IT industry analysis -- 2009 Week 25 -- on one page

SERVICES

The era of a two-tier UK IT outsourcing market may well be over, wrote Ovum. The ten biggest UK ITO providers—HP-EDS, Fujitsu, IBM, CSC, Capgemini, BT, Atos Origin, Logica, Computacenter and Siemens—saw the total contract value of their ITO deals grow an impressive 31% in 1H09, even though the total number of deals was down 17%. The UK IT outsourcing market is heavily weighted towards the large providers, so the mid-sized and niche players such as Steria, Northgate, Phoenix and Agilisys have a smaller potential ITO opportunity to address. Tier-2 and tier-3 players are finding life very tough in the current climate.

Wipro, TCS and Infosys are refocusing on the Middle East and Asia to compensate for falling revenues in America and Europe, says The Times.

Alcatel-Lucent is about to transfer 1,000 of its employees to HP, which is taking over the bulk of its IT operations in a 10-year deal. The two firms will also push communications solutions to medium and large enterprises and the public sector, via HP resellers or as managed services. These offerings will see Alcatel Lucent's IP telephony, unified communications, mobility, security and contact centre offerings bundled with HP's IT offerings. Staff may be concerned about moving from a previously nationalised firm to the more aggressive approach of HP's HR policies.

Capita has acquired Carillion IT Services, the external IT delivery unit of Carillion plc, for £36m. The business, with its 440 UK employees, will be renamed Capita IT Services.

Negotiators are being too cautious when agreeing new contracts, according to a new survey. The top negotiated terms are: limitation of liability; indemnification; price changes; intellectual property; protection of confidential data; service levels and warranties; delivery/acceptance; payment; liquidated damages; and jurisdiction. The report says that:

• 'The global economy has swung increasingly towards services. Most major manufacturers have sought to avoid the pressures of commoditisation by moving towards packaged solutions and services. These relationships demand outcome-based commitments, weakening the traditional principle of caveat emptor and making the ability to bear and manage risk into a source of competitive advantage.
• 'Today’s focus is wrong because it concentrates on assumed failure. It does not manage risk because it fails to enable opportunities, growth, and mutual benefit. The focus of negotiation today stifles collaboration, and results in many contracts being dangerously incomplete when they are signed. This is because battles over the allocation of risk frequently prolong negotiations and divert attention from the real issues, which are what the parties want to achieve and how best they can do it.'
  
  SAP

SAP has announced a benchmarking programme under which it will defer 30% increases in its maintenance prices until it can document cost efficiencies enabled by its new enterprise support programme, using 12 agreed performance indicators at 100 nominated customers.

The worldwide market for business intelligence, analytic applications and performance management software in 2008 increased by 22%, from $7.2bn to $8.8bn, says Gartner. Industry consolidation has resulted in customers accelerating their migrations and upgrades. SAP was the top BI company, with a 24% share in 2008, following its acquisition of Business Objects.

HARDWARE

Despite its CEO's claims that it wants all of Sun, Oracle has continued to try to sell Sun's hardware business since the announcement of the acquisition, but the asking price was "unrealistic", say sources close to the deal. It is also rumoured that Sun has cancelled development of the Rock processor, which would have powered its high-end Solaris servers. The budget for the project had shrunk as Sun lost market share, and key employees left Sun, causing the chip's planned 2008 launch to be delayed.

And between 25% and 30% of Sun's direct sales force in the UK are likely to be made redundant this month, as the company hands more customer accounts over to resellers.

MOBILE PHONES

Collective intelligence could be the biggest revolution in IT since the advent of the Internet. Mobile phones have evolved into handheld computers which record the details of our lives:

