The Agile Executive

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Posts Tagged ‘MGI Research

Y2K vis-a-vis IT Debt

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http://www.flickr.com/photos/plural/4279707276/

Andrew Dailey of MGI Research and Andy Kyte of Gartner Group kindly did some digging for me on the total amount of money that was spent on Y2K. Here is the bottom line from Andy concluding our email thread on the subject of Y2K expenditures:

I have remained comfortable with our estimate of $300B to $600B.

In other words, it will take an effort comparable to the Y2K effort at the turn of the century to ‘pay back’ the current IT Debt.

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Considering modernization of your legacy code? Let me know if you would like assistance in monetizing your technical debt, devising plans to reduce it and governing the debt reduction process. Click Services for details.

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Written by israelgat

October 18, 2010 at 6:13 am

Companies make shoes!

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Peter Drucker made an astute observation which is quite relevant to the current business situation during a September 1998 interview with Fortune:

Securities analysts believe that companies make money. Companies make shoes!

Readers of this blog might have said “software” instead of “shoes.” The point would have been similar to Drucker’s. Good financial management is no doubt  important for your company’s success. It is no substitute, however, to focusing on the business you are in, the technology(ies) that drives the business and the effectiveness of the underlying systems and processes.

The current macro-economic situation gives you an opportunity to soberly assess the viability of your business design (as distinct from doing a lot of financial engineering). With asset inflation corrected, measuring the effectiveness of your business model in terms of the ratio Market Value/Revenues is much more meaningful now then it used to be prior to September 2008. As pointed out by Slywotzky in Value Migration, a market value to revenues ratio lower than 0.8  indicates value outflow for your company and possibly for your industry.

For software companies, the impact of “good enough” Open Source Software should be assessed in conjunction with close examination of the market value to revenues ratio. Twitting from the recent OSBC conference in San Francisco, colleague Andrew Dailey of MGI Research reported “… ERP/CRM are viewed as least susceptible to open source disruption… due to high transaction volumes and high integration needs.” Conversely, Andrew considers office productivity software as ripe [for the picking by Open Source Software]. I am personally of the opinion numerous Application Life-cycle Management tools could be massacred by Open Source Software.

The confluence of the threads highlighted above poses a fairly unique opportunity for the Agilist to convey a major premise of Agile to his/her executives. Like a thriving Open Source Software community, a hyper-productive Agile team can pick a ripe market faster and cheaper than an old fashioned software company could. Moreover, if a company is in one of the markets that are susceptible to an Open Source Software onslaught, Agile can (up to a point) provide defense against such onslaught. Whether you choose to attack or defend, Agile software gives you the advantages of proprietary software at a fraction of the traditional cost.

Batten Down the Hatches

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“As you might expect, we are in a batten down the hatches mode.” These words, taken from an email an executive just sent, prefaced his decision not to go ahead with planned Agile projects due to the need to cut costs. His operating assumption is simple: His company must cut costs now and will somehow manage without  investing in Agile software and consulting.

Real $$ are hidden in your software

In Estimating Software Costs, author Capers Jones quantifies five year cost of software application ownership (for the vendor). He examines three  similar applications, each of nominal size of 1000 function points, as a function of the sophistication of the corresponding projects. The respective life cycle costs are as follows:

  • Lagging projects: $2,316,000
  • Average projects: $1,860,000
  • Leading projects: $1,312,000

Jones goes on to issue the following stern warning:

All known compound objects decay and become more complex with the passage of time unless effort is exerted to keep them repaired and updated. Software is no exception… Indeed, the economic value of lagging applications is questionable after about three to five years. The degradation of initial structure and the increasing difficulty of making updates without “bad fixes” tends towards negative returns on investment (ROI) within a few years.

Dwindling maintenance revenue streams complicate the situation

Revenues from maintenance services are subject to severe pressures these days as many customers are renegotiating service contracts. Igor Stenmark foresaw and foretold the phenomenon in November 2008.  To quote Igor:

…sacred cows like software maintenance can become hamburger meat if users feel enough of a budget pressure.

Net net, as they say, the exec mentioned above is likely to face rising maintenance costs due to software decay over time. At the same time, revenues from maintenance contracts are bound to fall short of projections due to customers renegotiating their contracts.

The shiny new toy is not a cure

Recognizing the software maintenance conundrum they are caught in, many executives are pushing hard to develop new software to increase sales in order to compensate for the decline in revenues from software maintenance services.

What is missing is a serious commitment to improve the underlying software process. Software developed today might indeed be sold as a shiny new toy tomorrow. But, unless the software process is improved, a little down the road the new software will have similar maintenance problems. The corrosive effect of software decay on the shiny new software will become more and more severe as a function of time. The current business environment, hopefully, will change in a few years. However, the underlying software development and maintenance laws will not. No getting around it.

