IT Vendors Disappoint The Biggest CompaniesBy John Parkinson | Posted 12-05-2005
IT Vendors Disappoint The Biggest Companies
Just 26 publicly traded U.S. Companies posted revenues of more than $50 billion in 2004 (allowing for various fiscal year-ends) to get into the $50 billion club.
Between them they account for a lot of people (several million employees globally), a lot of business ($2.5 trillion in collective revenues, and only one of them failed to report a profit) and, potentially, a lot of spending on IT. Talk to their CIOs, however, and the impression you get is that these companies are not well served by the mainstream IT industry, whether it's for hardware, software or servicesbut especially in software and services.
These firms are all truly marquee names, everyone wants them on a customer qualification list, and they can generally afford to buy the best. So what's causing the disconnect?
Partly it's because they are so large that any meaningful project they might undertake would consume significant talent and resources from even the largest services provider. Partly it's because their needs are so highly specialized that "commodity solutions" seldom have much to offer them. Partly it's because they are so diverse (covering fifteen different industries, with no more than four in any major industry category) that they don't really form a coherent "marketplace" that could attract a common set of solutions. After all, it's a lot easier to build a human resources system for the "core" market of companies with less than 10,000 employees (or the mass market with less than 100) than it is to build one for the tiny handful of companies that have more than 500,000.
And those core market systems just don't scale all that well. What works well at the scale that gets you into the Fortune 1000, or even the Fortune 500, will show signs of serious strain when you get to the Fortune 30.
The kinds of extensive engineering efforts needed to scale up by an order of magnitude are hugely expensiveand simply aren't justified by the returns from the few customers that require such scale. That's why most, if not all, of the IT departments in the very largest businesses are essentially still custom development shops. Even where they base some part of their business automation on commercial off-the-shelf products (as they all do in some areas), they end up customizing these offerings to such an extent that they might as well have developed them on their own.
There is an irony here.
It can be argued that the whole commercial off-the-shelf ERP wave was sparked by SAP, which got its start developing systems for the world's biggest oil companies and process manufacturers. But it wasn't until the advent of R/3 and a retargeting by SAP and others toward the "mainstream" corporate marketplace that ERP really accelerated.
This "small market" problem exists elsewhere. Consider the hospitality and travel industry (with central reservation and capacity scheduling systems), telecommunications (with the OSS/BSS suite), multistate, multiline insurance (with policy management and underwriting systems), and utilities (with billing and customer service).
The players in these industries may not all be as large as the $50 billion club, but there are few enough of them in each industry segment that they must all develop or heavily customize the systems that run their businesses.
Such high levels of customization translate into very high total lifecycle costs: Not only is the initial development effort high, but the results have to be maintained over what is, usually, a long lifecycleand there is no one with whom to share the costs. In a very large-scale, low-margin business (think auto manufacturing, big-box retail or pharmaceutical distribution), this adds a measurable burden to operating costs and corporate performance. It adversely affects the bottom line, yet the companies have no choice but to invest. You can no longer run a business of this size without extensive automation.
Forced Into Do
The $50 billion club has responded by accumulating some impressive engineering talent, and by building research and development partnerships with key suppliers; in effect, these companies have become world-class IT service providers in their own right. In many cases, these companies are so good at it that service providers can't offer them much in the way of ideas, skills or capacitya further disincentive for the technology industry to work to meet their needs.
Talk to their executive teams, however, and they all tell essentially the same story. "Sure we know that there will always be some areas we have to handle for ourselves. But why do we have to devote so much scarce talent and energy to areas that should be routine? Our only difference is related to our scale. Surely it isn't that hard to respond to scale?"
Perhaps, but it's not that simple. There are a few businesses where scale is the only factor, but most of the $50 billion club are complex, have very high performance and availability demands, and operate in very specific, often highly regulated markets. Scale may underlie their challenges, but solving scale alone won't solve all their problems.
Is it inevitable that the largest corporations will have to go it alone? I have been looking at this question (and discussing it with most of the major vendors) for almost 20 years, and I have just about concluded that they could do something about it, but they probably won't.
It's not that there has been no progress: Quite a lot has been achieved with both scalability and availability engineering. It's more that the key technology players (who have to be committed to and involved in any effective solution) don't see the need, even though two of themIBM and Hewlett-Packardare club members themselves. As far as I can see, the largest technology players make more profit supplying "inadequate" technology than they would if the technology truly met the business need. Instead of investing once to create a platform that was sized for the largest users, they would rather sell perpetual customization and support services that, in a sense, perpetuate the problem.
The major technology suppliers all have very impressive and, generally, very effective collaborative programs to develop new software and service capabilities. As soon as a vendor creates a workable offering, however, it is virtually always refocused on the mainstream market, where there is much greater potential return on the investment. The largest businesses simply get another component to customize and integrate into their unique environments.
Sometimes the customers themselves are part of the problem. On a number of occasions over the past decade, I have been involved with proposals to build large-scale platforms on an industry consortium basis.
None of these efforts has come to anything, though it hasn't been because of their technical infeasibility, or even economics. Mostly they fail because the industry players won't work together well enough to hammer out what the core specifications should actually be. Even when there is no credible competitive issue involved, ego and politics often get in the way. After all, you don't get to be a member of the $50 billion club by being shy and retiring.
Nevertheless, I remain hopeful that some combination of industry players and technology partners will team up to solve this problem in the same way that big oil and SAP combined to create ERP. We have the technology, tools and processes to serve small markets with high return potentials. All we need is someone with the vision and imagination to go after the solutions.
JOHN PARKINSON has been a business and technology consultant for over 20 years, advising many of the world's leading companies on the effective use of business automation.