• GPS in the handset reveals where we are, when we go to work, when we get home and where we go at weekends. Online calendars show where we have been and where we will be next. Social networking reveals who our friends are, and location services reveal where they are. Our online search history reveals our interests. when we start paying bills with our mobiles, they'll record our purchases. Because we take our mobiles everywhere, they create a crucial bridge between the real and virtual worlds.
• Logica demonstrates a scenario in which shops sense the arrival of a particular customer in a shopping mall and send a discount coupon to her mobile. Later the phone notifies the woman that two of her Facebook friends have entered the mall.
• TomTom, the Dutch sat-nav firm, no longer tracks traffic conditions through roadside cameras but instead measures the speed at which mobile phones in cars are travelling. So TomTom can spot traffic jams as they happen and predict their likelihood by calculating the number of cars due to arrive at a pinch-point.
• The big issue is, of course, privacy, with many users unwilling to hand over their digital footprint to third parties. Operators defend their proposals by saying they will be 'opt-in', and that each user will be known by a string of data, not their real name.
• One analyst says that collective intelligence has all the right qualities to spread rapidly: “History shows that market-changing technologies are ones that enable a broad class of people to do what, previously, only an elite class could do. That’s exactly what the network does. It gives individuals and companies access to the kind of information only previously available to the likes of governments and vast corporations.”
  

SOURCES USED IN THIS ISSUE
Channel Register (www.channelregister.co.uk)
Hi-Tech Scotland (www.hi-techscotland.com)
Information Age (www.information-age.com)
Managing Automation (www.managingautomation.com)
MicroScope (www.microscope.co.uk)
Silicon.com (www.silicon.com)
The Times (www.timesonline.co.uk)

IT industry analysis—2009 Week 24—on one page

IT SPENDING
According to a Gartner survey, about half of CIOs have changed their IT budgets since the start of this year, and 90% of them said the change was negative. They've cut back on consultants, software and hardware purchases and they're renegotiating vendor contracts. In the data centre, the average cost of a transaction continues to fall, but the volume of transactions continues to grow by 10% to 15%—hence the growth in storage shipments. In the past, as revenues grew, so did transaction volume. But since the start of this year, CIOs began reporting that relationship is broken. Transactions continue to grow even though revenues are flat to down. In banking, for example, balance inquiries are one of the fastest-growing transaction types. It doesn't generate any revenue, but it does generate a lot of work. When the economic recovery begins, IT budgets will lag by one or two quarters, because IT spending is a trailing indicator.

SERVICES
Outsourcing providers experienced business as usual for the first six to eight months of 2008 but then encountered the beginning of the downturn, cccording to Gartner. This surprised the firm's analysts because the potential cost savings from outsourcing usually keep the segment buoyant. The Indian vendors were affected early in the economic downturn, as they rely heavily on the financial sector, and typically lead with offshore application development projects which can easily be delayed in tough times. Gartner believes the global IT services market reached $806bn in 2008, up 8%.

According to IDC, the European IT services market is set to enter negative growth (down 0.6%) this year as support, training and project revenues fall. Project revenue is predicted to drop 3% while firms have get cold feet about investing in major deployments or costly upgrades. Outsourcing is still expected to grow this year, with revenue projected to hit 4%. Support and training will have a particularly awful 2009, with revenue dropping almost 5%. IT training market will plummet by 10% as firms book education only when course are needed.

In contrast to some of their western counterparts, neither TCS nor Infosys is slashing jobs in response to the slowdown. TCS claims it has advantages over competitors, including skills with the latest technologies and a highly motivated, skilled and mobile workforce. The company is currently selling its services as packages to appeal to cash-strapped customers. "Customers are looking for integrated solutions such as IT, infrastructure, BPO and testing services from one supplier," said a TCS executive. "Over one-third of the deals we won last year were for two services or more." About 30% of Infosys's staff are known as 'bench workers', which means they work full-time when a project is on but are retained even when there are no client projects. Then they are do things such as building new platforms for Infosys. It is only a matter of time, wrote Computer Weekly, before Indian suppliers overtake western competitors through competitive advantages such as flexibility, ambition and employee commitment.

In its last set of results as a separate entity, Fujitsu Services reported revenues of £2.8bn (up 7%) for the year ended 31st March. Its order book was down to 6% to £6.7bn. Revenues in the UK grew 4% to £1.7bn. Fujitsu Services did not win a single large deal last year.

HARDWARE
The worldwide storage market fell 18% to $5.6bn in the first quarter, according to IDC. The total capacity shipped rose 15% to 2.1 petabytes. HP led the market with a 17.4% share, with EMC second on 15.5%, IBM third on 14.4%, and Dell fourth on 11.7%.

Distributors expect the number of reseller collapses to increase later this year. The CEO of Ingram Micro expects to lose about 15% of its reseller population this year, compared to a usual churn of 5-10% a year. While some resellers might be able to hold on for six months of downturn, he said, 18 months was not viable. In a downturn, it is often the lack of credit that administers the killer blow to resellers.

