CUSTOMER NEEDS AND STRATEGIES

Coping with the "New Normal" — How the Changed

Economy Is Shaping IT Practices
Joseph C. Pucciarelli

IDC OPINION
At an extended, three-day conference of 140 CIOs and senior IT professionals held in
September 2009, IDC analysts discussed IT business, technology, and acquisition
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strategies expected for the balance of 2009 and 2010. A wide cross-section of
industries were represented, including financial services, discrete manufacturing,
hospitality, healthcare, retail, and CPG. The clear consensus among some two-thirds
of the participants was that the recent economic turbulence, and the resulting shifts in
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business and technology models, would echo for several years, creating a "new
normal" for IT budgets, capital availability, and technology adoption models. And
while IDC defines its mission as an IT market research firm choosing not to publish
broader economic measures such as GDP, investment levels, and unemployment,
the analysis in this document reflects the clear sentiment of the conference
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participants and explores how a "new normal" could impact IT organizations, the IT
provider ecosystem that supports them, and IT professionals worldwide.
Coincidentally, as this document is being prepared at the end of 3Q09, many
business leaders and economists have begun publicly forecasting a very modest,
multiyear economic recovery. Against this backdrop of "new normal" economic
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operating practices, the IT industry and technology platforms seem poised for a
period of significant change. Arguably, since the last recession in 2001, IT innovation
has focused on perfecting and solidifying concepts, platforms, and technologies that
were on the table eight years ago. IDC believes that in the next few years, we will
witness considerable IT platform change — from next-generation datacenters and
ERP software to a wide range of off-premise computing options. In the face of
potential platform changes, IDC believes IT organizations and the companies they
support will remain very cautious with their investment spending through at least
2010. In addition:

 IT equipment strategies will focus on lengthening deployed life and maximizing

effectiveness, limiting purchases to spot buys to address specific needs.

 IT software strategies will focus on addressing evolving business requirements,

achieving one-budget-cycle investment paybacks and minimizing upgrade
spending.

 IT service strategies, as a percentage of overall IT budgets, will likely increase as

companies spend to maintain older equipment, selectively hire technical skills to
fix problems, and continue exploring evolving business process outsourcing
options.

Filing Information: October 2009, IDC #220285, Volume: 1

Technology Financing Strategies: Customer Needs and Strategies
IN THIS STUDY
In September 2009, IDC participated at a large CIO conference held in Scottsdale,
Arizona. A total of 140 participants from companies with at least $1.5 billion in annual
revenue attended. A wide cross-section of industries were represented, including
financial services, discrete manufacturing, hospitality, healthcare, retail, and CPG.

During the course of the event, in facilitated group discussions, presentations, and
one-on-one discussions, in-depth conversations took place involving the IT issues
confronting both individual companies and IT in general.

Much of the discussion centered on the economic outlook and how it would shape
future IT budgets, strategies, and platform choices. As the discussions ensued, a
consensus emerged. Approximately two-thirds of the CIOs present believed that the
changes in business and technology management implemented as a response to the
recession have, in fact, become part of the permanent ongoing business framework.

This sense that a "new normal" has emerged and become instantiated, combined
with a mediocre three-year economic outlook for most of the world's mature countries,
has led us to summarize these insights and predictions.

SITUATION OVERVIEW
The world's economies have been struggling since late in 2007 in a period of
economic turmoil that has come to be known as the "Great Recession." Beyond being
a significant retrenchment in overall economic activity, this period has been marked
by an unprecedented contraction in the availability of capital — capital to fuel
business operation and capital to fuel business investment. Business and IT leaders
have responded to the changed conditions by making a number of tactical changes.
As it has become clear that markets will remain turbulent and that organizations will
face a prolonged period of changed conditions, there is a clear sense that a "new
normal" must be faced.

In Figure 1, IDC summarizes some of the challenges, reactions, and strategies.

©2009 IDC #220285 1

FIGURE 1

IT Management Landscape: The New Normal — Reaction

and Effect

IT
IT Management
Management Landscape
Landscape
The
The New
New Normal:
Normal: Reaction
Reaction and
and Effect
Effect

 Lower IT investment budgets

Challenges  Just-in-time IT spending
 Pressing new requirements

IT Equipment IT Software IT Services

 Stretch life cycles  Highly selective buys  Maintain reliability
Reactions  Improve utilization  One-year payback  Improve efficiency
 Used equipment  Open source software  Even more outsourcing

Equipment
Cost and Sourcing IT financial
Strategies leasing and Life-cycle
funding and platform management
software management
management strategies tools
financing

Source: IDC, 2009

The New Normal: IT Equipment

IT organizations, confronted with the requirement to both reduce operating expenses

and conserve capital expenditures, have adopted a number of practices to stretch IT
resources. The three principal strategies have been to stretch deployed equipment
life cycles; improve device utilization — whether it be servers, storage, or network
equipment; and selectively leverage resource gaps with the acquisition and
deployment of used equipment.

