deal architect

Tastes Consolidated! More Competition!

I choked on my Miller Lite when I read this research alert (registration required) from Saugatuck which says the Big 4 software firms - Microsoft, IBM, Oracle and SAP are driving "65 percent of software industry revenues, and more than 88 percent of earnings." Saugatuck is an advisory firm founded by my former Gartner colleague Bill McNee, one of the most likable and smartest Gartner analysts I have known. 

Just recently, I had done an analysis of the software market for this blog -  Larry Ellison's version of  "Survivor" - and that showed the 4 vendors with about 35% of the market cap around business software and services  - given that they have higher market valuation to revenues than the rest of the market Saugatuck's number of 65% of revenues was particularly striking.

So I reached out to Bill. Here's part of his response:

"Saugatuck is taking a narrower definition than you, focusing on "packaged" software (whether it be at the OS/platform level, middleware - broadly defined to include database, network/systems mgmt et al, or at the packaged enterprise apps level, both best-of-breed and suite) in contrast to all of the custom development work that is done (in the variety of venues available).”

"So at the end of the day, what we are talking about is essentially license and maintenance revenue for a classical "software" company. The denominator of our equation is taken from Dataquest's most recent Market Databook which has the classic software industry at around $ 94 billion at YE2004"

Bill, thanks for the explanation - but I still think the numbers are way off.  For SEC filings Oracle, SAP and Microsoft use the SIC code 7372 - Prepackaged Software - which is close to your "classic" definition.  If you look up Edgar for this code there are over 700 software companies listed (the total list is over 1000, but some have been acquired or have not filed recently). Then if you throw in countless private software companies and non-US companies like  iSoft, the UK healthcare software company (revenues over $ 450m); i-flex, the Indian financial services  software vendor (over $ 200m), Temenos the Swiss banking software vendor (over $ 150m) and many others  even the "classic software" market is far more fragmented than appears on surface.

Then look at IBM. For its SEC flings, it still uses its legacy SIC code of  3570 - Computer and Office Equipment. Therein lies the problem with using "classic" definitions.  IBM gets only 30% of its revenues from hardware. Oracle gets 70% of its revenues from services and support. The world has moved on.

Talking of "classics", allow me to invoke the 1960 Harvard Business Review article  "Marketing Myopia" by Theodore Levitt.  If the Big 4 continue to define the market as your "classic" definition they may feel good for a while about their market strength, but they will be blindsided by coming BPO competition. They will continue to be outflanked in vertical markets by the likes of SunGard and Cerner. And deep infrastructure capabilities at vendors like CA, Mercury and HP. Continued custom development by the likes of Accenture and Infosys. And new generation SaaS and open source models. Ask any CIO and he/she defines all that and a lot more as software.

Clearly, the Big 4 are not myopic.  They have been voracious acquirers the last couple of years. Microsoft is verticalizing its business applications and making large investments in search, colloboration and other software.  But while they scamper to diversify, it suits them to use your and other "consolidation" messages to advantage with 2 audiences:

a) Buyers – The message there is “Do not bother with the other riff raff, just look at us 4. Oh and by the way, since it the market has consolidated down to us, we will not be discounting much”.  The problem is the Big 4 have to offer today is  mostly "utility" products.  See my blog “The Giant Crunching Sound” about how CIOs will continue to squeeze Utility Spend to free up money for Innovation spend.

B) Other vendors - "Let me acquire you before you get consolidated out”  or if they do not get the vendor use the "the market is already consolidated, so we did not need that" explanation.  (Chris Selland who has been saying the CRM market is consolidated, suggests this in his recent post Have I been Had?). The problem with the logic is the “riff raff” is over 65% of the market cap (and a lot more if you include all the still private plays).

Bill, it's not about the numbers. Too many people are writing the software market off as "consolidated". Such talk just discourages software entrepreneurs and is disrespectful to the BEAs, Lawsons and countless others. Yes, the Big 4 grew big because they once had some innovative products - but look at their lack of innovation the last few years. From CRM to Web services to Blogging software they have mostly been followers. When you encourage buyers to consolidate because that "brings operating efficiency", the reality I have seen in my clients is the administrative and integration savings are often much lower than the "vendor lock-in" costs of such consolidation.  This also when SAP itself is telling users to get ready for an explosion of new vendors which will develop functionality around its planned thousands of web services.

