What can we learn on Offshoring/commoditization in IT Services from garment industry?

The above is a very interesting question.... I remember while as a kid in India, how the textile outsourcing promised endless employment opportunities to the skilled and unskilled labor of India...so much so that having a sewing machine was considered as an insurance plan for the unemployed spouces of bread-winners....

Lets look at something interesting from the garment industry....

The shift in factors of production to offshore was triggered by the low-cost labour to stich garments and the labour intensiveness (both skilled and unskilled) of the industry itself....As consumer started pushing for lower prices; the textile industry quickly pushed production to the offshore centers in Asia (China, India, Phillipines, Bangaldesh, Pakistan, etc...). The developed countries retained the designing and marketing at their respective centers. The entire offshoring/outsourcing in the Garment industry (textile and clothing) has been highly regulated through GATT, MFA, and ATC regulations limiting the scale and scope of offshoring to developing countries (in other words low-cost). It would be interesting to understand what contributed to commoditization in this industry:

1. Consumer propoensity to spend less on textile/clothing, and
2. Skill/capability requirements required to participate
3. the support provided by local governments which perceived it as a means to generate employment to the masses (both skilled and unskilled)
4. Low labour cost from developing countries and
5. Higher degree of automation in textile and clothing industry (more so in the latter)

The disincentives for commoditization and offshoring are:
1. Regulation (quotas systems, quantitative restrictions, etc.)
2. Customer proximity that helps in understanding the tastes, preferences, needs, wants and choices...this basically relates to lot of qualitatives that are difficult to do from offshore

An interesting additional perspective on this can be got from the web site: http://www.tno.it/tecno_it/fashion4_2_05/documenti/WTO%20Discussion%20Paper%20TExtile%20and%20Clothing%20after%202005.pdf

How much of it relates to IT services? I think most of it in different shapes, sizes, and in scope...We will address this in a seprate article...

What is common or different between "Product Lifecycle", and "Technology Hype-Curve"?

 

To understand the basic jargons here are few references for you:
1. Product Lifecycle: http://www.quickmba.com/marketing/product/lifecycle/
2. Technology Hype-Curve: http://en.wikipedia.org/wiki/Hype_cycle

 

A quick Narrative

When we look at the combined figure all new technology trigger leads to new product introduction in the market. The unabated hype results in inflated expectation this is usally marked by the growth  and maturity phases. The market soon comes to grips with the real potential of a technology offering in terms of the benefits/utility of it and troughs in disillusionment, this often is the stage of market decline. The final phase is a plateau of productivity reached by the new technology, this is where the product sales tanks… This is where the “Innovators dilemma” creeps in and also if there is no innovation dilemma there is the “long tails” for the product…Which way it heads to depends on what is the nature of innovation….

Now lets look at the commonality and difference between the curves….

 

First Lets tackle what is common:
1. They all have a "S-Curves" or seemingly a "Normal curve"
2. They all explain the phenomena of a seemingly predictable pattern for entities through their lifecycle
3. They all appear to be simplifying (maybe somtimes trivializing!) the challenges of Technology Forecasting. (Refer more on techniques one uses in Technology forecasting...)

Lets look at what is so different:
1. They use different jargons (depending on your subject of interest: Marketing, Change Mgmt, etc.) to explain the inflection points on the curves


I cant see any more differences though...Need your help! Any comments or perspectives you can share?


We can look at few ideas like Grid Computing, Cloud computing, SoA and so on on the curves to see how they pan-out... Quiet interesting to view these trends by positing them on the curves....I was quiet amused when I was reflecting on my journey through school where I was so obsessed with AI and NLP...Thanks to my internship in one of the premier R&D center and few Terminator type movies, I was able to see through the disillusionment :-)...

Its a worthy exercise after all!

For more reading on this topic visit : http://www.au.af.mil/au/awc/awcgate/awc-futr.htm#adoption

Its time well-spent I would

Your superstitious Strategic consultant- What do they say for IT?

