Thursday, March 31, 2005

HP's new CEO: the un-Carly

Hewlett Packard has a new CEO, Mark Hurd, and according to the San Jose Mercury News he's making a positive first impression with employees:
The HP employees started out with polite applause Wednesday, as they met their new boss for the first time.

But they erupted in spontaneous claps of delight when Mark Hurd told them he won't chase the limelight -- setting clear distance between himself and his predecessor, Carly Fiorina.
Fiorina, who was forced out by HP's board in February, spent more time building her CEO-celebrity image than bolstering HP's financial performance.

To get a read on how Hurd might change things at HP, analysts are studying Hurd's 25 year career at NCR, where he was CEO until this week. I checked with my own source within NCR about how NCR folks feel about losing Hurd. He wrote,
No doubt it is a big deal. For NCR it is bad news, as evidenced by our $600M loss in market cap over the past two days. It is very painful, but financially rewarding, to "right the ship", which is what he did here. It will be interesting to see if he can do it in a different and much larger context at HP. [The press is] portraying him as low key. While he is not very well known, he is very high energy. Let's see how much he avoids the spotlight. Personally, I think he will welcome it!
The San Jose Mercury News has more on Hurd's reception at HP.

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Tuesday, March 29, 2005

The Microsoft ERP lock in effect

Earlier this month, Microsoft laid out its roadmap for Project Green, its next generation ERP offerings. But one aspect that has not been fully discussed is how Microsoft will be locking in customers of its ERP systems to its own technology stack.

Although Microsoft's Project Green will provide an improved user interface, better interoperability via Web services, and new features for business intelligence, it will do so by tying the ERP system more tightly to several Microsoft infrastructure products, such as Microsoft's SharePoint portal, Exchange, Outlook, SQL Server, and SQL Reporting Services. This is great, if those products are part of your infrastructure strategy. If not, it pretty much guarantees they will be, or else you will miss out on the improvements of Project Green.

To be fair, Microsoft's strategy to lock in ERP customers to its own infrastructure technologies is not much different than Oracle's, which has made it clear that it intends over the long term to move its newly acquired PeopleSoft and JDE customers to Oracle's database and middleware. The big difference between Oracle and Microsoft, however, is that Microsoft plays in so many levels of the technology stack, including server and desktop operating systems. has more.

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Saturday, March 26, 2005

Software on demand: attacking the cost structure of business systems

I've long been convinced that the "on-demand" model for business applications has much to offer. Now, after listening in on a conference call with Timothy Chou, former head of Oracle's On Demand business, I'm even more persuaded that we're at the beginning of a major change in how business systems are sold, implemented, used, and maintained.

ThinkEquity Partners, an investment analyst firm, hosted the conference call with Chou. He presented more material than I can cover in this post, but I'll summarize what I consider the major insights.

What is software on-demand?
First, by way of review, the concept behind software on-demand is simple. Instead of a software vendor selling you a software license that you then implement and maintain on your own computers in your own data center, the software vendor hosts the system on its own computers in its own data center and sells you access to the system on a subscription basis. In a nutshell, software on-demand turns software from a license sale to a subscription service.

There are variations in the on-demand model. The vendor may host a separate system for each customer (the "single tenant" model). Or, the vendor may host multiple customers on the same instance of the system (the "multi-tenant" model). It is a relatively simple matter for most software vendors to deploy software on-demand in a single tenant model. But only vendors that have specifically designed their systems from the ground up to host multiple clients on a single instance can host the multi-tenant model.

Oracle's on-demand offering is a single tenant model. Oracle has to build a separate instance of its E-Business Suite for each customer., on the other hand, is a multi-tenant system: many customers are sharing the same single instance of the system hosted in a data center.

In response to my question, Chou agreed that software on-demand is really the return to a very old concept in business systems: the service bureau model of timesharing. However, he pointed out that in the old days, timesharing was a way to address the high cost of hardware, specifically mainframe computers. Today, the problem is not the high cost of hardware but the high cost of software, and especially the management of software. This is the problem that the software on-demand model solves.

