Unfortunately, scheduling conflicts have kept us from attending Leo Apotheker’s keynote today before the HP Analyst Summit in San Francisco. But yesterday, he tipped his cards for his new software vision for HP before a group of investment analysts. HP’s software focus is not to reinvent the wheel – at least where it comes to enterprise apps. Apotheker has to put to rest that he’s not about to do a grudge match and buy the company that dismissed him. There is already plenty of coverage here, interesting comment from Tom Foremski (we agree with him about SAP being a non-starter), and the Software Advice guys who are conducting a poll.
To some extent this has been little surprise with HP’s already stated plans for WebOS and its recently announced acquisition of Vertica. We do have one question though: what happened to Converged Infrastructure?
For now, we’re not revisiting the acquisitions stakes, although if you follow #HPSummit twitter tags today, you’ll probably see lots of ideas floating around today after 9am Pacific time. We’ll instead focus on the kind of company HP wants to be, based on its stated objectives.
1. Develop a portfolio of cloud services from infrastructure to platform services and run the industry’s first open cloud marketplace that will combine a secure, scalable and trusted consumer app store and an enterprise application and services catalog.
This hits two points on the checklist: provide a natural market for all those PCs that HP sells. The next part is stating that HP wants to venture higher up the food chain than just sell lots of iron. That certainly makes sense. The next part is where we have a question: offering cloud services to consumers, the enterprise, and developers sounds at first blush that HP wants its cloud to be all things to all people.
The good news is that HP has a start on the developer side where it has been offering performance testing services for years – but is now catching up to providers like CollabNet (with which it is aligned and would make a logical acquisition candidate) and Rally in offering higher value planning services for the app lifecycle.
In the other areas – consumer apps and enterprise apps – HP is starting from square one. It obviously must separate the two, as cloud is just about the only thing that the two have in common.
For the consumer side, HP (like Google Android and everyone else) is playing catchup to Apple. It is not simply a matter of building it and expecting they will come. Apple has built an entire ecosystem around its iOS platform that has penetrated content and retail – challenging Amazon, not just Salesforce or a would-be HP, using its user experience as the basis for building a market for an audience that is dying to be captive. For its part, HP hopes to build WebOS to have the same “Wow!” factor as the iPhone/iPad experience. It’s got a huge uphill battle on its hands.
For the enterprise, it’s a more wide open space where only Salesforce’s AppExchange has made any meaningful mark. Again, the key is a unifying ecosystem, with the most likely outlet being enterprise outsourcing customers for HP’s Enterprise Services (the former EDS operation). The key principle is that when you build a market place, you have to identity who your customers are and give them a reason to visit. A key challenge, as we’ve stated in our day job, is that enterprise customers are not the enterprise equivalent of those $2.99 apps that you’ll see in the AppStore. The experience at Salesforce – the classic inversion of the long tail – is that the market is primarily for add-ons to the Salesforce.com CRM application or use of the Force.com development platform, but that most entries simply get buried deep down the list.
Enterprise apps marketplaces are not simply going to provide a cheaper channel for solutions that still require consultative sells. We’ve suggested that they adhere more to the user group model, which also includes forums, chats, exchanges of ideas, and by the way, places to get utilities that can make enterprise software programs more useful. Enterprise app stores are not an end in themselves, but a means for reinforcing a community — whether it be for a core enterprise app – or for HP, more likely, for the community of outsourcing customers that it already has.
2. Build webOS into a leading connectivity platform.
HP clearly hopes to replicate Apple’s success with iOS here – the key being that it wants to extend the next-generation Palm platform to its base of PCs and other devices. This one’s truly a Hail Mary pass designed to rescue the Palm platform from irrelevance in a market where iOS, Android, Adobe Flash, Blackberry, and Microsoft Windows 7/Silverlight are battling it out. Admittedly, mobile developers have always tolerated fragmentation as a fact of life in this space – but of course that was when the stakes (with feature phones) were rather modest. With smart device – in all its varied form factors from phone to tablet – becoming the next major consumer (and to some extent, enterprise) frontier, there’s a new battle afresh for mindshare. That mindshare will be built on the size of the third party app ecosystem that these platforms attract.
