Gartner estimates global IT debt at $500 billion in 2010, potentially doubling to $1 trillion in five years. What does this mean for your business? How can IT decision makers use open source software to help address this “IT debt”?

What is IT debt?
Hardly a week has gone by in the past three years where debt – too much of it, or the risk associated with it – hasn’t played a prominent role in mainstream news headlines. Earlier this week Gartner added to these headlines, but with a twist – IT debt.

Andy Kyte, vice president and Gartner fellow, has written a fascinating research report about global IT debt. Gartner defines IT debt as “the cost of clearing the backlog of maintenance that would be required to bring the corporate applications portfolio to a fully supported current release state.”

IT debt hinders business agility
The reason that companies should be concerned about IT debt is because this form of debt hinders IT’s ability to meet line of business requirements at the rate and pace required by the market. Findings from IBM’s CEO Study, based on over 1500 face-to-face interviews with CEOs of companies of all sizes across 60 countries and 33 industries, continue to highlight the importance of responding to market opportunities and growing complexity faster.

It’s incredibly difficult to respond to market changes or deliver IT systems that support new business designs when underlying IT systems are too brittle to accept change.

Kyte explains how IT debt has built up over time:

Over the last decade, CIOs have frequently seen IT budgets held tight or even reduced. The reaction has been to still deliver quality of service for operational services and to use any potential project spend to deliver new functionality to the rest of the business. The bulk of the budget cut has fallen disproportionately on maintenance activities — the upgrades that keep the application portfolio up-to-date and fully supported. There is little problem if this is done in one year, or even in two years, but year after year of deferred maintenance means that the application portfolio risks getting dangerously out of date.

Why do CEO seeking business agility accept IT debt?
Israel Gat, senior consultant with Cutter Consortium and CEO at The Agile Executive, attempts to uncover why CEOs have been willing to accept alarmingly high levels of IT debt.

Gat draws from “The Big Shift: The Mutual Decoupling of Two Sets of Disruptions – One in Business and One in IT” [PDF] by John Seely Brown. Gat summarizes five key findings from Brown:

  1. The return on assets (ROA) for U.S. firms has steadily fallen to almost one-quarter of 1965 levels.
  2. Similarly, the ROA performance gap between corporate winners and losers has increased over time, with the “winners” barely maintaining previous performance levels while the losers experience rapid performance deterioration.
  3. U.S. competitive intensity has more than doubled during that same time – i.e. the US has become twice as competitive.
  4. Average Lifetime of S&P 500 companies ha declined steadily over this period.
  5. However, in those same 40 years, labor productivity has doubled – largely due to advances in technology and business innovation.

Gat uses Brown’s findings to explain the business agility vs. IT debt paradox:

Put yourself in the shoes of your CFO or your CEO, weighing the five facts highlighted by Brown in the context of Highsmith’s technical debt curve. Unless you are one of the precious few winner companies, the only viable financial strategy you can follow is a margin strategy. You are very competitive (#3 above). You have already ridden the productivity curve (#5 above). However, growth is not demonstrable or not economically feasible given the investment it takes (#1 & #2 above). Needless to say, just thinking about being dropped out of the S&P 500 index sends cold sweat down your spine. The only way left to you to satisfy the quarterly expectations of Wall Street is to cut, cut and cut again anything that does not immediately contribute to your cash flow. You cut on-going refactoring of code even if your CTO and CIO have explained the technical debt curve to you in no uncertain terms. You are not happy to do so but you are willing to pay the price down the road. You are basically following a “survive to fight another day” strategy.

How companies can start to minimize IT debt
To put Gartner’s $500 billion global IT debt estimate in perspective, IDC forecasts the total 2010 global packaged software market, across operating systems, middleware and applications, at just over $280 billion. This $280 billion includes spending on new licenses and ongoing maintenance subscriptions.

At a simplistic level, companies would have to stop new software license and ongoing maintenance renewals for nearly two years just to clear the IT debt backlog – a scenario that few IT decision makers, or their CEOs, would support.

There is no silver bullet for companies to reduce their IT debt. Rather, companies will need to take incremental steps over several years.

