Tuesday, September 30, 2003

15.2% of Americans Have No Health Care Insurance
The Census reported today that 43.6M American have no health care insurance.

What are the consequences of this delivery approach to healthcare in the US?

Well, first, it is pretty clear that healthcare is being damaged for all Americans. The evidence is pretty clear:

1. Emergency rooms are clogged. I recently advised a business whose primary product typically involved helping ambulances divert emergency patients to hospital emergency rooms that had room to admit people. Perhaps this is not a good way of running emergency service rooms.

2. Healthcare outcomes in US are not particularly good. Generally they are worse than countries that spend less on healthcare when you measure infant mortality or life expectancy.

3. US economic growth is certainly lower due to the high percentage of the economy spent on non-productive healthcare activities, which are estimated by healthcare economists at as much as one third of the total health care bill or around 5% of the GDP.

4. From a transparency perspective (an important issue in governance for private and public sector organizations), the flow of fund is essentially unmanaged with the corporate and middle class healthcare programs indirectly paying for the health care of the poor and uninsured through free poor quality healthcare to the poor.

5. The strong political voice of older Americans is likely biasing direct medical expenditures without examining the systemic biases that create bad health throughout life.

6. Unlike more interventionist governments in other countries, the US with its fragmented and disorganized healthcare delivery, has done a relatively weak job in marketing healthy life styles. Countries that have examined the return from investment in fostering healthy life styles vs. increasing expenditures on remedial healthcare have typically found the return to be much higher on encouraging healthy life styles (e.g. the 1971 Canadian Lalonde Report). After all, it stands to reason that avoiding treating a disease is typically less expensive than having to cure it. Obesity, smoking, excessive drinking all pretty much no-brainers as policy issues. The US does little in this area and even worse, does not reward those who pursue healthy life styles.

The most common objection I hear is based upon fear. "If we have a single-payor health care system, then we won't be able to get healthcare when we need it. So I prefer to control my own insurance destiny." The problem with this view is that it may appear to make sense personally, but systemically it does not recognize the increasing cost of healthcare due to indirect charges from providing healthcare to the uninsured, which makes healthcare uninsurable for many.

But wanting to be able to purchase a higher level of health care does seem reasonable in a free society, so let me argue that there exist two levels of healthcare need.

The first is the basic healthcare where universal coverage is just more effective and lower cost. Without addressing issues of fairness or political questions of government involvement in healthcare, does anyone really disagree with the advantages of treating children and pregnant mothers so that they avoid problems that will be expensive in later life for society? Vaccinations make a whole lot of sense in terms of the public good. And catastrophic insurance coverage is a traditional role for insurance.

The second type of coverage involves purchasing a higher level of testing, service and comfort. It is discretionary and is no different than buying an expensive car. But even here there are ethical issues. I doubt that most people would find it acceptable for a wealthy person to purchase a kidney from a poor person. But the issue starts to get more complicated in a world of biotechnology where a kidney might be growable. Should we prevent a person from saving up to buy a new kidney if biological materials become products?

I feel fairly sure that biotech and medical innovation is likely to experience lower growth in an environment of medical system collapse. So the systemic effects of the current healthcare system may cause the breakdown of the current research environment at teaching hospitals as they drown in losses from deliving a mandated healthcare to the uninsured, but receive no funding to do so. Voters may become so upset that short sighted politically appealing programs may jeopardize US leadership in healthcare products -- something seen in the parochial stem cell decisions of the recent president.

The problem is that universal coverage only appears expensive to those who have only listened to the superficial analysis of political campaigns, when in fact the US already has the most expensive system in the world. And then those who are covered worry about their ability to purchase discretionary medical coverage under such a system. If the two can be separated, then there may be hope for a higher quality more effective system.

Finally, there is the question of equity. I am in awe of people I meet who feel that society has no responsibility to help people who are born through no fault of their own with poor medical health. They fail to understand that the idea behind insurance is spreading risk and that insurance systems needs wide participation so that you don't end up with only the sick and the unhealthy willing to participate. A market system tends to encourage insurance firms to only insure the healthy. Which is of course why government regulation is unversal in the developed countries in the field of medicine.

Sometimes, these people claim to be religious. I suspect they have forgotten the biblical imperative of "Do unto others as you would they would unto you." not a bad way of talking about medical insurance coverage.

Alistair Davidson

Friday, September 26, 2003

Motorola Late to Market
Motorola's announcement today that it is late to market with camera phones and will miss having a presence in this hot new market prior to Christmas may well have been one of the reasons, it is now looking for a new CEO.

The strategic implications of being late to market are actually much more important than many people realize.

Most focus on the cost of lost sales. Perhaps they mention something about the brand value deterioriating.

But I would argue that the real damage from being late to market is that you have fewer opportunities to learn from customer experience. While you are not learning, your competitors are.

And the more you learn from customers, the more input you have for your next generation of product. THe more you can correct errors, fix usability issues, discover opportunities for increasing value, etc.

Those with experience in the new product area and those that have studied success have learned that competiting in the market with the most demanding customers and having international experience in product design improves both the likelihood of product success and the subsequent marketshare achieved.

It seems no coincidence as a result, that firms like Samsung and LG from Korea, Nokia from Europe, and Sony from Japan have out innovated Motorola. Their presence in markets with higher cell phone usage has clearly benefitted them.

Over the years, I have been very taken with the idea of "cycles of learning" or time-based management. In software, there is very little argument any more about the importance of iterative prototyping, or the notion that you should build software quickly, get feedback from users and then expand the project. But firms like the Thomas Group out of Dallas have argued in favor of cycles of learning in manufacturing - small lots and make sure you measure performance so that you can improve it. It's controversial, but the idea is less about small lots and more about what it takes to learn about optimizing.

