Nonlinear Thinking

Compendium/Miscellanea/Almanac 01.12.2011

Stuff that I find interesting.  Maybe you will too.

• Budgets, Innovation Squarely in CMOs' Sights in 2011 (Advertising Age) 
• Clouds, big data, and smart assets: Ten tech-enabled business trends to watch  (McKinsey Quarterly) 
• How Tech Will Be Critical to Corporate Sustainability in 2011 (Greenbiz) 
• Light My Fire: The Matchbook Makes a Cultural Comeback (Fast Company) 
• How Aha! Really Happens  (Strategy + Business) 
• Swimming Against the Tide: How Technology, Media, and Telecommunications Companies Can Prosper in the New Economic Reality  (Boston Consulting Group) 
• Eric Berlow: How complexity leads to simplicity  (TED)  
• The AI Revolution Is On  (Wired)  
• The Battle for Control of Smart Cities  (Fast Company) 

The Only Constant is Change: Addendum

When it rains, it pours, or so it seems.  On the heels of a recent Forrester report on the future of IT services which I wrote about here, management consultant A.T. Kearney weighs in with their own, very similar view on that future.  This recent op-ed in Businessweek by Arjun Sethi and Olivier Aries sees most of the same external drivers highlighted in the Forrester report  but offers a different and altogether more interesting futurescape for IT services.

“ In the next five years outsourcing as we know it will disappear.  The legion of Indian service providers will be sidelined or absorbed. U.S. and European companies that pioneered this corner of the high tech industry will suffer similar fates if they don't wake up.  Who will emerge as the new leaders?  Google and Amazon.com , brands that we associate with search and retail, will become better known for outsourcing."

Longtime readers of this blog will know that I have been harping on the threat that Amazon and Google, in particular, present to the old guard of IT service providers as I have written about it here, here and here. SaaS/cloud technologies, under any name, have been a game changing disruptive force for the past 10 years. When IBM acquired Corio five years ago, that should have, de facto, been some kind of canary in the coal mine.

In their commentary Sethi and Aries also conjure up a vision of what the new outsourcing model will look like.

“In the new model, outsourcers provide standard, off-the-shelf software on a "pay-per-drink" basis. For that, they will leverage so-called cloud technology, which lets users tap into computing power available via the Internet, rather than on a desktop or computer server housed locally. The appeal is scale, flexibility, and efficiency: Thousands of server computers can attack a task more quickly—and cheaply—or handle a patchwork quilt of different technologies that companies use to run their businesses. This approach will let businesses outsource entire tasks such as the tracking of inventory, paying only for the information accessed or used.”

The commentary also mentions who might be the losers in this new model (mid-tier Indian outsourcers), possible winners (SAP, Oracle, Microsoft, Salesforce), and a several major players that are not moving fast enough (Accenture, Xerox, Dell, HP).  

I am guessing that this commentary and the Forrester report will be far from the last discussions regarding the changing IT services landscape.  I would also imagine that we will see more and more discussion of the death of the internal IT department beyond the many books and reports already written.  Fasten your seatbelts.

The Only Constant is Change

"To improve is to change.  To be perfect is to change often." - Winston Churchill

Forrester has a new report out discussing the dynamic evolution that traditional IT services providers are going to experience over the next several years.  This analysis is very timely and it addresses a combination of external drivers that I have been writing and speaking about for the past several years.  The authors, John C. McCarthy and Pascal Matzke have done a masterful job in codifying the thinking around these externalities and their impact to the existing IT service provider business model. This excerpt from the executive summary delivers the high-level on the emerging metamorphosis.  

“The tech services market is about to undergo a massive transformation that will call traditional provider business models into question. Four factors will combine to dramatically change the dynamics, economics, and competitive landscape of IT services over the next three to four years: 1) the “restructuring economy”; 2) innovation moving to the edge of the enterprise; 3) the redefining of buying and governance dynamics in accounts; and 4) “as-a-service” becoming the norm.”

For those that have been engaged in surveying the technology market landscape over the past decade, the conclusions McCarthy/Matzke draw from their analysis is no surprise.  Unfortunately, few of those individuals appear to actually work for the major players in global tech services because those firms have made few, if any, alterations to the business model they have employed for the past 15 years.  As innovation in IT moved from the data center to the business units, on-demand/as-a-service and other cloud-based solutions gained traction, and social/mobile activity emerged as integral parts of the technology platform, Nero fiddled.

And the hits just keep coming.  The Forrester report offers a forecast of why and how the IT services model of today will cease to exist by 2020.  

• Forrester sees at least nine new services entering the market as cloud/SaaS redefine the services business.
• Selective sourcing and utility pricing models broaden their footprints.
• Digital natives and the advance of business (unit) buyers push traditional IT into the background.
• Standardization in cloud/SaaS solutions create pricing transparency and profound pricing pressure on traditional service models.
• Cloud/SaaS drive increasing standardization and process industrialization of services leading to delivery models based on solution partner ecosystems.

