deal architect

Software Consolidation: 'Nuff Said

Why do you bang your head against the wall? Because it feels so good when I stop...

Over the last few weeks I have posted a series of blogs challenging the notion of software industry  "consolidation" - here, here, here, here...need that extra strength, migraine quality stuff! 

My view is in fragmented markets like software and services, M&A  is an on-going (and healthy) phenomenon.  However, like solar flares which happen all the time, there are more active times than others. Those who want to believe we will be down to 4, 10 or 25 vendors in the next couple of years will continue to believe so. Hopefully, entrepreneurs will continue to launch new  plays and smart buyers will not be  conned into over-paying for "lack of viable choices".

I appreciate the fact that Chris Selland, Jason Busch, Bill McNee, S. Sadagopan have stopped short of calling me an outright idiot, but hopefully I have flamed at least some level of balanced  thinking on the topic.   It is good to see others challenging the mainstream consolidation thinking - see Bryan Stolle, David Dobrin, Bill Burnham, Erik Keller and others.

In the meantime, there are other more fun consolidations to focus on...

Technology Innovation and Hurricanes

Living in Florida is usually wonderful - but the price is the occasional hurricane. In recent years make that frequent hurricanes.  One of the most commonly visited web page in our household shows National Hurricane Center's 3 day "cone" - projected path updated 4 times a day of every major tropical storm brewing . The technology that goes in to this simple looking diagram is amazingly complex, as I describe below.

While Florida may seem a magnet for hurricanes, they are a global phenomenon (called typhoons and cyclones elsewhere). The wind, rain and tornadoes they bring are deadly and they are costly.  Cat-5, a term most technology geeks relate to, is disaster to a meteorologist. While we cannot begin to offset these natural monsters (National Geographic's August issue has a feature story on hurricanes), technology is helping track them, telling us when to board up or evacuate and then recover from their damage.

Weather Satellites, Doppler Radar, recon planes (the "Hurricane Hunters") and dropsondes all feed raw data on hurricanes.  I hate flying through normal turbulence - I cannot begin to imagine what the recon aircraft go through especially as they approach the "eyewall".  It has been described as "riding in a big semi going 90 miles an hour down a windy, bumpy dirt road in the desert at night, with the headlights turned off".  God bless these brave souls.  Credit also to the humble dropsonde whose only purpose in its short life is to parachute its way through these storms and transmit temperature, pressure, moisture and other data.  This raw data about the hurricane feeds supercomputers which work the tracking models. That is a plural. There are statistical, baroclinic and other models, sometimes contradictory on where the hurricane will likely make landfall. The National Weather Service computers can process 1.3 trillion calculations per second - and still struggle to make accurate forecasts. But they keep getting better each year.

Closer to where a hurricane makes landfall, local authorities use visualization and GIS technology to decide on evacuations and other responses. Local TV and radio stations are increasingly equipped with their own Doppler, PDAs, weather vans and other technology to allow their reporters and weather staff to provide localized alerts and information. The national traffic grid - affected by weather even in normal times - gears in to major action ( if you fly often see this fascinating report on weather impact on air travel space management). Airlines use their own technologies to re-route equipment, re-book passengers, communicate to passengers via their web sites, email, automated voice messages, alerts to cell phones and PDAs.

Once a hurricane strikes, FEMA kicks in to action using NEMIS to track claims and disbursements and other emergency information. Power outages are a common problem with hurricanes. Utilities are using technologies to detect where problems in their grid lie, and also to better communicate with uncomfortable customers without electricity. Insurance companies trying to expedite disaster claims have equipped their catastrophe field adjuster with a laptop computer with wireless modem cards, digital camera to take and transmit pictures to the electronic files; and cell phones to make appointments and transmit claims data. Remember, many of them are working in places with no power.

Which brings us to disaster recovery and business continuity plans the average CIO puts in place. But it is better to plan for the extraordinary as Jim Desjarlais, IT Manager at Lee County found out last year with Hurricane Charley.

Then there is technology to cope with household emergencies. We lost power for a couple of days during each hurricane last year. The kids borrowed my laptop and used it as a DVD player and used my APC DC to AC inverter to power the battery in the air-conditioned theater and hotel room our van got converted into . Technology to the rescue!

