Looking at previous new technologies can help draw a few important lessons that can be applied to manage RFID rollouts.
Like most mew technologies, RFID too is not immune to riding the turbulent looking waves of the Gartner Hype Cycle. The hype around RFID is evident from the mass of written word there is on RFID. A quick google for RFID yields 57,200,000 results. The RFID vision is compelling especially so for the FMCG sector, now often referred to as the CPG or Consumer Packaged Goods sector. RFID promises to make the entire supply chain transparent. RFID also promises closer collaboration between all players in the supply chain. And as a result will lead to benefits like reduced stock-out situations, reduction in the amount of goods that are not fit to be sold either because of expiration, perishability or any other cause. The peak of inflated expectations has been scaled.
However the first few big-ticket implementations have clearly shown that the initial economics of such projects are far from favorable. Widespread standards governing the use of RFID and the sharing of data among collaborating partners have not emerged. A host of technical issues like package design, tag placement and readability continue to nag. Its not before long that the pundits and the soothsayers start to talk of doomsday and about the good money that has been burnt during the days of ascent to the peak. The number of takers for the technology will fall rapidly and those that have implemented will go slow on expansion. These are signs of the trough of disillusionment.
Making RFID Work
Before looking at the ways to scale the plateau of productivity, lets understand the lessons that previous technology evolution cycles have taught us. Even when the technology implementation has been perfected, rollouts and deployments usually take longer than expected and it is impossible to get to cent percent compliance by all in the industry.
Let’s first look at what we have learnt from new technologies that have gone up and down the Gartner hype cycle before focussing on how to make RFID a success.
One, new technology implementation is not about technology. It’s about building a robust business case (See Planned Success.) It’s not about what the RFID tag or the reader can do; it’s about what business issues will stand resolved with the implementation of RFID.
Two, measure results. An associated learning from building a business case is the measurement of results, both short-term and long-term. So it is imperative to set milestones and measure results thereof. To set short term and long term goals and then measure the RFID initiative results against them will be the only mechanism to reconcile RFID economics.
Three, be realistic about costs and benefits. And as a note of caution, it is very important for the management to be realistic about the costs and the benefits that come out of a project.
Four, instill flexibility. The driving objective to manage the speed of rollout of a technology should always be the benefits and not the speed of the roll out itself. Therefore, it is important to adopt a flexible approach. A flexible approach using best practices and technologies will yield maximum benefits and long-term viability.
Managing the Rollout
For FMCG companies to successfully manage the technology rollout and reap benefits there are several aspects that must be addressed.
One, understand drivers of benefits. Over the next several years the focus must be accelerating the benefits. This will require a deep understanding of the supply chain from the point of production to the point of sale, including aspects like replenishment and stock rotation to warehouse and delivery. The effort should be driven towards the capture of pallet and case level data and thus efficiently use the captured data.
Two, adapt business processes. An RFID rollout will lead to generation of data that had never been captured before. This will open up a host of opportunities for better inventory management, product management and even recall of products and its management. This data will also create opportunities of better management throughout the supply chain. But the opportunities can be realized only with a substantial change in the business processes of both the supplier and the retailer.
Three, data standardization. In order to completely reap the benefits of new data that is generated, companies have to drive standardization of data formats. Many companies have been slow to adopt the data formats for products as maintained in a global registry under UCCNet. As a result a lot of data reconciliation is manual, something that can and must be avoided.
Four, drive industry wide adoption. For RFID be really successful, or rocking as some of you might say, it is necessary for the entire retail industry to adopt it. That’s when the supply chain will become truly transparent. More so, for most manufacturers, one retailer (no matter how large) will not be enough to justify the expense or generate the benefit.
Five, leverage existing infrastructure. The building of RFID infrastructure should be driven by the dictat of leverage. Not only should the existing infrastructure be leveraged, (See Emulate the Internet) but other applications and uses of product tracking information must be explored. Can the information be used for merchandising opportunities, for instance, or for tracking and tracing recalled products? Considering the large initial investment in the RFID infrastructure of tags, readers, middleware and application, it is only prudent to explore new applications as that will also help reduce the pay back period.
And finally, consumer is king. Despite the best efforts, many initiatives can be hijacked due to poor communications and misunderstandings. A coordinated and active approach is required to address some of the important consumer issues and privacy concerns. For instance, addressing RFID’s ability to be a practical tool to manage counterfeits in the pharma industry will instill confidence in the consumers. Another application could be easier redressal of returns and warranty will only further the confidence.
This is fifth and last piece on RFID for Dataquest
Monday, October 30, 2006
Monday, October 16, 2006
Emulate the Internet
The RoI figures on RFID deployments are far from encouraging. Most analysts suggest a focused approach to better RoI, but the catch is in adopting the right approach to infrastructure building and then deploying the right applications, not vice versa.
Wal*Mart put all its weight behind RFID and in January 2005 mandated its suppliers to adopt RFID for pallets shipped in to its retail warehouses. That’s old hat now. More than a year and a half into the deployment, the naysayers are already writing the deployment off. A research by a leading analyst company said that Wal*Mart and other retailers that have pushed RFID might be bitterly disappointed by the results. The company researchers modeled a company-wide roll-out of RFID, used to track cases and pallets of goods throughout the supply chain, at a hypothetical, $5 billion retailer. What they found: In the best-case scenario, RFID investments pay off in nine to 10 years. That's a long time to wait.
The obvious question then is, that is RFID a waste of money? Some analysts suggest that that RFID's deployment won't be as broad as anticipated. It will be highly focused. RFID won't make it into every store. It won't make sense in every store. In other words the research company suggests that it only makes financial sense when used for tracking certain individual items, such as DVDs. If retailers expand their deployment to track everything, it will only elongate the time to positive RoI.
Common Wisdom
Going by the numbers we have today, it would not be too hard to believe what the reports says. But a large number of analysts and informed people, ten years ago, questioned the RoI of a corporate Internet mission because of the limited functionality and associated administrative sweat. And therefore the mass market for residential broadband was inconceivable. RFID projects hold great promise for the future, but face the same concerns that the corporate Internet strategy did over a decade ago. The point that I am trying to make is that CIOs must look at the evolution and the growth of the Internet to take a few lessons. These lessons can then be applied to RFID to foretell its evolutionary path.
Amongst the first candidates to be RFIDed were those applications which were developed around manual data entry or non-serialized bar code tracking. These tasks, if I may call them that, could be upgraded and enhanced with low cost, high quality, automatically captured RFID data. In other words RFID holds immediate interest in areas like store operations, inventory management, electronic proof-of-delivery, and pharmaceutical tracking. However a slew of existing applications ranging from ERP to merchandizing applications are already used to keep track of products or goods. Does this not sound similar to the times when there were no products designed to deliver reliable Internet service and manage bandwidth among multiple business users. And thus out of necessity, many small and medium sized businesses had to work with connections multiplexed though multiple low speed dial-up modems. Similarly the real potential for RFID RoI lies with applications that will be able to leverage the automated tracking of objects at low cost, high volume, and in real time without human intervention.
And its these applications that will make the RFID RoI equation easier to comprehend and faster to turn to black. To be visionary with the Internet 10 years ago was to see the potential for it to spread from universities to enterprise email to today’s Web access via cell phone or e-commerce via wireless at the corner Barista coffee shop. The changes that RFID brings will be as large and life-changing as our mobile phone and Internet technologies have become. RFID networks will evolve from an application layer to become an enabling infrastructure and the ROI will come from both enhancing existing applications and building many new ones that harness this revolutionary data source. Some day RFID tagging may be as ubiquitous as Internet access is today.
The next obvious question is how is all of this possible?
Enabling Infrastructure
The most cost-effective way to deploy RFID on a large scale will be to follow examples set by successful network-building models. Enterprise networks combining ethernet and TCP/IP can easily add more users and adopt new functionality because their layered architecture and support for standards helps to isolate the complexities of implementation, promoting scalability and growth. A layered architecture is fundamental to every successful modern networking technology. This is exactly what the early RFID solutions have lacked, focusing on stove-pipe connectivity instead of network topology. Instead of building a separate foundation for RFID, the RFID network must be welded into the enterprise infrastructure and by standards that are already in place. So the idea is not to look at RFID not as an island of experimentation but as a global plug-and-play solution that can be rolled out enterprise-wide. And this is precisely the anti thesis of products and applications one sees in the market place today. Analyst firms also suggest that the driving mantra for RFID applications must be focus.
Key Benefits
This approach establishes a few key benefits that are otherwise overlooked in most RFID deployments, pilot or otherwise. One, it follows a network centric approach wherein RFID readers belong to the enterprise network. These RFID devices are managed as part of the enterprise, not as separate experimental nodes. The point here is to leverage the existing infrastructure that’s designed for scalability and manageability. Two, this approach to RFID networks builds on standards to promote interoperability and commoditization. This may not be as important today but in times to come, most RFID users will grapple with interoperability issues as a large number of RFID solutions still depend on proprietary tag protocols, reader protocols, and custom-built middleware.
RFID has the potential to emerge as the very fabric on which the new rules of business will be written, the distinguishing factor will be to get the script write.
This is my fourth article on RFID in Dataquest
Wal*Mart put all its weight behind RFID and in January 2005 mandated its suppliers to adopt RFID for pallets shipped in to its retail warehouses. That’s old hat now. More than a year and a half into the deployment, the naysayers are already writing the deployment off. A research by a leading analyst company said that Wal*Mart and other retailers that have pushed RFID might be bitterly disappointed by the results. The company researchers modeled a company-wide roll-out of RFID, used to track cases and pallets of goods throughout the supply chain, at a hypothetical, $5 billion retailer. What they found: In the best-case scenario, RFID investments pay off in nine to 10 years. That's a long time to wait.
The obvious question then is, that is RFID a waste of money? Some analysts suggest that that RFID's deployment won't be as broad as anticipated. It will be highly focused. RFID won't make it into every store. It won't make sense in every store. In other words the research company suggests that it only makes financial sense when used for tracking certain individual items, such as DVDs. If retailers expand their deployment to track everything, it will only elongate the time to positive RoI.
Common Wisdom
Going by the numbers we have today, it would not be too hard to believe what the reports says. But a large number of analysts and informed people, ten years ago, questioned the RoI of a corporate Internet mission because of the limited functionality and associated administrative sweat. And therefore the mass market for residential broadband was inconceivable. RFID projects hold great promise for the future, but face the same concerns that the corporate Internet strategy did over a decade ago. The point that I am trying to make is that CIOs must look at the evolution and the growth of the Internet to take a few lessons. These lessons can then be applied to RFID to foretell its evolutionary path.
Amongst the first candidates to be RFIDed were those applications which were developed around manual data entry or non-serialized bar code tracking. These tasks, if I may call them that, could be upgraded and enhanced with low cost, high quality, automatically captured RFID data. In other words RFID holds immediate interest in areas like store operations, inventory management, electronic proof-of-delivery, and pharmaceutical tracking. However a slew of existing applications ranging from ERP to merchandizing applications are already used to keep track of products or goods. Does this not sound similar to the times when there were no products designed to deliver reliable Internet service and manage bandwidth among multiple business users. And thus out of necessity, many small and medium sized businesses had to work with connections multiplexed though multiple low speed dial-up modems. Similarly the real potential for RFID RoI lies with applications that will be able to leverage the automated tracking of objects at low cost, high volume, and in real time without human intervention.
And its these applications that will make the RFID RoI equation easier to comprehend and faster to turn to black. To be visionary with the Internet 10 years ago was to see the potential for it to spread from universities to enterprise email to today’s Web access via cell phone or e-commerce via wireless at the corner Barista coffee shop. The changes that RFID brings will be as large and life-changing as our mobile phone and Internet technologies have become. RFID networks will evolve from an application layer to become an enabling infrastructure and the ROI will come from both enhancing existing applications and building many new ones that harness this revolutionary data source. Some day RFID tagging may be as ubiquitous as Internet access is today.
The next obvious question is how is all of this possible?
Enabling Infrastructure
The most cost-effective way to deploy RFID on a large scale will be to follow examples set by successful network-building models. Enterprise networks combining ethernet and TCP/IP can easily add more users and adopt new functionality because their layered architecture and support for standards helps to isolate the complexities of implementation, promoting scalability and growth. A layered architecture is fundamental to every successful modern networking technology. This is exactly what the early RFID solutions have lacked, focusing on stove-pipe connectivity instead of network topology. Instead of building a separate foundation for RFID, the RFID network must be welded into the enterprise infrastructure and by standards that are already in place. So the idea is not to look at RFID not as an island of experimentation but as a global plug-and-play solution that can be rolled out enterprise-wide. And this is precisely the anti thesis of products and applications one sees in the market place today. Analyst firms also suggest that the driving mantra for RFID applications must be focus.
Key Benefits
This approach establishes a few key benefits that are otherwise overlooked in most RFID deployments, pilot or otherwise. One, it follows a network centric approach wherein RFID readers belong to the enterprise network. These RFID devices are managed as part of the enterprise, not as separate experimental nodes. The point here is to leverage the existing infrastructure that’s designed for scalability and manageability. Two, this approach to RFID networks builds on standards to promote interoperability and commoditization. This may not be as important today but in times to come, most RFID users will grapple with interoperability issues as a large number of RFID solutions still depend on proprietary tag protocols, reader protocols, and custom-built middleware.
RFID has the potential to emerge as the very fabric on which the new rules of business will be written, the distinguishing factor will be to get the script write.
This is my fourth article on RFID in Dataquest
Wednesday, October 04, 2006
Opening New Vistas
RFID holds the potential to impact our daily lives in unprecedented ways in the future. The economic impact and the business benefits can not be fathomed today. What can, is that there is no leveling off.
From Lord Kelvin to Ken Olson to the great Thomas Watson, all have tried to play oracle, but did not do a great job. However the soothsayer who warned Julius Caesar of the ides of March was bang on target. Actually he is the only one I know who looked like a professional playing oracle. Despite knowing the dangers of putting one foot in a place where it hurts, I still fall prey to the strong temptation of playing “soothsayer.” Let’s try and gaze into the crystal ball to see how the future of RFID applications will look like.
