Level: Introductory Mike Devlin, Chief Executive Officer, IBM
Paul Levy, CEO, Rational
09 Mar 2004 from The Rational Edge:
Software is the world's most critical industry and will be for years to come. Yet most companies are spectacularly unprepared to create the software that will redefine how they interact with customers or that will help deliver their goods and services in new ways.
This is the first in a series of articles Rational will present called "Improving the Economics of Software Development." This first installment takes a look at the changing landscape of business and business growth in the new economy, and explores the challenges we as software professionals face in realizing the full potential of information technology over the coming years.
As we look at the drivers of what has been called "the new economy" and see why software is so critical to the success of companies around the world, it is clear that organizations need to closely examine -- and, in most cases, dramatically change -- how they create the software that will serve at the heart of their business. Many companies have already learned the hard way that the Internet is not a quick fix, nor is it a trivial matter to build a Web site that works well for both the customer and the business.
Over the past four to five months, some in the media have pointed to the demise of certain dot-com companies as if their disappearance indicates a trend regarding the importance of high-tech in business. In fact, many dot-coms have disappeared because bad business models were unable to sustain the promises made to their boards and shareholders. Does that mean technology is no longer important? Not at all. Technology still drives the new economy. The difference is, the stakeholders in the new economy have remembered how important profitability is. Underneath all the former hype lies the enabling power of the Internet -- and the software and communications technologies that drive it -- all of which constitute a more dramatic and fundamental transformation of business than anything we've ever seen. The rate of change is just as rapid as it was last year, and the direction is unequivocal.
Despite what happens on Wall Street -- bull or bear -- and no matter which "dot-coms" are up or down, these fundamental changes in our society and in our business plans will keep on occurring. What we've learned this year is that all roads lead to Rome: Whether a company is a brick-and-mortar establishment or a virtual enterprise, almost every organization is becoming an Internet company in some way.
Now, let's look at these changes more closely.
Drivers of Today's Business Transformation
The major characteristics of today's business opportunities create a much more open landscape of competition. These new characteristics include:
- Time to market: Both new and existing companies are being pushed to develop new products more quickly than ever before or risk losing to a competitor that has taken maximum advantage of the new environment.
- Increased productivity, both corporate and private, has been one of the major factors contributing to growth of the new economy, and this growth has occurred without inflation. In turn, the Federal Reserve estimates that the use of information technology and the production of computers accounted for about two-thirds of the productivity growth between the first and second halves of the 1990s.
- The "weightless economy": We're witnessing the increased valuation of intellectual property -- displacing oil, gas, and other types of durable or physical goods from the old economy as the primary means of making money.
- Globalization: The opportunity to become biggest and best, not only by expanding beyond the country of origin, but also by merging or partnering with companies overseas.
- Consolidation: Global mergers and acquisitions continue to redefine virtually every industry, especially telecommunications.
The Internet -- with the software and communications technologies that drive it -- is changing everything. The cover story of Fortune magazine's Oct 9, 2000 issue notes that we're living through one of the most profound transformations in human society since the dawn of the Iron Age, and calls this the "Age of the Network."
So, software has become the way we engage the world. And software is ubiquitous. It's everywhere, from the cars we drive (with more software in the average car than in the Apollo spacecraft); to military equipment (today, 80% of a fighter jet's capability is performed by software, compared to 6% in 1960); to the cell phones that are allowing us more freedom and mobility. Software even exists in household appliances like refrigerators, and in tiny devices like the cochlear ear implant for the hearing impaired.
Figure 1: Growth of the Weightless Economy. The graph shows corporate spending as a percentage of total capital spending growing from 18% in 1980 to 40% in 2000. Source: U.S. Bureau of Economic Analysis.
The Internet: Impacting Every Business
As software is becoming more present in more places, so too is the Internet impacting every business. For businesses the world over, the Internet continues to drive more change and more opportunity. That includes all the software that runs the infrastructure of the modern economy -- the computing and telecommunications platforms, all the operating systems and middleware, and all the underlying switching and routing software. It also includes our electronic devices and embedded software systems, everything from phones to refrigerators and transportation vehicles of every kind. Then, of course, there's e-business, whether it's done by traditional brick-and-mortar firms that are embracing new ways of developing relationships with customers or by dot-coms that exist only online.
