the meltdown

and beyond
Dr. Jimmy Schwarzkopf
Research Fellow

ICE AGE 2

STKI
jimmy@stki.info http://drjimmystki.blogspot.com/
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http://www.slideshare.net/jimmyschwarzkopf /stki-8th-cio-bootcamp-2009-presentation

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2009: The meltdown
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Latest STKI-IT Spending Survey Results IT Market in Israel: what is changing ? What are customers looking for in 2009? Who is gaining share of the shrinking IT budget ?

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Latest STKI-IT Spending Survey Results
• Data from Bank of Israel is becoming ever more available

200 years since Darwin: – Economic activity data from 1989 I feel like Darwin in Galapagos • GDP • GDP for Business Sector collecting data , looking at patterns – Indexes that could forecast change • Series of State-of-the-Economy-indexes that emerge and(but only until 2006) trying to figure out • OECD has data on Israel – Productivity what they mean
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Latest STKI-IT Spending Survey Results
• Data from Bank of Israel is becoming ever more available
– Economic activity data from 1989
• GDP • GDP for Business Sector

– Indexes that could forecast change
• Series of State-of-the-Economy-indexes

• OECD has data on Israel (but only until 2006)
– Productivity

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How bad is this “recession” ?

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How recessions affected IT vendors

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STKI IT Market Data (K USD)1989 - 2009

All amounts in K $ USD
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“The only function of economic forecasting (STKI-IT forecasting included)* is to make astrology look respectable”
John Kenneth Galbraith

* my additions
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low per capita ($ USD) IT expenditure

IT spending in Israel is 2.71% of GDP European Union IT spending is 3.3% of GDP

European Union per capita spending on IT amounts to 1100 €

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* IT spending data by STKI

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GDP per hour worked (x5)… excellent indicator but data is usually 3 years behind

IT Market change

Change in GDP per hour worked (*5)

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* IT spending data by STKI

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But in real time: State of the Economy Index as an “indicator “ of IT investment State-of-theeconomy index
is an indicator for examining the direction in which real economic activity is moving, in real time. (Bank of Israel)

Deviation from the trend is calculated via
the Markov-switching model and enables the turning points in the business cycle to be identified at an early stage. (Bank of Israel)

Deviation from the trend (*10)

IT market growth rate

All IT spending data by STKI
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IT Market in Israel: what is changing ?

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A little history……….

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A little history……….

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So let’s look at the numbers:
From the data we see several cycles for the IT Industry in Israel: 1. Up to 1996 : Market v0 : Age of Irrational IT Exuberance 2. 1997-2000: Market V0.1 : Age of re-structuring 3. 2001-2003: Ice Age : Age of “panic” 4. 2004-2007: Market V1 : Recovery, Growth and Integration 5. 2008- 201?: Ice Age 2 : Age of the “re-start” 6. 201?-

: Market V2: Age of Industrialization of IT

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Market V0:

1989 -1996

All amounts in K $ USD
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Age of Irrational IT Exuberance
• 1987 : first year the IT expenditures passed 1b USD • Profit came from moving BOXES • Mainframes from IBM (VM/VSE.. DASD): entering most big companies (some look-alike HDS were bought)
– Most were changing from NCR and CDC big machines

• Minicomputers like DEC, DG, Prime, HP were taking a slice (AS/400 - migrating from S/38 and S/36 from IBM)
– First time computer users – Microcomputers entering :
• As terminals in enterprises • For accounting and office use in SMBs
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Age of Irrational IT Exuberance
• Software sold through distributors:

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– Israeli software was successful: 4 dimension, Magic, DB1…. – John Bryce, IBS, Tekem, Contahal, SPL ……… – data bases, mainframe software and 4GL were third party

• BIG VENDORS: IBM , DEC, DG, HP……
– Mostly sold “hardware” and software/ networking came as “add-ons” – Some services like “system engineer” came with the “machine” – INTEGRATED server, storage and networking products

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Market Order V0.1: 1996-2000

All amounts in K $ USD
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Age of re-structuring
• IT departments re-organize infrastructures and applications… under the Y2K umbrella • Services become a profitable and independent “product” • Projects are starting to go to VARs as contractors (before they were sub to the big hardware vendors) • Big UNIX projects (billing, ERP , etc) • VAS vendors grow with Y2K related projects
– New “testing” vendors start – Complicated project management
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Age of re-structuring 2
• International software vendors in Israel start being the main movers in software deals (Microsoft, CA, Oracle ….) • Consolidation in the Service Market, several companies are bought by international and local players • Service players get their own sales force and compete with hwre vendors
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Growth in the 1990’s

