Bureaucracy Blamed for Bad Decisions

As Einstein famously stated, “Insanity: doing the same thing over and over again and expecting different results.”

According to a Wall Street Journal article this morning (Don Clark and; Shara Tibken, “Cisco to Reduce Its Bureaucracy”) Cisco CEO John Chambers has proven he is not insane. Several explanations of Cisco’s recent performance problems have been discussed. This blog has highlighted cannibalization of high margin staples by low margin products and the lack of accountability in decision making (the cause of the cannibalization?). It is appropriate to highlight Chambers’ solution. Per the WSJ Cisco will:

dispense with most of a network of internal councils and associated boards that have been criticized for adding layers of bureaucracy and wasting managers’ time.

Analysts applaud the move.

The question that should be asked is whether the problem was the existence of the collaborative councils, or the absence of executive decision making? To the extent that Cisco’s problems derived from a lack of executive accountability, deferring to collaborative councils for 70% of decisions, Chambers may be overreacting by eliminating the councils entirely. Collaborative processes provide a more complete fact set for executives to consider, we use a collaborative approach extensively at HarrisData for just this purpose. What was missing at Cisco was the accountability for the decisions taken – collaborative decisions diffuse accountability. While accountability at Cisco will be restored by this move, can the executives make good decisions without the comprehensive fact sets collaboration provides? Chambers may have thrown out the baby with the bath water.

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When Do Anecdotes become a Trend?

It is dangerous to extrapolate a trend from isolated reports, especially in a volatile environment such as the current world economy. It may be just as dangerous to ignore anecdotes concerning a change in a major trend. Fortunately, Auric Goldfinger provides a rule for just this problem:

“Once is happenstance. Twice is coincidence. The third time it’s enemy action.”

It was happenstance that a post last September cited William J. Holstein pegging a new trend of high tech manufacturing returning to the US:

“China is no longer cheap, and long supply chains are too slow”

It was coincidence that this morning the Wall Street Journal featured an article (John Bussey, “Will Costs Drive Firms Home”) suggesting a new trend of manufacturing returning to the US from low cost venues overseas:

A combination of forces – rapidly rising labor rates abroad, loftier materials and shipping costs, deep-discount tax incentives from U.S. states – are changing some of the calculations by which companies decide to move production abroad, or even keep what’s there now.

Is it enemy action that David Foster blogged citing the fall in value of the dollar and inflation in China as having:

the same effect of making U.S. manufacturing generally more competitive.

Foster then highlights concerns about government policies in the US which would counteract any trend towards a manufacturing resurgence here.

Finally a companion WSJ piece (Timothy Aeppel, “Candle Maker Feels Burned”) explores the travails of one firm moving production from China to Baltimore. The reason for the move according to owner Mei Xu is “to do well in this market, you need to be able to produce and ship the next day.” What Xu ran into was a mass of conflicting and overlapping regulations which delayed and increased the costs of opening the new plant. Her conclusions:

I think our government needs to ask itself, “Are we ready for business to come back from Asia?”

and

She thinks there ought to be a “concierge service” for small businesses seeking to move jobs to the U.S.

So it would appear conditions a right for a new trend of manufacturing relocating to the US – a trend which will be reduced by regulation and government apathy. The real question is whether governments in the US will take Xu up on her challenge to create a concierge service for job creation. At least one government has, Governor Walker of Wisconsin reorganized the state’s Department of Commerce to be a one stop shop for jobs creation. Maybe more will follow.

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Increasing Compliance Audits Irritate Customers

Software companies have increased the rate of license compliance audits to demonstrate their dedication to your organization’s well being. They also help you reduce costs by identifying unused seats and shelfware and adjusting maintenance bills downward.

Please excuse my sarcasm, but actions speak louder than words. Ray Wang highlights a dramatic increase in compliance audits over the past two years as major software vendors attempt to juice revenues in a slow economy. Apparently companies receiving audits were in compliance in the high 80s percentage wise – and notably missing from the report is any mention of reduced seat counts / maintenance fees resulting from the audits. These vendors are looking out for themselves, not for their customers’ interests:

After speaking with 13 major software vendors, most admitted that software audit served two purposes. The first – keep customers in compliance. The second – shaking the bushes for new deals during the recession.

