deal architect

Nicholas Carr: The Francis Fukuyama of IT?

In 1989, Francis Fukuyama, then deputy director of the State Department's Policy Planning Staff (now professor at John Hopkins) predicted the fall of Communism and the world beyond in an article titled “The end of history”. In 1992 he elaborated his thoughts in a book.

He explained himself thus: “This did not mean that the natural cycle of birth, life, and death would end, that important events would no longer happen, or that newspapers reporting them would cease to be published. It meant, rather, that there would be no further progress in the development of underlying principles and institutions, because all of the really big questions had been settled.”

His views brought him instant fame as a neo-conservative. The Berlin Wall fell a few months after his article and he looked prophetic. He has also borne criticism since as Iraq, 9/11, new world realities emerged that challenged “the end of history” thinking. His recent criticism of the Bush administration has made him even more controversial.

Nicholas Carr is trying to be the IT industry’s Fukuyama. He stirred up the industry with his 2003 Harvard Business Review article “IT doesn’t matter” and a book similarly titled. To his credit, he has faithfully kept track on his site of comments/reviews of his theme. He has been savaged in a number of those reviews. He persists, though. Borrowing from Fukuyama, Carr followed up last month with an article called “The end of corporate computing” . He projects a move to “utility computing”, similar to how companies moved away from proprietary power generation to buying it from large, more efficient utilities. Having argued the point in 2003 that IT does not matter, now he justifies outsourcing all or most of it.

Both Fukuyama and Carr serve a useful purpose – they challenge conventional thinking. Carr also appears to have a very good sense of humor - always welcome in the tech world. But....

Margaret Thatcher, one of the major contributors to the Fall of communism, and conservative herself is said to have reacted to Fukuyama’s article thus “The end of history? The beginning of nonsense….”

I am myself a big fan of outsourcing done well but my reaction to Carr on his views are in the posting “The end of corporate computing? The beginning of chaos…”

The end of corporate computing? The beginning of chaos...

Nicholas Carr, author of the Harvard Business Review article titled “IT doesn’t matter” in 2003 followed up last month with an article called “The end of corporate computing". He projects a move to “utility computing”, similar to how companies moved away from proprietary power generation to buying it from large, more efficient utilities. It fits with his first argument that IT doesn’t matter - now go outsource most or all of it.

I am a big fan of outsourcing – done selectively, done right and done at the right price/service levels. But reading Carr’s assumptions around utility computing and his justification of IT outsourcing I ended up with 6 questions below. While Carr says his vision is “long term”, I am concerned (as you read question f) about the consultant “ecosystem” which will give his ideas short term momentum before they are scrutinized.

a) WHEN WILL THE ARCHITECTURAL UNDERPINNINGS BEHIND HIS ASSUMPTIONS MATURE?

Two of Carr’s underpinnings for utility computing are the maturing of grid (and related on-demand) computing, and Web services. IBM has been pushing its “On-demand” model for years now. Forbes magazine has a sobering account of its progress in its article “"On-demand" Letdown"

Services oriented architectures are still evolving in very divergent ways - see my blog titled SOUP – Services Oriented User Procrastination

Neither is mature enough as a platform for the ambitious IT outsourcing Carr recommends. Not sure they will be 3 years from now. If anything, it makes the case for more selective outsourcing in mature areas.

b) ARE BUSINESS EXECUTIVES READY TO BUY AND MANAGE TECHNOLOGY EFFECTIVELY?

Carr is cynical of the CIO and of corporate IT in general. After Y2K, ERP and ebusiness project overruns a number of business executives are also justifiably cynical. But to jump from there to assume a VP of Sales or a CFO could buy or manage technology any better is huge leap of faith. There is a reason why the Deloittes and SAPs try to sell direct to the business execs and try to bypass IT – because the margins are better. Show me any contract where IT was not involved in procurement and I can show you 25% to 50% fat that could be cut out.

There is also an assumption that business execs will “buy” more than “build” technology than CIOs do. Most CFOs I know are far more loath to outsource even low value stuff in their areas than their CIOs are. How many CFOs continue to cut checks, handle collections, process time and expenses? I was trained as a CPA – trust me I can come up with all kinds of internal control excuses to not outsource them. Here’s another example - I know a CIO who wanted to discontinue pricey annual maintenance from their HR software vendor and move to a lower priced, utility model, third party support firm. The project was killed by the company’s VP of HR who did not want to displease her “strategic vendor” - the HR software vendor.

I would like to see the conversation not just focus on outsourcing IT – let’s look in to outsourcing everything tactical.

c) WHAT ABOUT LABOR, NOT CAPITAL, INTENSIVE ELEMENTS OF IT?

