The IT Spending Recovery and Implications for Enterprise Software

Computer Economics has just published its 22nd annual IT Spending and Staffing Benchmarks study. The latest data, based on our survey from the first half of 2011, shows that the US and Canada have emerged from the IT spending recession of the past two years. At the same time, the recovery is weak and organizations have not returned to the IT spending growth rates of the middle part of the previous decade.

That said, some industry sectors are showing IT spending growth rates well above the median 2.0% for the composite sample, as shown in the accompanying figure. The insurance sector leads the way, at 5.0% growth in IT operational spending, followed by wholesale distribution, discrete manufacturing, high tech, healthcare, and process manufacturing, which all beat the composite median.


To no surprise, the sector dragging the averages down is government. Median IT operational spending by governments is falling 3%, the second year in a row that IT organizations in the government sector have reduced spending. The retail and banking and finance sectors also continue to show below-average growth in median IT spending, at 1% and 1.1% respectively.

Other key findings include:

• IT operational budgets as a percentage of revenue is 1.6% this year, down from 1.8% of revenue in 2010, as revenue gains outpace investment in IT.
• In a continuation of a six-year trend, IT operational spending per user this year is declining to $6,667, down from $7,002 the prior year, on an inflation-adjusted basis. The long-term trend is indicative of improving IT operational efficiency but is being pushed further by the cost-cutting of the past three years.
• After three years of zero growth, IT capital spending is up 1.8% at the median. Discrete manufacturing, energy and utilities, and high-tech sectors show the strongest growth in capital investment.
• The modest increase in IT spending this year is not reflected in IT hiring plans: only 34% of organizations are increasing IT headcount, while 27% are reducing staff levels.

A free 40+ page executive summary of the IT Spending and Staffing Benchmarks study is available, along with a description of the full report.

Implications for Enterprise Software

The recovery in IT spending is certainly good news for enterprise software buyers and sellers. The stronger-than-average recovery in the manufacturing and distribution sectors is especially welcome, as these sectors were hammered hard early in the recession. In our soon-to-be-completed technology trends survey, we are already seeing signs of increasing interest in expanding ERP systems, replacing legacy systems, and new investments in CRM, supply chain management, business intelligence, and mobility applications.

At the same time, our data shows the recovery is weak. Although many organizations are now willing to spend, they still have one foot on the brake, ready to cut back or postpone new spending initiatives if the recovery slows. Fear of a double-dip recession is far from over.

This cautionary mood means that sellers should expect buyers to negotiate hard on price. Flexibility in payment terms, with milestone payments instead of cash up front will also be well received. With its subscription-based pricing and avoidance of large up-front costs, software-as-a-service (SaaS) will continue to be an attractive option for many buyers. Finally, many buyers will be looking to add new functionality to existing systems, rather than completely replace them. Vendors that are able to play well with others will benefit the most in this environment.

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In defense of incremental innovation

As regular readers know, I am a fan of Clayton Christensen, author of The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Christensen is the one who first coined the phrase disruptive innovation, which has become almost a cliche these days for anything "new" in the world of technology.

But when we say a certain innovation, or a certain technology, is disruptive, what does that mean? Disruptive of what? Disruptive to whom? Without a clear explanation, the term is ambiguous.

This became quite clear in a presentation that I gave to a client. At one point, we used the word "disruptive," and several individuals in the room grimaced. One of them spoke up and said something to the effect of, we are a conservative organization--we're not sure we are ready to be disrupted. Ironically, this is a high-tech company, at the forefront of its industry in terms of innovation. Yet, when it came to its own information systems, the word disruption was not viewed as a good thing.

Should our client have been concerned? I don't think so. Go back and read Christensen's book. In it, he is quite clear that the disruption caused by a new technology is not disruptive to technology buyers--it is disruptive to technology sellers, especially the sellers of older technologies that are replaced by the new technologies. In fact, buyers find the new technology anything but disruptive. They find it simpler, easier, and cheaper to use. It is the sellers of the old technology, which is more sophisticated, more feature-rich, and more expensive that are disrupted by the newer, cheaper, simpler technology.

The vendor's responsibility

This thought came back to me last week when I read a post by my friend and associate Vinnie Mirchandani, who attended, as did I, SAP's user conference in Orlando, Florida. In Sapphire Now: Innovation at the Edges, he writes:

But if there is plenty of innovation at the edges, the core [SAP's core products, such as ECC and the rest of its Business Suite] still seems fairly static. The lightbulb still has not gone on that if on-demand functionality can be delivered for sub-$100 a user a month, there is little justification for on-premise price points to be 10, 15, 20x that. That if Apple and Google and amazon can build mobile ecosystems of hundreds of thousands of applications and games with a cottage industry of entrepreneurs, SAP cannot continue to magically expect its current SI and outsourcing partners to match that speed or those price points. If small teams can build fairly ambitious HANA applications part-time in a matter of days, SAP’s and its partner’s project time scales need to be similarly compressed. if on-demand benchmarks are showing frequent upgrades and importantly instant propagation throughout the customer base, SAP cannot afford to have old-school and grudging multi-year customer base migrations at the core.