I have a friend, Sue Rudd, who used to work at Motorola. She made the point to me many years ago that the problem with Six Sigma quality programs is that if you are measuring quality and manufacturing performance, "stopping the production line" will often count against you. An interruption worsens your metrics. She commented that well managed companies try to measure the rate of increase in quality. That takes different incentive programs and often requires investment in new equipment, training and leadership.

Several years ago, I worked with a Japanese firm that had been very successful in Japan providing tools for speeding up the design of embedded systems (i.e. in products like cell phones, PDA, consumer electronics). Their research suggested that over the past 3-5 years, the complexity of embedded systems and the time available for developing them caused the design process to have to be 12X more efficient. It's hard achieving that kind of performance improvement without leadership committed to achieving that kind of success.

Having led projects that improved product development cycles by an order of magnitude, it takes secure manager permitted to make mistakes, and it takes time to improve processes. It rarely happens over night.

Alistair Davidson

Wednesday, September 24, 2003

The Sun Also Rises
Sun Microsystems recent announcement of a simplified variable cost per user pricing model for their Office Suite and middleware software is in line with the white paper I developed last year.

The white paper which is available at www.eclicktick.com/EclicktickTelecomWhitePaper2.pdf lays out the problems and approaches to selling technology in a world where there seems to be a surfeit of suppliers and and an absence of appetite for major technology capital investment.

The logic in short is that the world has changed. In the new IT Order,

1. There are many suppliers (Sun is competing with J2EE servers against Microsoft, Oracle, IBM and BEA)

2. There is wide choice of technology (though in the case of OpenOffice, the choice is pretty much MS-Office, increasingly part of the Windows operating environment).

3. Client companies are overwhelmed by the expertise needed to maintain their increasingly complicated systems (ERP, information warehousing and business intelligence, Sarbanes-Oxley requirements, e-commerce, managing the virtual value chain, personal computers, laptops, PDAs, cell phones, CRM, security and authentication, middleware, and the list keeps growing).

4. Business models are changing as a result, towards services, solution selling, out-tasking, integrated applications, and the modular integration of applications.

5. In fact, today, in advanced innnovative services, you are now selling business cases not technology.

6. Increasingly the impact of VoIP will be to permit a new generation of distributed services that combine voice and data applications e.g. distributed CRM.

The challenge for Sun is clearly that historically it has been a "technology push" company selling high end hardware. And while its development of Java has been enormously successful creating one of the largest and most interesting ecosystems around, something the firm often does not receive enough credit for, the challenge for Sun is: "How well can it create a more services oriented, solution oriented infrastructure and ecosystem?"

Sun certainly has formidable competition. IBM with WebSphere, DB2, the VisualAge family of development tools and a vast ecosystem of VARs and ISVs is well entrenched. Microsoft is investing in developing consulting capabilities and broadening its product line to provide core services such as accounting with the acquisition of Navistar and Great Plains.

The future increasingly looks to be a world where solutions are assembled, not built -- so while one can argue that the modular version of the future that Sun has espoused is the right direction -- the question seems to be "How fast can Sun move its culture towards customer service and solution development directly or via its ecosystem?"

My guess is that Sun can't do it by itself, but its strength will lie in certification of solutions that third parties develop. Ironically, for a company that has grown on the basis of proprietary software, the Open Software Movement may contain the solution for Sun. Ironically, IBM's brilliant move to offer Linux on all its hardware platforms represents an opportunity for Sun to become Burger King to McDonald's. Every time someone converts their software to IBM's version of Linux, it is an opportunity for Sun.

So, don't count Sun Microsystems out, IBM's move to Linux and HP's plethora of operating systems may drive software development more into the Linux/UNIX camp even as Itanium based and AMD 64 bit systems take off.

Alistair Davidson

Wednesday, September 17, 2003

Morgan Stanley's Steve Roach on Global Imbalances

I have been reading Steve Roach's economic analysis from Morgan Stanley for some time. His analysis of the balance of trade problems of the US strikes me as prescient. It is also I think consistent with Krugman's comments discussed in yesterday's blog.

Look at, for example, his September 15th column:


Alistair Davidson

Tuesday, September 16, 2003

Why the US Dollar has further to drop

In two of my previous jobs, I was involved in foreign exchange. Forecasting the vagaries of currency movements is always difficult. As a treasurer, the rule is: "If you are right, you are lucky. If you are wrong, you must have been stupid."

But I am going to go out on a limb here. I think the US dollar will depreciate further. Now, let me add the normal caveats - that is assuming no major events come along that make the US dollar a safe haven. But if current US fiscal polices don't change, then it is hard to imagine the US dollar not depreciating further.

There have been a number of warning signs. The first is the huge balance of trade deficit. But perhaps the most major is the current and predicted high level of deficits for the Federal government. Paul Krugman, writing in the New York Times magazine this past Sunday (http://www.nytimes.com/2003/09/14/magazine/14TAXES.html?pagewanted=1) describes the elaborate "Tax Cut Con" that right wing ideologues have been promoting for the past twenty odd years or so.

The article is well worth reading and so will the book version be when it is published (''The Great Unraveling: Losing Our Way in the New Century"). I will certainly be buying it.

Krugman does not argue in his article for depreciation of the dollar, but I am going to for several reasons, even recognizing that the US dollar has already depreciated 25% or so against the Euro.

