Sunday, May 25, 2008

Vendor Survival Guide: Supermarket, Grocery and Kiosk

Many years ago I listened to a presentation by an analyst (I do not remember his name). The presentation includes an analogy comparing IT products vendors to shops: big companies with multiple products lines – supermarkets, medium size companies with few products lines – groceries and small companies – kiosks.

According to the analysis groceries compete directly with supermarkets and therefore their long term survival is questionable because of supermarkets advantages due to their size. In addition they are acquisition targets for supermarkets. Unlike groceries, kiosks are Niche Players and therefore are not acquisition targets and are positioned better than supermarkets in their special niche. For example, who will wait in a supermarket queue for buying bubblegum?

It was easy to find example of small niche software vendors to illustrate this analogy.
The only product distributed by Syncsort was a SORT utility.
Syncsort competed successfully with vendors like IBM, HP and Sun in UNIX installations. Big vendors care less about selling a Sort Utility. Their major focus is Hardware and Software infrastructure (Servers, Storage, Operating Systems, Databases and Integration Software.). IBM can afford to loose to Syncsort as long as it wins the Hardware and Software infrastructure deal. Syncsort survival is al least questionable in case of loosing consistency Sort utility bids to IBM. Therefore Syncsort Sort utility is significantly better than the big vendors' utilities.

This analogy is no more adequate in the SOA age:
  • Kiosks could also be acquisition targets – big companies are buying niche players to complete their Eco Systems functionality.
  • No change for groceries the same analogy is still valid.
  • Independent Supermarkets are also potential acquisition targets by Supermarkets Chains - Big Vendors are acquisition targets for Mega Vendors.
  • New competition to Kiosks by Automated Machines.
Why buying a can of drink in a kiosk if you can buy it for reduced price in less time in an
automated machine? - Small Vendors selling products face new competition in two levels:

First level – Services: SaaS, Web Services and Mashups

Second level - Products: Open Source software products and free of charge
entry-level software products by big and mega commercial vendors limited in
functionality, size and concurrent users.

Flexibility is a must for adaptation to the new situation. Enterprises are not the only ones required to be agile. Vendors Agility is required as well.

Saturday, May 17, 2008

Vendors Survival: Will HP Survive until 2018? – HP's EDS acquisition First Take

In a previous post I asked the same question about Microsoft and predicted that the probability that at least three of the four leading SOA Echo Systems vendors, including Microsoft, will survive in the next ten years is high. I planed additional posts on other potential Long Term survival candidates.

HP's intend to acquire EDS changed my plan, so this post topic is HP's EDS acquisition. I would have predicted before the intended acquisition, that the probability that HP will survive until 2018 is high due to its dominance of the high volume Printers market and its position in other hardware markets (Servers, Storage, and PCs) and Network and System Management (HP OpenView).

For a long time HP tried to expand its business lines beyond hardware. Acquisition of a J2EE Application Server company resulted in BEA WebLogic as the preferred Application Server used by HP. It failed to acquire Price Waterhouse Coopers and few years afterwards acquired Mercury and few other software companies. Mercury acquisition enriched HP's software portfolio with Testing and Business Performance tools as well as leading SOA products, originated by Systinet which was acquired by Mercury.

As far as size is concerned Compaq acquisition by HP on 2002, is the most similar acquisition to the proposed EDS acquisition. HP's revenues in 2007 were more than 100 milliard USDs and EDS's revenues more than 22 milliard USDs. HP has about 170,000 employees and EDS 137,000 according to AP Associates Press . It was not easy to merge two competing companies (HP and Compaq): PCs, Servers Storage and UNIX operating Systems were overlapping Products Lines.