Half of all adults in the U.S. go online each month, according to a December 2000 survey by Mediamark Research in New York. That's a 27 percent increase over 1999 in the number of people who surf the Web. Although most Web access happens from home, some 10 million more Net users are accessing the Web from work since last year, Mediamark says. This, in turn, is causing businesses to re-evaluate how they reach their customers and to redefine their products and services offerings. It's also causing a sea change in customer service, as enterprises are learning how to provide 24x7 support.
The Click and Mortar Revolution
Traditional companies are moving various portions of their businesses to the Web. At Swedish powerhouse Ericsson, for example, its future heavily depends on the growth of the Internet. Along with other networking companies, Ericsson is helping build the infrastructure of the Web in 140 countries -- especially in the wireless arena -- investing 15% of its sales revenue into research and development.
Financial services are also racing toward the Internet. At a recent panel discussion moderated by a Federal Reserve assistant vice president, both speakers agreed that the successful providers of financial services will "model themselves as Internet portals or hubs," where consumers will return frequently.
Automotive giant Ford Motor Co. is also staking a large part of its future on the Web. Ford recently announced the Wingcast initiative to bring wireless mobility and information services into cars and trucks by 2003. These services will include voice, entertainment, Internet access, and safety features.
Additionally, Ford, GM, and Chrysler in February announced they are building a business-to-business parts exchange on the Internet to speed communications with their thousands of suppliers. They see the parts exchange as only the first step toward putting all their business on the Web. If so, they will be building the world's biggest B2B site, the foundation of an Internet-based industry that designs and engineers cars faster and better, and eventually builds them to order, delivering them directly to customers within a few days.
Internet pioneer Dell Computer has been selling its PCs over the Internet since 1994. For its most recent quarter, ended Oct 27, 2000, it reported that sales from its site have grown to an annual run rate of $16 billion, up from $12 billion a year ago. By itself, the current run rate for Dell's Web-enabled revenue would rank No. 110 on the Fortune 500 roster of companies.
Cisco Systems tells a similar tale -- not only is it the world's leader in building the infrastructure of the Internet, Cisco also uses the Web to serve customers in ways not possible before. By using networked applications over the Internet and its own internal network, Cisco is seeing financial benefits of nearly $1.4 billion a year, while improving customer/partner satisfaction and gaining a competitive advantage in areas such as customer support, product ordering, and delivery times. Some 90% of Cisco's orders are transacted over the Web.
The Web and New Business Opportunity
As for newer businesses, the Internet translates into brand new opportunities that simply didn't exist for entrepreneurs in the past. Software and services provider Commerce One enables online trading networks, allowing buyers and sellers around the world to trade in a barrier-free environment and creating new business opportunities for all trading partners. Another pioneer, eBay, created a format for auctions impossible to imagine even 10 years ago.
And while it's true that many e-businesses have taken a beating over the last few months, this simply demonstrates that poorly planned and executed business models do not generate long-term, or even short-term,j success. Clearly there are successful, profitable e-businesses like eBay who are breaking new ground, and demonstrating that innovation and solid execution are just as important in the virtual domain as they are in the brick-and-mortar domain.
Software: The Key Differentiator for Businesses in the New Economy
As companies are changing the way they think about technology and how they use it, so too are organizations changing the way they buy the software they need. As recently as the 1980s, software was the domain of a centralized information technology group that typically made all the purchasing decisions and controlled the back-office systems used to automate business processes.
By the 1990s, departments and systems were becoming more integrated through distributed architectures and corporate intranets. More corporate data became visible to more people. This led to a more robust front office -- a business could have a point-of-sale system integrated with an inventory system, so you knew as you sold that you decreased your inventory and could place a reorder with your suppliers.
Today, in the new economy, we're witnessing a much more collaborative environment for doing business. To stay competitive, every business must embrace the technologies of its customers, its supply chain, and its partners. Software is increasingly used as the basis of this connection. And because software investment is becoming a much more strategic investment for the company, this means the decisions about software and its use are increasingly being made by senior management today.
Figure 2: As recently as the 1980s, software was the domain of a centralized information technology group. Today, to stay competitive, every business must embrace the technologies of its customers, its supply chain, and its partners.
