Cloud Computing & SOA - Hype and Hoopla

There is so much hype and hoopla about Cloud computing and Service Oriented architecture....as I had earlier mentioned in my earler article that these are going through the peak of Inflated expectation (thanks Gartner for this nice terminology other than the Magic Quadrant)....

If you have been long enough in the IT career say 10-15 years you can see through it nothing differently than Inflated expectations...

Remember the great hype and Hoopla created at every phase of an Innovation:
a. Midrange computers challenging the Mainframes: The SUN & HP of thw world giving the IBMs of the world the run for their money...it all seemed to be a great hype on midrange as Intel based servers today are giving the midranges run for their money...
b. RDBMS challenging the Network and Hierarchical DBMS: Remember the Oracle/Ingres/Sybase/Informix/DB2s of the world giving the DEC and IBMs databases run for their money...we also brefly saw Object oriented Databases momentarily sending sparks and fizzling out
c. Client server architecture challenging the Mainframe screens/C cursors/the Windows SDK fat clients: Remeber Oracle, Powerbuilders of thw world giving the gargantuan and complex Windows SDKs run for their money...all to be challenged again by the internet thin client frameworks...we saw a full circle here...

What is a pattern we see in all the above...it seemed that they are really reinventing the wheel or coming a full circle...I'm unable to articulate this much better, but let me try and give this simple analogy...its like the earht going around the Sun year after year in a clocks precision...I dont really see the Cloud computing any different from retracing the Mainframe era....and the SoA going back to the very fundamentals of what the technologies and methodologies exit for to run a business with what you have rather than buying new technology to support the existing business....

So whats so great about the SoA and Cloud Computing...not coz' i', not chasing them this time...it all seems to be a good marketing gimmick...what has to be innovated in the technology space has really been innovated and it is just about putting the old wine in a new bottle or just plain message in a bottle ;-).... it seems its all about the context and not really the core....

What do you think? Just a hype and Hoopla around cloud computing and SOA...Whata the big deal?

Innovation at the Core and the Context - An IT Services View

Lets define what is Core and the Context first.

The core is the raison-de-etre of an organization, and/or
the purpose for which a going concern/organization exists,

Good examples of core:
a. IT Service Organizations: Wipro, Infosys, TCS, etc. exist for the purpose of providing IT services to clients
b. Tiger wood brand exists so he plays Golf :-)...
c. Shahruk Khan/Amithab Bachan/Angelina Jolie brand exists so he acts in Movies


The context is every other things that supports the functioning of the organization:
a. For IT Services: Company laws, GAAP/IAS/India AS rules, Brand, Marketing divisions, etc.
b. For Tiger woods: His clubs, his golf gears, turf, Gillette ads, golf balls, :-)...
c. Sharuk Khan/Amithab Bachan/Angelina Jolie: Loreal, Inox, Paramounts etc.

In the earlier post I had discussed about the ideas I got reading "Dealing with Darwin"....Thinking further on it, I realized that most of the innovation 15-16 different innovation types were really in the core of the organization...nobody talked about innovation at the context....

Imagins a new innovation of Titanium metal used in making golf clubs it may give our great Tiger woods an extra fillip of performance on the turf...maybe even a minor edge in his core to win more matches...

Now I realized that some of the Operational excellence zone innovations: Value engineering, Value migration, Integration, and Process innovations actually performed on the context of IT service industry can infact give the IT services industries the extra edge....Imagine applying lean principles, 6-Sigma, and good accounting policies, excellend financial controls within the organizations can provide great reputation for the service industry and infact contribute to winning more deals for them in the market...guess what the innovation at the context really translates directly into providing experential innovation in the customer intimacy zone...clients would love tow work with organizations that are nimble, flexible and provide a great reputation when associated with....That is the case of some of the Indian Pure plays like Wipro, Infosys and TCS (for its Nano...god one client manager in US remembers only one name TCS not coz it provided IT services coz thee guys make lorries and also sell Tetley tea :-)....

