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Sunday, September 27, 2009

The New Face Of The CIO

The responsibilities of the CIO span a spectrum of managerial tasks, with one end of the spectrum as "supply" - the delivery of IT resources and services to support business functions - and the other end of the spectrum as "demand" -the task of helping the business innovate through its use of technology. Many CIOs admit that balancing both demand and supply is a difficult task. Fortunately, the CIO has a range of new opportunities and tools to help him manage and order these competing priorities. The process starts with an understanding of how new sourcing models can liberate internal resources and funding for strategic business enablement and innovation.

While every CIO plans aligning IT and business strategy, the irony is that they don't have enough time for effective strategic planning. Usually they blame it on demand-side pressures.Look at the challenges confronting the CIO:
The business side complains that their CIOs aren't up to speed on issues confronting the business and can't think through the implications of systems trade-offs, on a business-unit level, for planned implementations or proposed IT investments. At the same time, the business side usually gets confused in making assessments of the relevance of new technologies to safeguard their business competitiveness. More often than not, business leaders say that their CIOs are not proactively bringing them new ideas about how technology can help them compete more effectively.

Part of the problem stems from the inherent conflict of managing supply and shaping demand. CIOs often must meet requirements to reduce total IT spending, for instance, while making investments to support future scenarios-even though these upgrades will increase IT operating costs. It's indeed a tough job - trying to be both a cost cutter and an innovator - and the CIO sometimes compromises one role. Structural issues whereby parts of the organization are under the control of other executives also complicate the job. Business-unit leaders want more IT leadership, but they are wary of CIOs who don't tread carefully along business leaders' boundaries. Strategic IT management calls for making improvements on the demand side. Managing the demand side of the equation broadly covers:
- The financial understanding of costs and benefits,
- Business accountability for IT and
- Clear framework for investments in technologies.
CIOs shift their attention to different aspects of these three core components. As part of the evolution the CIOs shift focus: once operations are stabilized and business credibility has been achieved, emphasis shifts toward working more closely with business leading to opportunities to contribute to strategic initiatives and direction.

In practice, it can be seen that CIOs who meet and exceed business expectations get rewarded with greater participation in their enterprise's business strategy, higher budgets and become favorites with the business side. In most cases, these CIOs tend to have the ear of the CEO through a direct reporting relationship. CIOs need to know not only what the differences are but also how to time the shift; move too soon or too late and credibility with business leaders will suffer.

This month IBM released its findings from the new global study of more than 2,500 chief information officers (CIOs), covering 19 industruesindustries and spread across 78 countries. The study confirms the strategic role played by CIO’s in making their business become visionary leaders of innovation and financial growth. Many CIO’s are getting much more actively engaged in setting strategy, enabling flexibility and change, and solving business problems, not just IT problems

The report replete with innumerable insights is an excellent collection and I started by looking at understanding some themes and associated metrics that preoccupy the CIO’s the most . I was startled to find that more and more CIO’s appear to be genuinely focusing on getting the growth lever of IT and business fire by rightly turning their attention in increased measures towards innovation. Someone quips overtime the role of the CIO is less and less about technology and more and more about strategy. Really hitting the nail on the head. As the role of the CIO itself transforms so do the types of projects they lead across their enterprises, which will allow CIOs to focus less time and resources on running internal infrastructure, and more time on transformation to help their companies grow revenue. CIOs are transforming their infrastructure to focus more on innovation and business value, rather than simply running IT. The report finds that today’s CIOs spend an impressive 55 percent of their time on activities that spur innovation. These activities include generating buy-in for innovative plans, implementing new technologies and managing non-technology business issues. The remaining 45 percent is spent on essential, more traditional CIO tasks related to managing the ongoing technology environment. This includes reducing IT costs, mitigating enterprise risks and leveraging automation to lower costs elsewhere in the business. Obviously not every CIO would make the cut. It’s reported that High-growth CIOs actively integrate business and IT across the organization 94 percent more often than Low-growth CIOs. The study notes that CIOs spend about 20 percent of their time creating and generating buy-in for innovative plans. But High-growth CIOs do certain things more often than Low-growth CIOs: they co-create innovation with the business, proactively suggest better ways to use data and encourage innovation through awards and recognition. 56 percent of High-growth CIOs use third-party business or IT services, versus 46 percent of Low-growth CIOs. The study also found that High-growth CIOs actively use collaboration and partnering technology within the IT organization 60 percent more often than Low-growth CIOs. Even more impressive, High-growth CIOs used such technology for the entire organization 86 percent more often than Low-growth CIOs
Successful CIO’s , the report notes actually blend three pairs of roles. At any given time, a CIO is:
• An Insightful Visionary and an Able Pragmatist
• A Savvy Value Creator and a Relentless Cost Cutter
• A Collaborative Business Leader and an Inspiring IT Manager

Adjusting the mix one pair at a time, the study reports make the CIO’s perform tasks that make innovation real, raise the ROI of IT and expand the business impact.