Talking about kids, they always want to know why hurricanes are named Ivan or Katrina. If you are curious about whether there is an order to male, female, Latin, Polynesian or other names check this out. You will notice that the 12th hurricane in 2009 in the Atlantic zone will be named Larry. If it comes anywhere near land SAP, IBM and Microsoft customers better have elaborate disaster recovery plans in place!

Author's Note: I started writing the blog on Thursday when Katrina was a Category 1 Hurricane targeting Florida. This evening it has grown to a Category 5 threatening New Orleans. The tracking technologies have worked and millions have been evacuated. However, this is only our 4th Cat-5 hurricane this century and New Orleans is already under sea level and has some very old structures. Also a number of oil rigs and refineries in that area may be threatened. Hopefully the Saints are watching over New Orleans and the Gulf Coast tonight. Tomorrow on technology will again help in the recovery. Link here to CNN's Miles O'Brien's blog as he battens the hatches in Louisiana.

Another Note: BusinessWeek has a nice article in its Jan 16, 2006 issue about technologies used to forecast hurricanes - especially longer term forecasts.

Fortune Cookie Projections

I am updating a presentation I first created a few years aimed at clients about to go to India for an offshore due diligence visit. It is titled "Diamond in the Rough". It describes how the local software industry has been amazingly quality and continuous improvement focused, while all around it shoddy products are delivered and thrive in a large domestic market. Over 50% of all software sites certified at the SEI-CMM Level 5 are in India. But no doubt about it - the software industry is an aberration. China has similar extremes - Shanghai  is a proud city which keeps itself very clean compared to the rest of the country. China's industrial pollution is another story.

I saw 2 extreme viewpoints about China and India this week.  One in Forbes about quality problems in China. You could extrapolate that easily to India as well. While India did not have communist inefficiencies, they took British ideas about licensing and protected incumbent family houses from global competition.   But how do you then explain the Indian software quality focus?

Another by  John Hagel (ex McKinsey and a respected contributor to innovation in business and technology) writing about Innovation in China and India. He talks about distribution innovations. Companies like Unilever and Coke have for decades now sold product in those countries in spite of logistical challenges. Not sure I would call those recent innovations.

I am sure we are going to see plenty of extremely positive and negative view points about China and India. In fact, after the BusinessWeek issue titled "Chindia" - I have heard a few conversations talking about the 2 countries as one. How then do you reconcile their competition for oil?

Urban legends and generalizations about the two countries abound. I was shocked to hear a couple of months ago  a company, conservative in other ways, about to sign an offshore contract say they were foregoing a trip to India to do due diligence - "what can we find that other US companies before us have not found".

If you want to do business with these 2 countries (and as I have written on numerous occasions you should) invest in your own due diligence. Ignore the generalizations - positive and negative. They are as reliable as fortune cookie projections. 

Blogging: Offense and Defense

Courtesy of Dennis Howlett I saw this Deutsche Bank report on Blogs as tools for Corporate Communications. Courtesy of Jeff Nolan, I saw Hill & Knowlton's guidelines for its employee bloggers. I also saw how this on Yahoo. Corporations are learning about blogging - at least outbound, "offensive" blogging.

On the other hand, corporations still do not seem to know how to monitor and react to independent bloggers - what could be called "defensive" blogging.  The technology vendor world appears even slower about this. 3 data points I can report in the last few weeks:

a) a conversation with a technology marketing consultant "Vendor marketing and analyst relations folks consider bloggers a nuisance. The major research firms - Gartner, Forrester etc get the majority of their attention. Then the tech media.  If a blogger writes something negative about a competitor it may get passed around"

b) conversation with another marketing consultant " Our recommendation is to monitor blogs. Look but do not touch. If there is something negative in a blog, use more traditional techniques - a press release, a white paper - to offset the criticism"

c) conversation with a  product consultant at a vendor I have written blogs on "I enjoy reading your stuff. But if I commented on your blog, I would get fired"

One of the frequent complaints I heard when I was at Gartner was vendors could not get "equal time" to debate what an analyst opined on. Blogging offers them a far more democratic format to engage a blogger and his/her community. "Look, but do not touch" is a significant missed opportunity, in my opinion.

May be Dell's recent experience will change  the way technology vendors (and corporations in general) look at blogs - offensively and defensively. 