IT leaders reported to IDC that they adopted these practices in an expedient manner,
generally without the benefit of detailed financial information to help them quantify the
impact of the changes. Essentially, they looked at the cost of the new equipment and
compared it with the cost of an additional year of maintenance — without being able
to fully quantify the entire cost via a more comprehensive life-cycle management
analysis.

The New Normal: IT Software

CIOs and other IT executives speak quite passionately when discussing IT software
provider business practices, and their comments are not always positive. Many speak

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with frustration about the "upgrade treadmill." They express dismay at large price
increases enacted by several major providers in the face of the recession.

Conversely, they recognize the opportunity and value of expanding IT service

management and automation software to improve operational effectiveness and
reduce labor requirements. They talk passionately about deploying business
intelligence software to improve their organization's ability to derive business value
from the volumes of data coursing through their businesses. Many expressed the
opinion that funding invested in improved business analytics was one of the easiest
"quick hits" in improving IT business value.

When acquiring new software, many organizations reported that they deducted the
value of the benefits expected from their budgets. This dictated software purchases
that were quite tactical and made relatively early in their budget year.

Finally, the topic of open source software was discussed at length and in virtually
every venue. A principal issue confronting companies considering open source
software was their level of risk tolerance. Many financial services companies require
their software suppliers to provide liability coverage — often as much as $10 million
or more. With open source software, this is not available. Therefore, the organizations
choosing to deploy it are underwriting this risk themselves. The challenge to the
business status quo has resulted in open source software being deployed within the
organization for inward-facing applications that do not directly affect customer data.

The New Normal: IT Services

Capital constraints limiting the acquisition of new equipment or software have resulted
in many organizations shifting spend to their IT services. For example, as equipment
useful lives are pushed to four years and beyond, there are heightened concerns
about maintaining availability. As a result, most organizations maintain tier 1 levels of
coverage.

Another area where IT executives are continuing to invest/spend is in technical

consulting services that can help improve operational efficiency and effectiveness.
Typically, they are bringing in external service organizations with skills that they do
not have. A number of examples were cited, including improved server configurations,
storage management strategies, security, and ediscovery.

On the last point, ediscovery, many voices echoed the complexity, cost, and sheer
frustration that experiences have brought upon their IT shops. Many said that going
forward they would attempt to use external service companies because they did not
have the discretionary resources to underwrite these often painful projects.

Finally, we addressed the issue of outsourcing — a topic never far from anyone's
mind. While many leaders were quite clear that IT outsourcing has many challenges,
many were experimenting with different types of outsourcing. Rather than simply
seeking labor arbitrage opportunities, outsourcing specific business processes had
met with better outcomes — higher service levels and more predictable cost profiles.

©2009 IDC #220285 3

Capital Investment Spending

Business leaders have already begun to selectively increase IT spending. During

2Q09, an analysis of companies within the Standard and Poor's 500 (S&P500)
disclosed that IT-intensive companies in the telecommunications, financial services,
and healthcare industries all increased capital investment by at least 6% compared
with the preceding quarter, as highlighted in Figure 2.

FIGURE 2

S&P 500 Capital Investment Growth by Industry, 1Q09–2Q09

Telecom

Financial

Healthcare

Materials

Utilities

IT

Industrials

Energy

Total S&P 500

-15 -10 -5 0 5 10 15 20
(%)

Source: Thomson Reuters and BusinessWeek Magazine, August 2009

IDC believes that this modest recovery in capital spending is consistent with a
modest, multiyear recovery and IT organizations' selective buying practices. Overall,
capital spending decreased by 3%, but in selective industries confronted with new
opportunities and requirements, investment has accelerated modestly.

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FUTURE OUTLOOK
The macroeconomic outlook for the next 36 months is more variable than at most
points in the past 75 years. A likely outcome is that the world's mature economies will
see a slow, modest recovery — slower than the norm. Given the problems with the
financial sector, it is also likely that capital — to sustain IT operational and investment
budgets — will remain at a premium. Given this outlook, tempered with the concerns
and strategies outlined by many IT executives at the September conference, IDC
believes that five management practices will be at the core of IT organization
initiatives for the foreseeable future.

