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.
Thursday, December 3, 2009
Monday, November 2, 2009
Reflective Inaction: Management Style of J. Alfred Prufrock
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.
...
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.
Saturday, October 31, 2009
Is Your PowerPoint a MECE document?
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.
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.
Monday, October 26, 2009
Systems Don't have Costs, Strategies Have
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.
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
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.
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.
Sunday, October 18, 2009
Personal Insult: Is it a distraction?
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?
...
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?
...
Friday, October 9, 2009
Business Problem Solving Approach of IT
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.
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.
Saturday, October 3, 2009
Peter Drucker and Marvin Bower
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.
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.
Friday, October 2, 2009
Papa's Battle with Cancer
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.
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.
Saturday, September 26, 2009
Overinvestment in Information Technology
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.
Thursday, September 17, 2009
Backward Compatibility
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.
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.
Sunday, August 23, 2009
Challenges of Design
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.
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.
Saturday, August 1, 2009
Chief Information Officer (CIO) sans Chief Utilities Officer
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.
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.
Wednesday, April 15, 2009
Value Acceleration
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!
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!
Monday, April 13, 2009
Achieving Strategic Fit Between Business Strategy and Technology Policy
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 |
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.
Sunday, March 22, 2009
How to Auction a $1 Bill?
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.
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
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
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