000,000

$10,000,000

$11,000,000

$12,000,000

2001 2002 2003 2004 2005 2006 2007 2008

Year

Rev

enu

e o

r O

per

atin

g E

xpen

se $

M

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

Tec

hn

olo

gy

Sp

end

$M



Technology Economics: Current State

Technology Intensity

varies across

sectors

IT Intensity by Sector (2006 Data)

0.29

0.30

0.33

0.33

0.37

0.40

0.42

0.45

0.54

0.55

0.58

0.59

0.63

0.67

0.68

0.71

0.72

0.77

0.79

0.81

1.19

- 0.20 0.40 0.60 0.80 1.00 1.20 1.40

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


Cross Industry Overview: Current State

Computing needs in support of revenue vary widely by industry

MIPS per $1M

Revenue

Servers per $1M

RevenueBanking Average 0.98 0.39Consumer Products Average 0.19 0.16Education Average 0.13 0.05Electronics Average 0.25 0.11Financial Services Average 1.07 0.46Food & Beverage Processing Average 0.18 0.12Government - Federal Average 0.49 0.115Government - State & Local Average 0.38 0.09Health Care Average 0.19 0.13Insurance Average 0.33 0.16Manufacturing Average 0.21 0.12Metals & Natural Resources Average 0.16 0.12Professional Services Average 0.14 0.08Telecommunications Average 0.85 0.25Transportation Average 0.23 0.21


Cross Industry Overview: Current State

Cost of Mainframe and Server resources per $1M revenue

Compute Cost per

$1M Revenue Rank

Compute Cost

Relative to Average

Financial Services Average 13,320$ 1 Financial Services Average 2.83 Banking Average 11,730$ 2 Banking Average 2.49 Telecommunications Average 8,850$ 3 Telecommunications Average 1.88 Government - Federal Average 4,665$ 4 Government - Federal Average 0.99 Transportation Average 4,530$ 5 Transportation Average 0.96 Insurance Average 4,380$ 6 Insurance Average 0.93 Government - State & Local Average 3,630$ 7 Government - State & Local Average 0.77 Consumer Products Average 3,540$ 8 Consumer Products Average 0.75 Electronics Average 3,150$ 9 Electronics Average 0.67 Health Care Average 3,090$ 10 Health Care Average 0.66 Manufacturing Average 3,060$ 11 Manufacturing Average 0.65 Food & Beverage Processing Average 2,880$ 12 Food & Beverage Processing Average 0.61 Metals & Natural Resources Average 2,760$ 13 Metals & Natural Resources Average 0.59 Utilities Average 2,160$ 14 Utilities Average 0.46 Professional Services Average 2,040$ 15 Professional Services Average 0.43 Education Average 1,530$ 16 Education Average 0.33 Averages 4,707$ Averages 1.00


Installed MIPS: 2007 Equivalents Without Growth

-

50,000

100,000

150,000

200,000

250,000

2006 2007 2008 2009 2010

Physical Servers: 2007 Equivalents Without Growth and Virtualization

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2006 2007 2008 2009 2010

Financial Services 2009 “Size of Plant” Trends:• Scale is increasing as a result on industry consolidation

• By the end of 2009 there will likely be 3-4 companies with scale of over 100,000 MIPS and 55,000 servers; there will be at least 1 with over 200,000 MIPS and over 80,000 servers.

Scale Economics: Infrastructure


Installed MIPS Scale Economies

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

- 50,000 100,000 150,000 200,000 250,000 300,000 350,000

Installed MIPS

Fu

lly L

oad

ed C

ost

per

MIP

S

Physical Servers (20% UNIX/80%Wintel/Linux) Scale Economies

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

- 20,000 40,000 60,000 80,000 100,000 120,000

Fu

lly L

oad

ed C

ost

per

Ser

ver

X = 2007 Competitors and Y = 2009 Competitors in terms of placement on the scale economics curve and do not represent actual competitor unit costs

X

XXXX

X

X

X

XXXX

XXX

X

Y

YY

YYY

YY

YY

YY

Financial Services 2009 Scale Economics Trends:• As a consequence of increased scale as a result of consolidation, the largest

firms will have access to never-before-experienced scale economies• Being an average performer at “scale” or best in class at “scale” will not be

competitive



Financial Services “New Math” of Infrastructure Cost:

With the new economics of consolidation scale and Moore’s Law at work, the same set of infrastructure services that cost ~$500M+ in 2007 will likely be delivered by the most efficient companies for ~$200M in 2010.

