Technology and Business Strategy

The Future That Was Never Predicted!

2010-09-23T11:01:00.000-07:00

Interesting table below:
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Year -------- Number of Computers on the Internet

1988 --------------- 60,000
2006 -------- 439,000,000
2011 ------ 2,000,000,000
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(Source: The Future of the Internet and How to Stop It by Zittrain)

Industry Data Warehouses

2010-08-21T11:43:00.000-07:00

So what is an industry data warehouse? And why do we need them? Are they a threat to our confidential information and core competitive advantage? In very simple terms, industry data warehouses are created jointly by the firms in an industry group. They enable a better competitive environment by providing a common “score card” for participating firms. Now you know the rules, you can find out who is winning and who is losing and the game statistics. The competitive game gets even more riveting. Given the right "fit", while corporate data warehouses have the potential of providing a competitive advantage (please note the emphasis on "fit") to the owner, industry data warehouses create cooperative advantage (What about coopetition instead of competition?) for the users in the industry. Therefore, it becomes necessary that industry data warehouses provide common industry definitions of performance and market measurements, enable comparison of relevant parameters between a firm and the industry, ensure privacy of the data contributed by member firms, and have sufficient number of firms from the industry to guarantee reliability as well as confidentiality of the information. Industry data warehouses will have users who are data contributors as well as those who are non-data contributors. The data warehouse must fulfill the needs of both these groups of users by providing firm-only, comparison between the firm and rest-of-the-industry, benchmarking, and aggregate industry-only type of queries.

Industry data warehouses for benchmarking have become common place. More than a decade back, these were just emerging. If you are interested in learning more about industry data warehouses and how to build them, below is a link to an article that I had written in 1999. Enjoy in your copious free time!!

Link to the Article on Industry Data Warehouses

Note: This is a scanned copy of my article in PDF format available from Google docs.

An SQL Journey: From Non-Procedural to Procedural

2010-08-19T00:18:00.001-07:00

The simplicity of non-procedural languages is really enticing. Non-procedural languages relate to describing the result instead of defining the process. For example, when I visit a restaurant I ask what I want instead of describing how my meal should be cooked. Most of the time, we are asking what we need, instead of describing how we want a particular result to be delivered. We leave the how to experts. So we let the cook decide how to cook the food, allow Google to figure out how to do our Internet search and leave it to our car mechanic to figure out how to fix the car. This allows development of deep expertise in each area. This is the reason we have financial experts, who don't know much about cars, doctors who don't know much about computers and computer engineers who don't know much about the pedagogy of the oppressed. To a certain extent object-oriented languages have been able to mimic this real-world paradigm by defining operations and hiding the "know-how" as encapsulated modules. But all object-oriented languages are still procedural languages, since the programmers use flow controls to define the events and actions.

A non-procedural language defines what is being expected, therefore non-procedural languages don't have flow control.

Let me give you an example:

SELECT FirstName, LastName
FROM STUDENTS_TABLE
WHERE TEACHER = "Peter Drucker"

Here I have defined the result that I'm expecting. Give me the first name and last name of students whose teacher is Peter Drucker. I can get more granular and add course too. For instance,

SELECT FirstName, LastName
FROM STUDENTS_TABLE
WHERE TEACHER = "Peter Drucker"
AND COURSE = "Management 301"

This is a purely non-procedural statement, since nowhere in the statement have I defined how the result should be obtained. Both these statements are valid SQL statements.

When SQL started out, it was based on solid mathematical underpinnings of relational algebra and it was truly non-procedural. However, there has been an unfortunate evolution of SQL. Slowly but surely, more and more procedural constructs have been added to SQL. For example, addition of a CASE statement in SQL-92 was definitely procedural. Vendors have added their own flow control. Sybase added "stored procedures". Rest of the vendors including Oracle (Of course, Microsoft had bought the Sybase source code) quickly followed the lead by adding their own procedures. I think Teradata tried to maintain the purity and elegance of non-procedural SQL for a long time. Teradata had its own vested interest. It was very hard to build a procedural language on a "massively parallel processing" (MPP) platform. Therefore, Teradata stayed true to non-procedural operations of relational algebra for quite some time.

Procedural additions to non-procedural SQL have caused a havoc in programming. Initially, it was impossible to debug procedural SQL due to lack of breakpoints. Companies wasted millions of hours of programming time trying to debug procedural SQL. Of course, I must say that debugging of original non-procedural SQL with multiple sub-queries and correlated sub-queries was equally painful. But technology is always seductive. Technology is the ultimate silver bullet to kill the corporate vampires. Therefore, procedural SQL or stored procedures were widely adopted. Under a newly emerging client/server computing architecture, you could write all your business rules in procedural SQL, store them on the server with the database and minimize the network latency when "client" computers made a request for data. This was the end of non-procedural SQL.

To a certain extent non-procedural SQL was doomed due to its one of its major weaknesses: Purity of logic. Its elegance was its failure. It was just too perfect. Good logic is neither common sense, nor intuitive. I can give you some examples, which you can test in your copious free time:

Example: There are a bunch of car manufacturers, who make multiple brands of cars. Each manufacturer can make one or more brands. Car customers purchase one or more cars each year. Pretty simple, eh! Now, can you write a single (not multi-pass) SQL statement to find all the customers who have purchased all the cars made by a certain manufacturer?

Since I'm having trouble going to sleep and I can't think of anything better, I've setup a simple Microsoft Access database for you.

Here is the download link:

Click here to download Car Database as a Zip file from Google docs

or

Click here to download Car Database as a Zip file from Box.net

If you don't have Microsoft Access and want to use another database, I've added an Excel Spreadsheet with multiple worksheets corresponding to database tables. The database has five tables as follows: CAR, CUSTOMER, MANUFACTURER, CUSTOMER_CAR, MANUFACTURER_CAR.

This is a database in 3rd normal form, which means that data redundancy has been reduced to downright minimum. CAR table has CarName and CarID, CUSTOMER table has CustomerID, cFirstName and cLastName, MANUFACTURER table has ManufacturerID and ManufacturerName. Such tables are sometimes called lookup tables. Now CUSTOMER_CAR table establishes a relationship between customers and cars. It shows which customer purchased which brand of car in which year. CUSTOMER_CAR table has CustomerID, CarID and BuyYear. Similarly, MANUFACTURER_CAR table establishes relationship between manufacturers and car brands. It shows which manufacturer produces which brand of car. Therefore, MANUFACTURER_CAR table has ManufacturerID, CarID and ReleaseYear.

In order to understand why I called non-procedural SQL as too perfect, try to write a non-procedural single-pass SQL statement that will return

(a) first and last names of all customers who have purchased all the cars released in 1974

(b) first and last names of all customers who have purchased all cars manufactured by Chrysler

(c) first and last names of all customers who have purchased all cars manufactured by Ford

(d) first and last names of all customers who have purchased all cars manufactured either by Chrysler or by Ford - If you got to this point using Microsoft Access, you will know exactly why it has a weak SQL engine.

You can use sub-querries and correlated sub-queries but no procedural or multi-pass SQL.

I guess I'm about to fall asleep now. Therefore, I'll write the solutions in my blog next week.

Until then enjoy these brain teasers!

Management Meta-Functions and Technology

2010-08-07T07:06:00.000-07:00

Note: Demand Management in this blog refers to management of demand for resources within a firm. I want to clarify it at the outset, since all business organizations are on the supply-side from a macroeconomic point of view.

No business organization has a demand management function as a department entrusted with the responsibility of managing internal demand for resources. But this function is critical and strategic. In fact, it is a meta-function of all functional areas and it requires active involvement of executive management and the board.

Within any business organization, demand is the sum total of all current and outstanding requests for resources. Resources could be dollars or labor or technology and generally these resources are fungible. There are countless instances: We need to make two more acquisitions, spend more to enhance customer service, upgrade technology, roll out new products, grab a bigger market share, improve marketing of our new products, spend on improving product quality, give salary increases to hard working staff and so on.

Demand management is mostly the responsibility of senior management and this responsibility extends to the executive level and board room too. Demand is controlled and directed by the mission, strategy, goals, policies, governance processes, capital budgeting, spending limits, return on investment (ROI) targets, et cetera.

On the IT side, demand is controlled and aligned with strategic objectives through a technology governance process that includes, inter alia, "tough love" (sorry, Mr. Cruz Bustamante) prioritization, chargeback mechanisms, and reviews of business cases.

Since demand always exceeds capacity, management of demand is about making choices. Sometimes there is a fear about making choices and at other times macho managers think that they can do everything: expand the target customer segment and meet all their demands, reduce costs and improve quality. Making a choice involves giving up. Choice involves trade-offs. Choice means deciding what we won't do. Choice means saying no. Doing everything and keeping everyone happy seems so much easier. Demand management is left to the winds of organizational weather system - whether it is functional or dysfunctional.

At the strategic level weaknesses of demand management show up in compromises and insidious erosion of competitive advantage over a period of time. But in the short run middle management has to figure out how to bring the resources to meet the demand coming from various corporate projects and day-to-day operational priorities.

Supply management that requires provisioning and allocation of resources is broadly a responsibility of middle management. Middle management has to make sure that their staff are not drinking beer with their feet on the table. This last sentence is a joke but what I mean is that middle management needs to make sure that available staff and skills are effectively and efficiently allocated to critical activities. If demand management meta-function is not effective, then either middle management has to step up to control the demand or it will end up dropping one of the balls - no pun intended.

Finally, we come to the meta-function of capacity management. What is capacity? Capacity is the upper limit of the aggregate output of the firm. It is the maximum ability of a firm to get the work done. There are three key determinants of capacity:

1. Staffing
2. Best practices
3. Technology

Business organizations can expand their capacity by improving capacity utilization or by adding new capacity. Addition of new capacity is expensive, particularly when existing capacity has not been driven to achieve its maximum. All business organizations try to expand their capacity. Often this meta-function is recognized as doing more with less. Some of the firms do this by having their managers scream harder and louder. Others do this by burning the midnight and weekend oil. None of these methods are sustainable. Therefore, these are non-strategic. Strategic expansion of capacity involves improving overall fit among various functions and activities of the firm to optimize effort and minimize waste. Southwest Airlines and Wal-Mart are good examples. Strategic expansion of capacity involves recognizing one's strengths and uniqueness. Increases in productivity are invariably part of improvements in the "fit" among various activities of the firm.

You will notice that technology is only one of the variables in the expansion of capacity. Therefore, acquisition of technology to drive capacity expansion across the enterprise involves a lot more than mere implementation.

Technologists have to understand how they help organizations do more with less. At a given level of technology, when maximum capacity utilization and productivity have been achieved through the use of best practices, demand has to match supply. Most of the IT organizations have begun to understand it and they are establishing control processes to manage demand and supply.

In fact, very large organizations have to build internal economy of the firm in such a way that the resources are routed towards the most profitable strategic opportunities.

Each organization has to evolve its own method of building an internal economy for management of meta-functions of demand, supply, capacity, productivity and competition. For example, several advertising firms have multiple teams competing internally for the same contract. Some of the advertising firms, in fact, launch several competing projects for the same contract. On the other hand, within technology firms, internal competition takes the form of how to skin a cat. IT departments use project governance, activity-based costing, project management and various software development methodologies to manage these meta-functions to match demand and supply. When they don't, they drop the ball. Some commitments are left unfulfilled. Project time lines are extended. At the end of they day demand matches supply but it happens mostly in an unpredictable and ad hoc manner.

Don't Enhance My Shopping Cart Now!

2010-08-05T19:02:00.000-07:00

Muckety Muck Electronics, Inc. (MME) was running a discount Internet shopping website for electronic components. MME had a policy of not publishing the prices of their merchandise until the merchandise were added to the shopping cart. The marketing department of MME had found that the rate of impulse buy on their website was quite low. Several of their online customers on their first visit added components of interest to their cart to check the prices and then left the website. However, the return rate of such first time visitors was above 37% and almost 70% of them were making a purchase on their return visit.

The shopping cart of MME was initially designed in such a way that it automatically emptied all its contents at the end of the day. Since search for electronic components with close tolerances was time consuming, the marketing department estimated that if shopping carts were able to retain contents between visits, then sales were likely to increase by at least 5%.

A project was immediately initiated to retain merchandise in the shopping carts. Since MME had to meet challenging financial targets, a tight time-line was implemented. The programmers modified the shopping cart program. Half-way through the project, the procurement department communicated that the inventory and the cost of procurement was changing on a daily basis, therefore the availability and prices of shopping cart contents had to be updated too. This was included as a new requirement and all the testing scripts had to be revised. The impact on the time-line was avoided by having the project team work through the weekend.

Finally, updated shopping carts were released in production. Two months later, sales from return visits were down by 7%. A root cause analysis revealed that the website “listing” module was originally programmed to display only those items that were best bargains based on daily comparative pricing feed. Any item that was not a bargain was not listed. This strategy was decided by the founders. However, when the items were retained in the shopping cart, they often lost their bargain status. They were not listed but still retained in the shopping carts with updated prices. This disappointed the returning visitors, who left disgusting comments on the discussion boards.

I have a list of two dozen questions related to the issues and problems in this business case. This is a real business case but I've changed the industry and the situation to protect business privacy.

No Survival without Operating Efficiency

2010-07-25T11:35:00.000-07:00

There is no way a business can survive without internal operating efficiency. For example, the sweet spot of most of the consumer electronics goods prices is about $300. This sweet spot price point has stayed at $300 level for almost two decades. The sweet spot for X'mas gifts in the consumer electronics segment in the US is in the range of $100 - $200.

Whether it is iPod, iPhone, PlayStation or a regular Denon receiver, it is hard to achieve a sufficiently large market without hitting this price point. Therefore, you have to cut down the cost of inputs to a point where you can hit this sweet spot without making a loss. If you can't, then you have to accept a loss on the main unit and attempt to make that up when you sell complimentary products. Sony and several electronic gaming system manufacturers have adopted this strategy for the initial roll-out of their PlayStation units. The search of lower costs and operating efficiency in the area of software development and manufacturing very quickly extends the supply chain to India and China. Several software development firms in India and assembling firms in China, for example, Foxconn Technology, have the sole strategy of maintaining high efficiency of labor and doing everything to lower the cost of labor in assembling of products.

While there is some differentiation based on the reliability of supplies and quality of output among the firms in India and China, their raison detre for being part of, for instance, iPhone supply chain is that they can provide labor-intensive software and assembly services at a lower cost than anyone else. The current state of competition among the software development firms in India and manufacturing/assembly firms in China is mostly cost-driven that relies heavily on tiny profit margins, lower cost of labor, economies of scale and internal operating efficiencies. Is this situation going to be permanent? I doubt. Competitive position based on operating efficiencies is not sustainable in the long run.

There are several other examples of firms that are heavily dependent on internal operating efficiencies to meet a low price threshold and achieve competitive advantage. Is this competitive advantage based solely on internal efficiencies sustainable in the long run? I agree that while the sustainability of competitive strengths based solely on internal efficiencies is highly doubtful, it is a necessary condition for staying in this market.