The Future
Some estimates suggest that in the very near future simple RFID tags will cost as low as five cents US or maybe less. That will open floodgates for economical widespread use. Actually at that level, they will be so cheap that you could also think of implanting them in wine glasses (Yes, you read that right!) At that place, the tag provides a novel way of sensing the level of wine in a glass and will then communicate the information to restaurant staff so that they know when a glass is almost empty and requires a refill of wine or water or any other liquid that resides in the glass. This will help the restaurant deliver immaculate and unobtrusive service and obviously create a huge potential for sales spikes. In fact wine and liqueurs are high-margin restaurant items. The dual impact of the technology will unleash a huge potential new-to-world market.
Let’s look at another application. An RFID tag can be embedded in a pizza delivery bag to create smart pizza delivery bag. The embedded tag can then use a heat and time algorithm to calculate when it should tell a base unit to stop charging the heating element. A thermal switch connected to the RFID tag can provide an additional layer to stop the heating. With embedded algorithms newer non-metallic heating elements can be tested instead of the conventional metallic heating elements. This will help create bags that are energy efficient and can be lighter considering the use of newer materials for its heating element.
The automotive sector is another area that will feel a widespread change because of RFID. Ford is actually using RFID extensively on its manufacturing lines for engines. Most cars in the future will come with smart RFID tags which will forever point out not only the location but also the health of the vehicle to readers. In a simple scenario, readers will be mounted on lamp posts and the real speed of a car zipping past two lamp posts will require just a little simple arithmetic. The RFID tag will also reveal the identity of the owner to the reader and also an associated mobile number. An electronic over-speeding challan will be generated and text messaged to the offender within a couple of seconds.
The Present
A whole lot of this will sound nothing short of wishful thinking. However some of these predictions are grounded in realities of RFID projects that are being implemented today or have been implemented in the past.
The Chicago Marathon is a mega event that has nearly 40,000 runners participating. It is a gigantic challenge to track runners over the race course and provide them with accurate running times. That’s because at a typical marathon, many runners stand behind each other at the starting line. When the starter’s pistol signals a race’s beginning, only a few runners cross the starting line in sync with the timekeeper. This means that these few runners, the race leaders, are the only ones who receive accurate split and finishing times. Under the Chicago Marathon’s previous practices, staff guided all runners who successfully crossed the finish line into chutes where race numbers and elapsed times were recorded by officials. When runners completed the race very close to one another, these chutes would sometimes get backed up, making it difficult for officials to record runners’ times accurately causing frustration for race participants and staff alike.
Enter RFID tag! A tag is attached to the running shoes of all race participants. With a few readers strategically placed along the route, Chicago Marathon staff can now record the precise start, finish and split times of each runner, giving them an accurate account of their performance.
What’s more, readers along the route ensure that all runners follow the correct course, dissuading those who might be tempted to cheat.
Hang on there’s more. Another service generated out of the RFID tagging is MarathonMessenger, an e-mail service that provides its subscribers with information on runner timings allowing friends, family and marathon fans to stay abreast of events. In its first year of use at the Chicago Marathon, the service had 15,000 registered users!
Let’s look at another one. ExxonMobil, one of the world's largest energy companies, introduced Speedpass, an RFID-based system for payment. Customers subscribe to Speedpass for free and provide a credit card number for making petrol purchases. In return, they receive a small transponder attached to a key ring. When a customer swipes the transponder in front of the petrol pump, it authorizes the pump to release petrol or diesel and charges the customer's credit card.
Speedpass creates a number of conveniences for customers. First, Speedpass purchases take about 15% less time than credit card purchases. Second, Speedpass purchases are more reliable: magnetic credit card stripes are prone to damage which can make purchasing inconvenient for customers whose damaged cards can’t be read by credit card terminals. Speedpass goes even further, allowing easier checkout at convenience stores. Research suggests that as much as 65% of the revenues of a petrol pump in the US are non-fuel related.
The results put in one word have been striking. Speedpass subscribers, on average, visit Mobil petrol pumps one more time each month and spend two to three per cent more each month than other customers. The use of Speedpass has also been extended a huge number of McDonalds outlets in the US thanks to its roaring success. Shell replicated the same with its version christened the Easypass. And all this started way back in 1996.
No Slowing Down
While history is a bad yardstick to forecast the future, nonetheless it must not be forgotten that technology is the greatest catalyst for change. From railways to automobiles, from radio to TV to computers, technology has never failed to amaze and get done the unthinkable. It’s precisely this attribute that proven all the soothsayers wrong, and hopefully me too. And I quote Prof. Harold J. Leavitt, Kilpatrick Professor Emeritus at the Stanford Graduate School of Business, “Regardless of other economic trends, technology itself has no brakes nor an OFF button, so the new world is unlikely either to slow down or to level off. Information technology has a long way to go before it comes into full flower, and other world changing technologies are ripening close behind.”
And by the way the wine glass thing I talked about is a project being developed by Mitsubishi Electric Research Labs!!
This is the third in my series for Dataquest
From Lord Kelvin to Ken Olson to the great Thomas Watson, all have tried to play oracle, but did not do a great job. However the soothsayer who warned Julius Caesar of the ides of March was bang on target. Actually he is the only one I know who looked like a professional playing oracle. Despite knowing the dangers of putting one foot in a place where it hurts, I still fall prey to the strong temptation of playing “soothsayer.” Let’s try and gaze into the crystal ball to see how the future of RFID applications will look like.
The Future
Some estimates suggest that in the very near future simple RFID tags will cost as low as five cents US or maybe less. That will open floodgates for economical widespread use. Actually at that level, they will be so cheap that you could also think of implanting them in wine glasses (Yes, you read that right!) At that place, the tag provides a novel way of sensing the level of wine in a glass and will then communicate the information to restaurant staff so that they know when a glass is almost empty and requires a refill of wine or water or any other liquid that resides in the glass. This will help the restaurant deliver immaculate and unobtrusive service and obviously create a huge potential for sales spikes. In fact wine and liqueurs are high-margin restaurant items. The dual impact of the technology will unleash a huge potential new-to-world market.
Let’s look at another application. An RFID tag can be embedded in a pizza delivery bag to create smart pizza delivery bag. The embedded tag can then use a heat and time algorithm to calculate when it should tell a base unit to stop charging the heating element. A thermal switch connected to the RFID tag can provide an additional layer to stop the heating. With embedded algorithms newer non-metallic heating elements can be tested instead of the conventional metallic heating elements. This will help create bags that are energy efficient and can be lighter considering the use of newer materials for its heating element.
The automotive sector is another area that will feel a widespread change because of RFID. Ford is actually using RFID extensively on its manufacturing lines for engines. Most cars in the future will come with smart RFID tags which will forever point out not only the location but also the health of the vehicle to readers. In a simple scenario, readers will be mounted on lamp posts and the real speed of a car zipping past two lamp posts will require just a little simple arithmetic. The RFID tag will also reveal the identity of the owner to the reader and also an associated mobile number. An electronic over-speeding challan will be generated and text messaged to the offender within a couple of seconds.
The Present
A whole lot of this will sound nothing short of wishful thinking. However some of these predictions are grounded in realities of RFID projects that are being implemented today or have been implemented in the past.
The Chicago Marathon is a mega event that has nearly 40,000 runners participating. It is a gigantic challenge to track runners over the race course and provide them with accurate running times. That’s because at a typical marathon, many runners stand behind each other at the starting line. When the starter’s pistol signals a race’s beginning, only a few runners cross the starting line in sync with the timekeeper. This means that these few runners, the race leaders, are the only ones who receive accurate split and finishing times. Under the Chicago Marathon’s previous practices, staff guided all runners who successfully crossed the finish line into chutes where race numbers and elapsed times were recorded by officials. When runners completed the race very close to one another, these chutes would sometimes get backed up, making it difficult for officials to record runners’ times accurately causing frustration for race participants and staff alike.
Enter RFID tag! A tag is attached to the running shoes of all race participants. With a few readers strategically placed along the route, Chicago Marathon staff can now record the precise start, finish and split times of each runner, giving them an accurate account of their performance.
What’s more, readers along the route ensure that all runners follow the correct course, dissuading those who might be tempted to cheat.
Hang on there’s more. Another service generated out of the RFID tagging is MarathonMessenger, an e-mail service that provides its subscribers with information on runner timings allowing friends, family and marathon fans to stay abreast of events. In its first year of use at the Chicago Marathon, the service had 15,000 registered users!
Let’s look at another one. ExxonMobil, one of the world's largest energy companies, introduced Speedpass, an RFID-based system for payment. Customers subscribe to Speedpass for free and provide a credit card number for making petrol purchases. In return, they receive a small transponder attached to a key ring. When a customer swipes the transponder in front of the petrol pump, it authorizes the pump to release petrol or diesel and charges the customer's credit card.
Speedpass creates a number of conveniences for customers. First, Speedpass purchases take about 15% less time than credit card purchases. Second, Speedpass purchases are more reliable: magnetic credit card stripes are prone to damage which can make purchasing inconvenient for customers whose damaged cards can’t be read by credit card terminals. Speedpass goes even further, allowing easier checkout at convenience stores. Research suggests that as much as 65% of the revenues of a petrol pump in the US are non-fuel related.
The results put in one word have been striking. Speedpass subscribers, on average, visit Mobil petrol pumps one more time each month and spend two to three per cent more each month than other customers. The use of Speedpass has also been extended a huge number of McDonalds outlets in the US thanks to its roaring success. Shell replicated the same with its version christened the Easypass. And all this started way back in 1996.
No Slowing Down
While history is a bad yardstick to forecast the future, nonetheless it must not be forgotten that technology is the greatest catalyst for change. From railways to automobiles, from radio to TV to computers, technology has never failed to amaze and get done the unthinkable. It’s precisely this attribute that proven all the soothsayers wrong, and hopefully me too. And I quote Prof. Harold J. Leavitt, Kilpatrick Professor Emeritus at the Stanford Graduate School of Business, “Regardless of other economic trends, technology itself has no brakes nor an OFF button, so the new world is unlikely either to slow down or to level off. Information technology has a long way to go before it comes into full flower, and other world changing technologies are ripening close behind.”
And by the way the wine glass thing I talked about is a project being developed by Mitsubishi Electric Research Labs!!
This is the third in my series for Dataquest
Tuesday, September 26, 2006
Pharma: The Bigger RFID Story
The implementation and the strategy are not easy but RFID can offer a lot to the pharmaceutical industry including solutions for some of its most difficult problems
Most of the press for RFID implementation and rollouts went to the consumer packaged goods industry (Thanks to the big daddy, Wal*Mart!) But the pharmaceutical industry worldwide is not very far behind in gearing up to take advantage of this technology. According to the Meta Group, the pharma industry will outstrip the consumer packaged goods (CPG) industry in RFID implementation by the end of 2006. In Europe alone the RFID revenues from the pharma industry will cross over $400 million by 2007 as compared to a measly $33 million in 2004.
According to another study by research firm Frost & Sullivan, RFID's application in the pharmaceutical and healthcare verticals globally will grow to about $2.3 billion in 2011, clocking a healthy CAGR of 30%. This includes money spent on hardware and software, professional services, integration, and applications. The report divides the market into three segments: medical equipment tracking, patient tracking, and pharmaceutical tracking. The latter, says the report, will constitute the biggest chunk of the overall market.
It’s Not Wait and Watch
Wal*Mart created a robust business case for RFID implementation and in effect wrote another chapter in technology adoption. And this is not the first instance that Wal*Mart has backed a technology successfully. Bar codes are just one case in point. It was in 1973 that the bar code standards were approved. And just about 15,000 suppliers were using bar codes on their products by 1984. And it was in 1984 that Wal*Mart issued a similar edict and within a short span of three years, 75,000 suppliers started to use bar codes. And therefore it is with this lineage in mind that a lot of pharma companies are waiting and watching. They are expecting to replicate the Wal*Mart success. But the CPG story is strikingly different from the pharma story.
Different Strokes
The average value of a pharmaceutical product is far higher than packed consumer goods. Thus the math becomes extremely simple. So the tag costs become as low as 1% in the pharma case on an average as opposed to 7-8% for consumer goods. Extending the calculation, it is not incorrect to say that the logistics spend as a percentage of revenue is also lower in the pharma industry. Therefore the opportunity to drive efficiencies and associated savings from improved logistics is lower and far and in between.
Another driver far more important to the pharma industry is the expiry date issue. RFID will help create a dual edged sword to fight this bane of the pharma industry. While on one side it will provide ease of manageability at the distributors’ warehouses and on the other it will provide a great deal of insight in to the inventory management practices of the distributors. This will help the industry manage stock outs of course, and also losses incurred due to expired products. The loss from both these factors to the industry globally is in the region of $2 billion.
The Biggest Bane
The World Health Organization estimates that about 6% of the world’s drugs are counterfeit. The loss incurred by the industry globally on this account annually? $30 billion! And an average email user everyday sees this in the inbox. All of us are inundated with spam peddling counterfeit formulations ranging from God knows what to Viagra. This problem, which every pharma executive today is fighting against, hurts two ways. It puts patient safety at risk and also can wreck havoc with the company’s reputation and brand image at large. And lost consumer confidence in the drug only leads to millions of dollars in marketing and PR spend and months, sometimes years, to regain the same.
RFID can here be a good friend of the industry. While it is true that putting a tag on the product will not guarantee that the consumers get the genuine product. More so since consumers cannot read the tag, there is no way they can find out the genuineness of the product. How then does RFID come to the rescue? The solution is simple. RFID will create a trail as the product leaves the point of manufacture and goes right up to the final consumer. It can help validation at any point in this trail at a very low cost with tagging at the pallet or the case level. This will vastly improve the bulk validation process that happens along this chain now. For this process in particular, RFID capability as a read-write solution versus a read only for bar code provides a huge advantage. In effect it means that the point where the counterfeit is injected into the distribution channel can be pointed out with a fair amount of ease. So RFID is not the solution but the enabler thereof.
It is prudent for the pharma CIO to build a contextual case for RFID deployment as the drivers are not the same as those that pushed Wal*Mart to back the technology. After all the pharma industry has its own standards for the bar code too, the pharmacode! And it was therefore not without reason that the US FDA wants the industry to adopt RFID by 2007. To help companies meet this deadline, it even published a compliance policy guide in late 2004.