Sample Commidity Costs

Product/ Service 2007 Average 2007 Best in ClassNew Best In Class

(2010)

Average Unit Cost Decline per

YearMainframe MIPS 3,946$ 1,994$ 1,400$ 10%

Mainframe TB 18,650$ 11,806$ 5,500$ 18%UNIX Server 18,200$ 14,680$ 8,600$ 14%

Wintel Server 8,856$ 5,700$ 4,400$ 8%SAN TB 16,500$ 9,000$ 3,300$ 21%NAS TB 15,500$ 6,000$ 1,600$ 24%Desktop 1,440$ 1,008$ 600$ 13%

Email 120$ 99$ 51$ 16%

Sample Market Basket

Product/ Service Model Volume At 2007 Bmk AverageAt 2007 Best in

ClassAt New Best in

Class (2010)

Average Decline per

YearMainframe MIPS 22,000 86,808,333$ 43,868,000$ 30,800,000$ 22%

Mainframe TB 1,200 22,380,000$ 14,167,200$ 6,600,000$ 24%UNIX Server 5,000 91,000,000$ 73,400,000$ 43,000,000$ 18%

Wintel Server 15,000 132,840,000$ 85,500,000$ 66,000,000$ 17%SAN TB 4,000 66,000,000$ 36,000,000$ 13,200,000$ 27%NAS TB 6,000 93,000,000$ 36,000,000$ 9,600,000$ 30%Desktop 50,000 72,000,000$ 50,400,000$ 30,000,000$ 19%

Email 55,000 6,600,000$ 5,445,000$ 2,805,000$ 19%Total Market Basket 570,628,333$ 344,780,200$ 202,005,000$ 22%

Note: See last panel the DataCenter SuperCenter and the IT Value Meal



Scale Economics: Business Process

Retail Banking provides an excellent window into the potential of business process scale changes as a consequence of consolidation.

Retail Banking Independent - 2008 Combined - 2009 Independent - 2008 Combined - 2009 Independent - 2008 Combined - 2009 Independent - 2008 Combined - 2009Company #Branches #Branches ATMs ATMs Credit Card Accounts Credit Card Accounts Online Users Online Users

Bank of America 6,139 6,909 18,753 18,753 48,696,000 48,696,000 28,636,000 30,566,402 Barclays 4,754 4,754 8,082 8,082 23,100,000 23,100,000

BBVA 7,909 8,188 17,136 17,870 14,000,000 14,000,000 4,412,000 4,412,000 Bear Sterns 25 N/A N/A 3,000,000

Bradford & Bingley 140 238 N/A 3,400,000 Capital One 739 739 1,310 1,310 37,916,000 37,916,000

Citigroup 8,441 8,441 19,500 19,500 64,973,000 64,973,000 35,821,453 35,821,453 Compass Bank 279 734 Countrywide 770 N/A N/A 1,930,402

Fifth Third 1,298 1,298 2,329 2,329 1,200,000 1,200,000 JP Morgan Chase 3,179 5,418 9,308 14,270 46,440,000 56,440,000 27,500,000 41,089,884

Key Corp 986 986 1,479 1,479 759,003 759,003 Lehman 50 N/A N/A 1,000,000

Merrill Lynch 1,000 N/A N/A 8,000,000 National City 2,600 2,600 6,000 6,000 2,545,168 2,545,168

Santander 11,685 12,575 16,664 19,202 13,900,000 13,900,000 4,380,000 8,780,000 Schwab 300 300 N/A N/A N/A N/A 4,000,000 4,000,000

Sovereign 750 2,300 N/A 1,000,000 SunTrust 1,692 1,692 2,506 2,506 N/A N/A

US Bancorp 2,556 2,556 4,903 4,903 5,000,000 5,000,000 2,500,000 2,500,000 Wachovia 4,820 13,444 1,300,000 5,252,000

Washington Mutual (WaMu) 2,239 4,962 10,000,000 13,589,884 Wells Fargo 6,200 11,020 12,000 25,444 9,000,000 9,000,000 10,800,000 16,052,000



The shifts in scale are similar to those for IT infrastructure

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Num

ber o

f Bra

nche

s

Pre- Consolidation Post Consolidation

-

5,000

10,000

15,000

20,000

25,000

30,000

Num

ber o

f AT

Ms

Pre- Consolidation Post Consolidation

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

Cred

it Ca

rd A

ccou

nts

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

Onl

ine

Use

rs



Consolidation will differentially impact business process scale economics as a function of business mix – retail branches.

