Just as e-mail, ERP and relational databases transformed business in the '90s, a new wave of emerging and rapidly maturing technologies is revolutionizing organizations today. The implications for finance departments are profound, says IT thought leader Phil Simon. To kick off our upcoming series of extracts from his book "The Next Wave of Technologies: Opportunities in Chaos" (Wiley, 2010), Business Finance talked with Simon about the IT innovations that will reshape management in the new decade.
Business Finance: Many of the "Enterprise 2.0" technologies that you describe — software as a service (SaaS), business intelligence (BI), open source — are familiar to CFOs. Has finance been at the forefront of adoption?
Phil Simon: I'm sure that in some companies that's the case, but in my experience it's very difficult to generalize. Many of these technologies are not new, but large organizations tend to be at the right side of the technology adoption cycle. They're not dot-coms, and they don't want to adopt new technologies that are possibly going to cause significant harm to their business if they're not done right.
Enterprise 2.0, if you want to use that moniker, does encompass things that have been around for some time. Take for instance cloud computing; it's been around basically since the early '70s, when it was called utility or grid computing. But back then it really hadn't become mature, and there wasn't much of a need. You didn't have a lot of broadband penetration, you didn't have a lot of cloud providers, and storage was expensive. And then, of course, mobility happened, which really emphasized the need to access, at least on a limited basis, your apps and your data anywhere.
This gets to a larger issue, which is the IT/business chasm. Does IT drive the technology of the organization, or is it responsive to it? In my book, I draw three analogies based on politics. At the "far left" you have IT departments that are very involved; there's a lot of control over who gets to do what, things are locked down. At the other end — the right wing if you like — you have almost a libertarian IT department; they basically get the hell out of the way, and they only respond when there's some sort of crisis like a network emergency or security breach. In the middle you have a moderate view of IT as a business partner: IT should own the data, but they tend to be the people who are forced to deal with it.
I've worked on projects in which individual departments like HR and payroll really drove it. I've worked in organizations as a consultant in which the CIO has basically bullied the organization into implementing a system. Sometimes IT is reactive, sometimes it's proactive.
BF: Why do many companies still shy away from these technologies?
Simon: Well, take ERP [enterprise resource planning] and CRM [customer relationship management] systems, which have been around for the best part of 20 years. Now, yes, there have been minor changes in accounting, payroll, inventory, and management in that time. I would argue, however, that those disciplines are not fundamentally different from twenty years ago. Yet, as I discussed extensively in my first book, Why New Systems Fail , IT projects of those sorts tend to have a greater than 60 percent failure rate. So it's understandable that IT organizations in general are not really frothing at the mouth to jump into cloud computing, SaaS, or BI. They don't have a great batting average.
Sure, the economy matters; IT budgets were slashed in 2008 and 2009. But I felt that there was something else going on. The burnt hand teaches best. If you can't get payroll or inventory management right, what are the odds that you'll want to turn over all your apps to the cloud? Or that you'll want to move away from a proven commodity go with an open source alternative? My book tries to provide some guidance in what is a very chaotic time.
BF: And then, adding to the choices, we've seen the rise of independent software vendors (ISVs), companies that will develop software for you. What's driving that?
Simon: If you look at the stock of an ISV like Infosys since it's been around, it's gone up thousands of percent. Part of it is that some organizations are realizing that they shouldn't be in the IT business. If you're a large organization such as Merck & Co., for example, and you're building your own systems, that doesn't make a whole lot of sense; it's not your core competency. You can pull something off the shelf, or with SaaS you can rent something, but you can also certainly have something built for you.
Organizations are starting to understand that if you're the world's best programmer, you probably don't work for a consumer packaged goods company.
And there are audit requirements, in some cases. I'm no Sarbanes-Oxley expert, but law places restrictions on what different people in organizations can do and how they can do it. That has pushed some companies towards using ISVs.
What's more, companies and ISVs have just gotten better at outsourcing. If you look at the late '80s and early '90s when outsourcing started to come in vogue, there were all sorts of horror stories. Well, now you can work together in real time with people in the Philippines or India, and you can overcome, at least in part, some of the cultural issues. You can take advantage of the cost savings without going back and forth via e-mail and missing a lot of that nonverbal communication that we know is so important.
BF: For companies that don't understand this new landscape, how great is the risk from start-ups that do?
Simon: I tend to think that it's a significant risk. One of my favorite quotes is from Charles Darwin: "It is not the strongest of the species that will survive, nor the most intelligent, but the one most adapted to change." I really believe that.
Take a company like Microsoft. It was afraid of Google, and now Google is afraid of Facebook. And Facebook has to be afraid of Twitter or some other company out there. Given the way these technologies can scale, the amount of open source software out there, and the different trends that are coming together, the risks are very real.
Unfortunately a lot of big companies just don't get this. Very common is the organization that says, "Well, we played around with the cloud, but our IT budget didn't go down." Well, yes, it didn't go down because you just tacked on cloud computing — you didn't supplant anything.
There are cases in which companies can't get away from the status quo; they've got a 10-year contract and there are legal restrictions that might prevent them from making a jump. And then you get into politics and financials; maybe an organization isn't running payroll or accounting as efficiently as it could, but there's the old expression — the devil you know is better than the devil you don't.
If you look at the original 100 companies founded on the New York Stock Exchange, something like eight are still around. Any organization that thinks it's going to be around in 20 or 30 years by just doing the same old same old is probably mistaken.
BF: Looking at, say, the next two or three years, which features of Enterprise 2.0 will have the greatest impact on finance?
Simon: There's a fundamental change in moving away from on-premise software. Traditionally those projects have been funded as a capital expense, and it's been difficult to make that argument to finance whenever the economy wasn't great.
If you think about it from a SaaS perspective, it's an operational expense. You rent the software; you date before you get married. You can try it out in some cases even with the premium model, so there's no explicit cost to the organization, though of course you have employees' time. You can see if it works for your organization. If it does, you can implement it gradually, whether you're paying on a per-transaction or per-license basis. So the way that projects are getting funded will change with SaaS. It has to.
In some cases I would argue if an organization really gets creative with open source software, it may actually knock down some of those expenses altogether. Now, with OS sources, it's free to download the software, but then you have to configure it, you have to test it, you have to have support for it. But the consequences for the finance department can be pretty significant. The entire procurement process may in fact go away. Enterprise 2.0 technologies, particularly collaborative and social tools like say Yammer or Salesforce Chatter, for example, are a lot more organic and bottom-up. You may find, if you're the CFO or the CIO, that people in your organization are already using something like this, whether you've blessed it or not. This isn't a top-down, 2-year procurement process with RFPs and steering committee meetings. It's a fundamental paradigm shift.
Phil Simon's latest book is "The New Small: How a New Breed of Small Businesses is Harnessing the Power of Emerging Technologies" (Motion Publishing, 2010). More information here.