1020RA Challenges in IT Classification Spotlight Underlying Financial Challenges to Come

What is Happening? — IT markets in general are going through a period of not just massive growth and change, but also a period of pervasive inconsistency that reduces the ability to see, manage, and account for IT, especially in the traditional ways that have become an integral part of organizational, managerial, and financial cultures.

It’s obvious how the use of Cloud-based IT (e.g., SaaS, IaaS, PaaS, BPaaS) changes how some types of IT are acquired, managed, and accounted for by enterprises – which creates some obvious (and not-so-obvious) changes in how IT developers and providers do business.

But the simultaneously increasing paces of change and growth on both the enterprise and provider sides of this equation lead Saugatuck to believe that the next massive, and possibly most influential, changes to IT and business are likely to be within the fundamental financial standards and practices used to account for the cost, use, and value of IT.

Why Is It Happening? — Old ways of doing almost anything almost always die hard. They became the “old ways” because they work(ed).  Comfort levels with almost any standards and practices become higher over time as they become entrenched within processes, regulations, cultures, and so on.

Unfortunately, the IT that is being developed, acquired, used, and paid for in 2012 is increasingly at odds with the “old ways” of doing things, from procurement to channel relationships to accounting.

But these differences go deeper than the accounting and financial practices that have been established, and which are closely regulated, in most markets. Increasingly, markets simply don’t know how to classify different types of IT. A couple of simple, current examples spotlight this:

•   Every week, or at least every month, we see articles, blog posts, and analyst reports regarding “Apple vs Android,”almost always comparing devices, makers, and OSes equally.  

•   Recent data suggesting that Apple had passed HP in numbers of PCs shipped were trumpeted far and wide - then were more closely examined after it was noted that the numbers for Apple included iPads, while the HP numbers did not include all of its tablets. “We [the industry] don’t have real standards today for counting what a ‘PC’ really is,” according to one prominent investment analyst.

We don’t mean to imply that these examples are exhaustive. They simply emphasize that even the entities who define markets and IT types cannot agree today on what is what, and how to account for them. The lines are not only blurring, they have been swept away.

Cloud of course is the greatest influence behind this. SaaS forced reconsideration – still unsettled in most markets – regarding what, exactly, software is and can be. BPaaS takes that further, by refusing to allow easy distinctions between business process and functions, software, data, and services. IaaS sweeps away many of the formerly easily-defined boundaries that made “infrastructure” relatively simple to define, manage, and account for. PaaS blends software and services development and delivery even more.

But the uncertainty also builds from a natural resistance to change, especially by organizations. Processes have been built, refined, and tested over years and decades to prevent change, to protect proven-safe means of doing business, and to fit accounting, regulatory, relationship management, and customer satisfaction requirements. It’s no wonder that so many enterprise buyers and users circumvent these in order to just get Cloud, mobile, social, and other emergent (and beneficial) IT into use – too many established ways of doing business practically forbid and prevent it. At Saugatuck, we’ve been consistently amazed and impressed with the creativity and ingenuity shown by some of our enterprise user clients in working through and around established procurement methods (and centers of power) that effectively prevent  the enterprise’s ability to profit from Cloud.

And we also are impressed with the numbers of IT, Finance, and Procurement leaders who are trying to find ways to modify and adapt their standards and practices as quickly as possible, while maintaining the core structures that are needed to satisfy relationships, reporting, regulatory requirements, and more.

Market Impact — The current (and increasing) confusion about “what’s what,” and how to classify, account for, and manage IT is going to grow for several years to come. That means that disruption and uncertainty will grow within enterprises, within regulatory agencies, and within markets in general.

It’s going to be more and more difficult to get straight answers when it comes to how to categorize many important and changing types of IT, and therefore how to account for them, where to include them, how to manage them, and what their value is. That means that, as their solutions and offerings grow in capability, sophistication, impact and cost, IT providers are going to face growing challenges in selling.

This is much more than what many firms (and providers) experienced in the 1980s and 1990s, when desktop PCs, LANs, and client/server sprang up in unpredictable parts of large and small firms. The Cloud makes so much of IT less tangible - yet its nature drives more types of IT to become more pervasive, and therefore more integral to business operations within the enterprise.

An inability to adequately classify IT, driven by the combined powers of intangibility, rapid adoption, and pace of change, will force collective disruption within user enterprises and IT providers, in the form of vague, inaccurate, and possibly even irrelevant financial accounting that will affect those enterprises and providers. We can see increasing confusion about asset models, depreciation, and classification of assets, services, and payments. Tax estimation, asset definition and valuation, and other critical aspects based on costs of IT and basic operational costs of doing business will be increasingly challenging.

The core financial standards will, eventually, be revised and adapted – they always are. But such change takes years, sometimes decades. Accounting standards regarding the depreciation of PCs, for example, took more than a decade to establish, codify, and become accepted in the US and other countries. Given the breadth and depth of today’s IT changes, we can see even longer periods of time being required for core accounting changes.

A long-standing tenet of IT management, including TCO, has been that “if you can’t measure IT, you can’t manage IT.” The corollary today might be, “if you can’t classify IT, you can’t measure IT.” It’s going to be a long and bumpy road before any market, or market-defining entity, reaches a quiet place where today’s blending of emergent and established IT can be classified and quantified adequately and consistently. 

Click here to view PDF for this article