Coming Full Circle Back To Custom Applications

As with all technology cycles, we are in for a reversal. The trend of buying packaged applications has been very strong for the last decade +, but is about to change directions. I predict (yes you can quote me) that over the next 24 months (possibly 36 months) we will see a new shift towards enterprise application development.

There are a few forces driving this shift:

1. Labor is less expensive - with off-shore development there are large groups of developers that are available to do application coding at a low cost (no duh comments on this one - I realize that off-shore development has been going on for quite some time).
2. The core functionality stack is already in-place - in most organizations, the large functional components (ERP, SCM, MRO, CRM, etc.) already exist. Still the complex differentiation requirements of modern businesses are not met by these packages. There is a need to extend and expand functionality to pull ahead of the pack.
3. 80% foundations exist already - this final factor is probably the most important. In the past, companies had to build complete solutions from scratch. Today they have a major advantage. With open source solutions available in almost every category, and with the components (web server, reporting, database, etc.) available for free, significant portions of solutions already exist pre-built. Customizing the functionality (which is never trivial) is all that remains.

So, if you are an in IT or are a corporate business user rejoice and celebrate the new opportunities......maybe; there is a reason that SAP, Oracle and the others seemed so inviting that you were willing to pay millions.

Off Shore Development - Shoe-horning a SWOT Analysis

A friend of mine has recently been considering off-shoring a portion of his development organization, this post is a synopsis of my thoughts and experience....

Off-shore development has been going of for more than a couple decades. When I started with Accenture (then Andersen Consulting) in 1994, engineers in the Philippines were being employed to do off-shore development - simply missing the ubiquitous moniker. Only with India's tremendous growth in this area and the exposure of outsourcing in Friedland's book "The World Is Flat", has off-shore development truly started to be universally discussed.

Despite all the hype, observations by media pundits and the reality of off-shore development don't really jive. India will not take all US IT jobs, China will not replace India as the preferred destination (in the Short Term) and the cost savings won't last all that much longer. Having managed a 40 person on-shore / off-shore product development and marketing organization (based in Bangalore, India) for the last three years, I have come to understand some of the capabilities and drawbacks of this development model along with some ability to cut through the hype.

Off-shore Model - Various Editions
A brief synopsis of 3 different models that can be used to analyze the various development structures.

1. Wholly Owned Subsidiary- The off-shore development organization is owned by the parent company and all 'workers' are employees. This structure is typically used by Multi-nationals that have the ability to staff a large organization, deploy the required processes, invest in the necessary tools and have a low enough overhead:delivery ratio to make it cost effective. Microsoft, Google, SAIC, IBM, EDS, etc. have successfully deployed this model.
2. 3rd Party Development Organization - The off-shore development organization is owned by a third-party organization and all the 'workers' are employees of the third-party organization. Typically the 3rd party will be responsible for the processes, tools, staffing and delivery. Tata, Infosys and Wipro are the pioneers of this model and are constantly evolving to be more like traditional consulting organizations rather than just low cost development organizations.
3. Body Shop - At the most basic form, Body Shop organizations provide workers and space without the management and oversite. Process development, tools, etc are left up to the customer. Body Shopping will not be addressed in this posting since I don't believe it is a particularly effective method of off-shoring compared to the other two models.

Model Analysis

Analyzing business models is always subjective and difficult to structure without some form of a framework. While not ideal, I am "shoe-horning" a SWOT Analysis since it is close enough and better than any alternatives that I considered.

Model 1 : Wholly Owned Subsidiary

Strengths

• Direct control over all aspects of development and delivery
• Your costs do not include their Margin
• As employees, you are able to provide unique incentives (e.g. options) and perks (e.g. rotation programs)
• Overhead costs associated with managing their manages do not exist

Weaknesses

• Your costs include your overhead expenses - unless you are a multi-national you will never have the same overhead:delivery ratio that a large outsource company will have
• All HR initiatives are yours and your HR department must be prepared to support the local initiatives and regulations.
• Engineers want career paths (especially in India) with specific milestones. Your organization must be large enough to support growth and their career paths.
• It is easier for "Name Brand" companies to hire top talent - if you don't have the brand, the Tata's, IBM's and Accenture's of the world will have a foot-up in recruiting.
• You are responsible for developing your processes and making sure that they work.
  