My reasons are as follows:

1. Any rational investor thinking about investing in the US with a high level of deficits and low interest rates will only do so if other international investments are too risky, or if he speculates that US interest rates will go up, or if he thinks American assets can be bought cheaply.

2. So, barring war, disease and destruction outside the US, if you think the US economy is weak, you are better off waiting for the depreciation in the dollar and buying cheaper later. Given demographcis, the inescapable consequence of current fiscal policy is that the deficit problem will get worse not better.

3. If interest rates go up, several things are likely to happen. First, large scale bankruptcies would likely occur due to a drop in the value of the housing market. Second, the value of stocks will not go up as much. Third, corporate bankruptcies will also likely increase. Politically, it would be very difficult to have a housing prices collapse in the US. It is the biggest tax deduction in the US and would upset a huge percentage of the population. In fact, the shallowness of the current recession is due in many regions to borrowing by homeonwers against the increased value of their homes. The US is a strange society. Tax deductions to the middle class make home ownership compulsory and the home becomes unemployment insurance.

Some will argue that mortgages in the US are often 30 year term, but in recent years, many homeowners have found it less expensive to stay short. And given that the fiscal problem is long term, interest rates are likely to stay high if the federal government is borrowing and putting pressure on interest rates.

4. The insanity of the US medical system is such that it costs about 3-5% more of the economy that in Canada and arguably on average produces worse health care. This cost is very large. If the US were able to grow at 3% per year faster, it would be a profound change of astounding proportions. Such a change would be the way solve a large number of today's problems.

But the current consequences of health care costs in the US are that many large and politically important US corporation, such as the Big 3 automobile companies are stuck with health care and pension costs for more retired employees than they have current employees. And their competitive position is perhaps less strong than ever before. Other writers have suggested that there is extensive lobbying going on for reduction in the liability of such companies. If one of them goes bankrupt, then it is can reduce these liabilities.

However, the political and cost fall out of such a bankruptcy would be enormous. So the easy way out, is to depreciate the dollar. By doing so, American producers become magically healthy. Imports become more expensive. Foreign companies have to invest in the US to stay competitive. So some foreign investment will occur and marginally push up the US dollar, but it won't likely be enough to drive the dollar back up given the fiscal and trade deficit position of the United States.

Krugman argues in his article that the "supply side" argument for massive tax cuts is a giant con. He points out that:

1. Americans are not taxed heavily.
2. Tax cuts have and will primarily benefit a very small and wealthy group in the population.
3. Tax cuts have been sold on the basis of economic growth, but for many ideologues, the real issue is cutting back the size of government.
4. The allocation of the tax cuts has been consistently misrepresented with misleading statistics.
5. "Supply side" economics, the notion that tax cuts will stimulate the economy more than they will cost is not considered accurate by economists. He distinguishes clearly between Keynesian deficits to stimulate a down economy and long term structural deficits which just increase the debt burden.

But what makes the economic situation so dire is that the majority of spending that conservatives would like to cut are politically uncuttable. Homeland security and defence are not on the table for the right wing and have received increased budgets. The cost of Medicare and Social Security is going up, predictably. What is left is the 5% of the budget that is devoted to education, transportation and other useful programs. So where will the cuts come from?

The evidence of the Reagan years is that the result is more spending and higher deficits.

Some Predictions Based Upon Canadian Politics
Canada in the 1970s had a very similar situation. The Liberals had used deficits to maintain the Canadian standard of living in the aftermath of the oil crises, which essentially transferred wealth to the Middle East and devalued assets designed for a low energy cost environment.

When the Liberals were thrown out of office in the middle 1980s and moderate right wing government took power under Brian Multroney (whom I temporarily worked under in the Office of the Leader of the Opposition), two key policy changes took place. They were widely contested and may only have been implementable because Canada has a Parliamentary system of government, which gives more power to governing party than the tripartate structure of Congress, Senate and the President in the US.

These two policies involved: (1) massive change to a major piece of the tax code, and (2) the creation of the North American Free Trade Area (NAFTA). These had three major consequences:

1. The change in tax regime rationalized a previously invisible wholesale tax that had the unfortunate effect of making it more attractive to manufacture off shore and import into Canada, than to produce and export from Canada.

2. The goods and services tax or GST expanded the tax base to include services and was a positive compliance system so that if you paid GST and exported, you got back the GST on what you exported. As a result, you had an incentive to collect GST. The more you collected the more you would get back if you exported.

3. NAFTA transformed the Canadian economy and made it more efficient. But just as importantly, it put in place a series of safeguards that allowed firms targeted by political protectionism in the US to have a court of appeal. Non tariff barriers had by this period become more important than tariffs.

So what does this say about the US?

Well the decentralization of power in the US, combined with options such as "Buy a legislator" means that change happens slowly. The US probably will need a major crisis before change occurs. A drop in the US dollar may not be enough, but a crisis will occur if legislators fail to address the problem.

My predictions are that:

1. The US will be forced to pull back from many of its bases overseas. The consequences of the Iraq war will be the demonstration of "Imperial Overreach".
2. The next administration will be more multlateralist in approach.
3. Healthcare reform will come to the US, painfully, irrationally, but it will come. The dollars are just too big and the excesses just too large for this problem to go away. SIgns of this are the recent approval in California of compulsory health insurance for all businesses with more than 20 employees. Once this type of program is in place, single payor systems or simplification of billing starts to become easier to implement.
4. Taxes are going to go up. States will put taxes up first, but I predict a long term trend towards more taxes in the US, perhaps not in the short term, but certainly the in medium term.
5. The dollar will go down. It's the coward's way of stimulating the economy. Better would be to have the US economy investing in creating high value R&D and exporting high value goods and services.

