TCO for software implementation projects

Understanding factors contributing to high TCO's for software projects and helping customers eliminate these adverse factors will enable ISVs and their channel partners to create and capture additional value.

Lengthy RFP Process: Complex RFP processes that drag along for months are expensive and erode value of projects and increase TCO.

Causes of delay: complex licensing structures, lack of clear list of capabilities,  perceived execution risk, cost of implementation

Implementation Costs: Professional services, which are complementary to software, in the same way as mortgages and houses, or hot dogs and mustard, account for a significant portion of the cost of the project. Remote customization and implementation templates provide the promise of reducing implementation costs. Reducing the cost of complements with automated migration solutions and help ISV's capture more of the value created, albeit at the expense of the party providing a less automated migration service. Automated migration solutions also eliminate switching costs that an incumbent may have built to retain some competitive advantage.

Causes: Migration/Rollout costs, complex dependencies between software - impact is usually broad; training and learning curves for corp IT developers and end users.  

Costs of "Lights On" Operation: Periodic maintenance expenses, if not automated require systems administrators and increase chances of failure in systems when they are least expected. Periodic maintenance also has to be scheduled to fit into enterprise change management windows. 

Allen and competitive advantages

Sports Illustrated and Seattle-PI columnist John Cook, both talk about Microsoft founder Paul Allen's investment and passion for sports teams - (Seattle Seahawks and Portland Trailblazers) he owns. For those questioning the wisdom of his investments, that rationale behind many of his investment decisions become clearer if you understand complementary products and competitive advantages that his asset management company, Vulcan, has over other more traditional venture investment firms.

Sports Teams As Complements - Real Estate is the Product

The Blazers are the only major league team in Portland, and the Seahawks were kept in Seattle after Paul Allen bought the franchise in '97. Sports teams, things to do - like museums, shopping and convention centers are all factors in attracting visitors and inhabitants to a city, and this increases the value of real estate. Also, investments in EMP, the Seattle Center are all really investments in Vulcan's South Lake Union project.

Vulcan Competitive Advantages - Timeframe.

Asparagus typically takes 3 years to harvest, so only farmers who can sustain a negative cash flow for 3 years can make the investment. However, it provides a higher return over 3 years than crops with shorter harvest cycles. Many fruit trees take longer, but again yield higher values over a long period than asparagus.

Vulcan, unlike private equity or venture capital firms that have an investment lifecycle, does not have a restricted timeframe. They can therefore invest a part of their assets in "fruit trees" when even the best venture firms cannot.

So investments that look less than stellar in a 5-10 year timeframe may make sense when looking at a 25 year timeframe.

Philosophy - Create Value before Capturing it

The lack of short term pressures like fund-raising and track records also means that venture fund managers  is likely to be more supportive of entrepreneurs and portfolio companies, and not succumb to monetization pressures too early. 

Of course this philosophy may not work for all startups, since it is not ideal to have no monetization pressures, nor is it great for entrepreneurs looking for an early liquidity event if the investor likes to add more value before a liquidity event, but it is good to know that there is an investment firm that offers capital under different terms than most funds.

Diversification - and an eclectic portfolio

Wall Street had a laugh at the eccentric "accidental zillionaire," noting that had he simply held on to his Microsoft stock -- that is, had he adopted no investment strategy whatsoever -- his net worth would have exceeded $80 billion. - Sports Illustrated

Hindsight is 20/20, and diversification is a smart investment management strategy. There are more cases of people who lost through putting all their nest eggs in one basket, than of people who have gained through lack of strategy.

Vulcan's portfolio seems well-diversified - both in sectors and time to maturity, and its technology startup portfolio is eclectic - consisting of Semantic Web startups (zoominfo.com, Radar Networks), energy efficiency/alternate energy companies (Ember, Imerium) and disruptive models (Redfin.com). 

The only thing I couldn't find is international investments, which are probably made through public securities or other instruments. Given that growth rates in emerging markets are much higher than the domestic market, it is an opportunity worth considering since it fits well into the gaps in Vulcan's current investment strategy.