Does outsourcing really mean achievement of operating efficiencies? This is another question. You can certainly outsource your internal inefficiencies and achieve a lower cost. However, this hasn't worked very often.

For a successful business operational efficiency is necessary but not sufficient. Here is another thought on operational efficiency and strategy: http://techenbiz.blogspot.com/2010/06/efficiency-is-not-business-strategy.html.

Efficiency is not Business Strategy

2010-06-08T22:37:00.000-07:00

Companies spend hundreds of millions of dollars on IT to improve internal efficiencies. The expense includes enhancement of internal core technology systems, design of internal workflows, integration between systems and decision processes, simplification of processes, lean manufacturing methods, et cetera. In the software world, rapid software development methodologies, like Scrum, with overlapping stages of concept, design, development and testing help in reducing time. All this need for speed is excellent and an absolute must to stay in business. But this need for speed is certainly not business strategy.

If you don't agree with this line of thinking, then let's assume for a moment that I'm wrong. This means that operational efficiency is your business strategy, which is how you are going to compete with your business rivals. Let's examine this topic.

At constant quality, operational efficiency means that you can keep your cost lower than your competitors. How do you communicate your operational efficiency as a "strategy" to your customers to gain market share? If efficiency is your strategy, then the only answer is low price.

If the only thing that is different between your product and your rivals' products is price, then how would you stop your rivals from achieving the same internal efficiencies and matching your prices? So you run and you run to catch up with the ...

Congratulations! You have just figured out a great way to commoditize your product with price as the only basis of competition.

Similarly, you can use internal efficiencies to deliver higher quality to your customers. Such gains in quality are again not beyond imitation by your rivals.

Operational efficiency is NOT business strategy.

Postscript: This issue is quite debatable. Therefore, here are my thoughts on some of the firms, like Foxconn Technology, that are heavily dependent on internal efficiencies and lower costs to stay in business: http://techenbiz.blogspot.com/2010/07/no-survival-without-operating.html.

A Myth Buster Anthology of Data Warehousing

2010-06-05T13:48:00.000-07:00

One of the strongest arguments in favor of data warehousing, which I have often heard from specialists, is that data warehousing can generate golden nuggets of information that can create competitive advantage for the firm. And I've watched several uncomfortable discussions on how to measure return on investment on data warehousing. And I've seen a lot of frustration that several large data warehouses failed to generate return on investment after tens of millions of dollars. Like any other technology, data warehousing has its own share of myths intentionally and unintentionally created by vendors as well as practitioners.

Myth #1 - A data Warehouse can create competitive advantage
Myth #2 - A data Warehouse is required for business intelligence
Myth #3 - Data Warehousing starting point is an enterprise data model
Myth #4 - You need both an Operational Data Store and a Data Warehouse to cover the entire spectrum of business reporting
Myth #5 - Data Warehousing requires an engineering approach
Myth #6 - Data Warehousing fails due to problems with transaction-processing systems
Myth #7 - We can't predict what questions will be asked from a data warehouse
Myth #8 - Data Warehousing improves decision-making
Myth #9 - Data Warehousing empowers front-line and business staff to do their own analysis
Myth #10 - Data Warehousing reduces overall cost of reporting on business performance and opportunities

Myth #1 - A data Warehouse can create competitive advantage
The most often cited example of competitive advantage is the way Wal-Mart created a data warehouse and linked the data warehouse-driven decision support systems with store inventory and transportation logistics to match the demand at various stores with the delivery supply chain to minimize out-of-stock, cost of delivery, excess inventory and maximize sales volume. I don't doubt this story.

There is another often repeated but probably apocryphal story about beers and diapers at Wal-Mart. It is claimed that a serendipitous market-basket analysis showed that on Fridays six-pack beers and diapers were being bought at the same time. Further analysis showed that when young fathers bought diapers on Fridays, they picked a six-pack beer too. Wal-Mart was able to increase sales by moving diapers and six-pack beers in close proximity. I've never seen any data or evidence that would validate this story.

First of all, operational efficiency is not competitive advantage. Wal-Mart's low cost positioning strategy has a large number of components that include marketing, vendor management, contract negotiation, labor and human resources policies, location selection, store management, etc. Inventory management, delivery, transportation and operational logistics are certainly an important part of this overall strategy. In and of itself, Wal-Mart's data warehouse does not create any competitive advantage. In fact, similar integration between decisions and activities can be achieved through other technological means, like, enterprise service bus. The important point to note is that Wal-Mart's strong strategic focus on "low cost" has created a nice "fit" among all its activities that enhance Wal-Mart's competitive advantage. Wal-Mart's data warehouse is a critical part of this overall fit. But to attribute Wal-Mart's competitive advantage to their data warehouse would be no different than saying that Wal-Mart's competitive advantage comes from their vendor negotiation policies.

Sans integration with business activities, a data warehouse is no different than an ATM. An ATM is a cost of entry into consumer banking business. It does not bring any competitive advantage. Similarly, anyone can hire the consultants who designed Wal-Mart's data warehouse and build a data warehouse. But would they get the competitive advantage that comes from Wal-Mart's low cost positioning that permeates millions of activities that Wal-Mart does every day? A competitive advantage is a competitive advantage because it can't be imitated.

A single insight leading to creation of sustainable and long-term competitive advantage is a fiction, though it makes fascinating business stories. In real world, a single insight has to be supported by tons of hard work in analyzing and aligning thousands of activities to fit into an overall coherent business strategy to create competitive advantage. Target has carved its market position in spite of Wal-Mart. Wal-Mart would have a tough time defeating Target's competitive advantage without compromising its position.

Finally, as everyone knows, competitive advantage is not absolute. It is relative to industry competition. It depends upon how you position your business vis-a-vis your competitors.

Myth #2 - A data Warehouse is required for business intelligence
Let's first clarify the vocabulary.

Among senior executives business intelligence means information about markets, customers, suppliers, competitors and business drivers in the industry. For a business process outsourcing firm, an example is a new customer silently searching around to outsource some of the internal processes. Majority of this information is not from inside the firm. This information comes from OUTSIDE. This is an important distinction. Most of the time, business executives rely on their own rolodex to gather such business intelligence. At other times, they engage with industry analysts and review publications to gather this outside information. Astute marketing departments can frequently supplement this business intelligence with frequent surveys of customer tastes and industry trends.

In the vocabulary of data warehousing, business intelligence means consolidation of internal transactional data from multiple systems followed by dissection of data across multiple dimensions of analysis to test hypotheses and derive some high-level conclusions about the state of the business. For example, point-of-sales data could be consolidated across multiple sales territories or lines of service and then analyzed across zip codes, categories, population demographics, etc. In fact, marketing activity tends to be highly data-driven and good marketing departments are all the time measuring the impact of marketing campaigns on sales volumes. I've seen that occasionally this data is supplemented by consolidated industry data but majority of data used in the data warehouse is internally generated. Therefore, business intelligence from data warehouses is predominantly internally focused on business operations, operational efficiencies and internal optimization.

Data warehouses can not provide EXTERNAL business intelligence that senior executives need and I question the premise that a data warehouse is a sine qua non for INTERNAL business intelligence. Most cost effective method of internal business intelligence starts with business analysis and hypothesis development. Data gathering is the next step. Once hypothesis has been defined, data can be gathered from the subject area within the parameters of the hypothesis. You really don't need a data warehouse for that as long as you can enable access to the data required for such analysis. The important point to remember is that you need to enable accessibility to data instead of building a data warehouse and technology presents several options, a data warehouse is one of them.

Myth #3 - Data Warehousing starting point is an enterprise data model
The starting point of any data warehousing effort is not an enterprise data model but a definition of business operations strategy that the data warehouse will support. The data warehouse will be a component of this strategy. Therefore, you can't find ROI on the data warehouse. Instead, you have to work with the business teams to find out ROI on the entire business operations strategy that the data warehouse will be supporting. Not only you have to have a good definition of business operations strategy, but also you have to define the requirements in detail. Data warehousing starts from the top with a clear definition of business issues. I have seen tens of data warehousing efforts fail because enterprise data model was treated as the first step towards data warehousing. At the same time I have seen several data warehousing efforts succeed because business goals, expectations and requirements of data warehousing were defined in clear terms with a business value proposition attached to each requirement. The technical team understood clearly what they were supposed to accomplish.

Generally, enterprise data model is an expensive, time consuming and meandering effort. You start with a conceptual business model, follow-up with a logical data model and then map that to a physical data model. All this is done under a vague premise that somehow once you have done all this, you will be able to get all the data that you need to test any hypothesis across the enterprise. Most of the time, enterprise data models generate a pretty good piece of documentation that is understood by a couple of people in the IT. While it is validated by business analysts, most of the people are unable to make head or tail out of enterprise data models.

Mark Hammond is an Orange County entrepreneur, who founded Risk Data Corporation and later sold it to FICO. He built a data warehouse with a clear definition of business goals, strategy and what was needed for performance benchmarking of insurance and provider claims. The focus was clear and the product was successful. Similarly, Sean Downs founded Enclarity in California with a clear focus on cleaning up provider data in the health care industry. They are some of the entrepreneurs, who have created hundreds of million dollars value by focusing on business strategy and leveraging their understanding of the potential of data warehousing to deliver a business solution.

Harvard Pilgrim was less successful in its enterprise data model driven data warehousing approach. Kaiser Permanente has several data warehouses. Some of them are business-problem driven and some of them are enterprise data model driven. Initiatives driven by enterprise data model have been more expensive and less successful than business-problem driven initiatives.

Myth #4 - You need both an Operational Data Store and a Data Warehouse to cover the entire spectrum of business reporting
In the vocabulary of data warehousing an ODS is defined as a copy of transactional data. Once this data been cleaned, normalized and combined with data from past several years and other business systems, this becomes a data warehouse. Creation of an ODS followed by build-out of a data warehouse leads to huge duplication of effort with feeble business justification. If we accept the premise that we need a clearly defined set of business requirements for driving a data warehousing initiative, then it is hard to prove why an existing ODS cannot justify that data collection effort. Most of the time, if you have an existing ODS, the justification for a data warehouse tends to be pretty weak from a business point of view. Therefore, the right strategy for data warehousing must smartly eliminate technological need for an ODS and a data warehouse.

Myth #5 - Data Warehousing requires an engineering approach
If you are a technology company building an industry-specific data warehouse or a technology consulting firm with a specialization in data warehousing, then you will need to build an engineering approach to data warehousing. For most of non-tech organizations, an engineering approach to data warehousing tends to be an overkill.

An engineering approach to a data warehousing starts with conceptual data mode, logical data model and then a physical data model with lots of arguments among the technical folks about 3NF versus star schema, fully normalized versus fully denormalized, etc. At the same time, meta data management and master data management infrastructure is built. At the end of the day what you get is an overengineered data warehouse that takes too much staffing for support and maintenance, in short a white elephant. A limited approach achieves cheaper, faster and better results by focusing on ETL and reporting tools and allowing the reporting tools to drive the data organization.

Myth #6 - Data Warehousing fails due to problems with transaction-processing systems
Most of the time limitations of business transaction processing systems are already known before a data warehousing effort is launched. Therefore, it beats the logic when a failure of data warehousing is attributed to data integrity issues created by transaction processing systems. The problem lies in overengineered data warehouses. It is a sharp business analyst who provides data analysis, not a data warehouse. The most effective and economical approach to data warehousing is to keep it simple and let it show all the blemishes and warts of the transaction processing systems. The business analysts should have the tools, skills and knowledge to decide which warts and blemishes they want to remove for their analyses. Often success means straight copy of data from transactional systems to a bunch of denormalized tables. I'm sure this will sound as blasphemy to specialists in data warehousing.

Myth #7 - We can't predict what questions will be asked from a data warehouse
If you can't predict what you will do from a data warehouse, then don't build it. This is exactly the reason why so many data warehousing efforts fail. They try to answer "unknown" questions, a very tall order under any circumstances. It becomes hard to calculate ROI or link the data warehouse with a business initiative. Such efforts are often IT-centric and waste of precious dollars.

Myth #8 - Data Warehousing improves decision-making
I have seen that data and analysis driven decision making tends to be cultural in organizations. Possibly, at the top of the hierarchy are McKinsey & Co., who can take measurement to ridiculous levels and at the other end are several small and mid-sized service organizations, who have no concept of measurement-driven decision making. You can't improve decision making in organizations without a cultural shift. This is an issue that is generally bigger than the mother of all business issues. Without a clear cultural awareness of decision-making processes within an organization, a data warehouse will be like an impulse buy that gathers dust after initial excitement.

Myth #9 - Data Warehousing empowers front-line and business staff to do their own analysis
You can bring water to a horse but you can't make it drink. Empowerment used in data warehousing means as follows:
(i) Business users will be able to generate their own reports instead of sending a request to IT

(ii) IT will have less work
(iii) Business users will be able to do more analysis
(iv) Business users will be able to generate more insights into business operations

Here are the assumptions behind the empowerment:
(i) Business users are sitting idle waiting for IT to provide reports
(ii) Business users have the skills and knowledge to do extensive hypothesis testing and data analysis
(iii) IT takes more time in generating reports than the effort that business users will have to make once they have a data warehouse
(iv) Necessary organization alignment (euphemism for laying off IT data analysts and replacing them with business analysts) will occur after data warehouse is ready

Empowerment won't produce the expected results unless all assumptions are clarified and necessary organization changes are made. A data warehouse won't do it ipso facto.

Myth #10 - Data Warehousing reduces overall cost of reporting on business performance and opportunities
A careful measurement of the expenses involved in making data accessible to business analysts and building a data warehouse shows that data accessibility is a much better option than a data warehouse, unless data warehouse is a carefully designed top-down as part of an overall business strategy with clearly defined business requirements.

In fact, analysis of firms who have built "overengineered, enterprise data model-driven, data warehouses to provide answers to unknown questions" shows that they had to hire many more staff to maintain and support such data warehouses.

Michael Porter and I

2010-05-30T17:18:00.000-07:00

I've read a majority of Michael Porter's books and articles. Several of his articles I've internalized by reading them over and over again. In fact, if Michael Porter has quoted anyone in his article or book, then more often than not, I've read them too. I think Michael Porter is the first real author of business strategy. Therefore, if you find Michael Porter paraphrased in my blogs, then you are certainly right. My blogs are not original, when I talk about his theory. As far as I understand Michael Porter, I also understand that neither I can imitate him, nor I want to. In fact, that is exactly what Porter would tell me.

Porter developed this model for analysis of competition within an industry. I had read Michael Porter several times but I did not really understand him until I attended Vijay Sathe's course on Business Strategy and Corporate Revitalization at Claremont Graduate University. Vijay brought Porter to me. There are very few professors like Vijay Sathe. In fact, the previous sentence is a direct quote from Peter Drucker, who thought very highly of Vijay.

Vijay makes a very simple grid in his class to evaluate competitive advantage of firms within an industry. A firm can get a +1, 0 or -1 depending upon whether the competitive situation is in its favor or not on the five forces model of Michael Porter. On this five point scale, a firm with solid competitive advantage can score +5 and a firm with negligible competitive advantage will score -5. Of course, a firm with a score of -5 will be doomed, unless they can change something pretty drastically, which is tough. Of course, operational viability is a necessary condition for the survival of the firm but it is not sufficient. Competitive advantage in combination with operational viability provide the necessary and sufficient condition for long-time survival and profitability of the firm.

