IT: The Price Is Right?

Automotive Manufacturing & Production, Sept, 2000 by Martin Piszczalski

Buying information technology (IT) has never been easy. The Internet, with its barrage of new business services and pricing formulas, has made it a whole lot more challenging.

Driving the pricing revolution is a big shift to services and away from IT products. Most manufacturers are baffled--if not downright leery--as regards how these services are priced. They must, nevertheless, come to grips with this new reality. Services are becoming the primary delivery mechanism for huge portions of IT.

Underlying the pricing confusion has been the subtle shift in what IT does. Traditionally, manufacturers bought systems and software for standalone applications, like payroll and shop-floor control. In the last two years, however, IT is starting to play a whole, new business role. It is interconnecting firms and thereby enabling new trading-partner practices. To function in this new role, IT vendors are starting to sell new business capabilities as a service.

Manufacturers have no or little experience buying IT in this manner. Instead of making the familiar one-time purchase, the manufacturer is asked to pay a monthly usage fee. Management is asking tough questions when presented with such purchase recommendations:

* What will we really own?

* How do we determine return on investment (ROI)?

* How much is it really worth?

* What are we paying for?

* How do we explain to our boss these recommendations?

Some of these new services, such as auctions, give a manufacturer instant access to an entire community of new trading partners. What is this worth? Will new business really materialize? What is a fair price to pay the service vendor for this new capability?

Many managers fiercely resist what they see as excessive pricing in some of these new service models. In particular, they do not want to share cost savings or new revenue generation in perpetuity with an outside vendor. They view such an arrangement as allowing another firm to install a toll booth on their core business processes and exact a tax on routine transactions. Bred by surviving on the thinnest of margins, many automotive managers find such arrangements as intrinsically repugnant, regardless of the payback.

A step back in history, however, shows sweeping changes in the IT industry, its pricing and the business context it serves. These changes have been in:

* The expected longevity of a system

* The connectivity to other systems and firms

* The infrastructure it operates on

* The number of interfaces it must connect to

* The stability of the auto industry itself.

In the 1970's and 1980's, software was expected to last almost forever. Indeed, Ford Motor Company has some core, business software still operating that is over 20 years old.

Until the last decade IT and the business processes it served changed relatively slowly. For instance, SAP's R/2 product had a 10-year run and SAP's follow-on product, R/3, is already over 10 years old. Hasso Plattner, SAP's co-founder, likened SAP's product life cycles to that of a Boeing 747.

Software pricing was far different in its early days as well. Most software until 1970 was included free of charge by the hardware maker (namely IBM) to consummate the hardware sale. In the 1970's the first independent software vendors started selling one-time licenses, typically for a single computer. The emergence of workstations and PCs led to multiple-seat licenses. Next on the scene were enterprise resource planning (ERP) systems. Many commanded a huge, up-front, purchase price with the belief the system would automate the enterprise for decades.

Those days are gone. No one believes these assumptions anymore. A far different reality greets today's IT user and buyer.

First, the pace of change in IT has gone up exponentially. Its product life cycles have dropped from decades to months in many cases. For instance, Scott McNealy, CEO of Sun Microsystems, said dotcom companies are throwing out all their assumptions every three weeks.

Another major change has been in connectivity. Past systems operated essentially on a standalone basis. There were minimal or no connections to other systems. In contrast today virtually every new IT capability must connect to the Internet.

Today, software must operate on the Internet infrastructure. This infrastructure can be likened to a "highway" that a software "vehicle" must operate on. Imagine the dilemma of selecting a vehicle when the highway itself is in a constant state of flux: next year the lane sizes are reduced, the year after that the pavement is embedded with a magnetic propulsion system, and so on. What do you buy?

The infrastructure of the Internet is this volatile and dynamic. It is an extraordinarily complex collection of protocols, routers, pipes, and service companies. No one expects the Internet in 10 years to look remotely like it does today. It will undoubtedly be different two years from now.

Lastly, the manufacturing industry itself is no longer particularly stable. The Internet is revolutionizing both the auto industry's business processes and its products. These include extremely fast order-to-delivery cycles and Internet-enabled vehicles. For instance, General Motors is spending $1.6-billion on e-commerce this year. Its chief executive, Rick Wagoner, has proclaimed leadership in e-commerce a top strategic goal.