It is just this kind of predatory behavior which gives the software industry a bad reputation among our customers. HarrisData offers our Software Customer Bill of Rights as a guide to improved relations between software vendors and customers. We follow through with our Omni License to put our customers concerns in writing. Once again we invite all software vendors to adopt the Software Customer Bill of Rights as their own and improve the experience of software customers everywhere.

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Collaboration vs Leadership in Decision Making

In last month’s post about vendor margins and cannibalization of older high margin products by newer low margin products, Cisco was highlighted as a firm with a high level of innovation whose profit margins disappointed investors. Carl at Chicago Boyz offers a critique of the management structures used by Cisco that gets at the root cause of their problems. It appears that Cisco CEO Chambers reorganized management to operate as committees and utilize collaborative decision making processes – ultimately 70% of Cisco’s decisions were collaborative.

The core idea of the business enterprise and entrepreneur-ship is all about leadership, accountability and personal responsibility. Businesses aren’t non profit organizations, they aren’t schools, and they aren’t after-school specials. They are serious efforts, with salaries and families and cities on the line, and people need to be given roles and held to the results that they committed to. These aren’t concepts that can be maintained through revolving committees where no one is responsible. Trying isn’t good enough.

While committees can be help bring many perspectives to a decision maker, business success relies on accountability and personal responsibility of decision makers.

This is equally true for ERP selection and implementation projects. Where ERP project committees can canvas the entire enterprise for business requirements, only an accountable leader who is responsible for business results can make the tradeoff decisions between functionality of competing vendors or the desirability of a range of system modification requests during implementation. A committee without such a leader will end up with an ERP project that is over budget and delivered late if ever, often missing out on the key business benefits that justified the ERP investment.

HarrisData’s Quick Start Guide helps our customers understand how to balance collaboration and decision making to ensure the ERP project is on time and under budget while delivering the benefits their businesses need.

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Its Good to be Public

The ERP vendor acquisition season heated up today with Apax Partners acquisition of ERP vendors Epicor and Activant, to merged into a new privately held Epicore. For the Epicore shareholder the offer yeilds an 18.9% premium over the past 30 day average price, and a 34% premium over the average for the year. Compare these numbers to the 19% premium over 90 day average price offered Lawson shareholders by Infor, then consider that SAP and Oracle may need to counter these moves. Where does this put the remaining publicly held ERP vendors? Would their shareholders want this kind of premium?

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The Slippery Slope of Software Services (Part 1)

Don’t let your project budget get blasted by services

Whether you are selecting new software, or implementing an application upgrade, your success depends heavily on whether you implement the software on time and on budget. You may be tempted to rely on your vendor’s experience to perform certain implementation tasks for you – hoping to save time and money. However, when you start using vendor services to accomplish tasks you either should do yourself or shouldn’t do at all, you start down a slippery slope of service expenses that will ruin your project budget and timeframe. Two examples illustrate this point:

  • Data conversion should NOT be left to the vendor

    It’s easy to fall into the trap that your vendor should convert all of the data from your existing system into your new system. After all, who knows the new system better than the vendor? However, consider that you need to know how the new system works for your organization as well as the vendor does (or it won’t work!). Further, you already know how your current system works – or, more importantly, how your organization uses it.

    If you pay your vendor to perform the data conversion, you will spend a lot of time teaching your vendor’s consultants how you use your current system (and what the data means), and more time teaching them how you intend to use their system (and what you expect the data to mean). Then they’ll do the easy part and map the data from one file to another – a process you can frequently get accomplished with a smart user and a spreadsheet – and charge premium rates for programming talent. The next time you see a proposal including data conversion services, ask yourself what you’re really getting, and whether it’s worth the money.

  • The software should NOT be customized to meet every user demand

    Customizing your applications to meet every user demand is the surest way to ensure your project misses deadlines and goes over budget. All user demands are not equal, and demands for new or modified functionality must be carefully vetted by your management before any consulting work begins. Vendors are usually happy to offer additional consulting services to address each and every user demand, destroying your project budgets and timelines. Cost overruns from this problem can run into millions of dollars.