This was a simple and elegant interpretation of Porter's model. However, you have to apply it to a large number of firms in different industries before you can understand its real value. I spent a lot of time reading Porter's books and articles on the elements of corporate strategy, particularly, positioning, strategic consistency, fit, competitive trade-offs, consistency and fit among activities. Therefore, you can blame me for copying Porter's ideas but that would fill me up with pride in the same way as a value investor would feel when accused of copying Warren Buffett.

Finally, a quick word about my blogs. My blogs are in permanent beta, which means that they will change and evolve as I think through the topic. When I write my blogs, I don't prepare rough drafts for editing and finalization before publishing. I publish my blogs as rough drafts and then I may work on them in full public view to edit and finalize. Often, I just leave them the way they are. I believe most of the bloggers work this way. However, that does not mean that I'm not inviting comments on my initial postings. I appreciate your e-mails and comments, which help me in formulating my thoughts and making improvements for the benefit of those who care to read.

What is FIT?

2010-04-30T22:44:00.000-07:00

Make ROI secondary to "Fit" when analyzing investment opportunities and strategic initiatives.

I have yet to meet a business executive who does not intuitively understand the idea of fit as a critical component of business strategy. In and around boardrooms, one can always hear incessant discussions about "fit". We can't hold this acquisition for too long, since it does not have a good fit with the rest of our business ... It will be a good idea to buy this other business, since there is a great cultural fit ... We have decided to join hands and merge our businesses due to extensive synergies between us, which will save us over $100 million annually.

While business people have a pretty good understanding of "fit", they become quite intrigued, when asked if they could measure "fit". Some of them define "fit" as synergy that will create savings, others define it as future increases in revenue at relatively lower investments. All these answers are partially correct.

Fit over ROI
My purpose is to show that "fit" and related concepts are not entirely unmeasurable. Of course, it is hard to measure the effect of "fit" due to complex interactions among its various components. But if we can work so well with an imperfectly measurable ROI, then what stops us from using a better metric of "fit". It is no secret that ROI on strategic initiatives, investment opportunities and sundry projects is hard to measure even if we exclude the impact of executive agendas on ROI. At the same time, it is possible that a perfectly accurate measurement of "fit" is NP-hard class of problem and measurement may become too technical. But if we can circumscribe the domain of our strategic decision-making, measurement of "fit" is achievable.

What "fit" is not?
But first, let's discuss what "fit" is not. "Fit" is not economy of scale, though returns to scale is one of the sources of "fit". "Fit" is not positive feedback effect either, since "fit" can exist independently of positive feedback effects and "fit" is not improvements in bargaining position. Though, enhancement of bargaining position may be an important goal during acquisitions.

Here are two examples of what "fit" is not and what it is. Two firms that offer white label "software as a service" solution in the banking industry merge together. As a result of the merger, the combined newco can now get larger discounts from telecom, hardware and power suppliers. This saves newco about $5 million annually. As you have guessed, this is not really "fit". In a seminal article on strategy, Michael Porter has described how different activities of Southwest Airlines fit together to form a strategy. That case study is a great example of "fit" but Michael Porter did not describe any way of measuring the value of that "fit".

How "fit" fits in?
So what is "fit"? "Fit" is complementarity. Complementarity means that doing more of a subset of activities increases returns to doing more of the rest of the activities. For instance--to use a very basic and hackneyed example--there is a high degree of complementarity or "fit" between assembly lines, low product variety, highly specialized workforce and hierarchical management. Similarly, there is a high degree of fit among flexible, programmable equipment, broad product line, knowledge workers, broadly trained workforce, flat management structure and higher quality. These complementarities are so strong that you can't improve profits by having flexible programmable equipment and narrow product line or by putting knowledge workers on assembly lines. You will be wasting investment in machinery in one case and talent in the other. Michael Porter found during his research that mutually complementary activities tended to make a coherent pattern. This gives us another conclusion, which is that you cannot take a subset of a coherent pattern of mutually complementary activities and combine that with another subset of mutually complementary activities. What this means is that you can't take quarter of a "fit" from one company and then try to insert that into another "fit" to improve profits. It just won't work. Cost will go up and the "fit" will be really poor. This issue of "fit" will manifest itself in low staff morale, low productivity, conflicts, wasted resources, problems in the design of HR policies and hiring practices. Management will blame each other for problems without realizing the fundamental problems inherent in the strategy. In short, a poor "fit" can lead to a really dysfunctional organization, an organizational equivalent of American Beauty movie. This is what makes it so hard to imitate successful companies. By the way, this proves another point, which is that you can't pick and choose parts of a strategy. Strategy is indivisible. It comes in one full whole lump with its strengths and weaknesses, with its beauty and warts and if you don't like the warts, its better to give up the whole strategy. Think of Freudian psychoanalysis, which is one full highly consistent set of premises and you can't logically accept one part, without accepting the rest of the theory.

Do Software Methodologies "fit" with Programming Languages?
Let's discuss the issue of software methodologies from the point of view of "fit". Traditional Waterfall methodologies were developed for a factory type, assembly line environment with distinct stages of software development. Modern agile methodologies, such as, Scrum are based more on overlapping phases of software design, programming and deployment to the extent of having a permanent beta in production. Waterfall methodologies had a good fit with programming languages like COBOL, where you could measure productivity by KLOC (kilo lines of code), separate requirements gathering, design, programming, testing and deployment activities and hire people with high degree of specialization in one of these activities. Structured programming methodology was developed to improve quality of software using old programming languages and tools. These mutually complementary activities made a nice coherent pattern. Newer object-oriented languages, service-oriented architecture did not fit in this mold. Programming of objects required programmers to have a good understanding of design. Test-driven development required software developers to become testers. As public knowledge about these languages increased, Agile methodologies emerged to leverage productivity using overlapping product development phases and a new coherent pattern of activities emerged. This coherent pattern comprised languages, such as, Java frameworks, Jtest, broadly trained software developers, short product development cycles and faster time-to-market.

Can't be half-hearted about strategy?
From the point of view of "fit", my question is: Would it be optimal for a subset of "Waterfall" pattern of mutually complementary activities to coexist with a subset of "Agile" pattern of mutually complementary activities? The simple answer is no. Due to lack of "fit", you can't combine parts of these two coherent patterns. In fact, if you don't find my idea ludicrous, you can try using Agile methodologies with Cobol and structured programming and then drop me an e-mail about how far it went. Even at a high-level you can't optimize on business goals by using "Waterfall" in one half of the organization and "Agile" in the other half of your product development organization. Change will have to be more radical that this pussyfooting approach. This is exactly the reason that newer start-ups are more successful in adopting Agile methodologies and achieving a fit with the rest of their activities to drive competitive advantage over established firms. An example is GorillaNation.com.

What's a million dollar baby?
Interestingly, the "fit" within successful organizations extends far beyond these simple concepts. Successful organization create far-reaching coherent patterns of product design, development, marketing, human resources policies, internal communications, internal controls, financial decisions, supplier relations, distribution, etc. Such strong fit among various activities not only leads to improvements in profits but also improves competitive position of the firm. I'm sure that by now you have guessed a problem. Exploiting such extensive systems of complementarites requires substantial high-octane coordination among different functional areas of the firm. This strong fit also causes huge resistance to change. You can't just make a change at the margins and expect to enhance profitability or competitive position. At one of the large organizations, due to high-level of coordination, several projects were called million dollar babies. Even smaller projects took nine months and a million dollar to deliver. If you heard your senior executive team talking about "radical restructuring" or "nothing short of an overhaul", or "wipe the slate to start from scratch", then they were certainly not kidding. You cannot effect a long-term sustainable change in these extensive systems of complementarities, unless you wipe the slate clean and start from scratch.

Search for an optimum "fit"
Let's again take a software example. If you are using traditional "Waterfall" with Cobol and you introduce a new platform with modern languages and Agile methodology, then profitability will decline, expenses will go up and depending upon how much your actions are valued, your failure will be characterized as full or partial. Please note that my objective for optimization is purely financial. In order to maximize profits, such a change will have to be coordinated at the highest level with finance, marketing, human resources and product distribution to create a whole new extensive system of complementarities or a new "fit". Mathematicians will say that in order to improve profitability through such a change, you will have to coordinate across the whole organization due to "non-convexities" created by complementarities or "fit" among all the different activities of the firm. Mathematicians tell me that a non-convex objective function cannot be optimized in time exponential. So does that mean that non-convexity is NP-complete. I don't know but it just emphasizes the need for high-octane turbo supercharged coordination among all the activities of a firm to search for an optimum solution. Exactly the reason why managers have to be reflective practitioners. However, a search for an optimum business strategy does not have to be a wild one. In fact, it possible to show that that you can limit your search to the adjacent domains, which provide improvements over the current optimum. You will still be able to achieve at least half the gains that may be possible from an unrestricted optimization of business strategy.

Coordinate like a chicken with head cut-off
Therefore, if you put your firm ahead of you, you are going to be running around--may I say like a chicken with head cut off in a positive sense--to ensure that all the activities across the organization are strongly coordinated for such a change to become a success. In fact, this was exactly what John Nash (remember The Beautiful Mind) proved. Every coordination game involving two or more players has at least one Nash equilibrium. Once Nash equilibrium is achieved, no unilateral action by a single member can increase the team's payoff. If you recall prisoner's dilemma, you will notice that it's impossible for a single member to unilaterally improve the team's payoff. The condition of co-existence of "Waterfall" and "Agile" methodologies may be no different than prisoner's dilemma. Rational decision-making ends up reducing payoff. This is exactly why big, hairy, audacious (BHAG) goals are considered more valuable, since such goals have the ability to drive a higher level coordination across the firm. Managers know this intuitively. There are complex mathematical theorems developed by Paul Milgrom that show that without coordination at the top, you won't go too far. To get real benefits, you will have to totally redesign the way you do business.

BHAG better than thousands of tiny little optimizations in functional areas
If managers are unable to coordinate their choices and while attempting to optimize within their functional areas they believe that the choices of other managers are fixed based on the past behavior of their colleagues, then they will positively and systematically under-respond to changes. John Nash proved that under such circumstances, if team members were individually allowed to search for improvements, no further improvement will be possible for the team as a whole unless changes were coordinated among the team members. This solves another puzzle for us. Several times I've been asked whether it is better for each manager to optimize within their functional areas instead of trying to do big stuff, since big stuff is frustrating and choices are painful. The answer is no. You will invariably end up suboptimizing your business strategy unless coordination occurs across all the functional areas. There are no short cuts to achieving fit.

Synergy, supermodularity and fit
Another mathematical concept that corresponds to "fit" is the concept of supermodularity. It was Paul Milgrom, who applied this concept to Economics and Michael Porter brought it to analyze business strategy. In a very rough manner of speaking, supermodularity is similar to 2+2 = 5 or synergy effects. Purists would like to hang me for saying that. What supermodularity means in Mathematics and Economics is that the sum of changes, when all components of a system are increased together will always be more than the sum of changes, if components are increased in smaller groups. Whole is more than the sum of its parts. Does it remind you of Kurt Lewin and Berlin School of Gestalt psychologists? Well, here we have another proof that if "fit" is extensive, then nothing will improve substantially unless changes are coordinated across all the functions. Are we talking about radical change again?

Therefore, "fit" is a concept that can be defined, analyzed and measured by looking at the complementarity of activities, supermodularity, coherent patterns of activities, theory of games analysis and returns to scale. But this measurement is not going to be a cakewalk. Allow me to use some circular logic to say that "fit" is important, since most of the firms value complementarity over similarity and "fit" over economies of scale.

Look for fit, don't cry over ROI
So what does this mean from a practical point of view. All measurements of ROI (Return on Investment) will be incomplete unless you can take the effect of "fit" into consideration. Fit is real but hard-to-measure. If the "fit" is going to be improved by the project, the ROI of strategic initiatives will be underestimated. On the other hand, if the strategic initiative won't enhance the "fit" or lead to friction and conflicts, then ROI will be an overestimate. Which proves that sometimes there may be good mathematical reasons for consensus-building within organizations. I'm not saying how this consensus building should occur. Such a consensus-building could be authoritarian or collegial. It doesn't matter how it is achieved as long as it exists. Anyway, that is a digression from our topic. My recommendation is that analysis of strategic initiatives should be more in terms of "fit" than in terms of ROI. In fact, ROI should be secondary to "fit". But as we have seen above, every "fit" comes with its own trade-offs. Alas, there are no free lunches!

A very contrived example for techies
As I had propositioned earlier, software development methodology must "fit" the programming language that is being used. For example, it would be foolish to use COBOL class of programming languages under an agile methodology. While programming languages get the job done or produce the functionality, there is plenty of evidence that shows that it is the software development methodology that ensures the quality of the output. How effectively business requirements are met is a direct function of effectiveness of a software development methodology. Therefore, programming creates part of the output and methodology generates part of the value of the output and then there is a subtle interaction between the two, like, yin and yang or whatever.

Here is a matrix (not really!) based on the theory of games. Assume that the best attainable output using aggregation of all available best practices is 10. The figure shows in top left cell that the output of COBOL class of programming languages in an agile environment is 6 and enhancements to the quality of the output as a result of plan-driven methodology is 6 too. When we use COBOL class of languages with agile methodology, the output of language declines to 5 but the contribution of methodology to the output declines substantially to a level of 4 due to "misfit". This is shown in top right cell. We notice a slightly improved productivity of object-oriented (Java type) and frameworks under a plan-driven methodology with the output of language at 7 and no improvement in the value created by the methodology, which is still at 6 under bottom left cell. Under agile methodology, the value created by language as well as methodology increases. This is shown in bottom right cell. It is easy to notice that Plan-driven methodology is dominant over Agile and object-oriented languages are dominant over COBOL-types. Under mixed environment, it is clear that Plan-driven will be a preferred strategy.

Now let's check out some mixed strategies. What happens when we use a 50/50 mix of COBOL and Java programming languages in an Agile environment. We get an average output from programming languages and methodology at (6, 5.5). This is worse that using COBOL under plan-driven. This is exactly what happens in many traditional IT shops, when "savvy" management introduces new languages and new methodology to achieve higher productivity, notices a decline and finds it hard to accept it. Similarly, let's check out 50/50 mix of COBOL and Java under Plan-driven. we get (6.5, 6), which is a slight improvement.