TRANSACTIONS
Dell has achieved more than $3m from Twitter followers who clicked through its posts to its websites to make purchases. Dell says it posts 6-10 times per week to its DellOutlet account, which is where the majority of Twitter-based sales have come from. Almost every post includes a coupon or a link to a sale, and about half of the posts are Twitter-exclusive deals. The PC maker, which has about 600,000 followers, is one of the Top 100 most-followed accounts on Twitter.

Many iPhone applications cost a few dollars to load onto your iPhone. Although some iPhone apps have generated hundreds of thousands of dollar sales, most developers have barely broken even. But soon Apple will enable developers to take further payments within applications sold through the iPhone App Store. This will change the economics of the mobile application market, and is likely to increase Apple's market share because, until they have exploited this enhancement, developers will be in no hurry to work with rival platforms such as the Google Android or Palm Pre. Apple's App Store uses a well-established ecommerce platform, iTunes, to bill customers, which has helped make downloading and paying for applications as easy as purchasing and downloading a song. By contrast, Apple's competitors have had to build their own mechanism for discovering and paying for new applications from scratch. And as a result, virtual storefronts, such as Google's Android marketplace, have been slow to get off the ground.

...AND FINALLY
The FT listed seven signs of corporate inertia—indicators that the board is too locked into its past:

1. Your CEO appears on the cover of a major business magazine. Praise from the press reinforces management’s attachment to their commitments.
2. Management gurus single out your firm for special praise. Just remember the curse of In Search of Excellence.
3. The CEO writes a book while still in his post.
4. Building a grand corporate headquarters often signals that executives have declared victory. The best giveaway is an indoor waterfall.
5. Have a sports stadium named after the company.
6. Competitors share the same zip code. Entire communities of similar companies can fall prey to active inertia.
7. Top executives look like clones. A homogeneous group of top executives often selects and promotes other managers based on their adherence to existing commitments. They also lack the diversity to envision alternative way of competing.
   
   SOURCES USED IN THIS ISSUE

• Channel Register (www.channelregister.co.uk)
• Channel Web (www.channelweb.co.uk)
• Computer Weekly (www.computerweekly.com)
• Financial Times (www.ft.com)
• Forbes (www.forbes.com)
• Nelson Hall (www.nelson-hall.com)
• The Register (www.theregister.co.uk)
• Silicon.com (www.silicon.com)

IT industry analysis -- 2009 Week 23 -- on one page

HARDWARE
There is a bloody price war going on in the server market, wrote The Register in reviewing Gartner's 1Q09 server estimates, and it will worsen during the rest of the year. It will be very tough for any server maker to get a dollar to the bottom line this year. And Moore's Law will make the price war even worse: the vendors will have to sell more iron to get the same revenue. Among the 'highlights':

• Yet again Sun didn't make it into the top five x64 vendors.
• IBM is the top Unix vendor by revenue, gaining three points of market share. (IBM's Unix revenues fell only 14%, against HP's 19% and Sun's 27%.)
• The once booming Eastern European market was particularly awful, with sales plummeting 48%.
• Western Europe was only slightly better, with revenues down 34%.
  

CEO Michael Dell said that, with technology firms currently receiving relatively low valuations, the economic downturn provides a good opportunity for Dell to digest a big acquisition.

EMC has started a bidding war with its storage rival NetApp for data de-duplication specialist Data Domain. This a defensive move by EMC, which seems to be prepared to pay a premium to keep Data Domain out of NetApp’s hands. De-duplication is already extremely useful when dealing with backups, because it can dramatically shrink what are often huge volumes of backup data. Data Domain is a very strong player in data-centre backup de-duplication, and by some estimates last year owned two-thirds of that market. (Neither EMC nor NetApp have such a product today.) The other high-profile company in this sector was Diligent. Last year IBM snapped up Diligent for a reported $200m, which is now looking like a very good move.

IT SPENDING
British Airways has slashed its IT budget by nearly a third as the airline struggles to cope with high fuel prices and the slump in passengers caused by the recession. Last month, the firm reported its biggest loss in more than two decades and is reviewing all areas of the business where savings could be generated. During the review, BA decided to postponed a number of projects, including a company-wide ERP rollout, which began last year.