Many a slip
There are many a slip betwixt the cup and the slip. These proverbial slips are more technical and business hurdles than economic. The marketplace for RFID technologies is still rather noisy and immature. While the hardware market is fast approaching stability, there are a host of issues with middleware that integrate RFID with legacy systems, which both mid-sized and large vendors are resolving. Also many ERP databases are not equipped to handle the granular data that each article tagging will generate. Many of the technical hurdles have to be addressed at the industry level also. For instance the industry must come to a consensus on electronic product code (EPC), the standard that RFID uses. Issues regarding sharing of information also have to be addressed. Its not before long that the pressures to implement RFID, both from regulators and customers, will mount and the industry must work together and with their suppliers to reap full benefits of the technology.
This is the second in my series on RFID in Dataquest.
Most of the press for RFID implementation and rollouts went to the consumer packaged goods industry (Thanks to the big daddy, Wal*Mart!) But the pharmaceutical industry worldwide is not very far behind in gearing up to take advantage of this technology. According to the Meta Group, the pharma industry will outstrip the consumer packaged goods (CPG) industry in RFID implementation by the end of 2006. In Europe alone the RFID revenues from the pharma industry will cross over $400 million by 2007 as compared to a measly $33 million in 2004.
According to another study by research firm Frost & Sullivan, RFID's application in the pharmaceutical and healthcare verticals globally will grow to about $2.3 billion in 2011, clocking a healthy CAGR of 30%. This includes money spent on hardware and software, professional services, integration, and applications. The report divides the market into three segments: medical equipment tracking, patient tracking, and pharmaceutical tracking. The latter, says the report, will constitute the biggest chunk of the overall market.
It’s Not Wait and Watch
Wal*Mart created a robust business case for RFID implementation and in effect wrote another chapter in technology adoption. And this is not the first instance that Wal*Mart has backed a technology successfully. Bar codes are just one case in point. It was in 1973 that the bar code standards were approved. And just about 15,000 suppliers were using bar codes on their products by 1984. And it was in 1984 that Wal*Mart issued a similar edict and within a short span of three years, 75,000 suppliers started to use bar codes. And therefore it is with this lineage in mind that a lot of pharma companies are waiting and watching. They are expecting to replicate the Wal*Mart success. But the CPG story is strikingly different from the pharma story.
Different Strokes
The average value of a pharmaceutical product is far higher than packed consumer goods. Thus the math becomes extremely simple. So the tag costs become as low as 1% in the pharma case on an average as opposed to 7-8% for consumer goods. Extending the calculation, it is not incorrect to say that the logistics spend as a percentage of revenue is also lower in the pharma industry. Therefore the opportunity to drive efficiencies and associated savings from improved logistics is lower and far and in between.
Another driver far more important to the pharma industry is the expiry date issue. RFID will help create a dual edged sword to fight this bane of the pharma industry. While on one side it will provide ease of manageability at the distributors’ warehouses and on the other it will provide a great deal of insight in to the inventory management practices of the distributors. This will help the industry manage stock outs of course, and also losses incurred due to expired products. The loss from both these factors to the industry globally is in the region of $2 billion.
The Biggest Bane
The World Health Organization estimates that about 6% of the world’s drugs are counterfeit. The loss incurred by the industry globally on this account annually? $30 billion! And an average email user everyday sees this in the inbox. All of us are inundated with spam peddling counterfeit formulations ranging from God knows what to Viagra. This problem, which every pharma executive today is fighting against, hurts two ways. It puts patient safety at risk and also can wreck havoc with the company’s reputation and brand image at large. And lost consumer confidence in the drug only leads to millions of dollars in marketing and PR spend and months, sometimes years, to regain the same.
RFID can here be a good friend of the industry. While it is true that putting a tag on the product will not guarantee that the consumers get the genuine product. More so since consumers cannot read the tag, there is no way they can find out the genuineness of the product. How then does RFID come to the rescue? The solution is simple. RFID will create a trail as the product leaves the point of manufacture and goes right up to the final consumer. It can help validation at any point in this trail at a very low cost with tagging at the pallet or the case level. This will vastly improve the bulk validation process that happens along this chain now. For this process in particular, RFID capability as a read-write solution versus a read only for bar code provides a huge advantage. In effect it means that the point where the counterfeit is injected into the distribution channel can be pointed out with a fair amount of ease. So RFID is not the solution but the enabler thereof.
It is prudent for the pharma CIO to build a contextual case for RFID deployment as the drivers are not the same as those that pushed Wal*Mart to back the technology. After all the pharma industry has its own standards for the bar code too, the pharmacode! And it was therefore not without reason that the US FDA wants the industry to adopt RFID by 2007. To help companies meet this deadline, it even published a compliance policy guide in late 2004.
Many a slip
There are many a slip betwixt the cup and the slip. These proverbial slips are more technical and business hurdles than economic. The marketplace for RFID technologies is still rather noisy and immature. While the hardware market is fast approaching stability, there are a host of issues with middleware that integrate RFID with legacy systems, which both mid-sized and large vendors are resolving. Also many ERP databases are not equipped to handle the granular data that each article tagging will generate. Many of the technical hurdles have to be addressed at the industry level also. For instance the industry must come to a consensus on electronic product code (EPC), the standard that RFID uses. Issues regarding sharing of information also have to be addressed. Its not before long that the pressures to implement RFID, both from regulators and customers, will mount and the industry must work together and with their suppliers to reap full benefits of the technology.
This is the second in my series on RFID in Dataquest.
Monday, September 25, 2006
Take Open Source Beyond Software
The principle engrained in the open source movement is strong that it shall not remain confined to debate in the software circles alone. The others will adopt it, hopefully soon.
Open Source has caught the imagination of nearly everyone and it has come to be synonymous with free but the meaning is rather different.
Open Source relates to source code that is available to the public and refers to software that is created by a community of software programmers rather than a single software company. This allows even the smaller companies to retrofit the software with a little tweaking here and there to best fulfill its unique needs. It gives the company the freedom to tailor the software to its needs. It also gives the company the freedom from the hegemony of the monopolistic behemoths of the software world.
The bigger idea behind open source is not free. Its freedom! And this revolution is too strong that it remains confined to the software domain. Ripples of the open source movement have started to touch other knowledge intensive streams. Unlike a physical asset, which is subject to diminishing returns, knowledge sharing and its use and reuse lead to creation of what is called the network effect. (In a very few cases, sharing may not add incremental value, the Coke paradox as we know it!) It is the creation of a knowledge product that is the most expensive, and with the Internet, the distribution costs tend to approach zero. I will try to augment my argument with an example. A health worker in Kamana, Zambia logged on to website of Centers for Disease Control and Prevention and got the answer to a question on how to treat malaria. The result is obvious. And the best part of the whole story is that this happened way back in 1995! While this is an example of access to free information, similar success stories can be created when a lot of “otherwise” proprietary information is put in the free domain.
The reason why I say this is simple. Actually it’s reasons… Lets look at the first one. Once the knowledge asset (if I can call it that!) has been created its use by more and more people can create the network effect, because these users add to, adapt and further enrich the knowledge base. And is that not the very essence of the open source movement?
The second reason builds a stronger case for sharing. Akin to the growth of a tree, knowledge also branches out. As a consequence of this branching out, knowledge becomes fragmented. What this essentially means is specialist knowledge of today becomes the generalist knowledge asset of tomorrow. So a knowledge asset of today will be less valuable tomorrow. So it makes all the more sense to share it today to extract maximum value.
Open Courseware
Outside the software industry, there is still a certain amount of resistance to share knowledge assets. The reason is obvious. While we have reached an era of information democracy, our mindsets are still anachronistic. We still equate knowledge with power. This is true, but the new caveat is that shared knowledge is even more powerful.
Massachusetts Institute of Technology or MIT as most of us know it, announced an initiative to put course material for all of its courses online. Anyone across the world could log in and download it for free. Yes for free! And it did not come as a surprise to me that one of the funding agencies for the project was from one of the pioneers of the global IT revolution.
“…exposure to the teaching of other professors raises the bar and I am sure that individuals will leap that bar,” says an alumnus of MIT. Raising the bar, creating incremental value are the cornerstones of open source. Since it opened to the public on September 30, 2002, users from more than 215 countries, territories, and city-states around the world have visited the website.
What is heartening to know that an Open Courseware is growing in our backyard too. The education department of Kerala has already put textbooks online that can be downloaded for free. Its textbooks, available in portable document format (PDF), are already downloadable.
The benefits are waiting to be accrued. All one needs to do is start sharing…
Open Source has caught the imagination of nearly everyone and it has come to be synonymous with free but the meaning is rather different.
Open Source relates to source code that is available to the public and refers to software that is created by a community of software programmers rather than a single software company. This allows even the smaller companies to retrofit the software with a little tweaking here and there to best fulfill its unique needs. It gives the company the freedom to tailor the software to its needs. It also gives the company the freedom from the hegemony of the monopolistic behemoths of the software world.
The bigger idea behind open source is not free. Its freedom! And this revolution is too strong that it remains confined to the software domain. Ripples of the open source movement have started to touch other knowledge intensive streams. Unlike a physical asset, which is subject to diminishing returns, knowledge sharing and its use and reuse lead to creation of what is called the network effect. (In a very few cases, sharing may not add incremental value, the Coke paradox as we know it!) It is the creation of a knowledge product that is the most expensive, and with the Internet, the distribution costs tend to approach zero. I will try to augment my argument with an example. A health worker in Kamana, Zambia logged on to website of Centers for Disease Control and Prevention and got the answer to a question on how to treat malaria. The result is obvious. And the best part of the whole story is that this happened way back in 1995! While this is an example of access to free information, similar success stories can be created when a lot of “otherwise” proprietary information is put in the free domain.
The reason why I say this is simple. Actually it’s reasons… Lets look at the first one. Once the knowledge asset (if I can call it that!) has been created its use by more and more people can create the network effect, because these users add to, adapt and further enrich the knowledge base. And is that not the very essence of the open source movement?
The second reason builds a stronger case for sharing. Akin to the growth of a tree, knowledge also branches out. As a consequence of this branching out, knowledge becomes fragmented. What this essentially means is specialist knowledge of today becomes the generalist knowledge asset of tomorrow. So a knowledge asset of today will be less valuable tomorrow. So it makes all the more sense to share it today to extract maximum value.
Open Courseware
Outside the software industry, there is still a certain amount of resistance to share knowledge assets. The reason is obvious. While we have reached an era of information democracy, our mindsets are still anachronistic. We still equate knowledge with power. This is true, but the new caveat is that shared knowledge is even more powerful.
Massachusetts Institute of Technology or MIT as most of us know it, announced an initiative to put course material for all of its courses online. Anyone across the world could log in and download it for free. Yes for free! And it did not come as a surprise to me that one of the funding agencies for the project was from one of the pioneers of the global IT revolution.
“…exposure to the teaching of other professors raises the bar and I am sure that individuals will leap that bar,” says an alumnus of MIT. Raising the bar, creating incremental value are the cornerstones of open source. Since it opened to the public on September 30, 2002, users from more than 215 countries, territories, and city-states around the world have visited the website.
What is heartening to know that an Open Courseware is growing in our backyard too. The education department of Kerala has already put textbooks online that can be downloaded for free. Its textbooks, available in portable document format (PDF), are already downloadable.
The benefits are waiting to be accrued. All one needs to do is start sharing…
The Making of a New Business Leader
New threats and risks present an opportunity unlike any in the recent past. All the CIO needs to do is reinvent his role and see old technologies in new light.
I would like to start with an anecdote, which I know is rather old, but its nice to start from the very beginning. It dates back to the mid 80s and goes like this: “A group of American managers visiting Japan found out that their counterparts were regularly supplied with information on the proportion of products that passed out of the factory without reworking or rectification. They found that the typical percentage of products that needed no reworking was 92 per cent. The American managers found that no such information was provided to them. On investigation, back home in America, this percentage was found to be eight per cent. They worked on this factor for six months and pushed the percentage up to 66 per cent.”
This small tale of lore hides a very profound message (or so I feel); the story, in no uncertain terms, tells us that to do the right things right, you must first know what the right things are. The EDP Manager of yesterday transformed into the CIO of today by knowing and then doing the right things.
But life for the CIO has come full circle today. Its time for the CIO to now start to figure out what the right things are, as the challenges of yesteryears have been won over.
My conviction about the subject has been further strengthened after I recently finished a book that started by lamenting about the decline in the importance and relevance of the marketing department and the CMO (The author later suggested strategies to overcome each of the challenges staring the CMO right in the eye). And throughout my reading the book, I could imagine a similar book being written about the CIO in the very near future. Actually if you read the business press, some have already started talking about it. And taking the cue from there one of my friends has very eloquently re-expanded CIO to “Career Is Over”, as an augury of things to come.
The role and the “value-add” provided by the CIO has come under even more scrutiny in the recent and all this has been largely driven by the increasing importance of managing IT assets strategically and extract maximum business value from these.
Business Results The Compliance Way
While it is a definite challenge, but the pressure of delivering tangible business results opens floodgates of opportunity for our dear friend, the CIO. I will as briefly as possible try to explain what I mean. But before I do that, I would like to remind you that this is a diagnostic and not a prescriptive effort.
The CIO has an opportunity to help his fellow executives in the high priority area of lowering risk and improving governance. Look at new reports around you and you will realize that poor corporate governance and accounting scandals due to non-compliance are leaving no one untouched. Enron and Tyco are history now. Even the great Warren Buffet is under the scanner today. Recent reports pointed that Federal and State agencies are investigating Buffet’s American International Group for accounting malpractices.
This recent epidemic of accounting scandals has prompted lawmakers and regulators to create strict new rules for transparency, accountability, and governance. Since most of this data today is digital in form and stored on assets (simply put it hard drives) that are under the purview of the CIO. Therefore it may not be entirely incorrect to say that the CIO must play an active role is ensuring that all regulatory compliances are met with. It may be becoming increasingly difficult to stay on top of these increasing complex and demanding regulatory requirements. But by making the CIO responsible for following these regulatory changes and translating the rules into business policy, processes, and the consequent architectural changes (if any).
And the tool that is best equipped to help overcome compliance issues has always been at the disposal of the CIO and his colleagues: ERP.