Now let's make a slight change to the strategy payoffs. In the game that I have shown below, I have slightly reduced the payoff of object-oriented languages in a plan-driven methodology environment. Similarly, I've reduced the payoff of plan-driven methodology in an object-oriented environment. Now we have set the stage that could lead to deep suspicion between the Engineering or Enterprise Architecture department that owns the technology for programming and the Program Management Office (PMO) that owns the methodology. Let's refer to the picture on our left for a review of strategies and "fit" from the point of view of cooperation between functional areas. The firm is using COBOL-type procedural languages for developing its product using plan-driven methodology. Analysis shows that productivity+quality will be raised by about 17% by moving to object-oriented framework technologies for product development using agile methodology. If the Engineering Department and the PMO are able to coordinate switching to a new programming technology and a new methodology, we won't have any problem. However, if PMO is worried that due to shortage of funding the Engineering Department won't be able to keep its words to switch to a new programming technology, then they will pay lip service to moving to a new methodology but won't take any action. The PMO will be afraid that the output of methodology will drop to a meager level 4, if the Engineering Department does not switch to a new programming technology. Similarly, the Engineering Department may be suspicious that due to lack of skills, the PMO will not be able to switch to a new agile methodology. The result of this suspicion will be that the Engineering Department will be highly reluctant to move to a new programming technology due to their fear of reducing their productivity. Now we have this paradoxical situation, where good intentions of functional departments to not allow their productivity to decline under any circumstance will hold them off from improving the firm's payoff. Does it sound like prisoner's dilemma?

As I mentioned earlier, this is a contrived and hypothetical example. But it does present a framework for analysis of "fit". Now you can change the values and run some tests to validate or invalidate your hypotheses. Drop me a comment if you like it. Have fun!!

Bring me a rock!

2010-03-27T00:06:00.001-07:00

There is a recurring story about "bring me a rock" that is deeply embedded in the collective consciousness of all failed and un-failed IT professionals. The story is about a boss asking an IT professional to bring him/her a rock and each time the IT professional delivered a rock, the boss said that that was not the rock that he or she had asked for. This back and forth goes on ad infinitum until the IT professional is fired due to his or her utter inability to deliver the right software product. The story ends with the IT professional blaming the boss for not accurately defining the specifications of the rock that was originally requested.

I have issues with this story. A product definition with detailed and proven specifications is an absolute requirement for a functional product. However, that does not absolve IT professionals from the responsibility of understanding the business issues and concerns and incorporating them in the product design. Often I come across IT professionals, who define tight boundaries between IT and business. Well, if IT is not business then IT better not be part of the business. If I could define my specifications accurately, then I'd rather outsource all my technology to vendors with larger pool of technology skills, better specialization and economies of scale. The only reason that IT continues to be part of several businesses is because of its deep understanding of business and business needs. Successful IT organizations are very good at analyzing business issues and designing solutions that directly deal with those business issues. They engage effectively and aggressively with business teams to solve operational and strategic business issues thus blurring the boundary between IT and business. If they can't do it, then it may be more cost-effective to outsource and close down the internal IT department. Not having requirements is a pretty bad excuse for not designing a product right. In the same vein explaining project delays on requirements gathering does not make much sense. The onus of creating business value is on IT.

Google’s Approach to Privacy Issues

2010-03-21T10:36:00.001-07:00

"If you have something that you don't want anyone to know, maybe you shouldn't be doing it in the first place."

— Google CEO Eric Schmidt

Do we have to make the need for privacy a filthy thing?

Eric Schmidt is one of the sharpest technology CEOs. He brings a calm and measured approach to managing the turbulence in technology industry. But Mr. Schmidt is not my pastor and I don't expect a moral sermon from him on my need for privacy and confidentiality. Recently, I was watching Maria Bartiromo interview Eric Schmidt on CNBC, when I heard Eric Schmidt make this comment after explaining Google's approach to privacy.

Let's do some thought experiments:

An employee is diagnosed with cancer and her search pattern reveals her identify, likely diagnosis and related concerns. Should her employer and colleagues know about it before she is ready to announce it?
One Mr. Eric does not want anyone to know about the church he attends. However, his search for directions reveals the church he attends. Should his search pattern related his church remain confidential as he desires?
A drug-addict decides to transform her life. Her search pattern reveals her identify and her addiction. Do we want this information to remain private to her?

There are some complex issues here:

Do people realize that when they do a Google-search, they are sharing their private information with a very large corporation?
Do people realize that Google mines this data and the pattern of their search not only reveals their identity but also their personal matters and concerns, which normally they would not share with anyone else?
Do people retain their right to the ownership of their private information after they have shared it with Google? US courts say no!
Do people realize that no search warrant to access their private information is required by a Government agency, if such information is obtained through a third-party like Google?

Eric Schmidt realizes that the strategic issues that Google is facing are intertwined with significant moral issues related to people's privacy. But do we have to conveniently make the need for privacy a filthy thing?

Ten Patterns of Failure

2010-02-12T19:55:00.000-08:00

Success must not depend on heroics and failure must not depend on lack of talent. But both these situations are recurring themes in many organizations, which shows that organizational learning is not automatic.

Organizational learning is deliberate, non-intuitive and requires a substantial and coordinated expenditure of effort throughout the organization. In IT organizations, there are several patterns of success and failure. In fact, some of the patterns of failure will often look like successes.

Failure Pattern #1: This pattern is quite common. A major problem is encountered and success is achieved through the heroics of a few people. Often this heroics involves working non-stop for long hours to get the job done.

Failure Pattern #2: Success is achieved by timely intervention of a couple of talented individuals. As the target date nears and the output does not look like what was expected, our talented troubleshooter, who is often working on something else, is called in to solve the problem. Mr. or Ms. Talented comes in and solves the problem. Management feels pleased that they identified the problem and took timely action to achieve success. The organization stays exactly where it was with zero learning.

Failure Pattern #3: A solution is found before the problem is understood. The solution is developed. When it does not fix the problem, more effort is made to fix the solution instead of defining the problem. Programmers work twice as hard in a trial and error manner.

Failure Pattern #4: This new technology is so exciting! A solution is purchased. It sits waiting for a suitable problem. A team is assigned to find out the problem that would be fixed by the solution.

Failure Pattern #5: A commitment is made with zero understanding of what is required to deliver.

Failure Pattern #6: This is a technology problem. Our business analysts don't understand technical design. Our computer programmers don't understand our business.

Failure Pattern #7: We are action-oriented. Let's get the job done. But the end state is never defined or a consensus about the end state is not established among the key stakeholders.

Failure Pattern #8: A solution and a system are proposed from the top. The rest of the pattern is all too common.

Failure Pattern #9: I like this technology vendor. We've good relationship. This approach becomes the fountainhead of several other patterns mentioned above.

Failure Pattern #10: Senior management says that we don't have resources. What this means is that we don't know what we are doing.

Google's Made in China Hack

2010-01-31T12:34:00.000-08:00

Recently, Google announced that their security was compromised by a "sophisticated" and "organized" cyber attack that originated in China. In addition, Google found that Gmail accounts of Chinese dissidents were accessed frequently by third parties and there was an attempt to access the contents of e-mail accounts of Tibet human rights activists as well. As a result of this, Google is now unwilling to be a partner of the Chinese government in self-censorship of their Chinese search engine Google.cn.

Well, the purpose of this blog is to raise some questions instead of trying to find answers. But if you have answers, please feel free to leave a comment. On the other hand, whatever the motivations of dramatis personae, viz., Google, Chinese government, US Government and yet unknown hackers, one thing that stands out in the clear is that Google's computers were hacked into and sensitive information was accessed. Therefore the information stored on Google's computers is not beyond compromise. Douglas Rushkoff advances an interesting hypothesis on this point of view.

I read about this story in the news and I noticed that the story had many gaps. Here are some of the gaps:

(A) Symantec corporation does not consider an attack using Trojan Hydraq and an e-mail attachment as a method of infection to be particularly "sophisticated".

(B) Google has been carefully avoiding directly blaming Chinese government for this incident, on the other hand Google wants to use this incident to start negotiations with the Chinese government for lowering or possible removal of search engine censorship. The cause and effect link between these two factors is rather tenuous without invoking the already compromised moral principles of free speech and "Don't be evil."

(C) Is it a belated realization on the part of Google that they cannot compete with Baidu in the Chinese market unless search engine censorship is substantially reduced or removed?

(D) Cyber spying is a growth industry. FBI reports indicate that attempted cyber attacks on the departments of defense and state have been rising. Gerald Posner's article on China's Secret Cyberterrorism examines this topic in more detail. I was heartened to know that Google did launch a counterattack to find out the source of the attack. But what was new about this issue, other than the fact that this was perhaps the first time that Google's computers were attacked and compromised?

Repression of dissidents and human rights activists in China has been going on since communists came to power more than half a century back. There has been little change in government-sponsored repression in China in spite of the economic progress of the last three decades. With as many as 470 executions per year, China continues to have the highest number of executions per year. In recent years, Chinese Communist Party (CCP) has brutally suppressed uprisings in Tiannenmen, Tibet and Xinjiang. In China, you are free to express any opinion as long as your opinion is in agreement with CCP. Recent removal of the blockbuster movie Avatar from the theaters in China was another example of this control. Chinese government has not shown particular sensitivity to international opinion in this regard.

Interestingly, during this spat Chinese government accused United States of information hegemony. Recently, Tom Mulvey, my colleague at ABPA, gifted a beautiful globe to me. Looking at the map of China I noticed that the map included more than 80,000 square miles of disputed territory as part of China. Taiwan had the same color as mainland China and Sakhalin was not mentioned at all. Of course, when I turned it upside down I noticed "Made in China" printed in a corner. Whose "information hegemony" it is?

If my reading of history is correct then restoration of natural rights is a political process, not a commercial activity. Therefore, Google's sudden reawakening of their moral commitment to free speech in China seems a little incongruous. Google is a respected and ethical business not unlike Microsoft, Oracle, Intel or IBM, who are rightfully guided by long-term economic interests and competitive advantage. Therefore, I'm afraid that Google's "holier than thou" approach to advancing of commercial interests and covering of their computer vulnerabilities with a righteous indignation will just create more political friction instead of achieving business goals.

A Bend in the River

2010-01-07T00:12:00.001-08:00

Only dead people have a past. Rest of us living have a future. I find it more worthwhile to talk about the future, which we can change, than the past. At least until we have figured out how to make a time machine. But as I'm about to reach a bend in the river towards the end of this month when I take the oath of citizenship of the country of my dreams, I want my readers to allow me to indulge myself by reminiscing about the journey of these past twenty years. My plan is to try not to choke when I take my oath of citizenship. I'm proud of earning my citizenship.

Rule #1: Language does not belong to anyone. If you know it, it is your language.
I must have been eleven or twelve years old when I told my dad that I did not want to learn English, since it belonged to British, who treated India as a colony. My dad said spontaneously that a language only belonged to one who knew it. If you learned it, it would be yours.

Rule #2: You can't get something without giving up something.
Twenty years back I had an excellent job in the Reserve Bank of India at a middle management position but I wanted to be somewhere else. I was married with a new-born and I was about to resign from my job to join a masters program in information systems at the Arizona State University. All my good friends and family thought that I was going nuts, nevertheless they all supported me. It was hard to give up a nice job and liquidate the household, it was harder to leave the family behind but the hardest part was when I sold-off my Yamaha motorcycle. That did hurt pretty deep at that time.

Rule #3: You can't plan for everything but if you follow your heart you will find someone to help you.
In my twenties I had thought that I had planned every aspect of my life pretty well. Almost like a Prufrock, I had measured out my life in coffee spoons ... I had achieved what I had set out to do. But very soon I realized that I was just not enjoying what I was doing and I was not ready to do what I was not enjoying for the rest of my life. So I landed at LAX with about a grand in my pocket, about the same in my bank and a scholarship for doing masters in Computer Information Systems from Arizona State University. Very quickly, I learned that that was close to being penniless and I had to find a job at Arizona State University in Tempe. Richard at the Disability Resources Center of ASU was kind enough to hire me as a Tutor. I worked for Richard for the entire duration, while I was studying at Arizona State University. When I was leaving, Richard and his assistant Phyllis gave me a very nice memento that said, "You have opened the doors that will never close ..." I keep that with me.

Rule #4: It is important to focus on your strengths but it is hard to know about your strengths unless others tell you.
I found a job as a Systems Architect in Los Angeles a couple of weeks before I had completed my masters. Professor Michael Goul agreed to have me give the final test from home in LA. I completed the final test in the night after coming from work but I was hallucinating through the test due to sleeplessness. Somehow I completed the test without messing up and got an A in Artificial Intelligence logic. Professor Goul called my paper a "tour de force of AI."

Rule #5: What you can do for others is more important than who you are.
My wife and son joined me in LA after almost a year and a half. My son was excited to see me but I quickly came to a realization that we did not have much of a relationship. Of course, I should have known that there was nothing like a dad-in-absentia. Whenever my wife stepped out for anything, he used to start running around screaming mom. One day my wife was in the bathroom, when our son woke up and started screaming for mom. My wife was quite irritated and she kept quiet. I tapped my son on the shoulder and both of us walked to the bathroom door, where I bent down and showed him how to peek through the slit at the bottom of the door to see mom's feet. He saw mom's feet, felt comforted and then looked happily at me. We had bonded.

Rule #6: Procrastination will kill you.
I joined UCLA Medical Center as a Database and Unix Systems Administrator but I had to complete my immigration paper work. I was like a kid in a candy store. Finally, I had all the technology that I wanted to play with. There were symmetric multiprocessors, mainframes, gateways, token ring and ethernet networks. Any technology that you could ask for, UCLA had it. I loved it and I must have been working at least 80 hours a week on an average. But I procrastinated on my immigration paper work and almost got thrown out of the country of my dreams!

Rule #7: Be thankful when you get what you ask for.
I was working long hours, when my daughter was born. It would be a gross understatement to say that I was excited about her. I was loving every moment of it but I was not willing to cut down on my work hours. One day we had several system outages and I had to work until late night on problem resolution. I came home exhausted and fell asleep. Shortly after I heard my daughter crying in her crib and woke up with frustration and anger. But the very next moment I was filled with guilt and shame when I realized that this was exactly what I had wanted in my life. That was one moment of epiphany for me.

Rule #8: You have to be fair.
I joined HNC Software, Inc. in Irvine. This is now called FICO, yes they do FICO scores. HNC merged with Fair Isaac Co (F. I. Co) and became FICO. This was an exciting time since I was leading the development of one of the largest data warehouses. Vince Bianco was the Chief Operations Officer. When I was promoted to the position of a Manager, he called me to his office and said that one of the most important things he thought was that a manager must be fair. You can hear a sentence a thousand times without it making an impact but there are certain occasions when someone says the same thing and it just stays with you forever. I still vividly remember Vince telling me that a manager must be fair!

Rule #9: Its not about money.
At the peak of Internet boom, I got a job offer from DoubleClick, which was about to go public. DoubleCick was giving me 10,000 stock options priced at a strike price of a penny each. I went to DoubleClick's Irvine office, met with people and joined Perot Systems instead. Somehow I felt that everyone at DoubleClick was working only for money. Within a month Doubleclick went public with stock price reaching over $100. But soon afterwards, there was a bust with several rounds of layoffs. On the other hand, I was having a ball working for Perot.