Because software has assumed such a critical role in business success, companies all over the world are taking their software investments VERY seriously. Every year over the next four years, a trillion dollars will be spent by companies and governments to build the software that the world runs on, according to analyst firm IDC. This figure takes into account software used for the design, development, maintenance, and analysis of the business applications being built in corporations and government agencies. It also includes all the salaries and benefits provided to the employees who do the work -- this, in fact, represents the bulk of the costs.
In June of last year, the U.S. Department of Commerce published a study called "Digital Economy 2000" in which they noted that business investment in IT equipment and software more than doubled between 1995 and 1999. They also reported that over the last five years IT industries have contributed nearly one-third of the real U.S. economic growth. This is because industries in many sectors of the economy are incorporating more and more software, embedded devices, and computing infrastructure into their products and their business operations.
Based on all the evidence -- including the degree of spending on software and the Internet as well as the widely embraced move to e-business -- we can draw one obvious conclusion: Software will be the key differentiator for every business in the new economy.
If we're going to thrive over the next decade, we will have to be using software in a creative way to deliver our products and services or to delight our customers in new ways. Mere software competence is not enough; software excellence is becoming essential.
Software and the Internet: Predictions
This past summer, Rational's chief scientist, Grady Booch, surveyed 100 people who are busy inventing the future -- the best minds in the software industry -- to get an idea of where we are all headed as stakeholders in this new, Internet-driven economy.
These are the four most important predictions based on this survey:
- Software will continue to become increasingly complex.
- The unwired Web will have far-reaching implications.
- The new economy requires software that can be continuously updated.
- There are unlimited possibilities for software's growth -- but there are some problems, too.
Increased Complexity
Grady Booch has often said, "We cannot reduce complexity in how we build software. The best we can do is manage it." Because so many of the products and services we value highly in the new economy are more complex than their predecessors, there are manifold processes required to support those new types of offerings. Today's software engineers are feeling pressured to deliver more complex applications that require more mastery of more computing concepts and techniques than ever before. In building for the Web, the trend is toward even more concurrent, more distributed, and more connected applications.
We see this happening in telecommunications, which has evolved from the hard-wired rotary phone to the global wireless infrastructure. Photography offers another example of increasing complexity, where the process has gone from silver halide film to all the intricacy of digital imagery. And we see increased complexity in the securities industry, where brokers hired to handle stock transactions are now being augmented by online trading services. But the software designed to handle the volume, the data security, and the transactional requirements of online stock trading is highly complex, and growing in sophistication every day.
Emergence of Wireless Connectivity
Our second prediction has to do with the huge consumer demand for wireless access to nearly everything electronic. Today, half a billion people currently use mobile phones -- and within three years, that number is expected to reach one billion. According to Ericsson, clearly one of the leaders in the wireless industry, wireless devices have penetrated less than 1% of the market, and there's enormous growth ahead of us.
An important aspect of the growth is wireless access to the Internet. Consider this:
- Ultimately, one-sixth of the world's population will be equipped for the unwired Web. Almost every facet of our daily routine will be affected as the Internet further snakes its way into our cars, homes, and businesses.
- There is an emerging OnStar architecture that in effect makes every car its own mobile IP address. Companies like Ideo are giving us electronic paper of various sizes, so we can more easily read our e-books. Imagine carrying this around as opposed to toting a traditional bound volume!
Figure 3: Within three years, there will be more than 400 million users of mobile Internet services. And that number will quickly exceed the number of fixed line Internet users. Source: Ericsson
As the wireless infrastructure continues to evolve, we see the growing sophistication of devices and embedded systems designed to take advantage of it. One of the most significant aspects of the unwired Web is its infancy. Within three years, there will be more than 400 million users of mobile Internet services. And that number will quickly exceed the number of fixed line Internet users. As this occurs, text services will give way to support for photos and blueprints. Eventually, increased bandwidth will mean that handheld mobile devices will access video over the Web as easily as do our machines wired to T1 and T2 lines.
Continuously Evolving Systems
In the past, most new software systems were developed by an internal IT organization, and the predominant value of software was in reducing the cost of doing business. Time pressures and feature content pressures always drove these software solutions, but there was generally little impact to the top line revenues of the business, and, consequently, these pressures were usually second order. Most software projects were one-of-a-kind systems that took years to develop, then they were upgraded and released back into the user community about once each year.