An ERP solution does all that is necessary for compliance. It captures and stores data; it preserves data integrity (another one of CIO’s business responsibilities); secures information and ensures information is made available at the appropriate times. All this needs is some bit of coordination with other departmental heads and voila, the CIO has killed more than a couple of birds with a single stone. The compliance issue has certainly been addressed; it also helps integration among the various business departments that are comfortable working as silos.
The other upside of all this is that its not just accounting regulations that can be adhered to. Most of the better ERP packages of today are being designed and written keeping all regulatory compliances in mind for instance in the case of the pharmaceutical industry, the FDA (Food and Drug Administration) compliance is adhered to.
Its time for the CIO to transmogrify his role form that of a technologist (as most organizations delegate that role to the CIO) to a business leader, to a strategic partner of the board.
This is typical consultant-speak! While it is dangerous to prophesize but it doesn't hurt once in a while.
I would like to start with an anecdote, which I know is rather old, but its nice to start from the very beginning. It dates back to the mid 80s and goes like this: “A group of American managers visiting Japan found out that their counterparts were regularly supplied with information on the proportion of products that passed out of the factory without reworking or rectification. They found that the typical percentage of products that needed no reworking was 92 per cent. The American managers found that no such information was provided to them. On investigation, back home in America, this percentage was found to be eight per cent. They worked on this factor for six months and pushed the percentage up to 66 per cent.”
This small tale of lore hides a very profound message (or so I feel); the story, in no uncertain terms, tells us that to do the right things right, you must first know what the right things are. The EDP Manager of yesterday transformed into the CIO of today by knowing and then doing the right things.
But life for the CIO has come full circle today. Its time for the CIO to now start to figure out what the right things are, as the challenges of yesteryears have been won over.
My conviction about the subject has been further strengthened after I recently finished a book that started by lamenting about the decline in the importance and relevance of the marketing department and the CMO (The author later suggested strategies to overcome each of the challenges staring the CMO right in the eye). And throughout my reading the book, I could imagine a similar book being written about the CIO in the very near future. Actually if you read the business press, some have already started talking about it. And taking the cue from there one of my friends has very eloquently re-expanded CIO to “Career Is Over”, as an augury of things to come.
The role and the “value-add” provided by the CIO has come under even more scrutiny in the recent and all this has been largely driven by the increasing importance of managing IT assets strategically and extract maximum business value from these.
Business Results The Compliance Way
While it is a definite challenge, but the pressure of delivering tangible business results opens floodgates of opportunity for our dear friend, the CIO. I will as briefly as possible try to explain what I mean. But before I do that, I would like to remind you that this is a diagnostic and not a prescriptive effort.
The CIO has an opportunity to help his fellow executives in the high priority area of lowering risk and improving governance. Look at new reports around you and you will realize that poor corporate governance and accounting scandals due to non-compliance are leaving no one untouched. Enron and Tyco are history now. Even the great Warren Buffet is under the scanner today. Recent reports pointed that Federal and State agencies are investigating Buffet’s American International Group for accounting malpractices.
This recent epidemic of accounting scandals has prompted lawmakers and regulators to create strict new rules for transparency, accountability, and governance. Since most of this data today is digital in form and stored on assets (simply put it hard drives) that are under the purview of the CIO. Therefore it may not be entirely incorrect to say that the CIO must play an active role is ensuring that all regulatory compliances are met with. It may be becoming increasingly difficult to stay on top of these increasing complex and demanding regulatory requirements. But by making the CIO responsible for following these regulatory changes and translating the rules into business policy, processes, and the consequent architectural changes (if any).
And the tool that is best equipped to help overcome compliance issues has always been at the disposal of the CIO and his colleagues: ERP.
An ERP solution does all that is necessary for compliance. It captures and stores data; it preserves data integrity (another one of CIO’s business responsibilities); secures information and ensures information is made available at the appropriate times. All this needs is some bit of coordination with other departmental heads and voila, the CIO has killed more than a couple of birds with a single stone. The compliance issue has certainly been addressed; it also helps integration among the various business departments that are comfortable working as silos.
The other upside of all this is that its not just accounting regulations that can be adhered to. Most of the better ERP packages of today are being designed and written keeping all regulatory compliances in mind for instance in the case of the pharmaceutical industry, the FDA (Food and Drug Administration) compliance is adhered to.
Its time for the CIO to transmogrify his role form that of a technologist (as most organizations delegate that role to the CIO) to a business leader, to a strategic partner of the board.
This is typical consultant-speak! While it is dangerous to prophesize but it doesn't hurt once in a while.
An Idea Whose Time Has Come
Taking a cue from their bigger peers in the industry, the SMB must actively look at outsourcing their IT activities
Like Alvin Toffler’s Third Wave, Nicholas Carr’s IT Doesn’t Matter is also on us. An article published in the May 2003 Harvard Business Review created the right kind of noise. In a nutshell, the article tried to put forth the idea that the strategic importance of information technology has diminished and its status is likely to be that of no more than a commodity. “When a resource becomes essential to competition but inconsequential to strategy, the risks it creates become more important than the advantages it provides,” said Carr in his piece. Something that spawned a mini industry of sorts. Words to fill reams and reams of pages were written about the article and not to forget the fact that the author also wrote a book of the same name, laughing his way to the bank in the process!
But the issue is unlike the piano keyboard, where the keys are either all black or all white. The answer lies somewhere in between. Lets stop here and for a brief while go to a 160-room mansion in California. Construction started in 1884 and continued till 1922 (that’s 38 straight years). The house boasts 10,000 windows, 950 doors and 47 fireplaces, not to mention the other numbers that speak of its grandiosity. It was built for $5.5 million, as much a neat sum then as it is today. But wait, the story doesn’t end here. The house is as bizarre as it is grand. The house also boasts 13 abandoned staircases (one of them leading into a ceiling), 65 doors leading to blank walls (just hope one never rushes into a door like that!), and 24 skylights embedded in floors. Some of its features are so bizarre that the common folk thought the house was haunted. And it was therefore christened the Winchester Mystery House.
But there is one thing that the house did not have. A blueprint! Mrs Sarah Winchester, heir to the Winchester Repeating Arms Company, did not have a single blueprint for a project as huge as this. Some of the sketches though were made on paper and tablecloths! The obvious question is what’s the point? The point is simple: let the experts do the job. Had Mrs Winchester allowed an architect to build and plan the house for her, the name of the bizarrely beautiful mansion would have been different. In other words, had the building of the house been outsourced to someone with the right skills, the effort and expertise of the 147 builders who worked day and night to build the place would have been mentioned today in a different light.
It may be extending the logic a little too far, but it is true that the Indian society since ancient times has been foundationed on the concept of core competence. Divided into four classes, primarily on the basis of their occupation, our ancestors did what they were best at and outsourced the rest. The Brahmins were the educators and left their security needs to the Kshtriyas. And its time the information technology industry realized this fact.
Coming back to Mr Carr, he is right in saying that information technology is more like a commodity today. So what really matters is not what you do with it, but how you do it. The use of technology and deriving the right benefits out of the same has never been and never will the issues for a technocrat. They have always been and will continue to be managerial issues. “It would be a mistake to think the overspending on and under-managing of technology during the bubble years were a one-time aberration. In fact, the failure to reap technology’s potential is symptomatic of deeper structural flaws in how technology is being managed,” feels Frank Mattern of McKinsey. Skills to manage and reap technology’s potential are far and in between. So it’s best to give it to some one who knows how to do it.
The best IT strategy for the SMB in India will be to do no IT at all. Some estimates suggest that the Indian business landscape is populated by over 3.5 million small and medium sized companies all of which have an ever-increasing need for IT. And a typical problem that most companies in the SMB space feel is the inability to react to the rapidly changing needs of the market. This was a key issue that Sterling Tools, an auto ancillary company supplying to the best names in the industry. Straddled between the ever demanding customer and a minimal IT staff, Sterling Tools was finding it difficult even to manage aspects like e-mail and user issues arising from office applications. And of course the regular hardware glitches were another thorny issue. The matters stood compounded by the fact the company was growing at a very rapid pace. It has grown to eight times its size in the last eight years and has grown from a single manufacturing facility to six. And I would frankly not blame the CEO of Sterling if IT was not too high on his list of important to-dos for the day. But this does not mean that the gentleman ever undermined the need and importance of a robust and scalable IT infrastructure. We partnered with Sterling Tools and took ownership of their entire IT infrastructure-hardware, software, network and even the manpower. Lock, stock and barrel as the Brits would say.
And it would not take a rocket scientist to guess the outcome. The number of complaints has headed south. Process based tracking of activities has moved productivity in the exact opposite direction. With all day-to-day IT activities being handled by us, Sterling Tools management time is freed to ficus on the more strategic issues (I am not implying that IT is any less strategic!)
Some studies suggest that by outsourcing all non-manufacturing related IT activity a domestic company can shave off as much as 30% from its IT budget. You don’t have to be a Bharti or a Dabur to engage an outsourcing partner. You can do exactly what the Sterling Tools of the world are doing. Do no IT at all, pass it on to those who know and can do it. And I certainly think IT outsourcing by the smaller companies is an idea whose time has come.
This also is based on a theme from one of my lectures for an IT class!
Like Alvin Toffler’s Third Wave, Nicholas Carr’s IT Doesn’t Matter is also on us. An article published in the May 2003 Harvard Business Review created the right kind of noise. In a nutshell, the article tried to put forth the idea that the strategic importance of information technology has diminished and its status is likely to be that of no more than a commodity. “When a resource becomes essential to competition but inconsequential to strategy, the risks it creates become more important than the advantages it provides,” said Carr in his piece. Something that spawned a mini industry of sorts. Words to fill reams and reams of pages were written about the article and not to forget the fact that the author also wrote a book of the same name, laughing his way to the bank in the process!
But the issue is unlike the piano keyboard, where the keys are either all black or all white. The answer lies somewhere in between. Lets stop here and for a brief while go to a 160-room mansion in California. Construction started in 1884 and continued till 1922 (that’s 38 straight years). The house boasts 10,000 windows, 950 doors and 47 fireplaces, not to mention the other numbers that speak of its grandiosity. It was built for $5.5 million, as much a neat sum then as it is today. But wait, the story doesn’t end here. The house is as bizarre as it is grand. The house also boasts 13 abandoned staircases (one of them leading into a ceiling), 65 doors leading to blank walls (just hope one never rushes into a door like that!), and 24 skylights embedded in floors. Some of its features are so bizarre that the common folk thought the house was haunted. And it was therefore christened the Winchester Mystery House.
But there is one thing that the house did not have. A blueprint! Mrs Sarah Winchester, heir to the Winchester Repeating Arms Company, did not have a single blueprint for a project as huge as this. Some of the sketches though were made on paper and tablecloths! The obvious question is what’s the point? The point is simple: let the experts do the job. Had Mrs Winchester allowed an architect to build and plan the house for her, the name of the bizarrely beautiful mansion would have been different. In other words, had the building of the house been outsourced to someone with the right skills, the effort and expertise of the 147 builders who worked day and night to build the place would have been mentioned today in a different light.
It may be extending the logic a little too far, but it is true that the Indian society since ancient times has been foundationed on the concept of core competence. Divided into four classes, primarily on the basis of their occupation, our ancestors did what they were best at and outsourced the rest. The Brahmins were the educators and left their security needs to the Kshtriyas. And its time the information technology industry realized this fact.
Coming back to Mr Carr, he is right in saying that information technology is more like a commodity today. So what really matters is not what you do with it, but how you do it. The use of technology and deriving the right benefits out of the same has never been and never will the issues for a technocrat. They have always been and will continue to be managerial issues. “It would be a mistake to think the overspending on and under-managing of technology during the bubble years were a one-time aberration. In fact, the failure to reap technology’s potential is symptomatic of deeper structural flaws in how technology is being managed,” feels Frank Mattern of McKinsey. Skills to manage and reap technology’s potential are far and in between. So it’s best to give it to some one who knows how to do it.
The best IT strategy for the SMB in India will be to do no IT at all. Some estimates suggest that the Indian business landscape is populated by over 3.5 million small and medium sized companies all of which have an ever-increasing need for IT. And a typical problem that most companies in the SMB space feel is the inability to react to the rapidly changing needs of the market. This was a key issue that Sterling Tools, an auto ancillary company supplying to the best names in the industry. Straddled between the ever demanding customer and a minimal IT staff, Sterling Tools was finding it difficult even to manage aspects like e-mail and user issues arising from office applications. And of course the regular hardware glitches were another thorny issue. The matters stood compounded by the fact the company was growing at a very rapid pace. It has grown to eight times its size in the last eight years and has grown from a single manufacturing facility to six. And I would frankly not blame the CEO of Sterling if IT was not too high on his list of important to-dos for the day. But this does not mean that the gentleman ever undermined the need and importance of a robust and scalable IT infrastructure. We partnered with Sterling Tools and took ownership of their entire IT infrastructure-hardware, software, network and even the manpower. Lock, stock and barrel as the Brits would say.
And it would not take a rocket scientist to guess the outcome. The number of complaints has headed south. Process based tracking of activities has moved productivity in the exact opposite direction. With all day-to-day IT activities being handled by us, Sterling Tools management time is freed to ficus on the more strategic issues (I am not implying that IT is any less strategic!)
Some studies suggest that by outsourcing all non-manufacturing related IT activity a domestic company can shave off as much as 30% from its IT budget. You don’t have to be a Bharti or a Dabur to engage an outsourcing partner. You can do exactly what the Sterling Tools of the world are doing. Do no IT at all, pass it on to those who know and can do it. And I certainly think IT outsourcing by the smaller companies is an idea whose time has come.
This also is based on a theme from one of my lectures for an IT class!
More Than Back Office
While shared services help in curbing costs, but there is more to it than meets the eye in the first look.
‘Shared services’ is quite explanatory a name, but to define the concept simply it is the centralized management of activities for more than one business user. Shared services is very quickly emerging as a popular mechanism (if I may call it that!) to drive scale and efficiency by stitching together support functions dispersed across departments. In other words it is sharing common infrastructure and to put things in perspective, lets see what it did for Boeing.
Considered one of the pioneers of shared services, Boeing has been able to reduce its global infrastructure costs by nearly US$1.4 billion in the last few years. With over 21,000 employees worldwide, its shared services group centrally manages functions ranging from IT and application development to human resources. This group works closely with business units to meet their unique needs and has been instrumental in bringing down the number of enterprise applications by more than a fifth since 2001. This is not a one off case study, estimates suggest that the average savings resulting from the implementation of shared services is as much as 14 per cent.