That is SAP’s next big challenge. It has picked up a whole bunch of hammers and sickles as it innovates at the edges. It now needs to use them to bombard the core.

Now, I have no argument with the thought that SAP needs to transform its core products with the same technologies that it is using to develop its new "edge" products, such as its line-of-business applications. In fact, SAP co-founder Hasso Plattner and board member Vishal Sikka emphasized this same point in small group discussions I participated in.

Where I do have a different point of view, however, is with any thought that SAP's existing customers would be well-served by a disruptive transition of SAP's core products. Call it the curse of the installed base or whatever you want. But the fact is that thousands of organizations use SAP's core products to run mission-critical systems that support their businesses. SAP cannot, and should not, disrupt or otherwise undermine the investment that those customers have made. Whatever SAP does in the way of innovation, it should do so in a way that preserves and extends those customer investments.

It's not that SAP doesn't know how to rewrite its core products. It's already developed a full ERP replacement built on a true multi-tenant, in-memory SaaS platform: its Business ByDesign product for small and mid-size businesses. And it is using the same platform to deploy its "edge" products, which Vinnie refers to. Ultimately, it intends to migrate functionality from the core to these new technologies.

Lest anyone think I'm an apologist for SAP, please search this blog for posts I have written about SAP since 2002, the majority of which are critical of SAP. But on this point, I respect what SAP is trying to do.

The customer view

Customers of SAP, Oracle, and other legacy vendors are in a difficult position. Many, such as the client I referred to earlier, see value in new technologies, such as mobile applications, cloud computing, and in-memory analytics. But the value does not justify a complete replacement of their core systems, which may be stable and meeting their basic requirements. Why replace those systems? How can the customer extend the value of those legacy or core systems, while at the same time acquiring and implementing new technologies?

Rather than focus on acquisition and implementation of a new technology just because it is new, I would prefer to focus on business value. If an old technology has value, why replace it? If a new technology is not cost-justified, or not justified for strategic reasons, why implement it? If an existing technology is already implemented, what is the business case for change?

That is the need that SAP (and Oracle, and other vendors with large installed bases of customers) is trying to address. It's not easy. In fact, one might say that if SAP can meet this need, SAP would be quite innovative. It would be like allowing a driver to swap out the engine while the automobile is moving down the highway at 75 miles-per-hour. I'm having a hard time thinking of an example where a legacy enterprise software vendor has made such a transition.

So, what most companies, especially large companies need is incremental innovation: implementation of new technologies for new applications, while at the same time preserving and extending the life of their existing systems, while over the long term incorporating these new technologies into those core systems. The alternative--ripping and replacing those core systems--is painful, expensive, and, yes, too disruptive for most organizations.

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SAP innovating with cloud, mobile and in-memory computing

Based on my attendance at SAP's SAPPHIRE NOW conference this week, SAP appears to be making major advances in three strategic themes of innovation. But to succeed, it needs to do two things equally well: reach new customers with leading-edge technology while at the same allowing its legacy customers to adopt these technologies in an incremental way.

I arrived in Orlando Sunday evening just in time for dinner with SAP’s co-CEO Jim Snabe and a small group of bloggers. It was a chance to get to know Jim up close and exchange views on SAP and the enterprise software market. The conversation was very frank, and most of it was off-the-record. Jim described his own roots at SAP as well as his vision for the future, which currently revolves around three broad themes of innovation: cloud, mobile, and in-memory computing. Not surprisingly, these turned out to be major themes throughout the keynotes and briefing sessions I’ve attended.

Cloud computing

As Jim pre-announced with us Sunday evening, SAP just sold customer No. 500 for Business ByDesign (ByD), its pure SaaS solution for small and midsize businesses. This puts SAP ahead of its goal to reach 1,000 customers by the end of 2011, a point of pride. On Monday, I met in a small group briefing with Rainer Zinow, who is in a leadership position with both ByD and SAP's new line-of-business applications for customers of SAP’s Business Suite. The ByD platform, though originally developed for the small business offering, now serves as the platform for all of SAP’s on-demand applications, such as its Sales On-Demand.

On Monday, I also took time to walk out to the show floor for a test drive of the ByD application. I was impressed by the extent of functionality offered by the product, though I did find screens to be crowded and a bit difficult to navigate at first. Some of this might be resolved at implementation, as screens can be customized to reduce the amount of information displayed.

On Tuesday, I interviewed an early ByD adopter, who confirmed that they did find it helpful to configure screens to remove unnecessary information. This configuration can be easily accomplished by end-users. Nevertheless, it points out that once you get into implementation and change management, there’s not much difference between an on-demand and on-premise solution.

Mobile computing

SAP took a big step into mobile computing with its 2010 acquisition of Sybase. Much of the focus since the acquisition has been on development of the Sybase Unwired Platform (SUP), which provides the infrastructure for mobile applications (for example, device management). Now, with the platform now in place, the focus is turning to mobile apps themselves. SAP is showing dozens of mobile apps on the show floor. I got a look at some of them on the floor and also in a blogger briefing with SAP’s Ian Kimbell. Kimbell reports that initially it took SAP’s team a week or two to develop the initial apps, but after coming down the learning curve, the team now only required a couple of days to developa new application. This sort of productivity will hopefully lead to an explosion of innovative mobility applications, not just to replace desktop apps but to enable new business processes.

