A Key to Bill Gates' Interoperability Message

I did not know how much of Bill Gates' announcement(s) about software security were directed at Microsoft employees, and how much at the whole ecosystem around Microsoft that gets hurt each time a virus hits.

Then, before we have seen it all in the area of security improvements at Microsoft, Gates releases a public call for interoperability. He makes a case for cooperation, to all industry players, for data-level interoperability--i.e. XML. In passing, he also considers as misplaced those past and present calls for interoperability at application or OS/platform level and finds one more opportunity to blast open source. Anyway, to return to data-level interoperability on XML, what is Gates' intended audience this time?

XML, SOAP, XSLT, WSDL, DTD, UDDI, etc., are usual terms describing the object of activity at organizations such as W3C--large and consensual, industry-sanctioned standard bodies that work to generate common views on just about everything ranging from http to web-services and beyond. Microsoft being member, often founder-, in most these standard bodies one may ponder as why the need for such call.

One could hypothesize for an answer any of the following: the recent anti-trust EU resolution directed at Microsoft, impatient customers, superfluous PR in a time of slow news from Redmond, and even hypocrisy.

Being a little skeptical in accepting such hypotheses wholesale, I thought to myself that Bill Gates should know all too well how busy (read behind public schedules) his colleagues are to play games. Then, all of a sudden, I recalled the B-school stuff called game theory and strategy--microeconomics/industrial organizations. So, I came with a hypothesis of my own:

What if Bill Gates is serious about all things interoperable, and is trying to make all industry players aware (rational) about a Nash Equilibrium the whole industry stands to capitalize on should anyone choose to cooperate on XML standardization? To reach Nash Equilibrium, players need to be rational and there should be a dominant strategy--no need for common knowledge or correct beliefs. I would not expect anything less from Mr. Gates, moreover, such approach is still perfectly compatible with his past behavior.

Once I had an explanation, I wondered about the odds of such call to succeed. From the same playful sources, we know about the Prisoners' Dilemma: players cheat even when knowing the outcome is sub-optimal. In reality, players may fail to be rational or they simply make mistakes. A company may choose to 'cheat' should it find comfort in the (usually short-term) gain associated with such action. Yet, the existence of the dominant strategy should give everybody a clear prescription of what to do. Moreover, according to the Flood-Dresher experiment (the players are rational and there is a rather long history/dependence path,) it is clear that a long-term prospect of the game encourages cooperation. In our case, at least the large companies/entities that do not live on borrowed time should cooperate towards interoperability. The wild card will always be some small guy with a big idea of his own.

Hence, this time, we may conclude that Bill Gates' audience is the industry at large, technology (corporate) customers included. His call has managed to stir up some powerful emotions, and I take this as a sign for the strong interest in the topic. Awareness about the interoperability challenge is the first step towards education, debate, and rational decision making. Yes, Microsoft will benefit handsomely from data-level interoperability, but so will most industry players, and, above all, the customer. The customer benefits for data-level interoperability gives the customer a better chance to make sense out of the heterogeneous nature of the IT environment, in other words to spend less money on integration leading to faster/better ROI. As a practical matter, in most upcoming squabbles around XML standardization, the corporate customer ought to be the ultimate instance of authority. This way, XML may be prevented from the predicament of, let us say, OSI. At least, today's corporate customers are more powerful, aware, and invested in technology, than they were twentysome years ago.

So, at least for the time being, there is hope and Bill Gates has apparently learned something from Ray Noorda (former CEO of Novell), the value of coopetition. This time though, Bill may be trying to get the customer to fight the battle on his side.

Cheap does not supplant Quality

I drove for 1/2 hour to Wal-Mart to buy a set of windshield wiper-blades only to find that the type I needed was out of stock. Is it a unique experience?

Have you also been bothered by the fan of your Dell laptop blowing hot air on your (right) hand-wrist as you were handling your mouse?

Beyond the fact that both types of customer dissatisfaction come from icons of our economy, is there anything else these companies share? Of course, they are both representatives, each in its own industry, of the transformational nature of technology and ensued operational efficiencies.

Wal-Mart, by operating a just-in-time supply chain, and Dell, by manufacturing-to-order, have managed to be the most efficient organizations in their given industries. The common knowledge goes on to say that the customer gets the benefits (read savings) when dealing with anyone of these two. Yet, driving twice to the same store to get wiper blades more than doubles my cost, and taking all the heat from a poorly placed fan is all I remember when the lower price I paid for the laptop is forgotten.

So, when you have a long supply chain, long in weeks and miles, or when you change suppliers of your parts every now and then, "to keep them honest," it becomes easy to overlook 'subtleties' in your service/product like the ones above.

