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Innovate with SOA - I

Why The 80/20 Rule Is Bad For IT Resource Allocation, and What You Can Do About It

This article originally appeared in NOW Magazine, which retains all rights.

A commitment to innovation in any organization can be stymied by the day-to-day reality—and resulting ennui—of accomplishing the basic work done that has to be done. Within IT organizations, for example, it’s generally accepted wisdom that a very high percentage of resources and budget are dedicated to maintenance and support, to ongoing operations, rather than to nurturing innovation.

The well-known 80/20 rule applies here—not only do 20 percent of customers typically drive 80 percent of sales, but 80 percent of resources are deployed to cover routine tasks. (The original usage of this shorthand, by the way, was by an Italian economist, Vilfredo Pareto, who used it to describe unequal distribution of wealth in Italian society in the late 1800s.)

A slightly altered ratio has become popular in IT recently, with publications such as Business Week and Information Week (to list just two examples) alleging that 70 percent of IT budget goes to maintenance, 30 percent to innovation. Following up on this point, Dell Chairman Michael Dell was quoted recently saying that 70 percent of IT budget in Japan was spent to maintain existing systems, with only 30 percent reserved for new systems, “a ratio that needs to be reversed,” in Dell’s words.

HP CEO Mark Hurd and Dianne Schuenemann, Merill Lynch’s Head of Global Infrastructure, both alluded to the need for more innovation in IT budgets during keynote speeches at TIBCO’s TUCON User Conference in 2007. Numerous other business leaders stress the need for innovation in their organizations today.

All of the above may be optimists: an assessment found in a Gartner report cited by CIO Magazine recently sets this ratio at 91/9! Finnish computer scientist and professor Dr. Jussi Koskinen uncovered a similar ratio in 2000, examining worldwide software budgets and finding the portion of software maintenance costs to exceed 90 percent of total budget.

Koskinen also found that this was hardly a new phenomenon, pointing to research that indicated software maintenance costs of at least 67 percent of total budget dating back as early as 1979. He also uncovered the cheerful nugget that there were 250 billion lines of source code being maintained at the turn of our new century.

The Name of the Game is to Maintain
Maintenance and support are unavoidable and not necessarily a bad thing, as they do represent a company’s commitment to ongoing operations. But maintenance and support are not something that managers want to spend northwards of two-thirds of their budgets on. Innovation is, of course, perceived as a good thing; it’s what keeps companies in their respective ballgames, and also allows them to sneak or leap ahead of their competitors.

The use of ratios such as 80/20 and 70/30 implies that there is a numerical, logical path available to us to build more innovation into our organizations. So, how do you go about trying to reverse the 80/20 ratio? Well, there’s an unimaginative way to do it—simply slash maintenance and support budgets and thereby increase the percentage of overall budget that’s dedicated to innovation. This has been reported by numerous CIOs, according to analysts and vendors interviewed for this article.

But that attitude won’t get you far. In fact, there may be a crisis brewing within the ranks of CIOs, who are increasingly perceived as being unimaginative providers of a utility, according to a recent article by John Sloat in InformationWeek. Entitled, “The Evolution of the CIO,” this article describes what may also be called a regression or devolution.

A key metric cited in this article comes from the Society of Information Management (SIM), which found a precipitous drop in the percentage of CIOs reporting to the CEO, from 45 to 31 percent. Additionally, the article cites a survey of 724 senior business technology professionals conducted by InformationWeek in which 41 percent of respondents said the influence of their CIO is “one the rise,” another 18 percent said this influence was “on the decline,” and 40 percent reported “no appreciable change.” One consultant consulted for the article went so far as to say that some CEOs are beginning to question whether their companies even need a CIO, the article reports.

The same survey found 43 percent of respondents saying that line-of-business managers are taking on more responsibility for IT projects. A possible reason for this may lie with the observation of a top Forrester researcher who notes that although IT “runs every business process today…they don’t take ownership.” Somebody will take ownership, “and soon,” the article states. The reality is that the costs and efforts associated with IT groups are those of maintenance—a necessary evil to be sure, but nonetheless something that are just perceived as sunk costs.

The obvious strategy for CIOs (and by extension, other IT managers) is to encourage line-of-business managers to participate in a collaborative relationship focused on innovation, rather than simply try to get formerly techno-ignorant managers up to speed then assume an adversarial relationship with them.

(Part 2 of this article is now available at www.rogerstrukhoff.ulitzer.com)

Follow the author at www.twitter.com/strukhoff or www.nowmagazineblog.blogspot.com

More Stories By Roger Strukhoff

Roger Strukhoff (@IoT2040) is Executive Director of the Tau Institute for Global ICT Research, with offices in Illinois and Manila. He is Conference Chair of @CloudExpo & @ThingsExpo, and Editor of SYS-CON Media's CloudComputing BigData & IoT Journals. He holds a BA from Knox College & conducted MBA studies at CSU-East Bay.