A final reason for worrying about the value of the American dollar is the impact of government cut backs on education. In the long run, a society creates jobs by being able to (1) attract investment, (2) creating centers of excellence, and (3) developing talented and entrepreneurial people (or so I argued in our book, Seizing the Future in 1983).

A major side effect of diverting government spending into non-productive areas such as Homeland Defense and the military is that while some innovations do occur, the majority of the spending is not productive and the cutbacks in education reduce the availability and quality of the workforce. And in a knowledge-based economy the quality of people counts. In other words, foreign policy affects defense spending. Defence spending affects the budget. The budget affects education. Education affects productivity growth and innovation. Lack of productivity and growth and innovation reduces the pie. A smaller pie causes a drop in the standard of living.

It is no coincidence that the Tigers of south-east Asia -- South Korea, Japan, Singapore and Hong Kong all place great emphasis upon education. And many have argued that the GI Bill after the Second World War was one of the most significant social programs ever.

So we are left with a picture of the US, painted ably by Paul Krugman, of a society where political voice has enabled the wealthy to become weathier, where taxes have remained constant for the middle class but where they have dropped for those needing it the least, where education and infrastructure are deterioriating. The US is maintaining its standard of living by borrowing excessively to give tax cuts to the wealthy. And long term investment will be diverted to funding government.

It's not a pretty picture, so I hope my analysis is 100% wrong. But I don't see how.

Alistair Davidson

Tuesday, September 09, 2003

Relaunching Failed Products - Seven Thoughts

One of the most popular topics on the Eclicktick Corporation (www.eclicktick.com) is the subject of re-launching failed products. It's an interesting challenge.

Having done turnarounds and worked with many startups there seem to be some fairly standard rules that are useful.

First, it's really rather tough relaunching a product that you were responsible for developing. You've lost your objectivity. I personally did not realize this until I did my first turnaround after having run my own company for many years where I had designed, architected, marketed, launched and sold the three generations of products and services. When I had to do a turnaround on someone else' company it was very different. Someone else's product or service is far easier to fix than your own. Even Michael Dell brought in some outside assistance to help when his company got into trouble in the 90s.

Second, some products can't be relaunched. The initial concept was wrong. The business model was crazy. The product did not work or did not deliver the benefits. Customers did not want the benefits offered.

Third, sometimes what it takes to turn around a company is throwing out everything you have done. And that is hard to do. One of the most common pieces of advice I give inexperienced entrepreneurs is "Don't do R&D." Distribute someone else's product to learn about the market you want to launch into. Develop your own product or service only once you have experience obtaining revenues from your target customer. Very few take this pieces of advice, but empirical data and experience suggests that about half of R&D is wasted. And I would guess way more (perhaps as much as 90%) is wasted in software and technology based businesses.

Fourth, probably the biggest problem in relaunching a product is credibility with investors or head office (particularly if they are in another country).

Fifth, most of the companies I work with really don't have a very good idea of how value is perceived by a customer. As a result, they delude themselves in to thinking that the customer is "stupid". Customers are actually very smart about what they buy. If you give them a good reason to do business with you, they will. It's no coincidence that the leading cause of product launch failure is inadequate or no market research. Now, don't get me wrong. Some products are launched so you can get market research on usage, but the more expensive the R&D requirements, the more market research you need to do.

Sixth, quality and ethics do make a difference. I am often amazed at companies who think that they are in the business of making money. Actually, you are in the business of creating value for customers. If you create value for the customer, then the customer will allow you to make money. Once you adopt this perspective, relaunching becomes a whole lot easier.

Seventh, value is not just about features. It is about services, perceptions of risk, support for standards, availability - soft things as well as hard.

My free e-book "Turn Around!" has more on this topic at www.eclicktick.com.

Alistair Davidson

Friday, September 05, 2003

Scoping, Testing, Prototyping, Expanding and Change

In an uncertain world, it's hard to be right all the time. And we all know that hindsight is often good after you have made a mistake (though hindsight is not always perfect -- people do draw bad conclusions about what went wrong).

When you are tackling a new problem, there is, I believe, a sequence that reduces risk. My examples come from both technology projects and new product launches.

The Four Stages

Scoping is something that good managers do automatically. But even good managers often fail to scope. What I mean by scoping is doing what some have called the "back of the envelope calculation". In technology, most scalability problems occur because the team fails to ask up front the key question: "How big and complicated is the problem?"

An analog in the selling process is "Is this customer capable of purchasing my product or service?" If you fail to ask this question, you can waste a lot of time and effort.

In the new product development area, the key question is, "What is the compelling reason and value that my product or services offers that will trigger a sale?"

Even if you have scoped a problem, you still need to test your idea. In a world filled with technology, one of the best ways of testing an idea, a project or a product, is to ask other experts who have experience in the area.

Actually, asking the experts is easy. Listening to what they say is much harder.

In the new product area, there is no substitute for market research. In fact, market research done badly or not at all is the major cause of new product failure according to major surveys (in about 45% of the cases).

There's a pretty simple rule in life. It seems to appy to just about everything. Large is typically riskier than small. A large information warehouse is a very risky project. Developing a subset of the problem first generates a lot of learning. And it can help you to refine your scoping estimate and validate the opinions of experts.

Just as importantly, most managers can't actually tell you what they want. They need to see something. But whatever you build will be wrong, so keep it small.

And with new technology products, usability studies and user interaction studies are often key to producing a superior product.

Expanding and iterating a project is exceptionally important because this is where the big money gets spent. Best practices in software development involve what is called iterative development. Strategist like Benko and McFarland (Connecting the Dots) talk about chunking a project to minimize risk and allowing the project to be killed if it stops being relevant.

