The CIO at a midsized utility company was facing a soft economy and a massive investment in a regulatory compliance...
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project. So she decided to free up some budget funds by slowing down the rollout of an enterprise software suite. The saleswoman from the enterprise vendor, seeing her commission at risk, quickly mobilized the political resources of her firm to launch a CEO-level "lunch and letter" campaign against the CIO (who asked to remain anonymous).
The campaign was designed to create the impression -- in the minds of the CEO, CFO and select members of the utility's board of directors -- that the CIO had made the wrong choice. At this point, the CIO realized that she and her software vendor had a different definition of the word partner.
This story ended well, however. Unlike many CIOs, this one had invested time in building good personal relationships with a broad constituency of business colleagues, so the vendor's effort to outflank her backfired. The other company executives were so incensed by the vendor's shabby behavior, in fact, that they're considering dumping this supplier for another and have considerably slowed down the product rollout.
Political threat is only one of several significant risks -- financial, operational and technical -- that enterprise software carries for top IT executives. As Vince Campitelli, senior vice president and chief IT auditor at Charlotte, N.C.-based Wachovia Corp., puts it: "Software equals risk. It is that simple. The question is, how do you manage that risk?"
To answer that question -- and several others pertaining to the future of software -- we surveyed some 300 CIOs, industry observers, vendors, CEOs, scholars and business executives for this special CIO Habitat Report (see "Survey Methodology"). In follow-up phone interviews with 100 of our respondents, we spoke in depth to both alpha-IT practitioners (leading-edge users) and senior business executives.
What emerged is a complex, multidimensional picture of where software is headed. It's not a comforting scenario. Extracting full value from software investments calls for discipline, professionalism and engagement on the part of the business community. Unfortunately, few companies take that approach.
"I have seen many companies running mission-critical operations with linked Excel sheets," says Norm Happ, a senior strategist at Kansas City, Mo.-based H&R Block and one of our respondents. "The decision to do so was based on the seductively low purchase price of the software. Executives at small to midsized companies rarely think about the thousands of hours they will spend trying to keep a web of Excel spreadsheets properly linked."
Many companies we surveyed are still struggling with how to bring their shadow IT organizations -- those business units making unauthorized IT purchases -- under control. This is especially critical now because these departments can place the organization at serious security and compliance risk. Wyly Wade, director of technology at San Diego-based General Land Corp., puts it this way: "Letting unauthorized software on your network is like leaving the keys in your car with a bag full of cash on the passenger seat in downtown Miami."
Our research reflected certain universal truths about software. Foremost among them was that the passive will be punished, and the aggressive rewarded.
The organizations extracting the greatest value from their software investments realized superior returns because they were active participants in the process. They were active in telling the vendor exactly what they wanted, and in setting the terms and conditions associated with payment. They were also active in mobilizing the business community to make sure the software, once deployed, actually changed workplace behaviors and processes.
Our CIO Habitat dwellers also made it clear they think the existing software development model is broken. The process by which commercial software is developed, marketed and deployed takes too long, carries undermanaged risk and costs too much. Our respondents know that as buyers, they have real choices now. IT decision makers, particularly those in the midmarket, are aggressively looking for alternatives to the status quo.@pb
Fascinating Mental Landscape
As the fourth-largest industrial sector in the U.S. economy, the software industry is almost incomprehensibly diverse. Yet our survey showed broad agreement on several key complaints about software vendors:
Lack of insight. They rarely understand the purchaser's specific situation -- financially, operationally, politically and/or technically. "I never count on vendors to define or understand my problems. That's my job," says Wade of General Land. "I can count the number of vendor-solved problems on my fingers; I need a calculator to count the number of new problems their products have created."
Customer cluelessness. Their pricing schemes are a nightmare of complexity, and product "innovations" typically arrive subject to vendor R&D timetables rather than the strategic needs of buyers. Jim Best, former vice president of infrastructure at Allied Signal and now executive in residence at Grand Circle Corp. in Boston, says, "Software vendors understand the problems of my organization as well as I understand their pricing models."
Scott Redilla, senior manager of IT security at Elemica Inc. in Wayne, Pa., explains that while midtier vendors may enter into "an active dialogue" about upcoming product innovations and releases, "the big vendors don't require our input. They pretty much tell us what they are going to do and what we are going to get."