Humble Pie - served hot

I love to profile innovative uses of technology...but every once in a while for a humbling experience I go back and read the story of Mumbai's "dabbawallahs" - lunch box carriers...a Six Sigma operation with no IT support.

Read about their fascinating operation - at less than $ 3 a month.  Mailing a letter back and forth in a city by US Postal Service 20 days would be $ 15 a month.

May be because they did not need Y2K fixes, did not invest zillions in ERP and eBiz systems!

"Asset-Lite"

I have been reading the book "24 days" - the story of how 2 WSJ reporters uncovered the issues at Enron. What struck me was how much Enron management had become enamored with "asset-lite" - more trading oriented businesses, compared to their traditional hard asset, capital intensive business - with encouragement from Wall Street.

I thought about that as I read this article which talks about a Katzenbach study which suggests that elaborate data centers US outsourcers have are now more of a albatross. This just when they are starting to sell "utility computing". And guess what - Wall Street loves the "asset-lite", well-run offshore companies rewarding some of them with valuations of 10X revenues.

One small difference. Many of the offshore firms do invest in a different kind of asset - real estate. In countries like India, those appreciate rapidly unlike computers in data centers.

Technology Innovation and Vending Machines

Diet Pepsi is running radio commercials which spoof GM's OnStar emergency response system. In one spot, a person claiming to be a chronic "nail biter" calls for assistance to open his Diet Pepsi. He chewed all his nails during a job interview earlier that day. When asked if he has a coin to open the can, he says he only has dollar bills. The dispatcher tells him they are aware of his location and help is on the way...how dare a low tech, beverage company make fun of GPS technology? Well, may be because the vending machines they are sold from are pretty high-tech.

In the mid-80s, a client told me a story about how his security firm was driven nuts as they tried to investigate outgoing calls from their building in the middle of the night. Their logs did not show any human being in the building - so who could be calling or faxing at those hours? Turns out it was a vending machine automatically dialing the distributor for replenishments. Since then I have been very respectful of vending machines. If they want to keep my money, fine. You may have heard the expression - "change is inevitable, except from a vending machine". I know they are smarter than they look. 

Vending machines have come a long way since their humble beginning selling post cards and books. Now you can buy h0t, cold, prepared, customized products of all sorts form them.  Japan, a country that loves gadgets has one vending machine for every 20 people. You can buy shorts, custom made business cards and insurance.

The Finns who love their cell phones (and the local success Nokia) figured out a way to use those phones to pay for vending machines - 8 years ago! In France, they have machines to charge cell phones. Coke has tested dynamic pricing - price of a can or bottle varies with the temperature (I think someone told them to research how yield management has ruined the US airline industry). A sure sign you have matured in the technology world is when hackers focus on you.

As this article describes, a whole bunch of wireless, GPS, PDA, electronic payment, data exchange and other technologies  are making the vending machine smarter each day - and enabling "V-Commerce".

Going back to the 80s. Remember when Steve Jobs of Apple recruited John Sculley from Pespi with these famous words ""Do you want to spend the rest of your life selling sugared water, or do you want a chance to change the world?"

Turns out Pepsi vending machines have been far more high-tech than Steve gave them credit for. They have been doing "self-service" decades before software vendors like SAP introduced that innovation in the mid-90s. If they want to make fun of GM's OnStar, I think they have earned their technology stripes.

India's software vendors: Gating factors

Buoyed by Oracle's investment in i-Flex, it is not surprising to see a flurry of interest in India's packaged software as against its traditional software services industry. Articles like this in Information Week, BusinessWeek can only encourage that interest.

The reality is, as Nasscom India's own software trade body points out,  India's share of the global packaged software market has been minuscule - 0.2%. Players like Ramco have offered ERP functionality for over a decade. Others include Sasken for telecomm vertical, Kale for airlines, Talisma for CRM software (profiled in the Information Week article above), Tally for mid market accounting software and so on. Even the bigger Indian services players like Infosys have spawned software companies like Yantra and continues to offer a banking focused product Finacle. But overall, the more established route to success has been through delivering services not building intellectual property.