Some writers like Jeffrey Moore (Crossing the Chasm) also point out that as you expand your market, the type of buyer, their needs and expectation change.

Projects and technologies develop inertia. As a result, it is extremely difficult to kill off old technologies and old projects. Encouraging change requires leadership and the willingness to specify the need for a major increase in performance improvement.

All this seems obvioius when you put it down on paper, but we all seem to forget these basics.

Alistair Davidson
Using Sarbanes-Oxley (SOX) to Improve Your Business Analytics, Competitive Position and Performance

Metagroup has suggested that Sarbanes-Oxley compliance spending can be thought of in two ways. You can either think of your spending as a compliance obligation. Or you can think of it as an opportunity to improve your Business Analytics - the more forward thinking way of keeping track of your business (vs. Business Intelligence or BI software).

Conventional wisdom suggests that SOX (as it lovingly referred) to will cause increased audit bills, more review work by software systems providers and increased spending on IT.

But CIOs are under pressure to reduce spending.

So, how can you resolve these conflicting demands.

The solution, I think, is to step away from conventional solutions. Conventional solutions - information warehousing, OLAP, etc. - are not going to solve the problem. And they are certainly not to going to build competitive advantage.

Let me briefly explain why.

1. Most companies using OLAP tools will find that they suffer from exponential growth. What that means is the more you are interested in connecting information in your enteprise reporting, the slower and the more expensive the solutions become. So, if SOX means an order of magnitude or more increase in complexity, your OLAP tool is either going to fail, or you are going to have to subdivide your problem into pieces. Lots of different cubes for looking at your business.

But isn't that going against the grain of what you were trying to achieve in the first place? You have a failing technology, massive and deteriorating technology performance and an increasingly high cost of maintenance. Not really a very good solution.

2. Information warehousing tends to be very expensive. Cleaning data is very expensive. And the best strategies in information warehousing mean starting small. but you have a compliance problem which means that you cannot really start small. You need to grow quickly and, even worse, change frequently as you figure more about your exposure. A very expensive problem.

When technologies start to break down, it's time to change the paradigm.

I have been working with a different paradigm - a object oriented enterprise peformance reporting, modelling and tracking paradigm for about seven years. For a number of years, I built strategic planning, reporting and modeling systems. What we found in our work with OLAP and database tools is that we were always building similar applications, but they varied just enough that each project required starting pretty much froms scratch. Which made consulting tough.

So we decided to ask the impossible question: "How could we deliver complicated views of businesses, their activities, their transactions and their performance measures using an approach that was incredibly fast at low cost?"

If you don't ask such a question, then you are pretty much guaranteed that you won't engineer that kind of exceptional value for money performance in your technology. Over three years, we figured out how to deliver complexity easily at 1/20th of the cost.

What we concluded was that the relational and OLAP framework did not match the strategic and performance reporting requirements that managers needed.

Essentially managers see the world as consisting of pieces of information that they want to combine in many different ways. Sometimes they want to look at information from a product perspective, sometimes from a process perspective, sometimes from a geographic perspective, sometimes they want to compare time periods, sometimes they want to compare versions (actuals, plans, scenarios, revised budgets, etc.)

But what remains constant is the manager's interest in looking at data in new and novel ways on short notice. And business is more complicated that most current software technologies can handle.

If you don't believe t his assessment, ask your top database designer how he is going to handle rapidly changing large scale many-to-many mapping relationships in a relational database. If he tells you the truth, he will admit that relational databases can't deal with the problem. He will tell you that you need to simplify the problem. But SOX and strategic performance improvement mean that you don't want to or can't simplify the problem.

And ask your OLAP vendor how they would model a 13 or so dimensional view of the business. Let's say you want to be able to track and relate the following:

1. Suppliers' suppliers.
2. Suppliers.
3. Administrative processes.
4. Manufacturing processes.
5. Products and product campaigns.
6. Distribution channels.
7. Customers.
8. Market research.
9. Time periods.
10. Actuals, budgets, plans, plan updates, scenarios.
11. Chart of accounts.
12. Currency.
13. Raw operational data.

Most OLAP vendors will be forced to explain that you need to decompose your problem. Which makes a lot of sense, but not if you don't have to. Unfortunaately decomposing your data means more work when you try to look across the decomposed data.

And processing times will start to grow very rapidly every time you add data and complexity. None will be able to handle the raw data. So you will be forced to manage data in at least two places, in relational databases and then in the OLAP environment.

The way out of this box is move to what the Convergent Engineering Institute has called an enterprise representation of the business. It's modern, it works and it is both fast and inexpensive. It's a new paradigm.

With this approach you can now start to look at stakeholders, processes, activity based models; be able to model products and marketing programs, market research and channels, you can focus on the issues that are important rather than the issues that have historically been easy to look at.

There is old story about the wise fool Nasrudin in the Sufi literature. He meets a drunk crawling on the ground beneath a lamp post. Nasrudin asks the drunk what he is doing. The drunk replies that he is looking for his keys. Nasrudin asks in turn: " But where did you lose your keys?" The drunk replies: "Well, I lost them over there by my front door, but there is more light over here."

Looking at SOX, strategic issues and improving performance means looking at what is important, not what is necessarily easy to look at in your legacy systems and legacy technology.

For more on this topic take a look at www.eclicktick.com under Performance Reporting.

Alistair Davidson

Thursday, September 04, 2003

Drowning in Data, But Needing Conclusions: Some Solutions (Part 2)
But let's assume that you do have an information warehouse, or you are thinking about how to look at all the information that your myriad systems are collecting and feeding into a number of centralized locations (physically or virtual centralization). What do you do to explore this enormous and complex data?