Post Consolidation Retail Branch Shifts

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Bradford &

Bingley

Compass Bank

Schw

ab

Capita

l One

Sove

reign

Countryw

ide

Key Corp

Merrill L

ynch

Fifth Th

ird

SunTru

st

Wash

ington M

utual

US Banc

orp

National City

JP Morga

n Chase

Barclays

Wach

ovia

Bank o

f Ameri

ca

Well

s Farg

oBBVA

Citigroup

Santande

r

Bran

ches

Pre consolidation Post Cosolidation



Consolidation will differentially impact business process scale economics as a function of business mix – ATM’s and ATM transactions

Post Consolidation ATM Shifts

-

5,000

10,000

15,000

20,000

25,000

30,000

Bradford &

Bingley

Compass Bank

Capita

l One

Key Corp

Sove

reign

Fifth Th

ird

SunTru

st

US Banc

orp

Wash

ington M

utual

National City

Barclays

JP Morga

n Chase

Well

s Farg

o

Wach

ovia

Santande

rBBVA

Bank o

f Ameri

ca

Citigroup

ATM

s

Pre Consolidation Post Consolidation



Post Consolidation Credit Card Shifts

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

Wach

ovia

US Banc

orp

Well

s Farg

o

Wash

ington M

utual

Santande

rBBVA

Barclays

Capita

l One

JP Morga

n Chase

Bank o

f Ameri

ca

Citigroup

Cred

it C

ard

Acc

ount

s


Consolidation will differentially impact business process scale economics as a function of business mix – credit card accounts



Consolidation will differentially impact business process scale economics as a function of business mix – online users

Post Consolidation Online-User Shifts

-5,000,000

10,000,00015,000,00020,000,000

25,000,00030,000,00035,000,00040,000,00045,000,000

Key Corp

Sove

reign

Lehman

Fifth Th

ird

Countryw

ide

US Banc

orp

National City

Bear Ste

rns

Bradford &

Bingley

Schw

ab

Santande

rBBVA

Wach

ovia

Merrill L

ynch

Well

s Farg

o

Wash

ington M

utual

JP Morga

n Chase

Bank o

f Ameri

ca

Citigroup

Onl

ine

Use

rs



Scale Economics: IT Cost of Goods and Profitability

The Post Consolidation cost structure of basic transactions will be driven by economies of scale and can reshape the profit structure of the industry.

Total IT COGSPost C onsolidation IT

COGSRetail Bank - Deposits Per Transaction 0.02$ 0.014$ -28.4%Retail Bank - Deposits Per Account 2.73$ 1.966$ -28.0%

Retail Bank - Consumer Lending Per Consumer Loan 29.00$ 20.938$ -27.8%Retail Bank - ATM Per ATM 984.00$ 709.956$ -27.9%Retail Bank - ATM Per ATM Transaction 0.04$ 0.031$ -28.2%

Retail Bank - Branch Per Branch per Year 54,014.00$ 38,511.982$ -28.7%Retail Bank - Branch Per Branch Transaction 0.32$ 0.228$ -28.9%

Retail Bank - Call Center: Deposits Per IVR Contact 0.65$ 0.471$ -27.6%Retail Bank - Call Center: Deposits Per Agent Handled Contact 0.90$ 0.649$ -27.9%

Retail Bank - Call Center: Consumer Lending Per Contact 0.75$ 0.539$ -28.1%Retail Bank - Online Per Online User 18.00$ 12.906$ -28.3%

Retail Bank - Credit Card Per Account 3.00$ 2.152$ -28.4%Retail Bank - Credit Card Per Credit Card Transaction 0.16$ 0.111$ -28.7%

Investment Bank Per Interbank FX 1.90$ 1.384$ -27.2%Investment Bank Per Corporarte FX 2.10$ 1.525$ -27.4%Investment Bank Per Single Stock Trade 0.53$ 0.382$ -27.9%Investment Bank Per Program Trade 0.15$ 0.108$ -28.2%Investment Bank Per Government Bond 1.67$ 1.200$ -28.2%Investment Bank Per Muni Bond 3.32$ 2.419$ -27.2%Investment Bank Per Option 1.02$ 0.743$ -27.2%Investment Bank Per Future 1.23$ 0.890$ -27.7%


The New Model: Fixed Vs Variable Cost Conversion

Category CaptainsIt is commonplace for one particular supplier into a category to be nominated by the retailer as a Category Captain. The Category Captain will be expected to have the closest and most regular contact with the retailer and will also be expected to invest time, effort, and often financial investment into the strategic development of the category within the retailer.

In return for this, the supplier will gain a more influential voice with the retailer but must be careful never to abuse this or fall foul of any antitrust laws. The Category Captain is often - but not always! - the supplier with the largest turnover in the category. Traditionally the job of Category Captain is given to a brand supplier but in recent times the role has also gone to particularly switched-on Private label suppliers.[13]

Soft Vs. Hard Landing Controls

Enabling “Agility”: Using a “model” company today only 36% of IT expense is variable (can be “shed” within 90 days). By changing the IT operating model, perhaps up to 60% can be made truly variable (though there may be some premium to pay for this conversion).

