deal architect

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.

Insourcing – more than a political slogan

Insourcing is on US TV every day thanks to back and forth between the Obama and the Romney campaigns.  Outsourcers may chuckle, smirk and discount the term as it is used in an opportunistic, nationalistic way. But they should be wary as Randy Mott, now CIO of GM, has announced his own version of insourcing. He wants to move from 90% outsourced to 90% internally staffed in 3 years. Now many will even discount what Randy says – I have already heard he came with an “agenda” from his last job as CIO at HP and GM’s largest outsourcer is EDS, now part of HP. Or there is ServiceMaster and its insourcing from IBM.  You could argue those are exceptions,  but I started hearing from several CIOs 3-4 years ago they felt they had “outsourced too much”. That led me to write in The New Polymath

…most enterprises spend 80 percent to 90 percent of their IT and telecom budget with outside vendors. That is a dangerously high dependence on a supply chain. ..Even in automobile and aerospace, which have much more mature supply chain management, companies such as Ford and Boeing get around 70 percent of components from suppliers. In those industries, supplier consolidation and tiering makes sense because Ford and Boeing are dominant customers and can dictate design standards and justifiable economics.In technology, by contrast, buyers have little leverage — even companies as big as Ford and Boeing make up less than 0.5 percent of an IBM ’ s or Oracle ’ s revenue.

Many outsourcers are sowing their own seeds of discontent. As I wrote last week, many of them seem bored with their current work assignments. Still others have eyes bigger than their stomachs. I was talking to a salesman at a Tier 2 offshore firm and he told me he is getting invited to deals at many big brand customers. “They are being neglected by their incumbent providers. The Wipros and the Infosyses want IBM and Accenture size commitments from their customers”.

And there are new competitors. In infrastructure services, players like Amazon and Oracle. On customer/revenue opportunities, digital agencies.

So, chuckle if you want when Joe Biden talks insourcing.  But when a CIO mentions it, while he may not bring it all back in, he is likely looking around.

And it will not end in November. 

What happened to NASSCOM?

For a while, the annual Leadership Forum in Mumbai was the IT equivalent of a pilgrimage to Mecca – you had to go at least once in your career. But, last week’s event came and went without a whimper.

It has been evolving in the vendors who show up. Used to mostly be Indian vendors – this year the sponsors had names like Accenture, Atos, CSC and Steria. The audience is global – Chinese, Irish, New Zealanders networking with customers accustomed to global delivery. Mercifully, there are many more non-stops to India from most places in the world.

What has not evolved much is the content at the event. Each year, the underlying theme is how great outsourcing is, how innovative, without acknowledging that real innovation is happening at places like Amazon and GE and salesforce.com, not in the outsourcing world. Indian politicians pitch how wonderful the country is, but avoiding substantive discussion on infrastructure or inflationary issues.  In that sense, the gathering is incestuous, and risks losing its stature in industry events.

Nasscom could learn from two of its leading members, Cognizant and HCL . Both run events,  Community and Unstructure  that are unafraid to drift in innovative directions. More importantly, they allow customers plenty to time to mingle and relax, without being bombarded by constant selling. It’s tough to stay awake in an outsourcing pitch even when Larry Ellison is coming up next – it certainly is when you are jetlagged and have had a couple of Kingfishers!  

Business Model Disruption

In the wake of Oracle’s missed quarter I have seen the words ‘business model” bandied a few times. My reaction: we ain’t seen nothing yet.  As Don Tapscott summarizes succinctly  “There are two kinds of business models: those that have been disrupted by technology, and those that have yet to be”

One of my elite attributes in the next book is being “Malleable” – with business model innovation (BMI). So many technology enabled models like “freemium”,”as a service” “from bottom of pyramid” are being tried in many industries.

The story of Apple becomes even more fascinating when you look from a BMI perspective. It popularized music by the MP3 unit and is evolving us into Music by Matching with iCloud at $ 25 a year. It has moved eBooks to an agency pricing model, away from the $ 9.99 standard Amazon had established (personal opinion as an author: Variable pricing adds complexity to a consumer’s decision. Would like to see pricing settle but you have to admire Apple for challenging the Amazon stronghold around books).  It positioned Smartphones away from the planned device obsolescence model carriers like because they can lock consumers into one long term contract after another with a small subsidy on a cheap new device.

Don’t extrapolate Apple to the rest of the tech industry, though. Enterprise tech vendors are BMI laggards for the most part. Amortize software maintenance over number of calls to their contact center and it may easily be $ 20,000 a call. A roaming call from staff visiting E. Europe may be at $ 4 a minute. Your storage may be fully costed at $ 2.50 a gb a month. A deskside PC visit by your outsourcer may cost you $ 500. Your printer likely needs ink which costs over $ 5,000 a gallon. 

Pick any SAP, IBM, HP, EMC, ACCN, VZ, any BPO shop at random and see how many of those scenarios apply. They are ripe for BMI. Actually BMD as in Disruption.

Like I said, we ain’t seen nothing yet.

Outsourcing: Gulliver’s Travels

I was struck by two lists I saw this past week. One was in an advertising section in the back of the Fortune 500 issue from the International Association of Outsourcing Professionals (IAOP) with its list of 100 outsourcing leaders (appears primarily sized based though IBM, TCS the largest Indian firm, Cognizant and others were missing). ISS, the firm ranked second on the list, which does facilities management, catering, security services etc had an ad which thanked its 522,835 employees. Yes, 522,835!

In contrast, I saw the Thiel Foundation (related to Peter Thiel the investor in PayPal, Facebook, LinkedIn and a few other not-too shabby companies) list of 20 under 20 – young entrepreneurs who qualified for fellowships of $100,000 each (the list added 4 more after the initial 20 were announced). Peruse the list - amazing what these young folks have already accomplished so early in life. What’s interesting, even controversial, about the fellowship is it requires winners to drop out of school for 2 years. Indeed, the mother of one of the winners who will leave Harvard is quoted as saying  “This is a different paradigm from what I grew up with”

Two weeks ago, at Sapphire Jim Hagemann Snabe, co-CEO of SAP hosted a group of bloggers and unsolicited, made the comment he wanted to meet with us because in the last few months he had become even more impressed with the power of individuals (as the Arab spring has shown forcefully).

The Sapphire expo floor was full of large, gargantuan booths of many of the firms in the IAOP list above. Yet, over and over again I heard questions about whether SAP would stick with its traditional larger partner firms as it rolls out its mobile ecosystem or whether it would emulate more of the Apple/Google model of entrepreneur created apps.

Outsourcing in many ways is at the crossroads. While some firms like Cognizant have been innovating and growing nicely (and this year cracked the Fortune 500 list), way too many have just become enamored with size in a world where individuals do seem to matter – and frankly have plenty of choices beyond becoming the 522,836th employee of a firm.

Welcome to a different paradigm than we all grew up with.