deal architect

Reading Tea Leaves: Darjeeling or Lapsang?

India or China?  That is a question increasingly asked by a number of companies looking to offshore or develop joint ventures or just look for new growth markets.  If you read the tea leaves in Washington, India is in, China is not.

The economic realities are far different.  If you look at the CIA World Fact Book on China and India on most metrics, China is far more developed. GDP almost 2.5X, exports almost 8X, land lines 5X, cell phones 10X that of India. The big plus for India, of course, is its vibrant democracy. But that is political democracy - when it comes to economic democracy, India has 2.5X more people below the poverty line than China does.

India's physical infrastructure needs a lot of work. As this McKinsey Quarterly suggests, its financial infrastructure also needs upgrading. Its shining success is services exports around software and BPO  - but they make up a little more than 5% of India's GDP. The politicians there need to put their heads down and keep executing and broadening that economy.

Of course, there are many who worry about the military threat from one or both. If numbers are any consolation, the high estimate for China's military budget  is $ 60b, and India's at 20b - the US spends $ 400b a year.

For a western business perspective, the smart strategy is ignore the political talk and not take sides.  Leverage India for services, China for manufacturing. And target growing middle classes, infrastructure industries in both countries as demand centers. Thar's gold in them thar hills with a combined population of 2.5 billion with a median age of 28...

Which brings us back to the subject of tea and politicians.  Churchill is associated with this repartee about a cup of Darjeeling

Lady Astor: If I were your wife, I would poison your cup of tea
Churchill: And if I was your husband, I would drink it.

Of course, he did not tell her that he took Chinese Lapsang with his Scotch.

HP Cuts may not be deep enough

HP this morning announced a 10% cut or 14,500 jobs. "Beginning in fiscal 2007, H-P expects to save about $1.9 billion a year from the restructuring measures, composed of $1.6 billion in labor-cost savings and $300 million in benefits savings". It "expects about half the savings to be used to offset market forces or be reinvested in its business while the remainder is anticipated to flow through to operating profit"

It's the "offset market forces" - code for discounting - that caught my attention. Sounds like about 25% of the cut impact is available for that or about $ 500 m a year starting in 2007.  With annual revenues at over $ 60b, that is less than 1%.

With so many HP products in the "utility" spend category, HP better have some dramatic price/performance innovations coming, because the labor savings are not going to handle the on-going squeeze on utility spend as I write in The Giant Crunching Sound.

But at least it is a start - and new CEO Mark Hurd has the right "survivalist" mentality as HP expands its footprint in to emerging BPO and other services markets where global realities more than its vaunted brand will drive pricing.

More Lou Dobbs sobs

I do not go out of my way to watch Lou Dobbs on CNN. Last time I saw his show, I wrote Lou Sobs, oops Dobbs.

At the gym this evening I saw part of his show...could not hear it , but could read the captions and it was negative about the "Chinese bid"  for the "All-American company, Maytag".

Lou, how about some unemotional, fact based reporting?

a) The bid for Maytag is by a consortium which includes 2 US private equity firms
b) Maytag owns brands like Hoover. Over half of Hoover revenues come from outside the US.  It is one of the best known brands in the world - so well known, that in the UK the name is both a noun and a verb.
c) In 1996, Maytag entered in to a joint venture with the Chinese Hefei Rongshida Group (later divested). It has other JVs around the world.

Lou, as your bio states you made Moneyline "the most prestigious business news program in history".  You must know global M&A, joint ventures are part of multi-national business. Is it realistic to just expect foreigners to keep buying Hoover, GE, Boeing and other US brands while we close our borders to their products and investments?  Should not Maytag's board and investors be allowed to decide what is best for them?

One final point - now that you consider Maytag an "All American" company do you plan to take it off your list on CNN.com  of  "greedy" companies which "export US jobs"?

Author's Note - July 19, 2005 - The Haier consortium announced it is dropping its bid for Maytag.  Hopefully, it was for good business reasons, not because of the "hostility" .

BPO: Real men don't "Orient"; they sign SLAs

The software industry likes the "oriented" word - as in object oriented,  machine oriented  and now, services oriented architectures.  But while software vendors debate SoA and SaaS, their services partners are not debating, just chasing after the other O  - outsourcing  as in the booming BPO market.  Cap Gemini signed a $ 3.5 billion (yes,  billion) deal with TXU last year.  Accenture just reported its best quarter ever - helped quite a bit by BPO revenue.  ACS has signed several $ 50 m plus finance and hr outsourcing deals in the last year. The still young Indian BPO market is exploding with Nasscom, the Indian trade body reporting 45% growth in what it terms "ITES" - IT  enabled services (BPO  services as against traditional IT services)

6 different groups of vendors are vying for the BPO market:

a) The "new Big 6"