Rule #10: You just can't connect the dots beforehand but you can make a difference at every point.
After my dad, Peter Drucker made the most influence on my life. However, it was a pure coincidence that I was passing through Clarement when I remembered that that was where Peter was teaching. There are too many coincidences in life. I left a nice job at the Reserve Bank of India, joined Arizona State University, worked at UCLA, FICO, Perot, studied under Peter Drucker, joined Kaiser Permanente and then came to ABPA. There is no way in hell that I would have been able to connect all these dots twenty years back. Sometimes, things just happened because I was at the right place at the right time. The only constant through all this has been that I have tried my best to make a difference and I've tried to be persistent in my efforts.

Rule #11: Sometimes the best moments of life come wrapped in a piss-soaked newspaper.
When I was working for Perot Systems, I had to work for two and a half months from India. I love trips to India but this was the worst time. I did not want to do it, since I had little kids and it was hard for me to stay away from them. But reluctantly I went to India. While I missed my kids and wife, I had a great time with my parents, brother, sister, in-laws and their kids. Those moments became incredibly invaluable for me, when my dad passed away a few years later.

Rule #12: Don't believe anything until you see firm evidence.
My dad passed away when I needed him most. Sometimes I see him in my dreams. I still miss his hugs. When all the drugs had stopped working on my dad, then he was treated with Trisenox. There is a more about my dad's battle with cancer here. Regarding his treatment with Trisenox, I came to know after his death that off-label use of Trisenox for multiple myeloma was really an Internet hype created through unethical and illegal marketing efforts of Cell Therapeutics, Inc. (CTI). In 2008 a federal judge awarded whistleblower James Marchese $1.6 million for tipping off federal prosecutors to a scheme by CTI to illegally promote unapproved uses of Trisenox.

Rule #13: Do the right thing one at a time and this too shall pass.
When I came to this country, I was alone, I was short of money, I had no job, I did not know how I was going to complete my masters or find a decent place to live or what I was going to do after doing masters. Those were some highly stressful moments. Similarly, when I was about to be thrown out of this country for delaying the paper work, I was completely stressed out. This was my country, my choice, my dream. But I had brought it upon myself by procrastinating. There were times when I had to wait in line outside INS offices for five to six hours. There was a time, when my wife was unable to leave for India to see her sick brother due to delay in processing of her paperwork by INS and I was scared. The law is that if your green card is approved pending status adjustment and you leave the country without seeking advance parole from INS, then your green card is considered abandoned and you can't re-enter the country. There are so many scary what-if scenarios that you can only pray and hope that everything will be alright. So next time when you have to sit on the Magic Mountain roller coaster with your kids, relax, take a deep breadth and remember that if you do one right thing at a time, this too shall pass...

Challenges for Google

2009-12-03T23:07:00.000-08:00

In the last decade Google has been an amazing engine of innovation. Google made huge strides in the Internet search process, web applications, web tracking and cloud applications. The list is certainly long, if not endless. Its relentless innovation engine continues to move forward unimpeded with Android and visual search engine. On the business side, Google's Adwords model has been an excellent example of trust-based contracts. Though, I'm not yet sure if Gmail e-mail application is transformational or just incremental. Started by two students with classic financial help from venture capitalists, Google has been a quintessential American success story.

It is hard not to fall in love with such a success story. But successful organizations are living organisms and they have a life span. General Motors that used to be on the top of Fortune 500 list is fighting for its survival today. Microsoft, a Wall Street darling of 80's and early 90's now claims to be an underdog. In spite of hefty profits, Microsoft's growth is slacking off and its once famed innovation engine is beginning to show its weaknesses in terms of poor product designs, feature-clutter and risk avoidance. Generally, life span of a successful corporation is about 20 to 30 years. You can look at the Fortune 500 list of 20 years back and do your own analysis.

Google will be shortly reaching its middle age crisis somewhere between 2011 and 2016. How effective Google will be during the second-half of its life will depend upon how well it can manage to resolve that mid-life crisis? It is hard to be successful but it is harder to be successful without being arrogant. The problem with arrogance is that it puts a blinder around our eyes and creates a false sense of righteousness. This is exactly the case with Google. One example is Google's scant respect for copyrights. I think scanning of orphan and out-of-print books by Google was a very commendable idea. The execution betrayed lack of respect for intellectual property rights. Google thought that it would be able to get away until Authers' Guild and Association of American Publishers filed a lawsuit. Google tried to play smart and made a revenue sharing settlement with them without understanding that they did not represent all the unknown copyright owners of out-of-print books. Was it that hard? Was it fair use under the digital millennium copyright act? Was it fair use under the various International laws that protect intellectual property? Same thing Google is doing regarding news content. Though I'm no fan of Rupert Murdoch but I agree with him that news reporting is an expensive business and Internet firms have no right to copy that content for free.

It is very likely that Internet news content will be not be free any more and several of the content creation firms will block Google from searching their websites.

Google will thrive as long as Internet search is valuable. Internet search will be valuable as long as Internet content continues to grow in a haphazard and disorganized manner. Once Internet content is organized semantically using taxonomies, the value of pattern-matching search will decline precipitously. Work is already going on in the area of knowledge representation and organization. Is semantic web 15 to 20 years away? Will that signal the end of Google? We don't know that. Will another technological change similar in scope lead to Google's demise? Yes, it is very likely unless Google decides to take its blinders off.

Reflective Inaction: Management Style of J. Alfred Prufrock

2009-11-02T20:31:00.000-08:00

Can we digress into some of the extreme situations of inaction and action? Agreed, these will border on neurosis and I promise to hold my tongue firmly in my cheek. Would it be worthwhile? Don't know but I'm going to attempt to describe at least one dimension of lack of action. Shall we begin?
...
There will be time, there will be time
To prepare a face to meet the faces that you meet
There will be time to murder and create
And time for all the works and days of hands
That lift and drop a question on your plate;
Time for you and time for me,
And time yet for a hundred indecisions,
And for a hundred visions and revisions,
Before the taking of a toast and tea.
...
Do I dare
Disturb the universe?
In a minute there is time
For decision and revisions which a minute will reverse.
...
Should I, after tea and cakes and ices,
Have the strength to force the moment to its crisis?
...

Well, the common term for this inane intellectualization is "analysis paralysis". But there is not much real analysis going on here. Therefore, lets give it a name. What about "reflective inaction"? Why not "analysis paralysis"? Analysis is empirical. Analysis is driven by data and facts. Reflection is introverted. Analysis drives evaluation and recommends decision and actions that are aligned with business strategy and available resources. Analysis is focused on results and recognizes the law of diminishing returns. If analysis can't generate valued results, then it is reflective inaction. Equally disastrous for business organizations is compulsive action-orientation.

In the world of technology, we are regularly bewildered by the choices. You can put your critical SOA applications on a cloud, implement desktop virtualization, upgrade productivity applications, implement new backup technology, encrypt your e-mail, improve security or improve availability by creating more redundancy, blah, blah, blah ... However, not even the largest of the firms with big IT budget have the wherewithal to do everything. Kaiser Permanente could not build sufficient redundancy for HealthConnect after spending over $3.5 billion dollars! Is it a consequence of these choices and the confusion created by vendors that insidiously propels organizations into this cycle of reflective inaction? Could it be true that in the shifting sands of strategy, in a minute there is time for decisions and revisions, which a minute will reverse?

This problem cannot be cured by compulsive action-orientation. Compulsive action-orientation, most of the time, leads us to build solutions even before we have understood the problem.

IT has to aggressively focus on business results in a time box. The leaders of IT have to be business leaders with deep understanding of how their organization creates value for its clients, customers, investors and other key stakeholders.

So what does Mr. Prufrock do? Nothing. Nada. Zilch. Zero. J. Alfred Prufrock has trouble doing what he wants to do. He is deeply conflicted about everything. At some places it seems like an approach-avoidance conflict. He wants to propose but isn't sure how his proposal will be taken. This turns into an overwhelming question. Or may be not, perhaps it is not worthwhile at all. His rationalizations are far-fetched and never ending. He visualizes growing old without a resolution of his indecisiveness and his end comes while he is still hallucinating.

Is Your PowerPoint a MECE document?

2009-10-31T03:59:00.000-07:00

McKinsey & Company would like to claim the credit for coining the term MECE (pronounced as mee-see). However, this abbreviation of "Mutually Exclusive and Collectively Exhaustive" is almost as old as statistics. I recall this is how we used to define statistical events when I was studying mathematics as an undergraduate. You can find a lot more about mutually exclusive and collectively exhaustive events on Wikipedia.

Let us discuss how do we apply this "MECE" principle to the preparation of presentations and documents. I'm sure that you have heard about death by PowerPoint. This refers to the death of ideas that were killed because of a badly prepared presentation. Your ideas are important. There are three simple ways to avoid high mortality rate of ideas:

1. Each slide must be "mutually exclusive"
2. Presentation as a whole must be "collectively exhaustive"
3. Make your presentations less verbose, more pictorial

How does mutual exclusion apply to slides? It is important that thoughts presented on each slide are non-overlapping and please don't repeat yourself (DRY). A DRY presentation keeps the viewers interested. Overlapping slides represent confused thinking. If the thoughts that you plan to present have to be grouped under categories, make sure that the categories are non-overlapping and that each thought is grouped under one and only one category.

The second point refers to the importance of exhaustively dealing with all the possibilities and outcomes related to the topic of your presentation. Leave no stone unturned. One way of validating collectively exhaustive property is to look for all the inputs, outputs, processes and risks and analyze alternative scenarios. This will be some real hard work. Who said ideas are cheap!

Last point is unrelated to MECE but important to remember that a story is best told through pictures.

By the way, this is not a "collectively exhaustive" blog about improving your presentations. I was just discussing about "MECE". So you still need to follow other rules of a good presentation, for instance, understand your audience, present facts and use emotional appeal, follow the rules of writing a good story, et cetera.

Systems Don't have Costs, Strategies Have

2009-10-26T23:09:00.001-07:00

As a strategic IT consultant for some time, I've seen several cycles of system selection and implementation. Most of the organizations adopt a common sense approach to system selection. Invariably, system selection process is driven by the IT department. This common sense system selection process follows a standard route in IT departments. A process is defined and the requirements are collected by business analysts. These requirements provide a basis for creation of an RFP document. After receiving RFP responses, system features are reviewed, compared and a list of candidate systems is prepared. Next round features intense discussions with business teams to narrow down system selection to two systems. In the final round a financial analysis is carried out that compares total cost of ownership (TCO) of candidate systems and projects an estimated return on investment.

This common sense approach is just as accurate as the common sense perception that makes a full moon look closer and five time larger when it is on the horizon. It is a waste of time to calculate total cost of ownership (TCO) of systems. Systems don't have total cost of ownership, strategies have. Systems should be selected based on their "fit" with a given business strategy. This strategic fit means consistency within the system of activities so that there are no conflicts among activities that generate valued business results. Each activity supports and enhances other activities within this configuration of activities. The competitive advantage emerging from such an optimized system of activities is sustainable, since it is hard to copy an entire system of activities.

In such a scenario a chosen system is just a part of an overall strategy. The right way to evaluate each strategy is to do an economic value-added analysis (EVA) that includes a comprehensive analysis of changes in cost structure, growth and revenue opportunities. EVA take opportunity cost into consideration too. Based on this approach, one can prepare projected financial statements of the entire business under each strategy scenario and measure creation of shareholder value. This provides a holistic way of evaluating performance of different business strategies and their impact on business as a whole. System selection is just a by-product of strategy selection.

The Saga of AIG: Objectivism vs. Existentialism

2009-10-26T21:21:00.000-07:00

I just finished reading another headline news on NY Times web. This was titled "Ex-AIG Chief is Back, Luring Talent from Rescued Firm". Now I know as much about objectivism and existentialism as Mary Williams Walsh knows about me. OK, may be a little more but not much. Somehow New York Times continues to find a way of getting on my nerves. The One Trillion Dollar Stimulus bill crowd is back in action. This time lambasting Maurice Greenberg, ex-CEO of AIG, for having this incredible chutzpah to start another firm, C.V. Starr & Co., and trying to make that successful by competing against the government run AIG. Mary Williams Walsh is an expert in adding subtle innuendos in her articles without suffering the burden of having to provide any evidence.

In the beginning this "economic stimulus" and bailout crowd wanted the treasury to throw tons of US tax payers' money at insolvent institutions, like AIG, to save them from bankruptcy. Once bankruptcy was avoided with billions of tax payers dollars to pay off liabilities, this same stimulus crowd is working overtime to bankrupt AIG by capping executive salaries. Unfortunately, now US government owned AIG has to compete with Maurice Greenberg's C.V. Starr & Co. When did legitimate competition and existential "freedom of choice" turn into "siphoning off" of business?

Is it a surprise that now AIG's executive talent has a major incentive to join Maurice Greenberg's C.V. Starr & Co. with better salaries and working environment than government run AIG. Mary Williams Walsh was quite worried about legitimate bonuses to AIG executives. Now she is worried about executives leaving AIG and joining Maurice Greenberg. She would like government to put some restrictions on AIG executives so that they are unable to leave AIG even after their salaries and bonuses have been drastically reduced. Since this country is not eastern Europe or China, it is hard for the government to force AIG executives to work at lower salaries. Of course, she does not say it but after reading her language, which is riddled with loaded terms like "raiding", "poaching", "siphoning off" and "success at the expense of tax payers", one is hard pressed not to have the notion that she is questioning the legitimacy of capital markets and our incentives-based economic system.

Is existentialism a leftist philosophy? That should explain it. If existence is essentially meaningless and a pure coincidence, then rationality is irrational. In that case, I would rather stay with objectivism.

Personal Insult: Is it a distraction?

2009-10-18T12:06:00.000-07:00

Peter said (Here I go again!) that organizations were bodies in motion and politeness was the lubricant that kept the organizations working smoothly.

At one of my previous organizations, we had a meeting with the executives of another business unit to review a chargeback issue. There was a problem with the design of chargeback mechanism. The result was that IT did not have enough dollars to meet business needs. During the meeting, one of the IT executives got frustrated and said that if the issue was not resolved then he would have the appropriate chargeback amount directly deducted from the budget of the business unit. The debate got a little heated and there was an exchange of insults couched in satirical language. The resulting distraction delayed IT investment and business results by at least three to four months at huge loss to the organization.

Should a savvy executive allow a personal insult get in the way of organizational or professional goals?
...

Business Problem Solving Approach of IT

2009-10-09T14:04:00.000-07:00

Information Technology (IT) is generally considered to be a solution provider. The problem is that if IT puts too much focus on solutions it runs the risk of becoming a problem creator. Most of the time I notice more solutions in and out of IT than there are problems. Everyone one with an opinion has a solution. It does not matter if the problem is well understood or not.

I think if IT has to become a real solution provider, the focus must shift from finding solutions to understanding problems. A solution provider is a first and foremost a business problem solver. Therefore, first IT has to understand the problem. Now once you understand the problem, you may find out that the problem you have just understood may just be a symptom and not a root cause. Therefore, you will want to focus on solving the root cause instead of the initial problem. In some other cases, you may find out that solving the problem will not provide the desired results and there may be another related problem that will provide better business results. The key point to note is that once the problem is better understood, you may realize that you don't really want to solve that problem. Best solution may be no solution.