    Instead, each demand should be assessed for what value it delivers the organization and what consulting costs will be incurred (both initially and in the future). Well-run projects will review all user change requests through the project team to quantify value, costs, and any alternatives (your vendor should be able to help you determine what alternatives there are). The project team will then submit the requests with the highest return-on-investment to a senior executive or steering committee for review and approval. Only with careful management of user requests can you stay away from the slippery service slope and make certain your implementation project stays on target.

Vendors eager to make money on services will propose ‘comprehensive’ data conversion projects and ‘effective’ change control procedures that do nothing but take the control of project – and your project budget – out of your hands, and offer little quantifiable value in return. The savvy software buyer will pay attention to these issues both before and after they buy a software application.

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ERP Software Vendor Metrics – What Matters?

With acquisitions in the air again, how do you tell if an ERP vendor is performing well? For example Lawson is performing well by many accounts, but received an unsolicited takeover bid anyway. Some suggest the cost of shifting to the cloud puts Lawson’s business model in peril – they only have the resources to either serve their on premises customers or develop a cloud alternative. Without a cloud alternative Lawson has no future, in spite of Lawson’s profit and revenue performance. Is this the best way to analyze an ERP vendor?

Several fundamental measures exist for any software company, including ERP vendors: initial license fee growth rate, maintenance renewal rate, services growth rate, and the percentage mix of license fees, maintenance and services.

Initial license fees are easy to track and predict the future of the other revenue streams, without a license there is no maintenance or services. The emphasis on cloud delivery of ERP reflects analyst belief that future growth will favor cloud over on premises delivery of ERP software. Thus a typical analyst would devalue an ERP vendor for a lack of emphasis on cloud, and factor in declining initial license fees in their projection of vendor performance.

The maintenance renewal rate is the most important indicator of ERP vendor performance because maintenance is the biggest revenue category for a software vendor. The maintenance renewal rate reflects how well the vendor is performing at the key task of continuing to deliver new value to its existing customers. Too little value, renewal rates decrease. Major shifts in technology can have big impacts on renewal rates. For example the shift to Windows based client server architectures led to much lower renewal rates of ERP vendors which could not deliver on the new technology. This led to two consequences: a relative unknown got to the new technology first and dominated market share in ERP (SAP); many strong ERP vendors could not make the transition and ended up acquired by industry consolidators. A rule of thumb in software is that a renewal rate of 85% is healthy – initial license fees and maintenance price increases can easily replace 15% of maintenance revenue and still provide for overall growth. An ERP vendor whose maintenance renewal drops to 60% is in very big trouble very quickly (this is what happened to most of the ERP firms acquired in the 90s as the client server trend took its toll). After two years the customer base is only one third the size of the original (60% * 60% leaves 36%), total revenues are falling through the floor and required layoffs eliminate the ability to invest in future products. Thus a typical analyst would devalue an ERP firm’s maintenance revenues as at risk from the lack of direction to the new cloud technology.

Services revenues have a different impact, and here I differ from the analysts. While the typical analysts sees post sale services as a vibrant and desirable revenue stream in the face of changing technology, I see a big services revenue stream as a drag against initial license fees and maintenance renewals. A high services percentage of total revenues tells the ERP customer two things: implementation will be very expensive, and upgrades will be prohibitively expensive. This holds true for both on premises and cloud delivery of ERP systems. Thus a focus on services revenues will make an ERP vendor less competitive in initial sales (implementation estimates often dwarf on premises license fees, let alone cloud rental rates) compared to ERP vendors who successfully reduce the need for services. The focus on system upgrades as a services revenue opportunity will cause fewer customers to upgrade, meaning fewer customers will receive continuing value from the vendor – thus reducing maintenance renewal rates. Thus unlike a typical analyst, I would devalue an ERP firm’s services revenues as destructive to the core revenue streams of license fees and maintenance renewals.

How the to measure services? As an overall benchmark services revenue should be less than 10% of an ERP firm’s revenue base. The effectiveness of the services delivered (and thus key predictor of maintenance renewals) is measured by the percentage of active customers on the current release / refresh of the software. Less than 60% of customers on the current refresh within one year of release suggests upgrade barriers are too high – and too few customers are benefiting from the ERP vendor’s R and D output. (One ERP vendor benefit of the cloud is the vendor controls upgrades, and can drive the associated services revenues whether or not the customer benefits).

