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Open minds, management authenticity and self-awareness lead Siebel's strategy into hosted CRM

When James Harkin rose to speak at Paul Budde's Roundtable* I was expecting a CRM sales and marketing overview for the telecoms industry. What I heard was far more impressive, as it touched on one of my perpetual hot topics for IT company executives.

James explained how Siebel, as successful as it was in the enterprise space, came to grips with what it was not when it decided to enter the "software as a service" market.

All too often I've seen IT company executives blithely decide to enter a different segment of the industry, with different dynamics and requiring different competencies, and different sales channels and cultures, and even different R&D budgets and focus, just because it appears to be part of the "IT business". This is all the more a problem when a company has been successful in its chosen segment.

In many cases it is not even a case of informed misjudgement, but one of ignorance of the industry dynamics outside of their segment, and inflated egos.

Siebel clearly recognised that they were a software products company - and obviously that self awareness included a deep understanding of what it means to be a software products company.

Therefore, to enter the hosted services market they needed to do something for which they had no experience and for which they were not suited. They then set about to construct a business ecosystem that would allow them to enter the managed services business. This in effect would be an extended corporation, almost a virtual networked corporation in the sense of Cisco's John Chambers.

This may seem obvious, but in practice such clarity and openness of thinking is rarely achieved. This is also especially impressive in Siebel because it emanated a reputation as a "we can do it all" corporation.

Siebel's strategy was a high dollar strategy, meaning it took a lot of money to support it. By building a strong vertical CRM applications set, it attacked a substantial number of markets in which it wanted to be the only player, reinforcing the "we can do it all".

To the great credit of its leaders it was able to recognise its "as is" strengths and weaknesses, and was able to dispel the "we can do it all" reputation, and come to grips with a new business model in which it was to rely totally on partners for joint success.

The partner it chose was IBM, with the strategy dubbed "CRM for everyone".

IBM has overwhelming credibility as a hosted service provider, and as a "on demand" utility services providers, and as a trusted name as a guardian of the hosted CRM customer data. These attributes were lacking in Siebel, particularly the lack of expertise and competence in running hosted services.

The Siebel-IBM OnDemand CRM service is a strategy to provide cheap customer relationship management software to users who are unable to implement the more expensive and complex enterprise version. This is also a large shift in the previous strategy and a large addition of new competencies is required - a substantial part of which is supplied by IBM's salesforce.

Seems simple to be so self-aware and to make such a clear decision?

Not really - in fact in my experience it is uncommon.

Take for example in the Australian market in the 1990's when BHP Information Technology a 2000 person services company tried many times to convince Mincom a software products company to come to a joint arrangement to promote our combined solution. Mincom, being a typical smaller and successful business, told me that "a dollar was a dollar" and they would chase every service dollar they could get. This led to them eventually thinking that they had a good professional services business, but ultimately they stumbled through lack of focus on their core product. After a string of reorganisations, new CEOs, and failed capital raisings, they are hopefully going to do well. I believe that their lack of ability to understand their core was a significant contributor to them failing to reach their full potential in the 90s. Mincom's sales have now regained about the same level as in 1998.

Take for example the Kaz Group, recently acquired by Telstra, who purchased Aspect Computing - a really excellent software development company. Kaz was an outsourcing and managed services company. I could never conceive of how they could combine the two businesses successfully. Even if they overcame all the cultural hurdles and different business dynamics for each, they would always face an insurmountable hurdle in the management attitude towards and necessity to fund R&D for two totally different business profiles. And in any case they could not afford to fund real R&D in both sectors - it was not sustainable even if they had convinced themselves that it was feasible.

Kaz's share price declined by 80% over the period from that purchase, reaching a low of 10% of their previous highest value in the year before the Aspect acquisition. Kaz was snapped up by Telstra in April 2004, for AU$333m at $0.40/share, giving the founders a 100%+ profit but returning a loss for the shareholders who came in on the prospects of the Aspect acquisition - see my blogs Telstra's Queer Eye for a Kaz Guy and Tactical Success batters against Strategic Intent as Telco buys IT Services Group.

In the case of Kaz's share price we could charitably say that the market was efficient, but I doubt that this 'efficiency' was anything to do with an understanding of the basic flaw of the merger.

That is why the Siebel story to me was very impressive. It lifted my respect for the company because to be realistic about your successful business is and what it is not requires open minds, breadth of view, clarity of insight, and extreme authenticity in the sense of GE's Jack Welsh. That's something to respect!.

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*At Roundtable with Paul Budde and Industry Experts: Expanding through a virtual company. Sydney, June 24, 2004.