Non-Profit websites

About 6 months ago, I was looking for alternatives to a poorly designed and rather unmaintainable shtml web site for a non-profit I am deeply involved with. Seattle Youth Garden Works has an annual operating budget of about $450,000, and after a restructuring, I volunteered to maintain the web site.

The CMS.

I decided on Drupal after evaluating a few Open Source and proprietary content management systems. Joomla was a close second, and I chose Drupal because

1. Already established in the non-profit world.
2. Had plugins that I needed.
3. Other research regarding future support etc.(IBM, forums)
4. The ability to add blogs, forums etc if necessary.

If you are looking for alternatives, Joomla, Magnolia or DotnetNuke are all good CMS choices depending on your comfort or choice of application stack.

The host.

Dreamhost, a widely popular hosting service is large enough to have professional support available 24x7, and has a user community that helps you solve most problems before going to technical support.

They provide free hosting for non-profits - which is an absolutely sweet deal, and they are carbon-neutral - which many of our donors like.

They also support PHP/MySQL and provide root access for their non-profit account - a very useful feature. My only gripe is that MySql queries on Dreamhost are rather slow.

The Modules

I recommend using Drupal 5.0 because most commonly used modules exist for this version. I used a number of modules including Event, Volunteer Timeslots and FCKEditor to enable employees to make changes to the website directly without having to request a webmaster. Contact me if you are looking for a list of modules to install along with a Drupal installation for your non-profit.

The Result

Check out the website to see what it looks like.

The Next Steps

It would be a useful feature to have donors commit to and donate online. Although CiviCRM integrates well with Drupal, changing donor management software is disruptive and may adversely affect fundraising activity. Enabling social networking feature for volunteer management would also be a cool feature, and would ensure a more engaged group of volunteers.

A Hypothetical Sun Microsystems – Unisys merger

It has long been observed that though Sun Microsystems comes up with superior technology, it has been unsuccessful in monetization. Solaris is now open-source, as is Java. Of course, this has been hugely beneficial to customers and other vendors building providing valuable solutions using these technologies.

Sun's struggles in the recent past and jugglery with stock symbols (they changed from SUNW to JAVA), and a recent 4-1 reverse split have largely been "busy work" for the financial mavens, when a merger or acquisition would make more sense. There are obvious weaknesses (see chart bottom), that could easily be removed by acquiring or merging with the right partner.

Sun's bet on giving away software (that can be installed on any hardware), but charging a premium for their servers doesn't make a lot of sense – SPARC based servers are typically 3 times more expensive than comparable white-box servers to purchase, and the total cost of ownership is still higher. In order to extract a premium for their servers, Sun focused on TCO by including data center build-out costs – in their Black-box offering. The Black-box offering, may certainly make sense for many computing-intensive firms, but this strategy can largely be replicated using commodity hardware by other vendors like HP.

Meanwhile, another vendor, Unisys, has evolved from primarily manufacturing proprietary hardware to becoming an expert in consulting, systems integration and data-center build outs. Unisys' professional services and consulting expertise are complementary to Sun's superior, but open-source technology offering, and it may make sense for some kind of Unisys – Sun partnership. M&A with other hardware vendors is nothing new for Unisys Corp, which was formed when Burroughs and Sperry merged in 1986.

A SWOT analysis of both companies is given below.

Unisys' strong consulting and system integration relationships and its expertise in high-performance computing is a great complementor to Sun's high-performance computing infrastructure and software. In addition, Sun's xVM family of products - which includes a bare-metal virtualization platform based on Xen and corresponding tools to manage a grid of computing resources - CPU, memory and storage, will benefit strongly in adoption due to Unisys' established data-center build-out and management expertise.

Although Unisys resells Sun products, a deeper relationship, where Unisys services are bundled together with Sun data center solutions, may be advantageous to Sun.