All amounts in K $ USD

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ICE AGE: 2000 - 2003

All amounts in K $ USD
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Age of “panic”
• Excess inventory (IT professionals and products) and very few projects:
– Vendors “destroyed” the service market by taking projects that could never generate profit – Software & hardware products were sold at ridiculous prices (even 90% discount in one case)

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Age of “panic”
• Excess inventory (IT professionals and products) “Unfortunately, a generation of and very few projects: salespeople
– Vendors “destroyed” the service market by taking havecould notion that they the never generate profit projects that create & hardwarebringing in revenue value by products were sold at – Software we found out that bringing ridiculous prices (even 90% discount in one case)

revenue means collecting value not creating it not enough to survive in today’s competitive markets.”
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Source: McKinsey Quarterly

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Age of “panic”

2

• CIO recognized as a profession:
– hired from one industry to another and succeed – become part of the COMPANIES MANAGEMENT Team – started talking about tactical and strategic IT

• The internet bubble hit the Israeli IT companies very hard but……
– New power houses in the IT market … (Matrix, Ness, One1, Taldor …..)
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Market Order v1.0: 2003-2007

All amounts in K $ USD
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Age of Recovery, Growth And Integration • Consolidation of Local and International Vendors changed the way IT business is done:
– most International vendors (hwre & sftre) sell through channels and only support (super experts) the local “delivery” of their products – STKI changed the way we look at the market, CIOs now make two decisions:
• What product • Who integrates it

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Age of Recovery, Growth And Integration 2 • Boom in server and storage sales
– “utilization” of resources fell under 30%: mainly because of high price of consolidation management (tools and people)

• Boom of “application&data” integration:
– Resource Management: Financial, logistics, procurement and HR – Transaction Management: core applications – Client Management: CRM and call centers – Analytics: Data Warehousing/ business intelligence/data mining
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Age of Recovery, Growth And Integration

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• Start of “data center” integration, consolidation, virtualization and infra management efforts • SERVICE ARCHITECTURE :
– CTO / Architecture VPs are hired in most IT installations and in most vendor management teams – SOA projects that include BPM, enterprise buses, portals and composite applications – Infrastructure projects where services are defined, optimized, managed and delivered
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Ice Age 2 - 2008 – 201?

All amounts in K $ USD
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JOB MARKET: 2004 vs 2009

We will all feel it

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Age of the “restart”
• What's different about this crisis is it's a CAPEX (capital expenditure) crisis
– CAPEX involves expenditures used to acquire or upgrade physical assets and IT projects.

• Today's credit crunch directly affects IT because:
– Information technology is the No. 1 "CAPEX" (capital expenditure) item.

CAPEX is not just affecting end users
but also solvency of the IT vendors
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Age of the “restart” 2
• IT is not buying (CAPEX- frozen) products:
– Hardware sales have dropped more than expected during 1Q2009 … about 37% average – STKI might make a change to its 2009 forecasts in the next 60 days

• Some CIOs are starting to feel pressure in OPEX expenses:

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New metric is PAYBACK PERIOD

ROI IN THE NEXT 90 DAYS

cost reductions and revenue enhancement precedence over functional enhancements
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Slide based on force.com presentation

Age of the “restart” 3
“business models” will change and IT is the strategic partner • Companies will have to:
– Allow due diligence of products and services – Tools for self service – NEW BUSINESS PROCESSES

• Customers demand:
– – – – – Value Quality Reliability Service Individuality
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Age of the “restart” 4
• Vendors change and the • Users change and when backbone of any new buying services will go business model: to vendors that have:
– Delivery management – Crisis management – Pockets of excellence (technologies) – Pockets of excellence – Good delivery record – Financial soundness

This change is reflected in STKI’s IT categories
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Age of the “restart” 5

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New Model for IT Vendors
Crisis Management

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Not only the market but the dollar

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Value
3

What are customers looking for in 2009?