As Palm was always more an enterprise rather consumer platform – before the Blackberry eclipsed it – HP’s likely WebOS venue will be the enterprise space. Another uphill battle with Microsoft (that has the office apps), Blackberry (with its substantial corporate email base), and yes, Apple, where enterprise users are increasingly sneaking iPhones in the back door, just like they did with PCs 25 years ago,
3. Build presence with Big Data
Like (1), this also hits a key checkbox for where to sell all those HP PCs. HP has had a half-hearted presence with the discontinued Neoview business. The Vertica acquisition was clearly the first one that had Apotheker’s stamp on it. Of HP’s announced strategies, this is the one that aligns closest with the enterprise software strategy that we’ve all expected Apotheker to champion. Obviously Vertica is the first step here – and there are many logical acquisitions that could fill this out, as we’ve noted previously, regarding Tibco, Informatica, and Teradata. The importance is that classic business intelligence never really suffered through the recession, and arguably, big data is becoming the next frontier for BI that is becoming, not just a nice to have, but increasingly an expected cost of competition.
What’s interesting so far is that in all the talk about big Data, there’s been relatively scant attention paid to utilizing the cloud to provide the scaling to conduct such analytics. We foresee a market where organizations that don’t necessarily want to buy all that and that use large advanced analytics on an event-driven basis, to consume the cloud for their Hadoop – or Vertica – runs. Big Data analytics in the cloud could be HP’s enterprise trump card.
Ever since its humble beginnings in the Palo Alto garage, HP has always been kind of a geeky company – in spite of Carly Fiorina’s superficial attempts to prod HP towards a vision thing during her aborted tenure. Yet HP keeps talking about getting back to that spiritual garage.
Software has long been the forgotten business of HP. Although – surprisingly – the software business was resuscitated under Mark Hurd’s reign (revenues have more than doubled as of a few years ago), software remains almost a rounding error in HP’s overall revenue pie.
Yes, Hurd gave the software business modest support. Mercury Interactive was acquired under his watch, giving the business a degree of critical mass when combined with the legacy OpenView business. But during Hurd’s era, there were much bigger fish to fry beyond all the internal cost cutting for which Wall Street cheered, but insiders jeered. Converged Infrastructure has been the mantra, reminding us one and all that HP was still very much a hardware company. The message remains loud and clear with HP’s recent 3PAR acquisition at a heavily inflated $2.3 billion which was concluded in spite of the interim leadership vacuum.
The dilemma that HP faces is that, yes, it is the world’s largest hardware company (they call it technology), but the bulk of that is from personal systems. Ink, anybody?
The converged infrastructure strategy was a play at the CTO’s office. Yet HP is a large enough company that it needs to compete in the leagues of IBM and Oracle, and for that it needs to get meetings with the CEO. Ergo, the rumors of feelers made to IBM Software’s Steve Mills, and the successful offer to Leo Apotheker, and agreement for Ray Lane as non executive chairman.
Our initial reaction was one of disappointment; others have felt similarly. But Dennis Howlett feels that Apotheker is the right choice “to set a calm tone” that there won’t be a massive a debilitating reorg in the short term.
Under Apotheker’s watch, SAP stagnated, hit by the stillborn Business ByDesign and the hike in maintenance fees that, for the moment, made Oracle look warmer and fuzzier. Of course, you can’t blame all of SAP’s issues on Apotheker; the company was in a natural lull cycle as it was seeking a new direction in a mature ERP market. The problem with SAP is that, defensive acquisition of Business Objects notwithstanding, the company has always been limited by a “not invented here” syndrome that has tended to blind the company to obvious opportunities – such as inexplicably letting strategic partner IDS Scheer slip away to Software AG. Apotheker’s shortcoming was not providing the strong leadership to jolt SAP out of its inertia.
Instead, Apotheker’s – and Ray Lane’s for that matter – value proposition is that they know the side of the enterprise market that HP doesn’t. That’s the key to this transition.
The next question becomes acquisitions. HP has a lot on its plate already. It took at least 18 months for HP to digest the $14 billion acquisition of EDS, providing a critical mass IT services and data center outsourcing business. It is still digesting nearly $7 billion of subsequent acquisitions of 3Com, 3PAR, and Palm to make its converged infrastructure strategy real. HP might be able to get backing to make new acquisitions, but the dilemma is that Converged Infrastructure is a stretch in the opposite direction from enterprise software. So it’s not just a question of whether HP can digest another acquisition; it’s an issue of whether HP can strategically focus in two different directions that ultimately might come together, but not for a while.