The Big 4 have clear roles as Tier 1 vendors, but so do so many other software and services vendors as we move to more of an auto and aerospace industry model.

Now, Bill when can we get together and share a few Millers? I promise to keep the "C" words out - no classic, consolidation or Coors...cheers!

Technology Innovation for Modern Columbuses

ok, so this is technically not about business use of technology...but what a marvelous story of the Hunters and their 7 year sail around the world 

The Hunters have benefited from a stream of technology improvements from the likes of John Harrison, an English clockmaker in the early 1700s  to more recent technologists like  Dr. Jim Clark, of SGI and Netscape fame. Not to mention all the innovations that help with "massive amounts of navigational, structural, and meteorological data" to compete in  events like America's Cup.

The chances the Mirchandani family will do something similar are pretty slim. My kids went to a sailing camp last month and hated it. May be as they grow up the Little River Band's words "The albatross and the whales they are my brothers..." will inspire them. And I will have won the Lotto.

 

Technology Innovations - US/Mexico Border Security

Naysayers see the US/Mexico border as nothing but trouble, but the reality is the truck and rail traffic both ways represents over $ 200 b in a year in merchandise. BusinsessWeek has a story - A Border Transformed on how the border is using technology to keep the bad guys out, yet not stifle the vibrant trade.  It must be the most high-tech border crossing in the world, far more sophisticated than the US-Canada one.

The article talks about usage of a number of new and established technologies:

a) Use of transponders to allow use of high speed lanes for those who qualify for the INS's   SENTRI program
b) Electronic Pre-notification an hour before crossing - using supply chain concepts behind Advance Ship Notice (ASN) EDI transaction
c) The Free and Secure Trade (FAST) program to pre-certify manufacturers, importers, carriers
d) X-Ray, Gamma Ray detectors to scan trucks and rail cars and portable radiation detectors

What the article  does not describe is the technology investments going into the trucks and the railways - the RFID, GPS Tracking, Route Planning and a whole bunch more.  Not to mention all the INS, customs and other databases and analytical technologies.

As the Taco Bell commercial says - some one is Thinking outside the Bun here.

BusinessWeek on Innovation

BW this week has a whole issue of articles on creativity and innovation.  You HAVE to beg, borrow, steal or buy this issue. Some powerful themes:

- " "What was once central to corporations - price, quality ....is fast being shipped off to lower-paid, highly trained Chinese and Indians..."

"Increasingly the new core-competence is creativity..."

"The Knowledge Economy as we know it is being eclipsed by something new - call it the Creativity Economy"

and a bunch of innovation examples in the issue.

More ammunition for CIOs to crunch "utility" IT spend n their budgets and move more to innovation budgets. Kudos to companies like Hertz, Starbucks and others I have cataloged below which have already been using IT innovations for years to improve customer, partner or employee experiences.  CFOs, VP of HR and others can similarly crunch their own utility spend by effectively using BPO.

Two big gating factors in all this:

1)  the emotional reaction to global competition in the West as I have written in a series of posts on China/India.
2) vendor behavior. As I wrote in The Giant Crunching Sound, incumbent utility vendors  are sucking up way too many dollars and continue to expect innovation pricing. If anything, the stampede to outsource may inflate those costs even more as I wrote in The Economics of cheap.

Keep on crunching...and keep on innovating.

China/India: What's good for the goose...

Manmohan Singh, India's Prime Minister is his recent speech to US Congress said "We admire the creativity and enterprise of the American people, the excellence of your institutions of learning, the openness of the economy, and your ready embrace of diversity."

Hu Jintao, China's President in a speech in May said  "China will keep opening up its market, find new ways of using foreign capital, improve on legislations and regulations for encouraging and protecting foreign investors, revamp foreign economic management, step up protection of intellectual property rights, and work still harder to help foreign investors and create an even better environment for trade and economic cooperation between China and the rest of the world."

Promising talk, gentlemen.  Now execute on your promises. Open up your domestic markets. Allow young Americans and Europeans to come work freely in your countries. Allow freer capital flows.  Streamline your bureaucracies. Dramatically expand your middle classes. And encourage them to travel. And try not to bristle about "national sovereignty" every time pressure builds for freer trade or currency revaluations.

Those of us who keep pushing for free trade, capital and labor flows in the West in the face of growing worries,  need your assurance and actions that you will push for the same on your side.