This requires a defined problem solving methodology. Though IT shops have the best and brightest people and some of them individually follow an excellent approach to problem-solving, organizationally, I've yet to come across an IT department that has built an effective problem solving approach. IT is business and IT must become an expert in business problem solving. From this point of view, it is okay to quickly arrive at an initial solution after a quick understanding of the problem. However, this initial solution should remain just that--an initial solution or an initial hypothesis. Once an intial hypothesis is defined, facts can be gathered to solve the problem. If initial hypothesis turns out to be invalid, an alternative hypothesis can be created and tested. This deductive method constitutes the core of problem-solving.

What I see most often is that a solution is found through a gut reaction before the problem is understood. This solution is communicated as the final solution. In the second iteration, facts are selectively searched to confirm the solution. If a selective search of facts does not confirm the solution, then facts can always be twisted to fit the solution with the help of IT consultants. Through psychology of escalation of commitment, good people bet their careers on getting those solutions implemented. After spending millions of dollars if a business is lucky, then from somewhere a sage emerges to point out that the king is naked and the project is finally abandoned. If the business is not lucky enough to have that sage, then the solution gets implemented and eventually dies out of existence due to lack of business results. Its no wonder that ROI on IT-driven business projects continues to be abysmally low.

Peter Drucker and Marvin Bower

2009-10-03T08:52:00.000-07:00

I learnt more from Peter Drucker during my years at Claremont than from anyone else except my father. Peter was my teacher, mentor and guide. At the age of 90 he used to speak non-stop for two to three hours and at that ripe age his memory was sharper than mine. In one of his lectures he mentioned reverently about Marvin Bower, who established the profession of management consulting. Peter and Marvin had worked closely. Peter had been a foremost management consultant and Marvin was the de facto founder and builder of McKinsey & Company. Peter had helped Marvin in setting up management practices at McKinsey.

Working with Marvin, Peter had noted that one of the key reasons of business failure was not wrong answers to right questions but right answers to wrong questions and Peter drilled that into us through myriad examples from his long career in management consulting. Problem formulation was more important than finding the right solution. Problem could only be formulated if there was an acute emphasis on collection of facts. Facts could never be collected accurately if information within a business was distorted by deference to hierarchy. Peter and Marvin had seen that frontline employees were scared to present the facts to their bosses, when those facts were in contradiction with what their bosses wanted to hear. This was one of the reasons Peter and Marvin encouraged flattening of the organizations, candor, informality and broad understanding of reality from multiple perspectives. Both of them put the interest of the client above their own personal interests and exhorted others to do the same. This required that the goals of a business could not be financial. Financial success was an outcome of the client success. They believed that business success and sustainability was based on organization's competence in regenerating leadership internally. Therefore, continuous investment in people was one of their core beliefs. Two of the firms most influenced by their thoughts, viz., McKinsey and GE are leadership factories today. Peter and Marvin understood that maintaining success was hard, since success created its own hubris and what caused success in the past might not be what would create success in future. Therefore, there was a need to develop an aversion to complacency within organization, which could be developed when there was openness and lack of defensiveness.

I listened to Peter for four years at Claremont Graduate University. His voice and the sentences that he uttered still ring in my years. In my own career I have seen validation of Peter's teachings umpteen times. These are the words that have helped me practice the discipline that Peter so diligently taught.

Papa's Battle with Cancer

2009-10-02T22:09:00.000-07:00

Papa passed away in 2005 in the ICU of SGPGI in Lucknow, India. My mom and sister were outside and my brother and I had gone to buy a medicine. Two days earlier I had landed in USA from India only to turn back and catch another flight back to India after getting a call from my sister. It took me a long time to come to terms with his death from multiple myeloma, a form of cancer. I learnt so much from him. When I was a kid, I told papa that I was not interested in learning English, since that was the language of former colonialists of India. Papa told me that a language did not belong to any nationality or race, it belonged to one who knew it. If you learn it, it will be yours. That irrefutable logic quickly sank in my twelve year old mind.

After his death, whenever I dreamt about him, it was a sad dream. In each one of my dreams I knew that he had cancer and he was not going to live for too long. I cried in my dreams. His cancer was detected in 1997. The harrowing news had totally devastated all of us. After that I had spent several days crying and researching about multiple myeloma, its diagnosis, causes and treatments. I discussed his case with the top cancer specialists at UCLA. I looked into bisphosponates like Pamidronate (Aredia) that had just been proven to reduce the incidence of fractures in myloma patients. I became a member of the Myeloma Foundation and tried to learn as much about it as I could. Aredia was not available in India then, therefore I got it shipped to India. Aredia and later zoledronate certainly helped papa. His treatment using melphalan was successful and around 1999, his cancer went into remission. I felt like we had won a major battle. In 2001, papa and mummy visited USA to live with us for three months. We went around lots of site seeing and we loved it from the depths of our hearts. I was happy like a child. This was one of the most memorable periods of my life. Papa was healthy and in good spirits.

Papa thought that his cancer was cured. Either he was in denial after going through some intense and deeply aggravating chemotherapy or he just did not know much about the disease. You can read all about painful side effects of chemotherapy but only those who have gone through it can really empathize. I knew that the monster was in remission but I had no courage to tell him that. But I was getting ready for the relapse. I had read that thalidomide was proving effective in the treatment of myeloma, Velcade had just been approved in USA by FDA and there was a lot of buzz on the Internet about the efficacy of Trisenox in the treatment of myeloma. Thalidomide was used in the sixties for treatment of morning sickness among pregnant women, which resulted in babies born with deformities of limbs. These babies were called Thalidomide Babies. After that the drug was banned all over the world. After tests had proven its effectiveness in myeloma, FDA approved it on a limited basis and Geraldine Ferraro was one of the first famous people to be treated with it.

A year after papa had returned to India, I came to know that he was not keeping well. He had pain in joints and intermittent fever. Those were all tell tale signs of a relapse. I was certain about the relapse but I lacked the courage to confront the denial or lack of understanding of my parents. I stand guilty of that. Eventually, my sister and I spoke and decided that enough was enough and papa had to go through a very painful bone marrow biopsy. Papa was reluctant but finally agreed. For cancer patients the choices are very hard. Cancer and its treatment, both are more than enough to make their remaining lives extremely miserable. If cancer doesn't kill you, then treatment will.

Papa's treatment started with thalidomide and dexamethasone. Dexa was really hard on him and when he mentioned this to his oncologist, she petulantly stopped dexa right away but continued with thalidomide. This was shocking since thalidomide's effectiveness without dexamethasone is limited. His treatment using thalidomide continued for about three months with no results. Whether his treatment started late or drug regimen was not correct or it was God's will, his blood test now showed that cancerous cells had moved from bone marrow into his blood stream. At this stage survival is a month or two at most. He lived for eight months after that and at one time we felt that he had a second remission. He was treated with Trisenox and then with Velcade. Velcade was a newly approved drug for myeloma and it was not available in India. I called everyone at Johnson and Johnson but they were not ready to start selling it in India. Finally, I bought it in USA and carried it to India with me. It was really too late by that time.

Regarding his treatment with Trisenox, after his death I came to know that that off-label use of Trisenox for multiple myeloma was really an Internet hype created through unethical and illegal marketing efforts of Cell Therapeutics, Inc. (CTI). In 2008 a federal judge awarded whistleblower James Marchese $1.6 million for tipping off federal prosecutors to a scheme by CTI to illegally promote unapproved uses of Trisenox.

I still feel that if I had convinced papa to go for treatment as soon as he had started complaining about joint pain and fever and put him straight on treatment using Velcade, the chances of his achieving a second remission would have been quite high. That guilt will perhaps stay with me for the rest of my life.

Just about two weeks before papa passed away he had an episode of shingles (herpes zoster) on his forehead. Shingles is common among multiple myeloma patients. Papa was in extreme pain. My sister had asked me to come fast to meet with him. I bought a ticket from LAX to Hongkong and boarded the flight. From Hongkong, I flew to Bangkok and from Bangkok to Bombay and from there to Lucknow. That took me more than 36 hours to reach home. It was late evening, when I got home. When papa saw me standing by his bed, he smiled at me and said that I was late, since he had been expecting me to reach in the morning. That was my last conversation with papa. My aunt told me that that was the first time she had seen him smile in several days.

Papa was in pain but he did not want to go to hospital. Against his will, we took him to hospital, where he breathed his last. I'm never going to meet him again but if I could do it all over again perhaps I'd have stayed with him at home and I'd have requested the doctor to put him on some strong pain killers. While I did everything to provide all the treatment options that were available at that time, I could not do much to improve the quality of his life towards the end. That pain will stay with me forever.

The last lesson that papa gave me through his battle with cancer was that discovery of truth was not enough. Truth has to be told, whether it is expedient or not. Ultimately, we have to face reality. Facts can never be covered for too long and must never be covered. Denial cannot withstand the storm of facts. Discovery of truth requires that you always ask for evidence even from those who are respected in their profession and scrutinize the evidence carefully to ensure that the results can be applied to a given situation. Finding a solution and then searching for evidence that supports the solution will positively lead you in the wrong direction. I owe my candor to papa. His lessons are deeply embedded in my personality. Today when I state facts, which may be inconvenient to me or my team or when I ask for empirical evidence, its not a job. Its a tribute to papa from deeply embedded intergenerational learning that has become part of my DNA.

Overinvestment in Information Technology

2009-09-26T18:54:00.000-07:00

One of the questions that is quite often asked during IT budget process is that what is the minimum "maintenance" level of capital expense on IT? There is no commonly accepted definition or vocabulary for "maintenance" level of IT capex. Generally, "maintenance" level of capex is the capex that will be needed to meet the minimum requirements of "business as usual." This includes replacement of discontinued IT assets, software enhancements to meet ongoing business needs, enhancements requested by customers and a certain level of capital to stay competitive in the market. Last item is hard to measure. "Maintenance" level capital does not include, for instance, release of new products, entry into new markets and new marketing campaigns for existing products.

There is a caveat though. This "maintenance" capex model does not work in high growth or emerging industries, where more than 90% of the capital plan is directed towards building up a strong position in the market.

I have seen several variations of this model used in the finance, health care and insurance industries. The capital requirements are variously labelled as "core" versus "growth", "maintenance" versus "growth", or "keep the lights on" versus "new business."

I do sense a problem with this method of capital planning. Invariably, this results in overinvestment in IT, which is a bad thing for any business. The reasons are not hard to discern:

Vendor-driven technology refresh cycles which result in lack of support and discontinuance of critical IT infrastructure every year. This pushes up the "core" capex.
Customer requested product enhancements for which customers are unwilling to pay, particularly, if one of the customers is a critical stakeholder.
Inability to accurately estimate the capital level required to "keep up with the Joneses". This is also called "arms race". This does not lead to new business or growth but you have to do it, since everyone else is doing it and if you don't do it, then you will lose business.
Government and regulatory changes
IT expense due to sudden or unexpected shifts in the market or industry structure due to changes in consumer tastest, industry consolidation, etc.
There is a wide spread belief that technology can solve critical business problems. This is the myth of silver bullet.

We know that the marginal efficiency of capital or IRR declines as investment level increases within IT. At certain point of time IRR goes below the cost of capital. This is the point at which the investment must stop but often does not and results in overinvestment that destroys value.

Backward Compatibility

2009-09-17T20:42:00.001-07:00

Is backward compatibility really necessary? This is again a question of choice and trade-offs. From a rational economic perspective, if the value that you expect to create by giving up backward compatibility is more than the value that you will have with backward compatibility, then go ahead and drop backward compatibility like a hot potato.

Now, I'm going to diverge a little and take a moment to talk about value. What is value? If a customer is willing to pay an extra dollar for a feature, then the feature has value. Therefore, value is in the mind of the customer and somewhat related to the concept of utility in economics.

Backward compatibility is a big deal. It would be a pain in the neck, if operating systems did not have backward compatibility. Testing and reconfiguration of hundreds of applications will kill you without backward compatibility at the OS level. If hardware did not have backward compatibility, then upgrade path would be strewn with problems. This is the reason most of the vendors follow a product life cycle approach, describe an upgrade path through various versions of a product and then finally sunset the product. What sunset means is that the next version of the product won't be backward compatible and you would have to go through the painful process of reconfiguration and testing. The key is that this pain should result in long-term value. This is what is promised when you go from Alpha architecture to Itanium architecture, from 32-bit to 64-bit, from Windows to Linux or Apple's Mac OS X. This is also called burning the bridge. You make a bold statement that you are not going back. You are going to start a new life. You are going to change all your applications and all the problems that came with it and configure new software with new business processes. This is very expensive. For a $50 million organization the cost could be $1 million, for a $500 million organization the cost won't be $10 million but more like $15 million and for a $5 billion organization the cost would be in the range of $250 million. The problem is that the expense increases with the size of the organization.

Why do we have this accelerated increase in expense as the size of organization grows? The problem is related to the cost of coordination, synchronization, business process optimization and testing. These are the diseconomies of scale. As you grow, you have to spend more. Clearly, our large organizations have many offsetting economies of scale, otherwise they will not be able to sustain themselves. In fact, this is not true in all the cases. I've seen several large organizations teetering on the brink of bankruptcy due to problems in upgrading of core systems.

From a purely software point of view, backward compatibility issues limit designers in pursuing the best course of action. So whether you should burn the bridges and burn the boat or not. It is as much a question related to philosophy as economics of risk and reward.

Challenges of Design

2009-08-23T12:09:00.000-07:00

There is only one true designer in the world today and that is Steve Jobs. I have never met him and missed him at the Las Vegas electronics show. It just gets too crowded and then he has so many idol-worshipping fans at these shows that it gets a little hard to get a commonsense perspective. But I've read his speeches as well as some books about him that are critical and no so critical. One of those books is iCon, an unauthorized biography. This book was actually initially rolled out at Apple stores. But as soon as Steve Jobs read that book, he had all the copies pulled out of Apple stores and thrown into dumpsters. I guess someone must have picked up one such hardbound copy, which I bought from Amazon.com for two dollars. Steve Jobs fretted for hours about each screw on iPod. Finally, he decided that iPod won't have a screw, since screws looked ugly. This meant that people won't be able to open the iPod and replace batteries. So be it. As a result programmers had to work another six-months to figure out how to conserve battery and make it last longer. Steve Jobs is all about form and flow. So does he give up on functions? Yes, he does. He tightly guards his hardware and software. He decides and limits functionality. He is a revolutionary, who sacrifices the scope of his inventions at the altar of form and flow.

Computer revolution was created not by Apple but by a mistake by IBM, when they decided to buy an operating system for their IBM-PC from Bill Gates for $50K without seeking full ownership and distribution rights on the operating system. This was such a small deal that IBM's lawyers decided to ignore it. As is well known this is what caused emergence of IBM clones using Microsoft operating system and revolutionized the industry.

Microsoft continues to have much wider acceptance. Apple continues to lag behind the functionality offered by PCs, whether using Microsoft OS or using Linux, partly due to cussedness of Steve Jobs. This cussedness comes as a package with his extraordinary strengths in design. His weakness only enhances his strengths and Steve does not give a damn to his weakness. Now the question is did Steve Jobs borrow for building what he is unwilling to share? I'm afraid that the answer again may be in affirmative. Steve's NeXT was based on Carnegie-Mellon's object-oriented Unix kernel. In fact, it is NeXT that powers Apple computers these days.