So what I really think is that the different innovations mentioned by Moore in Dealing with Darwin are indeed highly interconnected and one feeds into another....it seems to me that great organizations in the world (not just IT services companies) have infact know these interconnectedness and play the innovation nodes so well that one feeds into another leading to growth...For example I dont think Toyota has just been known for just operational excellence through its lean principles that is leading it to be Numero Uno in the Automobile industry it is far greater than that!

What do you think!

Dealing with Darwin in the IT Industry - What is the Innovation strategy that is apt for the IT Industry

In Dealing with Darwin book Geoffrey A. Moore brings a great menu of innovations types that can be applied by organizations operaing in different market/growth phase of their respective industry...

Let me trace the growth of Indian IT Services Industry and the innovations that were so effectively applied over 2 distinct phases:
Early 1980-2000: The Indian IT Industry was in the growth phase and if we look at the dominant innovation themes was that of Disruptive innovation of Offshoring. The primary participants here were TCS, Wipro, Infosys, PCS, IBM, and HCL-HP
2000 onwards the IT Service industry is quickly become that of a mature market: The dominant innovation themes used in customer intimacy zone were: marketing Innovation and experential Innovation. The marketing innovation was to provide different types of services AM, & AD and within them Fixed price, capacity and T&M models. The experential innovation was to provide services to client businesses on SLA and KPI. The participant in the industry were still TCS, Wipro, Infosys, IBM, HCL-HP and we saw new emerging MNC like Accenture :-)...
On the operational excellence zone it was a combination of Process Innovation and off late Value engineering and Migration innovations. The process innovations were the ISO, CMMI and so on. ALl participants in the industry have adopted this innovation which resulted in these cores actually becoming the context. Very few organizations graduated to the value engineering and Value migration innovation like TCS and Wipro by adopting 6-Sigma and Lean management practices....But there are some fast followers..

Now all the above innovations have actually been adopted and replicated very quickly by other resulting in these cores actually becoming the context...Now every client looks for their service provider to have adopted and assimilated these innovations. Hence performing on Quality, offshoring etc. only gives a neutral or negative outcomes to service providers and definitely not positive :-)...

The question of what is really the core of the services offered by IT services companies...I really dont know....I've been struggling to figure this out myself...the core it seems really lies in the unique culture of the organizations and in specific domains of IT service like in embedded engineering etc. we'll dvelve on this topic later...but you can reach me through the comment section if you are interested in discussing this and application of the 5 model core-context repurposing strategy...

It is also interesting to understand what will a new player getting into the market operate on in the mature market. It definitely has to be a disruptive innovation...where will this disruptive innovation come from:
1. Marekting innovation/Experential innovation in the customer intimacy zone: For example: Cost, price innovations like outcome based pricing, variable margins, etc.
2. Integration, Value Engineering, Value Migration/Process Innovation in the Operational excellence Zone: Usage of automated tools or operating model to provide a unique benefit to the client....

Or a combination of the above two...It would be good to think about this
Interestingly we see that the market has not gone into Declining market yet...so I'll reserve discussing this for later...however we have seen some organizations may soon reach this phase if they are in niche/commoditized service areas like AM where only the bigger players can survive the challenges by sheer scope and size....

Well my thoughts are flying in a zillion directions right now....maybe i'll structre it better with more insights....watch out this space for more....

Starfish & the Spider - The power of networks in IT Organizations

I read the excerpts of the book Starship and Spider and really loved the power of Starfish - Network of decentralized decision making...

Its quiet amazing how the author narrates the difficulty faced by Spanish in decimating the Apache tribe in the US, while the same decimated the Incas and the and other tribes of New mexico....

It seems it was difficult to decimate the apache coz it was a tribe which shared decision making in decentralized groups....the network of the groups were linked up by a Nantes where ideals, and beliefs are shared consistently among the Apache tribes...quier amazing..this is exactly what we with the evolving terror modules of Al Qeda..The interesting part of such society is that whenever it is attacked the society becomes even more open and decentralized...

No doubt the Americans have not learnt their lessons in dealing with the Talibans in the Afghan and Pakki borders...


