THE SURPRISING ECONOMICS OF MAINFRAME TECHNOLOGY

JED RUBINPRINCIPAL, RUBIN WORLDWIDE

GARTNER ADVISORPROFESSOR, INSTITUTO DE EMPRESA, MADRID

JED.RUBIN@RUBINWORLDWIDE.COM

DR. HOWARD RUBINCEO AND FOUNDER, RUBIN WORLDWIDE

MIT CISR ASSOCIATEGARTNER SENIOR ADVISOR

HOWARD.RUBIN@RUBINWORLDWIDE.COM1

THE STUDY OF TECHNOLOGY IN SHAPING THE GLOBAL ECONOMY, THE COMPETITIVE POSITIONING OF NATIONS, AND THE SUCCESS OF COMPANIES – FROM THE VANTAGE POINTS OF MARKETS, PRODUCTIVITY, AND QUALITY OF LIFE.

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INTRODUCTION

• A GLOBAL THIRST FOR COMPUTING CAPACITY THREATENS TO OUTSTRIP OUR ABILITY TO SUPPLY IT AT AN ACCEPTABLE PRICE. THE VAGARIES OF THE GLOBAL ECONOMY, INCREASING DIGITAL SECURITY CONCERNS AND THE MOBILE REVOLUTION ADD FURTHER TO THIS “PERFECT STORM” OF TECHNOLOGY INTENSITY.

• OUR “NEW MATH” OF TECHNOLOGY ECONOMICS INDICATES THAT THE LEVERAGE AND COMPETITIVE ADVANTAGE AN ORGANIZATION CAN GAIN FROM A MAINFRAME HEAVY INFRASTRUCTURE CAN BE CRITICALLY IMPORTANT TO ITS SUCCESS.

• IN ADDITION TO ITS DEMONSTRATED ECONOMIC EFFICIENCY IN BUSINESS TERMS, ITS INHERENT HIGH LEVELS OF SECURITY AND SCALABILITY, AND EVEN ITS POTENTIAL FOR “GREENNESS,” THE MAINFRAME IS A PLATFORM WELL SUITED TO THE EMERGING MOBILE DRIVEN WORLD.

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BUSINESS CONTEXT

• WITH DEMAND FOR “IT” INCREASING AND DRIVEN BY THE NEEDS OF SECURITY/RISK, MOBILE COMPUTING, BIG DATA AND INNOVATION ITSELF, IT LEADERS ARE FACING A CHALLENGE OF “TECHNOLOGY ECONOMICS”.

• DESIRE AND PERHAPS NEED TO DO “MORE WITH LESS” (COST, THAT IS).

• “END OF MOORE’S LAW”? ADVANCES IN HARDWARE/SOFTWARE ECONOMIC EFFICIENCY NO LONGER ARE SUFFICIENT TO SUPPLY THE FUNDING TO OFFSET THE INCREASED NEEDS OF DEMAND AND SECURITY/RISK AND THE INTRODUCTION OF NEW TECHNOLOGIES?

• THEREFORE, BUSINESS LEADERS MUST BE PREPARED FOR A MULTI-YEAR INVESTMENT IN IT “FOR IT” AND PUT IN THE PLACE THE GOVERNANCE AND INVESTMENT MODELS TO REAP THE BENEFITS FROM THESE INVESTMENTS.

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EARLIER FINDINGS: “PRE-MOBILE”• COMMODITY SERVER HEAVY

ORGANIZATIONS SHOWED 30% HIGHER INFRASTRUCTURE COSTS VS. MAINFRAME HEAVY PEERS.

• MAINFRAME-CENTRIC ORGANIZATIONS ALSO DEMONSTRATED LOWER COST PER IT GOODS.

• LARGER BUSINESSES SHOW MORE DRAMATIC RESULTS, BUT SIMILAR EFFECTS CAN ALSO BE FOUND IN SMALLER SIZED BUSINESSES.

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A WORLD OF INCREASING TECHNOLOGY INTENSITY

World GDP IT GDP

3.38

15.92

Growth 2014 vs 1980

World GDP IT GDP

2.3%

4.7%

Average Annual Growth 2014 vs 2010

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A WORLD OF INCREASING TECHNOLOGY INTENSITY

World GDP ($B)

ITGDP ($B)

World Population

(B)

World GDP per Person

IT GDP per

Person

1980 $22,195 $333 4.4 $5,044 $76

2014 $75,000 $5,300 7.3 $10,274 $726

Ratio of 2014 to

19803.38 15.92 1.66 2.04 9.6

• U.S. AVERAGE PERSONAL INCOME ROSE FROM ABOUT $17,000 TO $46,000

• PERSONAL TECHNOLOGY EXPENSE INCREASED FROM $132 ANNUALLY TO ALMOST $4,000.

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DRIVERS OF INCREASING TECHNOLOGY INTENSITY

PER MOBILE USER:

• 2004: LESS THAN 1 MOBILE TRANSACTION PER DAY.