OUTSOURCING
The global outsourcing market is predicted to grow by more 8% this year as businesses look to save money on IT expenditure, yet according to two new reports, companies are likely to emerge from the recession lacking in innovation and locked into cheap-and-not-so-cheerful contracts that are expensive to renegotiate or cancel. Some companies are going to suppliers and saying: 'Look, you've got this contract, but we need 20% off it. So how are you going to do it?' But you can't cut costs by 20% unless you don't do certain things. Other cost-cutting practices include:

• Companies bundling contracts together into one supplier so that they can ask for a much greater cost reduction or by going to more contractors, slicing it even smaller, and then going for the lowest bid on each contract.
• If you are an organisation that wants to save money and are looking at how you might cut costs, then it might look attractive on the surface to break up large contracts or, indeed, to move work you have done in-house into this multisourced environment. Companies need to invest in staff to manage the relationships with suppliers.
• One professor says there are cost-cutting alternatives to outsourcing IT to survive the recession. These include simply slowing down delivery of the IT strategy, outsourcing other functions, such as HR, accountancy or procurement instead of IT, or even moving those functions offshore.
• If you must outsource IT, restrict it to fewer than five suppliers, the professor advised, otherwise it starts to become unmanageable and costs begin to soar.

More than half of companies and clients polled for the Black Book of Outsourcing said they expected spending to come back to the pre-recession levels by the end of the year. But clients will be looking for short-term projects of less than six months and will steer clear of complex pricing deals.

SERVICES
HP has enhanced its managed enterprise services with new licensing options. Proposed structures include multi-tenanted systems where all users are supported with a single configuration, subscription plans based on individual usage, and long-term, perpetual service offerings. "Customers can do more with flat or shrinking IT budgets when they have a choice of procurement models for software and services," said HP's VP of worldwide alliances and software and solutions.

Phoenix IT Services, which provides services to enterprises and the public sector in the UK, reported sales growth of 4% to £104m for the year ended 31st March. The firm's chief executive said there had been fewer multi-million pound, multi-year contract opportunities; consequently new business wins were smaller. Customers are taking longer to reach purchasing decisions, renewal rates declined from 86% to 66%, and the order book had dropped 17% to £142m.

Channel companies must step up to the plate and take their transformation from box-shifting middlemen more seriously, according to industry players. Resellers have become very keen in recent years on identifying with terms such as solution provider but their practices are often not matching up. Many are still relying on a core of product sales, and merely wrapping a few services around the hardware or software, he claimed. At the solutions or managed services level, a far greater degree of consultancy should be apparent, focusing directly on customer needs, and little or no emphasis on selling product. Product margins will continue to erode and end-user businesses are increasingly demanding a single point of contact for IT provision. These things must force change in the channel. One of the biggest obstacles to this channel transformation is the vendors themselves. Vendor incentive and channel reward programmes are almost invariably linked to product sales, in some form or other. Vendors need to figure out how to reward VARs for selling SaaS. A successful sales team at this end will not ever talk vendors and speeds or feeds, but will focus directly and clearly on customer needs.

SMEs
SMEs are suffering more in the UK than elsewhere, according to research by AMI. Slower payments, cash flow issues and tightening credit are worldwide problems, but 76% of UK SMEs are seeing slower payments compared to 49% for the world as a whole, and nearly half of British firms seeing tighter credit, as opposed to the worldwide average of 36%.

CONTRACTS
Derbyshire County Council has signed a £6m contract with Capgemini to replace its mainframe technology with SAP systems, scheduled to go live by April 2010. The implementation will be carried out by a team of 25 people based at the council's offices in Matlock. But Capgemini will also use staff based in India as well as in China, Poland, Morocco and Latin America.

The value of BT's contract with NHS Connecting for Health (CFH) has increased by over £500 million over the last year. Written parliamentary answers revealed the lifetime value of BT's contract is now expected to be over £1.5bn. BT declined to comment on 'the commercial detail' of its contracts. BT originally underpriced the contract—at the time IBM's rival bid for the London contract was rumoured to be £1.4bn, according to Ovum. In its haste to secure a landmark IT services deal, BT underestimated the challenge the London contract represented. BT had NHS CFH over a barrel during contract renegotiations. As one of just two remaining providers, BT's very public threat to walk away from the contract carried real weight. Health minister Ben Bradshaw's response to the parliamentary question also revealed that BT's spine contract is now worth £889m (up from the original contract value of £620m over ten years).

