Half empty, half full

Half empty, half full

The economic downturn has forced a reordering of priorities as organisation work extra hard to control costs. We talk to CIOs and analysts about their plans for the year ahead.

The arrival of a new year is often a good time for fresh thinking and new strategies but it might not be the case this time around. With a global credit crisis still shaking business confidence to its foundations, widespread and ongoing consolidation in the vendor community and the prospect of shrinking IT budgets for the year ahead, many chief information officers could be forgiven for lying down in a darkened room and hoping it all goes away.

Unfortunately, that isn’t an option and CIOs have returned to work following the holiday season to face a year that’s likely to be loaded with challenges and uncertainty.

But although there might be fewer opportunities for fresh thinking, clear thinking will be more important than ever if senior management cost-cutting agendas are to be met without sacrificing growth opportunities that will emerge at the other end of the downturn.

This may be the Year of the Ox in Chinese new year celebrations but, given the current economic doom and gloom, Hydrasight analyst Michael Warrilow says 2009 will be the “year of no surprises” for CIOs.

He predicts IT spend will largely be piecemeal and directed towards getting the most bang for buck out of existing systems. Hardware spend in particular will drop off completely as organisations opt to keep refresh dollars in their coffers.

Environmental concerns will also take a place on the back burner this year, except where they offer cost reduction, while unified communications and desktop virtualisation projects may also slip off the radar despite much hype from the vendor community.

So where should organisations be focusing their IT attentions this year?

Business intelligence software looks like one huge drawcard as a growing number of organisations look to build a clearer picture of their internal operations. Looking longer term, it’s time to commit some plans for the much-lauded cloud computing to paper.

Heading into the clouds

Some enterprise firms, large and small, have already dipped their toes into the hosted software market – some to reduce in-house development and others to trial new applications.

Enter grid computing, utility computing, software-as-a-service or cloud computing. The fundamental hosted software ideal has been repackaged in a number of different forms but accurate assessments of risk against benefit are as hard to pin down as exact definitions.

While definitions and real-life examples remain illusive, most industry experts agree that cloud computing is the game-changer of the decade and CIOs would be foolish to ignore it. S2 Intelligence analyst Bruce McCabe considers cloud computing the most important transition in IT and business for some time.

“It will push an exponential change within the IT industry and we are just at the beginning,” he says. “By the end of last year everybody should have developed a paper-based strategy looking at which applications could move off premises and which ones are core differentiators to the business and should therefore remain in their control.”

This shift will be led by companies that consider themselves leaders in their field. McCabe believes these organisations will rent 90 per cent of software off premises within 8-10 years.

“There are already organisations using Google Applications and Google Office and testing the experience all the time,” he says. “They love the fact that it makes the market contestable and uninstalling software is easy. For some companies ripping out SAP or Oracle applications is unthinkable but cloud computing makes this a possibility.”

McCabe says moving applications off the premises completely changes the nature of application development and how they are purchased. He believes lowering the barriers to entry for all application developers and companies needing specific applications will also push the popularity of such services.

A measured approach

Insurance Australia Group’s CIO Neil Whiteing thinks cloud computing offers a clear value proposition for scalability – with a catch.

He says the disruption cloud computing could cause in the enterprise space means a tentative and measured approach must be taken, even when developing the paper-based adoption plan suggested by McCabe.

“When I joined the strategy and architecture group and led a forward-looking review this year, cloud computing was on the radar and now we are moving down the path of answering those questions intellectually,” Whiteing says. “In 2009 I would hope to be able to do a few proof-of-concept projects in a controlled environment but the market is fickle at the moment so it is not my top priority.

“Cloud computing, in my opinion, is a logical extension of software-as-a-service but I have not yet heard a conclusive definition [that clearly explains the differences between them]. Software-as-a-service is a natural extension of the basic outsourcing principles. It’s really just taking infrastructure and delivering it over the web but the economic model is slightly different. It’s about what truly offers competitive advantage in the marketplace versus what can be procured.”

Warrilow says it is a big issue for an established organisation to develop a trust in the external delivery of much-needed applications. He believes, because of the complete services and infrastructure dependency, cloud computing for the enterprise will initially be a hard sell.

He says it plays on all the big picture concerns for today’s CIO, especially given the current global market downturn, and there is an inherent attraction in giving up the management of capital intensive infrastructure to a third party.

“But it does not solve the application problem,” Warrilow says. “Software-as-a-service is the end of that extreme; it’s really platform-as-a-service and this may push development on a platform – hosted by Google, Microsoft or Salesforce – but there are inherent risks when developing in the cloud because people can still write a bad application.

“I do see the discrete use of software-as-a-service in the enterprise for particular niche applications but not for things like payroll and superannuation applications. Nobody is going to put the crown jewels in the cloud and only the really bleeding edge will use more utility-based infrastructure from hosted providers.”