Some of the new apps are quite simple, such as expense reporting or management approvals, while others carry deeper functionality, such as those for patient data reporting or field service management. Some are developed directly by SAP, while others are being developed by partners. Most are or will be available through the newly announced SAP apps store.

See the video I shot, below, of some demonstrations of these mobile apps.

In-memory computing

Most enterprise software vendors consider cloud computing and mobility applications as the top two innovations currently disrupting the enterprise software marketplace. But SAP consistently lists a third innovation: in-memory computing. The strategic place of in-memory computing was made clear in my meeting with SAP co-founder and current Supervisory Board chairman Hasso Plattner. In memory computing is simply an computing architecture where an entire database resides in main memory and all reads/writes are performed directly in memory, instead of in disk storage. (In SAP’s implementation, disk storage is still used as staging area for source data, for failover integrity, and to archive inactive data.) In-memory computing is enabled by the rapidly the improving price-performance of computer processors and memory, allowing main memory to reach into many terabytes, limited only by the number of nodes in the cluster. SAP’s flagship use of in-memory computing is in its HANA in-memory appliance, although the technology is also being deployed in other applications, including SAP’s Business ByDesign, described earlier. SAP referenced a number of early HANA adopters during the keynotes, most of which focus on business analytics with very large data sets. Early adopters include:

• Colgate Palmolive, which uses HANA to generate detailed real-time sales reporting for customers. The firm is also working with SAP now on a HANA application for trade promotions management.
• Medidata, a SaaS-provider of clinical trials data management. The firm uses HANA to allow its customers (generally large drug and medical device developers) to analyze clinical trial data from around the world for trends in quality issues and to quickly take remedial action, potentially saving large amounts of money in each trial.
• Caterpillar, the manufacturer of large earth-moving equipment, which uses HANA to analyze large numbers of product configuration options and design-to-order features. This application of HANA allows the firm to determine what configurations are feasible from instantly analyzing millions of rows of data.
• Canoe Ventures, a joint-venture of several cable TV companies that uses HANA to customize delivery of ads to millions of individual viewers, allowing them to instantly request more information. This is an application that uses HANA for non-SAP data. Once the ad and viewership data is no longer needed, it returns to its sources. Nothing is held in a permanent data warehouse.

These are just four of the many case-studies presented by SAP board member Vishal Sikka and discussed further in my briefing with him after his keynote session.

As a data analysis tool, HANA competes with Oracle’s Exadata product line. In-memory computing itself is not unique to SAP. It is also employed by other enterprise system providers, such as Workday, as well as data analytics firms such as QlikTech.

Interestingly, SAP has at least two connections between in-memory computing and cloud computing. First, its cloud ERP offering, Business ByDesign, itself uses an in-memory computing architecture. Second, SAP plans to offer HANA as a service, running in SAP's own cloud, for customers that cannot afford or cannot justify an on-premise purchase of a HANA appliance.

What does it all mean?

SAP is one of the largest and oldest enterprise software providers. It has a large installed base. In pushing forward on these three fronts of innovation—cloud, mobility, and in-memory computing—it has two goals. First, to keep its installed base customers supplied with new technology, to keep them from looking elsewhere. Second, to provide new and interesting solutions to prospects that are not yet SAP customers. These two goals can be seen in each of the three themes.

• With its cloud offerings, SAP is aiming its line of business solutions, such as Sales OnDemand at its installed base, some of whom have been leaving the fold, choosing Salesforce.com for sales force automation rather than SAP’s own on-premise CRM solution (as evidenced in a recent deal I was involved in). At the same time, SAP is targeting its Business ByDesign service to new prospects--small and midsize companies--that are increasingly looking at cloud solutions, such as NetSuite. In addition, SAP thinks it has a winning strategy in selling ByD to small subsidiaries of its large customer base, which might otherwise look to Microsoft, Epicor, Infor, or QAD, for example, in a two-tier configuration.
• With its Sybase Unwired Platform, SAP is trying to make life easier for its installed base customers, who otherwise would have to develop their own mobility applications or integrate offerings from a variety of providers to run on a variety of devices. At the same time, SAP thinks it can sell its mobility applications to companies outside of and separate from its installed base, potentially serving as an entry point for other SAP products. My associate Dennis Howlett thinks SAP should be even more aggressive in this strategy, by providing the Sybase Unwired Platform at low or even no cost, to gain a foothold in new organizations.
• With its HANA in-memory data appliance, SAP is looking at providing supercharged data analytics capabilities to its own installed customer base, such as its Business Objects users. At the same time it has taken great pains to ensure that HANA plays equally well with non-SAP data, to position HANA as a general purposes data analytics solution, as shown in the Canoe Ventures case-study, outlined above.

