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	Saturday, May 07, 2005

Technology and ROI  ( techdrivenlife)   I was talking to a top executive of an international computer services company.  They now use and buy a lot of Microsoft products, and he was informing me that it may be possible that they are considering some open source products to be able to save on licenses.  The following are some of the details of the things that we talked about and I am sharing this because it hopefully gives you another viewpoint  on how to view IT investments. Before I start however, I like to inform the readers that our company has been a Microsoft partner for the last 10, so you should be aware that selling and working with Microsoft is one of our business, though not the only one.  I am also a designated Microsoft Most Valuable Professional (MVP) whose part of the job is to evangelize on technology in general, and Microsoft in particular. However ,this executive says he likes Microsoft products, and the decision is purely a financial decision, so I will develop it at that.  This is not a debate on which technology is better or secure or discussions about evil empires or monopolistic practices, but purely on a business viewpoint -- which option will save more money, and give better returns. He told me that initially their own study reveals that if they want to migrate from Microsoft to open source, it will mean a couple of things -- reinvestments in hardware, rewriting some of their computer software programs,  massive reorientation and migration of data, as well as retraining of their people.  They also expect some amount of confusion, some amount of downtime, as well as possible loss of data or productivity.  They also took into consideration the employee man hours needed to rewrite and deploy programs, as well as do other changes. Taking these into consideration, they have come out with a financial model that they would end up losing money the first three years, with breakeven point around the fourth year, and eventually making money ( actually saving money on software licenses ) starting on the fifth year, and recouping back the loss of the first 3 to 4 years by the seventh year, and start making money on the 8th upwards.   Well, you don’t invest something , especially on IT, that will only give returns after eight years, especially on a system that seems to be running fine.  It is not as if you had to, I told him.  After all, when you bet your company on changing your technology infrastructure, it is extremely risky and also entails a lot of work with precious IT people that could have been used to do something else, and it better be worth the while.  The basic of financial decision making is simply the more risk, the more returns you should expect, and eight years is particularly a long time to get a return.  Moreover, in eight years, the technology landscape will have changed massively.  I asked him how he did his computations  -- after five or six years, were they expecting the current open source software and Microsoft licenses to be at the same price points? He admitted that it was indeed the assumption, and I cautioned him that it might have been too optimistic.  I told him that the market dynamics such that every enterprise is obligated to maximize shareholder return, and thus, every company cannot be giving things away free for long.  Witness that listing in Ebay was almost free before.  When they got market share, they started to charge.  Texting using cell phone was free before. Now they are charging.  Red Hat Linux is hardly free nowadays -- and it is increasingly becoming expensive, and it is to be expected -- after all, they are listed in the stock exchange and valued at over 2 billion.  With sales of only over 100 million dollars, and net income of slightly over 10 million dollars, why would a company be valued over 2 billion?  Obviously the market expects them to enjoy a ten to twentyfold increase in revenues in the next few years, and you cannot get that kind of revenues by simply getting market share --- you have to gain both market share AND better prices.  As a result, there is scarcely anything now from Red Hat that is considered cheap.  You can argue whether what they are selling is free license with paid support, as akin to paid software with free support, but the fact of the matter is that the price now stands at more than 780 dollars PER server.  You are not allowed to get a copy of their Enterprise version and install it in more than one computer, and you have to pay extra if your server happens to have multiple processors.  Will having more processors means you will need more support? Of course, Red Hat competitors will continue to be cheap, until they gain on Red Hat, then they will also start to charge more. So market dynamics are never simple and cannot be assumed to be static.  There will be two scenarios that can happen after five years.  The first scenario is that Microsoft keeps its market share and continues to be expensive, and Open source will continue to have a small market share and continues to be free.  If that is so, as a service company, it may be worthwhile to pay extra to work with a technology which 90% of their customers also use.  That means there is a value in maintaining a technology that everybody else uses because it makes everything much easier -- less training, easier interchange of files, easier to get the business,  etc.   The second scenario is that Microsoft will have lower market share and open source will have higher market share.  When that happens, you don’t particularly expect Microsoft not to respond, and you cannot expect also the open source companies not to start charging.  In both cases, I told him, the financial model may not hold. In the technology world, it is hard to project beyond the second year.  Unless you know where you stand, you should thread with caution on investments that do not pay back in 3 years.  What is your opinion?   6:11:05 PM     comment []   trackback []