Opportunities

• Your off-shore management team must be integrated into your local management team. I have been fortunate to work with an exceptional country manager. It makes all the difference.
• While cost savings are going away, there is still a pretty significant value proposition. As of April 2007, the loaded cost per employee, per year is approximately $17,000. This is for a 100 person development organization and includes HR, Operations, Finance, Management and IT resources in the total number. Additional costs such as

Threats

• Costs are rising rapidly - this is especially true in Bangalore and other Tier 1 cities. When compared to the US: Salaries are lower, Telecommunications is higher, HW is equivalent or higher, SW is equivalent, Power is higher, Space is equivalent in Tier 1 cities though lower elsewhere, Admin Overhead is lower.
• Attrition is a significant factor when working in India.

Model 2 : 3rd Party Development Organization

Strengths

• You do not need to "deal" with all the legal, HR and regulatory issues of managing an off-shore subsidiary.
• They can bring the processes, tools and best practices from day 1. This should not be overlooked.
• If you go with a large organization, they can provide the career paths and incentives that staff in India require. However, you have less control over the types of incentives that you can provide to their employees.

Weaknesses

• Your costs include their Margin.
• Their processes are fairly rigid.
• You have limited control over the resources that get added to your project.
  

Opportunities

• If you don't have world-class development processes in place, working with a CMMI-5 company is a good way to develop them.
• The Golden Rule applies. If you are a SME, you will always be a second tier customer - focus and priority goes to the customers that generate millions of $ in biling revenues.

Threats

• If product development / IT delivery is a core compency to your company, by off-shoring you lost control.

Critical Success Factors

• Your processes (or partner's processes) and associated tools must be rock solid.
• Metrics for tracking project success must be in-place.
• Your team must clearly segment activities and responsibilities between locations.
• HR needs to be a tremendous focus - hiring, growing and retaining talent can make or break an off-shoring initiative.
• Communication is critical
  Communication is critical
  One more time - communication is critical. Daily conference calls, online chat sessions, midnight Skype sessions and regular trips for in-person meetings are all absolutely critical to success.

Summary

• Difficult for SMEs to do it themselves
• Risk is compounded due to distance and time
• Cost justification for India is going away
• If your development processes are not solid you will have major issues.
• There are some great resources in India - skills extension for your team can be a great reason in itself.

Library

http://www.solovatsoft.com/softwaremethodology.html : some good white papers though tilted towards their approach.

http://blogs.msdn.com/architectinsight/archive/2007/03/12/globalisation-clinic.aspx : a Microsoft blog that addresses a number of valid points.

Online Marketplaces ...Back To The Future

InformationWeek has a very interesting article on Red Hat's move to having an online marketplace. This is consistent with the IQ strategy and certainly highlights that our approach and positioning are on the leading edge of the market. Other notable early movers include SugarCRM (SugarExchange), Joomla (Joomla Exchange) and Salesforce.com (AppExchange). Each of these companies have identified the value of leveraging their brands and user communities for growth - sort of like judo for nenw technology companies. I expect that we will see a lot more companies launching these types of initiatives. Having an Exchange is almost a requirement for Open Source companies but I also expect others such as Quickbase, Basecamp and even heavyweights like SAP to enter the fray.