To the extent these are not isolated occurrences, what can drive such organizations back to consider quality of service/product?

Could there be anything like a customer revolution or are we in a race to the bottom?

Juran saw the problem with quality (too) many decades back... Somehow, had he had mostly Japanese and European students?

Addendum: The minimalist approach throughout!
Ikea makes an interesting case study: Not the greatest service on the floor, several items out of stock unless shopping on the first floor or the warehouse, one's shopping experience is more like a crawl than a flow. Yet, Ikea manages somehow to offer simple lines / functional furniture, an entry level to Scandinavian design (as far as price and quality,) that is still popular with shoppers for the lack of alternatives. In the end, the model behind Ikea's success is keep it minimalist (assembly, features, price, logistics, etc.) The only exception from minimalism seems to be its global scale.

To understand the difficulty through which change comes about, at a macro-level, it's worth recalling how Thomas Kuhn used to say that mere disconfirmation or challenge never dislodges a dominant paradigm; only a better alternative does.

Immelt on hitting Wall Street quarterly numbers

Jeffrey Immelt, GE's CEO, talks about a whole host of issues during an interview with Charlie Rose. Then, as of nowhere Rose raises one of his questions:

Rose: What do you think about Warren Buffet's opinion about the undue pressure on today's executives to hit quarterly numbers for Wall Street?

Immelt: Why would that be a pressure? I give them that number! I don't see a problem with doing what you said you were going to do. Hitting a number now presupposes that I had good strategy three years ago, and then good execution ever since. On top of that, I've had to know my customer for all this time. I don't see the problem....

This position goes at the heart of the issue of not being able to think strategically as a CEO of a company due to Wall Street. If GE with its 170 business units can do it one must think that yes, it is possible to be strategic and hit quarterly numbers as well. Moreover, it seems that good strategy (and execution) implies foreseeable earnings (and profits).

I invite you, the reader, to comment on Immelt's position from your own industry/perspective. For example, how would things change in a fast moving consumer product company where, say, you don't know your customer by her first name?

Nota Bene: This is not a verbatim reproduction of what was said. It is captured only the idea of the dialogue.

When one doesn't know the future or backgrounder on HP

In the aftermath of the .com bubble HP found itself looking for a viable alternative to its Unix architectures in the corporate server market. The Unix server market had enjoyed an extraordinary growth during the .com boom. Every company, including your cousin's, was planning to be the next Yahoo or Amazon, hence the (anticipated) demand for scalable and reliable infrastructures was nowhere in sight. Cisco, WorldCom, EMC, Sun, HP are just few of the names that stood to gain big from the never-ending Internet revolution. Yet, when reality was set for a comeback, these same infrastructure providers were among the hardest hit.

Indeed, Cisco wrote off about $2.25B worth of inventory in 2001, WorldCom and several in its category ceased to exist, Sun is still looking for a way out, while HP saw the light of a new day with a blind eye. In fact, Sun and HP had some things in common: great deal of reliance on Unix-based hardware revenue at the expense of software and services revenue. HP though had the advantage of a revenue stream diversified enough between corporate and end-user customers. EMC, another hardware star of the late 90's, has since set itself on the (right) track of complementing its hardware (revenue) with a string of inspired software acquisitions (e.g. Documentum, VMware.)

In the 2001 corporate server market, Intel based architectures were becoming more capable in reality and not only in the perception of the customers looking to shave costs. One could cluster enough Intel (multi-)processor based machines to serve webpages and applications, route email traffic, or even build a decent storage solution. While Sun had all inertial reasons to reject anything less than Solaris on Sparc, HP had already been a player (however minor) in the Intel based server architectures. Hence the logic of HP in acquiring Compaq: to become a credible player in the Intel based server market. The logic went on and stated that Compaq's weakness in the Intel server market, relative to Dell, was going to be addressed by demand consolidation (thus lower prices forced on suppliers), scale economies, and operational efficiency in the combined entity--estimated at, and later achieved, $2.5B.

HP failed on a couple of fronts. The most obvious is its competition with Dell. By choosing the better set of systems and processes from the two companies (HP vs. Compaq) and making it into the merged entity's standard, HP failed to acknowledge the intrinsic advantages in Dell's systems and processes. So instead of outdoing Dell, HP decided to add scale to an underperfoming set of systems and processes. In fact, the extent by which HP could outdo Dell's processes would have been a better metric associated with the acquisition. So, HP's server strategy failed due to a miscalculated objective and/or sloppy execution.

