What a great quote I came across through my CEO, Tony Nemelka.  He attributes it to Foundation partner Bill Elmore’s daughter. 

You couldn’t ask for a better definition of strategy.  And in fact, this definition is all about what Marc Andreesen’s Product/Market Fit concept seeks to accomplish.  A company that has achieved a proper Product/Market Fit has made Winning Easy.

it also applies to the old adage that startups need to fail fast, adjust, and then try again.  The definition of fail is determining that winning is still too hard.  When you get some easy wins on a consistent basis, you know you’ve found the right strategy.  Double down on it and exploit it as far as it will go. 

The potential pitfall of winning easily is you may have a strategy that works for a pretty small market.  At some point you’ll exhaust it and winning will no longer be easy. 

That’s why you have to keep trying new strategies even after you’ve found one that makes winning easy.

Is your company’s strategy making it easy to win?  If not, maybe it isn’t really a strategy after all.

That new generation I talked about in my last post on the HP/EDS deal is coming faster than ever it seems.

Workday has landed a 200,000 seat deal with Flextronics, marking the biggest SaaS deal ever.  That’s a definite shot to the On-premise wheelhouse.  Given that it’s a Human Capital Management deal, it’s also kind of a shot in the wheelhouse for the other SaaS HCM vendors like Taleo and SuccessFactors.  The system replaces 80 disparate HR systems deployed in 30 countries.  This is the kind of job SaaS is ideal for.  Getting through such a blizzard of legacy systems takes some real streamlining if you’re going to live to tell of the story.  The savings potential on such projects is enormous, but the risks around a conventional On-premise install are what led to the phrase “boiling the ocean”.  Choosing SaaS minimizes that risk.

Another fascinating aspect of the deal is that a lot of the impetus to go Workday had to do with how easy it is to customize the system.  Flextronics CIO David Smoley had this to say:

“What we’ve seen with object databases, is it gives you an incredible amount of flexibility in how you access and manipulate data, which translates into a much more powerful ability to create interfaces with less technical people, and update and modify as necessary,” he said. He likes that Workday will “create and maintain interfaces [with benefits providers or other partners] so that customers don’t have to.”

Other factors included off-the-shelf integration with providers of employee benefits (integration has played out before as a huge competitive opportunity for SaaS players), and the realization the HCM software is not really an area of innovation for companies, so why not go SaaS?

What does all this have to do with money man Carl Icahn?  Mathew Ingram says it means Yahoo has hit the big time, or at least that’s what his headline implies.  I think it’s a good deal less pleasant than that.  If a pure money man who made his bones making moves on companies like RJR Nabisco (aka Barbarians at the Gates Nabisco), and other low tech properties is interested, it means he thinks you’ve got an easily understood commodity business that’s only good for flipping to the next highest bidder.

Traditionally these characters have avoided the world of High Tech out of fear they couldn’t understand the business, sustain the innovation, or manage the geeks.  You know you’ve got another version of the New Generation phenomenon if they come knocking at your door.

Evidently Icahn has managed to acquire about 50 million shares of Yahoo and is contemplating whether to launch a proxy war for control of the company.  This guy helped define the term “corporate raider”. 

Much hullaballoo in the blogosphere over this acquisition as one would expect from a major transaction like this.  The pundits can’t decide whether it is too small to place HP on a plane with IBM for services (“They should have bought Accenture or one of the offshore players”) or whether it is too big and eye-off-ball for what should be HP’s main mission–software.  From HP’s perspective (make that Hurd’s perspective), the deal is a slam dunk on the numbers.  What that means is that it is obvious to the HP planners how to cut costs so that EDS becomes a profitable new jewel in HP’s crown.

As I sorted through all the write ups, I couldn’t help but be struck by the similarities with Oracle’s acquisition game and how this all relates to the Big Switch (Nick Carr’s term for a movement to Cloud Computing) for IT.  I come away with a sense that EDS was struggling a bit, swimming against the current as it were.  This is not unlike the legion of On-premise software companies that Oracle has snapped up.  They weren’t exactly failing, but they were tired swimmers and it looks like the current will only grow stronger.  EDS is very much the services equivalent of a Peoplesoft or Siebel in this sense. 

When faced with a major paradigm shift, big companies have to decide whether to double down and invest in keeping up with the shift or whether it makes more sense to fold.  Folding is advantageous for the biggest players who can scale through M&A and do so profitably by cutting from their acquirees.  Cuts are straightforward once the mission changes from profitability to growth.  Just think how many projects your own company has going on that are future-focused and haven’t reached critical mass.  Nearly all of these will be ended together with the usual infrastructure cuts (we don’t need 2 finance departments, 2 HR departments, 2 CIO’s, yada, yada).  So HP and Hurd, and Oracle/Katz/Philips can do what they do best and act as shrewd number-crunching consolidators.  It’s all part of making the market relentlessly more efficient.