Consolidate
It was not very long ago that management consultants and business gurus were always talking about decentralization. But the wheel now seems to have come full circle. It is this very set of people who are now talking the exact opposite. The driving economic principle, they feel, that will lead to greater economic benefits is centralization. And this is the exact thinking that goes behind shared services. So rather than have different people, at different locations perform the same function why not have a common group of people take ownership of a function. In a single word: consolidate.
But consolidation alone will not lead to the desired results. Before we discuss further, lets look at a number. According to a recent AT Kearney survey conducted by Harris Interactive 76 per cent of companies expected increased productivity from shared services, but only 56 per cent achieved this goal. Similarly, 87 per cent of companies expected to cut costs, but only 67 per cent managed to save money. What this definitely means is that the idea has potential but there is some tweaking to be done.
Amongst the first few things that the company must look at while going full steam ahead for shared services is standardization. According to a study conducted by Accenture, standardization is among the top ten success factors. By standardizing processes and procedures, companies realize the benefits of scale much faster. But another thing to remember is that standardization must not come at the cost of simplicity and flexibility. The smarter companies drive simplicity and flexibility by setting architectural standards and closely scrutinizing the true costs and benefits of exceptions. These companies tackle complexity by reducing the number of processes, procedures and even technologies and platforms they deploy and then design systems that increase the flexibility and ease of implementation. Such companies also work hard at making systems more modular and the connections between systems easier and more standardized. This strategy allows these companies to ramp up (‘verticalize’ is a word I prefer instead of ramp up!) new processes and functionality more quickly. Another benefit is that it allows integration of disparate systems resulting from mergers, acquisitions, or reorganizations.
Technology: Bulwarks success
80 per cent of the executives polled by Harris Interactive for the AT Kearney survey agreed that technology is either extremely or very important for the success of shared services. AT Kearney observes, “…in large part, the fundamental success –and future competitive advantage—of shared services depends on technological improvements.”
While this is true, it is also important for business organizations to take into account commercial aspects of new technology adoption such as industry standardization and the likely future support of technologies because of the enormous costs of obsolescence. So it becomes imminent for companies to get the best out of their existing adoptions and that can be realized by building a technology-smart business organization.
Process is King
More than just a handful of companies today realize and appreciate the fact that a bare bone conversion to shared services will not lead to the promised land, i.e the desired paybacks will be hard to come by. This is largely attributed to the fact that during implementation most companies are tunnel visioned – focusing only on cost reduction, not realizing that the light at the end of the tunnel will mow you down, as the saying goes. While there may not exist a silver bullet for this but there certainly exists hope in the form of business process management or BPM as we know it for short.
“BPM is effective in integrating B2B transactions and workflow to create a single process modeling and execution environment.” While this definitely sounds like consultant-speak, what it essentially means is that a BPM implementation helps to reduce a lot of manual process inefficiencies, which are often the cause of operationally inefficient and low quality service. BPM solutions are designed to increase the productivity (and therefore the profitability!) by automating a substantial portion of manual processes while at the same time leveraging the business’ existing technology infrastructure.
While it may sound quite easy, it involves a lot of leg work (But there is no short cut to success, is there?) Businesses must thoroughly examine their existing processes to understand how are specific business processes being performed. This examination must be end-to-end, from the point the first actions are performed in a process through to the final stage of storage and retention. Its only at the end of this exercise can a better, more effective and efficient process be designed. It is very important to note that quite often the use of the available (and standardized, as they say) automation systems may not meet the unique needs of a business.
And once a BPM is in place, fine tuned and standardized shared services’ processes result in fewer employee training costs, fewer delays, reductions in the amount of misplaced or duplicated work, and smaller numbers of human errors. The benefits definitely outweigh the effort!
This is another one of my writings that never got published. And I actually don't remember why, honest!
‘Shared services’ is quite explanatory a name, but to define the concept simply it is the centralized management of activities for more than one business user. Shared services is very quickly emerging as a popular mechanism (if I may call it that!) to drive scale and efficiency by stitching together support functions dispersed across departments. In other words it is sharing common infrastructure and to put things in perspective, lets see what it did for Boeing.
Considered one of the pioneers of shared services, Boeing has been able to reduce its global infrastructure costs by nearly US$1.4 billion in the last few years. With over 21,000 employees worldwide, its shared services group centrally manages functions ranging from IT and application development to human resources. This group works closely with business units to meet their unique needs and has been instrumental in bringing down the number of enterprise applications by more than a fifth since 2001. This is not a one off case study, estimates suggest that the average savings resulting from the implementation of shared services is as much as 14 per cent.
Consolidate
It was not very long ago that management consultants and business gurus were always talking about decentralization. But the wheel now seems to have come full circle. It is this very set of people who are now talking the exact opposite. The driving economic principle, they feel, that will lead to greater economic benefits is centralization. And this is the exact thinking that goes behind shared services. So rather than have different people, at different locations perform the same function why not have a common group of people take ownership of a function. In a single word: consolidate.
But consolidation alone will not lead to the desired results. Before we discuss further, lets look at a number. According to a recent AT Kearney survey conducted by Harris Interactive 76 per cent of companies expected increased productivity from shared services, but only 56 per cent achieved this goal. Similarly, 87 per cent of companies expected to cut costs, but only 67 per cent managed to save money. What this definitely means is that the idea has potential but there is some tweaking to be done.
Amongst the first few things that the company must look at while going full steam ahead for shared services is standardization. According to a study conducted by Accenture, standardization is among the top ten success factors. By standardizing processes and procedures, companies realize the benefits of scale much faster. But another thing to remember is that standardization must not come at the cost of simplicity and flexibility. The smarter companies drive simplicity and flexibility by setting architectural standards and closely scrutinizing the true costs and benefits of exceptions. These companies tackle complexity by reducing the number of processes, procedures and even technologies and platforms they deploy and then design systems that increase the flexibility and ease of implementation. Such companies also work hard at making systems more modular and the connections between systems easier and more standardized. This strategy allows these companies to ramp up (‘verticalize’ is a word I prefer instead of ramp up!) new processes and functionality more quickly. Another benefit is that it allows integration of disparate systems resulting from mergers, acquisitions, or reorganizations.
Technology: Bulwarks success
80 per cent of the executives polled by Harris Interactive for the AT Kearney survey agreed that technology is either extremely or very important for the success of shared services. AT Kearney observes, “…in large part, the fundamental success –and future competitive advantage—of shared services depends on technological improvements.”
While this is true, it is also important for business organizations to take into account commercial aspects of new technology adoption such as industry standardization and the likely future support of technologies because of the enormous costs of obsolescence. So it becomes imminent for companies to get the best out of their existing adoptions and that can be realized by building a technology-smart business organization.
Process is King
More than just a handful of companies today realize and appreciate the fact that a bare bone conversion to shared services will not lead to the promised land, i.e the desired paybacks will be hard to come by. This is largely attributed to the fact that during implementation most companies are tunnel visioned – focusing only on cost reduction, not realizing that the light at the end of the tunnel will mow you down, as the saying goes. While there may not exist a silver bullet for this but there certainly exists hope in the form of business process management or BPM as we know it for short.
“BPM is effective in integrating B2B transactions and workflow to create a single process modeling and execution environment.” While this definitely sounds like consultant-speak, what it essentially means is that a BPM implementation helps to reduce a lot of manual process inefficiencies, which are often the cause of operationally inefficient and low quality service. BPM solutions are designed to increase the productivity (and therefore the profitability!) by automating a substantial portion of manual processes while at the same time leveraging the business’ existing technology infrastructure.
While it may sound quite easy, it involves a lot of leg work (But there is no short cut to success, is there?) Businesses must thoroughly examine their existing processes to understand how are specific business processes being performed. This examination must be end-to-end, from the point the first actions are performed in a process through to the final stage of storage and retention. Its only at the end of this exercise can a better, more effective and efficient process be designed. It is very important to note that quite often the use of the available (and standardized, as they say) automation systems may not meet the unique needs of a business.
And once a BPM is in place, fine tuned and standardized shared services’ processes result in fewer employee training costs, fewer delays, reductions in the amount of misplaced or duplicated work, and smaller numbers of human errors. The benefits definitely outweigh the effort!
This is another one of my writings that never got published. And I actually don't remember why, honest!
There is more than meets the eye!
Sun Microsystems buying StorageTek looked like another mistake from Mr McNealy. But closer examination revealed what my mom told me long back…
On June 02, 2005, Sun Microsystems announced its plans to acquire Storage Technology Corporation or StorageTek, as it is popularly known. And most analysts and doomsday soothsayers called in the last nail (I had heard that before). As I sat in my office looking out, I was struck by what my mom told me very long ago. “Son,” she said, “There is always more than meets the eye and the obvious is not always true.”
While I often thought this held true for ERP, I did not know the others in the IT industry were also driven by it. And I thought lets investigate to see if this holds true for this as well. And in my enthusiasm, I started to search for what was not the obvious in this particular acquisition. And here is an account of what I discovered.
The Industry View
As part of the all cash deal Sun will pay a consideration of $4.1 billion or $37 a share to acquire StorageTek. In a release issued by Sun, it said that the acquisition would strengthen its position in the market for managing information from creation through long-term storage to deletion. The companies expect to complete the acquisition in the next two to three months. The all cash deal sent some ripples in the global market, but the real question is whether any of the players in the storage and the ILM space will feel any real heat.
Selling servers alone is not a profitable business any more. As a consequence, more and more vendors are offering a complete bundle of storage hardware, software and services. And Sun’s current storage business is not something it can be too proud of. This came at the forefront during the reporting of the quarterly financial results in April this year. Citing it as a cause for the $61 million loss that it made, company executives said that the rate at which customers purchase Sun’s storage products along with servers had declined over the last three quarters. On the other hand, both of its systems competitors sell more storage than Sun, in terms of value and as a proportion to their server business. For instance HP's disk storage systems business was almost 40% the size of the server business in 2004, compared to Sun's 24%. Both HP and IBM have larger revenues coming to them from storage services, storage software, and tape drives. When combined with StorageTek's products, the integrated portfolio could prove quite attractive to customers. So this means Sun is in a better position to breath down HP and IBM’s necks. However EMC has not much to worry about as neither Sun nor StorageTek have traditionally done a good job at selling primary disk.
It is old knowledge that the need to comply with government regulations such as the healthcare information privacy, Sarbanes-Oxley act, new FDA regulations, and securities compliance is amplifying the demand for storage. With StorageTek under its belt now, Sun can go beyond cradle-to-grave management because the company can add its significant portfolio of privacy, security, access management and ID management software. This will thus help it compete further with IBM, HP and EMC who have been offering next generation data center solutions. An obvious outcome therefore will be stronger push for ILM sales driven by Sun along with compliance and governance solutions over next twelve to 18 months.
The flipside to the whole situation however will the impact on StorageTek’s existing OEM relationships. While Sun was StorageTek’s biggest OEM customer, HP has been an important partner as well. And in May this year, StorageTek had announced an extension of its partnership with HP to deliver mid-range storage products. As part of the tie-up, HP was to provide StorageTek with LTO Ultrium tape technology. Since HP competes head-on with Sun in the server market, one can at the outset assume that the HP-StorageTek deal is over following Sun's move. Competitors in the industry are known to source from each other in the spirit of competitive cooperation and it has come to be recognized as a common business practice. Sun executives were quick to point this and emphasized that Sun is committed to developing the existing OEM relationships. An aspect of importance here is that the relationship extends only to cover storage hardware, which is not a significant part of the value chain.
A Prognosis for Sun
One of the most obvious benefits for Sun will be its ability to arrest the slide in its server business. Its share in the worldwide server, which stood at $12.3 billion in the first quarter of 2005, slipped to 9.5% from 10.3% a year earlier. Sun was way behind IBM (30% market share), Hewlett-Packard (28%), and even Dell (10.8%). As indicated earlier the StorageTek purchase is intended to help Sun compete in the next-generation data center market, where virtualized pools of computing, networking, and storage resources co-exist. IBM, HP, and EMC have aggressively pursued their own virtualization strategies.
While sales of StorageTek's tape-automation and disk-storage products have grown slowly in the recent past, the company brings invaluable experience in intelligent data management and expertise in helping large companies manage heterogeneous servers and storage as a single network. While the growth of tape is expected to be relatively flat, the sustained revenue and profit pool remains substantial. With this acquisition, Sun will more than double the size of the company's storage software revenue and be well positioned to capture a meaningful portion of the tape opportunity.
One of Sun's biggest challenges in the storage market has been sales coverage. The deal brings into the Sun stable an army of over 1,000 storage sales specialists and nearly 2,000 storage service professionals. Add to this a combined product roadmap, Sun will have the broadest product line in the industry. The ILM opportunity now seems within Sun’s grasp. An opportunity that on last count measured about $65 billion annually.
Compelling financials was another reason for Sun to pick up the $4.1 billion tag. Was it really $4.1 billion? Lets put together some simple mathematics first. On a cash basis the deal took $4.1 billion to complete, StorageTek has $1 billion in cash - meaning in reality it took only $3.1 billion to acquire the company. On $3.1 billion in cash, Sun would generate an annual income of $100 million from interest. Using the cash instead to fund its acquisition of StorageTek, its earnings equal to StorageTek’s net income and cash flow. This exceeds $100 million. It actually stood at $191 million for 2004. On top of this, the company can add to its savings kitty through a common corporate infrastructure, increased purchasing power with suppliers, increased coverage opportunities that represent upside to the above figure. And all of this comes before the new combined entity can explore new revenue opportunities. The caveat however is that how quickly and seamlessly can Sun integrate the company within its realms without creating a cultural clash.
Buying a tape storage company did not look very exciting or glamorous at the face of it. Borrowing from a cliché, there is more to it than meets the eye. Tape revenues are unlikely to grow at scorching rates but there's no question customers will store more data on tape next year than this. It continues to be the most economic electronic storage medium available today. Just talk to any CIO, and he will tell you that tape is about five times less expensive than spinning disks. And that's before you get to savings from lower power consumption and reduced cooling needs - the great beauty of not having to keep disks powered and cooled day and night. While Sun cannot deny that the storage marketplace will move towards virtualized storage systems but it expect tape to continue to play its role as the lowest cost media. And the
deep-rooted principle behind the same is that customers may migrate to better apps, faster computers, but they never let go of their data.