First, work to hold the line on IT debt. Gat recommends IT departments combine technical debt measurements with software process change. Gat suggests “…you stop the line and convene an even-driven Agile meeting whenever the technical debt of a certain build exceeds that of the previous build.”

This first step clearly requires buy-in from line of business and C-level executives. Buy-in will require line of business and C-level executives to understand the relationship between IT debt and business agility. The fact that CEO claim business agility is a key corporate requirement, and yet, accept IT debt, suggests that the linkage between IT debt and business agility is not well understood. IT decision makers are encouraged to draw from Gat and Kyte’s research to demonstrate the linkage to C-level executives.

Use Open Source based on technical and business needs
The second step is to reduce the cost of running existing or new applications and redirect the savings to tackle existing IT debt. Open source software can play a role in this step.

Using open source software, with or without a support subscription, often carries a lower cost of acquisition versus closed source alternatives. However, IT decision makers should look beyond initial cost of acquisition, and rather, focus on total cost of ownership.

An IT department could choose to run an open source product in production without acquiring a support subscription. The cost of the software license and support subscription would be zero and zero. However, that’s not entirely true. The cost of supporting and keeping the software current has simply shifted from a yearly subscription payment made to a vendor or support provider, to the salary cost of an employee who undertakes the effort. This employee is thereby unable to do some other work for the department. Don’t ignore the people costs of software selections.

A more typical scenario is using a commercial open source product in place of a higher priced closed source alternative. However, it’s again important to consider the total cost of ownership (TCO) which includes costs such as training, hardware required, administration costs or cost of downtime. Not surprisingly, TCO, is heavily related to the project at hand.

For instance, TCO studies using open source and commercial Application Server products, which I’m most familiar with, reveal that both sets of products can deliver lower TCO than the other, depending on the project’s technical and business requirements.

This doesn’t sound as appealing as blanket statements that suggest: “open source is always cheaper” or “commercial software is always superior”. However, reality is always more nuanced than marketing messages or pundit sound bites would suggest.

IT decision makers are encouraged to analyze technical and business needs, and align them to open source or closed source software using TCO metrics. Consider prioritizing projects where the cost savings from using open source software in place of closed source, or vice versa, can be used to tackle your IT debt.

Follow me on Twitter at SavioRodrigues. I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies, or opinions.”

Forrester’s John Rymer tweeted:

“Spoke with a client who believes the 4 top vendors are stifling innovation by crushing small vendors — with no hope in sight. Yikes”.

Working at one of the “4 top vendors”, it’s natural for me to disagree.

First of all, innovation occurs across the software industry, from “elder companies” (thanks Cote) to startups.

Second, most startups nowadays use some variation of the open source business model.  With the code out in the open, it’s difficult to argue that elder companies can “crush small vendors”.  Sure, an elder company could try to fork the code as Oracle did with RHEL.  But this strategy hasn’t proved successful to date.  An elder company can acquire the small vendor as Oracle has done with Sun/MySQL.  However, as we’ve seen with MySQL, if the community doesn’t approve of the acquirer’s actions, the community will fork the code and innovation will continue.  The open source business model severely limits the degree to which an acquirer can “crush” the acquiree, either deliberately or by happenstance.

Third, let’s look at elder company acquisitions of small vendors. Most deals have been after the small vendor has established itself in terms of usage and/or a revenue stream.  This too argues against elder companies crushing smaller vendors.  More often than naught, a sale to an elder company is part of a smaller vendor’s (or more likely their VC’s) long term plan.

I will concede that elder companies don’t stand idly by as competitors, big or small, introduce innovation into the market.  Elder companies respond with their own attempts to leapfrog the existing innovative product or offering. But hey, that’s competition for you.

What do you think?

Follow me on twitter at: SavioRodrigues

Here’s a BusinessWeek article about how “Microsoft is Fighting Back (Finally)”.  The most interesting part is about Microsoft’s new “Windows Anytime Upgrade” strategy. Here are some details:

“Because of the smaller size of Windows 7, three versions of the program will come loaded even on lower-end machines. If a consumer on a cheaper PC running the “Standard” version tries to use a high-definition monitor or run more than three software programs at once, he’ll discover that neither is possible. Then he’ll be prompted to upgrade to the pricier “Home Premium” or “Ultimate” version.

