Monthly Archives: October 2015

Alignment, Analysis, Markets, Strategy

Clouds

I’m having a little trouble getting started on this topic. With the number of articles already written about clouds in the various business publications, it seemed that it would be only a matter of time before I got around to talking about it. I am now paraphrasing a speech by Winston Churchill in that it appears: “Never has so much been written by so many and understood by so few”.

Churchill was of course referring to the RAF and the Battle of Briton early in World War Two, but this variation also seems somewhat apropos for the market battles looming for the hearts, minds and most importantly pocketbooks of corporate customers now as well as in the future.

I went out and tried to find the simplest definitions for clouds that I could. I did this for two reasons. The first is that there is already an incredible amount already written on these topics (as I noted above) and the second is that I am just the tiniest bit lazy and don’t want to have to rewrite all of it. You will notice this trend throughout this article. Here is what I came up with for “Clouds”:

1. The second studio album by Canadian singer-songwriter Joni Mitchell, released on May 1, 1969.
2. A visible mass of liquid droplets or frozen crystals made of water or various chemicals suspended in the atmosphere above the surface of a planetary body.
3. A service with any resource that is provided over the Internet. The most common cloud service resources are Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS).

I’ll skip the first two definitions for now, and focus in on the third one.

I think the evolution of the name “Cloud Services” actually came from the fact that it was difficult for technology companies to draw a “network” when using the early iterations of the Microsoft PowerPoint application for presentations. The simplest ClipArt icon that conveyed the idea of a network without having to draw in all the complexity was a “cloud”. That was what was used in all network related presentations. We all became familiar with it. Hence the cloud became synonymous with describing a network and cloud services have become synonymous with services delivered over the network.

The power of PowerPoint. If early iterations of the presentation application had contained interesting representations of multi-sided geometric shapes instead of clouds, it is possible that we might all be discussing “Polygonal Services” instead of “Cloud Services”.

Getting back to Cloud Services. Software as a Service (SaaS) is a software distribution model in which applications are hosted by a vendor or service provider and made available to customers over a network, typically the Internet. Platform as a Service (PaaS) refers to the delivery of operating systems and associated services over the Internet without downloads or installation. Infrastructure as a Service (IaaS) involves outsourcing the equipment used to support operations, including storage, hardware, servers and networking components, all of which are made accessible over a network.

The question that initially came to my mind when looking at all of these items “as a Service” was why would anyone want to do all of this over the network instead of buying the stuff and doing it the way that it had been done?

The answer seems to lie in the potential efficiencies that may be gained. Moving to “the cloud” focuses on maximizing the effectiveness of the shared resources. In the past each company and its associated users, had to purchase its own dedicated resources, whether it was software, computing or network infrastructure. Cloud resources are usually not only shared by multiple users but are also dynamically reallocated per demand. This can work for allocating resources to users across a single company, or multiple companies.

The claim is that moving to the cloud allows companies to avoid upfront infrastructure costs, and focus on projects that differentiate their businesses instead of on infrastructure. It is also claimed that the cloud allows enterprises to get their applications up and running faster, with improved manageability and less maintenance and enables Information Technology (IT) organizations to more rapidly adjust resources to meet fluctuating and unpredictable business demand.

Cloud computing is viewed as having become the vanguard offer for cloud services in that it can provide a highly demanded service or utility with the advantages of high computing power, cheap cost of services, high performance, scalability, accessibility as well as availability. Cloud vendors are claiming to be experiencing growth rates of up to 50% per year in this area. Cloud services are provided to an organization by moving away from a traditional CAPEX model (buy the dedicated hardware and depreciate it over a period of time) to the OPEX model (use a shared cloud infrastructure and pay as one uses it).

So, if the computing piece of corporate infrastructure seems to work in a “cloud” environment, then every piece of corporate infrastructure ought to work in a cloud environment, right?

I suppose this could be the case, but when I look at it a little more closely it seems that cloud based services are best applied to those capabilities that could almost be considered a commodity. In the case of cloud computing it is the basic amount of computing power and memory that are commoditized. In buying a cloud based computing service you purchase an amount of memory and a number of processing units, both of which could be considered commodities at this point.

By extension, there seems to be groups that are trying to commoditize other customer infrastructure aspects in an attempt, or in preparation for them becoming a cloud based service. If we think of routing as a commodity we end up with a number of bits (megabits, gigabits, etc.) routed per second. The same sort of approach would be applicable to switching. Pretty soon you may be able to take everything down to a function, instead of a platform or piece of equipment, and provide it as a service.