So let’s speculate about software acquisitions.
SAP, the most logical candidate, is, in a narrow sense, relatively “affordable” given that its stock is roughly about 10 – 15% off its 2007 high. But SAP would be obviously the most challenging given the scale; it would be difficult enough for HP to digest SAP under normal circumstances, but with all the converged infrastructure stuff on its plate, it’s back to the question of how can you be in two places at once. Infor is a smaller company, but as it is also a polyglot of many smaller enterprise software firms, would present HP additional integration headaches that it doesn’t need.
HP may have little choice but to make a play for SAP if IBM or Microsoft were unexpectedly to actively bid. Otherwise, its best bet is to revive the relationship which would give both companies the time to acclimate. But in a rapidly consolidating technology market, who has the luxury of time these days?
Salesforce.com would make a logical stab as it would reinforce HP Enterprise Services’ (formerly EDS) outsourcing and BPO business. It would be far easier for HP to get its arms around this business. The drawback is that Salesforce.com would not be very extensible as an application as it uses a proprietary stored procedures database architecture. That would make it difficult to integrate with a prospective ERP SaaS acquisition, which would otherwise be the next logical step to growing the enterprise software footprint.
Informatica is often brought up – if HP is to salvage its Neoview BI business, it would need a data integration engine to help bolster it. Better yet, buy Teradata, which is one of the biggest resellers of Informatica PowerCenter – that would give HP far more credible presence in the analytics space. Then it will have to ward off Oracle – which has an even more pressing need for Informatica to fill out the data integration piece in its Fusion middleware stack – for Informatica. But with Teradata, there would at least be a real anchor for the Informatica business.
HP has to decide what kind of company it needs to be as Tom Kucharvy summarized well a few weeks back. Can HP afford to converge itself in another direction? Can it afford not to? Leo Apotheker has a heck of a listening tour ahead of him.
Over the past few years, HP under Mark Hurd has steadily gotten its act together in refocusing on the company’s core strengths with an unforgiving eye on the bottom line. Sitting at HP’s annual analyst meeting in Boston this week, we found ourselves comparing notes with our impressions from last year. Last year, our attention was focused on Cloud Assure; this year, it’s the integraiton of EDS into the core businesss.
HP now bills itself as the world’s largest purely IT company and ninth in the Fortune 500. Of course, there’s the consumer side of HP that the world knows. But with the addition of EDS, HP finally has a credible enterprise computing story (as opposed to an enterprise server company). Now we’ll get plenty of flack from our friends at HP for that one – as HP has historically had the largest market share for SAP servers. But let’s face it; prior to EDS, the enterprise side of HP was primarily a distributed (read: Windows or UNIX) server business. Professional services was pretty shallow, with scant knowledge of the mainframes that remain the mainstay of corporate computing. Aside from communications and media, HP’s vertical industry practices were sparse, few, and far between. HP still lacks the vertical breadth of IBM, but with EDS has gained critical mass in sectors ranging from federal to manufacturing, transport, financial services, and retail, among others.
Having EDS also makes credible initiatives such as Application Transformation, a practice that helps enterprises prune, modernize, and rationalize their legacy application portfolios. Clearly, Application transformation is not a purely EDS offering; it was originated by Ann Livermore’s Enterprise Business group, draws upon HP Software assets such as discovery and dependency mapping, Universal CMDB, PPM, and the recently introduced IT Financial Management (ITFM) service. But to deliver, you need bodies and people that know the mainframe – where most of the apps being harvested or thinned out are. And that’s where EDS helps HP flesh this out to a real service.
But EDS is so 2009; the big news on the horizon is 3Com, a company that Cisco left in the dust before it rethought its product line and eked out a highly noticeable 30% market share for network devices in China. Once the deal is closed, 3Com will be front and center in HP’s converged computing initiative which until now primarily consisted of blades and Procurve VoIP devices. It gains a much wider range of network devices to compete head-on as Cisco itself goes up the stack to a unified server business. Once the 3com deal is closed, HP will have to invest significant time, energy, and resources to deliver on the converged computing vision with an integrated product line, rather than a bunch of offerings that fill the squares of a PowerPoint matrix chart.