Most of these issues are well known in the industry but Steve Jobs is still the king of design. The likes of Sony, Ford and Toyota with their deep pockets continue to come out with ugly electronics and cars. Clearly, money doesn't a designer make.

Who started this race for the design of the ugliest car? Was it Pontiac Aztek? Toyota joined it with Prius and FJ Cruiser. Ford did not want to be left behind and they decided to release Flex. Why should Nissan be left behind in this race for ugly cars? So they released Cube. All of them have their own excuses. Toyota wanted to make a fuel-efficient car, Ford wanted to have a specious retro vehicle for families and Nissan wanted to create more space for less money.

Here are some stock pictures of these cars. Compare these to the design of iPod and think about the trade-offs that the designers refused to make. Car industry needs a Steve Jobs.

Chief Information Officer (CIO) sans Chief Utilities Officer

2009-08-01T09:54:00.000-07:00

A couple of weeks back I had joined a discussion with a few senior business strategy consultants. Our discussion veered in the direction of the role of CIO. I got a sense that several strategy consultants still think that the role of the CIO is to manage thousands of laptops and desktops spread across the enterprise. Nothing could be farther from truth.

If CIO's job were to be managing desktops, enterprises would have to hire a Chief Power Supply Officer and possibly a Chief Water Supply Officer too. Well, electricity and water are as ubiquitous across the modern enterprises as desktops.

It is surprising that even the best and brightest of strategy consultants from top firms think of a CIO as a Chief Utilities Officer. Agreed, that to a certain extent the fault lies with the CIOs that they have not been able to guarantee business applications availability, which will be at par with the availability of utilities. Why? The reasons are not far to seek. Many CIOs are so gullible that they are taken in by the hype created by technology vendors that technology renewal cycles of less than a year will give them "competitive advantage" or "reduce costs" and bring in operational efficiencies. Investment in people and processes lags investment in technology. Each technology vendor spends countless hours preparing models that show that their newest versions of technology will either require lower level of skills or lower number of people. More time is spent by the sales team on preparing these models and other marketing collateral than on fixing the technology bugs, which can always be fixed in the next technology refresh cycle. Strategy consultants and CIOs are impressed by these quantitative models and a new cycle of destabilization begins.

Businesses need CIOs not Chief Utilities Officers. If tens of thousands of desktops or laptops have to be managed, there are several desktop and laptop vendors to choose from. Dell, IBM, HP are just some of the big ones. They provide IT utility services. Similarly, same vendors or a different set of vendora can provide IT utility infrastructure services. In addition, there are co-location services, if you don't want to have a 100% outsourcing of data centers.

In addition, I believe there is some confusion about scalability. Let me use the same analogy. No one talks about how electricity supply will be scaled for millions of users. The issues of scalability of IT services has already been resolved in a proven manner. Though, rarely anyone stops CIOs from reinventing the wheel. No doubt that scalability is the most important part of the services but establishment of scalability of technology from a purely "technology" point of view is at least one level below the level of the CIO. Therefore, when strategy consultants say that issue of management of thousands of desktops is one of scalability, they are confusing business scalability with technology scalability.

In fact, my strategy consultant friends are going to be confused that now CIOs are going to compete with them. But that is correct, the right role of CIO is to coordinate aggressively with business partners to design and execute business strategy, establish a quantitative culture of facts-driven decision making by providing high-quality data and metrics for strategic decisions and make sure that the investment in people and processes does not lag behind investments in technology.

Value Acceleration

2009-04-15T22:43:00.000-07:00

About two years back I noticed in a LinkedIn Update that Bob Walton, who was a Sr. Vice President at Kaiser Permanente, had joined Qualcomm. Bob Walton is now Sr. Vice President of Enterprise Services. When I looked at Bob's profile, I noticed that he was following a modified "Private Equity Value Acceleration" model developed by Bain & Company. Bob's profile on LinkedIn contained a link to Bain & Company website. I was intrigued. I followed the link to Bain & Company website and reviewed the presentation. By the way, I checked Bain & Company website recently and I was unable to find that multimedia presentation. I loved the presentation for its sheer simplicity. The presentation outlined in as few words as possible that the only way to create value was to follow a disciplined approach to management. Since then Paul Rogers, who had worked on developing the Value Acceleration model, has written an article in Harvard Business Review as well as a book on "Value Acceleration: Lessons from Private-Equity Masters" in cooperation with Tom Holland, and Dan Haas. Bain and Compnay have an excellent summary of this article available on their website.

I'm going to briefly mention some of the key points of Value Acceleration approach. First of all value acceleration requires defining a simple and short investment thesis to increase the value of the firm in three to five years. Investment thesis emphasizes a limited number of key success factors. After this private equity investors define their blueprint for action. It is said that what you can't measure, you can't manage. This has resulted in creation of too many metrics at the cost of focus. Private equity firms are not distracted by a large number of metrics. They focus on a few limited measurements. They hire managers for their attitude. The managers who behave as owners-investors and not as administrators or employers. Private equity firms make their balance sheet work for them by identification of firm's assets and redeployment of those assets in such a way that overall return is maximized. They eliminate unproductive capital without being sentimental about it.

I think one of the hardest equations to learn is Profit = Revenue - Cost. There are just three ways to increase profit. Either you reduce the cost, or you increase the revenue, or achieve a combination of reduction in cost and increase in profit. That's it. There is no other way to make a profit. Cost reduction is generally easier to achieve than revenue enhancement. I have noticed that a large number of firms regularly focus on cost reduction. But cost reduction does not increase value of the firm. While cost control and reduction are necessary conditions for creation of value, it is growth that creates real value for the investors. Therefore, General Partners of private-equity focus on creation of growth. However, private-equity firms are not stickler for a particular kind of management dogma. They do whatever is necessary to create value. In case of certain distressed firms, drastic and unsentimental cost reduction may be the only remedy. Private-equity firms do not hesitate to take the necessary steps quickly.

Eventually hardcore management discipline, intense focus, effective deployment of capital and effective cultivation of growth opportunities allow private-equity firms to create high rates of return. Thank you, Bob!

Achieving Strategic Fit Between Business Strategy and Technology Policy

2009-04-13T23:55:00.001-07:00

One key issue that concerns many Chief Information Officers is validation of a fit between their technology strategy and firm's business strategy. CIOs follow a number of different approaches for validation of this fit. They hire management consultants to review technology policies and business strategy from a conceptual-logical perspective and highlight inconsistencies, if any. They spend days going through joint internal reviews of the fit between their technology policy and business strategy. If no inconsistencies are discovered, then the fit between technology policy and business strategy stands validated. This is often a difficult consensus building exercise, since there could be major differences between firm's articulated business strategy, executive intent and business strategy that is implemented. As a result conflicts and inconsistencies in fit are more of a rule than exception. Finally, a general agreement does not mean validation of a fit. Obviously, there has been some disappointment with these approaches and CIOs continue to search for a more objective analysis of fit between technology policies and business strategy. Some of the CIOs work closely with their financial experts to build financial models of technology spend and performance of the firm. But this approach is also far from complete.

This is certainly an interesting topic to dig into. But before we go deeper, let us briefly examine the concept of fit. Michael Porter, one of my favorite authors, mentions that fit has three different components: consistency, reinforcement and optimization of effort. Consistency among policies is certainly one of the oldest concepts of strategy since the days of Alexander, son of Philip of Macedonia. Inconsistency among policies whether at the conceptual level or implementation level results in incoherent communication of strategy and wasted resources. Secondly, a strong fit means that activities in one area of the strategy will reinforce and strengthen activities in another area of strategy. Here it is important to remember that presence or absence of economies of scale, while preferable, is not necessary for fit. Strategic fit can exist with or without economies of scale. I think it is the positive feedback effect among activities that leads to a strategic fit. Positive feedback effect means that learning and doing of one activity facilitates learning and doing of another activity and this positive feedback effect would also apply to groups of tightly interlinked system of activities. Complementarity among activities, which means that doing of one thing increases returns from doing of another, without the assumption of returns to scale, is an important source of strategic fit. Finally, certain strategic choices could lead to optimization of efforts. For instance, a good product design can eliminate the need for customer service and product choices could lead to optimization of inventory turnover and achievement of a strategic fit.

There is certainly a dearth of empirical studies on fit between generic business strategies and generic technology strategies. If you come across such a study, I'd certainly appreciate if you could please e-mail the reference to me. The three pure generic business strategies are differentiation, cost leadership and focus. There are firms that are focused differentiators and focused cost leaders. I haven't heard about focused focusers. That must be a real tiny niche! Generic technology policies try to create value for the firm through development/innovation of new products and services, for instance 24x7 web-based banking or reduce the cost of operations through process automation. A firm could choose to be technologically aggressive or not while following these two generic technology policies. Recently, I came across an excellent paper written by Zahra and Covin in 1993 in Strategic Management Journal. This paper is one of the few papers that empirically examine multivariate relationship between business strategy, technology policy and the performance of the firm.

Zahra and Covin examined four business strategy dimensions, viz., commodity-specialty, marketing intensity, cost leadership, breadth of product line and three technology strategy dimensions, viz., new product innovation, automation or process innovation and aggressive technology posture. Their results provided clear evidence that business strategy and technology strategy were distinct constructs with wide variation across firms. They also found that high-performance firms had made a coherent set of technological choices consistent with the strategy of the firm. Their results provided empirical support for the intuitively positive correlation between cost leadership and process automation. They also found that it was better for undifferentiated firms to focus their technology spend on process innovation rather than product innovation. On the other hand specialty firms' investments in new product innovation combined with an aggressive technology posture and high-intensity marketing paid off handsomely in terms of high returns on sales.

In order to test how business strategy moderated the impact of technology policy on the performance of the firm in terms of return on sales, Zahra and Covin created five distinct business strategy clusters. I'm describing these business strategy clusters in the table 1 below. Table 2 shows correlation between business strategy clusters and different technology strategy choices.

Table 1: Clusters of firms based on business strategy and their characteristics

Firm Cluster based on business strategy	Description of the cluster
High profile, specialty product firms	Specialty products	High intensity marketing	Cost leadership a strategic thrust	Broad product line
Prudently aggressive, medium product line breadth firms	Products typically more specialty-like than commodity-like	High intensity marketing	Cost leadership a strategic thrust	Moderately broad product line
Low profile, narrowly focused firms	Commodity-like products	Low intensity marketing	Modest emphasis on cost leadership	Narrow product line
Middle-of-the-road firms	Moderately more specialty-like than commodity-like products	Moderate marketing & advertising	Average emphasis on cost leadership	Moderately broad product line
Undifferentiated, low marketing intensity firms	Commodity-like products	Low intensity marketing	Not concerned with cost leadership	Moderately broad product line

Table 2: Shows correlation between business strategy cluster, technology strategy and its impact on firm's performance in terms of return on sales

		Technology strategy
	Business strategy clusters ordered from highest performing in terms of returns on sale (ROS) at the top to lowest performing at the bottom	Aggressive technology posture	Automation and process innovation	New product development
Business strategy cluster	High profile, specialty product firm	+	+	+
	Prudently aggressive, medium product line breadth firm	+	-	+
	Low profile, narrowly focused firm	+	+	+
	Middle-of-the-road firm	0	+	0
	Undifferentiated, low marketing intensity firm	-	+	0

Note: + indicates a positive correlation, - indicates a negative correlation and 0 indicates no correlation.

Table 3: Technology choices that created high-performance for firms in five distinct business strategy clusters

Business Strategy clusters	Technology strategy
High profile, specialty product firm	Aggressive technology posture Automation and process innovation New product development
Low profile, narrowly focused firm
Prudently aggressive, medium product line breadth firm	Aggressive technology posture New product development Deemphasize automation and process innovation
Middle-of-the-road firm	Automation and process innovation
Undifferentiated, low marketing intensity firm	Automation and process innovation

These results indicate that high profile, specialty firms and low profile, narrowly focused firms benefited from following aggressive technology posture, automation/process innovation and new product innovation. Prudently aggressive, medium product line bread firms benefited from deemphasizing automation and process innovation. Clearly, automation of processes across a wide range of products did not pay off for such firms. Such automation is hard to achieve and tends to be expensive. It is likely that return on sales declined for such firms due to overinvestment in technology.

How to Auction a $1 Bill?

2009-03-22T19:10:00.000-07:00

In my previous blog on sunk costs, I used the example of auctioning a $1 bill. I received some e-mails on this topic requesting clarification. Here is a quick clarification and analysis.

The goal is to auction a $1 bill to the highest bidder. Bidding can start in increments of 10 cents with an initial price of 10 cents. A $1 bill at 10 cents is quite a lucrative deal. However, this is an auction with a slight twist, which is announced at the start of the game. The twist is that the second highest bidder too will have to pay the amount of his or her second highest bid to the auctioneer, when the bidding ends. Of course, the second highest bidder does not win the $1 bill but he or she still has to pay up.

Generally, several people join the bid and the bid pretty quickly moves up to 90 cents. This is when most the people drop out of the auction and only the highest and the second highest bidders are left in the game. At this point the second highest bidder, lets call her Ashley, realizes that she will end up losing her 80 cents unless she bids at $1, which she thinks is still a better alternative than losing 80 cents. This is an easy decision for Ashley and she raises her bid to $1. Now the other party, lets call him Hank, follows the same logic as Ashley and realizes that for him it is still better to raise his bid to $1.10 instead of losing 90 cents. Again an easy decision for Hank. Now Ashley is about to lose her $1 but if she wins the next bid at $1.20, her loss will be only 20 cents. Ashley raises her bid to $1.20. Please note that competitiveness is playing no part here. These two individuals are trying to be as rational as possible to minimize their total loss. When the bid reaches $2 for a $1 bill, Hank, who is now the second highest bidder reasons that if he bids $2.10, his loss will be only $1.10 otherwise he will be losing $1.90. This can continue for a long time until one of them realizes ridiculousness of the situation.

What is the problem here? The problem is that Ashley and Hank are calculating their loss based on sunk costs. However, loss or gain should be calculated on future costs or gains only. Once we exclude sunk costs or costs incurred in the past, the quality of decision improves substantially. When the bid amount reaches $1, no one will be willing to bid on it, since sunk costs are no longer a factor in decision making. Therefore, Ashley or Hank will just pay up 90 cents to exit the game. In fact, the people who think through and realize that this game is based on escalation of commitment won't play the game. Another solution to this game is that if the first person bids $1 on a $1 bill, there won't be any second highest bidder and the game will end.

In business such situations are quite common. For example, a project that never seems to end. Past investments or past efforts in such cases should be given no consideration, when a decision about future has to be made. Analysis should be based on incremental costs and gains.