• 2014: THAT NUMBER HAS GROWN TO AT LEAST 37 TRANSACTIONS PER DAY PER MOBILE USER.

• BY 2025: POTENTIALLY 5X THAT LEVEL.

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9

JEVONS IS STARTING TO BEAT MOORE

Jevons’ paradox:“Resource use efficiency increases tend to increase the rate of consumption of that resource”

Moore’s law:“The number of transistors on an integrated circuit doubles approximately every two years”

Reductions in unit costs eaten up by higher computing power demand

Unit costs for computing power continue to fall

William S. Jevons (1835-1882)

Gordon Moore

“TECHNOLOGY INTENSITY” IS GEOMETRICALLY INCREASING IN THE DYNAMICS OF THE GLOBAL ECONOMY, YOUR PERSONAL ECONOMY, AND YOUR COMPANY’S TECHNOLOGY ECONOMY --- EXPANDING TECHNOLOGY OPTIONS AND ABUNDANCE ARE KEY DRIVERS.

INFRASTRUCTURE CONSUMPTION:

• OUTPACING REVENUE AND OPERATING EXPENSE GROWTH.

• OUTPACING SAVINGS DERIVED FROM MOORE’S LAW.

Revenue

Tech Spending

Opex

MIPS

Server Instances

Storage Terabytes

-1.5%

1.2%

2.7%

12.6%

13.3%

14.0%

Banking: 2012 - 2014 CAGR

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PLATFORM ECONOMICS: A TALE OF TWO BANKS

2009 2014

60,000

120,000

22,500 22,500

Bank A: Mainframe Heavy

MIPS Servers

2009 2014

30,000 30,000 45,000

90,000

Bank B: Commodity Server

Heavy

MIPS Servers

FOR BANK A AND BANK B BETWEEN 2009 TO 2014:

• FLAT REVENUE

• 2 DIFFERENT APPROACHES TO CHANGING COMPUTATION NEEDS. 11

PLATFORM ECONOMICS: A TALE OF TWO BANKS

• BANK A (MAINFRAME HEAVY): 2X MAINFRAME INCREASE RESULTED IN 30% INCREASE IN CORE INFRASTRUCTURE COSTS.

• BANK B (COMMODITY SERVER HEAVY): 2X SERVER CAPACITY INCREASE RESULTED IN 49% COST INCREASE.

2009 2014

Bank A MF Heavy

Count Unit Cost Total Cost ($M) Count Unit Cost Total Cost ($M)

MIPS 60,000 $1,597 $96 120,000 $1,249 $150

Servers 22,500 $3,448 $78 22,500 $3,448 $ 78

MIPS + Servers $173 MIPS + Servers $228

Total Infrastructure $780 Total Infrastructure $1,024

2009 2014

Bank Bcommodity

Server Heavy

Count Unit Cost Total Cost ($M) Count Unit Cost Total Cost ($M)

MIPS 30,000 $2,041 $61 30,000 $2,041 $61

Servers 45,000 $2,973 $134 90,000 $2,563 $231

MIPS + Servers $195 MIPS + Servers $ 292

Total Infrastructure $ 877 Total Infrastructure $1,313

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PLATFORM ECONOMICS: A TALE OF TWO BANKSWITHIN THE RANGES EXPERIENCED BY MOST BUSINESSES TODAY, THE MAINFRAME IS INHERENTLY MORE SCALABLE BECAUSE DECREASES IN UNIT COST OFFSET VOLUMETRIC CHANGES MORE SO THAN FOR COMMODITY SERVERS.

0 100,000 200,000 300,000 400,000 $-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

Cost Per MIPS

Installed MIPS

Co

st

Pe

r M

IPS

-30,000 20,000 70,000 120,000 $-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

Window Cost per OSI

Total OSIs

Co

st

pe

r O

SI

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PLATFORM ECONOMICS: A NEW METRIC

2009 2014%

Change

Bank A $13.84 $10.55 76%

Bank B $12.31 $8.22 67%

Average Bank $5.44 $3.86 71%

Income Supported Per $ of Infrastructure Expense

• AVERAGE BANK: 29% REDUCTION IN INCOME PER INFRASTRUCTURE $ SINCE 2014.

• BANK A (MAINFRAME HEAVY): HIGHEST INCOME PER INFRASTRUCTURE $. 24% REDUCTION SINCE 2014.

• BANK B (COMMODITY SERVER HEAVY): LARGEST DROP IN INCOME PER INFRASTRUCTURE $ (33%).

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PLATFORM ECONOMICS: A NEW METRICIN ALL BUT 2 OF 19 SECTORS STUDIED, MAINFRAME HEAVY ORGANIZATIONS SUPPORTED MORE INCOME PER DOLLAR OF INFRASTRUCTURE EXPENSE THAN PEERS THAT WERE COMMODITY SERVER HEAVY.