The question is when will companies and businesses be ready to look at their infrastructures, platforms and software in this way?

The most recent market analysis that I could find (from 2014 I think) shows that the total data processing market is approximately $115 Billion in annual revenue, while the Hosted / Cloud services portion of it is about $13 Billion (or a little over 11%) annually. While the portion of the computing market being served by cloud based solutions is a significant amount of money, it is still a relatively small but growing amount of the available market.

It is widely thought that computing services are the lead capability driving cloud services. That would indicate that other platforms, applications and pieces of infrastructure have not taken root in the cloud based structure and grown to the extent that cloud based computing has. That doesn’t mean that they won’t. It just means that they haven’t yet.

The market growth rate forecasts and estimates for Infrastructure as a Service (IaaS – computing, and other infrastructure capabilities) are reasonable, or at least it seems so to me. But when IaaS represents only 11% of the market, even a 50% growth as claimed by some suppliers only takes it to 15% of the market. Such is the next layer down analysis that must be done when such large percentage growth claims are made. Even at these growth rates and assuming there will be no slow down in its adoption, it appears that full Cloud Services market acceptance and utilization may still be a little ways off.

In other words, it seems that it is very wise to be aware of and prepared for cloud based services, but in the mean time it also appears that for at least the next few years the current capital based equipment solutions and services market systems will still be the majority market approach for business infrastructure, platforms and software. Cloud based services for these capabilities, for at least the shorter term will probably be a smaller, but potentially growing part of the market.

As Joni Mitchell said in the song “Both Sides, Now” on her 1969 Clouds album:

“I’ve looked at clouds from both sides now
From up and down, and still somehow
It’s cloud illusions I recall
I really don’t know clouds at all”

Wow. She wrote that forty six years ago. I’d say that’s pretty good but then I always liked Joni Mitchell.

Analysis, Differentiators, Leadership, Performance

Cost Plus

Do customers really care what it costs a company to provide a good or service to them? We have all heard that the vendor – customer relationship is supposed to be more like a partnership these days, but does it really? How much more would a customer be willing to pay to have that partnership? Do we really care what the cost of the car is that we decide to buy, and by extension how much that automobile manufacturer makes on each car we buy? I don’t think so. Do we really want to have a “partnership” with that automotive manufacturer, or do we just want to buy a car? I think people, and companies are more concerned about the price they pay and the value they receive for the good or service, more so than the cost the provider bears to provide the good or service.

I think this is a pretty interesting distinction. Customers are concerned with a supplier’s price, not with the supplier’s costs. Customers are concerned with the value they perceive they will get from the good or service, not the profit (or possibly lack thereof) that the supplier will recognize from the sale. In short, costs and associated profitability are an internal supplier issue, and prices are an external customer issue. In short it seems that it is the customer’s decision on whether or not they make the purchase decision, and it is the supplier’s decision on whether or not they stay in business.

I will look at a couple of examples to illustrate this point. People do not seem to care how much Apple makes on its iPhones or Macs or any of its other products. Apple is hugely profitable. They make an incredible amount of money on every product unit they sell, yet every year we see people line up (or even more unexplainably, camp out) in order to get the next new iteration of Apple’s products. They willingly spend the money. They don’t care how much Apple is making. They perceive the value and make the purchase. And every year Apple creates a new iteration of the product to feed this cycle.

On the other end of the spectrum, people did not perceive the value proposition of the products being produced by Studebaker, American Motors, Chrysler and General Motors at various times in the past. They didn’t care that these companies were not making enough margin on their products to remain in business. They did not like the designs, the quality or the prices enough to pay what the manufacturers needed to stay in business. Studebaker and American motors are long gone. Chrysler and General Motors would also have departed were it not for governmental intervention.

Economics teaches that the market sets the relative price for all readily substitutable goods and services. This price point is usually referred to as the intersection of the “supply” and “demand” curves. Unless you can influence or control the supply curve, you are pretty much at the mercy of the market when it comes to the price of the good or service.

Aha! You should be pointing to the fact that Apple does not control the supply of smart phones into the mobile phone market. As such, how can they set their price so high and make so much money? The answer here is that Apple does not in fact control the mobile smart phone market. Apple controls the supply of iPhones in the mobile smart phone market, and it has been shown that more than forty two percent of people buying smart phones want an iPhone.

