12:48 PM

Why Your IT Spending Is About to Hit the Wall

The increasing demand for computing power is beginning to exceed the computing efficiencies created by Moore's Law, and financial services firms are about to feel the pain of rising IT costs more than ever before.

During the short history of what we now call "technology economics" -- a history that spans 50 years -- it has always been clear that demand for computing is increasing and that upward expense pressure is a fact of life in what many have called the Information Age.

Equally clear and apparent -- especially in the past three to four years -- has been the desire (read: demand) by businesses to drive down IT total expense or at least constrain its growth in times of revenue and market pressure.

Fortunately, Moore's Law has been an ally in helping CIOs manage the dynamics of upward demand and downward cost pressure.

In short, Moore's Law hypothesizes that the number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every two years. Fundamentally, this translates to more computing power per dollar. And based on analyses of computing costs and power available in the market place, this enables CIOs to reduce the costs of their "run the business" processing on a continuing basis -- assuming a reasonable refresh rate to keep up with technology advances.

In supply-and-demand terms, this phenomenon has enabled firms to offset growth in demand for IT capacity by about 18 percent per year. Such growth rates, however, will probably now be known as the "good old days."

Between 2006 and 2010, demand for processing cycles (MIPS, servers and the like) has slowly approached an 18 erpcent annual growth rate in the big banks. Storage, by the way, has hit 45 percent per year -- the advent of Big Data is here -- and although the unit cost of storage is still dropping, storage cost pools around the financial industry are expanding out of control. The growth phenomenon is now exacerbated by market conditions, and Moore's Law just isn't enough.

[For more on Big Data's impact on the Street, check out Wall Street Scratches Its Head Over Big Data Challenge.]

In their efforts to protect revenue, grow new revenue sources, enter emerging markets, become more global, increase automation to lower operating expense, and even support new channels (social networking) and devices (Bring Your Own Device), financial services companies are now experiencing core platform growth rates exceeding 20 percent a year. It feels sort of like a perfect storm: big data, demand, and falling/uncertain revenue all have converged to drive a new era and behaviors in technology economic dynamics

"Rubin's Law" is now apparent: The geometric growth rate of computing demand -- technology intensity in the context of business and our personal lives -- will drive computing costs past the point at which Moore's Law will keep the costs manageable.

Put another way, computing demand is doubling every five years, and Moore's Law won't save you -- companies can no longer "surf" Moore's Law. Therefore, discontinuous/disruptive technology and innovative approaches are critical to the new economics we're are about to encounter.

Taking a step back, you will likely ask, "How can this be true?"

The answer involves yet another "law" -- actually, a paradox observed in the late 1800s -- "Jevons paradox," which states:Technological progress that increases the efficiency with which a resource is used tends to increase (rather than decrease) the rate of consumption of that resource.

William Stanley Jevons developed this hypothesis in 1865, based on his observations of coal consumption vis-à-vis the technology advances designed to improve the efficiency of coal usage. It was his argument that these improvements alone could not be relied on to reduce consumption; rather, they would lead to increased consumption -- and he was right. Today we talk about elastic computing; in 1865 Jevons focused on "elastic coal" – well, at least the demand was elastic.

Jevons Paradox
Jevons Paradox demonstrated that as fuel efficiency improved, the consumption of coal increased by more than double the original consumption level.

So the aforementioned growth in demand (passing the 20 percent mark per year) is actually fueled in part by the inherent efficiencies created by Moore's Law. Through 2010 we were in the Moore's Law zone of managing IT costs downward. Now we are a new world governed by the effects noted by Jevons.

The Future of IT Spending

The financial results reported in the financial services sector and almost half of those companies in the S&P 500 cast a long shadow on the future of IT spending. With some of the world's foremost global banking institutions having FY2011 revenue decreases of 9 percent to 26 percent overall and premier investment banks showing fourth-quarter results with revenues off 30 percent or more, IT spending will definitely show up on the corporate radar. With such a precipitous revenue decrease, firms that have been accustomed to IT spending in the range of 8 percent to 12 percent of revenue will see this ratio move up into the mid-teens or higher. Though not a good measure of IT efficiency or effectiveness, it will certainly be noticed.

CIOs and IT leadership need to be prepared for this and get ahead of it -- if it isn't too late already.

The technology economy of 2012 and beyond is going to be characterized by a continuing increase in technology intensity for the enterprise --- independent of revenue patterns:

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