Issues in HP-Compaq merge
  • Overlapping products lines
As far as overlapping products lines were concerned, the key problems were:
Which product line will be the leading or strategic line?
Which Brand will be the leading Brand and last but not least who will manage the product line?
  • Organizational Culture
Organizational cultures of different companies are not the same. Usually the culture of the merged company is more similar to the culture of the acquiring company, in this case HP. It should be noted that Compaq acquired DEC and Tandem few years before being acquired by HP, so the process of stabilizing its organizational culture was not completed.
  • Overhead
Other functions such as Financial Departments were redundant so as result of the merge some people were fired and others changed their role.
Some of the redundant roles are executives. For example there was no need for two CIOs or two CFOs in the merged company.

Reason for HP's EDS acquisition
EDS is mostly an Outsourcing company competing with that market leader IBM Global Services. Other major player in this market is Accenture. HP is a player in that market and by this intended EDS acquisition aspires to become a leader in that market, challenging IBM.

The optimistic View
HP-EDS combination will be a Co-Leader of the Outsourcing market together with IBM. The customers will benefit from competition between two equal sized giants commercially and technically.

First Take
Sorry, but the optimistic view seems to me less realistic than other scenarios.
Let's look at the dark side and not only at the bright side. Under the assumption that the acquisition will take place, the unified company needs to address the following challenges:
  • Internal Competition in Outsourcing
HP is a player in the Outsourcing market and not a small one, therefore in a lesser extent the company will have to address conflicts resembling in a way the conflicts cited above about HP-Compaq overlapping Products Lines. EDS Outsourcing is roughly twice than HP's Outsourcing business. Both companies strength is in Infrastructure and Technical Services Outsourcing. According to Cnet news Blog EDS Outsourcing revenues on fiscal 2007 were $38 milliard while HP's revenues on the same fiscal year were $16.6 milliard. EDS Outsourcing is roughly twice than HP's Outsourcing business.
The company should select one of the following three Long Term strategies:

Strategy 1: EDS remains as an independent unit keeping its brand
The main concern is HP's own Outsourcing business:
Is it possible that two units of the same company operate efficiently on the same field? Which unit will be the flagship? Should HP Outsourcing compete with EDS or focus on a specific Niche?
IBM Global Services size advantage over both HP's Outsourcing divisions is another concern.
Strategy 2: Merging the two Outsourcing units using EDS as the prime unit and brnad name
This strategy addresses size issues, but requires a long and costly process of merging the two Outsourcing businesses. Organizational Culture changes in HP outsourcing unit and layoffs are expected as part of that strategy.

Strategy 3: Merging the two Outsourcing units using HP Outsourcing as the prime unit and brnad name
This strategy is a mirror of the second strategy. Similar challenges to those cited for the second strategy are expected, but in larger magnitude because the challenges are applicable to the bigger unit instead of the smaller one.
Another possible undesired effect could be loosing customers due to abandoning EDS strong brand name.
  • Can EDS keep its current Hardware & Software strategy?
EDS strategy and IGS strategy are totally different. IGS solutions are based on IBM's large portfolio of hardware and Software. IGS synergy and knowledge of internal products is incomparable to third party knowledge and synergy. The strategy is based upon integration between products of the same vendor.
EDS's strategy is Best of Breed strategy. As a company which is not a software or Hardware vendor it emphasized partnerships with vendors with no significant services capabilities creating a Win-Win partnership. Like EDS these vendors are competing with IBM. EDS is an excellent partner due to its vendor neutrality, Size and Ability to Execute and sometimes even its participation in the Software or hardware vendor R&D activities.
In every hardware and software topic EDS employee acquired knowledge and experience in its partner's products. Usually there are few partners in each area and in some cases one of them is the preferred partner (e.g. EMC Storage, CA its Texas neighbor in Network and System Management and SeeBeyond, which was acquired by Sun because of its SOA products, in Integration).