There are I think a number of solutions.

First, you can rely upon the brilliance of your people. People can become very expert in using such systems and can learn to extract key information over time.

Second, you can find suppliers - consultants, software package developers, and those rare organizations with high levels of skills in both - and have them come up with best practices in extracting information that is tied to your strategic and operational objectives.

Third, you can pursue a more biological approach. Develop small and often simple pieces of technology that act as a "software agents" and look for connections between information in your information warehouse or information marts. Software agents might have different objectives. Some might look at patterns that drive performance in a company. Some might look at financial transactions to spot fraud. Some might look at relationships with suppliers. Some might like at sales force effectiveness. Some might like at customer segmentation and buying practices.

In fact, you might have multiple agents floating around your systems with different induced hypotheses about patterns in your data. And over time, outcomes will provide feedback and allow the agents to evolve.

In other words, there is likely not one answer to the problem of using the information you own or have access to to create new and valuable conclusions from your explosion in data. Over time, you are going to see interactions and learning occurring between your people, your suppliers and software agents reviewing your performance and data.

People's knowledge evolves. Managers learn what works. Suppliers spread best practices. And "software agents" may discover patterns in complexity that are invisible to other ways you are using to look at your organizations.

New conclusions developed in new ways -- it's rather interesting and potentially quite powerful for some organizations.

Alistair Davidson

Drowning in Data, But Needing Conclusions: Some Solutions (Part 1)

You can tackles this problem from various perspectives.

The technically inclined will want to pursue best practices. How can we simplify our processes? How can we pursue architectures and data representations with high reuse and low cost modifiabilty? The Convergent Engineering Institute has argued that a move to a an object representation of an organization has enormous pay off for companies, a view I agree with.

The methodologically inclined may want to pursue the Capabilities Maturity Model (CMM) and begin the process of creating an organization that can reliably and predictably engineeer systems, optimize them, make rational decisions about what to do internally and what to outsource or purchase in a best practices manner. The CMM model can make a lot of sense, but with so much of information management purchased and so many legacy systems being maintained, then sometimes the decision to eliminate old systems may be more important than improving the processes of maintaining them.

But my take is more strategic.

It seems to me that while best practices, better engineering and architecture make a lot of sense, reengineering the IT practices behind a "legacy system or activity" makes no sense in having the system or doing the activity in the first place.

In other words, if you don't know where you are going or what your objectives are then it is very hard to figure out the return on investment or the prioritization of investments. Having ROI on an information technology project is not as important as knowing whether the activities it supports are critical to the company.

In the current environment, downsizing and outsourcing are enormously popular strategies. But to be frank, cutting costs is always easy (however hard it is on the managers doing the job and the unfortunates being laid off). But cutting costs often has hidden and unmeasured consequences. Take for example a customer information repository, where a company tracks key information about customers, their accounts, sales activities towards the customers, purchases, warranty information, etc. Cutting costs in this area might have the consequence of storing inaccurate information that would cause customer alienation, lower loyalty and repeat purchase.

In the same way, failing to maintain procurement systems and the other supporting systems that coordinate with key suppliers may put you out of business in a hurry, particulary when disasters strike.

And information systems go through life cycles, so just as you need to separate out the different management, marketnig and reporting requirements for early stage, growth, mature and declining businesses, you also need to make sure that you are not starving new IT projects that have the potential to change industries.

RFID or radio frequency identification (wireless tags for tracking people, inventory and assets) represents one of those technologies in retailing and asset intensive industries.

Alistair Davidson
Drowning in Data, But Needing Conclusions

In a world where companies are trying to integrate information, the fascination with technology combined with a lot of bad practices often causes companies to invest in projects that are tactical rather than strategic. The first posting lays out the problem. The next will discuss some of the ways of solving the problem.

The Problem
When you think about information technology strategy, one useful framework is the pyramd.

At the top of the pyramid is the stuff that humans understand and which is not captured in information systems. This kind of knowledge is called wisdom, insights, judgment, values - it's the stuff of which we are made.

The next level down is sometimes called BI or business intelligence software. Typical software in this area is used for decision support, for reporting on the activities of the firm (recently named BAM or Business Activity Monitoring by Gartner Group). Tools in this area are budgeting tools, consolidation tools, activity based costing tools, simulation tools, strategic and financial planning tools, all forms of reporting tools e.g. Balanced Scorecard and other measurement reporting, and OLAP (on line analytical processing or multidimensional spreadsheets).

A layer deeper lies the information warehouse where information from multiple sources is collected in relatively raw form. At this level, customer, product, sales, and operational information is available but not terrible useful as there is so much data it is not comprehensible.

At the lowest level in the organization lie the transaction reporting and data collection systems. These are used for collecting the raw transactions that make up every organization. Some of these systems are integrated into the information warehouse; some are not. For example, a building security system might not be linked in with the HR system in the ERP (enterprise requiremens planning) package.

The Consequences
With all this complexity, five predictions can be made safely.

1. Moving information from each layer requires work and expense and often causes errors and opportunities for fraud.
2. The more ways that you represent your information, the more likely it is that maintenance costs for your system will be high and transitions in the way that you represent your business will be expensive to implement.
3. The more ways you collect information about your business, the harder it wil be to draw conclusions.
4. Cleaning data will be a material activity in firms.
5. Most human beings will find it very difficult to understand the sources of information in the organization.

By the way, the problem is probably getting worse. There are likely three major reasons why the problem is bigger today.