IBM, EDS, ACS, CSC, HP, Accenture  - traditional IT systems integration and outsourcing shops - are, for now, the mega vendors in the BPO market. Accenture, CSC and IBM (with PwC) were already pretty business process savvy through their ERP/CRM and vertical practices. The race is on to acquire or partner with others. EDS has a joint venture with Towers Perrin, and CSC with Aon to provide deeper HR capabilities. IBM acquired Daksh and Equitant in the last year to expand its customer care and order to cash offerings. ACS continues its phenomenal 15 year run by deftly making small vertical and application specific acquisitions.

b) The traditional BPO firms

The biggest. most mature BPO markets are around HR and customer care. Lead vendors from those markets like Convergys, Hewitt and others are expanding their foot print. Convergys recently picked up  Deloitte's finance and accounting BPO business.  Hewitt acquired Exult' HR outsourcing business last year.

c) Other Western IT firms

Big European players - Cap Gemini, Atos Origin, Siemens, and a number of  mid-sized US players like Perot and Keane are positioning themselves for more BPO work. They are comfortable moving into BPO given their traditional ability to sign defined multi-year IT contracts at defined service levels.

d) Offshore IT firms

Each of the big Indian IT firms is in big and small ways into BPO. Wipro, HCL and MphasiS have the biggest BPO units. Differently from Western vendors they are more focused on smaller transactions - many in vertically important  processing and analytical areas.

e) Offshore BPO firms.

A whole new set of Indian BPO  players has grown rapidly in the last few years. Names like WNS, EXL and Intelenet are aiming to become the next Wipros and Cognizants. Not wanting to cede the offshore  BPO to India, a number of Filipino, Chinese and other firms are also vying for this business.

f) An emerging breed

GECIS, a captive GE BPO operation staffed with a number of resources in India, E. Europe and China recently took money from US VCs and is aggressively seeking non-GE business. Shared -service subsidiaries of a number of other multi-national companies could similarly offer to support other customers or be acquired by some of the vendors in the categories above for even more competitive depth.

Of course, in any hot market, the hype leads to pricing beyond true value. Many of the vendors are talking about "transformational" and "dynamic" outsourcing.  It is important to remember they are mostly offering to take over the "utility" not the" innovation" pieces of business processes - check processing, claims processing etc. As I wrote in The Giant Crunching Sound, CIOs are squeezing the utility portion of IT spend to free up dollars for innovative business use of IT. They can help ensure BPO services are fairly priced. They can also leverage their experiences with service level agreements and governance techniques they have learned after decades of mistakes around IT outsourcing.

The good news is for buyers willing to look, the vendor choices are significant. Soon, software vendors will become the seventh category for such BPO services. Once they evolve beyond "orienting" themselves towards services and actually start doing them...

Jet - Cool Innovation - Blue

This continues a  new 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.

Innovation is what JetBlue oozes - since its birth just over 4 years ago  People make the point that if you are a start up, you have little legacy, utility spend to worry about - most of your budget can go towards innovation. But the US airline industry around it was not innovating much. If you go on a flight on a wide body plane,  most airlines these days show navigational maps on movie screens. I first saw this US  technology on a Swissair flight in 1989. I did not see one on a US airline till 4 years later. The airline industry in the US has been in a funk and just trying to survive, not innovate. Even Southwest, an airline I admire, was till recently a technology Luddite. They reluctantly gave up their returnable, plastic boarding passes after post- 9/11 security requirements forced them to. So, with this backdrop it is remarkable the technology innovation JetBlue has taken advantage of.

To start with, over 70% of their reservations are on the web.  It built its pricing, customer feedback, electronic ticketing concepts around a clean, simple Web experience. For phone reservations, work-at-home operators in a "virtual" contact center use voice over IP (VoIP) lines. They drove a paperless cockpit.  Pilots  use laptops to get FAA updates on-line and make pre-flight load and balance calculations. This 2002 CIO article catalogs a whole bunch of other small, but high payback, innovations. The company has evolved to try much more sophisticated technology - see this use of free space optics to help relocate corporate headquarters without too much disruption.

Passengers of course are delighted with some of the technology innovations Jetblue has delivered to them. The most popular is the DirectTV channels on each seat. No, they did not wait for Singapore Air to first roll that out.  JetBlue was the first airline in the world to offer live TV and, to maintain this advantage as long as possible, actually bought the company that supplied it with the technology. Then, there is the free WI-FI at their New York JFK terminal.

If you think all this technology innovation is expensive, think again. JetBlue says it spends relative to its revenues less than half the average in the airline industry. Now, that's cool.

Innovation - in Silicon and Ohio Valley

Innovation is alive and well in technology.  Kevin Werbach, formerly editor of Esther Dyson's Release 1.0,  recently finished his annual conference, Supernova. Tony Perkins, founder of Red Herring magazine, is hosting his AlwaysOn Innovation Summit next week. MR's SandHill Group Enterprise 2005 comes up in a couple of weeks and always attracts a number of VCs, technology CEOs and a number of fresh ideas. As you scan the agendas, compared to a year or two ago the discussions have evolved to facilitate "social networking" and leverage China efficiencies, but overall the mood is  fairly upbeat about new ideas, even in the face of talk of "industry consolidation".