Will SAP be successful in these three themes of innovation? It certainly has the resources to do so. Its large installed base throws off billions of dollars in maintenance fees that SAP can invest in new development. It also has a long and proud history of engineering excellence. And in its acquisitions of Sybase and Business Objects it gained the subject matter expertise and customer base to give it a foothold in mobility and analytics. If there is any area where I might have reservations, however, it might be in cloud computing. Cloud solutions are an entirely different animal than on-premise systems, in terms of how they are developed, sold, delivered, and maintained. The revenue model is different, and as a public company, SAP is very sensitive to short-term constraints on its profitability.

When it comes to investing in the resources SAP needs to make ByD or the line of business applications successful, will SAP willingly pull resources away from its high-margin on-premise business or its multi-million dollar HANA deals? Those who are fans of Clayton Christensen understand the "Innovator's Dilemma." It is not an easy step for market leaders such as SAP. The leaders in the Business ByDesign and the line of business applications areas are certainly smart, talented, determined, and visionary. But will SAP as a whole stand behind their efforts when there is easier money to be made elsewhere?

Whether SAP as an organization can maintain the level of commitment needed to make them successful remains to be seen. The early results, with 500 new ByD customers is encouraging, but there are many more months and years ahead.

Note: SAP covered my travel expenses for this event.

New details on Infor's Lawson acquisition

Confirming the rumors swirling for the past several weeks, Infor today announced that it is acquiring Lawson Software. (Technically, it is an affiliate of Infor's owner, Golden Gate Capital, doing the acquisition, but the practical outcome is that Lawson and Infor will now be one company.)

I received a quick phone briefing on the news from Duncan Angove, Infor's President of Products, Marketing and Support. Duncan himself is new with Infor as of last December, part of the new management team brought in from Oracle by CEO Charles Phillips.

The press release announcing the acquisition provides the primary talking points. But I wanted to get more details behind the announcement. Here's what I learned.

Product strategy

The acquisition is being driven by the top line (i.e. increasing revenues) and by the desire to create a "third-choice" for the top tier of enterprise buyers (i.e. someone other than SAP and Oracle) by delivering a strong offering for key industries. For example, Infor is interested not just in process manufacturing or "food and beverage," but "bakeries" and other sub-verticals. It intends to offer functionality that takes into account how bread dough rises at certain altitudes, or how long it takes an oven to reach its desired temperature, for example.

According to Duncan, there is little overlap between products of the two firms and they complement each other well. For example, Lawson has very strong presence in healthcare, and Infor does not have healthcare-specific offerings today. But Infor does have a strong asset management product, which is of great interest in hospitals, which must manage detailed information on medical device equipment. Infor sees the integration of Lawson's healthcare systems with Infor's EAM offering as an attractive offering.

Likewise, healthcare providers today face constraints due to the shortage of skilled nurses, and managing the productivity of nursing staff is a key driver of success. Lawson has strong human capital management (HCM) offerings for healthcare, which Infor intends to integrate with its own time-and-attendance and workforce scheduling applications (from its Workbrain acquisition), again, offering a more powerful solution.

On the Lawson M3 (formerly, Intentia) side, Infor sees strong synergies with its other manufacturing offerings, specifically with its product lifecycle management and supply chain products which many consider as best-of-breed.

Technology strategy

Here's where things get even more interesting. I wanted to find out how Infor viewed Lawson's M3 technology, which is 100% Java-based, in light of Infor's decision last year to standardize as much as possible on Microsoft.

Well, as it turns out, with the new management team in place, Infor has un-done its decision to standardize on Microsoft for key elements of its technology stack. Infor now prefers to stay "open" on the technology side. It will continue to leverage Microsoft Sharepoint but will leverage open source components for some elements of middleware, such as the Apache web server, OASIS standards for document exchange, and open source reporting tools. The technology stack will vary by product (e.g. Syteline will continue to be 100% Microsoft), but newly developed complementary products will not standardize on Microsoft SQL Server, for example, as had been Infor's statement of direction earlier.

As far as cloud deployments, Infor will continue to leverage the co-location data center services of Savvis and does not see a conflict with Lawson's strategy to host instances of its systems on Amazon's cloud. Infor currently uses Amazon's cloud to handle peak workload requirements, so it is not unfamiliar with Amazon's services.

Interestingly, Infor claims that the Infor/Lawson combination will have over 1 million users "in the cloud." The bulk of these will comprise Infor's current cloud-based users of its asset management and expense management systems, as well users of Enwise, a SaaS provider of HR service delivery and workforce communication solutions, which Lawson itself acquired in December 2010.

Impact on Lawson customers and employees

As with any software industry merger or acquisition, the primary concern is what the impact will be on customers, who have made large investments in Lawson software, and employees, who have invested their careers in Lawson. Concerning customers, Duncan maintains that, if Lawson was going to be acquired, Infor is the best place for its customers. It has committed not only to maintain current development efforts, but to expand them, with some of the 400 software developers it recently announced it was hiring. Lawson customers should see increased levels of investment with Lawson products, not lower.

Concerning Lawson's people, there is little doubt that there will be "efficiencies" (read: layoffs) in back office functions, but no plan to conduct layoffs among software developers. Infor sees no need to consolidate or push development offshore as a way of improving margins.