While other manufacturers might like to try and convince the market that their product is a readily substitutable alternative to the iPhone, it looks like they have not been entirely successful there.

While on the other side of the example, it has been shown that one manufacturer’s car can be substituted for another’s. We have seen this in the branding and segmenting that goes on in the automobile market. Segmenting is a process where a very large market is in essence broken down into several smaller market segments. That is why we have “economy” cars all the way up market to “luxury” cars.

It may not be logical to expect that a Hyundai is readily substitutable for a Mercedes-Benz, but it could be expected that a BMW, Audi or possibly a Cadillac, could suffice. It has been shown that there are certain brand loyalties in the various automotive segments, but as market trends, automotive designs and prices move, these can be overcome and new loyalties established.

However the point remains the same. Customers are not so much concerned with the cost of the Hyundai, Mercedes, BMW, Audi or Cadillac. They are concerned with the price. And even more specifically the relative price and the relative perceived value. A person looking for a “luxury” car could buy a cheaper “economy” car for a lower price, but would not receive the perceived value they want. Conversely an economy car patron might want a luxury car, but can’t afford it.

So now the question that this leads to is:

If customers do not care what the supplier’s cost for a good or service is, why do so many suppliers create their customer market pricing based on their internal costs associated with their good or service?

This is known as “Cost Plus” pricing.

If it is the market price, or the relative competitive market price that is of primary concern to a customer, why would a supplier base their prices on their costs, which are irrelevant to the market? If you are a low cost supplier and use this method you could undershoot the competitive market price and forego significant revenue and margin. You can bet that Apple did not make this mistake, judging by their revenues and earnings reports. They saw the price the market would bear and adjusted their price upwards accordingly. They are letting the other suppliers try to compete on price.

On the other hand, if you are not the low cost supplier, but rather a less efficient higher cost supplier, basing your prices on your costs could bring you in well above the market price. While Apple may be able to sell its products at a premium, I’m not aware of too many other suppliers that enjoy a similar market position. You can ask the extinct Studebaker or American Motors how that higher cost versus the market price thing worked out for them.

I guess Oracle might be another company that tries and somewhat succeeds it setting its own market price. Larry Ellison, the CEO at Oracle has always done things his own way. But then again, he likes to build yachts to race in the America’s Cup (a really expensive pastime) and he does own his own Hawaiian island (Lanai) so he must have figured something out.

The major difference between Apple and Oracle is that I am not aware of anybody that “likes” Oracle the way the like Apple (they are rarely, if ever mentioned in the same breath), and I have never seen anyone line up in the street to be the first to buy the latest iteration of Oracle’s database systems and applications.

“Cost plus” pricing assumes that a supplier has a competitively based cost structure. This may or may not be the case. Regardless, the market doesn’t really care. What the market (and the associated specific customers) cares about is the price and the relative perceived value that is derived from the good or service.

Those goods and services where there is a perceived high value and not a readily substitutable alternative can and do charge a premium in the market regardless of their cost structures. Those goods and services where there is a perceived readily substitutable alternative, regardless of the market value, can only command the market price, also regardless of their cost structures.

It seems that the only times that cost plus pricing can be used is if the supplier has a competitive cost structure (which will be difficult to ascertain since suppliers rarely share such information), or if the supplier controls the supply of the desired good or service, in which case the supplier can price in any manner they choose include cost plus methods.

In most other cases suppliers need to be cognizant of the prevailing market prices and trends, and strive to keep their costs reduced so as to retain their profitability at those market pricing levels.

Accountability, Achievement, Leadership, Self Analysis

Credibility

Let’s make certain that we are all on the same page from the start here:

Your personal credibility is the currency that you use for all of your business transactions. And like any other currency it is subject to many events and actions that can affect its value. Just like the value of the Dollar can fluctuate with respect to other currencies, the amount of credibility attributed to you can also fluctuate with respect to other leaders.

I had just read some article about writing that said something to the effect of “write killer first sentences to make sure you hook your readers into your story”, and thought I would give it a try. Somehow it doesn’t seem to have me hooked, but then again I’m writing this instead of just reading it. I await feedback to see what the rest of you think.

By the way, I didn’t finish the article. I guess I wasn’t fully hooked.