Now imagine large MNC or Transnational organizations operating a network of delivery center...do they really run it as a decentralized empowered network node that runs their organization...not exactly they are strongly controlled by the Headquarters either as a cost center or as a profit center with control over common functions like marketing, branding, corporate finance..etc. they have some function that limits and subserves the node to the headquarters....look at countless organizations in this sphere, P&G, Unilever, Pfizer, J&J, Dell, etc. But, do these MNC/TNC really achieving their mandate of successfull growth in the regional nodes they operate in...Not really they are also ran...



Just look at the IT Industry, the Indian Pure Plays are gicing a run for money to the large MNC/TNC like IBM and Accenture....How do they manage to do that so effectively...it seems the MNC/TNC always in a reactive mode when it comes to competing with the Indian Pure plays...almost to an extent that the Indian nodes of the organization grow only coz clients come to indian pure play....would they have really grown and pursued a strategy of India growth otherwise...

My perspective is a BIG NO...coz there are certain paradoxical and conflicting Performance gaols that drive the organization. For example Revenue received by using the India node is much less when compared to using the local workforce...the challenges of economic factor and their management: Inflation, Forex, etc.

What do you think? Any other whacky conspiracy theory????

Exiting a large IT service contract and its implications on companies

IF a large IT service contract is terminated midway in the deal there are implications to the IT services vendor financials...lets try and understand this a little bit more..

Whenever a client terminates a large IT outsourcing contract due to extraneous circumstances (for example when Satyam like episode occurs) the effects of the annulment of the contract has implications on the company financials. As we saw in the earlier post in this blog that revenue recognition and the expense incurring is amortized on a Straight line proration basis. The extraneous event will result in realizing all the expenses in the year the contract is annulled. Now the revenue recognition depends on whether client has already been billed and paid for or is deferred. Either way there is going to be Operating margin impact on the IT services firm margins negatively.

So when some of the financial companies went belly up in the last 6 months and annuled their contract (TCS/Infy) or when client annuls some of their contract with Satyam their margins will definitely get impacted....

But inspite of these challenges companies like TCS, Infy and Wipros have reported a great run with revenue and margin growths for the recently ended Q3...Whats really going on...have their revenues been increasing when the entire market is down and new deals are few and far between...or is it some accounting gaps...

I would love to see their annual reports for FY'09 to really figure this out...For now be sure not to go long on these IT companies...you maybe in for surprise

Revenue recognition and Expense realization for IT services contract

Well understanding the accounting treatment for large IT outsourcing contract is giving me sleepless nights now! God how I wish I get a cure for obsessive compulsive disorder when I hit upon something I dont know about and ought to be knowing!

I read the valuation book from Krishna Palepu (The same author who was Independent Director of Sathyam :-)...) where he has written so well on revenue recognition principles and Expense realization...

Revenue recognition is done under 2 key principles:
1. When the service or product is sold, and
2, There is a reasonable sound estimate of probability in realizing the revenue

Expense incurring for a deal is done under 2 key principle
1. Clear cause-effect relation exist between revenue and the incurred expense, where the expense is recorded as expensed in the year when the revenue is recognized and
2. Expense is incurred in the year when the resources are expended productively toward comletion of service or product

Now the above principles are really put to a test in a real life scenario where it leads to applying the above principles consistently. A good case in point is in the IT services space where the client is not willing to pay for the transition cost of the engagement. This is due to the fact that paying upfront for the transition is a balloning cash flow problem for the client due to 2 reasons:
a. It pays for the incumben t services while transition is going on
b. it pays additionaly for new resources for their high payroll and expenses during the transition period

In such troubled times when cash is the king this has a huge bearing on organizations cash-flows to pay transition fees upfront or pay them at all.

Now how the service provider accounts for this is even more interesting based on whether the transition cost leads to economic or normal margins or not and accordingly recognize the appropriate revenue or defer it...