Today, however, software's role has shifted from cost reducer to revenue producer, and competitive pressures are demanding ever-faster cycles of development and upgrade. While disciplined software management and common sense will remain the primary discriminators in software engineering success or failure, the Internet has truly revolutionized our ability to both include the user during development and deploy software products transparently to a broad user base. In contrast to the huge annual upgrades of the past that typically required a total shutdown, most markets today demand frequent releases that allow us to keep our systems available to customers and partners 24x7.
This need to support continuously evolving systems has driven today's software development processes away from the traditional sequence of waterfall development activities toward a highly iterative model. In the past, many software domains drew a distinct line between development and maintenance, but future software projects (legacy system upgrades, new applications, or some combination of the two) will probably not differentiate much between development and maintenance.
Iterative development and the Internet are also driving software engineering toward a more homogeneous software management approach. This includes process frameworks, advanced requirements and design notations, and Web-based architectural patterns. Ultimately, this should produce dramatic improvements in software release cycles along with several other major trends regarding continuously evolving systems:
- Greater use of commercial components that will reduce implementation activities, resulting in earlier transitions to demonstration-based assessment.
- More mature iterative development methods and Web-based architectures that will create a larger role for deployment activities within the life cycle.
- More mature iterative development environments (processes and tools) that will enable further reduction of life-cycle scrap and rework.
And Unlimited New Possibilities
We have come a long way in a short time to overcome many major constraints in the computing industry. Compared to the early 1990s, today we have ample:
- Power -- this translates into lightning-fast processing, ample memory, and virtually unlimited storage capacities.
- Accessibility and usage -- Although software's features and functions are ever-more complex, we've managed to vastly simplify the user interface, so it's easier than ever to get email, jump on the Internet, figure out how to do word processing, and use computers for personal and business productivity gains.
- Bandwidth -- In all honesty, we're not quite at the "all bandwidth, all the time" stage. But that's only a matter of time, as companies continue to build or buy the necessary infrastructure. Some analysts predict that 40% of all homes and businesses will have DSL speeds by 2003. And we are connecting the world through both fixed lines and mobile devices to the rapidly growing Internet.
So, Where Are the Problems?
Despite the tremendous strides this industry has taken in computing power, we will not be able to take full advantage of those benefits until our software achieves similar levels of excellence. Our next major hurdle as an industry is software development itself. That's our current brick wall.
Figure 4: Compared to the early 1990s, today we have ample power, accessibility, ease-of-use, and bandwidth. But our ability to achieve excellence in software development represents our next serious brick wall.
Until we eliminate the difficulties in this area, we will not come close to realizing excellence in the software accessed by our customers, partners, and employees -- and we will be less likely to become leaders in the new software-driven economy.
The Failure Rate for Software Projects
Let's take a closer look at the difficulties facing us in this area, some of which we can quantify. Figure 5 below shows the results from the CHAOS Study, by the Standish Group in 1999.
Figure 5: While companies have seen an improvement in the success rate of their software products over the past six years, the Standish Group reports an astounding 74% failure rate for all software projects undertaken today.
This study covered both commercial and government IT projects and identified several disturbing statistics. In 1994, only 16% of all IT projects were completed on time and on budget. By 1999, this statistic had improved, but still only 26% of all IT projects were considered successful by this standard.
We at Rational Software are fortunate to have worked with a number of customers who report far better results. In fact, we see extraordinary achievements here and there among companies pursuing both commercial software development and development of their own internal systems. Unfortunately, these represent the exceptions to the rule. What's more, we need to be getting closer to the performance rate in other industries. In the automotive safety and healthcare industries, for example, a failure rate of even 1% is considered unacceptable. We need to have the same kind of goals for software.
Labor Shortages
The high failure rate in software projects is not a problem we can solve by adding more people. For one thing, there just aren't enough qualified IT workers to go around. We will not examine in detail the labor market in every area of the world. But we certainly have a well-documented shortage in the United States. A study by the Information Technology Association of America predicted that U.S. businesses would try to add 1.6 million IT workers in 2000, but would succeed at hiring only half that many because of the shortage of skilled employees.