According to Livermore, the company’s portfolio is “well balanced.” We’d beg to differ where it comes to software, which accounts for a paltry 3% of revenues (a figure that our friends at HP reiterated underestimated the real contribution of software to the business).
It’s the side of the business that suffered from (choose one) benign or malign neglect prior to the Mark Hurd era. HP originated network node management software for distributed networks, an offering that eventually morphed into the former OpenView product line. Yet HP was so oblivious to its own software products that at one point its server folks promoted bundling of rival product from CA. Nonetheless, somehow the old HP managed not to kill off Openview or Opencall (the product now at the heart of HP’s communications and media solutions) – although we suspect that was probably more out of neglect than intent.
Under Hurd, software became strategic, a development that lead to the transformational acquisition of Mercury, followed by Opsware. HP had the foresight to place the Mercury, Opsware, and Openview products within the same business unit as – in our view – the application lifecycle should encompass managing the runtime (although to this day HP has not really integrated Openview with Mercury Business Availability Center; the products still appeal to different IT audiences). But there are still holes – modest ones on the ALM side, but major ones elsewhere, like in business intelligence where Neoview sits alone. Or in the converged computing stack and cloud in a box offerings, which could use strong identity management.
Yet if HP is to become a more well-rounded enterprise computing company, it needs more infrastructural software building blocks. To our mind, Informatica would make a great addition that would point more attention to Neoview as a credible BI business, not to mention that Informatica’s data transformation capabilities could play key roles with its Application Transformation service.
We’re concerned that, as integration of 3Com is going to consume considerable energy in the coming year, that the software group may not have the resources to conduct the transformational acquisitions that are needed to more firmly entrench HP as an enterprise computing player. We hope that we’re proven wrong.
Only leaked yesterday, this morning HP confirmed it would acquire EDS for north of $12 billion. The obvious driver, as colleague Dana Gardner noted, is that with the IBM and its global services colossus and the growth of outsourced, cloud, or on demand computing, that enterprise customers were going to demand a viable alternative – an Avis to IBM’s Hertz so to speak.
Of course the deal brings back memories of when Mark Hurd’s predecessor left off, which was the attempted purchase of PwC consulting for $18 billion back in 2000. Barely a couple years later, IBM swooped up PwC up for roughly a fifth of the cost. Besides the ridiculous price tag (these were pre-inflated dollars) was the question of culture clash. HP’s techie culture seemed a poor fit for PwC’s suit-and-tie atmosphere; as we maintained, IBM and PwC were a much better fit.
And while $12 billion still sounds like a lot of money, that’s probably about half of what HP would have paid back in 2000 with pre-deflated dollars.
But what a difference a few years and a more-focused senior management team make. Not only has Hurd rationalized the Compaq acquisition, but for the first time his team actually cultivated HP Software as more than an oxymoron, and has bulked it up with some shrewd acquisitions. Admittedly, success at HP Software doesn’t automatically portend similar results with EDS, which has been through the acquisition game before. More importantly, comparing Hurd to Fiorina, he exercises the far more hands-on management style that will be necessary to pulling such a transformative deal off.
Among the challenges are reorienting EDS away from IBM to promote HP infrastructure. Given that EDS is stronger in infrastructure outsourcing rather than mainstream systems integration, that might be a smoother shift, but it will require an internal migration of expertise. EDS is already part way down the transformation road, having been slimmed down by CEO Ronald Rittenmeyer (he stays on as business unit head), and before that, Michael Jordon (no, not the Air Jordans guy).
Significantly, HP will preserve EDS’s identity and autonomy, handing over some of Ann Livermore’s services operations. With more engaged management, HP stands a better chance this time of making such an acquisition work.
On the eve of last year’s Software conference, Sand Hill Group principal M.R. Rangaswami spoke on the prospects for innovation in a consolidating software industry. Evidently there was some room left for innovation, witness Sun’s billion dollar acquisition of MySQL. According to Rangaswami, it points to the fact that there’s life – and value – in open source software companies beyond Red Hat.
In fact, 2007 was a year of second acts, with Salesforce joining the ranks of billion-dollar software companies. On the eve of Software 2008 next week, we just had a return engagement with MR to get his take on what’s gone down over the past year. The first point he dropped was breaking conventional wisdom that another software company could actually crack the established order, given ongoing consolidation. “People questioned whether there would ever be another billion dollars software company again, although of course Mark Benioff doesn’t call it that,” he noted.
