And Vijay Says…

My pal Dennis Howlett wrote this piece on diginomica http://diginomica.com/2013/07/20/weekend-speculation-sap-ibm-accenture-2015/ where he speculates about the future of these three companies . Having worked many years at IBM , having competed with ACN all my life as a consultant and now working at SAP – my view is (surprisingly eh?) slightly different to Den’s . I am not saying Den is wrong , just that I have some different opinions. And in some cases, I agree with Den. As always – this strictly my personal opinion, and not my employer’s opinion .

Let me start with IBM . It is a company I admire a lot as most of you know. When other companies think of long term as 5 to 10 years , IBM invests billions every year in research that may not pay for 20 to 50 years . And that doesn’t change even when a given quarter is not doing well .

IBM is 100% ruthlessly capitalist – maximizing share holder value is key and there is little tolerance for not keeping a promise made to shareholders . They are also a highly ethical company – not even a remote case of unethical behavior gets tolerated there . If you think of IBM as an American company , there is some cause of concern on shrinking local workforce etc . However , if you think of IBM as a global company – it is not all that bad .

IBM misses its bets like every one else – but wins more than competitors on long term bets . They systematically got out of HW business before any one else realized what lay ahead. I have heard stories that they also passed on buying intel and Cisco when they were small companies . So yes – good and bad decisions . But there is no denying their ability to see farther than most . I do expect IBM to get rid of more HW business in near term . Not many people know that IBM does R&D for lots of semiconductor companies even if they are not a big semi player themselves . Smart bets I say .

What about services ? Lou G saw services as the next frontier and invested in it . Sam P and Ginnie R grew the services business into a powerhouse . I know there are public references of bad implementations etc – but having worked there for long , I can assure you there are many more successful projects than failed ones .

Services business is heavily competitive – and margins get thinner all the time . IBM has a partner model (like ACN ) which they inherited from PWC acquisition – although partners are just regular VPs , not real partners . This means there is a partner (or several ) at each customer holding and developing that relationships and selling and delivering work there . And then there is an over lay of service lines for each area like SAP, custom development etc . And then there are checkers and double checkers to make sure finance and legal and HR and so on are taken care of. So the over head is significant for maintaining that big organization . Even with periodic restructuring , it is a big cost . And since IBM is all about EPS growth financially – this will be a constant headache .

So I do expect IBM to make a lot of structural changes in services business to make it leaner , especially at higher levels . And since they already have shown that they are not averse to selling off businesses that have limited upside in future – on a stretch, I can imagine IBM even selling off a part of that business to an Indian consulting company who has cash, but does not have the ability to accelerate up the value chain organically . Of course that is an extreme stretch – but not impossible in my opinion . But hey, everything is ok when we speculate, right ?

Even while I was working there , IBM was getting into SaaS consulting . I do expect that to pickup – but in over all scheme, without structural changes it won’t align with their EPS targets .

Will they get out of SAP business ? Just like all good sales leaders , IBM leaders also play the opportunistic game well . Believe it or not – even with steady decline , SAP Business suite based work is still highly lucrative – and IBM has the ability to go after a global customer base . There is a bull market somewhere at any point. IBM has a definite opportunity they will capture to promote blue software via consulting . But it is a tricky game – the doomsday of consulting company is when customers suspect bias . When I was an account partner at IBM – I would do what is best for my client , even though I was paid a salary by the SAP practice . So if the SAP market is lucrative , there is no reason for IBM to get out of it any time soon. The only exception of course is if they sell off the non blue consulting practice as a whole . So generally low odds in my opinion.

IBM software is the one to watch . Steve Mills is a one of a kind leader – I have the utmost respect for him and his leadership team . Apart from waking up late to modern in memory computing, that team made very few wrong steps. They try to control the lower levels of the stack effectively – DB, middleware , security, App servers, ETL, Portal etc . Apps is not something they have a strength in . And they are an acquisition machine – probably the best at M&A in the industry . IBM has a big war chest in liquid assets – they can acquire a lot more companies , and I am sure they will do that .

