Big Ideas

Trends in IT Services: Redefining the Economics of Technology

Three trends will drive enterprise IT decisions and change the traditional role of the IT organization.

by Yashpaul Dogra

January 2014

2014 will be the year of efficient economic scale for many firms struggling with complexity within their data centers. Demands for new technologies and an increase in the number of critical applications are complicating an already complex portfolio of clouds, virtualization, mobile, and big data, to name just a few components. To add to the complexity, CIOs must manage all of this with a flat budget for the coming year.


Past economic patterns have led to a focus on architectural choices based on scale and utilization. But today, IT leaders are redefining the economics of technology to drive winning strategies. In the coming year, three technology trends will affect companies looking to accelerate, innovate, and align data center technology decisions to business strategy.

1. Economies of scope are replacing economies of scale. Leaders of IT organizations strive to maximize the value of the compute, storage, and network assets under their control. In doing so, higher utilization of individual components has been the primary strategy—this is the economy of scale strategy that most IT organizations use for optimization.

But scale largely ignores the cost of maintenance, management, and deployment of diversified services in favor of acquisition cost. Economics of scope, in contrast, seeks to gain efficiency from pre-engineered assembly of components. The higher level of assemblies enables services rapidly and efficiently. Economies of scope focus give firms an alternative to provide lower-cost, diversified business services versus specializing in optimizing component efficiency. Many leading firms are adopting this approach.

Let’s examine the case of public clouds as an example. Many of the public clouds can run at an optimum level, extracting value from the services that they provide. This is largely due to customers utilizing a service with minimal switching cost from provider to provider. When the services become too expensive or the service offered is no longer adequate, customers can switch to higher value providers. This results in an efficient market with competitive services based on scale.

Three main areas of focus—accelerating scope of services, extracting value of data, and innovating business models—are top of mind for leading companies.”

Firms that utilize a scale-based economic model as the primary technology strategy have reached their limit. This is largely due to the effect of diseconomies of scale. Diseconomies occur when the complexity of managing the scale increases cost beyond the benefits gained. Scale-based architectures rely on utilization of commodity hardware across traditional storage, network, and compute tiers. Many critical applications are still tied to specific platform components or are not designed to take advantage of infrastructure scale.

Over time, the ability of platforms and infrastructure to evolve becomes atrophied by application dependencies. The services scale benefits once envisioned are eroded. The high cost of migration or business criticality of applications detracts from the scale-based benefits originally envisioned. Additionally, the need to accelerate technology-based innovation inevitably results in a trade-off between enforcing platform standards and accelerating innovation. These trade-offs are driving firms to seek alternatives that can do both.

Gartner’s recent research on private clouds supports these findings. Scale-based architectures are only being adopted opportunistically with specific workloads or applications in mind. This has given rise to scope-based architectures of engineered systems. Engineered systems are a key strategy where technology can be aggregated for a specific scope and deployed within a higher-level framework. This simplifies management and accelerates deployment by obscuring the underlying technology components. In this distinction, these systems are further segmented into purpose built for specific workloads versus those for generic uses. In doing so, purpose-built systems inherently deliver higher value. IDC reports that the market for engineered systems 2013 third-quarter sales of US$1.4 billion grew over 68 percent from the same quarter in 2012. The market is rapidly validating the economies of scope over that of scale.

2. The network effect of data can no longer be ignored. Data is oxygen for companies. You know when it’s rarified or when it is not breathable. Data, in many cases, is accessible to those functions that use the information and fund its costs. The economic premise of traditional data platforms has been that data will generate better decisions and improve the strategic direction of enterprises. Justification of data center investment for analytics is typically made focusing on the return on investment of collecting, storing, and analyzing information. The network effect of data is largely ignored simply because it is an unknown, and technology investments are largely project-based.

Simply put, the network effect of data is the exponential increase in the value of information due to the number of nodes utilizing it. Intuitively, the value of the network effect of data is multiplicative. The economics of this are difficult to model even for the best economists. Bob Metcalfe, the inventor of the Ethernet, formalized the concept of network effect across nodes of connected devices. A simple addition to this theorem is that the value of information is inversely proportional to the number of systems and components you need to get to what you want. The number of systems and components adds to the friction and latency. Fewer components and bigger pipes generate the highest potential for network effect.

Leaders are utilizing this effect primarily by centralizing the platform for data services. Economic justification comes at a higher strategic level, when companies decide that being data-driven is a competitive advantage. Advanced data platforms have three main characteristics: speed of ingestion, scale of data, and scope of use. Within the data center, centralization of data services is more than just using common storage platforms. It is important to serve the data in many forms without friction. These structures require the ability to manage multiple workloads and deliver transactional, high-volume, and transformation abilities within a common, simple framework. In this way, the friction of data use is reduced and the network effect is unleashed within the enterprise.

3. Lines of business are increasingly turning to external IT providers. Companies will accelerate technology innovation; however, funding has shifted to the lines of business (LOB). The Corporate Executive Board (CEB) survey for IT budgets highlights the continued shift in technology innovation funding to non-IT leaders. The allocations for technology for lines of business will increase nearly 40 percent while IT budgets will be flat for 2014. The ability to innovate technology that is central to the strategic intent of the business has shifted to those directly responsible for it. The alternatives for LOB managers are many—cloud, SaaS, and shadow IT abound. As a result, the economic relationship between the LOB and IT is that of a buyer/supplier.

Thought LeaderDogra-headshot

Yashpaul Dogra is senior director of Oracle Insight for Data Center Technologies.

IT organizations will need to redefine their role to win business. With limited IT technology budgets, the CIO will need to align to the strategic intent of the business to remain relevant. As a supplier, the leading strategy for the CIO is to become a strategic services provider or trusted advisor. IT organizations will have difficulty competing on the basis of cost or time to market dominated with external suppliers specialized services.

IT organizations can compete by having a better understanding of the business context and strategic intent. A resulting technology strategy is aligning portions of the data center to Platform-as-a-Sandbox for innovation and experimentation. Incorporating existing services within the sandbox drives a more strategic interaction with business while improving the retention of the services as they migrate to production.

2014 will another challenging year for technology executives. Strategies aligned to the economics of past will need a new perspective that aligns to business strategy. Three main area of focus—accelerating scope of services, extracting value of data, and innovating business models—are top of mind for leading companies. For those that succeed, technology organizations will become critical to successful business outcomes.

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