But Rangaswami added that conventional wisdom wasn’t totally off, referring to the fact that a lot of promising break-outs are being gobbled up before they get the chance to go public – MySQL being Exhibit A. There’s plenty of cash around the old guard to snap up promising upstarts.
Nonetheless, there are invisible limits to the acquisition trend, most notably among SaaS (Software as a Service) providers. He ascribes the reticence to the fact that conventional software firms are scared of the disruptive effects that on demand providers could have in cannibalizing their existing businesses.
Going forward, Rangaswami expects some retrenchment. We’d put it another way – with last year’s 5 – 6% growth in IT spending, it was almost impossible for any viable ISV to not make money. Even if, perish the thought, we had been CFO for some poor ISV last year, it would have been in the black in spite of us.
But this year, with IT spending growth anticipated in the more modest 1 – 2% range if that, there’s going to be a lot of missed numbers. IBM cleaned up in Q1, but Oracle’s and Microsoft’s numbers failed to impress (Microsoft last year was coasting on Vista upgrades). Rangaswami advises ISVs to keep the lid of development costs (he expects to see more offshoring this year), but he also says that ISVs should be “smarter” with their marketing budgets. “Do a lot more with programs that are online and use Web 2.0 technologies as opposed to some of more traditional approaches,” he advised, pointing to channels like podcasts and YouTube. “Most people watch TV on YouTube these days,” he said, just slightly exaggerating.
Of course, Rangaswami says you can’t ignore emergence of social computing, for which Facebook for now has become the poster child. We admit to being a bit put off by the superficial atmosphere of the place, and of course not being under 35, why should we care what somebody did last night or who their favorite band is? But it’s become conventional wisdom that some form of social networking is bound to emerge for more professional purposes, like engaging your customers, that goes beyond the forums and chat rooms of user groups, the occasional regional or annual conferences, or the resume-oriented purpose of LinkedIn. In fact, one recent startup, Ringside Networks, is offering a “social appserver” where businesses can use Facebook apps to build their own communities on their own sites.
But Rangaswami says, why not use some of the less serious aspects of social computing to conduct real business. Like getting your New England customers together at the next Red Sox game (just make sure that one of your New York customers by mistake doesn’t slip onto the invite list).
The theme of this year’s Software 2008 conference is what Rangaswami terms “Platform Shift.” After the upheavals of the open systems and Internet eras, it appeared that the software industry was coalescing around Java and .NET platforms. But then on demand began making the Java vs. .NET differences irrelevant. For instance, if you want to write to Salesforce’s platform, it’s in a stored procedures languages that is like, but isn’t Java. On the horizon you have Amazon’s EC2 cloud, the Google Apps platform, and you could probably also consider Facebook to be another platform ecosystem (there are thousands of apps already written to it).
The good news is that tough times actually encourage customers to buy a couple of on demand seats for petty cash because it sharply limits risk.
The result is that barriers to entry for new software solution providers are lower than ever. You don’t have to ask customers to install software and you don’t have to build the on demand infrastructure to host it. Just build the software, then choose whose cloud you want to host it on, pay only by the drink, and start marketing. According to Rangaswami, the cloud might remove the hurdles to getting started, but getting your brand to emerge from the fog may prove the toughest challenge. “Sales and marketing in this new world will be totally different.”
Is the inevitable always inevitable?
That popped into our mind as we read headlines last week of Ford seeking a partnership with Toyota to learn the famed Toyota Production System – just as GM sought 20 years ago when it set up the NUMMI auto plant joint venture with Toyota in Freemont, Calif.
Back in the 80s, the Japanese lean production machine (as epitomized by Toyota) was considered unbeatable, and the conventional wisdom was that it was only a matter of time before it sucked away the last vestiges of manufacturing from the western world.
Today, the conventional wisdom is that you can’t underprice Chinese manufacturers or match the productivity of India’s programmers, and that it’s certain that they too will become impossible to compete against. Over the past couple years, Tom Friedman’s book, The World is Flat, has become the newest business bible based on its premise that an interconnected world inevitably levels playing fields.