How do ERP vendors rate on these metrics? While posting renewal rates is more common, few vendors release any of these key metrics. HarrisData looks pretty good by this view, naturally.

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Infor Gets Aggressive

In a move that doesn’t surprise anyone, Infor launched a takeover bid for Lawson Software. Infor CEO Charles Phillips found his first target, and with the offer at a 19% premium to the trailing 90 day Lawson stock price (and below Lawson’s current stock price) more negotiating is likely.

The average premium for completed software acquisitions in the past three years is 30.3 percent, Bloomberg data on deals over $1 billion show.

Lawson CEO Debes has been through this dance before (with JD Edwards acquisition by PeopleSoft then Oracle). Other potential Infor targets like Epicor or Microsoft Dynamics may be forced to counter this move.

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Vendor Margins and the Cloud

It’s all cloud all day in the buzz about the software business, and that definitely includes ERP software. With conventional wisdom pointing to a need for purpose written cloud software (multi-tenant architectures etc.), it is no surprise that on the acquisition front

81% of respondents in SEG’s 2011 survey said it is important or very important that the investment target be all or substantially SaaS/subscription-based, up from 51% in the 2010 survey.

The cloud gets the money and the attention. What does this mean for the rest of the ERP software customers? Does research and development for current products continue? What happens to the wonderful margins vendors command with on-premises ERP products?

Bob Evans provides a cautionary example in Cisco.

So because it was not—and perhaps still is not—keeping pace with the requirements and demands of its customers, Cisco’s high-margin legacy products are being cannibalized by its new gear, which offers the performance levels customers need but can’t yet deliver the profit margins investors demand. And this deep-seated problem of Cisco’s

Will ERP vendors keep pace with the requirements of their legacy customers, or do they face self cannibalization and margin erosion? For now the common approach is to price cloud offerings so that a customer on three years of the cloud product pays the same total dollars for software licensing (plus more for hardware and operations) as they would pay for comparable on-premises software. Of course any customers retained after three years would yield a far greater margin to the vendor (no break for paying the “original license fee” over three years). ERP vendors believe they can avoid Cisco’s fate by forcing higher margins on the innovative new products than they received with their traditional products.

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Make ERP Interesting

Blimps, like ERP, used to be interesting. Back when only a few were flown a blimp sighting was unusual enough to attract attention, less so today with several different branded blimps and at least one of them flying over just about every major sporting event. Today the most memorable blimp event was the Hindenberg disaster. [ed. a zeppelin is a blimp with hydrogen gas for lift]. It seems that disasters are interesting for quite a while, but trouble free service becomes boring.

ERP has its share of disasters including many well known companies and governments. A quick Google search for ERP success yields few lists, but a ton of critical success factors. Disaster is more interesting than hard work so an ERP disaster is more interesting than an ERP success. A disaster is also much more likely to be reported in the business press where your senior executives will see it.

The challenge is to make your ERP project interesting to management in a positive way. An ERP system is basically a tool for automating accounting entries and tying them to business documents (orders and payments) – the drab work that used to be performed by white collar automatons with desktop calculators. That orders are shipped complete, on-time every time with month end sales and cost of sales accounts properly updated is a sign of ERP success is beside the point , the executives tasked your organization to accomplish those objectives whether or not the ERP worked – they attribute the success to the organization and not to the ERP. However should excitement occur, say your biggest customer did not receive what they ordered, that is a sign the ERP failed and the failure will interest executives. The challenge becomes:

how to take a tool that performs boring functions, where success is defined as performing these functions in as unexciting a way as possible, and make it interesting.

The answer is to tie your ERP project to new possibilities for the executives to take credit for, self interest is always interesting to oneself. Wouldn’t it be great if the executive could announce shorter lead times for user customized product delivery? The executive would bask in customer accolades while the ERP made delivering on this promise a boring non-event (provided it supported user customization of products and lean manufacturing processes you need to be able to deliver). Tying the ERP to the executives business innovations is the way to make it interesting.

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