As in most cases like this, we'll have to wait to see what the real impact is on Lawson customers and employees.

My take

Infor's strategy to focus on specific industries, and sub-industries is a good one. It is quite similar to what Microsoft put forth in its Convergence conference for its Dynamics line of enterprise software products. The world has enough "broad spectrum" software that addresses a whole host of needs that no one company has, and thus carries a lot of unnecessary code, features, and configuration choices. Focusing on the differentiating requirements of specific industries (e.g. bakeries, breweries) is a better choice.

On the other hand, I think Infor's ambition to become a "third-choice" to SAP and Oracle might be a bit premature. In its ERP offerings, Infor is still a large collection of independently developed and maintained products. Lawson just adds two more (S3 and M3) to the portfolio. Nevertheless, there are enormous opportunities for Infor to establish itself as a strong contender in specific industries, short of being a "broad spectrum" provider like SAP and Oracle. There are also opportunities for Infor to position certain of its offerings in a two-tier configuration, with SAP or Oracle running for corporate or shared-services, with Infor offerings running at the plant or local office level. I would like to see Infor develop and promote out-of-the-box connectors with SAP and Oracle financials and shared services, such as order processing. That would strengthen its credibility further and would be quite attractive for many global organizations, which already are running Infor products in some of their locations.

Finally, the technology shift away from Microsoft, while understandable, represents the second or third major change in strategy over the past two or three years. Infor needs to make its technology strategy explicit and assure customers and partners that it plans to stick with it for the long run.

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What’s new with Microsoft Dynamics AX 2012

Microsoft held its Convergence conference in Atlanta last week, and one of the big items on the agenda was the scheduled general availability this August for Dynamics AX 2012 (formerly known as Axapta). There are several areas in which this new version of AX is a real advance for Microsoft, positioning AX up-market more and more as a viable alternative to SAP and Oracle for many customers.

First, let’s see some areas where Microsoft is moving the ball forward with AX.

Microsoft Dynamics AX as an ISV platform

With this new release, Microsoft is positioning AX as more than just another ERP offering. It is now pushing AX as a platform for other independent software vendors (ISVs) and business partners to build out narrow industry-specific solutions. AX currently has strong functionality for manufacturing, public sector (in four countries currently), service industries, distribution, and retail (coming soon).

Of course, many other ERP vendors target specific industries. But Microsoft is going beyond this level of focus. It has a major effort underway to recruit ISVs and business partners to extend this industry-specific AX functionality with more narrow solutions to target certain sub-industries.

For example, Microsoft has already signed up Lexis Nexis to build its legal firm solutions on top of native AX functionality for professional services. Likewise, Aldata is providing fashion and apparel industry functionality on top of AX’s retail industry solution. In another example, Microsoft recently purchased intellectual property from Tyler Technologies for the public sector and rolled it into the AX core. Now Tyler is building solutions for the government and government contracting sectors on top of AX.

Few ERP vendors are moving as aggressively to position their products as a platform for other ISVs. Smaller ISVs often do not have the resources to keep their products up-to-date with the latest technologies. By building on top of AX, they can focus their efforts not the part that really counts--the industry-specific part--instead of modernizing legacy code or reinventing the wheel with another general ledger. In one-on-one analyst briefings, Microsoft executives tossed out approximate numbers of ISVs currently in discussion about following the example of Lexis Nexis, Aldata, and Tyler Technologies—if half this number commit to AX as a platform, it will be truly impressive.

International support

There are also improvements for global implementations. Dynamics currently has development centers in Brazil, Russia, India, and China (the so-called BRIC nations). It is rolling in localizations for these countries and others into the core product, which greatly improves its global support. AX traditionally has relied upon local partners to provide customizations, which may still be appropriate in some localities. But too many partner localizations sitting on top of one another can be cumbersome. So, Microsoft’s approach makes a lot of sense to take on more of these international requirements in the core product.

Expanded functionality

In terms of new functionality, there is much to like, with new core ERP features and functions for supplier relationship management and case management, a new constraint-based product configurator, public-fund accounting, project quotation and budget control for service businesses, better multi-entity capabilities, and embedded business intelligence and reporting. There is also a new role-based user interface, and enhanced interoperability with familiar Microsoft tools such as Word, Excel, Outlook, and Sharepoint.

From the first day keynote, it was clear that Dynamics AX has its share of whiz-bang features, thanks to its ability to leverage innovations coming from other parts of Microsoft. For example, Microsoft's Lachlan Cash showed a prototype the new AX visual Kanban display, manipulated by means of the user’s body motion, using Microsoft Kinect, which is technology used in Microsoft’s Xbox gaming console (see photo). Cash pointed out that such an application would be ideal in a down-and-dirty manufacturing plant, where it might not be advisable to have users touching a keyboard and mouse.

There is much more, too much to list here. A "what's new" fact sheet is available that outlines all the enhancements of this new release and is worth a careful read.

Cloud deployment options

During the conference, many observers headlined their reports, in effect, that Microsoft is “moving its Dynamics line to the cloud.” However, the reality is that Microsoft is moving AX to the cloud in stages. At present, prospects can have their AX systems hosted in partner data centers. When the 2012 version is released in August, it will be continue to be available as a hosted solution in partner data centers, with hosting in Microsoft's Azure cloud available with the next major version after AX 2012.