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IT situation: overview
• The recession :
• IT departments will cut budgets • But will invest mostly in projects that: – cut costs of existing processes and activities – new ways to capture revenue/ growth – Smaller “divided” projects

• Radical transformation of IT Management:
• • • • Different way of consuming IT Industrialization of IT delivery Utilization increase of assets (over 90%) Cloud computing models (in-house, private and public)

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Radical transformation of IT Management
Managing the IT Budget Managing IT for business value Managing the IT capability

Managing IT like a business
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Managing the IT Budget
COST OF DELIVERING versus COST OF BUYING

• IT will have “new economics”
– Portfolio Management in order to drive maintenance and cost reductions – New models for “purchasing” USAGE of resources – Flexible sourcing of product usage and service • Budget management will be influenced by the new statement :

“CLEAN UP the waste”
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Datacenters today have 30% utilization
Energy waste 100s different Software products 25% utilization x86 servers

30% max in Storage Utilization

Ala-carte telecomm services
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Hundreds of Enterprise Processes 45

ROY: Optimization of IT
Optimize (Return on Yesterday)* High Utilization Of Resources

Develop

+

Install

+

Deliver

+

Manage

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* From SYMANTEC

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Managing the IT capability
• Utilization is all about:
– Virtualization – Automation – Standardization – Provisioning

• Things to do :
– ITIL, CoBIT, ISO 17799 (discipline & efficiency) – IT system performance management – Application Rationalization – AGILE project development
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Application Rationalization
• An assessment of applications will show what applications have to canceled and which should remain. • If usage continues, then which have high HATMAA and which do not:
– LOW HATMAA need special tools and re-training – HIGH HATMAA need tool for constant reinforcement

Which applications are over supported and which under supported.
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Resource optimization

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Factories get to nearly full utilization…. IT should also…..

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2 years ago IT was “overhead”
100 years ago Industrial Engineers:
– Assembly line revolutionized the economy – Assembly line took state of the art technology and organized work differently for PRODUCT factory

After the meltdown: IT Engineers
– Will take state of the art technology and change workflow (service factory) – Change How Work Is Organized

– Develop New Products And Services Based On New Technologies
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Building the IT factory
Moving IT from: LAB environment to FACTORY environment

Local Factory

Outsourced Factory Outsourced Factory

Local Factory

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Standardized Equipment Economies Of Scale

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Standardized Services Economies Of Scale
“Application Image” is a sum of
infrastructure services and software services needed to deliver an IT product
Two types of IT services: 1. Infrastructure Services or Ensembles 2. Software Services or Mashups
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The new Service-Based IT

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Delegating the Power to the Cloud

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New in Cloud Computing
1. The illusion of infinite computing resources available on demand, thereby eliminating the need to plan far ahead for provisioning. 2. The elimination of an up-front commitment, start small and increase hardware resources only when there is an increase in their needs. 3. The ability to pay for use of computing resources on a short-term basis as needed (e.g., processors by the hour and storage by the day) and release them as needed.
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Transformation of IT: CIO priorities for 2009
1. 2. 3. 4. 5. 6. 7. 8. Cost reduction DRP/BCP Server virtualization Server consolidation BI/DW Security CRM WAN Optimization/ application acceleration
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9. Storage virtualization 10. Desktop virtualization 11. Data De-duplication 12. Governance, risk management and compliance 13. Self-service 14. Mainframe optimization 15. Open Source
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Creating with IT >business value
§Grow Revenue
Bends the revenue line up faster than your competitor – includes innovation

§Protect Revenue

Net Revenue

Holds the revenue line at its current growth rate

§Reduce Cost

Operating Expense INCREASE THE SPREAD TO INCREASE MARGIN

Short term impact to drive costs down through automation and process improvement

§Avoid Cost
Avoidance of future costs that would bend the expense line up – includes innovation on the expense side/process side

§Manage Risk
Enables risk management from a firm and regulatory perspective

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Based on Howard Rubin’s presentation

CUTTING COSTS vs OPTIMIZING COSTS
• Changing BUSINESS PROCESSES to fit new business models • Fast delivery of “analyzed data” to enable decision making (BI,DW, Data Mining, MDM..) • Self- service and real time delivery of business and consumer services over the INTERNET will grow more than software sales

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So what do we do in the “New Era” ?

