Monday, August 26, 2013

A Lousy Job Of Embalming Microsoft

So now that Steve Ballmer has announced he’s leaving, the usual suspects – and some on-high commentators who also seem to be missing the mark – have gathered to criticize Microsoft via Ballmer.  I am no unthinking fan of Microsoft, and I have had my share of strong disagreements with their strategies and solutions over the years.  However, I have found myself in the last decade defending them frequently, simply because their critics seemed to fundamentally misunderstand them.  And now, here we go again.
Let me start by a quick thumb-nail sketch of Microsoft’s history and nature as I see it – not at all the typical view presented these days.  First of all, Microsoft started by finding itself (by virtue of a lucky contract with IBM, then dominant in PC hardware) with an incipient monopoly in operating system software.  The key word here is software – that uniquely flexible foundation for building “meta-solutions” that adapt more rapidly than anything else as technology and customer needs evolve.  Microsoft, even then, had two valuable characteristics:  it could create foundational software like Microsoft Word that was “orthogonal” – it was relatively user-friendly because the commands it offered were relatively compact and powerful – and it could keep at a solution until it got it right.  As a result, Microsoft was able to use its favored position in operating systems to create an effective monopoly in office-system suites, especially when the Windows version of its operating system led to the success of the mouse-using “graphical user interface.”  All of this pretty much happened in the 1980s.
Also in the 1980s, Microsoft took the tack of “rough and ready” versions of the operating system open to developers, and it took great pains to nurture those developers.  Here, I am talking about the ecosystem of developers in their time either outside of their employer, or in small companies dedicated to producing Windows versions of applications.  Apple, by contrast, wanted to control the “quality” of the operating system and sell hardware, so Apple’s share rapidly shrank to the entertainment and education markets, while Microsoft took a larger and larger software share of PCs that were now becoming ubiquitous and the machine of choice as cheap scale-out servers.  And so, by the end of the 1990s, Microsoft had adapted enough to the Internet via Internet Explorer to ensure a strong presence in scale-out server farms (the ancestors of the cloud), in businesses, and in the PCs usually used to access the Internet.
What followed in the decade of the 2000s was not so much the encroachment of competition from the likes of Google and Apple as saturation of existing markets.  Under Ballmer, Microsoft adapted to federal regulation by making a sort of peace with its enemies, from Sun to Apple to IBM, so that Microsoft joined the pervading “coopetition” approach to the market.  Far more importantly, Microsoft got business customers in its “DNA” by hires and investment, so that Microsoft was able to balance its customer markets with a secondary but still very important business market relatively impervious to saturation of the customer market. 
Over the last five years or so, however, Microsoft has finally begun to stop seemingly defying gravity in its rapid revenue growth.  Microsoft could see the handwriting on the wall, and has been trying to establish a strong position – necessarily, via innovation – in new markets.  It has had some success in innovating, and therefore reaping a strong market position, with video-game Kinect, and Windows 8 does represent some needed innovation in its present markets.  However, this is too little to move the revenues dramatically in what is a very-large-revenue company.  And it’s not clear what will change that.
What’s blocking Microsoft is fundamentally the hold of Apple and Google on developers of smartphone apps.  It’s not that Microsoft has lost its own developers, but if it wants a good revenue jump it needs an equal or greater mass of developers in some other market where it is a credible competitor.  And recent moves to establish its own app-development encouragement suggest that it’s not doing enough to create a relatively friendly app-dev environment in mobile smartphones/tablets.

The Usual Misunderstandings

You see very little of this in today’s commentary on Steve Ballmer.  There’s notes about how he didn’t understand Microsoft’s friction with US and EU governments about its monopolies – actually, that has died down, precisely because he did enough to defang much of it.  There’s the “dominance of iOS on mobile” – granted, Apple’s laptops have also made major inroads in the PC/laptop market, but that still leaves Windows with the overwhelming majority of sales and existing boxes, and, as noted, the non-smartphone/tablet market is saturated but not in a major decline, especially if you look at IBM Windows-PC sales compared to Unix/Linux.   There’s “it’s all about Apple design”, while a cursory inspection reveals that Samsung Galaxy based on Google Android is more than competitive with Apple design these days, and Samsung is seeing the results in its sales.  I’ve already noted the exceptions to the “Microsoft can’t innovate” mantra.
Then there are the more global economic commentators – now that they’ve finally realized that computing software matters, although they’re still underestimating the importance of software compared to hardware.  Prof. Krugman posited that Microsoft might do OK despite Apple’s seemingly obvious and eternal dominance, because it is now focused on business.  Um, no, Microsoft’s revenues and employees are still not primarily focused on business.  Microsoft will do OK because its present markets are saturated, not defunct, because Apple’s relative “innovative” status is going away where it counts, in the actual products, and because Apple is not doing enough for its own developer ecosystem.  Hence, as the need for larger-form-factor products for the enduring popularity of longer blog posts (like this!) persists, Microsoft will get its share via not-dead-yet laptops and their hybrid variants.
Or, we can cite Alex Tabarrok as simply noting that Microsoft’s stock jumped when Ballmer announced his resignation.  Sorry, the stock market is notorious for predicting 9 out of the last 3 recessions, as the old saying goes.
Above all, commentators continue to misunderstand the ongoing global economic contribution of software to such factors as productivity and “technological” advances.  Microsoft’s commitment to a developer ecosystem and its “orthogonal” designs (in the best cases) are simply examples of how the software industry enables a welter of new applications that actually do, once the dust finally settles, produce fundamental innovation that leads to productivity improvement as measured by our economic statistics. 
Resignation?  Who cares?  I don’t.  Microsoft?  Who cares any more?  I do; and you should.  For all the reasons no one seems to be talking about.