From my perspective, the most provocative item in the report is the following table that contrasts the top ten service providers in 2010 with a forecast of what the top 10 will look like in 2020.

 

Looks like a whole lotta growth, death and consolidation in the sector.  Ten years may seem like a lot of time for the current top ten to embrace and adapt to this new environment, but the truth is that this evolution has been ongoing for at least five years.  Too many of the incumbents lack the cultural and operational survival instincts to revolutionize their business models.  Some of the logos we have come to recognize in the global tech services space have already vanished.  It will be interesting to watch how this all plays out over the next decade.

And SaaS Marches On

IDC is warning in a newly released report that the challenging economic climate is actually going to accelerate the adoption of the software-as-a-service (SaaS) model.  I can't understand why anyone would be surprised by this finding.  As enterprises rein in technology budgets, they are driven to easier, lower cost and more tactical solutions.  SaaS delivers to that agenda nicely.

Based on the results of their survey, IDC has increased its SaaS growth projection for 2009 from 36% growth to 40.5% growth over 2008.

Additional findings from the IDC study include:

• By the end of 2009, 76% of U.S. organizations will use at least one SaaS-delivered application for business use.

• The percentage of U.S. firms which plan to spend at least 25% of their IT budgets on SaaS applications will increase from 23% in 2008 to nearly 45% in 2010.

• This market's growth prospects will accelerate the shift to SaaS for the whole value chain as the promise of a recurring revenue stream, and the opportunity to tap OPEX and project-related dollars, will benefit the whole SaaS ecosystem.

• While demand for SaaS is strongest in North America, new contracts from customers in Europe, Middle East, Africa (EMEA) and Asia/Pacific (excluding Japan) also look particularly positive, and IDC expects that by year-end 2009, nearly 35% of worldwide revenue will be earned outside of the U.S.

• On the downside, IDC interviews with SaaS providers highlighted several issues, such as cash-flow shortfalls related to slow-paying current clients, liquidity challenges stemming from tight credit at lenders, and — on the horizon — limited resources to scale up with expanded infrastructure to support new customers and new service offerings.

Bluehouse

One of the major attractions and a game changing element of the software-as-a-service (SaaS) movement has been the ability to provide the SMB market with access to world-class applications infrastructures.  IBM is using 2008 as a sort of spring training to test their offering to the small and medium-sized business community.

Bluehouse is IBM’s software-as-a-service offering for companies with 5 to 500 employees. According to IBM, Bluehouse offers a suite of collaboration services that allows businesses to work together by sharing contacts, files, project activities and interacting with chat and Web meetings. This new set of services will enable small companies to easily collaborate beyond their organizational boundaries without the need for any in-house technical expertise. Bluehouse is now available as a limited beta offering and will be progressively unveiled throughout the year.

Things Go Better With SaaS

Coca-Cola Enterprises, Coke's largest bottling company is becoming Microsoft's largest software-as-a-service customer to date, contracting for 35,000 employees to get their e-mail and other collaboration capabilities via a subscription service. InformationWeek has the story on why.

By later this year, most of the 35,000 knowledge workers at Coca-Cola Enterprises, known as CCE, will have moved from IBM Lotus Notes to Microsoft Outlook with Exchange Online, the SaaS version of Microsoft's e-mail server. It's the first piece of a larger move to Microsoft collaboration tools that CCE hopes will bring the company the ease of management and the consistent user experience of an integrated suite. The switch to a hosted model, which will take place over the next year, also will include SharePoint Online for ad hoc team collaboration and content management, Live Meeting for Web conferencing, and Office Communications Server Online for unified communications.

CIO Esat Sezer eventually wants to include CCE's mobile workers--30,000 employees stock 25,000 trucks and replenish 600,000 vending machines a day, reaching a million distinct locations--in the company's collaboration plans as well. 

Still, collaboration is only one reason for CCE choosing Microsoft. The other piece is the services dimension, which CCE saw as a way to accelerate deployment, cut energy costs, and free up IT staff for more strategic projects. "This is not a head-count reduction," Sezer says. "We love having these resources to do further simplification, further virtualization, and to work on strategic IT initiatives." 

Like Coke, CCE has been under pressure as people seek out healthier drinks over soda, and commodity costs squeeze profits. CCE lost $4.8 billion in the second quarter, due mostly to a one-time asset write-down based on an expected decline in North American operating income, and North American sales fell 1.5% as steep gas prices hurt convenience store business in 20-ounce bottles of soda and Dasani water.