As the virtualization bandwagon starts rolling by - with Oracle and other players announcing their own bare-metal VMs, this may be a good time for these companies to consolidate, and provide a much higher value service to their customers.

"Office is the Browser" - Microsoft

Hosted office applications are getting better, and are providing more and more functionality that is generally available on Office Desktop applications. Suites like GAPE and Zoho are providing functionality that is pretty close to what most people expect and use.

As Google, Zoho and a number of other SaaS firms bet on the providing rich functionality over the browser, Microsoft is attempting a contrarian strategy.

According to Microsoft, Office applications like Word, Excel and Outlook can be front ends for more complex back-end applications like SAP etc. This integration benefits

• the back-end application vendors through additional seat license sales, and consulting revenue through integration,
• increases Microsoft Office sales,
• and makes it more difficult for enterprises to switch to another Office application easily later.

Most firms have been using Excel to query and analyze databases and create usable reports, and Office Business Applications formalizes this process. However, the success of this strategy depends how competitive SaaS offerings can be to Microsoft Excel, which has been the undisputed leader in its class.

I see 2 key challenges to Microsoft Excel's dominance in the market.

• Google's ability to outprice Microsoft in its "free hotdogs, just buy mustard" offering.
• Office 2007 - which has been a significant change - and has not been adopted widely among the the most common users yet, and upgrades are likely to take some time to verify that integrations with previous Office versions work with the newer version as well.

Office 2007 has a significantly different look and feel, and there is a learning curve associated with using Excel 2007, after you have become used to the previous version. Also, Enterprise IT organizations have been waiting for any significant problems to show up and be fixed in Service Packs before adopting the new version. Given this uncertainty around Office 2007, both Google and Zoho have a unique window of opportunity to push and get SME's to adopt their solution instead of Excel.

Inefficiencies in the services sector

Inefficiencies in the service sector are not easily visible until you have to find a plumber on a holiday weekend or are looking for a story teller who can hold the attention of a dozen easily board five-year-olds.

These inefficiencies are challenging for both the service provider and the customer, and are caused by a number of reasons.

Frequency of use: Most people do not use these services on a daily basis or for that matter more than once a year. As a result, prospective customers do not understand what to expect. Not understanding what deliverable can be expected leads them to question whether the service worth the value being charged.

Information Asymmetry: The customer is not able to know the quality of a service provider’s work until after a contract has been signed. Therefore, customers rely on word-of-mouth referrals (which are inherently inefficient), or on reputation management sites (like Angies’ List – which is subscription based).

Friction points in the sales process: The sales funnel has numerous friction points – and a lot of time is spent by a service provider answering similar questions for each prospect. Advance payments for some services is made through checks in snail mail (which is another obvious friction point), or if a service provider doesn’t take deposits, causes a loss of service revenues through last minute cancelations or no-shows. Unlike airlines or restaurants that can use yield management algorithms to manage no-shows, independent service providers are left with lost revenues if this occurs.

High fixed cost/low marginal cost business: Service providers, like airlines, have high fixed costs, tied to cost of living, which they incur regardless of whether they are serving a customer or not. They, therefore split these high fixed costs across the orders they get over a period.

For instance, if a plumber had fixed costs of $10,000 a month, and charged $100/ hour of labor, and of the 160 hours he works each month, spent 30% of his time answering customer calls, he would make $11,200 or a profit of $1,200. However, if he were to answer all his questions on a website, and enable customers to book his services online, and was able to reduce the time spent answering phone calls to 10%, his profits would increase to $4,400. Even after assuming that he paid $500 per month on the system, he would still have 200% additional profit. His customers would get other benefits like the ability to book and schedule appointments online, and the plumber could pro-actively market things like “winterize your bathroom” specials to customers when he is less likely to be busy.

