Dr. Jimmy Schwarzkopf's Insights on Israel's IT Industry

ICE AGE 2
the meltdown
and beyond
Dr. Jimmy Schwarzkopf
Research Fellow
STKI
jimmy@stki.info

http://drjimmystki.blogspot.com/

1
Dr. Jimmy Schwarzkopf’s work Copyright 2009©STKI
Do not remove source or attibution from any graphic or portion of graphic

http://www.slideshare.net/jimmyschwarzkopf
/stki-8th-cio-bootcamp-2009-presentation

2
Dr. Jimmy Schwarzkopf’s work Copyright 2009©STKI Copyright © 1990-2009 IMDb.com, Inc.

2009: The meltdown

1
Latest STKI-IT Spending Survey Results

2 IT Market in Israel: what is changing ?

What are customers looking for in 2009?
3

4 Who is gaining share of the shrinking IT budget ?

3

1

200 years since Darwin:
• Data from Bank of Israel is becoming ever more available
I feel like Darwin in Galapagos
– Economic activity data from 1989
• GDP

collecting data , looking at patterns
• GDP for Business Sector
– Indexes that could forecast change

that emerge and(but only until 2006) trying to figure out
• Series of State-of-the-Economy-indexes
• OECD has data on Israel
what they mean
– Productivity

4

1

• Data from Bank of Israel is becoming ever more available
– Economic activity data from 1989
• GDP
• GDP for Business Sector
– Indexes that could forecast change
• Series of State-of-the-Economy-indexes
• OECD has data on Israel (but only until 2006)
– Productivity

5

How bad is this “recession” ?

6

How recessions affected IT vendors

7

STKI IT Market Data (K USD)1989 - 2009

8
All amounts in K $ USD

“The only function of economic forecasting
(STKI-IT forecasting included)* is to make
astrology look respectable”
John Kenneth Galbraith

* my additions 9

low per capita ($ USD) IT expenditure

IT spending in Israel is 2.71% of GDP
European Union IT spending is 3.3% of GDP

European Union per capita spending on IT amounts to 1100 €

10
* IT spending data by STKI

GDP per hour worked (x5)… excellent
indicator but data is usually 3 years behind

IT Market change

Change in GDP per hour worked (*5)

11
11
* IT spending data by STKI

But in real time: State of the Economy
Index as an “indicator “ of IT investment
State-of-the-
economy index is
an indicator for
examining the direction
in which real economic
activity is moving, in
real time. (Bank of
Israel)

Deviation from the
trend is calculated via
the Markov-switching
model and enables the
turning points in the
business cycle to be
identified at an early
Deviation from the trend (*10) IT market growth rate
stage. (Bank of Israel)

All IT spending data by STKI 12

2 IT Market in Israel: what is changing ?

13

A little history……….

14

A little history……….

15

So let’s look at the numbers:
From the data we see several cycles for the IT Industry in Israel:

1. Up to 1996 : Market v0 : Age of Irrational IT Exuberance
2. 1997-2000: Market V0.1 : Age of re-structuring
3. 2001-2003: Ice Age : Age of “panic”
4. 2004-2007: Market V1 : Recovery, Growth and Integration
5. 2008- 201?: Ice Age 2 : Age of the “re-start”
: Market V2: Age of Industrialization of IT
6. 201?-

16

Market V0: 1989 -1996

17

Age of Irrational IT Exuberance
• 1987 : first year the IT expenditures passed 1b USD
• Profit came from moving BOXES
• Mainframes from IBM (VM/VSE.. DASD): entering most
big companies (some look-alike HDS were bought)
– Most were changing from NCR and CDC big machines
• Minicomputers like DEC, DG, Prime, HP were taking a
slice (AS/400 - migrating from S/38 and S/36 from IBM)
– First time computer users
– Microcomputers entering :
• As terminals in enterprises
• For accounting and office use in SMBs

18

Age of Irrational IT Exuberance 2

• Software sold through distributors:
– Israeli software was successful: 4 dimension, Magic, DB1….
– John Bryce, IBS, Tekem, Contahal, SPL ………
– data bases, mainframe software and 4GL were third party
• BIG VENDORS: IBM , DEC, DG, HP……
– Mostly sold “hardware” and software/ networking came as
“add-ons”
– Some services like “system engineer” came with the “machine”
– INTEGRATED server, storage and networking products