Organic growth and partnerships with industry leaders would not have been sufficient for Sun to exhibit substantial short-term improvement in the storage business. This acquisition satisfies the company’s quest for increased revenue, immediately enhances earnings, and brings a captive customer base and a fair amount of IP. Unlike earlier acquisitions this one also offers direct product revenue and revenue from the installed base in the form of services and consumable tape media. While the acquisition may not seem totally complementary, it brings benefits to the table that are worth the buck. Rather a whole lot of bucks that Sun shelled out.
And with this I rest my case. There is more than meets the eye!
This piece was never published, because I wrote this as part of a job interview for a Singapore based IT Analyst firm. And yes I did get the job!!
On June 02, 2005, Sun Microsystems announced its plans to acquire Storage Technology Corporation or StorageTek, as it is popularly known. And most analysts and doomsday soothsayers called in the last nail (I had heard that before). As I sat in my office looking out, I was struck by what my mom told me very long ago. “Son,” she said, “There is always more than meets the eye and the obvious is not always true.”
While I often thought this held true for ERP, I did not know the others in the IT industry were also driven by it. And I thought lets investigate to see if this holds true for this as well. And in my enthusiasm, I started to search for what was not the obvious in this particular acquisition. And here is an account of what I discovered.
The Industry View
As part of the all cash deal Sun will pay a consideration of $4.1 billion or $37 a share to acquire StorageTek. In a release issued by Sun, it said that the acquisition would strengthen its position in the market for managing information from creation through long-term storage to deletion. The companies expect to complete the acquisition in the next two to three months. The all cash deal sent some ripples in the global market, but the real question is whether any of the players in the storage and the ILM space will feel any real heat.
Selling servers alone is not a profitable business any more. As a consequence, more and more vendors are offering a complete bundle of storage hardware, software and services. And Sun’s current storage business is not something it can be too proud of. This came at the forefront during the reporting of the quarterly financial results in April this year. Citing it as a cause for the $61 million loss that it made, company executives said that the rate at which customers purchase Sun’s storage products along with servers had declined over the last three quarters. On the other hand, both of its systems competitors sell more storage than Sun, in terms of value and as a proportion to their server business. For instance HP's disk storage systems business was almost 40% the size of the server business in 2004, compared to Sun's 24%. Both HP and IBM have larger revenues coming to them from storage services, storage software, and tape drives. When combined with StorageTek's products, the integrated portfolio could prove quite attractive to customers. So this means Sun is in a better position to breath down HP and IBM’s necks. However EMC has not much to worry about as neither Sun nor StorageTek have traditionally done a good job at selling primary disk.
It is old knowledge that the need to comply with government regulations such as the healthcare information privacy, Sarbanes-Oxley act, new FDA regulations, and securities compliance is amplifying the demand for storage. With StorageTek under its belt now, Sun can go beyond cradle-to-grave management because the company can add its significant portfolio of privacy, security, access management and ID management software. This will thus help it compete further with IBM, HP and EMC who have been offering next generation data center solutions. An obvious outcome therefore will be stronger push for ILM sales driven by Sun along with compliance and governance solutions over next twelve to 18 months.
The flipside to the whole situation however will the impact on StorageTek’s existing OEM relationships. While Sun was StorageTek’s biggest OEM customer, HP has been an important partner as well. And in May this year, StorageTek had announced an extension of its partnership with HP to deliver mid-range storage products. As part of the tie-up, HP was to provide StorageTek with LTO Ultrium tape technology. Since HP competes head-on with Sun in the server market, one can at the outset assume that the HP-StorageTek deal is over following Sun's move. Competitors in the industry are known to source from each other in the spirit of competitive cooperation and it has come to be recognized as a common business practice. Sun executives were quick to point this and emphasized that Sun is committed to developing the existing OEM relationships. An aspect of importance here is that the relationship extends only to cover storage hardware, which is not a significant part of the value chain.
A Prognosis for Sun
One of the most obvious benefits for Sun will be its ability to arrest the slide in its server business. Its share in the worldwide server, which stood at $12.3 billion in the first quarter of 2005, slipped to 9.5% from 10.3% a year earlier. Sun was way behind IBM (30% market share), Hewlett-Packard (28%), and even Dell (10.8%). As indicated earlier the StorageTek purchase is intended to help Sun compete in the next-generation data center market, where virtualized pools of computing, networking, and storage resources co-exist. IBM, HP, and EMC have aggressively pursued their own virtualization strategies.
While sales of StorageTek's tape-automation and disk-storage products have grown slowly in the recent past, the company brings invaluable experience in intelligent data management and expertise in helping large companies manage heterogeneous servers and storage as a single network. While the growth of tape is expected to be relatively flat, the sustained revenue and profit pool remains substantial. With this acquisition, Sun will more than double the size of the company's storage software revenue and be well positioned to capture a meaningful portion of the tape opportunity.
One of Sun's biggest challenges in the storage market has been sales coverage. The deal brings into the Sun stable an army of over 1,000 storage sales specialists and nearly 2,000 storage service professionals. Add to this a combined product roadmap, Sun will have the broadest product line in the industry. The ILM opportunity now seems within Sun’s grasp. An opportunity that on last count measured about $65 billion annually.
Compelling financials was another reason for Sun to pick up the $4.1 billion tag. Was it really $4.1 billion? Lets put together some simple mathematics first. On a cash basis the deal took $4.1 billion to complete, StorageTek has $1 billion in cash - meaning in reality it took only $3.1 billion to acquire the company. On $3.1 billion in cash, Sun would generate an annual income of $100 million from interest. Using the cash instead to fund its acquisition of StorageTek, its earnings equal to StorageTek’s net income and cash flow. This exceeds $100 million. It actually stood at $191 million for 2004. On top of this, the company can add to its savings kitty through a common corporate infrastructure, increased purchasing power with suppliers, increased coverage opportunities that represent upside to the above figure. And all of this comes before the new combined entity can explore new revenue opportunities. The caveat however is that how quickly and seamlessly can Sun integrate the company within its realms without creating a cultural clash.
Buying a tape storage company did not look very exciting or glamorous at the face of it. Borrowing from a cliché, there is more to it than meets the eye. Tape revenues are unlikely to grow at scorching rates but there's no question customers will store more data on tape next year than this. It continues to be the most economic electronic storage medium available today. Just talk to any CIO, and he will tell you that tape is about five times less expensive than spinning disks. And that's before you get to savings from lower power consumption and reduced cooling needs - the great beauty of not having to keep disks powered and cooled day and night. While Sun cannot deny that the storage marketplace will move towards virtualized storage systems but it expect tape to continue to play its role as the lowest cost media. And the
deep-rooted principle behind the same is that customers may migrate to better apps, faster computers, but they never let go of their data.
Organic growth and partnerships with industry leaders would not have been sufficient for Sun to exhibit substantial short-term improvement in the storage business. This acquisition satisfies the company’s quest for increased revenue, immediately enhances earnings, and brings a captive customer base and a fair amount of IP. Unlike earlier acquisitions this one also offers direct product revenue and revenue from the installed base in the form of services and consumable tape media. While the acquisition may not seem totally complementary, it brings benefits to the table that are worth the buck. Rather a whole lot of bucks that Sun shelled out.
And with this I rest my case. There is more than meets the eye!
This piece was never published, because I wrote this as part of a job interview for a Singapore based IT Analyst firm. And yes I did get the job!!
Outsourcing Woes
The outsourcing industry in India has had its share of misdemeanors in the recent past and a fair amount of publicity too. But these blips are more than just stray incidents. They pertain to far more fundamental issues, rather a lack of understanding of the fundamental issues.
The last few weeks have been really heady for the Indian outsourcing industry. Barely had the dust on the Karan Bahree scandal (as it has come to be popularly known) settled that ABC raked up another storm.
Without really discussing too much about the widely reported incidents, let's try and figure out if these events are an augury of things to come or they are just minor aberrations that have been over amplified by our sometimes panic-prone media? Whatever, these definitely warrant are a deeper introspection by both the outsourcers and the service providers.
Let's try and first look at what really are the benefits of outsourcing (I know reams have been written on the subject, but I would like to start from the very beginning).
The key driver to outsourcing has been the huge differential in manpower costs between the developed western economies and the developing countries or the source and the destination of the outsourcing contracts. Some studies suggest that the saving on manpower costs alone can be as high as 40 to 70 per cent, of course depending on the nature of work and the skill of the worker involved. Definitely a lucrative enough saving for any company to think about outsourcing. The underlying assumption to all this number crunching is scale of operations. The scale of operations must be large enough to absorb the increase in communications and technology costs and also the increase in management costs. And it is precisely because of an inability to address and quantify these that many outsourcing deals do not meet their preset return on investment (RoI) targets. A study suggested that this number could be as high as 80 per cent. Ah, so there goes some steam out of the whole mathematics…
An oft heard and repeated remark is that anything that is not core is an ideal candidate to be outsourced. So the other big driver has been the need to focus on core business activities. A survey conducted by management consultants AT Kearney revealed that as many as 80% of the respondents opted to outsource because of these two reasons.
This however is contrary to experience of companies from the field. A poster boy example of this philosophy was the signing of seven year $5 billion IT outsourcing deal between JPMorgan Chase and IBM Global Services in December 2002. At the face of it, IT is definitely a non core function for a global financial institution. While this may definitely be true for a small or a medium sized business organization, it does not ring true for a global company. And therefore in less than two years, in September 2004, JPMorgan Chase announced the cancellation of the deal. It was in retrospect (of signing the deal) that the bank felt the direct management and control of IT was critical to gain a competitive advantage.
Identify the right candidates
So processes that are not core but require significant personal intervention or high levels of customization or change frequently often may not qualify as good candidates for outsourcing. If looked at in light of the factors listed here, experience and research seem to suggest that as many 30% of a company's typical processes are not the right ones to outsource. Its ramifications for what can be outsourced run rather deep. What in effect this means is that companies must outsource only those processes which are characterized by low management complexity and low interaction needs. In other words processes that are simple and standardized are ideal candidates to be outsourced. Further more the technology supporting these processes should be stable. Am I suggesting that more complex processes like IT are not good candidates?
No, I am not suggesting that. While I say that only simple and standardized processes are ideal candidates, at the face of it, IT gets excluded. IT processes stand being termed as simple and standardized provided the risks associated with them are mitigated by the managers. And many mangers of today are barely aware of the risks associated with any outsourcing deal.
Risks classified
Any business process, even IT, that is being evaluated as a prospective candidate for outsourcing is exposed to strategic, operational, financial, and hazard risks.
All natural and some man made risks would fall under the hazard category. On the other hand strategic risks are those that threaten to take the business in a harmful direction. The JPMorgan Chase-IBM example is a good example of a strategic risk. JPMorgan Chase felt a certain loss of control over a process that could impart it a sustainable competitive advantage thereby hurling the company into an arena of increased competition. A company faces a similar risk if the outsourcing partner is incapable of scaling operations in response to the company's growing needs. After all it's a scale game, remember.
Operational risks are more to do with the operation capability of the outsourced party. Poor service is one of the biggest operational risks. Others could include risks that rise out of governance and staff related issues. Financial risks are those that leave a dent in the financial statements. Needless to say they are those that inflate costs or lead to unforeseen expenditure. The Karan Bahree case would be labeled as a cusp of the operational and financial risk. While it was definitely a governance issue, it led to quite a few costs for the client in doing damage control with its customers.
It's very important for managers on both side of the outsourcing deal to have a clear and sound understanding of the associated risks for effective mitigation and management of the same. Recent examples suggest that many in the industry are either ignorant or wishfully ignore this fundamental. And if that doesn't happen, the episodes that have been labeled as mere blips on the outsourcing radar will only grow bigger and louder.
I was writing quite a lot a year and a half ago and this one is from that era, if I can call it that.
The last few weeks have been really heady for the Indian outsourcing industry. Barely had the dust on the Karan Bahree scandal (as it has come to be popularly known) settled that ABC raked up another storm.
Without really discussing too much about the widely reported incidents, let's try and figure out if these events are an augury of things to come or they are just minor aberrations that have been over amplified by our sometimes panic-prone media? Whatever, these definitely warrant are a deeper introspection by both the outsourcers and the service providers.
Let's try and first look at what really are the benefits of outsourcing (I know reams have been written on the subject, but I would like to start from the very beginning).
The key driver to outsourcing has been the huge differential in manpower costs between the developed western economies and the developing countries or the source and the destination of the outsourcing contracts. Some studies suggest that the saving on manpower costs alone can be as high as 40 to 70 per cent, of course depending on the nature of work and the skill of the worker involved. Definitely a lucrative enough saving for any company to think about outsourcing. The underlying assumption to all this number crunching is scale of operations. The scale of operations must be large enough to absorb the increase in communications and technology costs and also the increase in management costs. And it is precisely because of an inability to address and quantify these that many outsourcing deals do not meet their preset return on investment (RoI) targets. A study suggested that this number could be as high as 80 per cent. Ah, so there goes some steam out of the whole mathematics…
An oft heard and repeated remark is that anything that is not core is an ideal candidate to be outsourced. So the other big driver has been the need to focus on core business activities. A survey conducted by management consultants AT Kearney revealed that as many as 80% of the respondents opted to outsource because of these two reasons.
This however is contrary to experience of companies from the field. A poster boy example of this philosophy was the signing of seven year $5 billion IT outsourcing deal between JPMorgan Chase and IBM Global Services in December 2002. At the face of it, IT is definitely a non core function for a global financial institution. While this may definitely be true for a small or a medium sized business organization, it does not ring true for a global company. And therefore in less than two years, in September 2004, JPMorgan Chase announced the cancellation of the deal. It was in retrospect (of signing the deal) that the bank felt the direct management and control of IT was critical to gain a competitive advantage.