Microsoft says the process will be simple. Customers enter their credit-card information, then a 25-character code, make a few keystrokes, then reboot. Brooks says pricing hasn’t been determined, but upgrading “will cost less than a night out for four at a pizza restaurant.””

After reading this, I instantly thought about Cote excellent post titled “The Return of Paying for Software” from last summer.  Cote wrote:

“When it comes to making money with software, the iPhone App Store is the glossiest example of trend I feel creeping up on us: people paying for software.

Yes, people have been paying for software forever, but the expectations for most consumer software of late has been that it’s free.

The change here is an environment where people will spend $0.99 to $20 for a piece of software. I often comment that this user-mentality – spending small amounts of cash on software – exists in the OS X world, but it’s been lacking from others.”

While I initially balked at the thought of a popup window with: “Hey, it looks like you can afford a high definition monitor, so why not get the most out of it with Windows 7 Home Premium, for an low price of $19.99?”, I’m willing to give this idea the benefit of the doubt.  This recent NYT article (via Cote – that man is Gold!) explains the success of an iPod/iPhone game called iShoot, and is a reason behind my openness to the Windows Anytime Upgrade strategy:

“In January, he released a free version of the game with fewer features, hoping to spark sales of the paid version. It worked: iShoot Lite has been downloaded more than 2 million times, and many people have upgraded to the paid version, which now costs $2.99. On its peak day — Jan. 11 — iShoot sold nearly 17,000 copies, which meant a $35,000 day’s take for Mr. Nicholas.”

Consumers are getting accustomed to acquiring software for instantaneous incremental gratification.  The consumer gets some value off the bat, but is faced with a purchase decision to get incremental value.  When the consumer decides to follow through with the transaction, the gratification is instantaneous, not tomorrow in the mail or through a 4hr download.  With the Windows Anytime Upgrade strategy, consumers would get some value off the bat.  Upon hitting a feature/function wall, a purchase decision would be presented.  And if the consumer chooses to transact with Microsoft, it seems that the incremental value would be provided on the spot, without having to download or acquire and install another DVD’s worth of an OS.

Seems like an interesting strategy that’s much closer aligned to how consumers pay for software today.  Maybe an unexpected outcome of Apple’s App Store strategy is to educate consumers ahead of Microsoft’s Anytime Upgrade strategy.

I was thinking about the discussion that Rich Sharples (Red Hat), Shaun Connolly (SpringSource), Larry Cable (Oracle/BEA), Jerry Waldorf (Sun), Adam Gross ( and I had at the SD West Application Server panel a week ago.  The session was billed as healthy debate about the Application Server market and our respective company’s role in the future of the market. I’d conversed with a few of these guys in the past and was looking forward to some level of one-upsmanship at the expense of the product/company we were each representing.  However, the discussion turned out to be much more civilized, with little discussion about kinks in the amour of our respective products.  Rather, we spoke about growing the ecosystem in which we all compete.  While this sits well with my Canadian sensibility, I wasn’t sure what to make of it.

Then I saw this tweet from Redmonk’s James Governor:

monkchips its great to see respectful, insightful coverage of Microsoft Silverlight news from #MIX09 from the Adobe team – @mdowney, @sjespers etc.

And then a light bulb went off.

It’s very easy to put down competitor X’s product when your statement is not going to be saved for prosperity on the Internet, and when the people working on product X are faceless.  However, in today’s interconnected market, many of us have interacted online with peers at competitors long before in-person meetings.  As this has happened, I sense we, as vendors in the software market, have raised the bar of mutual respect and learning.  This is goodness for those of us who compete.  It’s also goodness for customers because we vendors are spending our time and resources learning from our competitors in order to deliver a better product experience.  This is significantly more rewarding than spending time and resources putting down other products.  Customers choose products on the strength of the value they deliver, not on the lack of value delivered by competing products.

Dr. Phil over and out.

