We're at the end of corporate computing as it has been practiced for the past 50 years. From now on, billions of computers will only be network peripherals. Corporations will stop building and maintaining their unique hardware and software capabilities as fixed costs.
Most information-processing capabilities will be passed on to computing utilities that will charge for services as a variable cost much like telephone service. IT budgets will gradually move from being a vulnerable overhead expense and become a direct cost of operations, like labor and materials.
IT vendors have figured out that this new environment alters the economics of how to reap extraordinary profits. Selling software or shipping equipment doesn't offer any more of the profit growth that, until last year, justified stratospheric market valuations. For instance, until last year, the five-year average profit growth for Microsoft Corp., Oracle Corp., Sun Microsystems Inc. and IBM Corp. was 46.7 percent, 70.2 percent, 39.4 percent and 20.6 percent, respectively. To prosper, new sources of revenue will be necessary as corporate purchases for IT level off in the coming years. Consequently, Microsoft (with .Net and HailStorm), Sun (with Sun ONE), Hewlett-Packard Co./Compaq Computer Corp. (with e-Speak), Oracle (with Dynamic Services) and IBM (with WebSphere) have all announced that they expect their major future revenue growth to come from services.
Dominant vendors will be in a position to make the case that shifting from locally grown corporate solutions to industrial-strength application services reduces the risks now inherent in corporate IT management. The condition of corporate software assets has now reached a state of sufficient chaos that corporate executives are ready to welcome the takeover of IT by giant firms that will promise delivery of application services at predictable prices. The evidence of the vendors' intent can be found in their announcements. Their new services will displace the current practice of purchasing packaged software that subsequently requires spending huge amounts of money on integration, maintenance and upgrades. The vendors have promoted the new services as a cost-avoidance opportunity and have appealed to corporate management to purge their homegrown programs and replace them with standard applications. The vendors are also proposing to deliver the software as a guaranteed subscription service, making a vendor's network an extension of every corporate network. Once you're hooked up, the vendors will deliver online enhancements for continuous technology refreshment.
The vendors also plan to offer application-integration services that promise the interoperability of applications within a corporation, as well as among suppliers and customers desirable objectives that few, if any, large corporate IT departments can deliver now.
What will most likely happen to vendors' software revenues? They'll account for at least 40 percent of IT budgets over the next 10 years, up more than threefold from the current 12 percent. In effect, the vendors' traditional role of supplying information armaments will transform into a role of being mercenaries participating in information-based confrontations with those users' competitors.
Implications. This shift is proceeding at an unstoppable pace. It will alter the existing roles of corporate IT staffs, which will be asked to concentrate on making computer expenditures profitable.
This development will lead to a decline in the size of corporate IT staffs and a substantial reduction in corporate capital devoted to IT. To keep their jobs, a large part of the remaining IT staffers will have to augment their skills in managing improvements in business practices necessary to keep up with global information-based competition.
But vendors must address two issues before they can start displacing the people who have been their most loyal customers: Can the vendors deliver their goods with sufficient reliability? And can service vendors offer sufficiently secure networking environments? The question of security is the choking limitation on the pace at which the transformation to services may proceed. If the vendors can't guarantee protection against a wide range of risks, you may want to wait before handing over the keys to a source you can't trust.
Paul A. Strassmann will continue to write about risks to our information infrastructure in future columns. Contact him at email@example.com.