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How can I help? Email me; Call (Australia) +61 403 345 632.

How and Why India's and China's World Class Outsourcing will Continue to Grow

I was talking with a colleague recently about offshore outsourcing and he said with a solid conviction about India "Forget all that CMM stuff, we have just been through a major project and what you get is cheap average quality software".

And a CIO recently told me how he now regretted outsourcing to an Indian company. He said that although the project was delivered on time change requests take months and are jeopardizing the total acceptance and benefits from the system.

On the other hand, NASSCOM, the chamber of commerce of the Indian IT software and services industry, recently announced their review of the past year and their forecast for the coming years for software exports. Jerry Rao, the Chairman, said that India was "riding on the crest of a wave" caused by the squeeze on IT budgets in the west over the last couple of years.

Indian IT-related exports are predicted to rise +32% for the current year to March 31, 2005, and that on top of a 31% rise for the 2003/4 year. The predicted export value is US$16.3b, and by March 08 is predicted to reach $50b. The US remains the largest buyer, representing 70% of Indian exports, and the UK 15%.

To me, it doesn't make sense that a $50b export industry can be built on cheap and average quality software alone. Perhaps the bulk can be built on "average and cheap", but there must be a core of top quality world-class software practices underlying such growth. Even if this top quality work is only 10% of the total that will still represent a $5b industry by 2008.

So what's the missing ingredient leading to the comments quoted in the opening?

Probably faults on the buyers' side – the main one being inadequate due diligence and the second poor management and the third mis-aligned objectives and expectations.

This means that where due diligence is done properly, and where world-class software is required, then Indian for certain can produce it, now and into the future.

How about China and how does it compare to India?

In simple terms China is a viable option now, but with a different risk profile.

The facts speak for themselves to China's role in becoming a major software and IT exporter. For example, IT-related activities account for 6% of GDP, and the GDP is growing at around 9%, leading to massive compounding of IT activities. IT export related activity grew 31% lat year, and in fact Chen Kai CEO of Comlent Holdings believes that China will be the world's #2 IT exporter by 2008, as well as being the #1 semiconductor producer and exporter.

The number of college graduates will exceed 2.8 million in 2004, passing India’s 2.4m and 1.2m from the US. While in India the market is "hot", as acknowledged by NASSCOM’s characterization of "riding the crest of a wave", in China there is still underemployment of graduates in IT. Thus while India is approaching saturation of recruiting opportunities, and suffering from wage escalation and difficulties in retaining stable teams, China will be immune from these problems for a considerable time ahead.

India has the obvious advantage of English, and of course this is so obvious that the Chinese are addressing this need by insisting on English skills in their recruits, and sometimes enforcing an all-English policy at work.

There is no doubt that Indian has the benefits of experience in producing world-class software, and a long history of good training, both of which are lacking in China. On the other hand China offers raw engineering talent and huge pools of it.

In terms of sheer cost-competitiveness I don't know how to compare the two countries, but for China most commentators see raw ratios of about 1 to 8 in favor of China versus the US (Silicon Valley costs) for programming costs. But of course this is not comparing "apples with apples" since the US programmers have actually developed world-class software and the comparable Chinese employees have not.

According to Frank Yu from Augmentum the real ratio of all-up fully absorbed costs to the company is 1 to 5 in favor of China, bearing in mind escalating costs in the major Chinese cities like Shanghai where development is centred.

Silicon Valley VCs are all too aware of these cost ratios. The first outsourcing company to produce a solid track record in delivering world-class software from China will be in huge demand to reduce burn rates and to allow investment dollars to be directed towards marketing and sales.

The key for outsourcing to China is to select the right local partner, by doing a full and extensive due diligence and ensuring objectives and expectations are aligned.

Don't make any assumptions about experience since the experience is not in delivering world-class software (this is India's advantage not China's).

Make sure that you have your right management team in place but do not impose your foreign "world-class software team" structures and processes on the local team. Choose a partner that understands how to build a Chinese world-class software team being cognizant of the local work ethic and culture. Putting this another way, China can produce world-class software but not by imposing a "US world-class software team" on the local culture.

And finally, put in place a proper risk management process and apply it diligently in order to offset the different risks in China from India, and involve the local partner deeply in this process.

The truth is that successful outsourcing requires a lot of effort and planning, and in China training, and the best return will be derived over the medium term of say 3 years, not on a single short-term transaction.

In the case of both India and China they will continue to grow and succeed, and in China's case begin, in producing world-class software and be attractive to global partners. The industry and country and demographic forces are unstoppable as enablers for this outcome.