Although options for cloud-based deployment with the AX 2012 version are currently limited to hosting in partner data centers, this should be sufficient for most customers. As pointed out in the analyst briefings, customers today tend to be conservative in moving their core ERP functions such as financial applications off-premise, although they may be interested cloud deployment for selected functions, such as CRM, time and expense reporting, and applications that support the mobile workforce. As Microsoft and its ISV partners build out complementary products on Azure, all customers will benefit, whether they have AX hosted on Azure or continue with on-premise deployment. So, Microsoft still has time to build out its cloud deployment options.

Where does AX fit?

Considering all of the above, Microsoft Dynamics AX is a strong candidate for organizations in the mid-tier and above, especially for those with the following characteristics:

1. Organizations in sectors targeted by AX, specifically manufacturing, distribution, retail, public sector, and services. These are major industry groups covering a broad swath of business types.
   
   
2. Organizations that have standardized or want to standardize on Microsoft's technology stack, such as Windows Server and MS SQL Server.
   
   
3. Organizations where users want to leverage their familiarity Microsoft's end-user productivity tools, such as Microsoft Office, Exchange/Outlook, and Sharepoint.
   
   
4. Organizations needing an ERP system that can scale globally to multiple international locations without incurring the overhead and expense of an SAP or Oracle.
   
   
5. Or, conversely, organizations that have SAP or Oracle running for centralized functions such as financials and HR, but desire a lower-cost, small footprint solution for local operations or satellite offices/plants—the so-called “two-tier” strategy.

Finally, organizations running multiple legacy systems that want to consolidate to a single modern platform are well advised to short-list Dynamics AX. Its backing by Microsoft in many cases will be enough to warrant AX a closer look. With the enterprise software industry undergoing consolidation over the past decade, Microsoft’s continued investment in AX gives customers and prospects the assurance that AX is not at risk for being acquired and orphaned.

A practical way forward

The enhancements introduced in Dynamics AX 2012 are not revolutionary, but rather reflect the continued evolution of a product that has become the centerpiece of Microsoft’s ERP strategy.

Microsoft’s promotion of AX as a platform is an interesting product strategy, enabling ISVs and business partners to build out more focused industry solutions (the so-called “last mile” of the solution). This approach blends well with Microsoft’s partner strategy, allowing partners to find new ways to make money while increasing the attractiveness of AX as a niche solution in a variety of sub-industries. As more and more prospects choose cloud-based solutions, traditional sources of partner revenue (e.g. hardware sales, networking, etc.) will dry up, and partners will need to provide more of a value-add. Industry-specialization is their ticket.

Microsoft is also moving in the right direction in strengthening AX for multinational organizations. Microsoft’s efforts now make AX a real alternative to SAP and Oracle, either as a complete replacement or as part of a two-tier deployment, with SAP or Oracle operating at headquarters and AX running in satellite locations. For those uncomfortable with a de-facto duopoly at the top end of enterprise ERP, the emergence of Microsoft Dynamics AX as a viable option is a welcome development.

Update, May 18: corrected timing of hosting options for AX 2012.

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When smartphones disrupt medical devices

I'm here at the Medical Design & Manufacturing (MD&M) West conference, one of several shows running concurrently in the Anaheim, CA convention center this week.

Along with the trade show, there is an excellent conference program. I am especially interested the tracks on disruptive technologies in the medical device industry as well as updates on the regulatory environment with the US Food and Drug Administration and other regulatory bodies globally.

Here are some highlights of what I've heard so far.

Global competition for innovation

Tracy Lefteroff of Pricewaterhouse Coopers outlined opportunities and barriers in worldwide medical device innovation, based on a PwC survey.

The results are not good for the US.

• The US is becoming increasingly unfriendly to innovation. Israel is the easiest place to get regulatory approval for new medical device technologies, followed by the EU and India. The US ranks lower down the list. So, if you need treatment involving innovative technology, you may need to go outside the US.
• The US carries the highest cost per hospital bed, and fewer beds per capita than any other global region--by far.
• Industry participants expect that the regulatory environment in the US will become even more restrictive in the future.
• On the positive side, the US is still the best place to raise money for new medical technologies and it also one of the easiest markets to enter, once you have an approved product.

There may be hope, however. Lefteroff reports great interest in Washington to see the regulatory environment improve. Why? Jobs in the medical device industry are leaving the US for more friendly jurisdictions, and in the current environment, anything we can do to improve the employment situation is attractive, on both sides of the political aisle.

Disruptive technologies in the medical device industry

Jeff Brown from UBM TechInsights followed with an insightful look at how consumer technologies are disrupting established ways of addressing patient needs. Brown showed as new technologies reach critical mass, their IP is often transfered into other established technologies, disrupting them and driving down the cost and size of the established products. For example, digital camera capabilities increased and the cost dropped to the point that the technology could be incorporated into cell phones. Today, many consumers do not carry digital cameras, as the cameras in their cell phones are "good enough."