1. Companies have been downsizing.
2. Companies have been spending a high proportion of their budget upon enterprise application integration (40% is one quoted figure).
3. We now have more companies with a huge and wide investment in traditional information management systems, large ERP systems, and e-commerce and web front ends for servicing suppliers, employees and customers.

So, unless you are in a market leader with exceptional profits and an unlimited IT budget, what is the way out of this box?

I'll try to answer that question in the next posting.

Alistair Davidson

Wednesday, September 03, 2003

How should you choose a strategy?
Many companies in the current environment are unhappy with their performance. Most are asking the question: "How do we improve our performance?"

A less frequently asked question is: "How should we choose between potential strategies and projects, tactics and methods of implementation?"

Arguments about these issues can lead to firings of the right people of the wrong people, short term improvement and long term improvement or short term declines and long term declines. So what should a leader do?

My guess, from listening to and working with many companies is that there are a couple of basic ideas that people are relying on:

1. Things are going to get better. And when they do, we will do better, so we just have to survive.

2. We are going to lower our breakeven. If that means cutting costs and outsourcing, that's what it takes to survive.

3. We are just at an early stage in our life cycle. If we just get those early buyers, we will be OK. The market will grow.

But what if these ideas are not the best way of thinking about the future? What if the future is not going to be the like past? And rapid drops in the price of computing, telecom, lower barriers to entry, internationalization, terrorism, disease overpopulation, break down of health care systems, rising government debt levels combined with demographics do suggest problems or as a very minimum new challenges.

Cathleen Benko and Warren McFarland write in their book, Connecting the Dots, that the future is so uncertain, that companies should position themselves to adapt to the future as it unfolds rather than assuming it is predictable. If you buy their view of the future, then both of the three ideas listed above don't really work very well.

Benko and McFarland go further - they argue that companies need to think in terms of building capabilities or Traits as they call them, that will allow companies to survive an uncertain word.

They identify four traits in particular - though I suspect there may be others and they may vary in importance by industry:

1. Eco-trait: instead of trying to do everything internally, your organization needs to be part of a virtual coordinated value chain where you take advantages of other's superior capabilities.

2. Outside-in trait: instead of focusing on how the world looks from the inside, companies should thinks of themselvese as a collection of processes that represent the way in which suppliers, distributors, customers and stakeholders maintain relationships with you.

3. Fighting trim trait: companies need to focus on being able to react quickly to changing markets instead of assuming and relying upon the inertia of markets and relationships.

4. House in order trait: companies need to make sure that there systems and procedures are flexible and integrated able to power the other three traits.

It's an interesting perspective. The analogy is that character is more important than skills for the individual. As a parent, you hope to give your offspring the character that is necessary for them to learn, adapt and gain the skills necessary for success and happiness.

So, how do YOU choose your goals?

Alistair Davidson

One to One Marketing

You meet clients and get asked for business advice in the funniest places. The most bizarre situation I have experienced recently was under a full moon at the Stanford Mausoleum at a discussion group about intellectual property and the Internet.

This past weekend, it was a poetry reading. The executive in question was talking to me about his market position and how they were doing lots of market research on their customers. He talked glowingly of his web site as a source of information about his customers, that was going to help the company figure out what to sell them.

And then he mentioned some large generalist producers moving into his niche market.

I suggested that perhaps he ought to turn around his thinking. It's not like doing market research on your customers actually creates any value or relationship with them. I suggested he ought to be thinking about how he could own the relationship with his customers. Rather that thinking about selling more products to them, I suggested maybe he should be thinking about selling the experience, his customer were buying products to achieve.

He sat back in his chair. You could see the light bulb almost going off in this head as he realized he was talking a product-centric rather than a service and relationship-centric view of his customers. And his one big advantage was his focus. He and his company cared a whole lot more about the experience his customers were trying to achieve than his new and larger emerging competitors.

He thoughy out loud: "So what you are saying is that maybe we should be selling them the full service rather than just the product - the holiday, the organizating of the travel, the information about when to travel, the feedback from other customers."

He liked the idea.

What he had not thought about is what Tracey and Wiersema talked about in their book, The Discipline of Market Leaders, many years ago. You have a choice: you can be the product leader (like Apple), the process leader (like Dell) or the customer intimacy leader (like IBM deciding to buy PriceWaterhouseCoopers Consulting). Each strategy has its merits, but in a world where commoditization is always a risk, owning the relationships with customers and doing one-to-one marketing is increasingly attractive.

You still have to be in the ball park in producing the product, but owning the relationship means that if your products fail to be competitive, you can resell someone else's and not lose the relationship.

Something to think about for man at the poetry reading.

Alistair Davidson

Tuesday, September 02, 2003

Relaunching Failed Technical Products
The reason for product failure are many: bad management, wrong choice of features, poor sales strategy, bad distribution, competitive actions, mispricing, poor marketing and messaging, inappropriate segmentation - the list goes on.

But practical experience and empirical measurement give some guidelines on what you can do to relaunch a failed product.

First, the empirical data: the data on new product launches is very clear.

- The single largest predictor of new product success is offering a high value and differentiated product/service offering. Companies in the top 20% on this rating have a 25X better economic performance than companies in the bottom 20% i.e. those offering undifferentiated me-too products.

- The major cause of new product failure is doing inadequate or no market research.

The two issues are connected. Value varies by segment, so if you have not done market research, you may well be pitching the wrong benefits or you may be pitching benefits that are only appropriate to one segment, while your overall marketing message is too dispersed across multiple segments.

Second, if your product is technical, it is extremely likely that you are spending way too much on the technical side of your features, and are not doing enough to put yourself in the shoes of the customers.