The challenge for the established countries like the US and Australia and the UK is how to most effectively enhance their productivity through engagement with Chinese and Indian IT service providers.

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More on Industry Strategy and IT/Telco Services at www.digitalinvestor.com.au

Related Free White Papers at Digital Investor:
Why Telcos Should be Intelligent Outsourcees, not Outsourcers
Asian Broadband Cooperation to Lead Standard-Setting
Outsourcing Publications Sourcing Strategies at Digital Investor
Related Blogs: (see Categories, top left)
Sourcing Strategies for Telco IP Core Network
Can you trust China with your Software IP?
China's Own 'Goldman Sachs' - Not Just a Nation of Cooks and Engineers
Venturing into China in IT Investments

What's your take on the quality and future of Indian and Chinese outsourcing, do you agree that it will continue to grow and produce world-class software? Post your Comments.

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How can I help? Email me; Call (Australia) +61 403 345 632.

Can you trust China with your Software IP?

The current street price of MS Office in China is 50 Yuan, about 73cents, and that doesn't please Frank Huang, General Manager Microsoft China, who has invested in a large R&D center and global support group in China (which represents just 1% of Microsoft's global revenue).

However this type of rampant software piracy often clouds the picture when considering the general question of software IP protection in China.

As Frank Yu, COO and President of Augmentum pointed out at ATRE2004 in Shanghai, the MS Office piracy is more straight property theft than theft of intellectual property. Noone buying the 50 Yuan copy of Office is set on reverse engineering or re-creating a competitive product.

Yu says that protecting enterprise-class software is a whole different matter, and one that is complicated but solvable in China. And in fact George Hara, a former Chairman of Borland, says laughingly that they used to let people copy their software in China because to use it stimulated the sale of professional services. So one key in thinking about this issue is to differentiate between the street vision of copyright theft and the development and protection of enterprise-class software.

Another key, according to Yu, is to differentiate between prevention and enforcement.

As in most fields, the key is prevention. Augmentum pays intense attention to putting in place best practice in prevention measures, which are not dramatically different to elsewhere in the world, and include employee contractual restrictions and obligations.

The perception that enforcement is difficult in some ways arises because of inadequate prevention measures that have previously been accepted in China. Whereas although India has a 10-year start in establishing a reputation that enforcement is not an issue, in practice the enforcement is equally uncertain due to parochial influences. In China, attention to prevention and an avoidance of enforcement debacles will lead to it having the same reputation as India.

China cannot build a 10-year reputation overnight. But proof of the pudding in the quality of prevention measures lies in Augmentum's blue-chip base of clients, which include 20 leading global software companies. In many cases Augmentum is producing software central to the core of these client's IP, not at the fringe.

The lesson to be taken from Augmentum is that by having the right relationships, and the right commercial and legal approach to prevention, China is a place where your software IP can be protected.

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More on Industry Strategy and IT/Telco Services at www.digitalinvestor.com.au

Related Free White Papers at Digital Investor:
Why Telcos Should be Intelligent Outsourcees, not Outsourcers
Asian Broadband Cooperation to Lead Standard-Setting
Outsourcing Publications Sourcing Strategies at Digital Investor
Related Blogs: (see Categories, top left)
Sourcing Strategies for Telco IP Core Network
How and Why India's and China's World Class Outsourcing will Continue to Grow
China's Own 'Goldman Sachs' - Not Just a Nation of Cooks and Engineers
Venturing into China in IT Investments

What's your take on the protection of IP in China, do you have direct experience of what works and what to avoid? Post your Comments.

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How can I help? Email me; Call (Australia) +61 403 345 632.

Sourcing Strategies for Telco IP Core Network

At the recent Global IP Carriers Conference in London (*) those telcos and independent carriers who had rolled out IP in their core backbone were preaching its virtues, and those who were behind were scrambling to catch up. It is not a matter of IF but WHEN, triggered in a large part by the success of VOIP in the core.

While VOIP is the trigger, and captured a disproportionate amount of conference time, the real disruptive technology is the IP network itself, in conjunction with traffic engineering overlays to enhance service differentiation.

VOIP captures attention because with a CAGR 2000-2007 of 46% and 50% of that being substitution of PSTN voice traffic it strikes fear into those responsible for the current voice services, business models and networks.

However in the rush to catch up and to be positioned for the coming VOIP dogfight it seems that telcos are missing the chance to develop new business models around sharing, partnering and outsourcing within their own businesses.

As IP in the core hits the mass adopters in the telco community the rush to implement obscures the opportunity to rethink the basic network sourcing model.

IP Transit services are a prime candidate for out-tasking.

