deal architect

Haagen-Dazs Light

Häagen-Dazs, whose great taste and texture comes from its 10% plus butter fat, had a challenge. The butter fat is growing unpopular as diet debates grew, but the butter fat is what differentiates it and justifies  its premium pricing. It  is finally rolling out a low-fat product version this summer using as its site states "an exclusive European process of slow, low-temperature blending, Häagen-Dazs Light ice cream is crafted from only the world's finest ingredients without any artificial sweeteners or fat substitutes."

Analyst firms have over the last few years lost much of their own "butter fat". I know so many excellent analysts who run their own business or have moved on to vendors (Erik Keller, Bill McNee, Bill Hopkins, Art Mesher, Carter Lusher - ex Gartner; Brian Sommer, Peter Kastner, Chris Selland - ex Aberdeen; Stan Lepeak - ex Meta; Gopi Bala - ex Yankee and many, many more). Analyst firms, though never really acknowledged they had lost their "butter fat" and they continued to expect premium pricing.

In the meantime, alternative, offshore market research options have started to sprout. I have partnered with a firm in India called Value Notes on a variety of projects. Inexpensive and responsive.

Vendors still continue to patronize analyst firms. But as they realize that analyst firms have diminishing influence with buyers, this market will also gradually move away.

Time for analyst firms to do some serious re-engineering - either add back the "butter fat" and justify the price premium or innovate their own version of "European, low fat processes" a la Häagen-Dazs

Welcome back, George

I met George Shaheen a couple of years ago -  after he had left Webvan. He and I used to spar when he ran Andersen Consulting (now Accenture) and I was a Gartner analyst and both of us had gone on to start-ups.  He talked about writing a book about this Webvan experiences - but I could pick up on his cocktail of emotions - disappointment, anger, guilt, nostalgia - only those who have experienced the joy and pain of being an entrepreneur can relate to this.

It is good to see him back at Siebel. For those who savaged him for Webvan, all I can say is if you have never run a start up and spent sleepless nights worrying about payroll, cash flow and doing things for which there is no clear cookbook or path, you should try to run one before you throw stones. This man built a machine at Andersen - one which has endured for years after he left and one that has survived relentless offshore competition.  He is operationally qualified to turn around Siebel - not just package it for sale.

Yankees/Red Sox and Oracle/SAP

The baseball season is so young yet it has already been an electrifying few games between NYY and Boston. Same with the SAP Oracle skirmishes. SAP acquired TomorrowNow earlier in year – a third party maintenance alternative for PeopleSoft customers. It will pick up some nice contractual data and potentially needle Oracle by winning some maintenance revenue. Oracle’s bid for Retek was stunning. Now press reports of a merger between SAP and Oracle – please no! We need them to compete – we need the drama! And I need the competitive juices going to the benefit of my corporate clients.

Seriously, though – there are other teams which are doing fine. I spoke to executives at Lawson and Deltek this week. You know what – they are enjoying the opportunity to execute while the limelight is on SAP and Oracle.

Oracle and the $ 10 b vertical question

In 1999 at Gartner I wrote a paper titled “ERP’s vertical voyage”. I said then “Non-manufacturing markets will get a lot of attention — and hype — from enterprise resource planning (ERP) vendors during the next few years. However, history shows that robust vertical extensions, like good wine, take years to develop and mature”

In 2002, an insurance executive said a PeopleSoft exec had told him insurance companies would not be seeing claims processing functionality any time soon since they were too “cheap” with IT budgets. Chicken or egg? ERP vendors did not have the functionality, and clients were not about to give up their lifeblood transaction processing engines.

Even though manufacturing and industrial markets make up less than 30% of US and European economy, ERP vendors have continued to primarily focus there (and offer horizontal functionality like accounting, HR etc to the service sector). Retail merchandising, trading systems, mortgage processing, utility billing – even today major ERP vendors do not have robust functionality.

Hence Oracle’s desire not to lose Retek to SAP. And there will be growing interest in players like Cerner (healthcare), pieces of SunGard (financial services – recently taken private) and other vertical specialists.

Which brings me to these questions: Should Oracle have saved $ 10+ billion it spent on PeopleSoft for instead buying non-manufacturing vertical extensions? Does SAP, relatively unencumbered, have a head start in this continuing vertical voyage? Or will insurance companies like the one above and other neglected verticals continue to get offshore vendors to maintain legacy vertical applications? Or will they skip packaged software and go straight to BPO offerings emerging around many vertical niches (see my note on BPO earlier in month)?

What is clear is the major apps vendors missed a significant opportunity in the last few years, and are now having to catch up in a hurry..

