Twenty-five years ago, the high-tech business was small, computers were largely relegated to accounting, and the money major corporations spent on information technology barely made a dent in their overall budgets. Today that has all changed. High-tech businesses are some of the largest in the world. The Dow Jones Industrial Average includes four technology companies whose total market capitalization exceeds $600 billion. Computers have moved out of the role of accounting to managing supply chains, tracking manufacturing processes, and managing orders globally. There are even multibillion dollar companies founded and dependent only on information technology, such as Yahoo! and eBay.
With the increased role of computing has come increased spending to the point that global corporations' IT spending is no longer a rounding error. Today, we can estimate that the total spent on IT exceeds $1 trillion dollars per year. More amazingly, 75% of that is used for managing existing systems, most of which is dominated by the cost to manage the complex software that has been built over the past 25 years. Where does this cost come from? The increased usage of computing also brings increased exposure. Corporate costs for managing the security of computing is increasing each year. Today, most companies run 24/7; with no weekends or days off, managing the availability of these systems is a greater and greater challenge. And increasing dependence on computing also means an increasing need to change the environments. Some have estimated the cost to upgrade an enterprise application at $1,000 per user.
The disadvantage of this large expenditure on the operation of existing systems is that, with more than 75% of the budget being spent here, only 25% of the budget can be spent on new innovations. Unfortunately, the cost to manage past sins increases each year, so in time the amount of money spent on anything new will vanish—an alarming prognosis for any high-tech company.
Software as a service—or, as we will refer to it, software on demand—is the next step in the software industry. This isn't because it's a cool idea, but because it fundamentally alters the economics of software. If the cost of software (to a software company) can be reduced by a factor of 10, the shift in the software industry is as fundamental as the advent of the Intel microprocessor was to the hardware industry.
This book is full of examples and challenges to this transformation. Traditional software companies, including Oracle, are making the change, and new software companies such as WebEx are leading the way for next-generation startups. Read on if you think this will change your business. If you're the CIO or CEO of a large, medium-size, or small company and a consumer of software, you need to understand how this shift can change the economics of your IT budget and allow you to free up capital and resource to invest in the future, not the past.
If you're the CEO of a software company, you need to understand how the software on demand model changes your business starting in support, reaching into how you develop software, and culminating in changes to your fundamental business models based on a new economy. Finally, if you're an investor in high technology, I'm sure you wish you had bought Intel back in 1978. Key companies, both new and old, are participating in the move to software on demand. It's important that, as investors, you understand who gets it and who's pretending. The debate is not whether this shift in the software business will happen, only the rate.