19

Market Order V0.1: 1996-2000

20

Age of re-structuring
• IT departments re-organize infrastructures and
applications… under the Y2K umbrella
• Services become a profitable and independent
“product”
• Projects are starting to go to VARs as contractors
(before they were sub to the big hardware vendors)
• Big UNIX projects (billing, ERP , etc)
• VAS vendors grow with Y2K related projects
– New “testing” vendors start
– Complicated project management

21

Age of re-structuring 2
• International software vendors in
Israel start being the main movers in Growth in the 1990’s

software deals (Microsoft, CA,
Oracle ….)
• Consolidation in the Service
Market, several companies are
bought by international and local
players
• Service players get their own sales All amounts in K $ USD
force and compete with hwre
vendors
22

ICE AGE: 2000 - 2003

23

Age of “panic”
• Excess inventory (IT professionals and products)
and very few projects:
– Vendors “destroyed” the service market by taking
projects that could never generate profit
– Software & hardware products were sold at
ridiculous prices (even 90% discount in one case)

24

Age of “panic”
• Excess inventory (IT professionals and products)
“Unfortunately, a generation of
and very few projects:
salespeople
– Vendors “destroyed” the service market by taking
havecould notion that they
the never generate profit
projects that
create & hardwarebringing in revenue
value by products were sold at
– Software
we found out that bringing
ridiculous prices (even 90% discount in one case)
revenue means collecting value
not creating it
not enough to survive
in today’s competitive markets.”
Source: McKinsey Quarterly 25

Age of “panic” 2

• CIO recognized as a profession:
– hired from one industry to another and succeed
– become part of the COMPANIES MANAGEMENT
Team
– started talking about tactical and strategic IT

• The internet bubble hit the Israeli IT companies
very hard but……
– New power houses in the IT market … (Matrix, Ness,
One1, Taldor …..)
26

Market Order v1.0: 2003-2007

27

Age of Recovery, Growth And Integration

• Consolidation of Local and International
Vendors changed the way IT business is done:
– most International vendors (hwre & sftre) sell
through channels and only support (super
experts) the local “delivery” of their products
– STKI changed the way we look at the market, CIOs
now make two decisions:
• What product
• Who integrates it

28

Age of Recovery, Growth And Integration 2

• Boom in server and storage sales
– “utilization” of resources fell under 30%: mainly
because of high price of consolidation management
(tools and people)

• Boom of “application&data” integration:
– Resource Management: Financial, logistics, procurement and HR
– Transaction Management: core applications
– Client Management: CRM and call centers
– Analytics: Data Warehousing/ business intelligence/data mining
29

Age of Recovery, Growth And Integration 3

• Start of “data center” integration, consolidation,
virtualization and infra management efforts
• SERVICE ARCHITECTURE :
– CTO / Architecture VPs are hired in most IT
installations and in most vendor management teams
– SOA projects that include BPM, enterprise buses,
portals and composite applications
– Infrastructure projects where services are defined,
optimized, managed and delivered

30

Ice Age 2 - 2008 – 201?

31

JOB MARKET: 2004 vs 2009

We will all feel it

32

Age of the “restart”

• What's different about this crisis is it's
a CAPEX (capital expenditure) crisis
– CAPEX involves expenditures used to acquire or
upgrade physical assets and IT projects.

• Today's credit crunch directly affects
IT because:
– Information technology is the No. 1
quot;CAPEXquot; (capital expenditure) item.

CAPEX is not just affecting end users
but also solvency of the IT vendors
33
33

Age of the “restart” 2

• IT is not buying (CAPEX- frozen) products:
– Hardware sales have dropped more than
expected during 1Q2009 … about 37% average
– STKI might make a change to its 2009 forecasts in
the next 60 days
• Some CIOs are starting to feel pressure in
OPEX expenses:

34

New metric is PAYBACK PERIOD
ROI IN THE NEXT 90 DAYS

cost reductions and revenue enhancement
precedence over
functional enhancements
35
Dr. Jimmy Schwarzkopf’s work Copyright 2009©STKI Slide based on force.com presentation

“business models” will change and IT is the strategic partner

• Companies will have to:
– Allow due diligence of
products and services
– Tools for self service
– NEW BUSINESS PROCESSES
• Customers demand:
Value
–
Quality
–
Reliability
–
Service
–
Individuality
–
36


• Vendors change and the • Users change and when
backbone of any new buying services will go
business model: to vendors that have:
– Delivery management – Pockets of excellence
– Crisis management – Good delivery record
– Pockets of excellence – Financial soundness
(technologies)