The Dream is Alive

The space shuttle (STS-114-Discovery) took off a few minutes ago. What a tribute to science and technology!

Living in Florida, I have taken detours off highway 1-95 several times to run in to the Kennedy Space Center and just see the IMAX movie on the shuttle. The views from space, the night time take off, the sonic boom, Cronkite's narration - sends chills down my spine even after it was made 20 years. 

On a side note, here's to program managers who make tough "go/no-go" decisions even on more mundane IT projects. Your relentless testing, your sweat and your prayers all matter - even if you do not get much credit.

God speed, NASA!

Desert Roses

"I dream of rain
I dream of gardens in the desert sand..."
Sting

I thought of The Desert Rose when I saw this interview with i2 founder Sanjiv Sidhu. I admire entrepreneurs like him who persist and continue to dream of gardens even as the desert sand blows around them.

i2 today, of course, is a shadow of what it was when it acquired Aspect Development for over $ 9 b in 2000.  i2's vision was to add $ 50 billion of value for its customers by 2005.  I have only met Sanjiv a couple of times, but I was proud to have "discovered" i2 as a partner for PwC in 1993, way before they hit the big time. I imagine the last few years have been tough but he appears quietly resolute as ever.

One person who knew Sanjiv better was Art Mesher, my Gartner colleague. who influenced supply chain thinking in the 90s and went on to practice what he preached at Descartes. Now CEO, he has similarly persisted in his vision and execution.  He is one of the smartest people I have ever met but had  a short attention span, so he has shown incredible patience and persistence at Descartes which had a smaller version of the roller coaster i2 has seen.

As this article on Ted Fernandez, CEO of AnswerThink shows from 1997, when he and a few other partners split from KPMG to  2000 when revenues were already up to $ 300 m, it was a heady run. Then came the "nuclear winter" but Ted and his partners, Dave Dungan, Allan Frank, Rick Roth and others have persisted, re-positioned the firm around the Hackett benchmarking and best practices area, signed a nice partnering with Accenture and continue to chug along. Ted is a strong, passionate leader who has kept the group together.

Here's to all the entrepreneurs - and there are many more I could name - who keep on dreaming and refusing to listen to talk of "industry consolidation".  Even if the gardens seem elusive, sand storms make for spectacular sunsets and sunrises as Florida will see this week

Hertz: Customer Service Innovations

This continues a  category of posts focused on Innovative Uses of Technology for Business Benefit.  As I wrote in The Giant Crunching Sound, CIOs are crunching incumbent, utility technology spend and freeing up dollars for innovations.

Ask most travelers what the least hassling aspect of a business trip is, and the likely answer is that related to their rental car.  That may seem like a left handed compliment but given the joys of travel these days, it is a compliment. Hertz Rent-a-Car, now part of Ford, but soon to go IPO, is one major reason for driving customer service that the rest of the industry has to emulate. And a lot of that service comes from leveraging one technology innovation after another.

While most Hertz employees are pleasant, I love the fact that on most rentals, I can get away with a total of 4 interactions each averaging a minute or two with them.  I get on their courtesy bus and tell them my name. I show my driver's license when I exit the garage. I tell the attendant the mileage and fuel level when I return the car. I tell the shuttle driver the airline I am flying. Every thing else is automated or uses self-service technology.

Start with the web-site for reservations.  First introduced in 1996,  the site has evolved to support multi-lingual customers in over 7.000 locations around the world.  Given one way drop-offs, weekend rates, corporate discounts and an amazing range of cars and options, the site is pretty easy to navigate. You can print driving directions from the site (uses Microsoft Mappoint) or from a kiosk when you land. The kiosk computerized directions were introduced way back in 1984. Most competitors still only hand out paper maps, so I must admit I have cheated and availed of the Hertz kiosk if I happen to be renting from a competitor.   Of course, with the on-board option on many of their cars called NeverLost you can get GPS navigation, first introduced in 1995.

When you get on their courtesy bus, the driver has an Intermec handheld computer which allows him to relay on an AT&T wireless network to the garage which customers are en-route. That way, you could be coming in at an unplanned time and they still make sure the car is assigned and ready to go.  At the garage canopy, there are electronic boards pointing the customer to the assigned parking space - handy given the bigger locations have hundreds of such parking slots. They have the contract printed out and in the car. The garage attendant at the exit verifies your license, asks if you want to prepay for gas and lets you on your way. Many of the competitors still make even their frequent fliers sign contracts at 5 places in triplicates. Of course, they also try to sell you more insurance and upgrades you do not want.  From entering their bus to out of their garage averages 15 minutes, compared to twice or three times with many competitors. Of course, with WI-FI at Hertz garages, you can choose to stay and work on your laptop as long as you want - but it's your choice.

