Reforming Microsoft

  Quickly: It's good for Microsoft that it didn't buy Yahoo -- now it has to reform itself.

Steve Ballmer unintentionally dodged a bullet today when the Yahoo/Microsoft deal collapsed. Yahoo + Microsoft would have been a disaster -- the best and the brightest from Yahoo would have gone to Google, the culture clash would have been destructive, it would have put Microsoft back in the sights of the regulators. And Yahoo wouldn't have helped Microsoft with its biggest task at hand -- adapting to the emerging executable Internet software model.

Without a quick fix, Ballmer now has to truly lead the company through a painful and arduous period of reform -- he can't just write a check and get the company back in the game. In its scale I would put the required change right up there with IBM in the early 1980's, moving from mainframes to distributed computing, Intel in the 1970's going from selling memory to selling microprocessors, and IBM in the 1990's moving into the services business.

What must be changed at Microsoft? First and foremost, the financial business model. The company has been running at net profits in the mid-20s for decades -- a product of the company's monopoly position in several important markets. To redeploy assets and strategy, the company will have to re-direct investment, lowering net profit into the teens, at least. But that's just a start. Ballmer will have to reform: the culture, the people, the company's speed, how it sees software (it's not on shiny disks anymore), its design sense, its quality standards, its tired and annoying strategy of migrating its customers through predictable software versions, its old method of developing software (which produced the Vista flop). Ballmer's got a long way to go -- in his email to employees explaining why Yahoo got dropped, (available on Todd Bishop's Microsoft blog), he spoke in the vaguest of generalities about strategy change.

Ballmer has time (I'd give him four years given the company's sustained control over the desktop) but he's going to have leave the Microsoft of Bill Gates behind and create a new company according to his own vision. If he doesn't begin to move, Google is going to use its citadel of advertising to attack Microsoft's heart -- software. Advice to Bill: give Steve the space to change the company.

I'll be writing more about Microsoft's future in some upcoming posts. I'd love to get your thoughts about how, why, if Microsoft should change.

A favorite book: The Logic of Failure

If you're in the business of running a company, a large team, an acquisition, or a data center, check out this book. The full title is: The Logic of Failure: Recognizing and Avoiding Error in Complex Situations. It's written by the German psychologist Dietrich Dorner.

The thesis: "...we have been turned loose in the industrial age equipped with the brain of prehistoric times." Simply stated, most human beings are terrible at managing complex systems. Dorner's students run a model of a small fictitious African village -- changing variables like cattle stocks, food stores, arable land. Invariably the students kill off the entire "population" through their miss-planning

As it turns out, good managers of complex systems showed common approaches:

1) They started by laying out clear, measurable goals -- they didn't just jump in and start pulling levers. 2) Good managers acted "more complexly." Their decisions took different aspects of the entire system into account, not just dominant factors. 3) They tested their hypotheses. The bad participants failed to do this. Instead of generating hypotheses, they generated "truths." 4) The good participants asked more "why" questions. 5) They showed high capacity to tolerate uncertainty. They didn't get caught up in the "methodism" of bad managers.

Dorner gives advice to managers of complex systems:

1) State goals clearly.
2) Establish priorities, but don't cling to them.
3) Form a model of the system.
4) Gather information, but not too much.
5) Don't excessively abstract.
6) Analyze errors and draw conclusions from them for reorganizing thinking and behavior.
7) Develop common sense.

It's a rather technical read at times, but very instructive. Dorner's lessons are all the more fascinating given the management of recent history (e.g., Iraq).

Confessions of a two month CEO blogger

At the Forrester Marketing Forum in LA, held on April 8-9, I gave a short presentation on my first two months of blogging. Many of the marketing executives in attendance are urging their CEOs to blog -- I thought my early impressions might prepare them for CEO reactions. Here goes:

Number One: "No one is reading my blog -- my out-sized ego can't take it." Prepare your CEO for a slow audience build.

Number Two: "Once a week? I'm too busy trying to run the company to do this." Yes, one post a week may only take a few hours -- but "...getting into the conversation" -- reading and commenting at other blogs -- what all experienced bloggers urge you to do, will double the time required.

Number Three: "The technology sucks." Blogging technology is shockingly crude. Get ready to give your CEO tech support -- even around the fundamentals like getting a picture into a post.

Number Four: "I'm not getting anything back." This is the corrollary to Number One. I often feel like I'm on a one-way phone conversation -- I talk, but there's no one listening. I lust for value-filled comments that will improve and drive my ideas. With time, they will come.