Cost and Funding Management

The harsh reality is that most IT organizations do not have a comprehensive handle
on their delivery costs. Most do not have the internal systems and processes to
systematically track the cost per person of major applications (i.e., the cost of ERP
per user). The cost profile of necessary and integral functions such as security or
business continuity correlated to business process generally do not exist. Finally,
most IT organizations have no way to impute business value from their IT solutions.
The net result of this situation is that IT funding remains uncoupled from a deep
understanding of IT cost profiles.

IDC believes that cloud computing, or the use of off-premise compute resources, will
expand dramatically over the next 36–48 months. For a variety of reasons, this
technology (as it matures) will become a viable alternative to traditional IT delivery.
The challenge for IT organizations will come when aggressive third-party providers
approach their executives and propose to shift the compute loads from the company's
datacenter to their facilities. The company executives will ask IT to prepare an
analysis of the proposal.

Just as total-cost-of-ownership (TCO) analysis was all the rage during the go-go days
of IT outsourcing, increasingly, IT organizations will find they are being asked to
document their costs. And it will not be an easy or pleasant task.

Sourcing and Platform Strategies

A number of CIOs present at the conference operated virtual IT organizations. These

companies, either by choice or because they had been "spun out" of a larger
organization, were challenged to create a fully functional IT capability in months. One
CIO had a total of three full-time employees in his department — everything else was
sourced from a variety of outsourcing suppliers. His staff monitored quality of service,
cost, and change management. Other CIOs spoke about shifting their email from
traditional in-house platforms to cloud providers or new-generation providers such as
Google. Yet others wondered aloud about the security and business continuity risks
their colleagues were undertaking.

The discussion around cloud or off-premise computing can be summarized into three
major points:

©2009 IDC #220285 5

 CIOs and IT leaders are skeptical about the technical maturity of cloud
computing options and their applicability to real-world commercial IT compute
loads. Issues of data privacy, security, recoverability, and liability remain largely
open questions — from their perspective.

 The attractiveness of the potential business model, shifting from capital

investment to a reasonably predictable stream of operating expenses, is
extremely compelling to both IT and business leaders.

 The likelihood that cloud computing will spark a burst of commercial IT innovation
similar to that witnessed by the Apple iTunes App Center, with its unbelievable
two-year record of 75,000 applications and 2 billion downloads, intrigues IT
professionals and will likely be the most effective reason to try the cloud.

The point is not to argue pro or con for one platform or another. At issue is that IT
organizations will have an increasing number of options to choose from to achieve
their objectives. Whether it is modernizing COBOL programs and moving them to a
new platform, shifting select business processes such as software testing or business
continuity to off-premise compute resources (the "cloud"), or taking a fresh approach
to the business value inherent in mission-critical back-office IT computing, the choices
are multiplying — rapidly — heralding a period of experimentation, innovation, and
change.

Most IT leaders IDC spoke with concur. What is less clear is an informed decision
framework to answer conclusively to the board of directors — "Yes, we have an
optimal platform strategy now, are watching the right things, and understand what
needs to evolve before we consider changing."

Equipment Leasing and Software Financing

It can be forecast with a reasonable degree of certainty that worldwide capital

markets will be more constrained in the next three years than they have been for the
past three years.

The leasing and financing business is a countercyclic industry. It tends to thrive in a

period of constrained capital, higher interest rates, and economic volatility. At the end
of 2008, IDC estimated that about 10% of IT spending in the United States and about
8% of IT spending worldwide was leased or financed. Compared with other types of
commercial capital investments such as industrial equipment, aircraft, or high-tech
medical equipment, the percentage of IT equipment that is leased/financed is quite
low.

IDC believes that commercial organizations will return to IT leasing and financing as a
means of bolstering their access to IT resources. Most IT organizations have not
emphasized the internal process management required to achieve successful
outcomes from their IT leasing activities. In addition to changes in the absolute
amount of IT leasing and financing, increased focus on process management, both in
the form of focused human resources and tools, is also expected.

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Life-Cycle Management

Most IT organizations plan the deployment and retirement of their major IT resources
— equipment, software, and applications. Yet, most IT organizations lack the real-
time tools and processes to systematically test whether they should fix or scrap IT
resources. As IT equipment continues to decline in price, this becomes more and
more problematic.

Imagine a circumstance where an IT operations employee invests 1.5 days

configuring a problematic blade server — a three-year-old server that might have a
market value of $1,000. Is it a prudent investment? These are the types of questions
we each answer individually when confronted with a repair bill for a car or a
refrigerator. We consider the cost to repair, estimate the incremental useful life, and
then weigh that against the cost of a new device. In IT, most organizations typically
employ a service management framework — one that encourages the timely
restoration of devices but often lacks the financial elements to readily weigh the
decision from all viewpoints. This happens based on the good judgment of the many
fine professionals within IT — but not as a systematic process.