Accenture - "Mastersful" Marketers

Over my career, I have competed against Accenture (back when it was Andersen Consulting and when I was at PwC) and analyzed it (while at Gartner). I even started a company (IQ4hire) with an Aceenture partner and several other Accenture alum.  They are disciplined and to use Geoffrey Moore's terms, they are really good "tornado chasers".  They are never first in too many markets, but as market segments  take off - be in ERP in mid 90s, eBusiness in late 90s, now BPO - they are present in force and at high margins.

While at Gartner, I remember listening to an Accenture executive use the word "value" 20 times in his presentation.  I asked him what value his clients got when they paid $ 200 an hour for some mundane SAP report writing skill set. He did not skip a beat - "They paid our bills - they must see the value".

I can take ANY Accenture contract and easily find 10 to 20% savings (and more with detailed analysis) without losing a client much in the way of productivity or increasing their delivery risk. This is where their masterful marketing comes in.  They can usually convince some senior executive in the client that there really is little fat or that their premium is justified. Especially, when you watch Tiger Woods' miracle shot at the 16th at the recent Masters - and Accenture glows in its astute sponsorship of Tiger.

You got to admire that chutzpah and their "value selling".  They make negotiations fun!

SAP Deja Vu?

Bill McDermott is a great salesman. He wows audiences at prospects. And it is showing in SAP sales performance. Of course, the PeopleSoft Oracle battle and now digestion de-focus has helped.

Ideally he should have done a stint at Accenture before he came to SAP (he was at Siebel, Gartner, Xerox before SAP) because SAP is selling its own consulting services aggressively. I am not convinced SAP can do change management, program management, process re-design, testing and many other steps in a typical ERP project well. It is not stopping them from promising to do so.

They are also trying to get pricing back to the go-go late 1990 levels. This in a world where contactors have more reasonable expectations and offshore vendors are priced at a third to a quarter of rates. When asked about offshore rates, SAP has been known to say “our services are somewhat immature – not sure we can do that”. At a client where they were negotiated to more reasonable rates – imagine – an SAP consultant recently told a client “You paid B team rates – why do you expect A team performance?”

In the 1990s SAP let its implementation partners get out of hand. This time around it may itself lead its services ecosystem to over-heat status.

Of Serengeti and Software Migrations

Like clockwork, every year wildebeest and other animals perform their thunderous run (“The Herds of God”) across the Serengeti plains. For those who enjoy Africa and safaris in general, check out the article below on how the herd handles dangers, self-polices etc

http://www.travellerspoint.com/forum.cfm?thread=3663

I have always wondered how software vendors can get their users to be so driven to migrate as a group, with urgency to a new product release. Most software user base migrations take years and resemble “forced marches”. This is especially true when there is a major architectural/data model change. Even if the destination (a new release) has attractive features, the migration path is often fraught with dangers.

Most vendors develop some level of automated migration tools. But they only automate 5 to 30% of the migration effort. Here are some of the areas they ignore or cannot automate:

a) Even when automated conversion tools are provided, master and transaction records source and destination fields are often incompatible so that the converted data is often truncated, consolidated or other wise mangled
b) In most cases reports, queries, security, customizations, interfaces and several other items have to be manually migrated or custom coded.
c) Every re-implementation or new implementation involves a significant amount of testing – unit, integration, stress
d) A major upgrade calls for significant new certification. Under recent Sarbanes Oxley legislation, auditors want all kinds of comfort around risks as major transaction engines are upgraded.
e) New software versions or destinations call for a whole bunch of new training and documentation

Many vendors develop migration campaigns (several a year) and try to raid other vendor’s customers with “give away” licenses. The lowered license cost only offsets a small part of the migration cost, and so most of these campaigns are marginally successful.

As SAP and Oracle woo PeopleSoft and J.D. Edwards customers to migrate to their own current (SAP with its "Safe Passage" offering) and future (e.g. Oracle’s Fusion) offerings, this will be a huge issue they both need to focus on. Just like the “Herds of God” in the Serengeti, this herd can sense where the dangers are.

Software Market Consolidation

What consolidation? Read my and other views on the so-called market consolidation we are witnessing (I have extracted my post below)

http://www.sandhill.com/opinion/daily_blog.php?id=6

Memo to entrepreneurs - plenty of niches abound

Memo to technology buyers - talk of consolidation typically helps bigger vendors. Reward innovation and solutions that fit your business needs, not just "safe" solutions.