Identify the right candidates
So processes that are not core but require significant personal intervention or high levels of customization or change frequently often may not qualify as good candidates for outsourcing. If looked at in light of the factors listed here, experience and research seem to suggest that as many 30% of a company's typical processes are not the right ones to outsource. Its ramifications for what can be outsourced run rather deep. What in effect this means is that companies must outsource only those processes which are characterized by low management complexity and low interaction needs. In other words processes that are simple and standardized are ideal candidates to be outsourced. Further more the technology supporting these processes should be stable. Am I suggesting that more complex processes like IT are not good candidates?
No, I am not suggesting that. While I say that only simple and standardized processes are ideal candidates, at the face of it, IT gets excluded. IT processes stand being termed as simple and standardized provided the risks associated with them are mitigated by the managers. And many mangers of today are barely aware of the risks associated with any outsourcing deal.
Risks classified
Any business process, even IT, that is being evaluated as a prospective candidate for outsourcing is exposed to strategic, operational, financial, and hazard risks.
All natural and some man made risks would fall under the hazard category. On the other hand strategic risks are those that threaten to take the business in a harmful direction. The JPMorgan Chase-IBM example is a good example of a strategic risk. JPMorgan Chase felt a certain loss of control over a process that could impart it a sustainable competitive advantage thereby hurling the company into an arena of increased competition. A company faces a similar risk if the outsourcing partner is incapable of scaling operations in response to the company's growing needs. After all it's a scale game, remember.
Operational risks are more to do with the operation capability of the outsourced party. Poor service is one of the biggest operational risks. Others could include risks that rise out of governance and staff related issues. Financial risks are those that leave a dent in the financial statements. Needless to say they are those that inflate costs or lead to unforeseen expenditure. The Karan Bahree case would be labeled as a cusp of the operational and financial risk. While it was definitely a governance issue, it led to quite a few costs for the client in doing damage control with its customers.
It's very important for managers on both side of the outsourcing deal to have a clear and sound understanding of the associated risks for effective mitigation and management of the same. Recent examples suggest that many in the industry are either ignorant or wishfully ignore this fundamental. And if that doesn't happen, the episodes that have been labeled as mere blips on the outsourcing radar will only grow bigger and louder.
I was writing quite a lot a year and a half ago and this one is from that era, if I can call it that.
Sunday, September 24, 2006
ERP: Worth the Effort
Getting an ERP rolling can sometimes be excruciatingly painful but once the system is up and running the value accrued is worth the effort.
Enterprise Resource Planning or ERP as is popularly known was the hot and happening technology in the mid nineties. The Indian media covering business, rather the global business press, fell head over heals in love with the technology. Big businesses were scrambling to be a part of the revolution.
But the fall of the technology in the trough of disillusionment borrowing from the Gartner Hype Cycle) was almost as rapid as its rise to the peak of inflated expectations. So what has changed in the last decade for the technology? In a word, a lot!
Companies big and small have realized the fact that ERP is necessary for success in today’s turbulent and rapidly changing business environment (We have heard enough of this already!). But alas there is no silver bullet yet to reap an effective and efficient implementation.
A recent news article reported that a Fortune 500 technology company is struggling to complete a planned ERP rollout. The news article further elaborated that this was the second time the company has had difficulties with a planned ERP migration. The completion of the project has already been delayed by two years. “The obvious object
lesson is that the complexity of these projects requires even tech-savvy companies to stop, slow down and make sure they are getting all the little details right,” said Joshua Greenbaum, an analyst at Enterprise Applications Consulting, a California based firm specializing in enterprise applications for the new and the old economies.
And when the implementation is a smooth ride, which is not the case often, the real benefits that had been promised by the consultant and the media often prove elusive. Coming back to the case of this Fortune 500 company, by March last year it was clear to them that the project would take five years instead of three and that it “would at best break even” instead of getting the expected 35 percent return on investment.
Is there a learning in all of this for smaller peers of this company across the globe? I think there is, or rather there are. One is to focus on the softer issues that concern the entire implementation process. And two, the means are as important as the end. In other words the process of implementation itself throws open an opportunity to learn and refine.
Lets look at the second one for now and revisit the first one some other day.
The skills acquired by a company during the ERP implementation stage allow it to improve the ERP installation incrementally, and these improvements collectively add considerable value. ERP helps introduce in the DNA of a company what can be called the continuous-improvement mindset. This I must add is not particularly popular with most employees. One implementation consultant once compared installing ERP to running a marathon. And it was in this very vein that Greenbaum said that "redemption is possible if you catch the mistakes before you're too far down the road."
The Cynosure: Indian SMB
Some estimates suggest that as many as 90 percent of the larger enterprises have an ERP in place and as a result all the attention has shifted towards building and growing the SMB market. Some estimates also suggest that the cumulative value of SMBs in India by 2010 would be as high as $310 billion.
And the upside of all this number crunching and media attention has been that the smaller companies are now more cautious in their approach to the whole issue. And the consultants have become wiser and smarter from all the learning over the years. They are much higher on the learning curve, as they would like to say.
But there are still some aspects that these incumbent SMB implemetors must consider before jumping head long into the implementation. Senior business managers must recognize and appreciate the fact that core business processes must be changed dramatically before an ERP system can be deployed successfully. Its not just an MIS activity, it s a lot more that. It changes the very way work will now be done. And clear responsibility must be demarcated for ensuring a successful ERP deployment. In case of any ambiguity many pitfalls and hurdles lie in store for companies.
Foremost among them are too many and frequent changes in the implementation specifications, change of plans as the recent IBM ad on television puts it. What this means is that companies needlessly risk extending the planning cycle and delaying implementation, something SMBs cannot afoord. Freezing the implementation specifications early and managing a strict time table tight schedule requires strong project leadership and the backing of senior business managers. If left uncontrolled change of plans lead to nothing but spiraling costs. According to McKinsey and Company, most ERP implementations exceed their budgets by 20 percent or more when checks on costs are lacking.
The incumbents must bring in the fundiung in phases and not a single burst. And these must be linked to savings-milestones which must be defined at the very outset of the project. Defining these milestones at the very beginning helps maintain tight control over costs. To help business managers to monitor progress (savings targets for instance) these targets should be incorporated into unit budgets. And finally
work with a plan B. This will help the company from being overly dependent on a single individual, and make sure everyone knows about it.
I am not saying, avoid these at your peril but these pointers will certainly help a smoother and less bumpy ride!
I ghost wrote this one for the CEO of a mid-sized Indian ERP company around the same time I wrote IT & Marketing.
Enterprise Resource Planning or ERP as is popularly known was the hot and happening technology in the mid nineties. The Indian media covering business, rather the global business press, fell head over heals in love with the technology. Big businesses were scrambling to be a part of the revolution.
But the fall of the technology in the trough of disillusionment borrowing from the Gartner Hype Cycle) was almost as rapid as its rise to the peak of inflated expectations. So what has changed in the last decade for the technology? In a word, a lot!
Companies big and small have realized the fact that ERP is necessary for success in today’s turbulent and rapidly changing business environment (We have heard enough of this already!). But alas there is no silver bullet yet to reap an effective and efficient implementation.
A recent news article reported that a Fortune 500 technology company is struggling to complete a planned ERP rollout. The news article further elaborated that this was the second time the company has had difficulties with a planned ERP migration. The completion of the project has already been delayed by two years. “The obvious object
lesson is that the complexity of these projects requires even tech-savvy companies to stop, slow down and make sure they are getting all the little details right,” said Joshua Greenbaum, an analyst at Enterprise Applications Consulting, a California based firm specializing in enterprise applications for the new and the old economies.
And when the implementation is a smooth ride, which is not the case often, the real benefits that had been promised by the consultant and the media often prove elusive. Coming back to the case of this Fortune 500 company, by March last year it was clear to them that the project would take five years instead of three and that it “would at best break even” instead of getting the expected 35 percent return on investment.
Is there a learning in all of this for smaller peers of this company across the globe? I think there is, or rather there are. One is to focus on the softer issues that concern the entire implementation process. And two, the means are as important as the end. In other words the process of implementation itself throws open an opportunity to learn and refine.
Lets look at the second one for now and revisit the first one some other day.
The skills acquired by a company during the ERP implementation stage allow it to improve the ERP installation incrementally, and these improvements collectively add considerable value. ERP helps introduce in the DNA of a company what can be called the continuous-improvement mindset. This I must add is not particularly popular with most employees. One implementation consultant once compared installing ERP to running a marathon. And it was in this very vein that Greenbaum said that "redemption is possible if you catch the mistakes before you're too far down the road."
The Cynosure: Indian SMB
Some estimates suggest that as many as 90 percent of the larger enterprises have an ERP in place and as a result all the attention has shifted towards building and growing the SMB market. Some estimates also suggest that the cumulative value of SMBs in India by 2010 would be as high as $310 billion.
And the upside of all this number crunching and media attention has been that the smaller companies are now more cautious in their approach to the whole issue. And the consultants have become wiser and smarter from all the learning over the years. They are much higher on the learning curve, as they would like to say.
But there are still some aspects that these incumbent SMB implemetors must consider before jumping head long into the implementation. Senior business managers must recognize and appreciate the fact that core business processes must be changed dramatically before an ERP system can be deployed successfully. Its not just an MIS activity, it s a lot more that. It changes the very way work will now be done. And clear responsibility must be demarcated for ensuring a successful ERP deployment. In case of any ambiguity many pitfalls and hurdles lie in store for companies.
Foremost among them are too many and frequent changes in the implementation specifications, change of plans as the recent IBM ad on television puts it. What this means is that companies needlessly risk extending the planning cycle and delaying implementation, something SMBs cannot afoord. Freezing the implementation specifications early and managing a strict time table tight schedule requires strong project leadership and the backing of senior business managers. If left uncontrolled change of plans lead to nothing but spiraling costs. According to McKinsey and Company, most ERP implementations exceed their budgets by 20 percent or more when checks on costs are lacking.
The incumbents must bring in the fundiung in phases and not a single burst. And these must be linked to savings-milestones which must be defined at the very outset of the project. Defining these milestones at the very beginning helps maintain tight control over costs. To help business managers to monitor progress (savings targets for instance) these targets should be incorporated into unit budgets. And finally
work with a plan B. This will help the company from being overly dependent on a single individual, and make sure everyone knows about it.
I am not saying, avoid these at your peril but these pointers will certainly help a smoother and less bumpy ride!
I ghost wrote this one for the CEO of a mid-sized Indian ERP company around the same time I wrote IT & Marketing.
IT and Marketing: Grow the Bond
The pressures facing the marketer today extend beyond rapidly changing customer preferences. But these are easily tackled by allying with IT
“The market is very dynamic,” is an oft-heard lament, especially from the marketer. And why not, 20 years ago, 80% of a target audience could be reached with one 30-second off-peak television ad. Today, reaching the same audience often requires 200 to 300 prime-time spots spread across 70 odd channels. The response to direct mail solicitations for credit cards has dropped from 2.8% in 1992 to less than half a percent today. And in wake of all this marketing expenditures are ballooning like there is no tomorrow. According to an Accenture estimate the marketing spend by the Global 1000 rose to $1 trillion in 2003 from $825 billion in 1998 (Our GDP is a little more than half of that!)Samsung alone spends a billion dollars a year on marketing!!
The result of all this is simple, boards across the world are questioning the return on investment that the companies are getting form their marketing investments and the heat under the marketer’s collar is getting unbearable.
Pressures aplenty
And it is time to ponder and think as to what are the dimensions of this change. The list that I propose is definitely not all encompassing and is debatable, yet I am of the firm belief that these changes are causing ripples that every marketer can feel.
The first is the way consumers buy and interact with the manufacturer. Reams have been filled about the Direct Dell model. What started off in a dorm room changed the very landscape of the PC industry. I will not therefore spend too much time on this one. Over and above the fact that the manufacturer has the alternative of going direct to the customer, the customer enjoys the benefits of price transparency. “The vast sea of information about prices, competition, and features that is readily
available on the Internet helps buyers ‘see through’ the costs of products and services,” says Indrajit Sinha in an article in that appeared in the HBR aptly titled Cost Transparency: The Net’s Real Threat to Prices and Brands. The better price phenomenon is affecting every company in nearly all industries.
The second is about the way competition comes at existing companies. The Encarta CD-ROM came from nowhere and was instrumental in putting the Benton Foundation owned Britannica on the block. Offers of sale to Microsoft were promptly rejected and finally when the 200-year-old brand was sold, it went for less than half of its book value.
The third is the way society mutates to handle pressures. Lack of belongingness to groups and causes is the root cause of a number of forces that impact the marketer today. Fewer young adults today are a part of the boy scouts and girl guides. I see this everywhere around me. And in many parts the ease of access to electronic channels of communication, the cellular phone or the Internet, can be blamed. As Robert Putnam, professor of public policy at Harvard puts it, we are experiencing a lack of belonging that stems from a decline in social capital.
And finally, customers’ rapidly changing preferences. The top five preferences today are choice, price, novelty, simplicity and speed (in no particular order). Therefore the average customer today is demanding and wants a lot more for every penny that he spends (You have probably heard this before and know it well!) In 1980 however the top preferences were brand, quality, convenience, price and references.
What’s the point?
At this juncture the one question that’s running through your mind is what’s the point, wise guy? Its very simple, the common thread weaving itself through these and most other pressures that are facing the marketer today is the impact of technology. To explain to you, what I mean I will take the help of the man who is often referred to as the marketing guru of the information age, Regis McKenna. Says he, “Technology is the greatest catalyst for change in marketing. This shouldn’t surprise us; technology has always been the driver of change in marketing. From railroads to automobiles, from radio to TV to computers, marketing takes advantage of new technology and applies it to new methods of marketing. Although technology changes, its role never does. Its always the agent of economic and social change.”
This agent of economic and social change has now taken the form of information technology. And it is time for the marketer to make peace with the technocrat in the house. The geek can do what was unthinkable till a few years ago. Lets look at an example. An average customer in a retail store in the US today is getting lost in the aisles and is therefore spending less. The Solution: A smart cart that is being built
by the Big Blue comes with built-in scanners and LCD screens. The cart displays maps, runs tabs and offers special discounts and offers on products related to the ones placed in the cart. And it would take no rocket scientist to guess what the outcome is likely to be.
The silver bullet is right there, the panacea is well within reach of most marketers today. Technology is one ally that will not only make marketers understand their customers and prospects better (more on that some time later!), but also help address their latent needs.