By taking a strategic approach to sourcing, and employing the Cisco-led out-tasking model, it is apparent that backbone IP Transit cannot be a source of competitive advantage for customer-facing telcos. Therefore it is not core and should be a candidate for out-tasking.

This notion goes against the historical nature of telcos to own and operate their network as a source of advantage, derived from the high capital costs as a barrier to entry. However those days are past, thanks to IP technology.

Telcos would be better advised to focus on their core and mission-critical processes built around customer-facing demands and value propositions.

(*) Global IP Carriers Conference 2004, London, 160 telco executives, 90 organisations.

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More on the telecoms industry at www.digitalinvestor.com.au

FULL ARTICLE Sourcing Strategies for Telco IP Network
Why MLPS Might be a Carrier's Worst Friend
The Telco of the Future
Why Telcos Should be Intelligent Outsourcees, not Outsourcers
Asian Broadband Cooperation to Lead Standard-Setting

What's your take on IP in the telco core network, do you agree that it is a strong candidate for outsourcing? Post your Comments.

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How can I help? Email me; Call (Australia) +61 403 345 632.

Tactical Success batters against Strategic Intent as Telco buys IT Services Group

A major Australian telecom company recently announced a US$255m takeover of a local IT services provider and then set about defending a generally poor track record in similar investments. For example, the most recent similar investment cost the telecoms company nearly $75m but it eventually sold out and only recovered $12m. Furthermore it of course recovered none of the managment and strategic distraction that it suffered along the journey to diminishing its shareholders funds in this investment.

The telecom executive with direct responsibility for integrating and operating the new acquisition with existing in-house IT service capabilties provided a rationale. He explained: customers are demanding a one-stop shop and this acquisition expands our ability to be that one-stop shop.

He may be right or he may be wrong, but I found the proposition interesting for the following reasons:

1. The IT services company which was the target of the acquisition build its whole outsourcing strategy on the opposite rationale to its customers - i.e. "split up your large contract with IBM/CSC/EDS and give us desktops/servers/help desk etc".

2. On the other hand if customers are now going to pushed by the new venture to the strong view of the one-stop shop then these customers can only deliver shareholder value by buying best of breed for their class of company. However the plain facts are that this new venture doesn't qualify as best of breed for large corporates as compared to IBM, EDS etc. It is always hard to find any synergy between basic telephone services companies and large scale applications deployment and shared services outsourcing firms. They don't share the same scale and change management and risk management mental models. And they come from different cultures and have different investment priorities for R&D and IP, and sell differently. Customers should be sceptical that synergies exist. (Follow "Continue Reading" below for more on this point).

3. But in fact both these above tactics are doomed to lead to the same levels of dissatisfaction that executives have noted for past IT outsourcing. The "split up the big contract" represents a tactical win for the organisational politics and the little guys (being the IT staff and the smaller outsourcers), but in the end will represent yet another loss for the outsourcing organisations and their shareholders. The "give the entire world to one party" is also fundamentally a flawed strategy (although it may be a good tactic on the road to a strategic sourcing objective). No one firm can provide the whole IT outsourcing needs of any major corporate because no one firm can afford the investment in R&D, training, internal IP, business domain knowledge, technology expertise and industry leadership to cover the full range of services.

That last sentence brings me back to my opening curiousity about the rationale for the purchase - the one-stop shop for telco and IT services. In my opinion this is not a feasible, achievable, nor sustainable strategy.

(!-- Continue Reading below --)

How Innovation can be built into Outsourcing

Most reports that I have read say, that as far as innovation is concerned, companies that have outsourced IT are disappointed in the outcomes. The innovation outcomes have not met their expectations.

For example, in a survey in the UK 30% of clients surveyed were disappointed with the lack of innovation by their outsourcer.

Why should you be interested?

In a survey of 350 senior executives of US-based companies by Accenture and Chief Executive magazine, more than two thirds of CEOs said innovation was one of the top five factors in gaining competitive advantage for their businesses.

Therefore, it is vital that outsourcing arrangements deliver the platform for innovation required by CEOs in order to bring the full range of business benefits that outsourcing offers.

The way you address innovation in outsourcing is not obvious. For example, a well-known global consulting firm, concluded in an article: "There are strategies to counteract this but they usually only mitigate the problem." They did not suggest solutions.

There IS an answer

There is a process which can deliver innovation - one which builds collaboration between the client and the outsourcer in prioritizing innovation projects.

The key to this process is a mechanism I have developed called a Joint Technology Portfolio, funded by the client and the outsourcer.

CIOs should take personal responsibility for driving IT innovation in their company, and for putting measures in place to increase and manage innovation within outsourcing arrangements.