"What Market Consolidation? By Vinnie Mirchandani Apr 01, 05 In the DOJ case last year, Oracle argued – persuasively– that there was sufficient competition in accounting and HR software markets. It pointed to SAP, Lawson, Microsoft, American Management Systems and other competitors which would continue even if it absorbed PeopleSoft and J.D. Edwards. Accounting and HR software are mature markets – Frank Dodge (of McCormack and Dodge fame) began peddling asset accounting software in the late 60s. If that market segment is still fragmented what about newer software categories like PSA, PLM and several others that have only been defined in the last few years? What about vertical areas like utility billing, insurance claims processing, fixed income trading systems and hundreds of other areas where no major vendor even has a mature solution, forget a dominant position? How about emerging markets like India, China and Eastern Europe where most of the major vendors have only scratched the surface? What about new ways of buying software functionality in formats such as business process outsourcing? Yet growing talk (including this blog) is around software market maturity and consolidation. Give credit again to Oracle for fueling that debate just a few months after arguing the markets were fragmented. Larry Ellison, emulating Arnold, appears to be enjoying his new role as "The Consolidator". But even his Retek and Oblix acquisitions are very different from his PeopleSoft one – they are product extension plays. You could point to IBM's acquisition of Ascential as another sign of a consolidating market. But they also bought Daksh late year – a player in the still nascent BPO space. While it is always interesting to listen to Larry Ellison's views on the market, I think the software industry should also listen to Jeffrey Immelt, CEO of GE. The 2004 annual report from GE is a fascinating read – and a poetry on business optimism. He talks about new frontiers – in biosciences, renewable energy, "verticals" financing, Hispanic television, global mortgages, and countless other areas. 90% of GE's earnings in 2005 will come from its "growth engines" rather than its "cash generators". In 2000, 33% came from the latter. Sound familiar? The software industry is similarly addicted to its maintenance revenue and other "cash generators". Time for it to refocus on growth engines. There is clearly a role for M&A in developing growth engines – GE is a voracious acquirer. But the focus should ideally be on growth, not just consolidation. Frankly, there are so many unexplored, unsaturated markets that good, old fashioned entrepreneurial work that our industry has such a proud record of is will continue to be needed even as we look for talent to help smoothly assimilate acquisitions."

BPO and impact on software

I have received a number of comments about this BPO article I wrote in the Sandhill newsletter

http://www.sandhill.com/opinion/editorial.php?id=15

some say it is too scary...others say it  is timely as the software industry searches for new products and business models. One thing is for sure..systems integrators and outsourcers like Accenture and EDS have felt the impact of offshore competition much more directly than ISVs have...in the next wave the ISVs will feel the impact

GDM - a competitive barrier?

Several Indian vendors have honed what is broadly called the Global Delivery Model (GDM.) It is the ability to capture knowledge and specifications, smoothly transition that to offsite developers, and re-integrate the results at the client on-site location. The model requires several individual components to work well. These include knowledge capture/playback confirmation, hourly/nightly handoffs often on a 24x 7 basis, quality control and continuous improvement efforts, staff mobilization/demobilization as efforts scale up and down, onsite and offsite staff logistics, staff recruitment, training and retention, expense and time billing for teams across borders, demanding standards for security/business continuity/telecommunications connectivity at the offsite locations

Not trivial. But is it a “competitive barrier”? I have spoken to several Indian IT services executives who believe it is. They have honed this capability over a decade over hundreds, if not thousands of client engagements. It is part of their fabric. 3-4 years ago I would have agreed with them. Now, I am not sure it is that difficult to replicate. For starters the early Indian firms to build the GDM like Infosys and TCS have a well documented path of how they did it, and several of their alums have gone on to build it for mid-tier IT providers. Additionally three other sets of vendors are trying to replicate the model:

a) Western firms like Accenture, Sapient, Syntel and others. Each has ramped up capability in India (and elsewhere) to thousands of staff. They are using their Western brands to advantage in offshore recruiting and already have established onsite presence at client locations. Firms like Accenture already had remote solution centers in the West in the 90s.
b) A number of ISVs could have outsourced product development to Indian services firms but for various IP and other reasons have chosen to build their own captive subsidiaries. In recruiting. they sell the fact that their engineers are working on cutting edge technology and their efforts show up in commercial products not just behind the firewall at an individual client. Oracle and others have successfully built teams numbering thousands of staff
c) A new generation of BPO vendors is replicating the IT GDM model in various white collar transaction processing areas.

Another reason these providers are doing in themselves is they can see gross margins of Indian IT services firms are in the 40+ % level. Even it they cannot be as optimized, the build v/s buy option looks attractive.

So, not sure the Indian IT services firms have a huge, sustainable advantage with their GDMs. Perversely, the newer entrants are competing for the same talent pool stressing the efficiency of GDM models. Staff turnover rates of over 15% are common in India IT firms - even more in the BPO sector.

The question to me is less can new entrants replicate it, but can anyone keep it optimized?