expenditures, spends only 0.7 percent of its IT systems integration revenues on R&D, reflecting its reliance on off-the-shelf components researched and developed by IT vendors and the academic research community.31

Taken together, these facts suggest that most of the research included in federal statistics for computer and data processing services is performed by firms in the prepackaged software industry (e.g., Microsoft, Oracle, and SAP) rather than firms in the custom programming and systems integration industries, and insiders discount the amount of research reflected in the figures. Indeed, the largest supporter of research on systems and services appears to be IBM. Although detailed breakouts of the company's R&D expenditures are not available, managers in the Research Division estimate that about 25 percent of the company 's research budget is devoted to services and solutions. This figure is only a rough approximation, because some software research (e.g., speech recognition) could have been considered part of services and solution work but was not. But the 25 percent share is much higher than the corresponding share in the early 1990s, when services and solutions accounted for just a tiny percentage of the research budget. 32

The apparent lack of attention to large-scale systems issues is accentuated by changes in the structure of the IT industry. Historically, large vendors of computer and communications technology such as IBM and AT&T were vertically structured. They enjoyed both significant returns on investment that could be devoted to systems research and a clear competitive advantage from doing so. Over the past decade, the IT industry structure has changed, becoming horizontal rather than vertical, with individual companies focusing on only certain portions of the IT value chain—microprocessors, software, or PCs—and addressing a full range of applications within that functional group. Examples of horizontal structure are evident in the computer industry, with Microsoft specializing in operating systems and applications software, Intel in microprocessors, Compaq in computer platforms, and SAP in systems integration and business applications. The communications industry exhibits a similar pattern, with the separation of voice and data communications service providers (such as AT&T and America Online) from manufacturers of networking equipment (such as Lucent Technologies and Cisco Systems) and underlying communications facilities (see Box 2.4). Horizontally structured companies have less incentive to invest in large-scale systems research, because each is responsible for only a piece of the overall infrastructure and none has a holistic view of the systems created from its components. Although IBM has increased its emphasis on systems, few other IT companies conduct research in these areas—and, as suggested earlier and elaborated upon in the next section, organizations that integrate systems or build custom applications do not support research.

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