Number Five: "Where the hell is the money in this thing? Why are we giving this away for free?" I get it -- that if you blow pizza smoke out into the street, people will come in and buy pizza. But other CEOs may have a tougher time justifying the commitment of time and resources to blogging. Get ready to make a tangible ROI case.

The China Bubble

Quickly:  Conventional wisdom glosses over China's limitations and problems.

Roger Cohen's starry-eyed China tribute in the New York Times is emblematic of the runaway euphoria surrounding that emerging economy. Threat to America…threat to Asia…ready to overtake Europe in the next 10 years…exploding – the gold rush place to be...450 million cell phones…becoming highly creative and innovative…the new model…the future.

Much of the China hysteria feels like the Japan fad from the late 1980s. In that era the press and the experts babbled about the Japan threat, complete with how that country would beat the West in quality, cost, business thinking, discipline, worker productivity, creativity, cars and chips. Japanese companies were buying U.S. companies, the Japanese economy was booming, square feet of Tokyo real-estate were priced higher than middle class American homes. The next century was going to the Japanese century, not the U.S. century.

Oops. So beware purported threats from the East without full knowledge and common sense analysis of all of the factors at work. Such as…

We’re talking about a communist nation here sports fans. A vibrant, adjusting, fast-growing, free economy cannot exist in a society that is governed by a totalitarian regime. Government-controlled economies ultimately breed bad business decisions, poor application of capital, and the miss-match of people to leadership positions. Capitalism grows best in the rich soil of democracy -- something the China cheerleaders at GM and Goldman Sachs have conveniently forgotten.

Free economies run on transparent and trusted information. That's hard to attain when bureaucrats are filtering the Web. According to a Forrester 2006 survey, Chinese consumers have drastically lower trust in TV, newspapers, and the Web than consumers in the U.S., Japan, South Korea, Australia, and India.

Yes, it’s 1.2 billion people. But it’s truly only 300 million people in the eastern coastal metropolis’ that are driving the phenomenal growth in the country. 500 million peasants in the west are untouched by the newfound prosperity. Chinese history is punctuated every 150 years or so with a peasant revolution.

Then you have half of bank loans non-performing (shades of Japan), a floating, but controlled currency engineered to keep exports flowing, an immature rule of law, an incomplete infrastructure (sure you could sell 200 million PCs in China, but half of them won’t have power), and the persistence of bribery and other trust-eroding business practices.

Don’t get me wrong, I’m a believer in China’s emergence as a world power. But I am skeptical that the country can 1) sustain its present trajectory without near term trips and falls, and 2) grow to play at the same level as the U.S. and the EU unless it embraces major structural changes – primarily political.

So let’s not lose our heads. China up? Yes. China as number one or even number two (after the EU) within 20 years? No.

Not an IT/BT recession

I was at a Forrester event on Wednesday with 50 $1B+ CIOs and Enterprise Architects. When I asked the group whether they thought we were in a recession, three fifth's said "yes." Then I asked whether they thought their tech budgets would be cut this year-- one fourth said "yes." And one smart ass CIO said, "Hey my budget always gets cut -- nothing will be different about this year."

What it means:  While Forrester has lowered its estimates of tech spending increase for 2008 from 6% to 3%, the climate doesn't feel cold for IT/Business Technology. Projects are moving ahead, new Services-Oriented Architecture re-builds are in flight, green IT/BT data centers are breaking ground, server upgrades continue apace. So much fat was extracted from corporate technology teams in the 2001-2003 IT depression that now they are performing with high ROI and high efficiency -- which may be the best buffer from meltdown in 2008.

Is a secular recession here? I think the answer is "yes." For tech, I believe it will be a mild slowdown.

What do you think? IT/BT recession or not?

Advertising's Limits

Quickly:  Advertising's limitations will put a lid on the "free" economy.

Chris Anderson's article in the latest issue of Wired claims that Web economics will drive almost all content to be "free," funded by advertising, cross-subsidies, etc. While this is an obvious conclusion given Google's run, advertising has its limits:

1) The value of time. Advertising wastes time, requiring more clicks, more screens, more waiting. In an ever-wealthier world, consumers will be willing to place a premium for advertising-free content that can be accessed and absorbed quickly.
2) Cognitive pollution. Advertising brings no learning, teaching, or valuable advice. In a future that will highly value sharp IQ, over-exposure to ads will dull the mind.
3) Objectivity. Why don’t top scientific journals, Edgar, and the Congressional Record carry ads? Because their value lies in impartiality.
4) Form follows ads, not function. Yahoo and the Economist are built to deliver advertising, not to deliver value. That's why Yahoo offers value-light sidebars that attract the reader to click away to another page (and another ad-impression). Have you ever read an Economist article that could have been summed up in a short paragraph? Instead you had to read through paragraphs of filler as the writer drags you through pages of ads. Google search hasn't substantively changed or increased in value in years -- because the company is stuck in its ad-driven business model. 

