August 5, 2015

Where’s the Spark?: Emergent Sources of Innovation

CIO Strategy Exchange, New York, 2008

“Everything that can be invented has been invented.”
-Charles H. Duell, Commissioner of U.S. Patent Office, 1899 urging President McKinley to abolish his office.

“Trade is the natural enemy of all violent passions. Trade loves moderation, delights in compromise and is most careful to avoid anger. It is patient, supple and insinuating, only resorting to extreme measures in cases of absolute necessity.”
-Alexis de Tocqueville “Democracy in America” 1840

Charting the Expedition
With agreement from the CIOSE membership, we conducted a query into two broad and interlocking issues:

  • Why has new investment in enterprise software plummeted?
  • What new technologies will provide major corporations with service differentiation and productivity gains (i.e. rather than IT efficiency alone)?

We’ll focus first on the investment level in enterprise-targeted technology with responses from the CIO Strategy Exchange members, industry gurus, vendor CTOs, and professional investors. Then we’ll ask the same group about future technologies with the greatest potential for the business environment.

Thanks a thousand to our many savvy friends who shared new insights and participated with their characteristic level of pragmatism coupled with a farsighted views of the technology landscape. With all your help, the results are infinitely more interesting than we could have hoped!

Where oh Where? Investment in software for the enterprise market has plummeted because of flattening customer demand, resistance to the complexities of integrating diverse products and the more enticing financial opportunities the venture community perceives in the consumer sector. Today, most professionals are attracted to only two categories. First, software packages and “appliances” built to handle network security and regulatory compliance, both quasi-mandatory spending items in IT budgets. Second, old-line software companies with an applications portfolio and reliably lucrative maintenance revenues. Generally, investors expect a quick “exit” as these undistinguished old–timers are “rolled up” by bigger fish and/or occasionally acquired by hedge funds. But the incentive for innovation slows and that defines market stagnation.

Flattening Demand: Investors explain their retrenchment simply. Slow growth in the corporate market compares unfavorably with the boom in adjacent sectors. For evidence, industry insiders point to what’s absorbing new server capacity. The quantity of servers acquired for traditional business applications is growing no faster than GDP (less than three percent per annum in the U.S). Servers acquired to support analytical and scientific packages are definitely selling faster – a finding confirmed by CIOSE members and vendors alike. But the real boom is in engines for web services. Facebook already has more than 10,000 servers and its demand for capacity is increasing five percent per week!

Immediate prospects for enterprise innovation aren’t hopeful wherever you look, according to [REDACATED], a successful serial entrepreneur and former [REDACTED] CTO. (She’s just completed a book on the future of tech innovation based on interviews of over 100 cognescenti.) The implementation of SOX following the 2001 business scandals redirected a huge amount of corporate attention and budget to internal administration rather than innovation. And simultaneously, the (apparent) need for innovative infrastructure components also declined as network availability and response times improved from constant alarms to “pretty good.” VCs, having observed all that, gravitated towards hotter categories like consumer, content, and mobility. Without venture financing for enterprise products the number of entrepreneurs with business ideas melted away.

Meanwhile, open source equivalents to proprietary packages have been acquiring (some) credibility and become more competitive, making high-priced enterprise software a less attractive investment proposition. For insight, consider IT purchasing practices in the high-growth, web services sector compared to those in major enterprises. Web CIOs expect to pay nothing for open source applications (e.g. CRM) they cobble together. And support is free to contributing members of the open source community, [REDACTED] reminds us.

By contrast, establishment CIOs pay serious money for a proprietary package license, then continue to pay annual maintenance fees (“oligopoly rents”) which typically escalate from 18 percent to 23 percent to…? Prospective investors doubt the price differential between the two markets is really sustainable for the long term, and so they generally opt out of the proprietary business.

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