I've now realized how this accounting treatment can be made either to the benefit or detrimant of the shareholder..It seems here the brilliant mind and foolish mins can think alike based...one by knowing well and the other without knowing....:-)...I dont know where Satyams CFO and CEO would fall if they encounter similar scenario....

having understood this a little bit more I can now get back to my normal routine..Gosh, I'm amazed at how open the interpretation of accounting policy can be....wish there is more consistency and predictability of the numbers posted out there by all IT services companies.....

What is the best way to model economic externalities in pricing IT Services?

Lets look at some of the economic externalities/factors that impact a long-term pricing contract for IT Services (call it Outsourcing services):
1. Inflation
2. Cost of Living Adjustments
3. Foreign exchange volatility

Some of the above factors can lead to Operating margin erosions to tune of 10-15% if they are not built and recovered.

There are two ways in whic we can recover these costs
1. Engagement level: One by directly including it in every deal as part of the contract
2. Organization level: by currency hedging, managing cola & inflation internally through managed attrition :-)..

I'm now curious now what is the Accounting regulations that will support on inhibit either of the above model. or are there really none...

I've been struggling to get clarity on this and not being an accountant is a definite minus...Can someone help me here!

More on the Ponzi schemes on IT

I wrote a brief on Ponzi schemes http://insightful-journey.blogspot.com/2008/12/ponzi-schemes-in-it-do-we-have-ponzi.html on IT, just before the Satyam scam hit the media in December'08. Not that I was rolling a dice or had the sagacity/gumption on the Satyams case.

I would be too arrogant if I said Satyams case was not very surprising...what else will you be if you knew for sure the revenue recognition systems were doctored, the internal cost controls are negligible or altogether non-existant, the cash-flows can all be played up with help of Financial ponzis...

What was infact surprising to me is to see the former head of my alma maters sitting on the board and great valuation expert like Krishna palepu sitting on the board as independent directors...what did they think about their role when they accepted to be directors of companies...did it all make them look great on their resume...or they wanted to make some good money through the sitting fees...absolutely ridiculous....I cant believe people of intellect failing to decipher the scam going on around here...should I say they had no clue to what IT services is all about...maybe they were just sitting on board to understand how IT services companies work or dont work perhaps...maybe it helped them write a theisis or sponsor one based on some god known reasearch grants...

So here another episode of shareholders who know little abt IT taken for a ride on a Ponzi...What did they think when they invested in Satyam:

1.Cost saving thru offshoring is a route to perpetual earnings
2. Clients have infinite IT budgets and they'll come to offhsore vendors for IT services
3 Or are they after all wanting to hide their costs by siphoning out non-existant work or service to offshore vendors...

I'm sure we'll see more ponzis in our lifetime in IT....

Factors driving Output based pricing in IT Services

What are the factors that drive output based pricing in IT Services?

This is an interesting question client seem to be asking for IT services from vendors. Lets define the context for zeroing into the factors for output-based pricing. The context of our discussion is typical Application maintenance engagements with defined Service level metrics. Some of these factors that could be applicable are:

1. Price per ticket. To accomplish this the ticket has to be clearly defined and categorized:
a. Level of ticket (L1/L2/L3 definition,
b. Priority/Severity of ticket (P1/P2/P3),
c. Technical skill/experience required to resolve the ticket (Technical/Functional),
d. Timing when the ticket is raised for resolution
The best place to apply these is in the Application maintenance tickets.
2. Price per Service. To accomplish this the service has to be clearly defined and categorized using the same parameters as above. This is typically valid for Infrastructure based tickets, archiving, patch application, typical admin. tasks, pwd resets and so on.
3. Price per outcome/deliverable. This can often be applied for minor enhancements tickets such as price to perform a test based on defined test scripts, release/transport of objects to production, etc.

But to define all the above one needs to have control over the mean and almost negligible variance in resolving the ticket, providing a service or a standard estimates for outcome agreed by both the client and vendors/service providers.

We'll discuss the benefits of such a pricing model to client in a seperate thread...

Avenues are available to play more with this by providing options to client. Any ideas that you want to share. If you are interested to develop and share more perspectives on this mail me to sunil_raghunathan@hotmail.com...