I read this article on S&B advice for CEO on how to prepare for difficult times....Let me relate this to some of the IT firms that mushroomed all over India:

1. Acquire captive units of clients whos operations are sub-optimal...just as you note they are 10-20% more expensive then running thorugh a boutique offshoring company
2. Shop for acquisitions...but dont do an AXON one plz....
3. Screw your employees as they are 80% of the operation cost for IT companies..they have nowhere else to go! (Apologies for being rude but I think it is more effective to use strong words)
a.Put them in any project any technology...throw them into the first available project....if they dont survive fire them
b. If your employees ask for change or roll off from engagement lower their performance rating
c. reduce their salaries
4. Anyways IT companies are cash rich and dont need long-term debt (well corporate Financiers will disagree) so we can raise funds on carry huge assets on balance sheets that needs recapitalization (hopefully the operating leases are not revised here)...so use all the cash and diversify into other businesses (for example I know one few large corporates in India going into "Green" business :-)...
5. Take more forward covers and currency options....well you anyway lose them due to volatility...no doubt the currency futres in India is shining like a Star...
6. Invest in Innovation...good for integrated players..what about Pure IT services companies! Just buy more companies in the market to provide integrated services....diversifying into products is not a bad idea after all...
7 Take more risks and bid agressively for deals with lower margins...something is better than nothing...

Any other views!

Ponzi schemes in IT- Do we have ponzi schemes in IT?

Definitely yes...If you thought ponzi schemes are prevelant only in Capital markets you may be wrong...havent you heard of the latest Ponzi scheme run by Madoff ripping off $ 50 billion in corporate debt markets and becoming the undertaker (not an insurance jargon plz...i'm getting tierd of those at work) of few hedge funds exposed to corporate debts!

There are few in IT, let me name some of these schemes:
1. Offshoring
2. Productivity gains
3. Quicker return on IT investments
4. Zero transition cost
5. Transformational IT engagements
5. Lower TCO

hee hee i wish I can go on for some more....I'd love to elaborate on this further...wait and watch this space in the coming months....let us see what it all throws up...

What is the right Support cost to be factored for large SI engagement?

This is a very interesting topic for the academics & practitioners. Lets look at some examples of clients and large product vendors like Oracle and SAP only the cost side.



Academic

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Statistic presented in the paper for a 10 year software life: http://www.ifi.uzh.ch/rerg/fileadmin/downloads/teaching/seminars/seminar_ws0203/Seminar_9.pdf

GTE – 60% cost is maintenance and 40% is development

USAF Command & Control - ~65-75% Maintenance

GM – 80% (probably it’s the darn EDS who ripped them off!)

Oracle

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Oracle charges 22% for Product Update and License Support. The Product Update is 15% and License Support is 7%. Product update includes enhancement to products, patch release, internal R&D amortized expenses passed on to clients and so on…7% is their charge to clients to provide on-line support suchs as Tars, patches, etc this is typically the amortized cost of providing Level 4 (if you will for using the terminology here…J) for their on-call support. This has been consistent stand of Oracle. They usually do not separate Product Update and License support and sell only one to customer, but then for strategic deal they can do that. The above means once in every 5 years we should replace the software ;-) ……it has a shelf life of only 5 years if we do not pay support fees….

SAP

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SAP had initially priced their support at 17% and later increased it to 22% and invited client CIO wrath!. This aligns with what Oracle has been doing for a long-time (22%).

Lets look at the effort side of the game…

Based on same research mentioned in the Academic section above for a 100 man days of effort. 49 man days is spent on Maintenance, 43 man days in development and 8 man days in others…

No offence meant to anyone. Based on the above understanding of mine, I was surprised that some IT Consulting/Services orgs seem to anchor 25% - 33% number. I can see the rationale of where this number could’ve come from based on above. But not sure whether we are applying it right

The other challenge I have is to base estimates on call pattern and object maintenance pattern using our typical estimator. If the application built happens to be cutting-edge and innovation, we cant anchor based on SAP/Oracles of the world. There is no precedent exists in such solution similar to what is being proposed that I know off…

For now, it seems I’ve proposed the above 25% rationale on effort per annum.

Impact of 2008 crisis on IT – Driving forward looking at rearview mirror…

I read a very interesting article in Mckinsey: Industry trends in the downturn: A snapshot http://www.mckinseyquarterly.com/Energy_Resources_Materials/Steel/Industry_trends_in_the_downturn_A_snapshot_2264

Quiet interesting for those of us in the High-technology industry to look at the trends…The IT spending as a trend has reduced 5 to 7 times that of GDP (With h/w 8-9 times and the IT S/w/Svs 3- 5 times)…The article sites the trend chart reasoning rather shallowly as contributed by high-spending in the Y2K and .Com boom…I completely disagree with this, having participated in both the Hardware, Software and IT services in my checkered Industry experience…Lets look at what has really been happening…..