The cars themselves are loaded with technology (if you choose the options). In addition to the GPS mentioned above, Hertz has Sirius satellite radio (and likely soon satellite TV - Avis already has an arrangement with DirecTV), and DVD players handy for family trips.  (Caveat:  see growing privacy and law-enforcement concerns with tracking devices).

It is the streamlined return process which has always impressed me, and allowed me to catch a few flights I should have missed.  Attendants with their wireless devices and printers can process returns in the parking lot in seconds and allow you to jump on the courtesy bus. While most of the competition now offers something similar, Hertz pioneered this in 1987. The bus in turn is wired to tell you what gate your flight is scheduled for take-off.

Back to the web site.  Each rental receipt is available on-line for 6 months. Frequent flier mile requests can be processed on-line. Try getting retroactive credits with other travel companies  without calls and paperwork!

This is all the technology a customer interacts with. Behind the scenes is a sophisticated reservation and inventory management system, scheduling technology to optimize the pick up routes across various terminals at airports, maintenance record keeping for over 500,000 cars and so on - a pretty complex network.

Post 9/11, a number of airports have moved car rental garages away from terminals and also mandated shared shuttle service. Some of Hertz's innovations have been negated with this supposedly "equitable" treatment of all rental companies.  But given its track record of "firsts" in the industry, Hertz still is a shining example of how technology can dramatically improve customer service - in this case. by dramatically reducing the "face time" your employees need to have with your customer.

China/India: Shouldn’t we be worried?

Dennis Howlett at Bazaarz asks a valid question to my recent posts about doing buisness with China and India:  “What about when China (or India) becomes the powerhouse for innovation - which could happen - in say 5-10 years? Certainly from a European perspective, it's a worrisome scenario”.  And, if you see the comments under Chris Selland's post about offshoring on AlwaysOn, the topic generates other negative emotions - not just worry.

Dennis, we should all be worried – not just you in Europe. I have two young kids who will go to college in a few years and the investment in college is looking far more speculative than an investment in real estate or the stock market. (A potential topic for a future blog – should universities charge based on future earnings?). Heck, my wife and I still have a long., long way to go before retirement. Running a small business is tough enough without these global disruptions.

I worry when I read this Fortune article - Is America the World's 97-lb. Weakling?

I worry about Europe (my wife is Irish) when I read this WSJ article  - Familiar Litany of Woes Across the Pond

But then I read this Fast Company interview with Jeff Immelt, CEO of GE - he is a man who worries about his daughter Sarah and his 300,000 employees - I am somewhat less worried.

From my much humbler perch, I believe we have 2 options:

a) We can channel our worry into moving up the value chain or
b) We can worry and put up barriers

Japan evolved from a “utility” provider to an “innovation” provider. Ireland has evolved from an exporter of raw talent to one of sophisticated products and services. Virgin Airways evolved from a cut rate competitor to offering a fabulous “Upper Class”. I would suggest the world adjusted to that - and actually benefited from that. It forced GM and European call centers and BA to improve their product to the benefit of us consumers. Ford went on a quality kick. BA innovated with flat beds, modern fleets and other ideas. Not everyone survived or did well in this Darwinian process, but overall our economies adjusted

But why did Toyota and Virgin become viable in the first place? In general, the consumer in us is pretty loyal. When GM and Renault let the Japanese become world auto players it took 2 decades of neglect – boxy designs, poor quality etc. When a Virgin or an EasyJet or a Southwest grows strong, the incumbent competitors let it happen gradually. Look at the barriers to entry the Alitalias and the Deltas had in place.

Similarly, why did India and China become viable to the Western CIO and VP of Manufacturing? These are blue blooded Americans and Europeans who do not exactly enjoy wading through traffic in Mumbai or Shanghai with all the noise, heat, pollution, poverty. They go there because the incumbents – the EDSs and Accentures – have let it happen through their over pricing, poor service etc. At the same time, the competition has done better than lower prices. The Japanese worshipped Deming and his quality focus. The Indians adore the Carnegie Mellon CMM process improvement model. Half of the Chinese GDP is manufacturing focused – it is their core competence. Their kids actually compete to go to our engineering schools.