Even if HP will stick to one of the first two strategies cited above, some of EDS's partnerships will no longer be Win-Win partnerships.
Some of EDS's partners are HP competitors: EMC, Sun, Dell, CA. Will they continue their partnerships with EDS? I doubt if these partnerships will endure. I am almost sure that if these partnerships will continue they will be changed to tactical partnerships
On the other hand partnerships with Microsoft, Oracle & BEA (HP's partners as well as EDS partners) could be extended. I see no reason for changes in partnerships with Cisco, Tibco, Borland or other vendors, which are not HP's competitors.
  • Will the Outsourcing be biased towards HP hardware and software products?
Probably HP Outsourcing strategy, including EDS, will be based on its own Software and Hardware products, similar to IBM's strategy and HP's Outsourcing strategy prior the acquisition. However, HP's software portfolio is not as complete as IBM's, so partnerships with other vendors will be required.
  • Outsourcing as a subset of Services
Another challenge to HP Services Organization is to combine a huge Outsourcing activity with other Services.

In Summary
I am quiet skeptic about HP- EDS ability to address properly the complicated challenges if the acquisition will take place at all. If it will fail, than IBM and other Outsourcing vendors, such as Accenture and the Indian Outsourcers (TCS, Infosys and Wipro) will benefit from this acquisition.
HP's high survival probability will become higher if EDS acquisition will be a success. In case of a partial success or a failure the probability will not be as high as it is.

Monday, May 5, 2008

Vendors Survival: Will Microsoft Survive until 2018?

Probably many of the readers of this post will read it because of the title. Provocative titles such as:" IT does not Matter" (Nicholas G. Carr, MIT), "The End of Corporate Computing"(Nicholas G Carr, MIT), "The End of the IT Department" (Neil MacDonald, Gartner Group) attract readers attention and sometimes trigger emotional reactions. By using provocative title you can make sure that your opinion and your arguments are read, noticed and commented at.

Many readers are probably sure that Microsoft will be a dominant market player on 2018; however my opinion is that the probability for scenario of that kind is less than 100%.

Let's go back in time to 1989. If someone would have written an article (no Blogs and Posts on that time) titled: Will DEC survive until 1999? And explain why DEC will not survive, he would have been mocked. Dec was the second or third largest IT vendor in the market. In the 90ths IT business model was changed from Hardware Centric Model to Software Centric Model. IBM, HP and DEC had to adapt to the new model. Adaptation required profound changes in business, organizational and technological aspects. 

For example, IBM and DEC had to fire employees, which they never did before (DEC's CEO Ken Olsen resigned resisting the imperative firing). IBM and HP survived. DEC did not. It was acquired by Compaq which was acquired later by HP.

In analogy of the DEC case, one of the threats to Microsoft's survival is a Business Model change.
This threat and other threats were discussed by me in a presentation on 1995. Unsurprisingly its title was: Will Microsoft Survive until 2005?

My thesis was similar to the ideas presented in this post:

1. There is a probability higher than zero that the company will not survive (probably a very small probability).

2. A crisis will happen (e.g. Business Model change)

3. The company's ability to adapt to the crisis will decide its fate: survival like IBM or HP in the nineties or end of life same as DEC.

Following this thesis I tried to forecast future threats.
It is unrealistic to expect high correlation between IT predictions for 10 years and reality after that time.

Identified Threats in 1995
Let us look at the threats and reality:

Threat: Breakthrough in Desktop systems and/or Web interfaces which will question Microsoft's Desktop dominance.

Threat description and current status:
A new Desktop Operating System ("Doors") competing with Microsoft's Windows – Linux Desktop is only about 5% of Desktop market
Network Computer (NC) – NC failed but Server Based Computing and Thin and Ultra Thin Client architectures emerged.
Voice or other new Human Machine Interfaces as an enabler of a dominance of another Desktop Operating System – No significant change

A new Web interface as a threat to Desktop dominance – Microsoft survived the Browsers war. Netscape did not survive. FireFox is an alternative to Internet Explorer.

Web Services standards emerged and Microsoft (together with IBM) is a leader. Microsoft abandoned the unrealistic concept of Windows only World and opened interfaces to other platforms via Web Services and other methods.