H/w 2001 hence
In Hardware industry the prices has been falling the moment Industry revolutionized the Intel-based servers call it Titanium and/or multi-core technologies…I don’t see many proprietary server uptakes growing anywhere in the market…The commoditization of server has been doing extremely well to drive out the “Elephants who cant dance”
The processor is not he only driver to this trend…the trend is further supported by falling prices of Memory and memory access technologies…so you may use the additional terminology of “Economies of Scale”…Sorry Adam Smithsonians out there, I haven’t seen “diminishing rate of returns” yet…I attribute the reduction in cost driver to Innovation in Marketing first and technology next…

Storage:
In Storage industry too the price per MB/GB of storage has been constantly driven down…more than the commoditization of server it can be attributed to fine slicing of the storage segment for different application requirement of storage: archival, static, dynamic storage:
SATA/ATA disks vs the expensive SCSI disks
Falling prices of controllers
Falling prices of interface cards, and so on…
I attribute the reduction in cost driver in this segment to Innovation in Marketing and not so much the technology…

Network & Peripherals
There are 2 components that has been witnessing drop in prices one is the cost of communication equipments and the services associated with keeping these technologies up and running….some of the key developments contrivuting to these has been the following:
Falling prices of components to assemble network equipments
More efficient routing algorithms and efficient transmission of packets
Technology evolution both mobile and standard in transmissions (I may sound stupid rattling the technologies here without devoting a separate article on the topic backed by solid research: MPLS, ATM, FR, Ocnet, etc…)

Software
The greatest cost has been those of the reduction in license cost while increasing Product support and upgrade cost….

The license cost has been going south facilitated by the following:
Innovative subscription models and SaaS…written by me in other articles
Piracy forcing vendors to reduce cost lest it is completely free
GNU & freeware (spurious ware)

IT Services
No doubt the factors reducing the cost are not just India and China, but also the promise of the COTS packages and the industry specific features that are requiring less effort to manage on the lon term…(I’ll cover this more in detail later)…you can get more view to it on my article under “Outsourcing” category

Is there anything I’ve missed….share your comments and views on this…..

Does Ombudsmen process or Grievance cell created by firms deal with inappropriate behavior by firms’ agents effectively?

It has been noted that firms often create Ombudsmen process or Grievance cells to deal with inappropriate behavior of firms’ agents i.e. supervisors/managers within an organization. Especially in difficult environment (read economic) conditions there are more incidents where employees are often exploited by supervisors/managers (and vice-versa as well)… This has typically been dealt with in traditional industries by the employee unions….Unions can be effective or ineffective in dealing with such problem, without causing other implicit challenges to efficient functioning of the firm…(Well you know that I’m hinting at the UAW and their ballooning health benefits and other benefits, that is almost sinking big auto players in US…) Unfortunately in IT industry we do not have registered unions…atleast those that were sprouting due to firms entry in certain delivery locations where worker unionization has a strong political will, has also been rendered toothless due to several reasons attributed directly and indirectly to firms and their agents….Lets stop digressing and look at a simple model to look at the cause and effects of such Ombudsmen/Grievance cell in organizations…

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The above model clearly indicates the causal reasoning applied when the ombudsman/grievance cell is put in place to tackle with inappropriate behaviour..On analyzing the above flow it becomes clear that only very few oppressed employees will complaint through the Ombudsman process as they inherently know the effect of retribution by the supervisor/mgr against whom the complaints are launched, but those who do so are already prepared their exit options when retribution arises….The few employees who do not have exit options remain in the system and vent their feelings, which eventually erodes trust impacting the high performance of employees…(countless books written on trust vs. High performance…I’ve written few book reviews on the same topic, those interested may check out my book review section of blogs site http://insightful-journey.blogspot.com …)..You may be wondering how I know this? Well I’ve experienced it myself and seen countless people seeking my advice as well and how to handle this…(I’m not alone out there you see…J..)

 

Now if the above system is not effective from a systemic perspective why is this being put in place in the first place…Not all it seems is as negative as what is being portrayed above…It is very clear if you know why the system will break you would also define how to correct them by changing the rules of the game (I’m not going to discuss how strategies can be defined using concepts from Game theory though) like for example moving a complainant immediately out of the specific management & control of the oppressor.. Also, there are very few instances where employees utilize these processes and contribute to the system…as always there is a cost the firm and oppressed employees pay as well (either quitting or sometimes even staying on in the organization)…

 

How differently can such system be designed so the real problems highlighted above can be resolved? There are few potential, untested ideas I have as an effectual reasoning person….The best is to create a Points system (similar to the rewards system) which is objectively designed…whenever an employee is oppressed he/she raises the issue on the portal site using key pneumonic of issues (harassment, Oppression, favoritism, Integrity, etc.)..Each such reason has a certain points that can get debited from the manager who is also cited by the complainant (we can use techniques like AHP to crystallize on the quantitative points for the pneumonic). This can then effectively feed into the yearly appraisal cycle resulting in penalties and eventually affecting their pay-package/promotions etc….Now this system may create vested interest on employees as they may collude to weed out objective decision…the counter-balance to this is the complaint process that can be effected by the supervisor/manager through points system as well overseen by a neutral third-party (can be within the firm or outside the firm…its better to have an outside agency)…On a systemic level this system may figure out an efficient means to weed out  managers and employees with inappropriate behaviors…. What is your opinion on this any other system you think can be devised that is fool-proof and more objective?...