Dan Lyons has a sobering outlook on the future of the American IT industry over at Newsweek.  The article argues that the Government’s focus on bailing out weaker industries is occurring at the expense of relatively strong industries such as IT.  Dan argues that a lack of investment in maintaining domestic IT talent could have serious implications in the future.  Dan writes:

“…unless we boost government spending on science, technology, engineering and math—STEM, in industry jargon—we will be unable to keep up with countries like China and India. At some point, companies such as Apple, Cisco, HP, IBM, Microsoft and Oracle could be eclipsed by foreign rivals, just as Ford, General Motors and Chrysler have been.”

Could American IT vendors face the same fate as American auto makers?  I’m not sure that the analogy holds.  American auto makers all but ignored the competitive threat from foreign rivals.  On the other hand, American IT vendors have made significant investments in growth geographies in order to establish a foothold with customers in these markets and take advantage of local skills.   One could argue that the investments in India and China by large American IT vendors will help create future competition to American IT vendors.  By that logic, Google is creating its future competition by hiring and creating teams of  bright programmers.  The history of employees leaving IT firms to start competitive or adjacent ventures is long and storied.

To the broader question about training STEM students, I absolutely think it’s important.  However, can America expect to graduate more STEM students than India or China in the long run?  So the real question is how can American IT vendors best leverage local and international skills? And in doing so, can America’s IT vendors retain their leadership position?  To the first question, I’d argue that this is exactly what American IT vendors are doing today with their hiring in growth geographies.  The answer to the second question remains much more open.

What do you think?

Ars reports a study from browser maker Opera that suggests only 4.13% of the 3.5 million pages indexed were found to be standards-compliant.

Some interesting points:

  • Adobe Flash is used on about 35% of indexed sites worldwide, with China leading the pack at 67% penetration
  • Ajax (measured by the use of XMLHttpRequest) is used in 3.2% of indexed sites worldwide, with Norway leading the pack at 10% penetration
  • Only 50% of indexed sites that display the W3C validation badge were actually using valid HTML (anymore)

The really cool thing is that Opera is going to build a search engine on top of the data from this ongoing study. Users (web developers or vendors) will be able to search for data before making product or application related decisions. For example, Opera’s data could answer the question: “how prevalent is Silverlight use in India?”. This is exactly the type of fact-based information that we’d all want to know before building a web app for the Indian market.

Kudos to the Opera team for driving this research and the follow-on search capabilities. It is somewhat surprising that Google, Yahoo or Microsoft hasn’t done this already.

Not unexpectedly, Gartner has trimmed its 2009 Global IT budget forecast from 5.8% growth to 2.3% growth.

For comparison, the IMF reported the following GDP Growth in their October 2008 report (see pg. 22 of 321):

2006: 5.1%
2007: 5.0%
2008 projection: 3.9%
2009 projection: 3.0%

Maybe it’s yesterday’s (Canadian) Thanksgiving Tofukery, but I’m quite unnerved by Gartner’s 2009 forecast. My experience has been that Gartner (and IDC) estimates IT spending at rates higher than GPD growth.  I tried to find proof of this press release. The best I could do was this Gartner release from Oct. 2007, claiming that 2007 IT spending would grow 8.0%.  At 8.0%, the IT market would have grown 50%+ faster than the 2007 GDP rate reported by the IMF.

Adding 0.7% to the Gartner 2009 growth forecast, to set IT market growth equal to GDP growth, adds $21 Billion (0.7% of $3 Trillion) back into the IT market.  I started to think about what could be driving this $21 Billion gap.

In round numbers, IT spending by the Banking, Insurance & Financial Markets sector is approximately 25%-35% of worldwide IT spending.  At 20% (to be safe), the financial sector represents $600 Billion (20% of $3 Trillion) in IT market spending.  Note that $21B is only 3.5% of what the financial industry spends on IT.  With the various mergers and bankruptcies impacting the financial sector, one could make the case that the $21B gap between Gartner’s IT market growth prediction and GDP growth is largely driven by fewer customers in the financial sector.

However, I would guess that more than 3.5% of financial sector spending on IT has vanished (especially as a result of mergers).  If this is true, other sectors are spending more on IT than in the past, or the 2.3% IT market growth estimate is too high.

What do you think?

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