Although Brown covered several disruptive technologies in the medical device industry, much of his presentation focused on how smartphones (e.g. Apple's iPhone) are becoming and will become part of future so-called mobile health (mHealth) solutions.

For example:

• The AliveCor EKG sleeve turns your iPhone into an electrocardiogram monitor. Note however that the device is not cleared for marketing in the US. More on that issue in a minute.
  
• iStethoscope Expert, a free primitive iPhone application, uses the native microphone in the iPhone to listen to and record your heartbeat.
  
• Hearing aids, which at the high-end can cost thousands of dollars, are about to be disrupted by blue tooth earpieces connected to smartphones.

In these and many other examples, Brown pointed out the tremendous improvement in capability that comes when standalone devices (e.g. hearing aids, stethoscopes, EKG monitors) are replaced by devices that connect to smartphones. They not only perform the same function as the device they are displacing but they can go beyond with their ability to record and store data and to communicate with other devices.

For example, a traditional hearing aid can only do one thing: help you listen better. But a hearing aid that is connected to a smart phone can take advantage of the smart phone's capability to record and store conversations. In fact, a smartphone could take that recorded conversation and convert it into text and email it to you. One can imagine many applications, even for people that are not hearing impaired.

Innovation vs. regulation

Brown briefly covered the regulatory issues that constrain the convergence of new technologies with medical device solutions. Current FDA regulations treats many of these new applications and distruptive technologies as medical devices, depending on their intended use to diagnose or treat disease, or to affect the structure or function of the human body. This classification puts FDA squarely in the middle of commercialization of such products.

As Lefteroff indicated earlier, other jurisdictions are friendlier environments for introduction of these new converged technologies. It may be that some of these solutions will take hold first in developing countries, where their low cost and "good enough" capabilities will allow them to be perfected and proven.

It is ironic that, while the underlying technologies may have been developed by US companies (e.g Apple), their application as medical devices may only come to the US after they have been established and proven in other geographies.

Related posts

FDA still enforcing regulations for validation of enterprise software

Avoiding project death by ROI

I had an unusual experience recently: a client demanded an exhaustive ROI calculation for a project, and the client approved the investment.

How to kill a project

Why is that unusual? First, some background. Over the years, my consulting firm, Strativa, has developed a methodology for building the business case for enterprise IT projects (or, any initiative for that matter). We identify the perceived benefits of the new system (for example), trace them back to features/capabilities of the new system, then quantify the direct financial impact. We also identify the time-phased project costs so we can calculate the ROI, whether by a simple break-even calculation or a more sophisticated internal rate of return. The whole methodology is implemented in an elaborate Excel workbook.

Although we are quite proud of this tool, I have noticed a pattern in cases where we use it. Often, when a client demands an exhaustive ROI calculation ("show me the money"), the project does not get approved. This is true even in cases where our calculations show a strong ROI.

Although I am a great believer in the need to demonstrate financial return, I have come to the conclusion that, in practice, too many executives ask for the business case not to determine whether they should make the investment, but to find an excuse for why they should not.

Now, having said that, there are some cases where an organization's capital expenditure processes require a formal business case. Here, the project sponsor requests the business case not as a means to kill the project but merely to get funding for a project that he or she already wants to do. But apart from these cases, what explains the correlation between client demands to see an ROI and projects being killed?

The "ROI Trap"

My hypothesis is that, due to a reluctance to say "no" directly, ROI calculations are often a convenient way to refuse projects that management simply doesn't want to do.

This "ROI trap" can take several forms:

• Management argues the project budget is underestimated
• Management argues the benefits are overly optimistic
  
• Management argues the benefits cannot be connected to the proposed initiative

That final point is the most subtle. For example, benefits involving increased sales are the most difficult to get by management review. A new sales force automation (SFA) system, for example, might be justified in part by increased revenue from new sales. The rationale would be that sales people today only spend about 50% of their time selling. The rest of their time is spent looking for information, administrative activities, and reporting to management. By providing faster access to information and automating much of this administrative overhead, sales people can spend more time selling, which should result in increased revenue per salesperson.

The problem, however, is that the organization is planning to do all sorts of things to increase sales, such as any number of marketing programs and new product introductions. If sales do increase after the new system is implemented, how will management know that the improvement is due to the new system and not to other things that the organization is doing? Therefore, when presented with a SFA business case that relies in part on increased sales, the easiest thing for management to do is to say, we don't see the connection.

Who owns the business case?

Is there a way out of this trap? We have found that there is one important key to having a business case approved: management ownership of the benefits statement.

Here is how we now prepare the business case for a new system or business initiative. We hold a series of workshops to collaborate with the client's project team and stakeholders around five questions:

1. What the objectives for the proposed investment?
2. How will the project meet those objectives?
3. What financial metrics would improve if those objectives were met?
4. What are the baseline measurements for those metrics today?
   
5. What percentage improvement would be achieved in those metrics if the project is approved?

We often find, however, that even among the project sponsor, project team, and key stakeholders there can be significant disagreement, especially in answering the fifth question. The reason is simple: stakeholders are going on record that they believe the project will yield certain benefits, and if the project is approved they are in effect taking responsibility for meeting those improvements in performance.