The second and more insidious development HP failed to fully consider was Linux's and the growth of the Lintel market. Around 2001, when Amazon and Google announced their adopting it, Linux was still relegated to the fringes of the corporate data center. So much has changed since that even Oracle and SAP run on Linux today. To its defense, HP could not have anticipated IBM's Linux moves, directed not only at Microsoft but at itself and Sun as well. It is through the IBM gifts that Linux has its place in today's datacenter. These gifts have been both direct, intellectual property, and indirect, corporate credibility. IBM has more than made up for the value of its gifts to Linux and forsaken revenue in its own Unix servers by selling services and/or a myriad of software applications on top of Linux. Arguably, IBM benefits now from an virtuous cycle it was instrumental in creating: Linux + services + Linux-applications + weakened competitors. If HP's Linux-delay could be half understood, Sun has no excuse for letting IBM steal the show. In conclusions, it is neither HP nor Sun that has capitalized on one of the most important trends in the server market: Linux.

One may add HP's loyalties to the company's problems. It could be viewed that staying for too long too close to Microsoft, Intel, and its own Unix, made HP less than prepared to capitalize on developments such as AMD's Opteron, and Linux.

On both accounts, HP failed for it did not know the future. In conclusion, one who doesn't know the future either stares at it and is condemned to reaction or creates it.

Offshoring to Central and Eastern Europe

The offshoring/outsourcing impetus still seems to feed on steroids, despite the recent withdrawal of JP Morgan-Chase from its $5B/7-year outsourcing contract with IBM. No doubt, the offshoring/outsourced movement will have its ups and downs. Yet, for those companies looking for such options beyond your typical Asian players, Central and East European IT service providers look like a promising destination. The West Europeans have already gotten a taste of the opportunity in areas ranging from games to customer service, and to enterprise software.

For the US based entities looking to offshore IT projects in Central and East Europe a few things are worth considering: The supply is rather small when considered against the demand of large projects, yet it makes up in eagerness and skills. Good engineering education and strong American cultural ties also help. The supply is skilled in Microsoft, Java, and Unix/Linux technologies. Not so great are the web-services skills nor their familiarity with best practices in the enterprise environment. The price may be moderately higher than in several Asian countries. One may very well consider these places as alternative destinations for R&D campuses.

Addendum: Reaping the benefits of business-process outsourcing (Bloch & Spang / McKinsey)

HP: Déjà Vu all over again?

There used to be a PC manufacturer that didn't know what to make of the Internet; other than buy Digital, and thus get an aura of respectability, and possibly know-how, in the big server area. That company went by the name of Compaq. When the acquisition magic was gone, and not much else could be produced to the satisfaction of shareholders, another company was trying to make sense out of its engineering prowess in the Internet age. This latter company, as we know it today HP, had ambitious plans of its own. We very well recall eSpeak, Chai VM, utility computing, services, etc. On the services front, it was in 2000 that HP tried to buy PwC Consulting for $18B. And that was last we heard from HP on the services front. As for Compaq and HP, they both underwent changes at their top executive levels. Capellas went on to become the CEO of Compaq, and Fiorina became the CEO of Hewlett Packard.

Now, it is worth having a selectively comparative look at two industries: retailing and computing. In retailing, we've witnessed the success of Wal-Mart and Target, at the expense of other players, and most notably K-Mart. Among the contributing factors, let us not forget of operational excellence driven by technology in one instance, and clever branding and positioning in the other, respectively. In computing, we've seen Dell driving the cost of the PC-based architectures (and most everything else it touches) so low that manufacturing commodity-based computers is nigh impossible in any other way but Dell's. What is Dell's way about? Driving efficiencies through operational excellence, commodity based architectures, and an impressive and growing amount of process-related intellectual property. IBM managed very well to elude these problems by complementing its strong engineering with first class services, open source software, integrated architectures and such. In 2002, IBM found it opportunistically convenient to augument its Global Services and acquired the same PwC Consulting for $2.7 billion in cash, with the remainder of the $3.5 billion purchase price composed of stock and convertible notes. On the other hand, the recent proposed sale of its PC business is indicative of IBM's pain through these transformations.

So, in the Fall of 2001, Fiorina and Capellas thought of combining their two companies. They presented the whole deal as 'there is no other way out,' despite skeptical or dissenting voices at HP or in the analyst-community. At least, not much dissent could be heard as coming from Compaq... Scale was the new corporate orthodoxy at HP, and Deustche Bank vouched for it in a tight proxy-battle that went on well into the next year.

Fast forward to early 2005. The printer and imaging unit at HP is still the most profitable--its market price alone could be about 2/3 of the whole company's. HP finds itself ever more cornered by IBM and Dell, which are squeezing its margins at both ends. Maybe it is indeed time for a change--a real one and not some gimmick to alleviate impatient Wall Street types. Going back to the core competencies HP has always been capable of could be one of the directions. Luckily, HP happens to have a board of directors that believes in change. And, if Lenovo passes the legal hurdles in acquiring the PC business from IBM, how far would an Indian suitor be for the PC-business of HP or, as Yogi Berra has it, déjà vu all over again?