Over 70% of IT budgets are in labor intensive components (software/content, external services, internal IT staff). The rest – hardware and telecommunications - are capital intensive and much more aligned with electric utility scale and economics Carr talks about. IT labor has been stubborn to deliver economies of scale/repetition around. EDS has over 110,000 employees. The average Fortune 500 CIO has 500 IT employees. IBM has 40,000 sales people – more sales talent than most Fortune companies have employees in total. Yet, in spite of this scale, IBM and EDS often cost more per employee than do internally burdened staff costs.

There is actually considerable excess capacity around IT labor – in offshore markets and “at home” markets. For all the noise around offshoring, all the offshore vendors together have less than 5 % market share of the global IT services market. But there are significant structural issues around using this capacity – political issues around offshoring, and cynicism around using “at-home” labor.

Let’s open up the labor debate, not just outsource it..and not let people like Lou Dobbs keep that conversation in back-room, whisper mode.

d) WHERE WOULD YOU BUY "INNOVATION" ON A UTILITY BASIS?

I agree with Carr IT does not often bring strategic advantage. It can, however, be a huge driver of innovation – even if in tactical areas. CIOs I have worked with in the last couple of years have a) rolled out Blackberries and mobile applications through their entire sales force b) rolled out WIFI to entire corporate campuses c) enabled RFID and GPS tracking throughout their logistics chain d) implemented sophisticated data mining around customer data. In each case the business productivity payoff was phenomenal. In each case, when they started these projects 2-3 years ago, even if they wanted to they could not find a systems integrator to pull the project together. Their internal teams had to pull together early, often beta technology from multiple vendors.

Not sure “utility vendors” will support future innovation needs – or that the VP of Sales above could have implemented the Blackberry program or the VP of Logistics the RFID initiative without solid internal IT support.

e) IS THE IT VENDOR COMMUNITY DISCIPLINED ENOUGH?

Carr extrapolates price/performance around hardware to all of IT. See my posting around “What if Intel was a services vendor?” Systems integrators have done thousands of SAP projects – in level of effort their work plans even today show hardly any productivity improvement since the early 90s. Accenture has had a Philippines unit for two decades. It essentially used it as a regional delivery firm. Till Indian firms showed that the global delivery model could work around software, Accenture did not much leverage its Philippines cost arbitrage for its Western client base.

Financial, MRP and other core functionality in SAP, Oracle and other ERP software was developed in the 80s. They recouped their investment a long time ago and still expect to charge similar pricing even today for even that functionality (you can understand the higher pricing for more recent supply chain or CRM functionality). A CFO at a fashion company recently marveled at ERP pricing “I wish I could sell even 6 month old merchandise at today’s prices”

Swapping out one electric utility for another is child’s play compared to swapping out a major enterprise IT vendor. Till most IT vendors show consistent productivity improvements and pass along savings of scale, we should be wary of the “lock-in” the “utility computing" model would give them.

Even around hardware which has shown huge price/performance gains over the years, there are substantial maintenance and other “add-ons” which negate the gains. Ask many CIOs and they will tell you EMC, the storage vendor has been one of the most difficult to manage costs around. Ask CIOs who are experimenting with Linux how much more they are saving compared to their Sun gear. In the utility model, would they have this pricing transparency?

Electric utilities are regulated. Not sure IT vendors, with their entrepreneurial roots, can ever accept being regulated. While we occasionally slap Microsoft or Oracle on their wrists, not sure our bureaucrats would even know how to regulate them.

f) HOW MANY STRATEGY CONSULTANTS WILL CAPITALIZE ON THIS "PARADIGM SHIFT”?

I have been in a number of clients where a McKinsey or consultant of similar ilk was brought in to do a “technology strategy” project. There was one project where one of these firms developed a technology sourcing strategy – there was no customization for buying PCs v/s buying software. No different thread for planning a software maintenance renewal or negotiating a hosting contract. My instructions were “Do not criticize the work this firm did – they have friends at the board level. But flesh it out 5 levels deeper”. Such firms happily offer to develop “offshore strategy” when they could not tell you the difference between firms like Aztec or Zensar, or the difference between EAI and PLM skillsets.

What Carr is talking about at his high level perspective will be read in a number of board rooms and airline magazines – and will bring such “technology strategy” consultants out in droves. Many probably went to school at Harvard and know Carr. Really smart consultants – just not very technology knowledgeable. But, they cost companies millions and their report plus six quarters may buy you a cup of coffee at Starbucks – may be.

MY VIEW OF THE WORLD

I am all for outsourcing - I constantly put up GE’s 70% IT outsourced model as a benchmark. But it has to be done well, selectively, and cannot just focus on IT. And to do it without the CIO is foolhardy. He/she is far more sophisticated than his/her other executive peers around process benchmarking, price/performance analysis and importantly in setting up service level agreements with vendors. He is also used to a much faster rate of change.