Inflexibility. They are unwilling to adjust their behaviors, mind-sets or pricing to a buyer's particular situation. For example, vendors won't map the price charged to the value-as-perceived-by-the-buyer. One consumer products CIO explained that vendor flexibility was "very much a function of size -- size of the contract you are willing to sign with them." This means that midsize firms can expect little in the way of flexibility in their dealings with larger software vendors. As Best of Grand Circle wryly observes, "Most software vendors reassess their business practices periodically, usually on the 29th of February."
Secrecy. They fail to reveal accurate post-purchase costs for deploying, operating and maintaining their systems. "The initial charge for the software is hardly an issue anymore," says Patrick Ruckh, chief technology officer of First Horizon National Corp. in Memphis. "It's really the maintenance," adds an IT auditor in the energy industry. "It's rare for executives to know how much it will ultimately cost to produce and deploy a piece of software in its current state."
Deception. They actively engage in "specmanship" using metrics inspired by their marketing departments, often in a deceptive manner. Product quality -- especially when first shipped -- is usually disappointing.
Yet despite these complaints and cautions, most new computational functionality does come primarily from external vendors. Going forward, what is the role that in-house software professionals will play in this world? What skill sets will be needed to make sure the software the enterprise most needs -- whether built, bought or rented -- will be available and operational? Three things have to happen here:
- CIOs and IT executives must materially improve the technology imagination of the enterprise. As the charismatic chairman of an insurance company recently told his executive team, "We don't know how to exploit -- really exploit -- technology. This is not an IT problem. This is a business problem." Every business needs to create the capability to "imagine" products and services that truly differentiate that enterprise from its competition.
- You must understand what your options are and what they truly cost. The toughest job in many midsized enterprises is getting a basic cost-accounting system for IT in place.
- You have to get on the same page with vendors. People don't really want technology. They want the business outcomes that technology enables. Getting involved in the R&D investments vendors are making -- from inside the product development tent -- should be a key goal for CIOs.
Guiding the Next Generation of Software Suppliers
As the software industry matures, we are seeing a pronounced movement away from new product sales to customer service. As one CIO notes, "[Software's] value was never well-expressed by boxes moved on trucks but is better appreciated in a relationship."
The successful software vendors of the future will become experts at relationship management. Indeed, many of the IT leaders we spoke with had a succinct wish list for improving their vendor relationships. They would, for example, like to see the ratio of money paid to software benefits change.
Software testing -- how it's done and by whom -- was another big item on that list. That especially ties into the compliance readiness of the software assets, to the identification and documentation of testing associated with key controls.
Better approaches to testing also lead to better overall risk management of software assets. Cost-effective programs for mitigating and reporting risk really grab the attention of CIOs these days, so the vendors who address that issue will stay a step ahead of competitors.
IT leaders also want flexibility in software pricing models, so that they more accurately reflect the particular situation of a buyer. Stuart Berman, a network engineer at furniture maker Steelcase Inc. in Grand Rapids, Mich., explains, "We are asking for a different kind of pricing model. We are really tired of buying somebody's product and then having to become product experts and then basically spending way too much time and money dealing with a product when in essence what we really want to do is provide a service [like] secure computing. We want safe desktops or spam-free mail. We try to push our vendors to deliver that to us."
Beyond the pricing models, users in the future will seek simulations, prototypes and modeling tools that detail how the enterprise will operate once the software is installed. How seamlessly various vendor partners can work together is also key to a better relationship with customers.
In the most ideal world, several CIOs said, a vendor would be able to figure out what they are trying to accomplish and then work with them to get traction and momentum throughout the enterprise.
Conclusions and Predictions
The frantic scavenger hunts for the software product du jour are coming to an end. The notion of "The Next Big Thing" no longer induces lemming-like purchases.
Cost and margin compression will continue in all software categories. Economists estimate that mass retailers like Wal-Mart and Home Depot have reduced costs and compressed margins that freed up, in 2001 alone, some $100 billion. The same thing will happen in software. The question is, who will be the software industry's Wal-Mart?
The software industry, like the automobile industry, will ultimately offer warranties on its products.