The evidence suggests that the labor shortage problem for software development is worldwide, and growing year by year. Analyst firm IDC issued a report in June that projected even greater labor shortages in Europe, up from today's deficits by as much as 30%.
To overcome this particular problem, IT investments need to become more focused on existing personnel, so that software development teams can produce more bottom line results with better tools and processes. Measuring your return on IT investments can be difficult, but as software becomes a competitive differentiator for more businesses, we are beginning to see studies and methodologies emerging that can help business leaders better address their ROI questions regarding software investments. IDC, for example, has recently published such a study.
1
The New Economy and the "Software Development Paradox"
To sum this up, while the possibilities for software are seemingly limitless, so is the growing demand. We must become more competent in our ability to deliver high quality software. And this is a huge challenge. As we've seen, most companies are struggling in the effort. Of course, success is possible, and Rational sees it on a limited scale. We have been privileged to work with some of the market leaders in different industries, the ones who understand how closely the success of their business is tied to their success in developing high-quality software.
The answer for most companies is not going to come through additions to their software development staffs. There just aren't enough skilled workers anywhere in the world to meet the demand. And as quality experts in any field know, throwing more people at a problem is not necessarily the answer, either.
The problem is that speed and quality have typically been opposing forces in software development, and they still are. In the past, businesses could sacrifice software quality to make their ship date, or compromise on software features to meet time-to-market deadlines. In the new Internet economy, we have no choice: we must produce higher quality software in Internet time.
And this conundrum forms the heart of what we at Rational call the "software development paradox."
Fast time-to-market is absolutely critical for business success. The competitive features that once took years for the market to embrace now, overnight, have become absolute checkbox requirements for consumers. So now we must respond with our own product plans, or risk losing market share.
At the same time, a poorly engineered product that gains wide visibility simply because it captures "first mover advantage" will ultimately fail, due to low customer satisfaction. Products rushed into market will typically not live up to the expectations in the vast marketplace of the Internet.
Figure 6: To be truly successful, businesses need to rise above tradeoffs in quality or time to market.
On the other hand, if we can get our business to a point where we are not obligated to trade off speed for quality, we can enjoy a sustained, competitive advantage in our respective markets. Our business success will depend on how well we execute in the process of software development. We need speed AND quality in our software development process, in order to escape the "software development paradox."
Conclusions
Let's summarize the key points covered in this first installment of our series, "Improving the Economics of Software Development."
-
Software will be the key differentiator for every business in the new economy. It connects businesses to customers, suppliers, and partners. It empowers everyday devices. And a high degree of competence in our development and maintenance of software is becoming essential to every business.
- But we can't simply rely on the past decade's improvements in computing power, bandwidth, and accessibility to realize the full business benefits of the digital revolution. While future possibilities -- and demand -- for software are endless, we need to vastly improve our methods for designing and building software to sustain healthy business growth and success in the new economy.
-
This is a challenging situation. Most companies struggle with their software development projects. While success is possible, the answer will not be found through the addition of more people to our software engineering teams. There's simply not enough qualified help available.
- The answer lies in improving the economics of software development -- that is, reducing complexity and improving processes at all levels of software engineering. It can be done. With proper investments in productivity, companies can escape both burdens of time-to-market pressure and quality-of-product pressure.
We will share with you how Rational Software believes these goals are best accomplished in an upcoming edition of The Rational Edge. In the meantime, we want you to know that Rational's mission is to ensure the success of customers who depend on developing or deploying software. You'll find answers to the software development paradox in the product pages of www-306.ibm.com/software/rational/, in our services, our best practices, and in the combined solutions that our partners help us deliver to the IT industry.
1
This whitepaper offers a case study of Rational Software customers using Rational ClearCase for software configuration management. To view this paper online, click here.
About the authors  | 
| | Mike Devlin co-founded Rational Software in 1981 and is currently Chief Executive Officer and Director. Before September 1996, Mr. Devlin served as Rational's Chairman of the Board. |
| 
| | Paul Levy co-founded Rational in 1981 and was Chairman of the Board. Before April 1999, he also served as Chief Executive Officer of Rational. |
Rate this page
| 
