deal architect

Burning Platform: Not your grandpa's Services economy

In the 48th episode of the series we have Peter Bendor-Samuel of Everest Group, a research firm focused on IT, business process, and engineering services since it was founded in 1991.

I enjoy catching up with Peter on a regular basis to get his perspective on trends in outsourcing and the broader IT, BPO, strategy services market.

He says the market is broadly strong - "rising tide raises all boats" - with the confluence of digital transformations, modernization projects/ related legacy outsourcing and pent up demand from projects slowed down or postponed in 2020.

What's different is the influence of hyperscalers like Google and Amazon and strategy firms like McKinsey, BCG and Bain. We also discuss the trend of "servitization" - where industrial and other sectors are generating more service revenues around their products and moving to "as a service" models with subscription revenues and outcome based models.

BTW, on the last point about servitization, I have been researching that trend in detail over the last few months. You will hear more from me on that in the next few weeks. In the meantime, enjoy this conversation.  

We cover wide ground, as is common with my conversations with Peter. I always learn something new from him.

Burning Platform: Architectural Trends in Enterprise Software

Brian Sommer and I have recorded 12 episodes in this series - see index here . Last couple of weeks, we have had several guests Rob Kugel of Ventana, Josh Greenbaum of EA Consulting, Bonnie Tinder of Raven Intel, Frank Scavo of Avasant, Dennis Howlett of Diginomica, Cindy Jutras of Mint Jutras and Dave Hofferberth of SPI Research

This time it is Holger Mueller of Constellation Research. He follows architectural, platform and other technological underpinnings of application vendors like SAP and Workday and of hyperscalers like Amazon and Google.

He talks about how the public cloud has scaled amazingly during the pandemic. He also says first-generation SaaS players will have to adjust to the growing strength of the hyperscalers. SAP has been talking about its 4+1 strategy and Salesforce has announced Hyperforce. He sees an opportunity for application vendors to not emphasize their platforms but to re-imagine business processes. Traditionally, they have relied on customers and SIs to help them codify business process logic - now they can lead using new technologies like ML that their traditional sources of guidance are not that familiar with as yet.

We talk about AWS, Azure and Google and why Europe still does not have a player like Alibaba. We discuss the prospect for Oracle in this segment.

We talk about how it has been an amazing year for new data streams - COVID-19, election polling, census, shortened sports seasons, all kinds of planning/forecasting scenarios, video streams and new players like Snowflake and Palantir. In the enterprise world, we routinely talk about "single source of truth" Yet the citizen on the street is actually cynical of much of the data because definitions are inconsistent and the media has been cherry picking data to suit its narrative. It's the Mark Twain's quote updated for today - Lies, Big Lies and Big Data. We talk about how to build trust in data.

We discuss developer communities - Salesforce Trailblazers, SAP breathing new life into ABAP, Apple, Microsoft and Google expanding their developer communities and what that means in the meta context of building v. buying enterprise applications.

Finally, we have some fun. You can see his playful side and how he convinced a Starbucks barista to brand my cup as "Sugar Daddy". I was the only one on the Southwest plane who did not realize it, even though they were laughing at me. He finally showed me a photo of my cup. No more freebies for him:)

Really invigorating session.

New Normal: A conversation with Phil Fersht of HFS Research

I have been doing video interviews with a number of CIOs, software executives and practitioners about acrobatics they have been seeing in various vertical sectors during the COVID-19 crisis and the "New normal" they can expect as the economy wakes up. Here is the index to all the interviews in this series.

This time it is Phil Fersht, Founder, CEO and Chief Analyst of HFS Research which covers global sourcing strategies.

He talks about acrobatics at Cognizant as they tackled the pandemic, a ransomware attack and are still delivering impressive results. He also mentions leadership and unique practices at Accenture, IBM, Infosys, Mphasis, Wipro and other firms.

He discusses practices around Digital Transformation, Cloud Computing and Automation.

We cover wide global ground - we discuss Brexit, the lockdown in India and Philippines, and of course England, where he is based.

Fascinating discussion of trends in a human intensive industry which has been significantly impacted by travel and work from home trends during the pandemic.

Burning Platform: Episode 3 - School Buses or RVs

In this episode of the Burning Platform series, Brian Sommer and I discuss the impact of the COVID-19 pandemic on SIs and outsourcers.

With travel challenged, they will need to move to much more remote projects and support. In doing so, they also have the opportunity to rethink their delivery models and include more shared services and automation.

Barbarians at the Cloud Gate

In the last year, as I built the model for SAP Nation, I have had conversations with several cloud vendors and shared my view that outsourcers/SIs from the on-premise world are looking for new parking places for their massive workforces and infrastructures. Cloud software vendors should leverage this bounty but be careful of the baggage many of those providers may bring along.

Some of those warnings need to be amplified as Phil Wainewright writes about the Salesforce partner ecosystem

“In annual revenue terms, they generate at least three times Salesforce’s own revenues, or close to $20 billion, according to new research from IDC presented on stage at the morning’s partner keynote.”

Time for me to write “Salesforce Nation”?

No.