Changing the cost structure for providers and customers
Chou's main argument is that the traditional cost model for software is broken. He says,
On the side of the customer, IT guys are spending 75% of their budgets managing installed systems, and the percentage is growing. At the end of the day, if we as an industry do not solve this problem it will be the end of software, because there won’t be any money left for customers to buy new software.
On the customer side, the total cost of ownership of business systems is heavily weighted toward on-going support. Customers often worry about the cost of software licenses. But the license cost is dwarfed by the support cost.
The rule of thumb is that a customer is going to spend four times the purchase price of the software per year to manage the software. For example, Oracle's E-Business Suite costs about $4,000 per user. Therefore, the support cost is $16,000 per user per year, or $1,300 per user per month!. Gartner reports similar numbers for SAP. This ratio is even true for applications such as e-mail. This is why IT department budgets are dominated by the costs to maintain existing software systems.

But if I can come in and say, it’s not $1300 per user per month, but $100, why would a customer not take my offer? Particularly if I can argue that I can do it better than he can.
If the cost structure for customers is unworkable, it is no better for vendors. Chou says,
On the producer side in the software industry today, we are seeing massive top line pressure. The days of million dollar software deals are over, there is increasing competition, and there is increasing pressure from the open source community. If a vendor cannot significantly alter the cost structure of the software business, there will be no margin left.
Chou breaks down the cost structure of a software vendor into three main categories and shows how the on-demand model addresses each of them.
  1. The cost of R&D, which is typically 15-20% of the cost in a software company. However, much of a vendor’s R&D investment is swallowed up by work other than developing new functionality. For example, developers have to test against various configurations of operating systems and accommodate back-levels of various infrastructure components. Chou estimates that less than 5% of the R&D cost is actually spent on innovation.

  2. The cost of support. This includes the vendor’s help desk and second level customer support to answer customer questions about how to set up and operate the application. Chou claims that prior to the PeopleSoft acquisition, there were over 4,000 support staff at Oracle, and "none of them are involved in building new stuff."

  3. The cost of sales and marketing. In a traditional software company, the sales force spends much of its time answering questions from the prospect's technical staff regarding hardware sizing, infrastructure requirements, and other support issues. Chou also points out that when you are selling multi-million dollar software licenses, sales cycles tend to lengthen because a lot of money is at stake up front.
Let’s see how the on-demand model attacks these three categories of cost for the vendor. A pure on-demand vendor, such as, avoids many R&D costs because there is only one configuration of hardware, database, and software to worry about: the one that the vendor runs in its own data center. Therefore, the on-demand vendor does not need to spend as much on R&D, because the complexity on the customer side is greatly reduced.

The on-demand vendor also has lower costs of support, because many technical support calls are eliminated. Software on-demand addresses this cost by taking over the support function from the customer and handling it with the vendor’s own staff.

Finally, the cost of sales for an on-demand vendor is lower. Although software on-demand still needs to be marketed and sold, most of these issues become moot inasmuch as the customer will not be hosting the system. In addition, because the up-front commitment is less, sales cycles are generally shorter.

Obstacles to software on-demand
Chou says that many of the early objections to software on-demand, such as security, have been largely overcome. Furthermore, CIOs these days seem to have less of a need to be "server huggers," as he calls them—CIOs that want to be able to see the computer sitting in the corporate data center.

However, there is one objection against software on-demand that still arises--the fact that software hosted by the vendor does not easily accommodate modifications. Chou’s response is that the on-demand software providers today are doing a better job of allowing customers to make configuration changes without having to actually modify the software. But he also points out that CIOs really want fewer customizations. CIOs know how expensive modifications can be, and how much trouble modifications to packaged software can introduce. Ultimately, modification of packaged software is an economic decision.