Other key findings of the survey:
• CIOs are continuing on the path to dramatically lower energy costs, with 78 percent undergoing or planning virtualization projects
• 76 percent of CIOs anticipate building a strongly centralized infrastructure in the next five years.
IBM's CIO Pat Toole has this to say about the findings. In addition to the detailed personal feedback, IBM also incorporated financial metrics and detailed statistical analysis into the findings.The report also highlights a number of recommendations from strategic business actions and use of key technologies that IBM has identified that CIOs can implement, based on CIO feedback from the study.

(Picture Courtesy :IBM)

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Friday, September 25, 2009

The Product Maintenance Paradox!

There was a mild tremor in the IT market few weeks back when Siemens threatened to terminate its annual maintenance contract with SAP owing to high price being charged by SAP. I have noted four years back that around half of Oracle's total revenue of $11.8 billion(in 2005)came from maintenance. As a matter-of-fact oracle sometimes used to justify its roll-up strategy based on attractive maintenance revenue streams of acquired products! The current maintenance stream revenue for Oracle continues to be very high. These open the questions :Why do customers pay vendors annual maintenance? What do they get in return to justify this substantial outgo year after year? For end customers, switching software providers is not easy. Most experts and customers agree that replacing big applications from one company with those from another is far too costly (millions at minimum) and time consuming to be worth the bother.
Now Wall street seems to be waking up to the fragile nature of the solid natured maintenance revenue stream of enterprise software vendors.

Courtesy Vinnie saw this CGCowen report written by Peter Goldmacher, Joe del Callar dated Sep 25 - focusing on the license revenue stream of enterprise software vendors.The report highlights

“As we interpret this data, we can't tell if vendors aren’t investing in R&D because customers aren.t buying products, or customers aren’t buying products because vendors aren.t investing in R&D. Regardless of the cause and effect, the trend is clear. Absolute investments in ERP are down dramatically, way beyond the synergies created by scale via M&A. The net result is that customers no longer look at material ERP upgrades as a competitive advantage and therefore vendors are unwilling to increase investments. Customers are watching their ERP vendors generate expanding margins without plowing that profit back into the product and we believe customers are getting resentful”

I certainly believe that the time is now ripe for the Tier I enterprise software market to be disrupted by third-party maintenance providers. With SAP and Oracle said to be realizing gross margins in the neighborhood of 90% on their maintenance business, the economics are simply too strong for third party maintenance providers not to rise up. Some regulatory interventions like antitrust suits may help accelerate the shift,this would embolden service providers to look at the maintenance market form a fresh value perspective.

I must also agree that with the moderate success of some pure play third party service providers, the landscape is changing and customer expectations are increasing and we shall begin to see third party supports coming in and several customers are also demanding annual lease contracts in place of perpetual license – at least in emerging economies. The era of enterprise software as we know may be over. The straightforward calculations about existing customers continuing to pay very high maintenance revenue year after year may prove to be wrong moving forward and in fact may choose to converge into one homogeneous platform and look at saving lot more costs. The real test of one's ability to hang onto customers will not come when maintenance contracts expire but when the major software companies, transition to so-called "service oriented architectures," a fundamental change in the way applications are deployed, integrated and accessed which should accentuate the ability of different vendors to provide ongoing maintenance support and create a new vibrant win-win business therein.


Wednesday, September 23, 2009

The Coming Video Revolution & The Internet Buildup

Nielsen reported few weeks back that on an average Americans watch 153 hours of TV every month and 3 hours of online video every month. Video ads are beginning to appear in newspapers! Video has a powerful impact, it is easy to share on social platforms, it is much less expensive to produce that in the past, and more and more people have access to it as technology and reach are improving.

Cisco’s recent forecast of IP traffic for the coming years, makes an interesting read. The company expects IP traffic to increase fivefold compared to today, reaching two-thirds of a zettabyte by 2013. That's two thirds of a trillion gigabytes with a compound annual growth rate of 40 percent. In 2013, the Internet will be nearly four times larger than it is in 2009. By year-end 2013, the equivalent of 10 billion DVDs will cross the Internet each month.