Let’s put things in perspective. In SAP Nation 2.0, I actually increased the estimate for the economy from $ 200 to over $ 300 billion a year. And the SAP economy has a long track record of massive overruns and failures. The number above does not include amortization/writeoff amounts.

So, the Salesforce ecosystem estimate is not that worrying. Also, unless the cloud model deteriorates dramatically, it will never approach the size of the hosting, upgrade and application management economics which plague the on-premise model.

What is more worrying is the focus on outsourcers as a brand validation and sales channel versus them as a customer delivery support extension. Too many software vendors focus on the former and not enough on the latter.

If cloud vendors do not start tracking and benchmarking success/service levels/economics the partners are delivering, in a few years I may have ammunition to write Salesforce or Workday Nation. I hope not.  

“Empty calories” at IBM

The WSJ profiles IBM CEO Ginni Rometty after its 12th straight quarterly decline in revenues and she calls some of her divested hardware units “empty calories”

“These units were producing revenue but not profits”

The WSJ adds a chart where they point out other businesses IBM has moved out of and markets IBM aspires to

What the graph misses is a big fat belly that customers, not Ginni, would call their “empty calories”. Notes, Tivoli, Websphere, DB2, SAP consulting, outsourcing from Cold War era bunkers called Data Centers – by my estimate 2/3rds of IBM revenues still come from products and services 10, 20, 30 years old.

She has shown little willingness to work out that layer. Tough to do with an executive team most of whom proudly show off gold watches for 25 years of service.

Also difficult to see how that leadership and a mostly people-intensive services oriented team can provide leadership for the top line in the graph.

Any customer doing due diligence on the top line is likely to go visit with Google and learn about their “Deep Learning”, for clouds to Microsoft or Amazon, for Business apps to vendors like Oracle and Infor for deep vertical apps, for cyber security to players like GE’s Wurldtech, for personalized health to Apple, Microsoft and others.

IBM still lives in the world of HP, EMC, Accenture and TCS. Ginni has ways to go to change that world.

NASSCOM: More Moore, less ABAP

My friend Phil Fersht was at the annual Nasscom event in Mumbai last week and wrote “More MBA, less ABAP is the recipe for India’s digital success”.

There is much to like in what he says, but I would go further

a) Much Less ABAP

My book SAP Nation shows a $ 200 billion a year ecosystem ready for disrupting, even collapsing. Part of it can come from Indian firms cannibalizing their own services in that market. Much more could come from Indian firms diversifying to SaaS vendors that SAP customers are migrating to and providing  third party maintenance to SAP customers. Unfortunately, many will just tell their customers to wait and see how SAP’s next-gen product, S4HANA matures.

b) Digital with Big D

As I wrote in this post, Digital Transformations require a wide portfolio of skills. “There are so many opportunities to digitize products, channels, shop floors, logistics, business models etc.  So many legacy systems need to upgraded and integrated to. The portfolio of skills needed to build a vibrant Digital Enterprise is very wide.”  Many Indian firms have some of these components in place, but many need to acquire digital agencies, product centric/R&D focused practices, and as Phil says maybe even some MBAs for digital strategy and business model transformation.

c) Refocus on Moore’s Law

This is probably the biggest change Indian firms need to make. They have to quit leading with labor intense models. A blend of symbiotic man-machine skills is key. Indian firms should have been leading the automation of knowledge work. They missed the last wave where Google, Amazon, Microsoft and others have shown the art of the possible. Plenty more to be done there. And even where the model is labor heavy they need to dust off their CMM and Six Sigma disciplines they religiously applied 10-15 years ago. As I wrote here, Moore’s Law is back in the enterprise, and to offset the wage and real estate inflation that plague India, Indian firms need to become even more acutely focused on continuous improvement.

d) Become geographically agile

When I interviewed Mike McNamara, CEO of Flextronics, the large contract manufacturer last year, I was struck by his comment that they moved a quarter of their physical plant across borders. Manufacturing has become agile – to take advantage of changing US energy economics, to be closer to emerging middle classes in Indonesia, Brazil or wherever and other trends.  If physical plant can be moved quickly even with all the logistical challenges,  there is no reason why labor pools cannot be similarly agile. Indian firms need to evolve the delivery model – doing the bulk of the work in India may not be the best way any more to service clients in the throes of complex digital transformations.

Indian outsourcing at the cross roads

Vivek Wadhwa writes “Why I have become pessimistic about Indian IT”

“It is not that Indian outsourcers have become less capable of servicing Western needs. It is that their customer base—the CIO and IT department—is in decline.”

He is right and wrong.

Actually there are large chunks – over $ 300 bn a year in IBM, Accenture, EDS, Cap and other outsourcing business (and over priced contracts  at incumbent Indian providers like Infosys and Wipro) for the Indian firms to still target. So, by flying low – and aiming for what HCL calls the “rebid” business which I estimate will be for about half that contract value – the short term road is still ok. When it comes to scale, IP protection etc Indian firms continue to have an advantage over E. European, S. American, Chinese competitors. But they have to compete vigorously on economics not continue with poor habits they have picked up in last few years. And dust off the continuous improvement ethos which was a hallmark of Indian outsourcing a decade ago.

