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Infrastructure vs. Applications: Pressure for Unified Global Delivery Services Causes Significant Changes in Infrastructure Spending

05 January 2010 – Ken Male, Founder of TheInfoPro – Every quarter we hold a roundtable for our investor clients with an executive that is part of TheInfoPro’s (TIP) peer network of IT decision-makers. At our most recent session, our guest, the CIO of a Fortune 1000 consumer goods company, discussed in great detail how he has rolled out a sophisticated “internal cloud” platform that has drastically reduced his spending on IT Infrastructure while providing a “foundation for unified global service and application delivery.” An overarching goal when he got buy-in from his management to embark on this was to “get the IT infrastructure out of the way of the apps and user community.” Before the move to internal cloud, the company’s annual IT spending was a 1:1 ratio of application to infrastructure to support it. Those days are over – the goal of the CIO at our roundtable is to make it 80% application and 20% infrastructure by 2011 – they are at about 65%/35% today.

For several years TheInfoPro has tracked a move to the commoditization of certain infrastructure elements (e.g., servers, low-cost storage tiers). The economic crisis has made companies work hard on “optimizing” their infrastructure, as demonstrated by technologies related to this scoring so high on the TIP Technology Heat Index®, which gauges the immediacy of user need and planned spending.

So what can we take from this event as we triangulate the CIO’s comments with our data from interviews with decision-makers who represent more than $23 billion in buying power for IT infrastructure? Several threads become apparent:

1) Spending on Optimization: Investments in technologies that drive down the ratio of spending on IT infrastructure have dominated the top quartile of our respective Heat Indexes for the better part of the past 18 months and will continue into 2010. These include:

WAN Optimization – Our guest CIO cited his company’s WAN being 50Mbps, and it is optimized to 400- 600Mbps.
Thin Provisioning – This is enabling storage teams to increase their utilization rates dramatically, and to put off purchases.
Deduplication – Well-documented success for backup environments. Look for more primary storage to leverage this in 2010.
Server Virtualization – Nearly ubiquitous today for non-mission-critical applications, we are starting to see more discussion of production applications moving to virtual environments.
Replication – Low-cost replication solutions are starting to minimize the use of expensive backup solutions.
Unified Communications – Leveraging this (e.g., VoIP) continues to be deployed in an evolutionary fashion.

2) Cloud Computing: Internal vs. External? The discussion of external cloud usage has been a catalyst for the move to drop the ratio of infrastructure spending. Many organizations are able to show that the cost differential to move external is minimal. In addition, the ability to allocate more spending to the applications allows IT to be a better business partner and to help drive revenue-generating activities.

Caveat emptor – the shift to internal cloud computing architectures does not come without some pain, specifically around licensing costs. As software companies try to use the move to more processing power via internal cloud in a virtualized environment to mean more money for them, this is becoming a contentious point. This is one of the primary drivers for more things being considered to run on open source. Stay tuned for more work on this issue.

3) Open Source: Linux continues to grow in the enterprises mostly at the expense of Unix. One key reason is the software licensing issue mentioned previously; companies are trying to avoid additional licensing costs as more processing power gets shared by an application in a virtualized/cloud environment.

4) Standardization: From 2002 to 2008 we saw a lot of “flavor of the month”/“one of everything” mentality. This has changed dramatically and will continue to do so. Operating expenses have been decreased dramatically since fall 2008, and standardizing is a means to lowering spending. In addition, the aforementioned move to internal cloud is also a driver to move to standard offerings.

5) Procurement Strategies: In our work with enterprises, we see firsthand the sophisticated techniques being deployed to drive down the spending with their infrastructure providers. As an example, expect reverse auctions to procure servers and storage to become common by the end of 2010.

The biggest challenge we hear in our interviews with the Global 2000 is the ability to manage this new cloud-like infrastructure – as our research has shown for the better part of the last year, meeting SLAs, provisioning, lifecycle management – all come into play here and will be a key battleground for the vendors to provide an effective solution.

TheInfoPro has a research practice geared specifically to cloud computing and will continue the investigation of the storage, servers, networking and security markets. In 2010, we will report on the reality of the decreased spending ratio on infrastructure and how it is evolving. We suspect the trend toward changing the ratio of application to infrastructure spending will be a driver for more M&A activity by the technology providers who, not to sound cliché, are looking to become a “one-stop shop” and provide “one throat to choke.” More details on our M&A thoughts on this can be found in Barron’s October 2009 cover story: http://online.barrons.com/article/SB125633689630504703.html.

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