Multitude of End User devices (e.g. Cellular, PDA etc.) are emerging, Mobile is replacing some of the PCs and it is no more a World of Servers and Desktops.
No conclusion yet about Mobile and Multi Devices effect on Consumer or End User devices market dominance.

Threat: Bill Gates. Microsoft's strategy was totally dependent upon Bill Gates. 

An Analyst described Microsoft's leaders at 1995 as chorus of monks humming Bill Gates words. Dependence of Strategy Architecture and Roadmap on a single man is a threat because, everyone finally quit his job and even the most skilled can make strategic mistakes. Can the company remain a leading vendor when other people replace him?

Bill Gates is no longer Microsoft's CEO and his responsibilities are gradually transferred to other people. The results of Bill Gates departure from Microsoft should be evaluated few years after he will not be involved in the company's strategy and business. It seems like the gradual departure process reduce the threat.

Threat: Legal issues (Anti-Trust)
Other companies and governments could apply to court due to Microsoft's monopoly and binding strategy of products. This could lead to court decisions to divide the company or to restrict its activities.

The company had to address legal demands referring to it as an abusive monopoly. According to a judgment in the case of United States vs. Microsoft on 2000 the company should be divided into two companies Microsoft A (Applications) and Microsoft S (Operating Systems and Infrastructure). The company succeeded in settling it with no division to two companies.

It looks like after that traumatic verdict the company learned to better address other cases and build an image of less abusing monopoly.

Threat: Failures in new markets.
Microsoft's strategy is a growth strategy: entering to new markets and gradually becoming the 80 pounds gorilla of these markets. Multitude of failures may stop the company's growth and cause a crisis. In case of improper addressing of such a crisis the company's growth will be stopped and it could finally loose its leadership.
Remain to be seen.

Threat: Stock value going down significantly
The company employed young people retiring in their thirties. The employees worked hard and received high payments. Options were a significant part of the payments. As long as Microsoft's stock rate increased the options were attractive. If stocks rate will go down for a significant time then the model could be ineffective and the company could collapse.

The number of employees is significantly higher. No longer retirement in thirties.
Microsoft's stock rate did not decreased consistently.

Threat; Company Image changed to less attractive image
Less attractive company will not be able to attract the most talented young people. This threat could be correlated with Failures in new markets and Stock value going down significantly.

Younger and more innovative companies (e.g. Google) are more attractive but Microsoft is still attractive.

New threats and threats not identified in 1995
The current two significant threats, which were not identified by me on 1995, are Internet as a Platform (see my posts on Web 2.0 for dummies) and the Open Source communities. These two threats are a Business Model change and are related to each other.

Ideally, Open Source change the model of software licenses fees to a model of software services incomes. If this model will become the dominant model it could harm Microsoft's core revenues.

Web 2.0 and future Web 3.0, Web 3D, Web 4.0 is platform independent and community model. Revenues model is usually not based upon software licenses.

Will Microsoft survive till 2018?
The probability that at least three of the four leading SOA Ecosystems vendor will survive is very high. Microsoft is one of these vendors. Looking at the future threats of 1995 it looks like the company coped well with many of the threats realized.

Microsoft as well as other two SOA ecosystem leaders (IBM and Oracle) has a variety of product lines and is a leader in some of these markets (e.g. Operating Systems, Development Environments, Office Systems, Databases ). 

IBM is a leader in Integration, Development Environments, Mainframe, Databases, UNIX, Servers, Storage and Outsourcing. Open Source is not a significant threat to IBM due to its participation in Open Source projects and its ability to provide professional services in addition to products. 

Oracle is the database market leader, CRM, ERP, Development Environment and Integration leader (BEA acquisition strengthened its position in the integration market see my post Oracle BEA acquisition: SOA perspective). Oracle is also an advocate of Open Source and participates in some of the Open Source initiatives. 

The forth SOA Eco Systems vendor SAP is the ERP market leader and a CRM leader. SAP will probably also survive unless it will be acquired by IBM.

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