And in signing off, I would like to again seek help from some one wiser than me (I have taken more than my share today!). I quote Prof. Harold J. Leavitt, Kilpatrick Professor Emeritus at the Stanford Graduate School of Business. Says he, “Regardless of other economic trends, technology itself has no brakes nor an OFF button, so the new world is unlikely either to slow down or to level off. Information technology
has a long way to go before it comes into full flower, and other world changing technologies are ripening close behind.”
I wrote this a year and a half ago, actually ghost wrote! This is a topic close to my heart and I have used this theme for my lectures as well in both the marketing and the IT classes.
“The market is very dynamic,” is an oft-heard lament, especially from the marketer. And why not, 20 years ago, 80% of a target audience could be reached with one 30-second off-peak television ad. Today, reaching the same audience often requires 200 to 300 prime-time spots spread across 70 odd channels. The response to direct mail solicitations for credit cards has dropped from 2.8% in 1992 to less than half a percent today. And in wake of all this marketing expenditures are ballooning like there is no tomorrow. According to an Accenture estimate the marketing spend by the Global 1000 rose to $1 trillion in 2003 from $825 billion in 1998 (Our GDP is a little more than half of that!)Samsung alone spends a billion dollars a year on marketing!!
The result of all this is simple, boards across the world are questioning the return on investment that the companies are getting form their marketing investments and the heat under the marketer’s collar is getting unbearable.
Pressures aplenty
And it is time to ponder and think as to what are the dimensions of this change. The list that I propose is definitely not all encompassing and is debatable, yet I am of the firm belief that these changes are causing ripples that every marketer can feel.
The first is the way consumers buy and interact with the manufacturer. Reams have been filled about the Direct Dell model. What started off in a dorm room changed the very landscape of the PC industry. I will not therefore spend too much time on this one. Over and above the fact that the manufacturer has the alternative of going direct to the customer, the customer enjoys the benefits of price transparency. “The vast sea of information about prices, competition, and features that is readily
available on the Internet helps buyers ‘see through’ the costs of products and services,” says Indrajit Sinha in an article in that appeared in the HBR aptly titled Cost Transparency: The Net’s Real Threat to Prices and Brands. The better price phenomenon is affecting every company in nearly all industries.
The second is about the way competition comes at existing companies. The Encarta CD-ROM came from nowhere and was instrumental in putting the Benton Foundation owned Britannica on the block. Offers of sale to Microsoft were promptly rejected and finally when the 200-year-old brand was sold, it went for less than half of its book value.
The third is the way society mutates to handle pressures. Lack of belongingness to groups and causes is the root cause of a number of forces that impact the marketer today. Fewer young adults today are a part of the boy scouts and girl guides. I see this everywhere around me. And in many parts the ease of access to electronic channels of communication, the cellular phone or the Internet, can be blamed. As Robert Putnam, professor of public policy at Harvard puts it, we are experiencing a lack of belonging that stems from a decline in social capital.
And finally, customers’ rapidly changing preferences. The top five preferences today are choice, price, novelty, simplicity and speed (in no particular order). Therefore the average customer today is demanding and wants a lot more for every penny that he spends (You have probably heard this before and know it well!) In 1980 however the top preferences were brand, quality, convenience, price and references.
What’s the point?
At this juncture the one question that’s running through your mind is what’s the point, wise guy? Its very simple, the common thread weaving itself through these and most other pressures that are facing the marketer today is the impact of technology. To explain to you, what I mean I will take the help of the man who is often referred to as the marketing guru of the information age, Regis McKenna. Says he, “Technology is the greatest catalyst for change in marketing. This shouldn’t surprise us; technology has always been the driver of change in marketing. From railroads to automobiles, from radio to TV to computers, marketing takes advantage of new technology and applies it to new methods of marketing. Although technology changes, its role never does. Its always the agent of economic and social change.”
This agent of economic and social change has now taken the form of information technology. And it is time for the marketer to make peace with the technocrat in the house. The geek can do what was unthinkable till a few years ago. Lets look at an example. An average customer in a retail store in the US today is getting lost in the aisles and is therefore spending less. The Solution: A smart cart that is being built
by the Big Blue comes with built-in scanners and LCD screens. The cart displays maps, runs tabs and offers special discounts and offers on products related to the ones placed in the cart. And it would take no rocket scientist to guess what the outcome is likely to be.
The silver bullet is right there, the panacea is well within reach of most marketers today. Technology is one ally that will not only make marketers understand their customers and prospects better (more on that some time later!), but also help address their latent needs.
And in signing off, I would like to again seek help from some one wiser than me (I have taken more than my share today!). I quote Prof. Harold J. Leavitt, Kilpatrick Professor Emeritus at the Stanford Graduate School of Business. Says he, “Regardless of other economic trends, technology itself has no brakes nor an OFF button, so the new world is unlikely either to slow down or to level off. Information technology
has a long way to go before it comes into full flower, and other world changing technologies are ripening close behind.”
I wrote this a year and a half ago, actually ghost wrote! This is a topic close to my heart and I have used this theme for my lectures as well in both the marketing and the IT classes.
Thursday, September 21, 2006
Planning for Success
My first column on RFID in Dataquest. More will follow, hopefully!
A sound planning process and looking beyond technology eases the pain points of implementation and helps create a successful long term RFID strategy
RFID has been a mainstay in popular imagination for some time now. With the Department of Defense rolling out a very successful and large implementation followed by Wal–Mart’s expression of faith in the same, RFID got all the press and CIO attention that it needed. But when it comes to on the ground RFID implementation a large number of organizations are still grappling with issues and are hoping that some day they will bump into the wise caterpillar smoking his hookah just like Alice did in the rabbit hole.
All the trends emerging out of the RFID triumphs and tribulations have a common thread among them. And that is the technology is not very far from being mainstream. And it’s not before long that Kevin Kelly’s prophecy of 1997 that every manufactured item will have a flake of silicon in them will be true. Meta Group/Gartner estimates that by 2008, 30% of all manufactured goods will have RFID tags attached to them with a growing trend to over 80% by the end of 2013. Its common knowledge now that the benefits are multi dimensional and sum of all these advantages far outweighs the seemingly large initial investment. But the real world challenges are far from tackled. And therefore the technology is far from being mainstream. In a recent interview to a global business magazine, Rob Carter, CIO, FedEx, said, "RFID might be a three-15 technology." This was a take on Bill Gates' definition of a "two-ten technology." That is, for the first two years, hype reigns, followed by disappointment, until the day ten years later when people realize the technology has become embedded in daily life.
There are many a slip between the cup and the lip and looking at them through the eyes of a large apparel manufacturer makes it easy to understand that the old principles still apply.
The Challenge
Let’s call this apparel company AppCo. AppCo is a large apparel manufacturer and owner of several brands of clothing lines for men, women and children across the casual and formal wear segment. Apart from ownership of the brand and related marketing, the company also operates several distribution centers. These centers act as the hubs that feed the retail chains through it’s and hub and spoke model.
AppCo wanted the RFID implementation to not be just one off roll out but to bring in its supply chain the efficiencies that we were theoretically thought to be possible, namely efficient inventory management and control, lowered levels of stock and fewer stock out situation coupled with simplified warehousing processes.
The Solution
AppCo’s vision driving RFID implementation was long term, therefore the company opted for the obvious long-term planning approach and ensured a provision of flexibility to deal with possible inorganic growth opportunities.
As the first step in the long journey AppCo created an in-house cross functional team of experts to study the alternative technology solutions and providers available in the market place. This was undertaken through a mix of secondary information and calling for vendors to directly educate the team on their solutions. The team looked at a host of other issues other than the technology and the solutions. These ranged from testing the preparedness of distribution centers for implementation, identifying the product line that would be among the first to be tagged and tested.
The next step that followed was by far the most extensive and tedious. It involved mapping the processes at all its distribution centers for all its brands across all clothing lines. This was done with a two pronged objective. One was to ensure that the final solution roll out would be applicable for one and all and the second was to ensure that AppCo could retrofit the available tags, readers and the middleware to create a best in class solution.
It was at this juncture that AppCo also considered hiring an implementation consultant, who would suggest the vendor and monitor the rollout to ensure that none of objectives stand defeated. The consultant suggested the roll out in phases. In the first phase two brands across one distribution center were RFIDed. Once AppCo smoothed the issues at its test distribution center, the entire center went the tag way. The success of the first distribution center was quickly replicated across all the others. By rolling out the implementation in a staggered manner over a pre defined timeline, AppCo lowered the cost of implementation at the last center by as much as 20%. Added to this was the cost saving that accrued to AppCo through its ability to predict tag consumption over the long-term. Thus by utilizing a volume contract on tags, AppCo was able to save significantly by simply purchasing tags at the time of consumption. In effect AppCo created an optimal inventory level for tags as well.
The Learning
The situation in the AppCo case has been overly simplified to send home a few very critical points.
One, it is imperative for a company to discern the value of the technology with respect to the business challenges, and companies should be aware of both the advantages and the pitfalls associated with any technology. The hype associated with a technology often blinds decision makers to the pitfalls and only amplifies the associated benefits. And the only way to understand all of this is education. AppCo’s cross functional team was a step in this direction.
Two, establish a proof of concept. Real on the ground roll out can be replicated only on the ground. The proof of concept not only builds organization wide confidence but also allows for future rollouts to continue through minimal changes to the existing system.
Three, spend as much time and energy as possible to ensure that the RFID network is highly reliable. AppCo entered into an extensive process mapping exercise to ensure the best tags, the best readers and all the associated software and hardware were best in breed.
And finally also look beyond technology. AppCo looked at the preparedness of distribution centers for implementation. In translation it means consider the business processes and also the physical layout of the location. This will help address issues like selecting most appropriate place for the readers for ease of inventory movement.
A sound planning process and looking beyond technology eases the pain points of implementation and helps create a successful long term RFID strategy
RFID has been a mainstay in popular imagination for some time now. With the Department of Defense rolling out a very successful and large implementation followed by Wal–Mart’s expression of faith in the same, RFID got all the press and CIO attention that it needed. But when it comes to on the ground RFID implementation a large number of organizations are still grappling with issues and are hoping that some day they will bump into the wise caterpillar smoking his hookah just like Alice did in the rabbit hole.
All the trends emerging out of the RFID triumphs and tribulations have a common thread among them. And that is the technology is not very far from being mainstream. And it’s not before long that Kevin Kelly’s prophecy of 1997 that every manufactured item will have a flake of silicon in them will be true. Meta Group/Gartner estimates that by 2008, 30% of all manufactured goods will have RFID tags attached to them with a growing trend to over 80% by the end of 2013. Its common knowledge now that the benefits are multi dimensional and sum of all these advantages far outweighs the seemingly large initial investment. But the real world challenges are far from tackled. And therefore the technology is far from being mainstream. In a recent interview to a global business magazine, Rob Carter, CIO, FedEx, said, "RFID might be a three-15 technology." This was a take on Bill Gates' definition of a "two-ten technology." That is, for the first two years, hype reigns, followed by disappointment, until the day ten years later when people realize the technology has become embedded in daily life.
There are many a slip between the cup and the lip and looking at them through the eyes of a large apparel manufacturer makes it easy to understand that the old principles still apply.
The Challenge
Let’s call this apparel company AppCo. AppCo is a large apparel manufacturer and owner of several brands of clothing lines for men, women and children across the casual and formal wear segment. Apart from ownership of the brand and related marketing, the company also operates several distribution centers. These centers act as the hubs that feed the retail chains through it’s and hub and spoke model.
AppCo wanted the RFID implementation to not be just one off roll out but to bring in its supply chain the efficiencies that we were theoretically thought to be possible, namely efficient inventory management and control, lowered levels of stock and fewer stock out situation coupled with simplified warehousing processes.
The Solution
AppCo’s vision driving RFID implementation was long term, therefore the company opted for the obvious long-term planning approach and ensured a provision of flexibility to deal with possible inorganic growth opportunities.
As the first step in the long journey AppCo created an in-house cross functional team of experts to study the alternative technology solutions and providers available in the market place. This was undertaken through a mix of secondary information and calling for vendors to directly educate the team on their solutions. The team looked at a host of other issues other than the technology and the solutions. These ranged from testing the preparedness of distribution centers for implementation, identifying the product line that would be among the first to be tagged and tested.
The next step that followed was by far the most extensive and tedious. It involved mapping the processes at all its distribution centers for all its brands across all clothing lines. This was done with a two pronged objective. One was to ensure that the final solution roll out would be applicable for one and all and the second was to ensure that AppCo could retrofit the available tags, readers and the middleware to create a best in class solution.
It was at this juncture that AppCo also considered hiring an implementation consultant, who would suggest the vendor and monitor the rollout to ensure that none of objectives stand defeated. The consultant suggested the roll out in phases. In the first phase two brands across one distribution center were RFIDed. Once AppCo smoothed the issues at its test distribution center, the entire center went the tag way. The success of the first distribution center was quickly replicated across all the others. By rolling out the implementation in a staggered manner over a pre defined timeline, AppCo lowered the cost of implementation at the last center by as much as 20%. Added to this was the cost saving that accrued to AppCo through its ability to predict tag consumption over the long-term. Thus by utilizing a volume contract on tags, AppCo was able to save significantly by simply purchasing tags at the time of consumption. In effect AppCo created an optimal inventory level for tags as well.
The Learning
The situation in the AppCo case has been overly simplified to send home a few very critical points.
One, it is imperative for a company to discern the value of the technology with respect to the business challenges, and companies should be aware of both the advantages and the pitfalls associated with any technology. The hype associated with a technology often blinds decision makers to the pitfalls and only amplifies the associated benefits. And the only way to understand all of this is education. AppCo’s cross functional team was a step in this direction.
Two, establish a proof of concept. Real on the ground roll out can be replicated only on the ground. The proof of concept not only builds organization wide confidence but also allows for future rollouts to continue through minimal changes to the existing system.
Three, spend as much time and energy as possible to ensure that the RFID network is highly reliable. AppCo entered into an extensive process mapping exercise to ensure the best tags, the best readers and all the associated software and hardware were best in breed.
And finally also look beyond technology. AppCo looked at the preparedness of distribution centers for implementation. In translation it means consider the business processes and also the physical layout of the location. This will help address issues like selecting most appropriate place for the readers for ease of inventory movement.
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