This change is reflected in STKI’s IT categories
37


38

New Model for IT Vendors
Crisis Management

39

Not only the market but the dollar

40

Value

What are customers looking for in 2009?
3

41

IT situation: overview
• The recession :
• IT departments will cut budgets
• But will invest mostly in projects that:
– cut costs of existing processes and activities
– new ways to capture revenue/ growth
– Smaller “divided” projects
• Radical transformation of IT Management:
Different way of consuming IT
•
Industrialization of IT delivery
•
Utilization increase of assets (over 90%)
•
Cloud computing models (in-house, private and public)
•

42

Radical transformation of IT Management

Managing the
IT Budget

Managing IT for Managing the
business value IT capability

Managing IT
like a business
43

Managing the IT Budget
COST OF DELIVERING versus COST OF BUYING
• IT will have “new economics”
– Portfolio Management in order to drive
maintenance and cost reductions
– New models for “purchasing” USAGE of resources
– Flexible sourcing of product usage and service
• Budget management will be influenced by the new
statement :
“CLEAN UP the waste”

44

Datacenters today have 30% utilization

100s different
Energy waste Software
products

25%
30% max in
utilization
Storage
x86 servers
Utilization

Ala-carte
telecomm Hundreds of
services Enterprise
Processes
45

ROY: Optimization of IT
Optimize (Return on Yesterday)*
High Utilization Of Resources

Manage
+ +
Develop Install + Deliver

46
* From SYMANTEC

Managing the IT capability
• Utilization is all about:
– Virtualization
– Automation
– Standardization
– Provisioning
• Things to do :
– ITIL, CoBIT, ISO 17799 (discipline & efficiency)
– IT system performance management
– Application Rationalization
– AGILE project development
47

Application Rationalization
• An assessment of applications will
show what applications have to
canceled and which should remain.
• If usage continues, then which have
high HATMAA and which do not:
– LOW HATMAA need special tools and
re-training
– HIGH HATMAA need tool for constant
reinforcement
Which applications are over
supported and which under
supported.

Resource optimization

49

Factories get to nearly full utilization….
IT should also…..

50

2 years ago IT was “overhead”
After the meltdown:
100 years ago
IT Engineers
Industrial Engineers:
– Will take state of the art
– Assembly line
technology and change
revolutionized the
workflow (service factory)
economy
– Change How Work Is
– Assembly line took state of
Organized
the art technology and
organized work differently – Develop New
for PRODUCT factory
Products And
Services Based On
New Technologies
51

Building the IT factory
Moving IT from:
LAB environment to
FACTORY environment

Local
Factory
Local Outsourced
Factory
Outsourced
Factory
Factory

52

Standardized Equipment
Economies Of Scale

53

Standardized Services
Economies Of Scale

“Application Image” is a sum of
infrastructure services and software
services needed to deliver an IT
product

Two types of IT services:

1. Infrastructure Services or Ensembles
2. Software Services or Mashups

54

The new Service-Based IT


Delegating the Power to the Cloud

56

New in Cloud Computing

1. The illusion of infinite computing resources available
on demand, thereby eliminating the need to plan far
ahead for provisioning.

2. The elimination of an up-front commitment, start small
and increase hardware resources only when there is
an increase in their needs.

3. The ability to pay for use of computing resources on a
short-term basis as needed (e.g., processors by the
hour and storage by the day) and release them as
needed.

57

Transformation of IT:
CIO priorities for 2009
1. Cost reduction 9. Storage virtualization
2. DRP/BCP 10. Desktop virtualization
3. Server virtualization 11. Data De-duplication
4. Server consolidation 12. Governance, risk
management and
5. BI/DW
compliance
6. Security
13. Self-service
7. CRM
14. Mainframe
8. WAN Optimization/
optimization
application
15. Open Source
acceleration
58

Creating with IT >business value
§Grow Revenue
Bends the revenue line up faster
than your competitor – includes
innovation

§Protect Revenue
Holds the revenue line at its current
Net Revenue
growth rate

§Reduce Cost
Short term impact to drive costs
down through automation and
Operating Expense process improvement

§Avoid Cost
INCREASE THE SPREAD Avoidance of future costs that
TO INCREASE MARGIN would bend the expense line up –
includes innovation on the expense
side/process side

§Manage Risk
Enables risk management from a
firm and regulatory perspective

59
Based on Howard Rubin’s presentation

CUTTING COSTS vs OPTIMIZING COSTS

• Changing BUSINESS PROCESSES to fit new
business models
• Fast delivery of “analyzed data” to enable
decision making (BI,DW, Data Mining, MDM..)
• Self- service and real time delivery of
business and consumer services over the
INTERNET will grow more than software sales

60

So what do we do in the “New Era” ?