They have leveraged our best education and thinking while our incumbents have been coasting. We want our CIOs to feel guilty for offshoring. Honestly, we should blame the IBMs more. We should blame ourselves as workers for continuing to expect a lot of money for flipping SAP switches. 

But let’s look ahead. In our sector, we are used to disruptive technologies and I would like to think we will make the transition well. Like BA, we will hopefully invest in automation, improved processes, get used to lower margins and become much more competitive and innovative. Just look at what this gallery of CIOs is innovating with technology.

Also look at what happened at demand patterns in Japan (and Ireland and Singapore) as they grew affluent. They became voracious consumers of Western products - Disney, Hermes, McKinsey. In 1989, when I was assigned in London for PwC I flew with a mid-level Japanese exec to Paris. I sailed through customs and went to make a call and wait for him. 30 minutes later a custom official beckoned me back in. I was concerned – how often do you get asked to go back into customs? They wanted me to explain in my broken French why my Japanese colleague was trying to smuggle four suitcases full of stuff from Harrods? There must have been $ 25,000 worth of stuff he had bought. I had to assure French customs the items were all meant as gifts back in Japan.

Something similar is happening in India and China. The middle classes are learning to enjoy Pizza Hut, buy Italian cars and come to Disney for holidays. At the recent Paris Air show, they were the biggest buyers for Boeing and Airbus. That’s not to say we do not need to continue to push them to keep opening up their markets or appropriately value their currencies.

I think it will take India and China longer than the 5-10 years you mention to make a similar evolution from “utility” to “innovation” but the west will similarly adjust – and their own economics will catch up. As my article, “The economics of cheap” describes, the total cost of offshoring is rapidly rising. The Indian and Chinese middle class will price themselves out to the Bangladeshis (I was surprised to read recently that 65% of “Indian” restaurants in UK are actually run by Bangladeshis) and the Vietnamese.

Now let’s take the other scenario – if the West actively ignores India and China. Even if we did, Japan and rest of Asia will not, and they can continue to leverage each others domestic markets, and their appetite for oil will continue to grow. We suffer as consumers from lack of competition. As businesspeople, we will be locked out of their markets. I would rather see us engage them, influence them, sell to them – make them part of our economies.

Which brings me back to Jeff Immelt. He may say he is not worried about his daughter’s future. But GE is investing heavily in R&D.  GE is well positioned to earn money in China and India and elsewhere in the developing world. And continue to do well in the West whether we end up as services or manufacturing economies.

But when I see reasoned confidence like his, I am much less worried.  I am encouraging my kids to think about a global career, though. For the rest of us to become like GE we will have to adopt more of an global mentality, travel more, relocate more.

IBM's Innovative Electronic Workplace

This continues a  category of posts focused on Innovative Uses of Technology for Business Benefit.  As I wrote in The Giant Crunching Sound, CIOs are crunching incumbent, utility technology spend and freeing up dollars for innovations.

First a caveat. This is a post about a technology vendor. The webcast I link to below has sales slides for IBM Global Services. I am not endorsing their capabilities - more how IBM internally has leveraged technology to create an innovative workplace environment.

I first saw an IBM presentation in 1996 on how they had re-engineered their employee travel expense processing.  They had taken a very manual, paper based process around approvals, receipts, audits, reimbursements and automated it using fax, workflow, digital imaging and archiving and neural networks (for exception analysis). While those technologies seem ancient today and there are many packaged solutions today,  10 years ago, the  innovative use of technology had helped reduce their travel accounting staff 80% from 1993 to 1995.  "Innovation" used to squeeze their "utility" spend.

Recently, IBM presented its "On-Demand Workplace" at an Information Week conference I attended.  It is interesting to see to see how IBM has evolved over the decade several similar employee focused applications covering collaboration to training to provisioning. IBM says it has realized over $ 680 m in annual savings. The slide below shows some of their "savings" areas.

What is innovative is the mesh of self-service, portal and other software and hardware which has been leveraged in creating this electronic workplace. In a lot of ways it brings together its global work force of 300,000 + employees, almost half of which are almost constantly mobile - their sales and consulting staff. The payback from that common cultural and communication tool is, of course, much harder to quantify.