EMPLOYMENT
BT has been accused of laying off expensive UK contractors and replacing them with Indian staff. Workers brought in using intra-company transfers are replacing contractors for about half the price, a contractor told BBC Radio 4. According to a contractor working for BT Global Services on the National Programme for IT, the NHS project, workers from Tech Mahindra earn about £220 a day whereas UK contractors earn £400 a day. BT said that it was looking to cut its dependence on expensive contractors and that anyone brought in from India was a specialist; intra-company transfers are meant to be for people with skills not available from the British workforce. It said it had not replaced any permanent staff with Indian staff.

SOURCES USED IN THIS ISSUE

• Computing (http://www.computing.co.uk/)
• CRN (http://www.channelweb.co.uk/)
• Kable (http://www.kable.co.uk/)
• Microscope (http://www.microscope.co.uk/)
• Ovum (http://www.ovum.com/)
• The Register (http://www.theregister.co.uk/)
• The Times (business.timesonline.co.uk)
  

The Crucial Source of Information: People

A couple of days ago we received an enquiry from an executive: his impression was that a competitor was executing the strategy of systematically targeting countries, one at a time, directing a disproportionate level of marketing resource at that country until the firm achieved the No. 1 position in that country, then moving on to the next country.

The shift to the next country necessarily involved the reduction of resource aimed at the first country, so that the resource could be transferred to the next. Presumably the customers and channel partners in the country either wouldn't notice the reduction or, if they did, had become so loyal to the vendor that they wouldn't bother to switch to another vendor.

Was the executive's impression correct, he asked? And if so, how could we counter the strategy?

Led by our director, our initial position was the null hypothesis: the vendor wasn't targetting countries one at a time, but instead behaving consistently across all countries, and over time. Indeed it's very difficult to find evidence that suggests the contrary:

• We forwarded the question to our worldwide counterparts, who are normally assumed to be wise in all matters. They took some time and some pushing to respond. When they replied, they knew of no serial targeting strategy in Europe by the vendor.
• There was no secondary research, no single report, that focussed on the vendor's country-by-country strategy or gave any impression of the timing of such a strategy.
• There was nothing that we could look for in our own financial records that could possibly demonstrate a single vendor exercising a country-by-country strategy. If our results go up or down, it is usually due to a load of market effects and the actions of multiple competitors. To show the movements of a ghost vendor through our financial records seemed impossible.
• We found several news clippings from 2007 that indicated that resellers liked this vendor for its consistency.
• We didn't approach any employee who had previously worked for this vendor, because to do so would be unethical.

A first draft of a 'No Evidence' presentation was forwarded to the original requesting executive. A second version, polishing the English and improving the flow of the argument, but basically maintaining the 'no evidence' position, was produced.

Then suddenly, a contrarian view came through. Our European channels specialist, who had been copied on the request, not by us but by one of our respondents, said he had spoken to a respected external analyst, who said the vendor did, at times, employ a targeted, country-by-country approach.

So much for serendipity. My personal view is that the exernal analyst is so experienced and respected that we should take his word for it. Besides, he has direct contact with the vendor itself.

So the moral of this story is that much of the time in market intelligence, you'll be relying on the judgements of people. Numbers have their place, but too often they are historical—too historical to act upon. The more accurate they are, the older they are likely to be. If you try to work it out all on your own, you're almost bound to miss some important points. So ask for input, almost always.

Rewarding good market selection

I'll be brief tonight, as it's been a long day and I haven't had a chance to think deep thoughts.

I spent the day in the City of London, as guest of one of our investment advisor firms. They were educating us about interest rate swaps and inflation swaps—financial tools that UK pension funds are increasingly employing.

But perhaps the most intriguing nugget emerged from a discussion in the morning: our equity fund managers don't get directly rewarded for good performance—e.g. a financial incentive for exceeding the benchmark for that asset class. The reward they get is the continuation of their contract with our pension fund. But, unless the manager's performance is absolutely appalling, it tends to take at least three years to collect enough data to indicate that the manager should be sacked.

I guess this shows what a random process stock-picking is assumed to be. So, nothing like market selection in the world of business strategy, then ...