An important highlight of the Cisco report : A significant part of that traffic will be online videos, which will make up 90 percent of all consumer IP traffic by 2013, reaching over 18 exabytes per month. Internet video is now approximately one-third of all consumer Internet traffic, not including the amount of video exchanged through P2P file sharing. The sum of all forms of video (TV, video on demand, Internet, and P2P) will account for over 91 percent of global consumer traffic by 2013. Internet video alone will account for over 60 percent of all consumer Internettraffic in 2013.Video communications will be a formidable block in this traffic – Cisco anticipates an increase by around ten times by 2013 (in the next four years). As the global mobile explosion continues, it reflects in mobile video volume as well. Mobile online video watching is also expected to rise spectacularly, reaching 64 percent of the total mobile IP traffic in 2013, growing from 33 petabytes in a month in 2008 to an estimated 2,184 petabytes, this is 2 exabytes, per month in 2013. The increase represents a 131 percent annual growth rate. However mobile IP traffic will still be only 4 percent of the total IP traffic.

The volume growth also factors in expected growth in Peer-to-peer traffic, which is also expected to increase but its percentage of the overall IP traffic will decline by 2013. P2P networks currently use 3.3 exabytes per month and the numbers are expected to grow at a compound annual growth rate of 18 percent. However, overall P2P traffic will decline to only 20 percent of the total consumer IP traffic coming from 50 percent in 2008. Cisco expects file hosting services to grow instead at a much bigger rate of 58 percent per year reaching 3.2 exabytes per month in 2013.

The internet continues to grow. With more and more news of a global economic turnaround, the growth can only accelarate. The support Infrastructure needs to grow faster to keep pace and this seems to be happening. Since 2007, the annual growth rate of international Internet capacity has exceeded 60%. In 2009, international internet bandwidth increased 64%. In 2009, network operators added 9.4Tbps of new capacity—exceeding the 8.7Tbps in existence just two years earlier.No wonder the internet buildout phenomenon is indeed an amazing one

(Picture courtesy : Cisco)

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Tuesday, September 22, 2009

Consumerization Inside Enterprises Reinforces The Idea : IT is Business

When more and more focus is put on innovation, its evolution, growth and in managing innovation while looking through what conventional collaborative mechanism in fusion with powerful mechanisms like internet enabled collaboration could help achieve –all these point to a world of immense possibilities. With a dominant number of internet users poised to take a dip in the virtual world, the virtual world could become more and more real!! Apple and the high tech semicon industry can vouch for the pull from the consumer segment – for both of them, consumer segment happens to be the largest consuming class!

The interesting part is that the consumerization of IT is creating a whole new world, all managed by a new set of rules. The impact of consumerization on enterprise and opportunities to leverage such advances are all groomed in the consumer space itself. The transition of such things into enterprise IT thereby happens automatically – in a way, advances in consumer space dictates the corresponding fallout in the enterprise space. Many of the digital collaboration mechanisms are made available at throwaway prices today. This creates so much pressure inside enterprises such that the IT departments are forced to give corporate users access to the scale and innovation of the consumer market. True, but difficult to believe – right? An analysis of the past shows that in a significant number of cases the technologies that were originally focused on consumer space have made deep impact over time on the enterprise space – Personal computers, search, IM all are shining examples of this powerful trend. Native web companies keep coming out with a lot of full blown but trial offerings that entices lot many more consumers and many a times a revenue and utilization value evolves out of more and more usage of such offerings. In the process, the consumer space gets more and richer forcing successful offering(s) to be pushed into the enterprise –in larger numbers and faster pace.

Consumerization opens up the organization to consumer-grade services that innovate at a much faster pace than the organization can. –providing in the process, an unmatchable potential for handsome returns to business. Productivity could rise as workers become less tied to the office. consumerisation is also forcing massive changes in resource consumption - consumerization offers a path to reducing a company’s carbon footprint by encouraging telecommuting and Internet-based applications run by mega-scale server farms, which are in many cases powered by greener energy sources and are more energy efficient than hardware in corporate data centers. Large corporates are beginning to adopt such technologies aggressively. With an impending explosive growth of communication and broadband capabilities, the medium of virtual reality/world is sure to take a central seat. Clearly the virtual reality movement does not appear to be a fad per se but can help business create and define new frontiers in its growth path. Implementing IT consumerization is not a major technical challenge, but it does need effective organizational change management discipline . What should the CXO’s do in such contexts: Beat the status quo. Break any resistance that comes from outsourcing partners who come in the way of faster adoption of consumer technologies inside the enterprise. By definition, consumerization is at odds with the notion of paying such high or fixed costs and, therefore, is perceived to be against outsourcers’ interests. .Embrace such technologies faster and in innovative ways align them to their business growth plans. Consumer technologies are not a taboo to be shunned - these need to be constantly assessed for their potential for innovative leverage in growing business. This could end up forcing a larger role for IT in Business further reinforcing the idea that IT is Business.