A change agenda across the $21 billion-a-year company has goals of keeping it No. 1 or 2 in every market it's in, overhauling its distribution, and acquiring talent to drive growth. The communication tools are a starting point. "It became clear that we had to communicate these changes quickly," says Key. "The quick shift is the competitive differentiation, because the market is changing."

SaaS: A Niche No More

Software-as-a-Service (SaaS) continues to build market momentum due to widespread adoption by customers, a strong embrace by more and more traditional software vendors and an increase in share-of-mind in the media and analyst communities.  I believe that this momentum will continue and that we remain in the early stages of a structural change in the way technology is going to be sold, delivered and employed.  Here are just a few of the reasons why.

Services Rule

SaaS is part of the larger Web megatrend towards Internet-based services that is driving Web 2.0, SOA and every other expression of today’s increasingly Web connected world. Fundamentally, the infrastructure of the Web allows us to cut out much of the location-dependent friction that gets in the way of communicating, collaborating and trading.

Software Vendors Have Caught the Fever

Can SAP, Oracle, and Microsoft all be wrong.  Trust me, if they could have avoided moving to the SaaS model to sell their software, they would have.  But they have read the very large tea leaves and made the leap, some more easily than others. Microsoft joined the party several weeks ago, announcing that the Office suite would soon be available on a subscription basis.

Everyone is Going Virtual

Most industry pundits and participants view virtualization as a technology trend, but it is also a  business trend.  Employees are increasingly working outside the four walls of the  traditional office.  Gen Y workers are always on the move and online. Traditional, on-premise applications and centralized servers sitting behind a firewall can’t effectively serve today’s mobile workers.  SaaS and managed services are perfectly suited for these new, virtual business requirements.

The Lousy Economy is Good for SaaS

A recession will create challenges for all technology vendors but conventional independent software vendors will be at a competitive disadvantage to SaaS provides. The low-risk, pay-as-you-go model will give SaaS vendors a big competitive advantage if capes budgets are slashed, according to Goldman Sachs: “The ability to quickly and easily turn on new applications with a significantly lower initial cost of ownership makes SaaS an attractive offering... these benefits are likely to be key in a slower economic environment where purchasers of software may be increasingly skeptical of significant upfront investments which we anticipate to characterize 2008.”

Enterprise IT Embraces SaaS

In the past, the IT department was the biggest barrier to the adoption of managed services and SaaS.  Many IT professionals were afraid these on-demand solutions might eliminate their jobs. Now, a growing proposrtion of IT staff see managed services and SaaS as a way to out-task mundane work or overcome complex application/technology deployment and maintenance responsibilities.  While some IT organizations may have held out hope that they could control the adoption of SaaS within their enterprise by deploying SaaS applications internally, that isn’t the reality.  In fact, many IT professionals, including CIOs, really like the low-cost, low-maintenance, low-resource profile of externally delivered SaaS application.

SaaS Platforms Proliferate

The more mainstream SaaS becomes, the more platform vendors (BEA, Oracle, Microsoft) will be forced to offer effective platforms for ISVs and enterprises that want to build SaaS applications.  All of that is in addition to the separate emergence of hosted SaaS platforms.

Cloud Computing

Amazon, IBM and Google are all investing huge amounts of intellectual and financial capital in building out their versions of the “cloud”. SaaS is the applications thread in the whole cloud computing construct. As the cloud takes over as the structural center of the computing universe, SaaS will become the defacto application services model.

SOX is Made Simpler

Early on, most publicly traded companies and other large-scale enterprises rejected the idea of SaaS because they thought they needed to take greater responsibility for their own compliance requirements. Now, they view the process controls, auditability and offsite hosting features common in most SaaS applications as a perfect solution for their Sarbanes-Oxley (SOX) needs.

The Investor Community Loves SaaS

Wall Street loves the the predictability of subscription services. It's good for cash flow, forecasting and business planning. The venture firms also relish the opportunities that are opening up in a software as services-oriented economy. The ability to circumnavigate the incumbent software players with new disruptive technologies and propositions that are significantly easier to try and access for prospective customers compared to traditional software evaluation, along with usage and subscription-based business models verses the old licensing model makes investing in services-based software companies very compelling propositions from the venture firms' point of view. We should also see healthy M&A activity based on these similar opportunities in the coming year.

SaaS Platform Wars

McKinsey & Company has delivered several white papers over the past year on the emergence of the software-as-a-service (SaaS) market.  Their most recent one, Emerging Platform Wars in Enterprise Software, delves into the growth of SaaS platforms and the challenges in establishing a successful platform.  A battlefield is clearly emerging between the established mega-vendors and pure play SaaS vendors as well as the different platform archetypes that will shape the future evolution of these platforms.  McKinsey outlines the key challenges necessary for success.

