January 25, 2001, 10:21 PM — E-business, outsourcing, and the transformation of IT from cost center to revenue generator figure largely as IT leaders plan their budget priorities.
Gregor Bailar is not the most typical of IT executives. As CIO and executive vice president of operations for Nasdaq, the world's first electronic stock market, Bailar is part of a business built on technology. So it comes as no surprise that Bailar foresees a 20 percent to 25 percent increase in technology spending for his company in the year 2001, compared to this year's expenditures.
Considering that it represents almost half of Nasdaq's total annual expenditures, the figure is quite impressive. It's a much bigger bite out of the total IT pie than is found in most enterprises -- something south of 10 percent is far more "normal," according to analysts.
But Kurt Potter, research director at Gartner, a research consultancy in Stamford, Conn., says there's no such thing as "normal" when it comes to IT.
"We categorize companies as either leading-edge adopters of technology, mainstream adopters, or conservative," Potter says. "We sampled 510 companies and found that 74 percent were in the mainstream category. A mainstream company tends to spend 10 percent or less of the total budget on IT."
Nevertheless, Potter says things are moving toward a new standard. "Many more companies are going to have to begin the transformation in the direction of leading-edge technology users," he says. "This means spending over 10 percent of revenue on technology."
Regardless of classification schemes, the trend is clear: IT budgets can no longer be regarded as simply a cost of doing business. Rather, they represent critical investments in developing and growing the business.
Rob Austin, senior fellow at Cutter Consortium, a research company in Arlington, Mass., says it is the tension generated by the perception that IT departments are cost centers, rather than revenue-generating units, that has finally come to the forefront. "In the budgeting process, this tension is a huge part of the picture -- an underappreciated part," he says.
Y2K all over again?
A significant portion of IT money next year, Potter says, will go for something widely regarded as over and done with. But although the Y2K bug has come and gone, Potter says that, in one sense, it will never leave us.
"It is Y2K all over again," Potter says. "The Y2K bug was really just one species of a very large family. New federal regulations, for example, mean that the health insurance industry suddenly has their own new version to wrestle with."
No one knows this better than Nasdaq's Bailar. In 2001 the Nasdaq will move to decimal quotation, scrapping its traditional system of quoting prices in eighths. The shift may not seem critical, but looking closely it is easy to see why it will keep Bailar busy. "This means a tremendous increase in volume," he says. "This is because there are 12.5 decimal places in every eighth of a dollar, which means a theoretical multiplication of volume by a factor of 12.5."
Outsourcing on the rise
Nasdaq has relied primarily on homegrown systems in the past, but this too is changing. "We are now able to use more off-the-shelf products," Bailar says, adding that, for example, the company will be using Tibco's Information Bus as middleware to expand its online trading capabilities. He's even outsourced a mission-critical function. "WorldCom does our trading network. This kind of goes against common wisdom -- that you don't outsource your core systems. In this case, however, we think it makes sense," he says.
In fact, Bailar says the key question in turning technology systems over to someone else is, "Does it make sense?"
Bailar uses the analogy of building a house to make the point. "You would not custom-manufacture each doorknob," he says. "In fact, when you build a home, you outsource most items. We are nowhere near being able to do this yet with software components, but the whole ASP [application service provider] phenomenon is exciting in this regard. It indicates we are moving in that direction."
Gartner's Potter agrees, saying that outsourcing will definitely take a bigger slice of the IT budget in the future.
"Really, this involves answering two more questions," Potter explains. "If it is both strategically important and also part of your core competency, then you probably don't want to outsource it. In Nasdaq's case, I suspect that the trading network, while strategically important, was not part of the organization's core competency."