It’s not a bad deal for HP.  Protestations about acquiring Accenture to the contrary, they now become the #2 IT Services provider.  Apparently there is some synergy in the area of automating data centers–EDS was the largest customer for HP’s OpsWare suite.  Automating data centers is a good cost reduction move for IT, but it still can’t compare to the 16:1 cost advantage SaaS brings.  Companies will likely always have some activity requiring their own datacenter, but smart companies should be working to reduce that with SaaS as much as possible, hence there could be competition for a dwindling pie here at some point.  And, as Jeff Nolan writes, there is also the opportunity to bundle in other HP offerings, especially hardware, with EDS’s outsourcing business.

Who knows, maybe HP can push this into a higher level strategy to get into the Cloud Computing game on their own.  Certainly EDS has been very active in the application outsourcing business, but historically that’s been an ASP’s game and has not been very competitive against true SaaS offerings.  Dana Gardner seems to feel this is exactly the right move when he says:

HP with EDS has now clearly staked its future on the top prize in IT: next-generation IT operations efficiency, proper outsourcing methods, cloud computing services management, and high-level consulting as the onramp. This amounts to business transformation via IT transformation via IT multi-sourcing.

I’m a little less enthusiastic.  Being an admitted card-carrying member of the SaaS religion, this all feels like a bit of rearranging the deck chairs more so than actually addressing the Cloud Computing threat.  I am respectful enough of Mr Hurd’s (and his lieutenant’s) expertise not to see this move as a bad thing at all, it just feels more short term/tactical/number massaging than big bet/long term/game changing.

Some folks I was chatting with saw this as another signal that the IT world has fundamentally changed, that IT is now a commodity, and that the future is what Oracle and HP are doing.  In short, there’s little hope for smaller companies and innovation.  Someone else in the conversation observed that most of the Big Enterprise plays made their bones with big customers. The SMB market cannot afford to do things that way, and it’s a huge market. SaaS can tap into it very effectively.

Whether the new generation is going after a fundamentally different market, or whether even the old market is headed for the new generation, I don’t see things as “total commoditization and less opportunity” at all.

One generation is mature, and a new generation is off and running, growing like weeds.   I would hate to be at an on-premise perpetual license company right now.  Even mighty Oracle eventually was unable to innovate, they were unable to take much share with their apps business, and so they needed another alternative.  SaaS was closed—the business model was absolutely corrosive to Oracle’s existing model.  What to do?  Do what the last guys did when client server was eating the prior generation’s lunch.  Follow the CA model.  Become the hostel for over the hill software (and services it seems) companies.  Get some smart investment banking or financial executives on the team and you’re off to the races.

The real question here is what happens when the M&A feedstock runs out?  The consolidators are in a race to keep their M&A currency high (PE or Sales/MktCap, your pick) while acquiring stalled companies with lower valued currency.  Will it enable them to transition to SaaS by buying their way in through acqusitions?  Way too early to tell, but these guys are stuck in the cross hairs between open source and SaaS any way you look at it.  The good news is they’re really smart and have played the game incredibly well so far.

It’s funny to ask people who the big software companies were before Oracle, SAP, et al.  Huge empires can vanish in the mists of time surprisingly quickly when the new model is compelling enough.  Why wouldn’t SaaS and the rest of the Cloud Computing montage be at least as compelling as the Client Server wave that made Oracle what they are?  What we’re principally missing so far is the double witching hour of growth acceleration that included Y2K and the Internet Bubble.   Perhaps not having those urgent events will provide enough time for the old school to morph gradually enough this time.

I try hard not to stray into politics or religion in this blog, but recent posts by Mike Loukides on O’Reilly and now Larry Dignan chatting with Vinnie Mirchandani about the constituencies a corporation serves and the relative value of each force me to step close to the line.  I confess neither posting sat very well with me in terms of balance.

First, Mike Loukides didn’t even mention the customer consituency in his post which was title, “The Corporation’s Two Bodies.”  Is it any wonder that sometimes investors or employees can forget one of the other constituencies in the heat of trying to get what they think they’re entitled to?

Vinnie, by way of Larry, starts out on a good track by asking whether Technology companies cater to Wall Street interests too much at the expense of a good strategy.  SaaS presents us with a brilliant example there.  Most conventional public software companies are incredibly hobbled in the pursuit of SaaS because of the fact that it delays revenue but not expenses so that a company in transition to SaaS suddenly looks like it is doing very poorly according to Wall Street’s yardsticks.  But then Vinnie crosses the line for me when he asks whether the customers and employees are more important than the shareholder interests.  He suggests that there are outcomes that are great for employees and customers and terrible for shareholders that actually really good.  And finally he asks why we listen to Wall Street when they can’t seem to manage their own business, given the woes with the ledning system.