Income Supported Per $ of Infrastructure Expense Mainframe HeavyCommodity Server

HeavyBanking & Financial Services $5.54 $3.88Chemicals $13.34 $10.67Construction, Materials, and Natural Resources $40.63 $30.47Consumer Products $8.00 $5.76Education $2.38 $2.26Energy $46.53 $36.29Food & Beverage Processing $29.56 $23.35Healthcare Providers $2.33 $1.75Industrial Electronics and Electrical Equipment $13.24 $9.54Industrial Manufacturing $5.92 $4.14Insurance $1.63 $1.24Media and Entertainment $9.97 $9.07Pharmaceuticals, Life Sciences, and Medical Products $11.13 $7.90Professional Services $6.62 $4.64Retail and Wholesale $22.77 $17.76Software Publishing and Internet Services $0.27 $0.33Telecommunications $5.71 $4.00Transportation $13.15 $10.26Utilities $13.97 $11.45Full Database $13.35 $10.55 15

PLATFORM ECONOMICS: RENEWED INSIGHTPAST STUDIES (2010 AND 2012) SUPPORT CURRENT FINDINGS. AN UPDATED ANALYSIS OF IT COST OF GOODS ACROSS 15 SECTORS SUPPORTS THIS HYPOTHESIS AND INDICATES THAT FURTHER LEVERAGE HAS BEEN ATTAINED IN THE PERIOD 2012 TO 2014.

Industry MeasureAverage IT

Cost of GoodsMainframe

HeavyCommodity

Server Heavy

% Mainframe Cost Less than

Server2010-2011 Differential % Change

Bank Per Teller Transaction $0.300 $0.125 $0.401 69% 67% 2%Mortgage Per Approved Loan $295 $100 $358 72% 68% 4%

Credit Card Per Transaction $0.14 $0.09 $0.19 51% 48% 3%Railroads Per Ton Mile $0.0011 $0.0012 $0.0020 39% 36% 2%

Armored Service Per Person $9,410 $7,124 $12,544 43% 35% 9%Automotive Per Vehicle $382 $279 $413 32% 31% 1%

Retail Per Store/Door $560,266 $453,444 $675,899 33% 27% 6%Utilities Per Megawatt Hour $2,580 $2,499 $3,345 25% 19% 6%

Hospitals Per Bed Per Day $82.88 $62.32 $91.56 32% 27% 5%Oil & Gas Per Barrel of Oil $2.33 $1.80 $2.61 31% 28% 3%Consulting Per Consultant $58,650 $48,766 $68,100 28% 28% 1%Trucking Per Road Mile $0.19 $0.16 $0.23 29% 20% 9%Airlines Per Passenger Mile $0.009 $0.007 $0.010 36% 30% 6%

Chemicals Per Patent $66,588 $58,922 $68,566 14% 10% 4%Web Sites Per Search $0.040 $0.042 $0.038 -11% -8% -2%

Average 35% 31% 4%

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PLATFORM ECONOMICS: NON FINANCIAL IMPACTS THE SCALE ECONOMIES ACHIEVED BY THE MAINFRAME ALSO HAVE A POSITIVE IMPACT ON RESOURCING AND ENVIRONMENTAL BENEFITS.

Mainframe Heavy

Commodity Server Heavy

Credit Card 0.04 0.23

Loan Organization 0.14 0.38

Process and Maintain $1M Loan 103 709

LBS of CO2

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

FTE Impact: Banking

Data

Cen

ter

FTEs %

of

Tota

l Em

-p

loyees

MF Heavy

CommodityServer Heavy

• ENVIRONMENTAL BENEFITS: EFFICIENT PROCESSING OF HIGH TRANSACTION VOLUMES LOWER MAINFRAME HEAVY FIRMS’ CARBON FOOTPRINT.

• RESOURCING BENEFITS: MF HEAVY ORGANIZATIONS BENEFIT FROM THE PLATFORMS SCALE ECONOMIES.

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CHALLENGES

• ECONOMIC CLIMATE OVER THE PAST DECADE HAS EMPHASIZED AGILITY OVER LEVERAGE.

• GENERAL MISPERCEPTION OF THE MAINFRAME AS AN ANTIQUATED TECHNOLOGY.

NEXT STEPS

• UNDERSTAND AND ARTICULATE HOW MAINFRAME CAPABILITIES HAVE EVOLVED.

• IDENTIFY HIGH TRANSACTION APPLICATIONS, WITH AN EYE ON GROWTH AREAS LIKE MOBILE, WHICH ARE BEST SUITED FOR THE MAINFRAME PLATFORM.

• COMMUNICATE BENEFITS USING TECHNOLOGY ECONOMICS “NEW MATH”: BUSINESS LEVEL, PRODUCT LEVEL, PLATFORM LEVEL, RESOURCE LEVEL AND ENVIRONMENTAL IMPACTS.