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Competition in services? Business Process Improvement
New Business Model

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Roadmap: Business Process Innovation
High Contribution to Business Performance

Improve: SURVIVE

Innovate : GROW

Invent: CHANGE 2012

4Q 2009
2010 2010

2011

2009

Low

Redo Existing Processes
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Rethink Business

Redefine Business
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SELF SERVICE AND MOBILE
“STOP aligning IT with the businessConnect with the CUSTOMERS”

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How new “models” like due diligence of products changes everything:
• Los Angeles Restaurants must have a letter in front window reflecting the results of last health inspection (A,B,C) • Restaurant Websites show the results and allow other comments on the restaurant’s service and food.

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Who is gaining share of the shrinking IT budget ?

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This study cannot ……….
• The IT market offers service and products in:
– Over 500 different hardware classes – Over 1000 different software families – Over 1000 different types of services offered

• The Israeli IT market has:
– Over 250 firms that have over 5 employees – Over 100 firms that have between 2-4 employees – Over 1000 individuals that work as “freelancers”
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This study cannot ……….
• The IT market offers service and products in:
– Over 500 different hardware classes – Over 1000 different software families – Over 1000 different types of services offered

• The Israeli IT market has:
– Over 250 firms that have over 5 employees – Over 100 firms that have between 2-4 employees – Over 1000 individuals that work as “freelancers”
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Amount of ‘big” IT (in Israel) has decreased in the last 3 years

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The Israeli IT Market (% changes)
“missed” 4Q2008 was worse than expected

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“hope not” new data after Q2 2009 Q1 was worse than expected 70

IT market share (%) by INDUSTRY

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Industries IT expenditures ($ USD)

All amounts in K $ USD
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Industries 2003 – 2009 (in $USD)

All amounts in K $ USD
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Industries 2003-2009

All amounts in M$$USD K USD
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STKI Technology Spending Cycle
Outsourcing Development Time Software Transaction processing Networking Technology Contract awarded to…
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Consulting

Hardware

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As markets changed, STKI also changed its categories (pockets of excellence)
"It is not enough that I should succeed, others must fail“

• Pockets of excellence

Gore Vidal

– Users identified the need for experts – Most vendors are moving or moved into the new delivery model

All amounts in M $ USD
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TOP 9 IT Vendors in Israel
These 9 vendors either sell in all Hardware, Software and Services categories or they have extremely large market share in only part of the categories

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Hardware & Software Categories

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Tactics : to lower spending on hardware
1. Elongating PC upgrade cycle 2. Reuse of desktops/notebooks rather than replacing all 3. Increase utilization rates above typical levels 4. Purchasing from fewer vendors in exchange for lower prices 5. Accelerate migration from Unix, Open VMS and OS400

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Hardware Market
All amounts in M $ USD

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Servers
1. HP strong in BLADES and HIGH END servers 2. IBM continues to sell System z and System p/i besides their x86 servers 3. SUN strong in UNIX server sales

MANUFACTURERS

All amounts in K $$USD M USD
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Clients
1. Notebooks continue to displace desktop units in corporate PC market. 2. Substantial JUMP in “desktop” virtualization
3. NETBOOKS, SMARTPHONES, APPLE are game changers
MANUFACTURERS

in the next 24 months.

All amounts in K $ USD
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Storage Equipment
1. Clients are storing more and more data into midrange and low-end arrays. 2. DRP projects : new purchases. 3. Biggest issue : how to deploy storage in virtualized environments. 4. Storage virtualization?

MANUFACTURERS

All amounts in K $$USD M USD
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Networking
strong gain for WAN optimization and application acceleration solutions: high ROI by cutting communication costs

VoIP / Call Center
MANUFACTURERS

Network MANUFACTURERS

All amounts in K $$USD M USD
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Printers and “new” services
• We were very surprised at the slow use of printing services and software in order to cut costs during 2008

All amounts in K $$USD M USD
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Special Categories

COMPUTER ROOM (Racks, etc)

SELF SERVICE Mobile and Special Purpose (ATMs, Kiosks, etc)

COMPUTER SUPPLIES AND DISPOSABLES

All amounts in K $$USD M USD
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Big issues in SOFTWARE
• IT departments are “changing” the way they choose software (next slide) • Licensing problems in virtualized and multi-core environments • Open Source will start to be standard in several areas • Focus on “high” maintenance costs:
– Customers may consolidate best-of-breed purchases into bundled suites with “cheaper” maintenance – Move to SaaS solutions
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Top 10 criteria for selecting software 1st and 2nd time around

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Source: Deloitte & Touche - 1500 companies surveyed