There’s little question that the Japanese lean production machine sparked a remarkable transfer of wealth to Japan in 1980s, and that China and India are effectively shifting the center of gravity in manufacturing, software, and back office processing. And there’s little question that the flat world is enabling emerging regions to join the world economy.
But there are invariably bumps on the road to inevitability.
Back in the 80s, we recalled articles posing the half-seriousl question on what Japan Inc would do after it bought California. Heck, it already snapped up Rockefeller Center. And inside executive suites, bootlegged translations of The Japan That Can Say No were must-reads.
Problem was, Japan’s success was built, not only on the dominance of its lean production machine. It was also built on a system of highly rigged trading rules demanding unfettered access to export markets, but severely restricting imports or the ability of offshore companies to set up shop in Japan.
Nobody realized what havoc that would eventually wreak. The huge entrapment of wealth brought by Japan’s unbalanced export machine begat a real estate bubble that practically bankrupted the nation’s financial system. Meanwhile, the arrogance of market leadership spawned delusions that Japan could extend dominance to the computing industry as well. Japan’s Fifth Generation Computing Project aimed to reinvent software through artificial intelligence. It foundered because Japanese culture lacked the necessary individualism and creativity.
Similar cultural issues, institutional hurdles, and overconfidence will trip up any aspiring economy fixated by the dream of inevitability.
India has competed on a huge, educated, and highly motivated workforce, backed by training in newer practices, while China has traded on basement wages, an absence or regulation, and the ability to ramrod infrastructure.
But the downside is that India has a highly bureaucratic culture that has infected some, although not all companies. Meanwhile, China lacks the rule of law and stifles civil liberties, placing at risk the kind of creativity necessary to allow it to advance higher up the value chain. And it’s kept its currency at unrealistically low exchange rates (sound familiar?).
In a recent panel, Tom Friedman recalled a comment from his grandmother, that any country that censors Google would only get so far.
Of course, it could be argued that obstacles and adversity can spur excellence, witness Russia’s technological and political backwardness that forced programmers to be more clever as they worked with primitive equipment. But keep in mind, they’re from a country that practically owns the game of chess.
As for the inevitability that the rise of offshore regions is a zero sum game, in actuality, it has changed the nature of manufacturing, back office processing, and software development. Rather than a sucking sound, the flat world stretches the value chain as design, customization, configuration, and final assembly are performed closer and closer to the customer. And once more, you’re hearing about a shortage of qualified software engineers, not just in India, but the developed world as well.
Unlike conventional wisdom, our manufacturing and software sectors are hardly dead in the water. What was supposed to be inevitable wasn’t.
Every few years, a new tome becomes the bible of business. Back in the
80s, it was Tom Peters’ “In Search of Excellence.” In the IT field, NY
Times columnist Tom Friedman’s tome “The World Is Flat” has become the
latest conventional wisdom.
Friedman contends that, in a world awash with bandwidth, barriers to entry
have virtually disappeared. Witnessing the explosion of the IT sector in
places like India or China, it’s hard to argue. Last year alone, India
graduated 10x the number of computer scientists as the U.S.
Yet, viewing this as a zero sum game ignores some basic realities. For
instance, when you outsource offshore, you must increase management
overhead because you are running a remote project that is hampered by lack
of accessibility, 12 hours of time zone difference, and culture gaps.
Conversely, when you “insource” a project, you may also have to bulk up on
management to compensate for poor communications that have long existed
between IT and the business.
Yet, at Sand Hill Group’s Software 2006 conference, we were intrigued by
an idea cited by University of Michigan business professor Dr. C K
Prahalad that offshoring provides a multiplier effect. Applying principles
resembling Metcalfe’s Law (which stipulated the value of the network
growing exponentially with the number of nodes), Prahalad said that when
you have more software brains, you gain more chance of getting innovation.
And innovation, of course, creates value and new opportunity.
Arguably, nobody looks at the growth of SAP, Mercury, or Fuego (recently
acquired by BEA) as threats to domestic IT employment. Yet each of those
companies capitalized on development conducted in Germany, Israel, and
Prahalad made another interesting point: regardless of how fast India is
growing, it remains highly interdependent on western talent that not only
has state of the art expertise, but intimate knowledge of the customer and
If you look at how manufacturing globalized, you might get an idea of
what’s in store for IT (we’ll also credit Erik Keller and Brian Turchin,
who have come to similar conclusions). A generation ago, Japan applied
American doctrines of total quality management to produce cars faster,
Yet, in the interim, American manufacturing didn’t disappear. Instead, it
reconfigured its role in two pivotal points of the value chain: ideation
and final configuration and service for the end customer.
