To Plot the Course of Network Change, Follow the Money

Last week, I mentioned that my input from enterprises suggested that 26% of enterprises had shifted their view of how to optimize network purchases from “new technology” to “hammer for discounts”. Monday, Nigel, Maven, and did a podcast about Juniper versus Cisco and about Arista and Palo Alto, and I commented that you can’t go head to head against Cisco, you have to fake them out. What I want to blog about today is how those points all intersect.

Let’s start by following the money. The shift in what network users think will help them in cost management is more significant than it might seem, because it’s tied to a broader change in how network spending is managed, and that larger change may indicate that new network technology will be harder to bootstrap in the future. That’s good news for incumbents, but potentially a risk for startups.

I’ve tracked enterprise network spending for decades, and through the entire period I’ve noted that networks are paid for through a combination of budget spending and project spending. Budget spending is the contribution that pays for sustaining the network-that-is, covering orderly upgrades and modernization. Project spending is the contribution that pays for everything else, things that require a separate business justification. In nearly all cases, it’s project spending that has to fund changes in technology.

Budget spending is usually driven in large enterprises by an RFP process with varying degrees of formality. The point is that the enterprise knows what they need to buy, what specifications are required, and they’re asking for prices. Think “Give me a bid” and you’ve got it nailed. Most successful bids, over the last 30 years or so, have conformed explicitly to the framework of the RFP. Over that period, less than 4% of the successful bids made any significant modification to the requested equipment framework, and over the last 15 years, the number is less than 3%.

Project spending is usually driven by an RFI, which presents vendors with a requirement set and sometimes some general constraints, and then calls for a solution and bid/pricing. Behind the project spending is of course the project, which is a set of business benefits that are assigned a value, a set of costs, and a calculated return on investment that has to meet corporate targets. Over the same 30-year period, almost half of RFI awards went to vendors who actually tweaked requirements and constraints somewhat, though that number has also dropped (to 39%) in the last 15 years.

If we forget technology for the moment and look at the process of converting a prospective buyer into a committed buyer, we see a pretty significant difference between budget and project spending. Budget spending is strongly influenced by sales teams. Not only are they usually the players who will receive the RFPs, they’re also often in a position to influence how they’re developed, obviously in their favor. The term “wired” is used to indicate an RFP that a vendor has influenced strongly in their own favor. Project RFIs, in contrast, tend to be driven by vendor marketing. In 62% of all RFIs I’ve assessed in the last 30 years, the project request came about because a line organization need and a technology capability known to senior management through media coverage or other non-sales channels intersected. That percentage has actually been growing steadily; in the last 15 years almost 70% of projects are launched that way. By the way, in the remaining cases the driver was a vendor sales team from the vendor who had account control.

Over the last 30 years, there’s been a major shift in the balance between budget money and project money in networking. For the first ten years, the two were roughly balanced, and this period represented the period of greatest changes in network technology and in vendor market share. In the next 20 years, the balance has slowly (and a bit erratically) shifted to the point where in 2021 only 13% of money was from projects. My data for 2023 suggests that number will drop, perhaps even to single digits, and that is likely to generate some significant forces on the network market overall.

The first of these forces is the force of inertia. Absent project money, history says that buyers are less likely to either adopt new technology strategies or even change vendors. Market share shifts less when project funding is suppressed, purchases are more likely to be pushed back during times of uncertainty because the option to “not refresh” infrastructure is always on the table, where network projects are often linked to things outside networking or even outside IT, which are difficult to derail.

The second force is the force of cost management. When budget dollars are so dominant, there is almost no interest in feature differentiation, only price. The presumption is that the technical status quo is being refreshed, and nobody even wants to consider rocking the boat by trying to introduce changes that would elevate consideration and approvals.

The third force is the force of negative reinforcement. Vendors tend to respond to budget-focused spending with product cost-cutting, which limits innovation and reduces the chance new features or capabilities will be introduced. As a result, there’s less chance that project spending will be stimulated, which continues to focus vendors on cost-cutting and so forth. Only a technology revolution brings the market out of this loop.

Our final force is the force of quota. Salespeople have sales quotas to meet, and they have to manage their time so that they can make their numbers for the quarter, and support their companies’ attempt to do the same. For decades, salespeople have told me that they dread the “educational sell”, meaning that they dread having to spend time explaining why a particular technology should be purchased, starting with how it works, how you transition to it, and so forth. They’re not paid to be educators, they’re paid to get orders.

What this brings us to is simple if a bit disheartening. Networking has fallen into a trap of their budgets’ making. Not so much the quantity of budgeted funds, but the fact that budgets are by nature a commitment to preservation and not to advancement. If the combined effect of our four forces isn’t broken, then networking will end up being a total commodity, both at the infrastructure level and at the service level, and that would have profound impacts on every player involved in the space.

The root of the issues networking faces is the same for computing, it’s complexity. The missions we set for both networking and computing have expanded radically in the decades since networking and computing started their dance of symbiotic association. We used to have technical solutions to challenges, and we now have components of technical solutions because it’s increasingly hard to grasp the scope of the missions and what we would hope to use to address them. What I’d hope to see is a re-framing of both the compute and network models to package the pieces we now believe are essential, and if we can do that we’ll promote a new age of growth in both spaces.