There will also be new forms of software development. Software can now be designed in a "Lego-like" architecture -- rapidly composed by IT based on need. Software development teams will be smaller, more professional and feature a mosaic of on-shore, offshore, open source, purchased, built and/or rented resources. High-demand skills areas will include user interface design and data access.
Most CIOs have not thought much about hiring biologists into their architecture groups. Marv Adams, CIO of Ford Motor Co., is looking aggressively in this area. He believes traditional ways of thinking about IT architecture must be expanded to include genetic algorithms as a way to solve some of our most complex problems.
Ultimately, we have to look in new places for the competencies required in tomorrow's world.
SURVEY METHODOLOGY: In a series of open-ended questions, CIO Habitat asked survey respondents by e-mail about the future of software as it pertains to open source, in-house development, off-the-shelf softwa re, softwa re pricing and specific vendors. Pa rticipants we re also asked if the relationship between CIOs and vendors has improved, remained the same or wo rsened in re cent years. Other questions cove red their "points of gre a test frustration" with ve n d o rs, as well as "points of greatest progress" and general thoughts on where the user/vendor relationship is heading. In follow-up phone interviews with 100 survey participants, CIO Habitat asked the executives about their general experiences with software and their views on software industry changes over the last decade.@pb
IT executives drive the purchase process at different speeds
What kind of software buyer are you? Do you forge ahead aggressively with change or move cautiously with the second wave? Our CIO Habitat survey of 300 IT, business and industry thought leaders revealed five distinctive "cognitive clusters" into which the executives fell when considering the future of software. They each exhibit some unique characteristics:
New World Homesteaders
This group believes in driving change vs. being driven by change. The Homesteader executive team is motivated by a need to discover, challenge and conquer new frontiers. They are viscerally dissatisfied with the software status quo and quite willing to try new things, such as open source. They operate aggressive venture capital arms, specifically targeting areas of sought-after technology advantage. When they can't find off-the-shelf solutions, they push vendors to create the technology. They embrace a certain amount of chaos and uncertainty, but succeed at reducing the risk of constant experimentation.
This group is similar to New World Homesteaders but with one significant difference: They still think hard work and superior organization will enable them to exert control over their environment. Most banks and insurance companies are Gung Hopers. They are smart and market-focused, but they just can't let go of their need to control things. Gung Hopers are leading the way in wresting pricing concessions and/or innovations from incumbent vendor giants. Among these are:
- Pricing geared to certain software performance metrics. The more bugs found in a shipped piece of code, for example, the less money the buyer pays.
- Elimination of inflexible, value-insensitive CPU-based pricing. In the banking industry, nothing upsets CIOs more than being charged another $1 million for software because volume increases call for the use of bigger machines.
This group recognizes that the software status quo is deeply flawed, and that change is actually happening. But they are unwilling to go first, preferring to follow the path blazed by others. They move only after broad cross-industry consensus emerges. This group is currently consumed by compliance issues. They are letting Sarbanes-Oxley requirements remove smaller vendors from the playing field, believing that only big, rich vendors will have the resources to render compliant code.
The After U crowd seeks to control compliance risk by transferring it to well-established, "we-can-sue-them-if-anything-goes-wrong" third parties via contractual guarantees and assurances. By contrast, the New World Homesteaders are opening the door to smaller vendors, providing them with modeling and simulation tools (bordering on video game quality) to demonstrate how the software in question would be brought back online following an incident.
The Near Sighteds are vision-challenged. They are technically competent but not charismatic. Smart enough to be frustrated with the status quo but seeing no viable alternative path forward, they lack the hope that having a dream of a better destination can provide. Whereas a New World Homesteader/Gung Hoper might simultaneously play the role of newsmaker, agenda setter or peer educator, the Near Sighteds don't make news. They don't set industry agendas, and they don't spend any time educating their business colleagues on what the future might look like. The Near Sighteds respond only to the world around them. Thus they are consumed by working on line-of-sight problems such as regulatory compliance.
The visual for this group is Nero, fiddling while Rome burned. While New World Homesteaders combine vision with action, and Gung Hopers use brute force to move forward in the absence of vision, this group is resigned to the way things are. Anchored in the past, they trudge along.
Thornton May is a respected futurist, adviser and educator whose insights on IT strategy have appeared in Harvard Business Review, The Wall Street Journal, BusinessWeek and numerous computer industry publications. To comment on this story, email email@example.com.