Software Market

All amounts in K $$USD M USD
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System Software

DBMS Operating Systems Middleware

All amounts in K $$USD M USD
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Information access & analysis
Exploding volumes of digital information (video, audio, images, text, transactional data, etc)

1. Tools for finding and making sense of the information. 2. Tools for data cleansing. 3. Tools for minimizing duplication. 4. Tools for storage management. 5. Tools for backup management.
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IT Management Software

Service desk

Storage Management
Enterprise System Management

Security Software

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All amounts in M $ USD

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Information Management Software

All amounts in K $$USD M USD
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Cont: Information Management Software

PORTAL & COLLABORATION

DEVELOPMENT AND MODELING

BI / MDM/ ETL 94

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Business Applications

CRM ERP

All amounts in K $$USD M USD
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Testing Software
1. APPLICATION TESTING SOFTWARE market is close to saturation. 2. DATA TESTING SOFTWARE will start to dominate this category (needed for SOA projects)

All amounts in K $$USD M USD
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Value Added Services
• This remains the one area that CIOs look for potential cost-reductions by re-negotiating contracts
– Third party professional services have been the target for most contract openings during the last 90 days. Maybe changing the “game rules”.
• No “big” IT service supplier can survive with the rates being talked today (less than 10% + cost)

– Project delays and slow-downs have helped CIOs cut budgets but the cost could be higher than expected when the IT department wants to start again
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Value Added Categories

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Value Added Services Market

All amounts in M $ USD
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Cont: Value Added Services

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IT Consultants & Analysts
The use of consultants has been reduced but:
– People still don’t check the ethics of consultants – Risk officer should check – Still use integrators as consultants, analysts as consultants and consultants as analysts

All amounts in K $$USD M USD
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Cont: consulting / analysts

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Hardware Maintenance
• Maintenance will change given the change in purchasing and using of equipment:
– Keeping equipment longer – Using it at higher capacities – Users need 24X7

All amounts in K $$USD M USD
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Hardware/ networking/infrastructure /DRP/ Management The need for changing usage and management of infrastructures will force users into complicated projects

All amounts in K $$USD M USD
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Special integration services

All amounts in K $$USD M USD
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System Integration Projects
• Virtualization and consolidation plus SOA projects will be exponentially more difficult

All amounts in K $$USD M USD
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TRAINING and HATMAA
• Training, assimilation, implementation, rollout,etc:
are change management processes.

• Change management that
helps users change working processes.

• HATMAA: is the measurement of
the change process success.

All amounts in K $$USD M USD
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Development Services

All amounts in K $$USD M USD
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Cont Development Services

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Enterprise Risk Management
• Governance and risk management became confused with obeying the law • According to any “new age” theory:
– Management proposes OPTIONS to the CEO/Board and also shows the RISKS each of them carries. – Risk also changes with TIME – This process is called: “ENTERPRISE RISK MANAGEMENT”
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Enterprise Risk Management
• Should be divided into several categories:
– Ethics – Regulation – Operations control and quality – Risks – Data and premises security – Q/A (testing …) – Project and portfolio management

All amounts in K $$USD M USD
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Enterprise Risk Management
Customer Demand Shortfall
24

Cost Overruns Accounting Irregularities Management Issues
11

Competitive Pressure M&A Integration Problems
12

Product Issues Customer Pricing
7 6 4 2 1 1 1

Supply Chain Issues
Foreign Macro-Economic
7 7 6

Loss of Key Customer

Commodity Prices
3 2

Interest Rates
1
0 0

Strategic

Operational

Financial

Hazard

58%
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31%

6%

0%

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Cont: Governance, risk, security …..

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Project Services

All amounts in K $$USD M USD
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Outsourcing Services
many .. many types
from call centers (Calanit Carmon) , complete outsourcing (HP-EDS), BPO salaries (Hilan) to cloud computing ( Salesforce.com)

All amounts in K $$USD M USD
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All OUTSOURCING categories

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IT Service Delivery (“good souls”)
This type of service will finally see its maturity: 1. Augmented IT staff providers 2. Project-based on-site third party service providers 3. Specialized on-site third party service providers 4. Near-shore third party service providers 5. Off-shore third party service providers

All amounts in K $$USD M USD
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Cont. “good souls”

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Thank you
Dr. Jimmy Schwarzkopf

http://drjimmystki.blogspot.com/ jimmy@stki.info
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