Model Company Tech Spend $M % Variable Today

% Variable Future State Model

Total Tech Spend $5,000 36% 60%

Compensation $1,800 50% 70%

Contractors and Sourcing $500 100% 100%Hardware Depreciation $600 0% 33%

Hardware Maintenance $400 25% 50%

Software Expense $500 25% 50%

Software Capitalization $500 0% 50%

Telecommunications $300 25% 60%

T&E $50 50% 50%Recruiting $50 100% 100%

Facilities/Rent $300 10% 33%


The New IT Value Meal

The current global economic environment has driven significant merger/consolidation activities in the financial services sector. As a consequence, enterprises of new scale are being created.

The largest of these organizations will have access to information technology (and business process) economies of scale that have never been experienced in the industry.

The scale gap between firms will become a competitive lever for those that can harness such benefits.

Current analyses indicate that scale-economic cost reduction by 2010 for IT infrastructure may be as much as 40%-60% overall (relative to 2007 baseline costs).

Those firms that do not have access to such economics will inherently be non-competitive unless they can develop ways to access the economics of their largest competitors.

The impact of scale economics will be further amplified with effective demand management and heightened virtualization which will enable new levels of IT infrastructure efficiency (supporting even larger enterprises with less physical resources.

Companies that can attain the new scale economics of IT will gain insurmountable competitive advantage. IT

DOES Matter


The New IT Value Meal

“New Math” of Infrastructure Cost:

With the new economics of consolidation scale and Moore’s Law at work, the same set of infrastructure services that cost ~$500M+ in 2007 will likely be delivered by the most efficient companies for ~$200M in 2010.

Infrastructure Market Basket Cost $M Annually

$489

$295

$132

$-

$100

$200

$300

$400

$500

$600

2008 2010 Cloud

$M

Volume 2008 Rate 2010 Rate "Clouded Rate" 2008 Expense 2010 Expense Cloud ExpenseMainframe MIPS 22,000 1,996$ 1,400$ 1,400$ 43,912,000$ 30,800,000$ 30,800,000$

Mainframe TB Storage 12,000 11,000$ 5,500$ 1,600$ 132,000,000$ 66,000,000$ 19,200,000$ UNIX Server 5,000 14,000$ 8,600$ 3,504$ 70,000,000$ 43,000,000$ 17,520,000$

Wintel Server 15,000 5,700$ 4,400$ 1,402$ 85,500,000$ 66,000,000$ 21,024,000$ Distributed Storage 10,000 8,000$ 3,300$ 960$ 80,000,000$ 33,000,000$ 9,600,000$

Desktop 50,000 1,296$ 1,008$ 600$ 64,800,000$ 50,400,000$ 30,000,000$ Email 55,000 240$ 108$ 72$ 13,200,000$ 5,940,000$ 3,960,000$

Totals 489,412,000$ 295,140,000$ 132,104,000$

Oppty 194,272,000$ 357,308,000$ % of 2008 Expense 60% 27%


The New IT Management Mandate

The foundation is a set of principles learned from companies that have had superior performance through recessions: • Cut the right costs • Migrated to variable costs• Increased automation• Identified and focused on key customers• Marketed to growth areas • Invested when competitors didn’t

Source: Study of 400 companies during the last recession by Diamond Management and Technology Consultants


Technology Economics: The New Mandate

The new technology economic mandate is to:

Optimize, Resize, and “Give it up”

Leverage the marketplace and take advantage of the rapid commoditization IT services of non strategic core business functions; “Give it up” if a provider can do it better/more efficiently; Engage in transformation sourcing (virtualization, re-hosting; virtual desktop; “cloud”)

Remove “poison pill” service levels that undermine your mass cost structure

Own less; build less

Zero population growth – Servers/People/Other resources

Consider “The Commons”.. Internal and with external firms to provide new scale economies

Realign, reclaim, and reinvest – rethink the RTB/CTB model and portfolio strategy – while managing risk

Enable agility -- fixed versus variable costs and capacity;

Leverage the supply chain -shift costs to vendors with new supply chain management models

Fund IT forward and “follow the money” – the business money that is.

Strategically engage the business and become an IT Savvy enterprise


Conclusion: IT DOES Matter

1.Technology is a competitive lever – a driver of operating efficiency, product leadership and differentiation, effective customer/market intimacy and information, and agility. It is the most critical lever your business has at this point in time.

2.Scale economics will reshape the industry and provide bottom line benefits to those that can control it.

3.Engineer your technology economy – your mix of fixed and variable costs -- to create agility (and avoid “hard landings”)

4.Time is of the essence – you need external partners that understand scale, that understand rapid transformation, that understand the global economy.

The most opportunistic time for technology investment is during a technology recession (or depression) – doing so effectively can create an insurmountable competitive gap. Bad IT economics will put you on the wrong side of this gap

and may even be creating advantage for your competitors.

IT DOES Matter


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it does matter: the new technology economics dr. howard rubin ceo rubin systems/rubin worldwide mit...

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