Of course it’s the Microsoft-Yahoo (shouldn’t Yahoo’s name come first?  the fact it almost never does tells us something) drama that brings this nascent topic to the surface at this moment in time.

First, there is a lot of knee jerk in these posts.  Many scenarios are presented and acted on in isolation of a real doctrine or philosophy to guide judgement.  It makes for interesting reading, but it’s situational ethics, which seems to me is something the writers would think of as the shareholder’s dangerous modus operandi.

So, let me put forth a philosophy or point of view.  Each of these three consituencies has made a contract with the corporation:

– The employee will work in exchange for his wages and benefits.  She may receive stock options, and hence be made a shareholder of sorts, although most shareholders who buy long shares see the options as a very cheap way in.  Put that aside, there is a fair bargain that was entered into by both parties.  Services in exchange for consideration.

– Customers receive a product or service in exchange for whatever the company is charging.  If they work on an advertising model, the payment is in the form of attention (from the good ole attention economy).  More typically, cash is the medium of exchange, although many things are certainly possible.  A customer might contribute content or there may be a barter system of some kind in place.  But, once again, there is a fair exchange agreed to by both parties.

–  The evil investors (I call them evil because the posters above seem to view them as such) have also agreed to a fair exchange.  They have provided investment capital to the company in exchange for their shares.  This was done in the expectation that the shares would appreciate and hence the investor could make a profit. 

That’s pretty straightforward and above board.  Now let’s look at some of these terrible scenarios in light of the bargains made.  I want to understand who is breaking their bargain, because to me, that’s the source of the problem.  For a particular constituency to simple expect the bargain they made be upheld seems to me entirely reasonable, and not evil after all.  Can you see where I’m going?

Start with what set Mike Loukides off.  That was The New York Times quotes Laura Martin of Soleil Securities, as saying “This is management putting its employees and its job security ahead of current Yahoo shareholders’ interest.”  Well sorry Mike, but aren’t the investors simply reminding the company that a bargain was struck and that in their view management is now ignoring that bargain so that one of the other constituencies gets a better deal?  Of course Loukides immediately blows the shareholder position out of proportion by suggesting, “Where did the notion arise that management’s sole responsibility is to its funding sources?”  But that’s just puffery.  How was management being asked in any way to make its funding sources their sole responsibility?

So too with Vinnies remarks (again via Larry Dignan):

– Isn’t what a company does for customers and developers (employees) more important than shareholder interests?

Why is it more important Vinnie?  When the bargain was made, the company wanted the capital.  It did not make a bargain that says, “You can put in this capital, but you’re going to take a secondary role to customers and developers.”  Such bargains are possible.  Two tiered stock schemes say essentially that, as does subordinated debt.  But that wasn’t the bargain made.  Let me turn the question around.  Why should shareholders be asked to forget the bargain made with them so that a the other constituencies can get more than they bargained for?

–  Why listen to Wall Street at all? 

Oh come on, that was uncalled for.  There certainly are no end of folks in any of the three constituencies whom we could conclude are indicative that we should never listen to an employee or a customer by this logic.

Larry’s examples of why it’s bad to honor the contract with shareholders are equally as uncompelling to me.

– Microsoft-Yahoo:  Most of the world seems to think both Microsoft and Yahoo ought to do something.  Shareholders are voting with their own pocketbooks what that ought to be.  Am I now suddenly not entitled to sell my shares and make Yahoo’s stock go down if I don’t like their strategy?  Makes no sense.

– AMD:  Same story as Microsoft-Yahoo.  I get to vote with my shares.  It’s a free market.  What could be more democratic and less evil than that?  Moreover, I get to speak my mind to management.  Again, where is the evil there?  Lastly, part of the bargain inherent in the governance of the company is I get to vote the board.  Why should you be allowed to change the bargain I made and have already paid for because you happen to like their product?

– Amazon:  Taken to task for making investments that involved too much capital spending and resulted in lower share prices when that wound up being Amazon Web Services, a really good thing.  Let’s be real, it was a really good thing in 20/20 hindsight.  The investors never heard about it nor bought into the vision.  They just saw lousy profitability compared to similar businesses.  And they voted their shares.

It’s times like these when I am reminded of this quote:

“It has been said that democracy is the worst form of government except all the others that have been tried.”
Winston Churchill (1874-1965)

I might paraphrase it in this way:

It has been said that capitalism is the worst form of economic system except all the others that have been tried.

But there is a good one for that too:

Capitalism is the unequal distribution of wealth.
Socialism is the equal distribution of poverty.

A good corporation will honor the bargain made with each constituency and not at the expense of any constituency.  Perhaps that’s a good interpretation of a “do no evil” corporate charter.