Red Hat Talks Up Online Open Source Marketplace
Linux leader looks to certify the growing number of open source programs for its operating system and middleware platform. http://www.informationweek.com/story/showArticle.jhtml?articleID=198001606

Developing an Exchange / Marketplace strategy is one thing, being able to fund, execute and deliver on that strategy is quite another (sounds very late 90s .bomb) . So, what are the critical success factors? I believe that there are at least 5 :

1. Strategic Positioning - how does the marketplace contribute to making customer's existing investments even more valuable? how will the "owner" company benefit from the Exchange? Salesforce, SugarCRM and F5 have all done great jobs of launching Exchanges that are complementary to their core products. From what I have seen of the Red Hat Marketplace, they are missing the mark. Their marketplace is a venue to purchase a limited number of products that you can purchase directly or download for free with an extra click or two. Without value to the end customer, I don't forsee much traction.
2. User Base -the larger the user and partner base, the higher the probability of success. It stands to reason that the more consumers there are, the more developers are inclined to spend time building solutions that they can profit from.
3. Community - I draw a distinction between User Base and Community since one does not imply the other. To be successful there needs to be a vibrant Community which can add new applications (free and for a fee), post answers to user questions and most importantly refer others to the product / service / marketplace.
4. Ease of Engagement - ease of engagement is probably the most important aspect of building a dynamic community and network. If it is difficult to "engage" - customers and partners won't. In a world of distractions and countless alternatives, engaging and captivating customers and partners is critical. From sign-up through documentation to online chat and user forums, engaging customers and partners is the critical challenge.

Will there be a first mover advantage? Will established players such as Microsoft, SAP and Google enter the market and provide superior alternatives? We are in the early stages of an exciting time - traditional software, open source software and SaaS business models are colliding, business models are evolving and revolutionary new players are entering the marketplace (lousy pun...couldn't be avoided). I look forward to seeing how the first crop of Exchanges 2.0 take-off and evovle.

Why managers need leadership and leaders need management in indivisible, mutual partnership

I am a big fan of Robert Heller and Edward de Bono - two management, strategy and leadership "wonks". The following article is thought provoking. My comments are in Yellow.

From Robert Heller: The Leading Manager
The sovereign truth about leadership and management is that the key to success lies in choice [and the ability to play to your natural strengths]. Choose an an activity which is not the most apt for your talents - innate or acquired - and you will fail, either relatively or absolutely. By the same token, so will all those unfortunates who work under your leadership. For that is where leadership and management join hands. Both depend on the ability to persuade others to deploy their own talents and know-how to achieve the goals of the organisation. Good managers have long known that failure, properly studied and exploited, can lead to exceptional success. Indeed, trial and error - one of the major engines of progress - very obviously embodies failure, as a possibility and an experience. But that perception is hard to build into a systematic, scientific programme that can be taught and replicated. Defects of personality mean that leader/managers often find human relations extremely difficult to manage. Nothing is more basic to effective leadership than the ability to relate tellingly to others, from one's close colleagues to the most distant new employee. [I wholeheartedly agree - communication and dialog, (scheduled or informal) is so important. When teams are virtual and separated by timezones and cultures, it becomes even more so.] Yet I've dealt with leaders who fail the most elementary human tests - like one individual who told me that he didn't know how to say thank you, that most useful of all verbal pairings. But he was still a great success. Had he been a better communicator and man manager, though, he might well have been more successful still.

The great leader needs to judge his or her performance more rigorously than anybody else. Try the following eight questions on yourself:
* Leadership: do I lead effectively myself and enable others to lead just as effectively in their spheres?
* Challenge: do I continuously scan myself, my colleagues and the organisation to identify and exploit areas of significant potential improvement?
* Decisiveness: do issues get identified speedily and resolved as fast as possible and with due diligence?
* Actions: do decisions get converted into deeds and feedback with no undue delay?
* Communication: does everybody know what I am doing and why - and do I know the same about them?
* Change: have I created a climate in which everybody welcomes change and knows how to implement it?
* Basics: have I identified the key success factors and do I know for certain that they are working well?
* Objectives: have we formed high and potentially rewarding ambitions that govern all our work?
* Credibility: do I have the credibility by leading from the front and setting an example that others value and want to emulate?

Never forget that nothing stands still. The revision of strategy and tactics is a most powerful tool for positive change. At the same time, its neglect spells disastrous performance; whether you call it bad management or bad leadership hardly matters.