Wednesday, August 14, 2013

We Have Blamed the Vendors and IT; Is It Now Time to Blame the Business Types?

Reflecting on the recent financial reports of the giants of computing infrastructure – companies like IBM, HP, Oracle, and Microsoft – I am struck by the continuation of a troubling trend:  The technology and its usefulness is moving ahead as fast as, if not faster than, ever before; IT has made some striking adjustments; but the revenues to vendors from this, and therefore IT spend, are flat if not falling. Why?
Let’s see.  In databases, Oracle and IBM are almost flat, despite (at least in IBM’s case) two technologies in two years that potentially deliver performance and price-performance gains well ahead of Moore’s Law.  I find plenty to criticize in Windows 8, but its implementation with regard to business needs, in Windows and Office usage, should deliver benefits comparable to that of the introduction of the mouse-based user interface – and Microsoft enterprise revenues are flat.  Cloud technology is not replacing, but rather complementing, in-house architectures, and therefore should require, initially, more rather than less total spending – and yet, increases in cloud spending are instead paired with overall flat or lower user computing spend.  No, I don’t buy the “public cloud saves money” rationale – the benefits come later rather than sooner, and involve mainly flexibility and to a much lesser extent multi-tenancy and grid savings, especially when many users are employing multiple cloud providers that must be coordinated.  And the IBM and Oracle/SPARC data suggest the biggest hardware decline is in Unix/Linux hardware, the darling of the cloud set, not in mainframes or PCs. 
In the past, a typical explanation for this has been the need for the business to cut back IT spend in response to decreasing profits.  Of course, that did not prevent IT and computing from becoming a larger and larger part of overall business spending during the 1980s and 1990s.  In the early 2000s, IT spend actually decreased proportionally to the cost-cutting of the rest of the business – and yet, despite an initially tepid overall business recovery, computing spending from about 2003 to 2008 rebounded and grew quite briskly. So this pattern of user computing spending is unprecedented in three ways:  its length, its unremitting focus on cost-cutting apparently comparable in size to the rest of the business, and its seeming inability to reflect major technology advances with a good claim to deliver major cost or other benefits to the rest of the business.

The Blame Game

In the past, I have found, when things go wrong in computing spending the first reaction is to blame the vendors.  In this case, the obvious critique is that they have failed to communicate the benefits of the technology, cost and otherwise.  Except that, as I can attest from my experience as an analyst, both the technology advances and the communications from the vendors are as good as, if not in many cases better than, those of most or all of the past.  Big Data, for example, is not pure hyperbole, and vendors have done a reasonable job by traditional standards of highlighting the ability of targeted Big-Data analytics to explain and bind the customer as never before, in a cost-effective way. 
OK, then the next line of analysis is to blame IT, typically for failing to align themselves with the business’ strategy, or (when times are tough) identify ways of lifting the dead hand of older systems and other seemingly outdated costs.  To this, I have one response:  agile IT.  As never before, IT is aligning itself with agile development, by supporting a software lifecycle that includes operational feedback integrated with development, and by encouraging automation of functions that provides a basis for rapid response and identification of architectural problems and opportunities at the administrator level.  As my studies have shown, these plus the increasingly agile nature of the software that IT makes available to the business translate into major cost-cutting and major benefits beyond what traditional IT approaches can deliver.  And as for aligning itself with business strategy, IT is well aware of Big Data as a hot topic, hence the sudden and somewhat odd demand for Hadoop experts.  No, whatever IT may have done in the past, it seems clear that it has upped its game.
OK, then, who does that leave?  And yet, how can we blame the business types?  Aren’t these the same folk who drove those increases in IT percentage of spending over the 1980s and 1990s?  Aren’t these the most receptive listeners when we talk about the power of embedded analytics to improve business processes and the importance of analyzing the “customer of one”?

