Commentary
2/23/2010
07:11 PM
Howard Anderson
Howard Anderson
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Global CIO: There's No Money Left

That sucking sound you hear is the sound of yearly software maintenance fees.



Time to check in with our old buddy Stu Laura, a CIO who always seems to be angry about something -- surprising for a guy pulling down $500K plus options.

Us:What is it today? Problems with your app consolidation? Demands of your mobile users? Security problems? Trouble keeping your best people? Fighting with your overseas offices about moving personal records across borders?

Laura: Your cynicism is duly noted. No, no more than the usual problems. I am still having internecine warfare with the lines of business, still trying to push platform strategies, but I have done all of this before and I expect that I will be doing all of that next year. And the year after. My real problem: There is no money left!

Us:What are you talking about? You have a budget bigger than the gross national product of some Third World countries. Did your budget get cut again? I thought that it was pretty much frozen to last year's number.

Laura: That is the problem! The budget has been frozen for about two years, and we have been on this efficiency kick for about the same amount of time. We have virtualized and we have consolidated our data centers. We have cut hiring and outsourced -- so we have harvested our low-hanging fruit. The real issue: maintenance expenses on our software!

Us:Explain.

Laura: Think about it: Every software product we buy carries a 15% to 22% maintenance charge. So do that for eight years and then there's nothing left in the budget. If we buy new software each year, and we do, the old stuff still has that expense and the new stuff also. And next year we buy more new software. Sooner or later, almost all of our budget is paying maintenance for what we bought in years past. It's kind of like the U.S. government: The majority of expenses are the entitlements -- like Social Security and military pensions. We're the same way. There is almost no money left to really doing something significant. Sure, we can sometimes buy the requisite big iron and bunches of new servers, but when you take out the capex, there's nothing left. It's kind of like a rock star who has a cocaine habit; it may look like he's bringing in the big bucks, but after he pays for his habit there ain't much left.

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Us:So go cold turkey -- consolidate your apps, get rid of old software that you aren't using, and free up some of that budget.

Laura: Don't think I haven't tried! It used to be that, excluding internal programming and people costs, hardware was 50% of our budget and software 50%. Now it's 20% hardware and 80% software ... and maintenance expenses on that software are 80% to 90% of that budget. In short, there's nothing left.

Us:Sounds like you have a management problem. Isn't this what you get paid for ... or overpaid for?



Laura: You still don't understand. Imagine that you're still paying rent on every house you ever lived in. Imagine your relatives are now living in those houses: How could you throw them out? That's what we are faced with. Our divisions are still using that software, so we have to keep up our maintenance expenses -- what might seem "tactical" to us is "strategic" to them. Sometimes there even may be a better software solution, but then it's a Big Number to buy ... and that division may not want to pay for it. They would rather keep what we have.

Us:So what can you do about this? Can you push this budget back on the divisions?

Laura: I'm not sure. Imagine you own a house where you have water pipes leaking because they're obsolete and it's costing you so much for plumbers that you really can't seem to afford to rip out the pipes and build a new infrastructure. What I would like to do is to buy software with no maintenance. And putting the budget back on the divisions is no answer either, because they will always take the short-term solution. No, I really would like to be able to buy our enterprise software with no maintenance expenses.

Us:That's called The Cloud ... isn't it?

Laura: I know what it's called! It's just not ready for Prime Time yet. It's OK for the sales guys to use for their 400 salespeople, but it's not rugged enough for us to build on for the rest of the company. For security reasons, for business reasons, and maybe for emotional reasons we aren't ready to go there -- and the vendors aren't ready for us either.

Us:So you're telling me you're caught between a rock and a hard place? You can't go forward because you're bleeding from all this software maintenance?

Laura: I've been cost cutting for five years, but this is one area that I haven't been able to cut effectively. I feel I'm starving my company for innovation because this ongoing maintenance expense is eating 90% of my disposable budget.

Us:So get a bigger budget!

Laura: You really do have your head up your rear, don't you. This is NOT the year for bigger budgets. I have to show that we are "team players," and team players suck it up. You see, the other line officers have this thing called "depreciation," which means they can take a factory, assume a certain useful life, depreciate it, and then show an asset that has almost zero value. Then they can go build a new one. We do not depreciate our software, but maybe we should -- then we could show that we're paying 18% maintenance on something that has next to no value -- and move on.

Us:So, in reality, you ARE buying software as a service?

Laura: Yep -- if we buy a license for $1 million, we will end up paying probably $2.5 million by the time we finally throw the software out. Some of the stuff we're still paying maintenance on is so old that I think the Romans used it, but it's so integrated into our systems that it stays.

Us:So what's the probability that you can convince your CFO to do what you suggest?

Laura: Zero.

Howard Anderson, founder of Yankee Group and co-founder of Battery Ventures, is currently the William Porter Professor of Entrepreneurship at MIT.

He can be reached at [email protected].

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