The SaaS platforms market will be shaped as much by the demands of stakeholders as by platform vendor actions. Given the number of players that have entered this market in recent months, winning the platform wars in the long term will be a very challenging task. Industry research highlights various important factors driving the success of platforms, which vendors must incorporate into their business models and strategies. We believe that platform vendors will need to focus on four critical elements of their businesses to succeed.

• Build a robust offering: First and foremost, vendors will need to create a robust offering that offers real value to SaaS developers. They must offer technology and services that address SaaS-specific needs and are at the cutting edge of industry innovation. In addition, reliability of services and quality of support will play a critical role in separating the winners from the losers.
• Monetize effectively: Monetization will be the most important success factor for platforms. Vendor offerings must deliver significant value to users compared with their alternatives (e.g., do-it-yourself, on-premise, etc.). Platform leaders will be those that are not only able to truly share economic value across their ecosystems but also create significant economic value for the ecosystem.
• Deliver extensive value-added services: Apart from the core offering, value-added services that extend the value of a platform (e.g., go-to-market benefits for ISVs, access to customers, etc.) will play a significant role in the market. Addressing customer pain points will be key to creating “sticky,” successful platforms.
• Drive ecosystem growth: Driving growth of ecosystems with extensive distribution and partnerships (often possible only for first-movers) will be critical for platform vendors to capture share. Vendors will need to build a community that adds value to all its members through collaboration and sharing of tools and best practices.

Getting Religion? Microsoft Embraces SaaS (Sort of)

There are probably bell-weather events for every movement, market evolution or technological advance.  For the Software-as-a-Service (SaaS) market, this is probably one of them.  With its Office suite continuing to face challenges from competitors, such as Google, offering free software, Microsoft applies a tourniquet by offering a subscription pricing model for the software.  InformationWeek has the story.

Microsoft said Wednesday that it will give consumers the option of buying an annual license for Office and its Windows Live OneCare security package for $69.99 per year under a program called Equipt. The license covers use of the software on up to three computers and includes access to all future product upgrades.

More than anything else, Microsoft is counting on Equipt's convenience factor to help it fend off competitive threats from Google, IBM, and other vendors that are offering free and open source desktop productivity suites that can be downloaded over the Internet and provide capabilities similar to Office.

Microsoft is hoping that's enough to prevent consumers from migrating to free software. Google recently introduced its Google Docs package, which features functional equivalents of Office's main applications and costs nothing.

The emergence of free software could be hurting Microsoft's bottom line. The company said that sales of its Office products among consumers dropped 39% in the most recent quarter. The company blamed most of the decline on the fact that the previous year's third quarter results were significantly boosted by revenues that had been deferred under an Office 2007 upgrade program.

Still, consumer sales of Office have shown no growth over the past three quarters, Microsoft said. 

Confirmation Bias

Change is hard.  Too much experience with enterprises both large and small has confirmed this to me in spades.  But experience has also shown that maintaining enterprise stasis, when external market drivers suggest a different path, is incredibly dangerous, if not outright fatal.  Such is the place that we seem to find the majority of the global IT service providers with respect to the very large, and growing, externality known as Software-as-a-Service (SaaS).  There appears to be an almost collective confirmation bias among the service providers in viewing SaaS as, at best, a minimal threat to their business model.  They shouldn’t have to be reminded that five years ago, they didn’t view the India pure play service providers as game changing competition either.

  

Confirmation bias refers to a type of selective thinking whereby one tends to notice and to look for what confirms one's beliefs, and to ignore or undervalue the relevance of what contradicts one's beliefs. For example, if you believe that during a full moon there is an increase in admissions to the emergency room where you work, you will take notice of admissions during a full moon, but be inattentive to the moon when admissions occur during other nights of the month. A tendency to do this over time unjustifiably strengthens your belief in the relationship between the full moon and accidents and other lunar effects.

IT service providers are struggling with understanding how their application management delivery models will be impacted when/if they integrate SaaS into the service mix.  How are margins impacted? How is systems integration revenue impacted? If they don’t have intellectual property, in the form of proprietary applications, to deliver in a SaaS model, do they become expensive middlemen in the delivery model?  And if they are just middlemen, do they have a future in a SaaS world?  Hence, the search for validation that SaaS will not become much more than a niche service, albeit an important one.

This tendency to give more attention and weight to data that support our beliefs than we do to contrary data is especially pernicious when our beliefs are little more than prejudices. If our beliefs are firmly established on solid evidence and valid confirmatory experiments, the tendency to give more attention and weight to data that fit with our beliefs should not lead us astray as a rule. Of course, if we become blinded to evidence truly refuting a favored hypothesis, we have crossed the line from reasonableness to closed-mindedness.

As Bob Dylan sang so many years ago, “You don’t need a weather man to know which way the wind blows”.  Service providers must begin to embrace SaaS as a key element of their service delivery models and their business models or prepare end up on the wrong side of a very strong, and sustained, gale.