There’s Something Not Going On Here …

To understand why there might be cause for concern and, yes, for blame in business strategy – driven by the CEO, the CFO, and their staff – let’s look in very broad-brush terms at what has been going on, not just for the last five years, but for the last three decades.  Here are a few of the highlights, as suggested by various studies:

1.       Advances in productivity have been accruing 90% to the CEO – ½ in his income as CEO, and ½ in his increases in wealth as an investor.  While this still represents a fairly small percentage of overall expense, it does unnecessarily increase the focus on cutting costs for all except the CEO.

2.       Hedge funds that sometimes act as turnaround artists or “shadow banks” have taken a good 90% or so of the funds’ investment profits for themselves, and thus receive compensation not just in the tens of millions of dollars but, at the top, in billions of dollars, despite the fact that they deliver less to the investor than an index fund in most if not all cases.  While it is difficult to see direct effects of this “fleecing of the rich” on corporate strategies, one significant effect is to increase the fleeced CEO’s focus on growing profits uber alles, to at least get some return from their investments – with the Googles of the world the few happy exceptions.

3.       The present long-lasting recession/stagnation has effectively removed perhaps 10% of the workforce from work over a long period of time.  This has the effect, since businesses often discriminate against the long-term underemployed, of creating a permanent gap between “potential” GNP and real GNP.  To put it another way, even if the economy grows at a reasonable pace, it will still be much smaller it should be.  That means smaller markets and, again, more relative emphasis on cost-cutting to achieve profit growth rather than growing revenues to grow profits.
There are three concerns about this excessive focus on cost-cutting.  The first, which probably is not serious right now but is far more troubling than five years ago, is that cost-cutting eventually runs out as a strategy if revenues continue to be flat (and, don’t forget, revenues are pretty flat for the bulk of businesses, hence the 1% growth in GNP over the first part of this year).  The second concern is that this cost-cutting, applied economy-wide (as it seems to be doing), reinforces and cements smaller markets by eliminating the part of the market funded by the now underemployed.  Ordinarily, recessions are too short for this to happen; but it seems to be happening now, as new jobs continue to make no dent in the workforce/working-age-population ratio.
The third concern, which I for one find the most troubling, is the possibility that reflexive cost-cutting becomes the answer to every situation, the reflex of the business.  If that is true, it would suggest that businesses are blowing opportunities for savvy increases in computing technology spend because it’s all about cost-cutting, not strategic investment. 

Blame or Not, What Might Business Strategists Do Better?

First, I would suggest that businesses set up a long-term plan and process for using analytics to better understand and improve the relationship with the customer.  This means acquiring data virtualization software and the like, to allow aggressive searching out and combination of all the new customer information constantly being created.  It also means buying the new infrastructure tools (database and information architecture) that can scale to handle aggregation of social-media data on the Web and in-house customer-experience data. 
Second, I would argue (not that I expect many businesses to listen) that in order to grow revenues as well as profits (and probably grow profits faster), business types need to acquire and foster use of agile tools and processes – such as agile marketing, with its emphasis on data-driven understanding of the customer and prospect rather than the anecdotal, top-down opinion that has been all too common in the past.  As I noted in a recent blog post, an agile business is a possibility, if the CEO and his lieutenants really commit to it – and it typically means not only the CEO using a Scrum-type planning process, but also constant modification and constant feedback up and down the organization about plans.  I should also note that an agile process specifically builds in slack for learning and review, and yet (according to my studies) it produces much better cost-saving and profit results than a “cram as much work as possible in, be as cost-efficient as possible” approach, for the CEO as well as the developer.
And then there is the really controversial stuff. Sustainability efforts are, by and large, really underperforming, as a recent article in confirms my impression that gains in the US in carbon emissions are effectively coming from offshoring the problem.  Businesses need to acquire effective global carbon-tracking software, and use it.  Businesses need to join to push shared quality regulations that will move all towards new computer and software technology that is more productive, rather than clinging to the infrastructure of the past that in the long run costs more, as in the electrical/energy grid vs. software-coordinated regional combined solar/wind – and rather than enabling the block-all-regulation political excesses of the U.S. Chamber of Commerce and its ilk.
I’m not saying that all this is doable, or that the case for questioning the approach of the overall business to computing technology is clear.  I am saying that it’s time we recognize the seriousness of the overall problem of which computing spend is a part, and we stop blaming the usual suspects.  Five years is enough.  Thirty years is enough.  In the long run, a cost-cutting strategy is not enough – and the long run is beginning to arrive.