Work-Life balance- Looking through a multi-specialty view (economist, Sociologist and Maybe philanthropist…)

Work-life balance is often the most pronounced topic especially in the IT world…..I was just reading Paul Krugmans book on economics on production frontiers and would construct a very simple model of work in one axis and Life in other axis…to me the graph may have a very interesting bell shaped curve….(depending of course on which axes you put work and life…J….)

 

Let’s look at the graph to really understand this model….

 

 

If one has to view it very simply…there is an optimal balance of work required for a decent life…in effect no works leads to no life and in the same context increased work leads to decreasing life (due to stress, loss of health, poor quality)…again this curve in general applies to a normal productive resource…I mean normal for those who has a balanced life (life is not all about work; but also about spending time with the family)…the above graph itself  demonstrates that the perception of balance is often subjective….

 

The graph above does not differentiate race, color, region, sex, status and so on…it generally applies to all…though the social norms may vary and promote diversity in perception of what a balanced resource means….

 

Going now by the same logic does it mean then that during difficult times increasing work-hours or putting in more productive hours benefit the organization or economy as a whole…This is a very interesting topic to discuss…what the increase in productive hours seems to do is basically shift the kurtosis of the above bell shaped curve…lets look at this in context of what increased working hour does to the above graph as represented in Fig 2….

This has basically reduced the quality of life for a productive resource…but did it commensurately increase the productive hour of a resource…this may be debatable as one needs to understand what is productive hour of resource…especially if resource contributions are not measured or directly account to achieving or not achieving an outcome…Achieving or not achieving a outcome is usually better achieved through the means of shifting accountability to resources rather than just increasing the productive hours….Again, there is another interesting debate on whether working longer leads to passing on productivity benefits to client…not really so it seems especially for new deals as the new deals will drive towards charging more to client per hour in a day by ~11%...however the old deals contracted for 8 hours a day may stand to benefit due to increased hours of working? Not to sure again it shifts back to what resources really do in that 1 additional hour of work contributing to the outcome….. This is an interesting topic….my hypothesis is just increasing the productive hours may be a bad decision in long run ceteris paribus….What do you think?

What are the IT Service trends that would reduce the cost of providing IT Services by half?

This is an interesting question. There are some trends that are interesting to track, as they have a bearing in reducing the cost of providing IT Services:

1. Labor Arbitrage: More low-cost countries China, Africa replicating the IT service model and providing the labor cost arbitrage benefits to developed markets - Probability 40%
2. Growth in OSS: and the associated services - Probability 60%
3. Automation through IT tools - Probability 30%
4. More stable platform based COTS applications that reduce the cost of maintenance for S/w - Probability 80%
5. Seeking lesser skills and hence lower cost of providing the required IT maintenance services - Probability 70%

One needs to look at the above trends and run correlation of the above models growth to the reduction in cost of providing maintenance service...The interesting challenge here would be to first track the cost of maintaining the Software and definition of right elements to be considered here such as:

a. Labor payroll cost
b. Non-Labor costs such as Software/Hardware/Network Support, Maintenance & Upgrade license costs


It seems the above is relatively straightforward factors to track. The impacts of the above trends on the elements of costs are interesting to see as in the following table:

Events\Factors	Labor Cost	Non Labor costs
Labor Arbitrage	Medium	Medium
Growth of OSS	Medium	Low
Automation	Low	Medium
COTS package	Medium	Medium
Pyramid rationalization	Medium	Low

Based on the above matrix…it seems one can evaluate the effect of the impacts by understanding the proportion of cost play for the Labor and the Non-Labor factors... Typically this ratio swings from 70-80% of payroll cost and shift the maximum impact to lowering the Payroll cost….It will not be too far when the Non-Labor cost factors moves up to take a significant share of the cost primarily due to COTS packages oligopolistic powers, increasing customization of the packages, extraneous other factors such as inflation/forex mkts and so on….