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Monday, September 21, 2009

Dell To Buy Perot Systems : Too Little Too Late!

Dell plans to acquire Perot systems. The momentum picks up! Dell expects this deal to position itself as a more formidable player parading both its hardware and services expertise given the fast changing nature of the business and the faster adoption of cloud computing. Dell was as always seen as a laggard when it to comes to services and given that its principal competitors – HP & IBM are now very big in services, Dell had to anyway bite the bullet of acquiring some big service player. Perot’s strengths are mostly in Banking, Financial Services, Healthcare & Government and would to a limited extent help Dell directly with its footprint. The capabilities of Perot system may be more useful to Dell compared to its current customer base. Perot systems customers would have to factor in the new reality of Perot systems ownership changing to Dell, though the existing CEO would continue to run the business. Two things struck me:

A. Dell must have acquired a services company at least two - three years back when it confronted serious growth troubles – At around the same time, HP muscled in to acquire EDS. I predicted that HP may buy EDS in years before ithappened.

B. Perot has limited scale compared to the other global service players and India headquartered service players. Perot’s offshore capability also is generally seen to be quite limited compared to other traditional global players. Valuation looks interesting here: 2.8 billion USD revenue gets a valuation of 3.9USD billion after providing a substantial premium to last quoted trade.

I am not too sure if this move by Dell would perturb IBM or HP given the lack of scale of Perot's operations, while this may give some limited upside to Dell. The corporate integration may get accomplished easily given that both companies are headquartered in Texas. I was actually expecting Dell to make a serious move to get into smartphone market - say by acquiring Palm. It may happen in the future - we will have to wait and see. It would be interesting to see how Oracle (which recently acquired Sun) looks at this development. I am very keen to watch what Cisco does now – it has entered into the more competitive server business (big competition to Dell , IBM, HP) and has more ambitions in unified computing. Cisco cash position and appetite for acquisition is well known and in the recent past there had been rumors of Cisco looking at acquiring Accenture.While am not clear about how this acquisition may decisively benefit Dell, I do believe that Dell’s move may trigger a new momentum in Cisco’s next acquisition move as well!

Update : See Phil's and Vinnie's perspective as well.

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Thursday, September 17, 2009

The Changing Enterprise Software Momentum

Changing economic sentiments, and diminished IPO market create the perfect storm for the Big 4 MISO - (Microsoft, IBM, SAP, and Oracle)as they see the medium/small sized vendors are beginning to make M&A moves. See this:

-> Adobe acquires Omniture

-> CA buys NetQoS

-> VMware buying SpringSource

-> PE players scooping Skype

-> Intuit buying startup Mint

- >Avaya buys parts of Nortel

Clearly momentum is slowly beginning to hit the M&A circuit - the backdrop has been that this year has seen very few deals compared to last few years averages. Some trends at work that shape the thinking on why the immediate future could see more and more of continued consolidation. Sramana Mitra assesses the prospects of some players. One may ask - why think of enterprise software when consumer technologies and internet infra/app players are getting more attention. As I wrote here, the consumerization of enterprise technology has the potential to open up new powerful combinations. The possibilities of such fusion of different worlds may open up good chances for disruptive innovation - this provides a platform for such an ideal fertile ground that can lead up to a potential business model innovation – so enterprises need to be well prepared to capitalize on such possibilities. What should the CXO’s do in such contexts: Embrace such technologies faster and in innovative ways align them to their business growth plans. Consumer technologies are not a taboo to be shunned - these need to be constantly assessed for their potential for innovative leverage in growing business.

Strategic acquisitions target vendors with new product presence/ strong recurring revenue streams in well established areas. The cognoscenti keep whispering that large maintenance revenues as an area for potential targets. Look at Oracle’s reported numbers for this quarter: GAAP new software license revenues were down 17%; software license updates and product support was up 6%.Nurturing a profitable and recurring revenue stream will allow many vendors to share overall development and support costs as they weather the next storm. The hunt is on for vendors who fit this bill as megavendors and private equity actively chase after these assets.

Weaker companies would see much lowered publicly traded vendor valuations. For companies on the prowl for acquisition with a target class, its never been cheaper and easier to acquire a competitor. Most P/E ratio have become quite attractive and fall below the standard 2X to 3X revenue price target.

International market expansion. the larger vendors express tremendous interest in acquiring new distribution channels, micro industry verticals, and new geographical coverage. Many in the MISO ecosystem see a lot of turbulence and rumors of M&A run fierce as the partners consolidate to gain scale for regional and global delivery.