Runs on the board

Many CIOs believe the process behind delivering applications over the web is technically sound but immature for full-scale dependability. Most have issues with seeing past so many single points of failure for core application delivery. Other issues hindering enterprise adoption include network security, privacy and a provider’s capability to deliver in peak times.

An organisation with national reach, a large number of point-of-sale outlets and an existing network management contract with a national telecommunications company that is exploring cloud computing seems like an ideal environment for a pilot.

Australia Post would fit the bill but it signed a four-year deal in 2008 worth an estimated $112 million to replace SAP ERP software and roll out supporting server hardware. SAP had launched its Business ByDesign hosted application service a year earlier but Australia Post CIO Wayne Saunders would rather wait for others to put some runs on the cloud computing board.

Saunders, who has been CIO at Australia Post since leaving BlueScope Steel in 2006, thinks an aggressive, listed organisation with a higher risk profile would be a better fit for a cloud pilot.

“It’s a technology you cannot afford to ignore, but I’d rather watch someone else using it first,” he says. “Our core business is in letters, but agency services are also quite critical to us, and our brand is trusted in the marketplace.

“We do about one million transactions per day through our Eftpos network as people pay bills and buy stamps so we cannot afford for our brand to be compromised in any way, shape or form.

“It is fundamental if we are to put electronic transaction software into the cloud to have another player that is linked to our brand integrity. That is a major adoption issue for us.”

Although he is generally open to the concept of cloud computing, Saunders cites privacy, security, retention of data and access to the application as large-scale adoption concerns. Another is handing over a lot of functions that the IT department is held accountable for to an external provider.

“It’s just like the standard outsourcing contract with Service Level Agreements but without the proven processes and contracts that protect an organisation. At this stage it is embryonic, and maybe there are some opportunities around collaboration that are worth experimenting with, but I don’t know about putting missing critical applications in the cloud,” Saunders says.

Back down to earth

A more concrete and practical spending prediction noted by Warrilow and McCabe is the seemingly recession-proof funding to be thrown at business intelligence software.

Australia Post had signed on to use Business Object’s BI software prior to the company’s $US6.8 billion purchase by SAP towards the end of 2007. Saunders says the takeover allowed Australia Post to standardise on four strategic product vendors, which gives the organisation a lot of stability – something that could be essential in the lean times that lie ahead.

“If we focus on four strategic vendors they get a good understanding of what we are trying to do and can bring more to the table. This creates a sense of stability that can ensure the path we go down,” Saunders says.

“But our focus here at the moment is to get the basics right – we have made major investments to improve the level of integration and business process flows for the organisation and generally increase our capabilities in service delivery.

“We are calling one project a business integration program, which is enabled by IT and is key to our future strategy.”

The blending between cloud computing ideals, software-as-a-service and service-oriented architecture, which has a more “internal development” flavour, taps into all the big CIO issues in today’s volatile global economy.

According to Warrilow, the pressure to ‘do more with less’ combined with a lack of clear direction on how to do that is driving cloud computing or hosted applications. It’s a way to reduce complexity that can bring an organisation back to its core competency.

McCabe says it comes down to whether or not managers would rather have business software kept as an operational or capital expense – and for that reason alone the idea is attractive.

Working smarter

Where recent years have seen most organisations focused heavily on growth, cost management has moved rapidly up the order of priorities in recent months and is likely to stay there for the foreseeable future.

Online travel and accommodation website uses a mixture of externally-hosted and onsite applications. Agreeing with Warrilow’s suggestion that this will be a ‘year of no surprises’, CIO Mandy Ross says there is “nothing too sexy” in terms of IT innovation going on behind the doors. Instead, the company will concentrate on consolidating applications and company purchases made last year.

Due to the economic climate, she is conscious of the need to be cost focused and is taking a long, hard look at the scheduled program of projects for this year. Those that offer benefit to the bottom line, such as business intelligence, are front of mind. will work on BI tools to offer better data for judgement calls and Ross says budget will possibly be slightly increased to enable such projects. She believes the majority of organisations will be accelerating such work this year. uses externally-hosted applications for internally-facing services such as web analytics, CRM, timesheets and Google Maps on its website. Ross says it ensures the company stays in its core business and expertise but she draws the line at using externally-hosted applications for mission critical systems such as the online shopfront because she is not completely comfortable with relying on software-as-a-service.

Stephen Tame, CIO of low-cost airline Jetstar says the main driver for his organisation will be to control variable IT costs as much as possible. He believes the drive to cloud computing, hosted applications or software-as-a-service is attractive in the current economic climate because funds intended for purchasing software can be based on a variable costing base or usage model.