While all this may sound a bit esoteric, the issues are very real. Many IT
organizations report they have extended the planned deployment of a major
equipment type — from servers to storage and networking equipment. Without the
tools and the management discipline to optimize operational decisions, many of these
decisions are being made based on informed intuition.

As IT organizations drive IT budgets to 0.35% or 0.65% of revenue, the need for

better decisions becomes even more apparent.

IT Financial Management Tools

Most organizations with annual revenue exceeding $1.5 billion have implemented
financial management software from one of the leading providers such as Oracle or
SAP. Despite the success, maturity, and capability of these software tools, they do
not map well to IT business management requirements. The organizing principles of
multiple "corporation" codes, cost centers, and a chart of accounts do not map to IT
requirements, which include the ability to track project costs from internal and external
teams, a human resource management system that can track and manage contract
employees, and system features to track and manage internally capitalized software
and projects (including distributing their costs across multiple countries as a way of
managing international taxation practices).

Most IT organizations continue to rely upon MS Excel spreadsheets linking together

information from disparate systems, including the general ledger, IT project
management tools, and the IT service management suite. IDC believes that in both
the short term (36 months) and the long term (60 months and beyond), the need to
track, manage, and measure IT expense and capital investments in a more
systematic manner will emerge.

Current ad hoc systems of existing software with manual MS Excel integration has
met requirements when most expenses were internal. As IT platforms and business

©2009 IDC #220285 7

processes move inexorably to third-party providers, the need for IT financial
management software, tools, and best practices will crystallize. A recent conversation
with an IT organization demonstrates the point: Its IT professionals had reached the
breaking point when software-as-a-service feeds into the enterprise firewall exceeded
100 unique feeds.

IDC believes that these issues of managing, integrating, and controlling an

increasingly complex mixture of IT resources have created new demands,
requirements, and opportunities for IT providers to extend their IT management
software suites. These are opportunities some providers have already begun to
address with shipping software products.

ESSENTIAL GUIDANCE
Against this backdrop of "new normal" economic operating practices, the IT industry
and technology platforms seem poised for a period of significant change. Arguably,
since the last recession in 2001, IT innovation has focused on perfecting and
solidifying concepts, platforms, and technologies already on the table eight years ago.
From new, more efficient servers (courtesy of virtualization) to robust networks
capable of desktop video and sophisticated storage management tools and software,
IT has continued to become more efficient, effective, and reliable. Poised on the
horizon are a wide range of disruptive IT technologies and business models — from
new datacenter server products from "network company" Cisco to rapidly evolving off-
premise compute options (cloud computing) and next-generation ERP software suites
that promise flexibility and rapid reconfigurability — IDC believes the next few years
will witness considerable IT platform change.

In contrast to a technology cycle poised to introduce disruptive innovation, business

and IT leaders confront an economic reality of diminished demand and somewhat
uncertain prospects. Regardless of their strategy — selective investment in focused
opportunities or retrenchment and caution — overall IT spending will be scrutinized,
poked, and prodded. A crystal-clear linkage between business requirements and
spending will need to be made and agreed upon by business and IT leaders.
Economic payback periods will be shorter and internal capital thresholds higher.

IDC believes the "new normal" will be characterized by a reprioritization of

management practices and investment priorities. For IT organizations, IT
professionals, and IT providers that recognize the premium placed on economic
linkage, enhanced financial management and accountability and an ability to
articulate technology requirements in business versus technological terms will be
favored.

LEARN MORE

Related Research

 CAPEX vs. OPEX: How Capital & Budget Constraints Are Shaping IT Investment
& Platform Strategies (IDC #TB20090827, September 2009)

8 #220285 ©2009 IDC

 Cloud Computing 2010 — An IDC Update (IDC #TB20090929, September 2009)

 IDC MarketScape: IT Project and Portfolio Management, 2009 Vendor Analysis

(IDC #219087, July 2009)

 HP Introduces Financial Planning and Analysis for IT Organizations (IDC

#219040, June 2009)

Synopsis

This IDC study examines the changes affecting IT equipment, software and services
management, and acquisition practices, including longer life cycles, rising interest in
open source software, and services trends such as outsourcing.

"Changes resulting from the recent economic turbulence are resulting in substantial
changes to business and technology management models that will echo for several
years, creating a "new normal" for IT budgets, capital availability, and technology
adoption models," says Joseph Pucciarelli, program director, Technology Financial
and Executive Strategies.

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