Third, if you are selling a product that you have developed, you probably have a bad case of NIH (Not Invented Here) Syndrome. Customers are profoundly indifferent to the source of R&D. They want superior value, so if you have limited resources, your likely first step, once you have established what value means to customer segments is to figure our how you can immediately increase your value proposition. Often this means:

- introducing a service element into your product mix
- licensing and incorporating third party technology and services
- identifying business ecosystems that you can become part of (i.e. becoming more compatible with standards)
- changing your pricing model
- altering the risk of doing business with your organization
- doing usability testing and user interaction design to improve the performance of the product for target users.

Fourth, if you really don't have a clear idea of which segment will buy your relaunched products, maybe it would be a good idea to put yourself in the shoes of the customer. Go live with your customer and observe them in the wild. How do they live? How do they talk about their problems? What triggers decision in their organizations?

Fifth, if you have a big product with a long development cycle and the product is incomplete (and inevitably you don't have the money to finish it), sell a service. Make up for your product imperfections with human beings. It may not be the business model you originally envisioned, but get revenues and interact with customes.

Sixth, consider the heretical. Stop developing your failed product. License a third party product. Sell it. Learn more about customers. Launch new versions based upon what you learn by servicing customers.

I will write more on this topic in a later blog.

Alistair Davidson

Solution Selling and Pricing
Pricing is a much ignored area in business. Marketers certainly spend a lot of time on pricing, but the strategic impact of pricing is inextricably linked with value and the structure of your value chain.

In my last blog, I write about the difference between tactical use of pricing and strategic use of pricing. Tactical pricing is often used to get short term sales. Strategic pricing is about gaining not just short term revenues, but positioning your value proposition to build a loyal customer.

There's another part of pricing that worth considering as well. That's solution selling. Examples abound and in a complicated world, solution selling addresses a big problem for consumers. The explosion of choice and increasing complexity of products leads to uncertainty and perceptions of risk. If a digital component in a car or electronic appliance fails to work, the entire investment in the product is typically lost. And while products with microprocessors, software and signal processors may be attractive, it is impossible for consumers to know in advance the stability or reliablity of such engineered products.

Take cameras. In my career as a photographer, it has been exceptionally rare for a camera to have a mechanical defect. It just wasn't really an issue. In contrast, I took out a four year warranty on my first digital camera (which has produced the best pictures, I have ever taken) and I needed to use the extended warranty this past month just prior to the warranty expiring. My most recent notebook, a marvellous three year old Thinkpad T-20 from IBM has had to go back twice to IBM. My last cell phone had to be replaced under an extended warranty. And many high end luxury cars incorporate service into their price. They are selling transportation of high reliability. By incorporating service and extended warranties into their product offering, they are simultaneously insuring that owners maintain their cars and delivering what customer actually expect - hassle free ownership.

But the trend is even greater in information management. Organizations cannot keep up with technology, so they are forced to move in the direction of (1) purchasing packages from suppliers that anticipate their integration needs, (2) outsourcing parts of their business, (3) out-tasking highly specialized tasks where they lack expertise, interest or economies of scale, and (4) strategic partnering.

What this means for startups is that in many areas, the old strategies no longer work in the same way. Service based launches will often be more successful than product launches. And the type of distributor you need will alter because the method of selling software may have such a high service component. And your pricing strategy has to be different too.

The good news is that services based launch strategies can both reduce risk for buyers and make it easier to sign up customers.

Alistair Davidson

Monday, September 01, 2003

The Whole Cost and Nothing Above the Cost
Expedia, the travel reservation service has now started to let customers know that the full cost of purchasing a ticket or renting a car is. They are not perfect. They don't tell you until you place your order, but it's a step forward.

I don't know about you, but I find it insulting when companies misrepresent their pricing. It may not technically be lying, but it's pretty close. Other examples include:

- Car companies that advertise a lease rate of $399 a month, but concealed in the small print of a TV ad, unreadable in the time available, or in a small font in a print ad, is the note that you have to put four to seven thousand dollars down to get the rate.

- Airlines that list the price of a single portion of a return flight are equally deceptive.

The logic seems to be: if I scream loudly enough, I will get someone to pay attention to me and they will buy anyway even if I understate or don't specify all the costs. But think of the hidden cost to the viewer or reader, the inquiry that leads to no purchase, wasted time and frustration. If business is about establishing a relationship with your customer and delivernig value, a failed inquiry due to a misrepresented price actually subtracts value from the relationship.

As I have argued in this weblog before, if you think of your role in business as being to "act on behalf of your customer", then these misleading ads just don't work, particularly if your objective is to build a relationship with customers.

A entrepeneneur commented to me the other day: "I fly Southwest. I typically have to change my schedule two or three times before it gets finalized. With SouthWest, changes are painless. There are no stupid penalties. They have my loyalty."

Companies that scream low price and hang a lot of hidden prices off the low price are not likely to be engendering loyalty. And if loyalty is as much emotional as cognitive, how can companies expect loyalty when nasty surprises lie at the end of the purchase attempt?

I am sure that tactically, screaming misleading prices may have short term positive impact on revenues, but you are also educating your prospects not to believe you in the future. You have lost their trust. You may win the battle, but lose the war.

In contrast, companies like Ikea, Costco, Expedia and SouthWest (to name just a few of may good companies with a clear strategy and a value orientation) are saying to customers: "We respect you. We are in the business of creating value for you. We want your loyalty and we want your business long term."

In a competitive world, where ratings and rankings can make and break brands, it makes a whole lot of sense to treat your customer with respect.

Alistair Davidson