The Joint Technology Portfolio provides a means to execute this responsibility.

I've written a complete HOW TO which is available for free from my website www.digitalinvestor.com.au. It is too long to blog, at 9 pages, because it explains and then solves the outsourcing innovation problem in full.

By reading my paper you'll learn the answers to the the following questions:

What can we learn from non-IT outsourcers about innovation contracts?
Why does the IT outsourcing model mitigate against natural innovation?
How does the Joint Technology Portfolio (JTF) provide the solution?
How are projects selected for the JTP?
What target areas should be selected?
What is a suggested budget and costing model for the JTP?

Read my free Guide, by clicking the link below:

How Innovation can be built into Outsourcing. PDF - 9 pages.

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If you are interested in strategic sourcing, then you might like to read my other free outsourcing and Executive IT White Papers, including my One Page Guide to Identifying Core Processes at the subscriber section¹ How to Understand the Business Model of Out-tasking. Available at my website Digital Investor.

When Will Outsourcing Grow Up?

The considerable investment of money and enormous investment of time and attention given to outsourcing has unfortunately not been matched by satisfaction. Surveys consistently show that between 30 and 50% of executives indicate disappointment in the results of their investment in outsourcing.

Outsourcing is by no means new, and some firms have achieved outstanding results in terms of business improvement. What are the lessons from the firms that have succeeded and from those that have performed poorly?

Lessons from the strongest performers include these:

• Analysing trade-offs for IT sourcing holistically. What does this mean? It means involve purchasing, sales, engineering, manufacturing and top management in IT outsourcing decisions;
• Tracking well-defined metrics. The metrics should be a combination of business-oriented metrics and also easily benchmarked global metrics for the base and commodity services and pricing; and
• Sharing forecasts with their outsourcers. Forecasting, and its impact on IT services, is difficult. But by doing so many surprises and mismatches in performance and expectations can be avoided.

However the biggest single root cause of success in companies that are satisfied with their outsourcing is that they set IT sourcing policies strategically. Conversely, the failure by companies to set IT sourcing strategically has led to much of the disappointment among executives today about IT outsourcing.

First and foremost a company must set its strategic objectives and then establish IT sourcing policies to meet them. This naturally leads to the question:

What is the best source for every IT service to meet our objectives?

However, where things go wrong, and where companies leave IT sourcing to a tactical or departmental level, the question that reverberates in the corridors is:

What do I have in IT that seems appropriate for outsourcing?

Starting from the first question focuses on customers, because a firm’s strategy will focus on customers. Starting with the second question relegates IT sourcing to an internal focus, generally with little cross-functional involvement, and thus missing the holistic approach. Thus the second approach necessarily delivers limited benefits.

These latter efforts fall short in satisfaction because they do not challenge, and support, the cross-functional processes inside the company. They focus on performance gains, often just cost-performance gains, within the existing limitations of IT services.

It is a decade since the publication of Michael Hammer and James Champy’s Reengineering the Corporation, and focusing on cross-functional processes has become the norm today in such disciplines as supply chain management. This has also bought about the concept of the “extended enterprise” and leaders in the field take a broad strategic perspective of their enterprise.

In contrast, most IT sourcing decisions are still functionally-focused. Even worse still, they are often the domain of the IT department to decide, according to their concern for their individual performance measures and technology biases at the time.

In order to grow up, IT sourcing innovators must break this tactical decision-making process and encompass the extended enterprise.

Leaders, such as Cisco, have even coined a new term for this strategic approach in order to distance it from the failed tactical model. Cisco’s John Chambers calls it “outtasking”.

The focus in outtasking is for a firm to fully extend itself into its partners’ business systems, while retaining tight control of its own core systems architecture and data architecture and standards. The value chains are highly synchronised.

John Chambers, as CEO of Cisco, frequently espouses this operating philosophy and it is clear that he is deeply involved in such decisions. A recent study by Booze Allen Hamilton found that CEOs can play a key role in improving the supply chain. The study found that greater CEO involvement in designing supply chain strategy brought about improved business performance.

There is little doubt that in order to improve IT sourcing performance and to lift the rate of satisfaction, CEOs need to participate more actively, pay closer attention, and get more involved.

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More on Sourcing at www.digitalinvestor.com.au

Strategic Sourcing - Identifying Core Processes
The Offshore Outsourcing Debate - Examined
The Traveler's Guide to Offshore Insourcing
How to Understand the Business Model of Out-tasking

What's your take on this favourite topic of mine, do you agree Outsourcing needs to grow up, and what does it need to get there? Post your Comments.