Whichever way I look at it , IBM as a whole ain’t gonna fall flat on its face . It will suffer some transition pains to restructure , and I do expect them to suffer some pain to meet 2015 roadmap for EPS . Maybe one year after 2015 is going to be painful , but that is about all I think is worst case. What also makes me say this is the depth of executive talent on bench .

About Accenture – I know a lot about them too thanks to them being a major player in SAP consulting . At IBM, many of my managers and peers benchmarked only against ACN . They were the ones to beat . They are very similar to IBM services . excellent customer focus , ethics and skills .

They don’t have software and hardware businesses like IBM. They are also a bit top heavy due to the matrix partner model . But they sell services better than almost anyone else – and have good investment in people . Their relationships at C level will see them through any hardship in long term . They invest in cloud consulting and together with some structural changes , they should be ok . Just like with IBM services , it is possible that another company might buy a part (or all) of Accenture . Not being diversified outside services is a risk for them . And they have no reason in my opinion to ever get out of SAP business .

Finally SAP . Den says SAP can reshape SI business . I doubt that seriously. SI’s – other than really small ones – do not depend on SAP for most of their business . And SAP’s culture is collaborative , not dictatorial . Every time SAP comes up with something new , a lot of time , effort and money is spent making sure ecosystem partners are on board quickly . SAP is a software company first – so services are strictly done on a need basis .

Economics and elasticity of software and services are very different – and SAP has been generally better off letting ecosystem deal with most of its services business .

However , there are couple of important points in the post ERP world . Speed required to get value is in weeks now – not in months and years . And SAP technology projects like Hana do not cater well to packaged implementation approaches that worked for ERP.

This is not a waterfall vs Agile problem although that is how popular opinion is formed . Waterfall won’t go away till customers change buying behavior and Agile becomes more predictable in services business. There is also an analyst push on outcome based projects – pay for result and not effort . This is easier said than done – I have first hand seen how many customers show resistance to gain share contracts . And “measure of outcomes” is usually hard to agree up on at contracting time.

The method of sales – especially direct sales – for services is a big eater of margins . For large ERP or maintenance projects , direct sales is unavoidable . But for a Hana project or a SFSF implementation , I doubt the big SIs can make it work inmost cases via direct sales . I expect them to start using a web store for some types of services one day soon . Maybe they use SAP Hana market place , maybe their own . But I do expect sales model of newer solutions to change in very near future – like within 2 years or so. It’s not just web stores – talent sourcing , billing etc all will change for a part of the services business.

Just like cloud vendors make every effort to discredit larger on premises vendors , some smaller SIs and independent consultants also tend to discredit larger SIs . All sizes of SIs have a segment of market they can serve better than others . I am all for a fair mix of independents and big SIs – but it is rather hypocritical to point fingers at each other . For deep tech expertise – a freelancer might be a good bet . But that alone doesn’t make a project successful . So – I expect no big disruption from small SIs and freelancers for majority of Services business . Pie is big enough to share for everyone .

However I do not expect even a third of the global services businesses to move to cloud by 2015 . Real customers are orders of magnitude more conservative than what is reported on social media . Enterprise software consulting business is a marathon or maybe a steeple chase occasionally – I don’t expect it to change to a sprint by 2015.

As world moves to SaaS more and more – the demand for integration will open up a very lucrative SI model . And to add to that will be the big data movement . So this disruption is just a shift of business from one service line to another for SIs . As my ex manager used to tell me – it is all green dollars whether it is ERP or Hana or SFSF or integration .

Ok that was a LOT of typing on a small phone screen . All I wanted to say was that I don’t see any of the SI companies – certainly not IBM and ACN – take a big hit long term , except a few bumps along the way . And for SAP – I have full faith in Vishal , Bill and Jim to match execution with the strategy they have laid out .

Phew …my thumbs hurt with typing – now I need a beer 🙂

Another random rambling – this time caused in part by a twitter conversation today morning, and a few analyst reports I got around to reading at lunch break. And finally I saw this past homework sheet that my daughter filled last year , where she says she wants a job like the one her daddy has.

I work in this great industry, and yet I continue to be amazed (and amused) by the logic of big and small companies that make our industry. An entire set of companies operate as if the forces of market just don’t EVER apply to them.