Nonetheless, you can’t ignore the fact that IT employment in the western
world is nothing compared to the dot com peak. For instance, according to
Federal Reserve Bank figures, “non agricultural” (the bucket under which
they put IT) employment in the Bay Area dropped 9.5% between 2000 – 2003.
But we contend that the dot com bubble was an historic aberration. Taking
the Fed’s own figures, if you factor out the step gains of 1995 – 2000,
what remains is a more sustainable 10 – 15% overall growth in jobs from
1995 – 2003. Consequently, if you look at IT as a more ”normal” business,
job trends don’t look that bad, the emergence of offshore notwithstanding.
Instead, the real issue for the software industry remains finding a viable
business model. You’d think that after 30 – 40 years of existence, that
we’d finally get it right. Yet, according to numbers cited by Kleiner
Perkins principal Ray Lane, three quarters of all profitability is
accounted for by Microsoft, SAP, and Oracle. Now that’s something to get
About three years ago, we moderated an outsourcing debate pitting a software vendor CTO vs. a representative from a leading Indian offshore firm. While some of the discussion was predictable, what surprised us was an admission that the offshore firm rep volunteered out of the blue.
Recalling the metaphor of two cultures divided by a common language, he admitted that certain expressions or idioms didn’t always translate well.
The prime example? Interpreting the routine request, “It would be nice if you could finish the job by tomorrow.” To our ears, such a question means, “You’d better finish the job by tomorrow or else.” To Indians, it was seen as a polite request that, if you fulfilled it, would be rewarded with brownie points. Evidently, Indians just didn’t comprehend our sense of urgency.
What if we were to reconvene the same discussion today? That was in the back of our mind as we spoke with Marc Hebert, executive VP with the offshore firm Sierra Atlantic, who described his firm’s management training program.
Sierra’s program borrowed role models primarily from western pop culture. As part of the course, management trainees are shown the film The Dirty Dozen, where a group of convicts are drafted and shaped into a lean, mean fighting machine to overrun a major Nazi compound.
Of course, the program featured other examples, such as The Bridge Over the River Kwai and various Bollywood productions. But what drew our attention was the notion that the untouchables of American society had anything of value to teach India’s emerging elite. According to Hebert, films like the Dirty Dozen illustrate how to perform under pressure. In today’s consolidating IT market, we’d concede he’s got a point.
But our sense is that today, Indians – and anybody else that wishes to play in the global economy – have an even more important lesson to learn. It’s about avoiding complacency.
Right now, the spotlight is ready to shift towards China, where BEA’s Alfred Chuang recently delivered a triumphal speech about local prospects.
Admittedly, today Indian IT services are sitting pretty. They’ve profited from their ability to perform faster, cheaper, better – just as the Japanese did with the US auto industry a generation ago.
When it comes to raw numbers, China is the one place that could give India a run for its money. Nonetheless, China also faces hurdles of its own ranging from lack of legal infrastructure to an authoritarian Confusion tradition, heavy-handed government that doesn’t know when to let go, plus the fact that English remains a second language.
Some of China’s hurdles remind us of Japan’s ill-fated Fifth Generation artificial intelligence computing project back in the 1980s. Following their triumphs in manufacturing, conventional wisdom held that it was just a matter of time before they would be defining the future of computing as well.
Turns out, the future came and went, and the Japanese lacked the individualism gene to make it happen.
The punch line? Neither China or India has it made. Furthermore, there’s no such thing as permanent competitive advantage.
While outsourcing is almost as old as the computing profession itself (in the early days, corporations didn’t always have their own development staffs), the nature of outsourcing has changed. With today’s enterprise apps penetrating the core of the business far more thoroughly than yesteryear’s general ledger, outsourcing has had to morph into a more dynamic, collaborative process. And obviously, with the Internet, the business has globalized, enabling any region with the right infrastructure and expertise to play.
The conventional wisdom is that offshore is becoming mainstream because it’s the only way that enterprises or software vendors can afford the cost of development. However, if price is the sole criterion, the customer will only get what they pay for. What’s more interesting is looking at the levels of collaboration that are emerging in some of the more advanced engagements.