Why the hesitation to build more packaged products? An Indian investor told me a few years ago "We are so different from our VC cousins in Silicon Valley. They love software investments but are suspicious of services investments. We are just the opposite." Without a well developed capital investment structure, Indian firms found it a lot easier to start and sustain services firms. Their customers were also more willing to give them low risk development or maintenance contracts, rather than buy long-term software from them.

Then Wall Street started to reward well run services firms like Wipro and Cognizant with 10X revenue valuations, much higher than it is rewarding packaged software companies.  Some non-manufacturing verticals, tired of waiting for the established software companies like Oracle to deliver industry functionality, have continued to build custom software or are looking at BPO as their next path (again benefiting Indian services vendors), bypassing packaged software. So the established Indian services firms almost look down on packaged software. 

The building blocks for more dramatic packaged software growth are certainly in place. Every major western player - Oracle, SAP and others have significant captive software development and maintenance staff in India.  A number of other software companies have outsourced portions of R&D to focused outsourcers like Aztec and Sonata Software. Much of services revenue in India comes from maintenance of legacy customer systems. So the culture is in place to also maintain and upgrade packaged software.

What Indian software vendors need to build is more elaborate sales channels - selling software is very different than selling services. And they need to build more financial viability and capitalization. The bigger Indian services - certainly have the latter.  They could use their huge market capitalization to buy a handful of mid-tier software companies and acquire their channel and customer base that way. If they do, they will find that Romesh Wadhwani has been executing on that strategy for a couple of years with his feet squarely in both packaged software and offshore software services.

One Wallet to Squeeze

"One Throat to Choke" - most CIOs want lead vendors to manage their sub-contractors. Most big vendors will say the right things about it. But when it comes to pricing and negotiations, the concept often falls apart. Too many vendors treat each others like partners and forget they are responsible to the customer, not to each other.

Let me give you 2 examples

a) on an ERP negotiation last year I added up proposed training costs across vendors

- The software vendor proposal called for a third of the customer project team to be in classroom training for months at various locations across the country.
- The software vendor packaged a third-party end user documentation and training tool. So there was additional license and annual maintenance costs
- The SI's budget included coaching the project team on a "train the trainer" basis, which in turn would was expected to train the end users
- SI's change management budget which included several executive training sessions about the system.
- Travel expenses on many of the categories above.

We could not get the software vendor or the SI to step up and take sole responsibility for the proposed multi-million dollar training budget and remove redundancies. In the end, the client decided to become the training "integrator" and spent one third of the original, fragmented budget.

b) I did a budget review for a software vendor. I was shocked at the size of the quality/testing staff size being budgeted. Turns out there was a large customer contract with significant modifications where the software vendor was expected to do a lot of testing, but which the SI was duplicating. By looking at testing (acceptance, integration etc) as a more seamless process across the software vendor and the SI, we were able to recommend savings to both companies - and hopefully to the end customer.

On the other hand here is an example where it worked. We gave leeway to a hosting vendor on the hardware platform they could propose and to also obtain a run-time, database license. The hardware, labor and database deal together was far better  than what we could have done individually.

As the technology industry moves to automobile industry like tiering, vendors will have to get used to the concept of one wallet to share. The Tier 1 vendor will be given a defined budget and will have to parcel it out to the Tier 2s and so on.  And then hold them responsible for performance across the supply chain for that unit. In some cases the customer may find it more efficient to contract directly with the Tier 2 vendors, or do it by itself. One throat to choke, one wallet to squeeze.

Blog Modesty and Envy

I am honored to be mentioned by Louis Columbus in his article Beating Blog Envy in CRMBuyer this week. Honored especially since Louis is a prolific writer - much more so than any one of us bloggers.   Look at his publication list at amazon.com - Louis, keep writing books, they pay more than blogs!

I stumbled across blogging as a way to organize the various articles I get quoted in or write. It has taken a life of its own, now.  I have since encouraged several folks to create their own - one around ski slopes, one around neighborhood issues.  It is the virtual version of  London's famous "speaker's corner". Louis, you are eloquent and  can write on such a wide variety of topics...you would have a great blog.

Now about your dog and blogs. We have Peanuts, a beagle and Perdy, a basenji, a barkless breed. Peanuts, true to the beagle tribe, has lots to say for himself. But we all know who is the boss around here. Perdy don't need no blog!