61

Competition in services?
Business Process Improvement
New Business Model

62

Roadmap:
Business Process Innovation
High
Improve: SURVIVE Innovate : GROW Invent: CHANGE
Contribution to Business

2012
Performance

4Q 2009 2011

2010
2010

2009

Low

Redo Existing Rethink Redefine
Processes Business Business
63

SELF SERVICE AND MOBILE

“STOP aligning IT with the business-
Connect with the CUSTOMERS”

64

How new “models” like due diligence of products
changes everything:
• Los Angeles Restaurants must
have a letter in front window
reflecting the results of last
health inspection (A,B,C)

• Restaurant Websites show the
results and allow other
comments on the restaurant’s
service and food.

65

4 Who is gaining share of the shrinking IT budget ?

66

This study cannot ……….

• The IT market offers service and products in:
– Over 500 different hardware classes
– Over 1000 different software families
– Over 1000 different types of services offered
• The Israeli IT market has:
– Over 250 firms that have over 5 employees
– Over 100 firms that have between 2-4 employees
– Over 1000 individuals that work as “freelancers”

67

This study cannot ……….

• The IT market offers service and products in:
– Over 500 different hardware classes
– Over 1000 different software families
– Over 1000 different types of services offered
• The Israeli IT market has:
– Over 250 firms that have over 5 employees
– Over 100 firms that have between 2-4 employees
– Over 1000 individuals that work as “freelancers”

68

Amount of ‘big” IT (in Israel) has
decreased in the last 3 years

69

The Israeli IT Market (% changes)
“missed”
4Q2008 was
worse than
expected

“hope not”
new data
after
Q2 2009
Q1 was worse
than expected
70

IT market share (%) by INDUSTRY

71

Industries IT expenditures ($ USD)

All amounts in K $ USD 72

Industries 2003 – 2009 (in $USD)


Industries 2003-2009

All amounts in M$$USD
K USD 74

STKI Technology Spending Cycle
Outsourcing
Development

Consulting
Time

Software
Transaction
Hardware
processing

Networking
Technology

Contract awarded to…
75

As markets changed, STKI also changed its
categories (pockets of excellence)
quot;It is not enough that I should succeed, others must fail“
Gore Vidal
• Pockets of excellence
– Users identified the need
for experts
– Most vendors are moving
or moved into the new
delivery model

All amounts in M $ USD 76

TOP 9 IT Vendors in Israel
These 9 vendors either sell in all
Hardware, Software and Services
categories or they have extremely
large market share in only part
of the categories

77

Hardware & Software Categories

78

Tactics : to lower spending on hardware

1. Elongating PC upgrade cycle
2. Reuse of desktops/notebooks rather than
replacing all
3. Increase utilization rates above typical levels
4. Purchasing from fewer vendors in exchange
for lower prices
5. Accelerate migration from Unix, Open VMS
and OS400

79

Hardware Market

All amounts in M $ USD

80

Servers
1. HP strong in BLADES
and HIGH END servers
2. IBM continues to sell
System z and System
p/i besides their x86
servers
MANUFACTURERS
3. SUN strong in UNIX
server sales

All amounts in K $$USD
M USD 81

Clients
1. Notebooks continue to
displace desktop units in
corporate PC market.
2. Substantial JUMP in
“desktop” virtualization
3. NETBOOKS, SMARTPHONES,
MANUFACTURERS
APPLE are game changers
in the next 24 months.


Storage Equipment

1. Clients are storing more and
more data into midrange and
low-end arrays.
2. DRP projects : new purchases.
3. Biggest issue : how to deploy
storage in virtualized
MANUFACTURERS
environments.
4. Storage virtualization?