The Unmeasurables

Pick a typical action-oriented decision:

1. Whom will you choose as your next partner?
2. Whom will you vote for?
3. Which CD will you buy next?

How are you likely to make that decision? My guess is that no-one would make any of these decisions on entirely numerical criteria. You might have included some numerical factors—e.g. 'height greater than 150cm' or 'jazz band with at least two lead instruments'—but I would imagine that you would also include at least one personal judgement criterion, such as 'personality that I would rate at least 8 out of 10' or 'any new CD by an artists whose previous albums I have been at least 70% satisfied with'.

If you're committing your future or your money to a decision, you wouldn't leave it to entirely numerical criteria. You might let Amazon recommend a CD purchase, but you wouldn't let a computer make your purchase decisions without consulting you first.

This refusal to make personal decisions on entirely numerical criteria makes me highly suspicious of any business decision-making tool which uses only numerical criteria. Would you buy or divest a business on purely numerical criteria? I hope not—there would presumably be many qualitative factors, such as your judgement about the degree of fit with your existing business and the calibre of its management.

But in my job, I see an increasing number of tools being proposed for internal usage which aim to produce a composite number out of a series of purely numerical factors. Some of these tools generate a number, and others produce a 'traffic light' colouration of cells in which the decision to go for red, amber or green is based on a number. Other tools promise to create a 'heatmap', whatever that is. Many of them lhave a passing resemblance to a half-hearted GE multi-factor Matrix.

What they all share is the implicit message that if you can't measure it, it shouldn't be a consideration in the invest/divest decision. They don't trust the client management to supply qualitative judgements on unmeasurable factors (such as 'quality of indirect channels') because they fear that these managers will adjust their input to get the result they require.

And yet proper use of the GE multi-factor matrix should always involve some input criteria which require qualitative judgement. People seem to think they can include what they like in these tools, without realising that their proper construction has some intellectual basis. For instance, the 'Boston Box' arose out of the Experience Curve, though I can't recall the precise connection at the moment. It must be time to finish.

Tomorrow I'll discuss these matrices further, or something similar, or perhaps something quite different.

Make sure you ask the question very clearly.

Q1. What is the minimum number of people you need in a room before it is more likely than not that two of them share a birthday?

The answer is 23. Bypass the next paragraph if you either are not interested in how the answer is calculated or already know the solution.

Without substantially altering the answer, we'll assume the year is 365 days long. We'll focus on the chance of everyone in the room having a different birthday.

• The first person enters the room. The second person has 364 out of 365 chances of having a different birthday to the first person.
  
• The third person has 363 out of 365 chances of having a different birthday to the other two.
  
• And so it goes on. The 23rd person has 343 chances of out of 365 of having a different birthday.
  
• Multiply all these probabilities together to get the probability of all the events happening. You can do it on your calculator.
  
• After 22 people have entered the room, the probability of them all having different birthdays is still greater than 0.5. But multiply that number by 343/365 when the 23rd person enters the room, and now the probability is less than 0.5, so it more likely than not that two of the people in the room share a birthday.
  

Q2. What is the minimum number of people you need in a room before it is more likely than not that one of them shares a birthday with you?

The answer is about 254. Each person who enters the room has 364 chances out of 365 of not having the same birthday as yours. If x is the number of people in the room needed, then we have to solve the equation (364/365)^(x-1) = 0.5.

What intrigues me is that the questions are very similar, yet the answers are very different: 23 versus 254. Indeed the questions are so similar that many people might not detect the nuance. If we put the questions through an automated translator (e.g. Babelfish), and translate them into, let's say, Spanish and back again, we get:

Q1. Whoever is the most minimum number of persons that you need in a quarter before you are more likely that no those two from her part in the birthday?

Q2. Whoever is the most minimum number of persons that you need in a quarter before you are more likely that no that one of the parts in the birthday with you?

Both sentences no longer make sense, although they still differ. Will anyone understand the questions? It's highly unlikely that anyone will come up with 23 and 254.

The moral of the story

I'm not trying to make a point about not giving numerical tasks to foreigners. The key issue is about clarification of the question. English can be a very compact language—small differences in wording yield very different answers. Mechanical translators have a long way to go before they can understand these nuances. (And I have to admit that it is mathematically interesting that the two answers are so different.)