For software, supply is a non-issue in most cases. You build it once, and you sell it many times. And one way or another, you get customers to pay for maintenance and enhancements – either explicitly in case of on-premises companies, or built into subscription costs for the cloud companies. This model worked great for many years because only a few companies were competing in each segment – be it ERP, Databases, CRM or whatever. The threshold of entry was always high enough so that supply side remained a vendor advantage – Supply won over demand , believe it or not.

Software was not the only industry where this happened – even in the world of tangible goods, we have examples to learn from. Look at semiconductor companies. Till very recently – they defined demand of their customers based on their available capacity. Customers were told how much they will be allocated – and customers could not do much about it given the capital needed to stand up a new fab was beyond the financial strength of  most companies. Well, these companies eventually had to turn (painfully) to pure demand driven companies – and the same is bound to happen to software companies too at some point. In a few cases, it is already happening.

Along came cloud, and it made it easy for anyone to be a SW player. When I passed out of college – it was hard to start a SW company given there was no cheap way to access internet or buy hardware. Many good ideas never saw the light of day and many bright students shelved their ideas and took employment at big companies to execute on someone else’s vision. That is so not the case now – it costs very little to start a new software company today in comparison – at least from a “production” point of view.

Challenge today is that of demand (as in top line revenue) – not supply. Since threshold of entry is low, everyone and his brother is now in the SW game. And not surprisingly, the quality of ideas is poor in many cases, and there are no “easy” customers to find . So what is one to do – you hire the best sales person(s) you can afford and ignore the cost of selling to “buy” market share.

Profits be damned – it is all about growth. The trouble with this model is that you probably can never take your foot off the high sales/marketing expense pedal since competitors are also trying the very same strategy as you are.It is a mega race downhill.

Its not just high sales and marketing expenses that come with accelerated growth. To “buy” market share – acquisitions cannot be avoided either. The problem is that the owners hate to dilute their stock – so in most cases, debt is the only viable option. So between debt and the high expenses – the question is how long can such a company do its business . Debt is cheap for now – so probably they can all keep afloat for a while, but sooner or later, they will have to pay up. And it remains to be seen how many will be still viable and solvent at that time.

Then there are the companies who care only about profit ( EPS for the public companies ). They have the same challenges to generate demand – but instead of taking the harder route of increasing topline to create more profit, they play with other levers. They squeeze costs out of their system ( move to cloud, use labor arbitrage etc), they buy back shares aggressively and so on. Again, at some point – you run the risk of cutting into the bone.

Then there are the companies who try to take a more balanced view on top line and bottom line together. But they are in a fight of their life too – since companies who are aggressive on top line and companies who are aggressive on bottom line both have “trained” their customers on what to expect. So these “middle of the road” companies usually will have to resort to tactics unnatural to their DNA to fight it out with the others.

Customers “might” win in the short term when there is intense competition on vendor side, and that is a good thing. But in the long term, the very existence of some of the vendors might be questionable. So over the long term, do even customers win? or do customers also join this downhill race , maybe without even knowing it?

In short it is a mess – or I guess the more PC way of saying it is “It is an interesting scenario”. The extent of this mess is clear in the communication style of the leaders who run some of these companies. Every one touts they have the right strategy – yet very few seem to execute to it over time.  How fast can they drive forward while constantly watching the rear view mirror?

When I worked in the UK more than a decade ago, my friends got me hooked to watching horse races. Did you know that a horse never loses a race because it is slow ? That is how I understood it reading the coverage of races in newspapers and magazines. A horse  might lose because of bad training, bad surface, unfair handicap and a hundred other reasons. But NEVER will a horse lose because it was slow. If you watch our beloved industry from outside, I think you will feel kind of the same way about the companies that make this industry.

I do believe that the forces of market will eventually trump everything else – and I wonder how many vendors will stand when that happens and how many will bite the dust. Maybe it is time for this industry to get off the high horse called “strategy” and focus a little more on good execution.

And I hope this happens before my kiddo starts looking for a job – and yes it would be quite an honor if IBM (or SAP) employs her.