On telecoms

A lot of attention goes nowadays to telephony and its several forms--baby bells, wireless, VoIP, ma bell, etc. Two of the latest developments will be analyzed here:

1) The announced acquisition of ATT by SBC;
2) WI-FI enabled (wireless) phones.

1. Many a reason has been given for the situation ATT has gotten itself into. As far as I can tell, here there are some of them:

a) McKinsey's advice: In the early 80's McKinsey (under-)estimated the wireless market to reach up to 1 million wireless subscribers by the end of the 90's (70+ actually). In the mid 90's, the same McKinsey was suggesting synergies at the intersection of bandwidth, content, and services. ATT's Armstrong and AOL-Time Warner were pursuing these very opportunities and lost big--yeah, it could be endlessly argued about reasons but it is of no use for those shareholders who lost value in the process.

b) The unintended consequences brought about by the actions/intentions of regulators: On one hand, regulatory constraints prevented ATT from making much of its NCR acquisition--thus, loosing big on the computer revolution. On the other, it was after the 1996 Telecom Act that we've witnessed not only dropping long distance rates but also the demise of the long-distance carriers. It is not by chance that the biggest acquirers of the day are the baby bells, so, to the extent the regulators intended the replacement of one big monopoly by several ones as defined by smaller geography, regulation has been a success.

c) ATT's peculiar culture, as revealed by recent studies/books or through direct interaction with telecom types in the industry--who doesn't have a story to tell about some ATT alumnus whose modus operandi was about (#minutes * fee)?

So, it's been strategy (or lack thereof), regulators, and culture, that brought about the demise of this icon. As a side note, ATT might have done well to hedge McKinsey advice in the 80's by considering instead an approach similar to Shell's scenario planning--just as an example. Another conclusion one may draw from the evolution of the telecoms could be that a monopoly--through its quasi-guaranteed cash-flow--is better for business than market forces alone. Otherwise, how can one explain why it is that local monopolies acquire most anybody else?

2. Soon, one will be able to go to any WI-FI hotspot (e.g. one's own house, Starbucks, etc.) and be able to make a call from a WI-FI enabled cell phone, over the Internet. Clear winners, for now, seem to be the handset makers and the Vonages of the world. Let us not talk about losers for now for the consumer will not always be in winner's seat. VoIP in general may lead us into a near-term future where there will be only low-, and high-quality telephony (corresponding to VoIP and land-line, respectively.) The so called high quality telephony may come at a premium and through further consolidation. Unless the baby-bells manage to bring into one's home a bundle of digital goodies priced for masses. For starters, I still dream of a cafeteria-style menu of TV programming choices. But, where did we start?

Sony vs. iPod

The whole company versus a product? Not really, yet almost. People fault Sony for its ATRAC (an encoding proprietary format) yet Apple's iPod is not any more open. People praise Apple for its cool factor. Gee, where have these people been when Sony introduced its several mini-disc players and recorders?

Then what is it that gives iPod, a 2001 product, so much of the market share? For one, it is the fact that consumers and Sony got equally tired--alas, the former of the latter. For another one, Sony's R&D seems so altered by the desiring management folks concerned with the 'cannibalization' of content... It's interesting, from the outside it is as if the model customer of the R&D were at odds with the model customer of the content folks: the former is this tech/gadgetry-loving avant-garde urban person willing to recognize financially a great product by paying extra for a Sony product, whereas the latter is the 'nothing can ever compete with "free" for my money.' Tough choice...

So, what is a challenger to do? Keep it simple, open for others to drive value to and from, and pay attention to performance. Simplicity, especially in the case of up and comers, ought to come at a price: don't be stingy guys and spend some $$ with folks at Idealab or similar places that employ good design-engineers! Nobody is asking for B&O yet in a world built from standard components you've got to differentiate your product! The openness in discussion is about standards and extensions. Balance right and generously--the generosity of openness can be sustained only by innovation, so there you have another cost. As far as performance is concerned, this thing you are building ought to stand on its own. Simplicity speaks to one's emotions, openness to one's social needs, and performance to one's brains!

To come back where I started, let's say that while Apple's iPod and Sony's minidisc achieve equally high marks on emotions and brain, Apple is the better of the two on openness. Moreover, when Apple introduced iPod in 2001, Sony's customers had already been waiting a revolutionary installment for about 10 years.

Now, that you've come so far, what am I really talking about? Is it music players, search engines, or simply great and long lasting brands? You be the judge!