Despite the somewhat ham-handed introduction I want to look at the role that our credibility plays in business and leadership. I think it is important in that our personal credibility can be the difference between “compliance” with our requests and directives, and “commitment” to our leadership. Compliance occurs because you may inhabit a role where others who report to that role must respect the requests of the “office”. Commitment occurs when the transition is made from aligning with the requests of the office to aligning with the requests of the person in the office.

It’s subtle, but significant.

Credibility is a pretty strange concept. You can increase your credibility by doing incredible things. On the other hand you can decrease or even destroy your credibility by claiming to be able to do incredible things. Credibility is somewhat similar to a retirement or savings account. Credibility is built up over time with continually reinforced deposits. It is added to slowly over time. However it can be destroyed or fully withdrawn as the result of a single, poorly planned action.

Your credibility is based upon other people’s beliefs in your abilities.

Think about that for a minute. Your credibility is not entirely based upon your abilities. Your credibility is not entirely based on what you think you can do, or even on what you know you can do. It is based on what you have done and other people’s opinions of your abilities and what you have done. This idea can lead to multiple mismatches within the business organization.

You can believe you are credible, when others don’t. You can believe someone else is credible when others don’t. You can believe someone else lacks credibility when others ascribe credibility to them. All of these situations can add to the complexities already infesting the business process.

Many items contribute to people’s opinions. It is not just what they observe, but also what they are told, what they hear, and how it is presented. It is also based upon what people want to believe as well. People are required to sort through a blizzard of information on a daily basis. While we all strive to be as objective as possible, sometimes based on the inputs we have received it may be difficult. Such are the vagaries of credibility.

I guess that sometimes credibility doesn’t seem to matter. As I have noted before, we have all been through the various political election seasons where various politicians are contending to see who can appear to be the most credible while claiming to be able to do the most incredible things. This would seem to violate almost all of the precepts associated with credibility, but such is the case for politics. This seems to be a case of who can tell the most people what they want to hear, and not so much what they need to know.

However there are those in business that can also be described as being politically astute. I think that may be where the term originated with respect to business performance. We all know these types. They are more capable of being able to tell people what they want to hear and not so much what they need to know. We look upon them with a mixture of both derision and jealousy. They are able to take what appears to be failure and position it as success. They can take the smallest success and spin it as a game changing moment in business. They seem to be able to create credibility out of almost nothing at all.

Personally, I prefer to see the data.

Here in lies the issue with credibility. It is almost always a personal preference issue. By telling someone something that they want to hear, no matter how outlandish or impossible you can increase your credibility with that person. At the same time there may be those that recognize the implausibility of those statements and will accord a decrease in your credibility because of them.

Every time you say something or do something in business, you change your perceived credibility. Statements are interesting in that they can affect your credibility twice: once as they are first made when people can consider the relative plausibility of them, and then again a second time when the result of the statement can be measured out against the reality of the business performance.

It is somewhat interesting to me in that the credibility associated with actions can only be measured once, when they occur.

It is the action in business that is the credibility defining event. Promising huge growth, or market defining strategies, or game changing products are all well and good. We have all seen many such announcements. It is the delivery of growth, the implementation of strategies and the introduction of new products that define the true credibility. Sooner or later all statements or claims will eventually need to be backed up with performance and attainment.

We have all seen the effect of setting expectations in the valuations of companies in the market. During the quarterly earnings announcement times the company’s actual performance is measured against the markets perceived expectations for earnings. Those companies that consistently “miss” these expectations tend to be priced lower, because the expectations that they set lack credibility.

In short credibility is based on doing. It can be based on doing what you say you can do, but the key aspect is the doing. Meeting the deadline. Achieving the goal. Doing it almost as a matter of course. It seems that Tom Peters, the co-author of the book “In Search of Excellence” has been attributed as the first to coin the phrase:

“Under promise, over deliver.”

It sounds simple to do. If it was, everyone would have a high credibility rating. The reality is that not everyone ascribes to this approach. That’s why we have “marketing”.

Many things go into the credibility that you are accorded. Your level of confidence, how you position or phrase things, it may even be somewhat indefinable as in “charisma”. In the final analysis the end result of what you do will be the primary contributing factor to your credibility. If you are recognized as someone who does what they say they will do, then over time you will build credibility. If that is not the case, you will very quickly lose credibility. And once lost, credibility is very hard to regain.

I wish I could think of a short cut to generating credibility, but I can’t think of one right now. If someone else claims to have one, I might question their credibility.