For instance, mortgage broker Ameriquest used personal connections to gradually evolve relationships at the staff level as it and Tavant Technologies (the outsourcing provider) ended up seeding each other’s organizations. Another interesting angle: because the firm was aggressively doing custom development (prompted by a booming refinance market), no internal jobs were lost to outsourcing.
SpikeSource, an open source software testing vendor, added yet another angle. According to CEO Kim Polese, the firm works with its outsourcer, Cognizant, jointly interviewing job applicants for the offshore team.
Then there are outsourcing providers who specialize, not on corporate clients, but vendors, who add another angle to collaboration. Providers like Sonata Software take VAR approaches because they target many of the same ISVs whom they previously represented as local sales and integration channel. That means not taking engagements from client rivals, to ensure that intellectual property is protected. But there’s another angle. Extending the outsource relationship, one of Sonata’s ISV clients testified that the outsourcer wasn’t simply taking orders for developing new product features, but was also suggesting them.
These cases – especially Ameriquest’s – aren’t necessarily typical. But the emergence of collaborative outsourcing points to a principal too often overlooked by organizations sourcing development as if they were shopping at Wal-Mart: even if your development team is 12 time zones away, software is not an arm’s length business. As one software CEO remarked, even if you can source offshore for 30% less, it’s hardly a bargain if the project takes twice the time.
There’s a more powerful reason to collaborate. With today’s most successful businesses competing on their ability to collaborate (because they know their limits and focus on their secret sauce), why should software development be any different?
There’s a lesson for outsourcing providers as well. If all you do is deliver traditional staff augmentation body shop approaches, you’re eventually going to hit a wall when your rivals provide tangible evidence that they are helping their customers, not only save money, but grow more competitive.
In the 1990s, conventional wisdom was that economic cycles were relics of the past, and that the inevitable march of technology would render IT recession-proof.
The last five years have certainly shaken those assumptions. Today, IT is often lumped with mature sectors like automotives, steel, or appliances. Recently driving past a bunch of empty Rte. 128 office parks sprouting dozens of For Rent signs, we recalled similar drives a decade ago through the Ohio River Valley, where we gazed upon abandoned hulks of steel plants resembling Mediaeval ruins.
But not all mature industries stay mature. Take consumer electronics. Twenty years ago, just about every Baby Boomer had a stereo set. Yet in recent years, digital technology reinvented the field — just gaze at all the iPods, not to mention High Definition plasma TVs gracing the landscape. Significantly, the Consumer Electronics Show (CES) has replaced Comdex as the place to be seen.
A stroll through the splashy Samsung showroom at New York’s Time Warner Center reminds you that the possibilities of marrying consumer electronics and computing are limited solely by the imagination. Only time will tell as to which combinations actually morph into viable markets.
Over the past few years, emerging technologies like WiFi have helped transform mobile computing. But as upstarts like Cometa learned the hard way, WiFi wasn’t a standalone market. Blackberries have proven that there is a commercially viable mobile text messaging market — but does that mean we’re going to forsake the convenience of the tiny cell phone footprint if all you want to do is reach out and call someone?
And just how much content or communication can one actually consume, or be willing to pay for, while in motion? Obviously, this is the stuff of market trials and ergonomic studies.
The common thread is that the success of IT is increasingly reflected in its invisibility. Voice over IP (VoIP) will supplant and enhance conventional circuit-based phone service only if it looks and feels like the thing it is replacing. So you may not “see” IT, but it is becoming ubiquitous and essential. For instance, the emergence of technology-enabled services like hosted applicatitons requires domain expertise to drive it, but IT architectural competence to support it.
Ironically, the flipside is that the emergence of “IT invisible” markets may be creating demands for the very people that technology was supposed to replace.
* For every 10 Indian offshore developers, you still need people close to the customer who understand local culture and prevailing business practices.
* Voice recognition technology may automate the offshore customer support call center people who once replaced domestic counterparts. It also could create new job opportunities for Level 2 or 3 support back home, because voice recognition and remote call centers only take you so far.
* Business process outsourcing creates new opportunities for corporate veterans who toiled away for decades before their companies deemed them redundant.
Maybe the one lesson we’ll learn in 2005 is that technology growth is not necessarily a zero sum game.
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