Making the transition
Chou believes that most of the major traditional software vendors have not embraced the on-demand model because it requires changes to nearly every aspect their business. It is not just a matter of rewriting the application but of changing how software is developed, marketed, sold, paid for, and supported. He says,
This change touches every aspect of a software company, from sales, finance, R&D, distribution, and service. It’s not a simple shift, such as rewriting everything in Java. One of the challenges that the traditional guys have is not technical but organizational. The traditional guys have got to make the crossing, or they are finished. Many of them, including Oracle, have made a great effort, but they have to. The challenges are not insignificant.
In conclusion, Chou is not optimistic about the future of many traditional software vendors, many of who will probably not be able to make the transition to the on-demand model. Therefore, the future of software requires new players. The economics of the on-demand model are inexorable. Providers, such as, Webex, and Rightnow, are showing that the on-demand model is not only viable but also thriving.

Some vendors fear that software on-demand will just turn software into a commodity. But, as Chou says, "It's not bad to be a commodity--it's just bad to be in second place."

For more development of these ideas, check out Chou's book on the subject, entitled, The End of Software.

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Friday, March 25, 2005

New study claims Microsoft more secure than Linux

Fans of Linux point to better security as a benefit of Linux over Microsoft operating systems. However, a new study by security applications firm Security Innovations comes to the opposite conclusion.

The study found that Web sites running on the default configuration of Red Hat Enterprise Linux ES 3 are less secure than those running on the default configuration of Windows Server 2003. The study uses a "days of risk" metric, which is calculated as the number of days that each vulnerability is known by the vendor but not patched.

Critics of the study immediately jumped on the fact that, as it turns out, the study was funded by Microsoft. It's not the first time that a Microsoft-funded study has found Microsoft superior to Linux. Back in 2002, I wrote about this IDC study funded by Microsoft that touted Microsoft's benefits over Linux. I later did a detailed rebuttal to an Aberdeen study that found Linux and open source products less secure than Microsoft's offerings.

Although Microsoft's funding of the study calls into question its objectivity, the results should not be dismissed out of hand. A more thoughtful approach would be to look at the data and the methodology and determine whether the conclusions are valid. Security Innovations, to its credit, has published both the data and the methodology, making such an evaluation possible.

Red Hat, which was not given an opportunity to review the findings prior to publication, criticizes the study for not taking into account the severity of each vulnerability when calculating the days-of-risk metric. In other words, vendors should prioritize their efforts and should fix the most critical vulnerabilities first. Red Hat claims that under a severity-weighted calculation, Linux is more secure than Microsoft Windows Server 2003.

I might also point out that the Security Innovations study assumes that users run each operating system with its default out-of-the-box configuration. That's a questionable assumption in practice. If the security of a specific Web application is critical, the real question should be, how difficult is it for a system administrator to secure the application?

The Security Innovations study is on the firm's Web site. A brief response from Red Hat is on the Red Hat People blog. An article on ZDNet has more reporting on the debate.

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Monday, March 21, 2005

SAP walks away from Retek deal

Oracle has just announced that it has reached agreement to acquire Retek for $631M. Retek is a leading vendor of retail management systems. SAP, which made the initial offer of $8.50 for Retek, refused to respond to Oracle's latest offer of $11.25 per share.

I predicted last week that if Oracle countered, SAP would walk.

There's more detail in a press release on Oracle's web site.

Update, Mar. 22. SAP isn't exactly walking away empty handed. SAP had negotiated a $25 million termination fee if Retek cancelled the deal. According to an article in CNET this morning, SAP plans to "take that termination fee and reinvest it in its retail strategy." So, in effect, Oracle helping to fund SAP's retail applications development effort, or contributing $25M toward SAP's next acquisition.

Who might SAP go after instead of Retek? Keep watching JDA, a main competitor to Retek. A JDA acquisition might be particularly apt, seeing that JDA is a partner to PeopleSoft, which could mean SAP would be gaining a foothold in some Oracle clients.

Forbes has a more in-depth analysis of the battle between SAP and Oracle in the retail market space.

Update, Mar. 28. Bruce Richardson at AMR thinks that Oracle overpaid for Retek.
Price aside, Retek is strategic to Oracle because of the pull-through effect. Most Retek customers use Oracle’s database and run the financial and human resources software. Plus, Oracle didn’t want SAP to box it out of the retail market. Did SAP’s counterbid cause Oracle to pay too much? In my view, yes.
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Friday, March 18, 2005

Oracle loses You

CFO Harry You is leaving Oracle, after only eight months on the job, to become CEO of BearingPoint (formerly KPMG Consulting). The new position won't be a big adjustment for You: prior to taking the job at Oracle, he was CFO at Accenture, a major competitor to BearingPoint.