A success story

Now, back to our recent client project, which involved selection and approval of a new customer relationship management (CRM) system.

Early in the project, the client made it clear that a strong business case would be needed for a new CRM system to be approved. Based on my past experience, alarm bells went off in my head. What were the chances that this selection would end in "no decision," to the disappointment of the project team and the vendors asked to bid on the project?

Knowing about "the ROI trap," our consultants took a collaborative approach to the business case. Instead of going off in a corner and coming back with the proposed business case, they brought the client's team into the room and asked the five questions outlined above. The CFO was particularly strong in telling the team: if you say these things are benefits, you can expect your sales quotas and budgets to reflect what you say. Translation: they would be held accountable. The CFO even went so far as to ask us to break down the benefits by region, so that the regional sales managers could be held accountable.

The result? A business case that, perhaps, was understated (due to the desire not to set too high a bar) but one that was still quite positive, and most importantly, one that had the ownership of the stakeholders who would be responsible for implementation.

In the end, the project was approved, and contracts have been signed.

Lessons learned

No one likes to be held accountable, and if the business case for a new initiative is the consultant's work only it becomes an easy excuse for stakeholders to escape responsibility. Collaboration is the key: combining the consultant's methodology and industry knowledge with the client's ownership of the goals and metrics. Then, when it comes time to present the business case, it is not the consultant's presentation but the project team and stakeholders arguing in favor of the investment.

Footnote: way back in 2004, I explored the psychological dynamics of the ROI trap, based on the work of Max Bazerman. These are still quite relevant today. See the related posts below for more discussion.

Related posts

Escaping the ROI trap
Escaping the ROI trap, Part 2

*Image courtesy of Ramberg Media Group.

Apply for Our 2011 IT Spending Survey

For more than two decades, the annual Computer Economics IT spending survey has been the authoritative source for IT spending and staffing benchmarks for IT executives.

Our 2011 survey is now underway, but we're looking for additional survey respondents.

What's in it for you? We've sweetened the deal this year. If you qualify for and complete the online survey, we'll send you nearly $2,500 worth of research publications, including the composite benchmarks from this year's study.

Click here to see if you qualify, and to apply online >>

IT spending outlook for 2011 and implications for enterprise software

Over at Computer Economics, our end-of-year update on IT spending and staffing trends is showing some incrementally positive good news.

IT spending outlook

First, based on our Q4 survey of US and Canadian IT end-user organizations, we are forecasting IT operational budgets to increase 2.0% at the median. This might not seem like a big jump, but if it holds (and we'll know when we conduct our annual survey in Q1 2011), it will be an improvement over the past two years, when budgets were flat at the median.

Figure 1 shows the trend for this metric since 2006.

However, don't expect big increases in IT staff hiring, at least in early 2011. Although 27% of IT shops say they've been adding to headcount over the past three months, 14% were cutting headcount, for a net gain in only 13% of IT organizations, as shown in Figure 2.

On the other hand, on a positive note, those IT professionals who are employed are already seeing an increase in their work hours. Over the past three months, a net 47% of IT organizations have been allowing their staff members to work more hours, which could include overtime or cessation of furlough days.

On another positive note, nearly half of all IT organizations have been increasing their work on major projects over the past three months. That, of course, could be a large part of what is driving the increasing staff hours.

Finally, in welcome news for IT staff augmentation firms and contract service providers, a net 31% of IT organizations have been increasing their use of contractors and temps over the past three months. Again, this may be tied to the renewal of major project work.

Implications for enterprise software

For customers and vendors of enterprise software, what does it mean? First, the overall trend for IT operational spending may be moderate, but it is positive. The news on the capital spending side is likewise positive, with over half of our respondents expecting to spending more for IT capital investments. Our full report has details.

Second, the underlying dynamics in IT organizations are shifting. Whereas last year, and the year before, many of our respondents were canceling or deferring major projects, laying off IT staff, and cutting work hours, the picture over the past three months is exactly the opposite. New project work is increasing, new hiring is exceeding layoffs by a small amount, work hours are being extended, and IT contractors are getting the nod. All of these are positive signs.

Bottom line

I wouldn't expect 2011 to be a boom for IT spending--not only in comparison to the late 1990s, but even compared to the 2006-2007 time period, which was sort of a mini-boom compared to today. Still, after the last two to three years, any improvement is welcome.

We know from our previous years' surveys that many organizations cut back dramatically on major new initiatives, including enterprise software projects. As a result, many needed improvements were put off, and users are clamoring for relief. While economic recovery is still weak, organizations that make those investments now will be in much better shape when business conditions improve. In addition, most vendors of enterprise software are still in a deal-making mood: prices for software and for services are still a buyers-market.

Therefore, now is a good time to be making those investments.

The full report, Outlook for IT Spending and Staffing in 2011, is available on the Computer Economics website.

Related posts
Computer Economics: IT Spending and Staffing Benchmarks 2010/2011: IT Ratios and IT Cost/Budget Metrics by Industry Sector and Organization Size