Utility computing, web services and open source, VoIP, blade servers, global delivery models are positive developments every CIO should take advantage of – but on his terms.

The CIO also needs to learn to swim through the sea of reports “technology strategy” consultants I mention above are about to generate quoting Carr early and often.

May the salesforce.com be with you

salesforce.com has had a successful product even as ASPs and other “software as a service” offerings around have faltered.

While analysts have all kinds of explanations for their success, as a user (at my start up) I liked 3 things about their offering

a) they were “vertically integrated”. I got one price for the software, hosting and services. ASPs like Corio expected you to sign a software license with the publisher (like Oracle or Siebel), and you often had to hire a third party SI for the implementation.
b) I liked the low cost of entry,expansion and potential switching. I could export my customer data pretty easily. I did not get the feeling of “lock in” that is so common with other software.
c) It “democratized” data access across the company. Sales people can be data squirrels and they resent having to report – to anyone, anytime. They did not find the tool too onerous (of course they all bitched they still liked Act! better on their laptops) to populate, and executives could access that information on their own anywhere on the web.

Where does the company go next? I know the temptation will be to chase after the bigger ERP and CRM boys. I would like to see them focused on departmental solutions. In the mid '90s, Hyperion had an opportunity to expand beyond budgeting and consolidation applications to other departmental solutions – treasury, taxation etc. They turn a wrong turn towards ERP transaction processing capabilities, and then with Arbor became a more general purpose analytical engine. The market for divisional applications – travel, expense, currency management – is still pretty fragmented and plays well to salesforce.com’s strengths. It also plays well to Intuit’s strengths. Marc Benioff may not agree – but I think he should focus more on Scott Cook than Tom Siebel.

SOUP - Services Oriented User Procrastination

The software industry is abuzz with talk about Services Oriented Achitectures and Software as a Service (SaaS). But the definitions vary considerably:

a) salesforce.com can justifiably argue its model and its boast "the death of (traditionally packaged) software" was right on
b) IBM with is recent Corio acquisition will repackage the ASP model (and rethink the capital intensive model that bled Corio out of over $ 200 m in capital and also likely banish Sun and HP gear from its customer base) across a wide range of applications. IBM expects to have 100 application vendors in its SaaS "enablement" program by next year.
c) SAP announced at Sapphire it was exposing 500+ web services entry points to its transaction engines. I got a quick demo and was told the number would triple in the next two years. Probably need a taxonomy tool to keep all that straight
d) Many BPO vendors are positioning their services as the ultimate SaaS

So across the spectrum of software, hosting and implementation/maintenance services - the SaaS models are quite different - vertically integrated like salesforce.com and some of the BPO offerings, less so with the others

The variety of definitions reminds me of client/server models in the early 90s. I remember the Gartner 5
definition model (remote presentation, distributed transaction etc). I also remember the mood swings some vendors went through as they rolled out client/server architectures. Oracle went from a character based user interface to its Smartclient to its Network Computing architecture in less than 3 years. The inside joke at Gartner was the Big "O" was not Oprah, but Oracle - thin, fat, thin...Who paid the price for this architectural thrashing? Customers.

Corporate buyers are right to be wary till robust (and winning) SaaS models evolve...they also need to be wary about economics. More than architectural re-engineering, the financial re-engineering in most software companies away from the cash-rich, upfront license and the margin-rich annual maintenance revenue stream will take some time.

Yes, corporate buyers are entitled to procrastinate and only opportunistically take advantage of SaaS

Chinese Entrepreneurs and Dave Duffield

The 21st  Century Business Herald asked me to write a column on Dave Duffield.  The editor, Xu Zhiqiang, tells me it is in the top 3 financial papers in China. I titled it "Dave Duffield a "gentleman" technologist". Not sure how they found me or how it got translated (click on image below to see larger type size). But I hope budding Chinese entrepreneurs will emulate his somewhat old-fashioned style of business

VCs - More Indiana Jones and Captain Kirks needed

Sandhill Group (MR) asked me to contribute a blog on the continued relevance of VCs, whether they have changed etc. I have cut and pasted it below.

My views on VCs are in line with market opportunities. Plenty abound in spite of market talk of "consolidation" and adventuresome and articulate VCs are what the industry needs to lead us there...

"I did not always agree with George Shaheen when he ran Andersen Consulting (now Accenture) and I was a Gartner analyst. But he made a speech years ago I still remember. He said he wanted Andersen to become like Bechtel. He wanted metaphorically to go to remote places in the Brazilian Amazon and build cities – in his case "digital cities". While Greenpeace may disagree with the logic of doing so, it left me with a romantic notion of what tech leaders do. Dreaming big dreams.

To me that is what Valentine and Doerr and Khosla have done in so many market segments. We need more of them, not less. As I have written before all this talk of market consolidation is premature – if we just follow GE around the world (places like Tataouine - Luke Skywalker's home world and the town in Tunisia) there are hundreds of new opportunities - see my blog on this here.