Most privately held vendor exit strategies revolve around acquisition not IPO. Many firms with IPO plans have been told by their boards to refocus on revenue growth and partnerships. The intention - use partnership success to both drive revenue growth and attract acquisition by a larger vendor. Many see acquisition by the Big 4 as the best exit strategy at this point in time.

Newer delivery models get more and more acceptance : If we analyze the standalone new sales numbers we may get to see this trend clearly. MISO on-premise license revenues may keep dropping/stagnating and in some cases record very moderate growth (in specialized areas). The ERP refresh rates may slowly begin to show a downward trend! SaaS and cloud players need to and i would believe will expand their presence beyond FAS,CRM & HCM spaces - this may also include on premise players getting to offer SaaS solutions in niche areas like procurement, PLM etc. Cloud computing models would over time get to become more popular with ease of use, quick implementation times, pay as you go, no infrastructure model a la google or salesforce and are in fact seeing more faster adoptions.

Net-Net : Despite the expectations of a slow moving economy, end users should assume that the biggest vendors/ faster moving niche vendors will continue their torrid pace of acquisitions. As these acquisitions factor into long term apps strategies and planning for 2010 purchases, users must assume that truly specialized solutions with significant industry footprint will be acquired. Many customers recommend niche vendors that they work with to the megavendors to acquire them so that their investments are deemed to be safe.



Tuesday, September 15, 2009

SaaS Evolution & Endless Cycle Of Innovation

Ever wonder what the current state of SaaS adoption is and what does the future hold? Most of the answers come out in a report from Saugatuck. In its report very aptly titled, "Journey of endless cycle of innovation", it notes that SaaS is now an agent of change inside enterprises and could reach a state of taking on little less than 25% of new IT workload inside enterprises by 2012. It additionally points out that the nature of SaaS is changing user business, and user business is changing the nature of SaaS. True indeed. As we see today, enterprises are tired of over-provisioning by 150% only for equipment to sit idle and burn power/paying for bells and whistles in software and eating money in the process.

Saugatuck sees SaaS developing and being adopted in Waves, from stand-alone applications through integrative business systems, to game-changing transformative business workflow capabilities, through to ever-more-sophisticated Cloud Computing capabilities. Development, deployment, and adoption vary by size of firm, by regional and vertical markets, and by firms’ IT strategies. The SaaS markets are expected to go through at least three waves. Wave 1 took place from approximately 2000 to 2006. Stand alones characterized Wave 1 adoption – the focus was on reducing TCO and rapid deployment using standard web technologies here .

We are currently enjoying the breeze of the next series of Wave – Wave 2 expected to rule the roost till 2011 where we see mainstream adoption of on-demand applications and mostly coalescing as business services. Today we are seeing the evolution of SaaS integration platforms Viz SIPs. These provide for various set of SaaS point applications to interoperate. This enables in some cases to make the dream of fostering the much desired vertical and horizontal solutions & ecosystems.

How does a SaaS ecosystem look like ? Streams of related SaaS applications co-exist to deliver to the needs of a horizontal or vertical industry market and most importantly delivered as a business platform on-demand. Covering business, data , collaboration services and the like.

For business transactions are most dear to their heart as a first principle and here the adoption rates and evolution curve both travel fast. Not only that, even the quality of solutions are also improving-from plain focus on configuration, integration challenges, the veneer is also improving –usability and workflow mechanisms, service based extensions etc. Net result : Some sort of integrated industry solutions catering to small, medium and large enterprises are beginning to get deployed. The appeal is widening to cover a large spectrum of business. This would lead to fulfilling rising business needs thus more and more integration would happen at the data, process levels covering both on-premise and on-demand applications across the business spectrum.

SaaS Wave 3 is envisioned to start in 2010 and completely form by 2014 primarily characterized by ubiquitous adoption of business service delivery available on-demand. Adoption of SaaS centric enterprise applications enabling business transformations that include cloud collaboration platforms characterize this wave of SaaS evolution. The outreach would cover SME to large enterprise business encompassing industry solutions to core enterprise solutions provided as services. This phase would also provide for integration with other on-premise applications at the data, process and application levels. By YE 2014, however, SaaS (and Cloud Computing) will become integral to infrastructure, business systems, operations and development within all aspects of user firms, with variations in status and roles based on region and business culture.

As part of this evolution, one could actually see more opportunity in defining, creating new platforms and service like vertical/niches going beyond the currently available horizontal solutions, factoring the high degree of complexity therein.

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