M USD 83

Networking
strong gain for
WAN optimization
and application
acceleration
solutions: high VoIP / Call Center
ROI by cutting MANUFACTURERS

communication
costs
Network
MANUFACTURERS

M USD 84

Printers and “new” services
• We were very
surprised at the slow
use of printing services
and software in order
to cut costs during
2008

M USD 85

Special Categories

COMPUTER ROOM
(Racks, etc)

COMPUTER SUPPLIES
SELF SERVICE AND DISPOSABLES
Mobile and Special Purpose
(ATMs, Kiosks, etc)

M USD 86

Big issues in SOFTWARE
• IT departments are “changing” the way they
choose software (next slide)
• Licensing problems in virtualized and multi-core
environments
• Open Source will start to be standard in several
areas
• Focus on “high” maintenance costs:
– Customers may consolidate best-of-breed purchases
into bundled suites with “cheaper” maintenance
– Move to SaaS solutions
87

Top 10 criteria for selecting software
1st and 2nd time around

88
Source: Deloitte & Touche - 1500 companies surveyed

Software Market

M USD 89

System Software

DBMS

Operating Systems
Middleware

M USD 90

Information access & analysis
1. Tools for finding and
Exploding volumes of
making sense of the
digital information (video,
audio, images, text,
information.
transactional data, etc)
2. Tools for data
cleansing.
3. Tools for minimizing
duplication.
4. Tools for storage
management.
5. Tools for backup
management.
91

IT Management Software

Service desk

Storage Management
Enterprise System Management Security Software

92

Information Management Software

M USD 93

Cont: Information Management Software

PORTAL &
COLLABORATION

DEVELOPMENT AND
MODELING

BI / MDM/ ETL

94

Business Applications

CRM
ERP

M USD 95

Testing Software
1. APPLICATION TESTING
SOFTWARE market is close
to saturation.
2. DATA TESTING SOFTWARE
will start to dominate this
category (needed for SOA
projects)

M USD 96

Value Added Services
• This remains the one area that CIOs look for
potential cost-reductions by re-negotiating
contracts
– Third party professional services have been the target
for most contract openings during the last 90 days.
Maybe changing the “game rules”.
• No “big” IT service supplier can survive with the rates being
talked today (less than 10% + cost)
– Project delays and slow-downs have helped CIOs cut
budgets but the cost could be higher than expected
when the IT department wants to start again
97

Value Added Categories

98

Value Added Services Market

99

Cont: Value Added Services

100

IT Consultants & Analysts
The use of consultants has been reduced but:

– People still don’t check the ethics of consultants
– Risk officer should check

– Still use integrators as consultants, analysts as
consultants and consultants as analysts

M USD 101

Cont: consulting / analysts

102

Hardware Maintenance
• Maintenance will change given
the change in purchasing and
using of equipment:
– Keeping equipment longer
– Using it at higher capacities
– Users need 24X7

M USD 103

Hardware/ networking/infrastructure /DRP/
Management

The need for changing usage and
management of infrastructures
will force users into
complicated projects

M USD 104

Special integration services

M USD 105

System Integration Projects
• Virtualization and
consolidation plus
SOA projects will be
exponentially more
difficult

M USD 106

TRAINING and HATMAA

• Training, assimilation,
implementation, rollout,etc:
are change management processes.
• Change management that
helps users change working
processes.
• HATMAA: is the measurement of
the change process success.

M USD 107

Development Services

M USD 108

Cont Development Services

109

Enterprise Risk Management
• Governance and risk management
became confused with obeying
the law
• According to any “new age” theory:
– Management proposes OPTIONS to
the CEO/Board and also shows the
RISKS each of them carries.
– Risk also changes with TIME
– This process is called:
“ENTERPRISE RISK MANAGEMENT”

110

• Should be divided into several categories:
– Ethics
– Regulation
– Operations control and quality
– Risks
– Data and premises security
– Q/A (testing …)
– Project and portfolio management

M USD 111


Customer Demand Shortfall Cost Overruns
24
Accounting Irregularities
Competitive Pressure
Management Issues
M&A Integration Problems
Supply Chain Issues
11
Product Issues
12 Foreign Macro-Economic
Customer Pricing 7 7
Commodity Prices
6
7
Loss of Key Customer
6
3
4 Interest Rates
2
2 1
1 1 1
0 0

Strategic Operational Financial Hazard

58% 31% 6% 0%
112

Cont: Governance, risk, security …..

113

Project Services

M USD 114

Outsourcing Services
many .. many types
from call centers (Calanit Carmon) ,
complete outsourcing (HP-EDS), BPO salaries (Hilan) to
cloud computing ( Salesforce.com)

M USD 115

All OUTSOURCING categories

116

IT Service Delivery (“good souls”)
This type of service will finally see its maturity:
1. Augmented IT staff providers
2. Project-based on-site third party service providers
3. Specialized on-site third party service providers
4. Near-shore third party service providers
5. Off-shore third party service providers

M USD 117

Cont. “good souls”

118

Thank you

Dr. Jimmy Schwarzkopf

http://drjimmystki.blogspot.com/

jimmy@stki.info
119

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