In the other half of that incumbent spend and in newer markets, the challenge for Indian firms is more from clouds, crowds, cybertech and  customer priorities.

Clouds apps vendors like Salesforce, NetSuite and Workday have shown the world tens of thousands of customers can be supported and upgraded by a few hundred staff. That is quantum more efficient than the current Indian model where a single SAP customer needs 20 to 100 support staff. Cloud infrastructure vendors have invested billions in hyper efficient data centers and networks. Most Indian firms are capital allergic and have made few such investments (other than in broadband pipes to the West)

Crowdsourcing is starting to affect chunks of the outsourcing model – low end stuff like testing, but with models like Kaggle even high end work.

Activity after activity is starting to factor robots, drones, machine intelligence. We have moved into a world of cyber-physical IT but most Indian firms are still persisting with head count heavy business models.

The biggest challenge comes from growing customer investments in product and revenue centric technology. Many companies are beefing up their own technology staff to do that and looking for creative product design firms, digital agencies, contract manufacturers and logistics providers with scale. Few Indian firms fit that bill. Most have chased after Microsoft or Oracle and built relatively “safe” practices around mature, horizontal IT tools, not in emerging and creative vertical areas. 

As Vivek says “There are new $100 billion opportunities that could revitalize this industry. But from what I’ve seen, Indian executives seem incapable of steering their ships in the right directions.”

That may be too harsh an indictment, but it is clear what worked for Indian firms in the last five years will not be sufficient going forward.

The danger of linear thinking

I am seeing clients come up to end of 3-5-7 year SaaS and outsourcing deals I and others helped them with. And I often hear things like “routine renewal” or “let’s re-bid with a slightly different group of vendors than we invited last time”. There is a sense of “steady state” in many of these scenarios which makes me uncomfortable.

I used the HfS Blueprint fireside chat this week to gently warn folks about the “calm before the storm”  - the storm as in 5 market disruptions we discussed during the session (slides included below)

I used 3 personal anecdotes from my international travels in the 80s

a) a visit to Berlin just before the Wall fell and almost losing my passport to the E. German bureaucracy

b) a trip to Paris with a Japanese colleague from PW and explaining to French customs the 3 large bagfuls of trinkets from Harrods would not stay in France but were gifts for his friends in Japan

c) a bus ride in Israel and being pelted by rocks as the first Palestinian intifadah started.

I told them I (and many US diplomats and economists) used linear assumptions  through the 90s – that E. Europe would continue to be a communist mess, that Japan would continue its economic march, that the Middle East protests would continue in relatively harmless ways. We were wrong on each and I am afraid many clients are going into their next phase of IT outsourcing with similar linear assumptions.

Ned May of HfS did a great job pushing and probing me on the disruptions. I will see if we can share a recording. In the meantime, download the slides we used.

BTW HfS brought together a really nice group of outsourcing buyer, vendor executives and advisors to the event in New York, now in its third year. Kudos to Phil Fersht and his team.

Download Vinnie Mirchandani BPS Presentation Final

Outsourcing: The Seismic Changes

As Nasscom kicks off its flagship Leadership Forum event in Mumbai and  seeing the vendors and analysts presenting, I am reminded of a meeting with a group of outsourcing execs last year.  I asked them who they thought was their fastest growing competitor. Several US, European and Indian firms were mentioned. When I mentioned Foxconn  and GE, the group was puzzled.

Foxconn assembles the iPhones and iPads most of them had. It has over a million employees in China alone.  GE provides data centric services to customers around its plane engines, scanners, turbines. These are captive products outside service providers can only dream of accessing as data sources

In fairness, Product Engineering and the Internet of Things are not yet a major focus for most outsourcers.  Most of their focus is still in the corporate office and the data center.

But even there new players keep emerging from left field.

• In the data center, everyone talks about Amazon. But two software vendors, Microsoft and Oracle are starting to be major Infrastructure as a Service (IaaS) providers. Most major outsourcers have shown little appetite to invest in capex for cloud computing.
• In the exciting new world of Big Data and advanced analytics, players like Mu Sigma and BGI have already scaled to thousands of staff in India and China respectively. They are not traditional outsourcers (BGI focuses on genomic analysis) but are showing clients there is a potentially different staffing model – MasterCard is a client of and an investor in Mu Sigma. Even more interesting is Kaggle’s crowdsourced data scientist model. 
• Mobile apps – just compare the well stocked shelves of the Apple iOS and Google Android stores to that in the SAP mobile store. And the major outsourcers are absent in the former, and more aligned with the latter.
• Social marketing - Many outsourcers are working out from their CIO relationships to get to marketing budgets. There they find digital Agencies like LBi are already known to most major brands and are positioning themselves as “We’re experts in SEO, PPC, affiliate marketing, usability and multi-signal search.”
• Even in the once reliable ERP services marketplace, the changes are dramatic.

I am not in Mumbai this week but I would have liked to have seen where the Richter scale at the Nasscom event shows these seismic movements in the outsourcing industry.