Entrepreneurship: A great article on what makes entrepreneurs entrepreneurial and the gauge of value...

I came across this really interesting article written by Saras Saraswathi, which I downloaded while looking up Vinod Khosla the No: 1 VC ranked by Forbes & Fortune. http://www.khoslaventures.com/presentations/What_makes_entrepreneurs_entrepreneurial.pdf. The article clearly brings out what qualities makes an entrepreneur unlike the qualities that make a good manager by bringing out the difference between causal reasoning and effectual reasoning. While in causal reasoning the manager often knows that goals to achieve and may or may not use creativity to pick the best means to achieve the stated goal, while the entrepreneurial effectual reasoning takes stock of the means and set out to action on several means to achieve a unstated or not clearly articulated goals. The author brings out an interesting nuance that good entrepreneurs demonstrate both the qualities of reasoning fairly well....Quiet interestingly entrepreneurs have 3 very important principle abstracted by the author so well: 1. "The affordable loss principle", 2. The strategic partnership principle and 3. The leveraging contingency principle. The Causal reasoning fellows look for predictive model to enable them control a situation, while the effectual reasoning fellows don’t care predicting things they can control nevertheless...Quiet interesting insight for some managers out there :-)....it often sparks a question in my mind why are managers so paranoid about risks-contingency plans, issues etc. on an opportunity...aren’t they the experts who should take it on stride and solve it as it comes along or atleast influence the desired outcomes being the players rather than the spectators... to me that separates leadership and management....

I've also been simultaneously reading about the value created by entrepreneurship http://www.mitpressjournals.org/doi/pdf/10.1162/itgg.2006.1.1.97 . One is an Opportunistic entrepreneurship and the other is Necessity Entrepreneurship.
Opportunistic: It seems leads to tapping the opportunity for unmet need in the market through Innovation. This will result in creating probably a "New Business Model" with new job. This I also come to believe has a positive correlation with GDP and growth of country, thereby adding the maximum value.
Necessity: This I understand stems, when a new entrepreneurial venture is started as the resources are not employable or lack of opportunities for employment. Classic example is that of an agriculturist who ploughs his/her own land to make a living. This does not add great value to the society...
The article also goes ahead in identifying three stages through the development cycle that a country goes through resulting in entrepreneurial ventures/self-employment opportunities: The 3 stages are: agricultural/small manufacturing firms with high self-employment but limited value, stage 2 where managers are in great demand and small firms become bigger, here the self-employment opportunities shrink, this is then followed by Stage 3 where services overtake and creates more self-employment opportunities. Interesting to see in which stage a country is in, thereby giving us cues to what we can expect as the next stage of development/evolution of firms.... But, interestingly it also helps us understand whether an entrepreneurial venture would eventually lead to contributing value to the society on nation-sate.....interesting reflections for me is to consider if any of this thoughts could be used to view the new deals that we sign for our firm....are these deals value adding or value eroding....which stage of cycle is the firm in considering the unprecedented volatility in the markets right now....interesting to think about it....

Is R&D spending a good indicator of Innovation?

To understand that we first need to define what Innovation means. Innovation is a defined as new way if doing something. There are interesting ways of measuring this and one can get more information from the Oslo Manual, Frascati Manual, Patent Manual, and so on.

So now let’s try answering the above question on whether measurement of R&D spending is a good indicator of Innovation.

No maybe not. Let’s look at some examples all research does not fructify to useful innovation as in the case of Pharmaceutical research. Similarly all development expenses do not lead to innovation either, this cannot be more true than looking at the auto industry...Interestingly the R&D spend for 2007 by 1000 top companies (in terms of revenues) is 3.6% of their sales decreasing moderately from last year. Interesting pattern to observe here is that Software/Internet/Computing & electronics, Pharmaceuticals and Auto are the top R&D spenders. Software and Internet industry has been spending 13.7% of their sales on R&D and are on top of the table even before healthcare...isn’t it surprising....how much of their innovations are we seeing that is making difference to the lives of millions of ppl out there...contrast this with pharmaceuticals....interesting parody!

I'm dying to get the "Grabbing Lightning" book about innovation where the authors’ state: “We found no relationship between R&D expenditures as a percentage of sales and innovativeness,” . They reached this conclusion after reading the same article that I read :-)....( “Beyond Borders: The Global Innovation 1000,” by Barry Jaruzelski and Kevin Dehoff, s+b, Winter 2008.)


It is altogether interesting topic to discuss whether innovation has contributed to profitability and sustenance of a firm in industry more than anything else? I'm not too sure if I'd look at Auto companies in the US....