The timing of You's departure is not good for Oracle, as it is still digesting its acquisition of PeopleSoft and is in the middle of a bidding war with SAP for Retek. Oracle co-President Safra Catz, who already has a lot on her plate, will fill the CFO slot until a full-time replacement is found.

Because the major consulting firms, such as BearingPoint, have significant influence with large Oracle customers, it's important that Oracle maintain a positive relationship with You. CEO Larry Ellison said, "We wish Harry good fortune in his new job and look forward to partnering with him and BearingPoint for years to come."

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Thursday, March 17, 2005

SAP ups the ante for Retek

SAP is raising its offer price for Retek from $8.50 per share to $11, topping Oracle's bid of $9. SAP says that's its best and final offer, and it will expire April 1. SAP's latest offer raises the total deal to $640M.

My prediction: if Oracle counters, SAP walks.

Update, Mar. 17. Oracle has responded, increasing its offer to $11.25. Let's see if SAP's "best and final offer" was really its best and final. We'll also see whether my prediction that SAP walks was correct. The San Jose Mercury News has a good round up of the bidding war so far.

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Wednesday, March 09, 2005

Bidding war: Oracle fighting SAP over Retek

Oracle is offering $9 per share for Retek, a leading software vendor for the retail industry, topping SAP's deal with Retek last week at $8.50 per share. At the time of the SAP/Retek announcement, I said that the deal was probably motivated by SAP's attempt to gain ground against Oracle in the retail industry, especially since Oracle's acquisition of PeopleSoft gave Oracle a stronger presence in the retail sector. Apparently, Oracle saw it that way as well and is trying to block SAP's move.

As of this writing, Retek shares are trading above Oracle's price, indicating that investors are expecting a bidding ware between Oracle and SAP.

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But looking at Retek's stock price, you wonder whether there might have been some insider trading going on. Oracle announced its bid for Retek after the market close on Tuesday. But on Monday and all day Tuesday, Retek's share price began to climb above SAP's offer of $8.50. On the other hand, Oracle revealed that it has already accumulated 10% of Retek's stock, so maybe that accounts for the price rise prior to the announcement.

Oracle's move was a surprise, since Oracle has its plate full with PeopleSoft right now. But apparently, Oracle does not want to stand by and allow SAP to scoop strategic deals unless it is willing to pay top dollar. So, what other software vendors might be the next Retek? JDA Software, Retek's main competitor in the U.S., is an obvious candidate. But I'll go out on a limb and put Lawson and Manugistics on the list as well. Both could be strategic deals for either SAP or Oracle, and neither of them are large deals. Lawson's market cap is about half a billion, similar to Retek's, and Manugistics is valued at only $176M.

Update, Mar. 11. In an e-mail exchange, Peter Coleman at ThinkEquity, an investment research firm, writes that he doesn't think there will be a bidding war and that Oracle needs Retek more than SAP does.

[For a bidding war to take place,] you need to have two irrational buyers, and in this I think there is only one. SAP may come back with one better but that will be it. They will walk away before it gets to $10.50.

I don’t think it’s a bluff. This is a must have deal for ORCL. They had been planning on buying Retek but were not in a rush because they thought Retek wasn't going anywhere. PSFT gives them some stuff in retail but not the core transaction system. With out Retek, Oracle is done in retail. On the other hand, SAP still has their solution. It's not growing as fast as they would like, but it is gaining traction.
Coleman also points out that JDA is probably not an alternative target to Retek for Oracle, even though PeopleSoft already has a relationship with JDA. The reason: JDA's products are based on Microsoft's technology, which is of no interest to Oracle. Retek, on the other hand, is Oracle based.