Accounting for $105 Billion of US Taxpayers’ Dollars to AIG

2009-03-22T18:38:00.001-07:00

Table 1: Shows where US taxpayers' money went

	Payments made to Parties Overseas and within USA	Amount Paid in Billons of US Dollars
	Payments to Overseas Parties	$57.8
	Payments to Parties in USA	$38.2
	Unknown	$9.4
	Grand Total	$105.4

Table 2: Shows major expense categories of US taxpayers' bailout funds to AIG

	Key Payment Categories	Amount Paid in Billons of US Dollars
	Collateral Obligations	$22.4
	Maiden Lane III (owned by Federal Reserve to buy back CDOs)	$29.7
	To Municipalities, etc. for GIA	$9.5
	Securities Lending	$43.8
	Grand Total	$105.4

Table 3: Shows details of how AIG used $105 billion dollars of US taxpayers' money? We are still awaiting accounting for $68 billion dollars.

	Details of Payments by AIG	Amount Paid in Billons of US Dollars
	Payments to Overseas Parties	$57.8
	Societe Generale	$11.9
	Deutsche Bank	$11.8
	Barclays	$8.5
	UBS	$5.0
	BNP Paribas	$4.9
	HSBC	$3.3
	Calyon	$2.3
	Dresdner Kleinwort	$2.2
	ING	$1.5
	Bank of Montreal	$1.1
	Deutsche Zentral-Genossenschaftsbank	$1.0
	Rabobank	$0.8
	DZ Bank	$0.7
	The Royal Bank of Scotland	$0.5
	KFW	$0.5
	Credit Suisse	$0.4
	Dresdner Bank AG	$0.4
	Banco Santander	$0.3
	HSBC Bank	$0.2
	Danske	$0.2
	Royal Bank of Scotland	$0.2
	Landesbank Baden-Wuerttemberg	$0.1
	Payments to Parties in USA	$38.2
	Goldman Sachs	$12.9
	Merrill Lynch	$6.8
	Bank of America	$5.2
	Citigroup	$2.3
	Wachovia	$1.5
	Morgan Stanley	$1.2
	State of Virginia	$1.0
	State of California	$1.0
	State of Hawaii	$0.8
	AIG International Inc.	$0.6
	State of Colorado	$0.4
	JPMorgan	$0.4
	State of Ohio	$0.4
	State of Georgia	$0.4
	State of Oregon	$0.3
	State of Kentucky	$0.3
	State of Illinois	$0.3
	State of Massachusetts	$0.3
	Citadel	$0.2
	State of Pennsylvania	$0.2
	Reconstruction Finance Corp	$0.2
	State of Washington	$0.2
	Paloma Securities	$0.2
	State of New Jersey	$0.2
	State of Mississippi	$0.2
	State of New York	$0.2
	State of Arizona	$0.1
	State of Rhode Island	$0.1
	State of Delaware	$0.1
	State of Texas	$0.1
	State of Florida	$0.1
	Unknown	$9.4
	Other Collateral Postings	$4.1
	Other & Foreign	$2.8
	Other payments to AIGFP under Shortfall Agreement	$2.5
	Grand Total	$105.4

References:

http://www.aig.com/aigweb/internet/en/files/CounterpartyAttachments031809_tcm385-155645.pdf

http://www.aig.com/aigweb/internet/en/files/Counterparties150309RELonly_tcm385-155648.pdf

Overseas Investments by AIG Mentioned in Lawsuit against IRS

2009-03-21T22:28:00.001-07:00

Table 1: Showing overseas firms owned directly or indirectly by AIG Financial Products Division, place of incorporation and investment made

Overseas Firm owned directly or indirectly by AIG Financial Products	Place of Incorporation	Amount (in millions of US dollars) invested directly or indirectly by AIG Financial Products Division
Lumagrove Finance Company Limited	Cayman Islands	$479
Palmgrove Finance Company	Cayman Islands	$229
Maitengrove Finance Corporation	Cayman Islands	$257
AIG-FP (NZ) No 1 Limited	New Zealand	$440
AIG-FP (NZ) No 2 Limited	New Zealand	#1 Amalgamated with #2
Financiere Laperouse SCA	France	$1,000
Financiere Vespucci SCA	France	$265
Foppingadreef Investments (No. 2) NV	Netherlands	$1,000
Total		$3,670

Table 2: Showing overseas firms owned directly or indirectly by AIG Financial Products Division, borrowing made against shares and the lender

Overseas Firm owned directly or indirectly by AIG Financial Products	Borrowings in millions of US dollars against shares	Lender
Lumagrove Finance Company Limited	$295	from Bank of Ireland
Palmgrove Finance Company	$148	Irish Permanent PLC
Maitengrove Finance Corporation	$160	from Bank of Ireland
AIG-FP (NZ) No 1 Limited	$268	from Bank of New Zealand
AIG-FP (NZ) No 2 Limited
Financiere Laperouse SCA	$800	Caisse Nationale de Credit Agricole
Financiere Vespucci SCA	$100	Banca Commerciale Italiana SpA
Foppingadreef Investments (No. 2) NV
Total	$1,771

Table 3: Showing overseas firm owned directly or indirectly by AIG Financial Products Division, earnings share received directly or indirectly by AIG-FP and taxes paid overseas

Overseas Firm owned directly or indirectly by AIG Financial Products	Overseas earnings share received directly or indirectly by AIG-FP	Overseas Taxes
Lumagrove Finance Company Limited	$7	$4
Palmgrove Finance Company	$2	$1
Maitengrove Finance Corporation	$8	$5
AIG-FP (NZ) No 1 Limited
AIG-FP (NZ) No 2 Limited	$29	$14
Financiere Laperouse SCA	$25	$18
Financiere Vespucci SCA	$9	$7
Foppingadreef Investments (No. 2) NV	$5	$13
Total	$85	$62

Resource Allocation and Project Governance

2009-03-16T22:15:00.000-07:00

I guess we are going to need some kind of resource allocation process unless we are living in Neverland, where time is unlimited. It is a complicated management challenge. Particularly when senior executive leadership starts reinvigorating and revitalizing organization, they are faced with a growing number of ideas, projects and investment opportunities clamoring for their attention. Each new idea seems to be more promising than the last one. But any coach will tell you that if you want to compete effectively, you need to be able to focus on those opportunities and those core strengths where you can do better than your competitors not by 10%, 15% or even 25% but by an order of magnitude.

For NBA players height is an advantage and if you are not tall, you will have to work twice as hard to attain the same level as taller players or you will need some other extraordinary compensating quality, for example, lightening speed and accuracy. Similarly, football is a game that rewards speed and strength and sometimes speed over strength. Therefore, we get a three step resource allocation process. First, identify your strengths, then find the opportunities that match your strengths and finally build a single minded focus on selected opportunities to the total exclusion of everything else. When you focus on a few things, it is likely that you will make errors and those errors will be glaring. Eureka! Making errors, big visible, glaring errors is wonderful, when you are pushing your limits and exploring your boundaries. I hate small, tiny errors. It is hard to recognize them and easy to ignore them. Tiny errors can accumulate over a period of time and then collectively put you in a deep hole, without you ever realizing that you have been screwing up. This is called variously as commitment by default, boiling frog syndrome or slipper slope argument. Big errors show all over. You can't ignore them. They force you to take a lesson.

Jack Welch had decided that GE would stay only in those markets where it would be able to develop and sustain a market dominating number one or two position. As a result of this strategy, GE sold off divisions, which were unlikely to have dominant positions in their markets and used those resources to position itself better in markets, where it was able to create and sustain a dominant position.

Markets reward growth more than profitability. But more and more companies are realizing that they can't be everything to everyone in their quest to find growth opportunities. They are understanding the importance of positioning for building a long-term sustainable competitive advantage. So how are they allocating resources. This is a multi-level process with several variations. Some firms have been prescribed tough resource allocation directives by external parties like banks and other lending entities documented in bank covenants and lending agreements. Often these directives leave little leeway for discretion. Other firms are following annual planning cycles for divisions. Earnings and growth targets are established by the corporate at the division level. After that each division prepares minimum of an operating and a capital budget and corresponding business plan to meet those targets. These are subject to changes and revisions as the year progresses. Capital budgeting and allocation of resources among divisions and within divisions is often guided by relationships among senior executives and how they leverage that relationship to achieve their corporate and divisional goals.

There are major differences among firms' effectiveness and efficiency in converting those resources to desirable results. Some firms are able to achieve more from those inputs. These firms are able to offer better products and services to their customers at a lower or comparable price. Project failure rate among such firms is lower. They are better able to estimate their capacity to do projects and underestimation of project size, a hallmark of maturing organizations, does not happen that often. Having a mature project management process is a critical and necessary part of organizations' capability to manage its resources effectively and efficiently. But project management methodology in and of by itself is not enough to guarantee a high success rate of corporate projects. From senior management's point of view, project governance is a critical part of the overall process that can track execution of a strategy. Governance ensures alignment between strategy and action. I'm in agreement that actions at the shop floor as well as operating level decisions can have a major impact on strategy. Therefore, it is not always that projects have to be aligned with the strategy. Sometimes strategy may have to be aligned with decision made at day-to-day operating level. The story of how Intel transformed itself from a memory chip producer to a microprocessor designer and manufacturer is often cited as an example of operating decisions transforming the strategy of a firm.

To summarize this discussion, I think that strategy should be based on firm's core strengths and resource allocation process should support that strategy by focusing on a few selected opportunities. A strong project governance process ensures that the resource allocation follows the intended strategy and that the gap between realized and intended strategy is not dysfunctional. Finally, project management process ensure that firm has a strong execution capability to create the desired results from allocated resources.

What are Sunk Costs?

2009-03-13T06:20:00.000-07:00

There was a rich knight in the court of an agreeable king. One day the king got mad at the knight. Since the king had known the knight for a long time, he described three punishments to the knight and allowed him to choose one. The three punishments were caning, eating a gallon of farm fresh manure or expulsion from the kingdom. The knight accepted caning but half-way through caning realized that he would possibly not survive the full course of caning. Therefore, he begged the king to allow him to choose another punishment. The kind king agreed and the knight asked for a gallon of manure. After consuming half a gallon of manure, the knight felt dizzy with nausea and knew that he would certainly die, if he were to eat the whole gallon. Therefore, he begged the king to expel him from the kingdom. Our kind and immensely agreeable His Majesty agreed again. He then expelled the knight from the kingdom, asked IRS to attach his property to the government treasury and lived happily ever after.

Many people tell me that the knight was an idiot. If he had known his limitations, he could have chosen to leave the kingdom in the first place without suffering the ignominy of caning or eating the humble cow pie. I disagree since this conclusion is based on hindsight, while life choices have to made with foresight. I think that the knight was a bright smart cookie, who was willing to take risks and explore his limitations. Best of all, he was not afraid to take a loss and get out at the right time. By doing this he avoided the worst case scenario, which could have been the loss of his rear-end or death. Half way through caning, he accepted caning as his sunk cost, realized that enough was enough, took the loss and got out of the market. His next venture was equally disastrous but he knew when enough was enough and got out in time.

Most of us have trouble realizing when enough is enough and continue to throw good money after bad until we are overwhelmed by the worst case scenario. We keep on pouring money into projects several months after the return on investment has turned negative. Often the only rationale is that we have already invested several millions in this project, why not a few hundred thousand more to finish it. When you come across this logic, try to extend it ad infinitum and you will quickly realize the futility of such logic.

At several parties I have auctioned a one dollar bill for six to eight dollars before people realized that they were really being stupid. I begin auctioning a one dollar bill at the starting bid of 10 cents with a condition that I'd also seize the bid amount from the second-highest bidder. For instance, when the highest bid reaches 70 cents, the second-highest bidder realizes that he would lose his 60 cents, unless he raised his bid. Eventually, the bid for a one dollar bill reaches $1 and the second-highest bidder at 90 cents reasons that his loss would be 90 cents if he did not bid. On the other hand, if he won the bid at $1.10, he would only lose 10 cents. This reasoning continues with disastrous results for the bidders and usually they end up paying several dollars to me for a one dollar bill. Human behavior is not designed to accept sunk cost. Humans are inveterate loss-avoiders and have deep trouble accepting the notion of sunk cost.

I have another way of looking at the sunk costs using the notion of time machine. I say that I wouldn't worry about the past until I got a time machine that would allow me to go back in the past and fix things. Until that time, we can only change the future. Therefore, let's work on changing the future.

Don't Cover Your Ass

2009-03-12T20:53:00.000-07:00

Good to see you again!

I'm sure you have known people, who work hard to cover their asses. This is done so often and by so many that CYA has become a common acronym. There are managers, who put so much armor around their asses that they have trouble walking around and getting things done.

In corporate environments ass is one metaphoric piece of human anatomy that is best left uncovered to discourage defensiveness and build trust. Defensiveness and spinning are ginormous waste of time and insulting to customers, investors and other stakeholders alike.

I've another acronym. Leave open your ass (LOYA). How can you and I start practicing LOYA? Well, I'll share my tips with you, if you will share yours:

Listen attentively and take notes when someone criticizes you in a meeting. This is good stuff. Thank your colleague after the meeting and request him or her to continue to provide feedback in future.
When you feel regret for not covering your ass, openly accept your errors and move on.
Create transparency into what you are working on using frequent corporate communications, status updates, project management tools, task lists, design documents, marketing collateral, et cetera.
Stop e-mailing FYI to your boss as a CYA. You are just wasting his time.
If you are a senior executive, build an organization that is error-friendly and error-tolerant. Error-friendly organizations are more resilient. Such organizations allow people to quickly recognize, recover and learn from errors.

I believe LOYA is critical to building trust and initiative in a team. Now since I've written this blog, I'm going to try it first.

See you soon!

Challenging Organizational Entropy

2009-03-12T20:10:00.000-07:00

Sometime back I came to know from an old friend of mine that his medium-sized firm located in San Diego had decided to drop a product line with almost five million dollars of annual revenue because the management found the product line unprofitable. The product line required 50 full-time employees to generate sales, maintain the website and provide customer service at a direct cost of about $4.6 million per year. In addition, the product line was paying $800,000 as internal chargeback for the use of company-owned data center and corporate office. Clearly, it was not hard to notice that the company was losing $400,000 per year on this product line. At an offsite meeting it made a lot of sense to the company executives to shut it down and layoff 50 employees. As you may have already guessed, the company ended up losing $400,000 per year.

It is not surprising that such misguided decisions continue to be made more than five centuries after the invention of accounting. The issue here is not understanding of cost accounting. The problem is with corporate dysfunction, which when not kept in check by the top leadership, creates an environment in which facts are twisted to serve the interests of powerful coalitions, information is colored, personal agendas are advanced at the cost of creation of customer value and no one rises to challenge conventional wisdom.

In traditional organizations, only executive leadership is capable of challenging and stopping this tendency of organizations to become dysfunctional. What does it take? It takes candor, honesty without insensitivity, openness to inquire into thoughts that are contrary to one’s beliefs or conventional wisdom and a healthy dose of ego-suppression syrup. What are the alternatives if you are not at the executive leadership level? Candor, honesty and openness will still help you stay above the organizational dysfunctions and contribute effectively. Just remember, it is important to be nice. Don’t be rude, even if you are right. As Peter (Drucker) used to say in his class that organizations were bodies in motion and politeness was the lubricant that kept organizations working without friction.

Have a nice day and will talk to you soon!