The problem is much worse if you look at services where customer tastes change rapidly and high demand elasticity exists – like entertainers and venues. Demand elasticity is also much higher than you would see in essential services like plumbing. Also, utilization of services usually centers around weekends – utilization of venues is as low as 15% and is lower in case of entertainers. Increasing utilization by offering discounted prices but which are higher than marginal costs, can ensure significant additional revenues for entertainers and venues.

A number of web-based applications, the growth of social marketing and service providers getting comfortable with this new customer acquisition method will go a long way in correcting this inefficiency.

Integrating front office and back office tools: IT systems for most venues have evolved to encompass most sale and post-sales functionality – like bookings, deposits, printing receipts, accounting etc. However, these systems primarily assume that the customer is booking through telephone or in person. Booking or inquiries through web-based systems are rarely tracked within the system, and generally assume the form of an email notification containing lead information, which has to be manually re-keyed into another system. Integrating search engine marketing tools and lead generation forms with back end processes like instant booking will improve sales for franchises and entertainers significantly.

Online reputation management: Word of mouth referrals, while effective, are rather inefficient methods for generating leads, especially where customer tastes change regularly. Online reputation management is of paramount importance for a service provider who is looking to increase his revenues and decrease expenses.

Comfort with web bookings: Most people under 40 are comfortable using the internet to make purchases, choose restaurants or other services. They also the “instant gratification” of buying or booking being confirmed when they place an order. Service providers should take advantage of this trend and ensure a sufficient web presence to meet the demands of their target customer.

Google and Microsoft

Google seems to have perfected the art of attacking its competitors cash cows. Attacking cash cows is a good strategy for two reasons – it makes the company being attacked move to a defensive role. Once in a defensive role, you are reacting to the competitor's threats, rather than focus on adding value to the customer and others in the value chain. Second, a loss of revenues means that there is less investment available for other projects that help the company retain competitive advantage.

Google has done this often and rather successfully. First, it took on Paypal. Google Checkout's price promotions in the 2006 holiday season and throughout 2007, have led to significant adoption in the marketplace, and has forced Paypal to spend additional product development dollars or lose market share.

It has also done this with Microsoft – with GAPE (Google Applications Professional Edition), which bundles the equivalent of Office and Exchange in a SaaS solution at a price of $50/user/year. Exchange and Office costs of ownership are significantly higher.

The unchallenged competitive advantage Google has as a market maker for ads makes it possible for Google to finance these strategic initiatives.

SWOT Analysis for Microsoft

Strengths	Weaknesses
Closest to customer	Hard to convey incremental value to customer
Solid Development platform	Execution
Established ecosystem of partners	Partners capturing too much value
Lots more experience in managing value chain
Opportunities	Threats
Better Development Tools	Google - Office
Publisher Ad incentives	Open source - Servers
international markets	Virtualization – Can they make server OS' irrelevant? Adobe?
Enterprise software

SWOT Analysis for Google

Strengths	Weaknesses
Execution	Dependent on network operators and PC OS's
Unchallenged Ad market making	Single source for revenues
Established ecosystem of publishers and advertisers
Major SEM tools integrated
Traffic cop for the internet
Opportunities	Threats
Mobile SEM	Can execution be sustained?
Making other advertising markets efficient	Can someone incentivize publishers to move elsewhere?

For Microsoft to retain competitive advantage and the ability to price products without significant competitive pressure, it must act to somehow dilute Google's source of revenues. As most of you already know, Google a significant portion of ad inventory where Google Ads are served is on non-Google sites. If Microsoft were able to convert these publishers to use their own version of an ad network, codenamed Gatineau, or at the very least undermine the use of the Google Adsense program (through legitimate means, of course). Microsoft can do this in 2 ways – buying a stake in publishers –like Facebook – which it has already done, offers a potential for a significant amount of ad inventory that is out of Google's hands. The second, possibly more difficult option, is to provide ads cheaper to advertisers, and pay more to publishers – and take less of a margin or no margin at all in brokering the transaction. While this doesn't help Microsoft's bottom-line directly, it helps by impede Google's ability to invest in high projects that will continue to offer it competitive advantage.