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Tuesday, March 08, 2005

Microsoft: Project Green to appear in waves

At its Convergence conference this week, Microsoft laid out its vision for Project Green, its roadmap for Microsoft business applications, which include acquisitions Great Plains, Navision, Axapta, and Solomon, as well as Microsoft CRM. According to Doug Burgum, head of the group, Project Green will appear in "waves" of incremental improvements in functionality and changes to the underlying technology to bring the applications into line with Microsoft standards and platforms.
  • The first wave, which is now appearing until the end of 2007, will incorporate into the products common Microsoft technologies, such as Microsoft's Sharepoint portal, its workflow engine, and SQL-Server business intelligence capabilities. This wave will also create a common Web services architecture among the products to facilitate integration.

  • The second wave, which will run to the end of this decade, will allow the products to take advantage of features in Microsoft's next generation Longhorn operating system and the next version of its Visual Studio developer tools.

  • What about the original vision of Project Green: to merge the four disparate products to a single code base? Burgum said that would be a third wave, maybe. Quoted in a CNET interview, he said, "It's a tough challenge. Some of it was expected to be tough, and some of it was even tougher than what was expected."
It's easy to poke fun at Microsoft for having to scale back its ambitions for Project Green. But frankly, I'm glad to hear that the road ahead will be more evolutionary than revolutionary. Business users prefer stability, continuity, and incremental improvements in business systems, rather than radical wholesale disruptions.

Microsoft's plan for Project Green is a realistic and acheivable roadmap for its business applications. Existing users will be glad that they will be able to stay on their current systems and take advantage of new technology as incremental upgrades. New prospects will be able purchase Microsoft's applications today, knowing that they are not investing in products that will soon be at their end of life.

For more details, check out the article on CNET and another one on Microsoft Watch.

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Thursday, March 03, 2005

Microsoft fuzzes up the definition of Project Green

Satya Nadella, head of Microsoft's Project Green, appears to be redefining success in delivery of his initiative. In an interview with Computerworld he says,
Project Green is one of those things that with a little help from us gets written up as different things by different people. Project Green is a bunch of research we're doing on those design pillars I talked about. It is also actual product delivery of that research in the context of releases of Great Plains or Navision or CRM. Project Green is showing up in our products today. When we start taking the innards of the business logic of these apps and start putting models on them, putting them on a single model, that's when you'll start to see us having a convergence of our core code.
The goal of Project Green originally was very clear: the development of a single code base that would be the successor product to Microsoft's four acquisitions: Great Plains, Solomon, Navision, and Axapta.

But, Project Green has had a rough go from the start. First, it fell behind schedule and Microsoft cut the number of developers assigned to it from 200 to 70. Then it faced further delays with the push back of delivery of Longhorn, Microsoft's next generation operating system, which was to supply the developer tools and other infrastructure pieces for Green.

Now, if I'm reading Nadella correctly, Green isn't a product at all, but a process--a bunch of research that produces incremental enhancements in existing products. At some point, the four products will converge into one core system. When will that be? Nadella doesn't say, but it sounds like a long time.

To be fair, in the rest of the interview, Nadella says some good things about evolving Microsoft's applications into a service oriented architecture (SOA), one that will make them easier to incorporate into composite applications that include components of other vendors. But, based on the track record of Green thus far, one has to ask whether Microsoft can deliver on even this scaled back vision.

Nadella's interview continues to show the difficult time that Microsoft is having in developing, marketing, and selling enterprise applications.

Update Mar. 7. Information Week has an article confirming that Microsoft is changing the definition of Project Green. Further clarification from Microsoft is expected at the MBS Convergence partner show this week in San Diego.

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Tuesday, March 01, 2005

i2 founder gives up top spot to new CEO

Floundering supply chain management vendor i2 has appointed a new president and CEO. Michael McGrath will take over the top spot from co-founder Sanjiv Sidhu, who will remain as chairman. McGrath is coming out of retirement to take the job. He was formerly a co-founder of the consulting firm PRTM.

McGrath will have his work cut out for him. i2 has had a tough few years lately: it was delisted from Nasdaq last year, and in its most recent quarter posted a $2M loss.

According to an interview in Computerworld, McGrath plans more layoffs, up to 20% of the work force. He also plans to focus on consulting services to help customers actually achieve benefits from its software.

Novel idea.

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