As I wrote in The Giant Crunching Sound, CIOs are crunching incumbent, utility technology spend and freeing up dollars for innovations. And I have started a series of posts on Innovative Business uses of Technology, as at Starbucks or at the McDonald's franchisee. But the definition of innovation is quite different on Main Street than it is in Silicon Valley.

The technology industry is often not focused on practical applications of their stuff, and minimizing execution risk.  Two professors, W. Chan Kim and Reneé Mauborgne,  at the B-School at Insead in this NY Times interview summarize it pretty well "We should never see innovation as a random process. That's not the way to do it. Silicon Valley has a huge failure ratio. There should be a systematic, repeatable pattern that maximizes opportunities while minimizing the risks. "

The message is clear. Keep bringing out cool stuff. But cool, workable, usable stuff is much better. Listen, then innovate. Which means Kevin's and Tony's and MR's conferences will hopefully, in future, have as many corporate CIOs and CTOs as they do VCs and tech CEOs.

Innovation - Distance Order Taking

This continues a  new 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.

Look at this innovation  about leveraging technology  to streamline order processing in a drive through food chain.  What is particularly interesting it the innovation did not come from the parent McDonald's, but from one of its franchisees, and came from using well established technologies - in this case call center and digital photography related.  Innovative Business use of ITneed not cost millions - it is often about creatively using existing established or beta technology.

"We're not Afraid!"

I wrote last week about  London's toughness, The world has joined it with pictures of support  on this site  - over 1,000 so far. A Blog we can all feel good about.

Star "Innovation" Bucks

This continues a  new 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.

Starbuck's HQ in Seattle and proximity to Microsoft and amazon.com must help, but I am impressed at the number of technology innovations they have taken advantage of over the years to keep up with all the product innovation their stores showcase.

The most visible, of course, is  the availability of WI-FI in most of their stores. What is impressive is how far back it made its decision to do an aggressive roll out. Has it helped revenues? Numbers are hard to come by - though this post would suggest mom-and-pop coffee shops are also under pressure to offer similar services and the number of providers have grown significantly. Using my personal sample size of one - I looked up my T-Mobile Hotspot usage and in the last 9 months I accessed their network over 30 times at Starbucks in different cities.  I am a one-coffee-cup-a-day person and probably would  not have stopped at Starbucks without the WI-FI.

It fits in with Howard Schultz, the Chairman's vision of Starbucks as the Third Place  (the home and work being the other two) where you spend much of your time. And if you do spend time there, you invite friends, colleagues, you try teas, pastries, maybe linger for your second or third cup  - traffic and business increases.  McDonald's has the same vision - but its "store of the future" is still in concept mode.  Starbucks has a few years lead over every other chain.  Another payback from the WI-FI network -  the employee base in the retail chain is "connected". 

Not just coffee or snacks  - it allows Starbucks to diversify in to other product areas. Starbucks  is now offering music downloads at its locations and  by extension its music collection through an XM channel. Some day you may be able to order your favorite Grisham book custom printed while you enjoy the java.

Then there was the decision to roll out its prepaid/debit card in 2003 to migrate an already loyal, frequent customer base.  Also, the  use of RFID not just to track shipments but to validate supplier employees making deliveries at its stores.

None of this is "break the company" stuff -  the technology is relatively well tested and Starbucks has partnered well for most deployments with the likes of HP and Bank One.  It is, however, so well aligned with the company's overall innovation culture...

Who says money does not buy love?

Interesting survey by Pew Research on how the US is perceived by other countries...while overall it is depressing how poorly the US is perceived, there is one, big bright spot.  The favorable rating in India was 71%, up from 54% in 2002 and much higher than in our traditional allies - Canada, UK etc.

So I did a little more research and found  this article which tries to explain Why Indians love America so much. I know most Indians love their own democracy and are fascinated by the US version. But, let's face it - overall the vibrant offshore IT and BPO trade between US and India has helped this favorable attitude. 

Not sure the survey interviewed the homeless or the farmers in India, but the survey suggests that the 100+m strong middle class has neutral to positive attitudes towards the US. Which should be good for all kinds of US brands.

So far, there have been four kinds of US performances in India a) companies like GE, Pepsi, Boeing, Coca Cola, Citibank which have done very well in India because they have made local investments and adaptations; b) those that have a historical franchise there like Delta but have not really taken advantage of their opportunity; c) those that have stayed on the sidelines - like US auto manufacturers - while the Japanese and Italians have delivered the small cars that can navigate India's clogged streets and d) those waiting for closed  local markets to open up - as in the retail and construction sectors.

Doing business in India is not easy and politicians on both sides do not help matters. But the infrastructure and other frustrations can be tolerated a lot easier when you know the audience is atleast  friendly. Even the local food is pretty good if you can get beyond your curry-worry!