No better time than now

The numbers from Capers Jones cited above are illustrative of the cost savings you could expect to attain by modest investments in improving software process and practices. You might perhaps have more attractive cost saving alternatives available to you. However, if you don’t, there is no better time to invest in software process and practices than now.

Written by israelgat

February 16, 2009 at 4:09 pm

Enterprise Software Innovator’s Dilemma

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In his classical book The Innovator’s Dilemma, author Clayton M. Christensen introduced a framework for analyzing disruptive technological changes. The framework is based on four principles, as follows:

  1. Companies Depend on Customers and Investors for Resources.
  2. Small Markets Don’t Solve the Growth Needs of Large Companies
  3. Market that Don’t Exist Can’t be Analyzed
  4. The Technology Supply May not Equal Market Demand

Christensen illustrates how the four principles apply to computers, retailing, pharmaceuticals, automobiles and steel at various critical junctures along the road. In the software industry, Netscape’s web browser technology is an enlightening example of disruptive technology in action.

Enterprise Software Innovator’s Dilemma

A couple of years ago, my colleague and friend Sebastian Hassinger characterized the state of affairs in enterprise software by the following chart a la Christensen:

Enterprise Software Innovator's Dilemma

The key point this charts gets across is that Open Source Software is becoming “good enough”. It has already met or will soon be meeting the minimum requirements of the enterprise customer. By  so doing, Open Source Software will steadily gain ground from traditional enterprise software vendors.

Strategic Implications for the Incumbent

The maturation of Open Source Software forces incumbent software vendors to seek differentiation for their proprietary products. Such differentiation usually attempts to follow one or more of the following three patterns:

  • Strategy of fear, uncertainty and doubt (FUD), portraying open source products and the communities behind them as not quite appropriate for mission critical applications. As the open source community has been tackling more complicated problems and producing increasingly sophisticated  products, the FUD strategy has lost much of its effectiveness.
  • Functional differentiation through features that are not available in open source products. This kind of differentiation loses much of its effectiveness once the “good enough” open source software line in the chart above intersects with the enterprise customer requirements line (the purple line in the chart). The extra features might indeed be included in the proprietary software, but the incremental value to the customer diminishes.
  • Customizing proprietary software offerings to the particular requirements of top customers. This differentiation stratergy is discussed in the next section.

IT Services

Given the ineffectiveness of the first two strategies to deal with Open Source, various incumbent enterprise software vendors try to protect their business by way of customizing their vanilla offerings to the particular environments, needs and use patterns of their top customers. Such customization  is typically done through professional services engagements for which the customer usually pays. Under this business design, IT service revenues – professional services as well as customer support – often become more important than product revenues. The attach rate the ratio of service revenues to product revenues tends to hover in the 100- 400% range. In other words, for every dollar a sales rep brings in, in the form of product revenue, he is expected (and often goaled) to bring as much as one to four dollars in service revenues.

Although a high attach rate might be attractive from a revenue stream perspective, it is counter strategic on three critical accounts:

  • It completely distorts the economics of the product – a $1 product could  for most practical purposes cost $2-5. Readers of the Customer Intimacy post in this blog might recall the characterization given by Crawford and Mathews to Consumer Underworld relationship between vendor and customer: “Be inconsistent, unclear, or  misleading in your pricing”.
  • It accentuates the customer frustration with the enterprise software model, tilting the balance further in favor of Open Source Software. IT services are seen for what they often are –  complementary business to unsatisfactory enterprise software.
  • The attach rate dives like a rock in difficult economic times such as the current macro-economic crisis. The phenomenon is described in the recent MGI Research article on the subject.

Agile Based Market-of-One

Hyper-productive Agile teams are sure-footed in moving requirements back and forth between release and backlog. This flexibility in changing the release contents quickly can be channeled toward customizing software to the needs of top customers straight from the R&D lab. Instead of doing it through professional services, R&D tailors custom releases.  In other words, the enterprise software vendor produces markets of one in an efficient manner through Agile methods. If these efficiencies are passed on to the customer, the customer-vendor relation with respect to price could be transformed from Consumer Underworld all the way to Customer seeks the Company.

Although the development of market of one software through Agile methods in the lab can be quite effective, its distribution, deployment and subsequent operation in the customer environment need to be equally efficient. The “containerization”, distribution and provisioning of the output of hyper-productive Agile teams enables the achievement of end-to-end agility. This topic will be explored in forthcoming posts with special emphasis on three important business aspects, as follows:

Written by israelgat

January 27, 2009 at 9:45 pm