Having said that as here are 6 tactical areas I think VCs can do better:

a) Provide more industry leadership. With all the talk about "IT doesn't matter", we need more industry salespeople to talk to CEOs and other business execs about the magic of technology. A few like Ray Lane of Kleiner do so. Most VCs seem to mingle with each other and other financial types.
b) "Customer revenue is mother's milk, VC money is sugared water". – it's ok to diss yourself to entrepreneurs. Keep them focused on customer and revenue. Bringing a wider buyer rolodex – a) above again helps – is one of the best things you bring to your entrepreneur. Hate to put is this way – but the capital you bring is just fuel. Important, but undifferentiated.
c) Tough-love is even more important. In the start up I founded we got too much money in the first round, way too little in my second. We should have shut down when the second round we raised was 40% of what we needed because the capital markets had turned in the summer of 2000. Instead we ploughed on when we should have been slapped to our senses. Now I know - but we entrepreneurs have one or two or three data points – VCs have hundreds.
d) Markets evolve – so could your thinking. I am constantly amazed US VCs still think services are bad investments – they cannot scale, margins are poor etc. Have you seen Cognizant's performance – revenue growth in excess of 50%, gross margins of 45%, valuation of 10X revenues? Ditto for Wipro, Infosys and others. They are just different manifestations of software.
e) Do not uproot entrepreneurs unless absolutely necessary. See my blog titled "Californication" here.
f) Rethink comp models – much more fresh management blood would move in to start-ups if we re-thought the cash poor/equity rich model. Yes. folks like George Shaheen.

The cynics say "but look what George did after Andersen with Webvan". I would like to think VCs can instead relate to the scene in "Indiana Jones and the Last Crusade" where the collector known in the credits as ″Panama Hat″ tells Indy, ″You lost today, kid. But that doesn't mean you have to like it.″ And in a show of admiration for the kid's spunk and courage, takes off his hat and places it on Indy's head."

"Cool vendors will drive IT Innovation"

so reads the masterfully understated title of a series of Gartner reports on promising new vendors in various tech categories..

Gartner has historically been better at covering vendors and markets as they mature so this is encouraging...no doubt Gartner is looking for research, symposium and other revenue from a new generation of vendors. It is refreshing, however, to see this in the light of all the talk around market consolidation (such talk even in the relatively young offshore market). Gartner's signature Magic Quadrants often help propagate consolidation talk - because they come out only once or twice a year they give a snapshot, static view of any market segment. There was some talk about putting directional arrows on each vendor on the quadrant - moving up, down, sideways. Consolidation talk typically helps larger vendors and discourages innovation.

I have an immigrant's optimistic view on this ...every wave of immigration (at least in the US) has made previous generations more productive...newer vendors do the same to a technology portfolio.

Nicholas Carr on Sapphire

I left Sapphire Wednesday night and missed Shai Agassi's speech on Thursday. But courtesy of Chris Selland I happened to see Nicholas Carr's version of it. He will not win any more friends in the IT world for this pretty funny commentary, but let's face it he did not dream up the speech.

Judging by Kagermann's and Agassi's speeches SAP is playing in to Oracle's hands if it keeps pushing architecture talk more than business functionality...

But if SAP pushed the tech buttons, its guests at Sapphire did not. Mike Capellas' speech - clearly that had a bunch of 802.1 tech talk in it, but it was a marvelous business story. Also the CIO panel on Wednesday focused on a number of business issues and all the service partner talk in the booth space was pretty business oriented ...

Al Case on Open Source

Al, my friend and former Gartner colleague has a series of great posts on open source - from a practical, commercial perspective

one on IBM's focus on open source

The economics holding back open source

and the risks of open source components in commercial software

I know he is a big fan of open source tools and uses many of them...like many of us he is eager to get that community much more mainstream

SAPP-power-HIRE

while more subdued than in the late 90s, Sapphire is still the most important IT event every single year. Yes Comdex used to bring bigger crowds, and Gartner Symposium/ITxpo still brings together large numbers of mid-level IT professionals, but Sapphire brings out major CIOs and top execs of most of SAP's hardware, services and other partners. It reeks of big IT money.

One of the other things I used to really enjoy at past Sapphires was an hour Dr. Hasso Plattner, the former CEO of SAP religiously allocated to Gartner analysts. He would charm us, scold us, market test us. While his PR handlers would faint at some of the stuff he told us, the rule for that session was Las Vegas: "What is said here, stays here"

Heard the Ellison "mooning" story - two versions one reported by WSJ and BusinessWeek
and a different perspective in Sailing World . He had told us about the incident at a Sapphire 4 years earlier.

Sapphire is still the industry's Paris Air Show.