Making sure essential projects are kept on track for the delivery of new aircraft next year, while keeping one eye on fuel prices, are more immediate concerns than developing an adoption plan for cloud computing this year. But he says capital will be a scarce resource during the next two years and anything that can free it up, such as cloud computing, will mean it makes sense to rent software rather than purchasing it outright.

“The whole focus for many organisations next year will be moving towards making as many costs as you can variable because the fixed spend was significant last year. The whole IT industry is facing the same challenge as the market turns so you have to look seriously at discretionary spend,” Tame says.

“What we do have control over is our business operations and the costs within, which we have made largely variable through outsourcing. All of our business intelligence spend has been done. Doing low-level analytics in regards to operational costs is pretty much how we run as a small flat structure. That means the guys in pricing know what current revenue and market conditions are like.”

Buckle your seatbelts

Tame predicts big changes in the delivery and pricing of hardware and software this year but is more immediately concerned with industry consolidation.

History has shown that low-cost carriers take advantage of the cheap assets available during a downturn to position themselves when the economy turns. Jetstar projects this year will include server virtualisation and using hosted software applications.

Existing hosted software agreements with means the airline can avoid fixed charges for CRM systems. It pays for a Navitaire ticketing application per ticket sold and has also implemented a new operational control and crew scheduling system. A reservation departure system was launched in January.

Tame says the infrastructure virtualisation work was done before the arrival of a new Boeing 787 fleet that is due to land in May next year. He notes that 28 airlines collapsed in 2008 and expects to see more industry consolidation given the current economic downturn.

No doubt there will be plenty of merger and acquisition activity in other industries during the next 12 months, and nobody can yet offer any concrete guarantees that we will have seen the back of the downturn by this time next year, so a more conservative approach is the order of the day.

It may well be that 2009 is the ‘year of no surprises’ in terms of major IT developments, but there will be plenty of opportunity for CIOs to show their worth and help the business plot a safe course through potentially turbulent times.

Sidebar: Ten strategic technologies for 2009

1. Virtualisation

2. Business intelligence

3. Cloud computing

4. Green IT

5. Unified communications

6. Social software and social networking

7. Web-oriented architecture

8. Enterprise mashups

9. Specialised systems

10. Servers – beyond blade

Source: Gartner

Sidebar: Ten CIO resolutions

1. Start building an alumni network: This should include a semi-official company IT alumni association with its own web page, use of social networking tools and re-establishing bounty schemes, where staff are paid for recruits they bring in.

2. Stop being the exception that enforces the rules: CIOs should design and adopt two or three key behaviours to match the required direction they want their reports to follow such resisting the option to upgrade to the glitziest new smartphone.

3. Start scouting for key talent: As large numbers of laid-off people flood the market, some salary-level attrition is inevitable and even good people could find themselves without a position for months. Rather than shutting the door to headhunters, CIOs should insist on interacting with a senior partner to obtain a few real talent resumes.

4. Start preparing for the unexpected: Challenge and develop the thinking styles and frame of reference of your leadership team as well as yourself. Find people to join the discussion that don’t fit the existing mould and consider choosing people who will irritate the majority.

5. Start using social networking systems, visibly: Lurking in quiet observation is not enough to kick-start participation from other staff. The leadership team should use social media to communicate internally and externally because it will help rebuild brand confidence, energise the company culture, develop ideas and refine solutions.

6. Start taking cloud seriously: This is a major new stage in the evolution of commercial IT that CIOs must take seriously even though it is still confusing at this stage. Set a side a reading day to immerse yourself in the issues, terms and sub-trends before personally subscribing to and testing a variety of cloud applications.

7. Stop ignoring people and opting for soft targets: CIOs should not lay-off people they will need long-term and are difficult to replace just because their work is not an immediate deliverable. Instead, look to temporary redeployment. Similarly, don’t cut projects that are unfashionable if they will yield significant value in a year or two.

8. Start offering your vendors a free lunch: CIOs will require vendors to deliver flexibility and cost savings so take time to reset the style of relationship. Politely decline their courtesy trips and invite the senior management leader in each of your key vendors, probably not the account manager, to lunch or dinner at a chain-restaurant that sets a thrifty tone to discussion of value-driven cost optimisation.

9. Stop fearing the future and start driving it: CIOs should reflect conspicuous frugality within their organisation but not be defined by it. Splash out a little where it is important for staff morale such as training courses and software development tools.

10. Newer technologies to explore: Protect the time to stay in touch and get hands-on with key technologies such as e-book readers, Google Chrome, building mini-cloud applications, using YouTube as a default search engine for a day and high-definition teleconferencing.

Source: Gartner

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Tags strategycloud computingCIO roleeconomic crisisnew technologies

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