What it means one:  Anderson is half right. Many are willing to sacrifice time and attention to get their content free. But a growing market will pay to get just what they need, when they want it, with few or no ads.

What it means two:  Technology giveth, but it also taketh away. As advertising proliferates, so will ad-killer software, challenging the economics of "free." The guerilla war will be never-ending...

What it means three:  Criticality of information on the Web will push out ads. Why aren’t there ads on Wall Street trading systems? Why aren’t they on first-responder radio links? Because users of those systems have critical jobs to do – ads divert them from those jobs. As more mission-critical systems pervade the Web, think subscription, not ads. See Bloomberg.

What it means four:  Human activity that requires completeness of thought or unimpeded concentration will eschew advertising. That’s why books do not carry ads.

As the Internet moves from its file-based, Web structure (which is well-suited to the ad model), to a more executable architecture (more like a lively, real-time conversation – check out what I’m talking about here) new types of mission-critical content will find its way on-line. And much of that information will be paid for with hard dollars, not advertising.

IT saves GM?

Here's the lightning account of what's happened at General Motors over the last ten years. The company lead all automakers in cost. Even though its IT was outsourced, it ignominiously sported the most expensive IT costs per car. Enter Ralph Szygenda as CIO with the charter to fix the mess. Ralph (along with then CEO Roger Smith) realized that they had to change an out-of-control decentralized culture in which every brand did things their own way. So Ralph didn't focus on tech -- he centered on standardizing process -- designing, engineering, manufacturing, and selling vehicles the same way, all over the world.  The results have been amazing: costs down, quality up, speed increased. With a single process language the company can now design a car in China and build it in Detroit. It has gone from total decentralization to global in the space of a decade -- an amazing achievement for an organization of its size. In contrast, Toyota's manufacturing is global, but its design and engineering remains primarily centralized in Japan.

What's notable about this case, and a big lesson for CIOs in complex businesses like discrete manufacturing, is how Ralph didn't see himself as the guy who bought routers and configured servers. He saw no daylight between technology and process and he threw he and his team into harm's way -- into the business of the business, to paraphrase Calvin Coolidge. Technology is only half the job of the CIO, according Szygenda, even though most CIOs spend most of their time there.

So now it's put up or shut up time at GM. The company has solved its legacy problem (employee and retiree insurance), standardized process, and rationalized IT. It's done the ditch-digging to get itself back in the game. As Ralph puts it, "Now we've got to design cars that consumers want." It must win back customers that it has lost to Honda and Toyota over the last 15 years -- and impress and attract a new generation to its products. Bob Lutz and other senior designers have a perfect opportunity to wage an amazing comeback. If that happens, IT should and will get credit for the GM renaissance. If the designers fail, an extraordinary opportunity will have been wasted.

Social Sigma

Under Six Sigma, companies gradually improve process to enhance the quality of their products. With Social Sigma they use feedback from social networks to improve products.

Two great examples.

1) Credit Mutuel, the second largest retail bank in France, has been drafting its customers into product improvement through a program called, Si j'etais banquier -- "If I was a banker." The bank has recorded more than 50,000 suggestions, e.g., "If I was the banker, I'd explain the fees in clear terms." and recently let customers vote on the top 30.

2) GM's Fast Lane blog carries some amazingly straight-up conversations about GM's cars and trucks. Bob Lutz, the company's chief designer, uses the blog to hear firsthand from customers about design, quality, and product problems.

Product design and R&D will become much more of a continuous conversation -- not a black box, "Here it is!" process. Products will be revised under much tighter schedules, with obvious product errors corrected in new versions.

Why does Social Sigma work? Because the social network for a company is trusted and interested -- they have a stake in improved services and products and have built-in incentive to contribute time and ideas to the cause.

Companies who fail at Social Sigma will claim to be listening but will fail to incorporate ideas from the social network into its products. They will be faking it -- and customers will figure that out quickly.

The biggest hurdle for companies that want to engage in Social Sigma will be the CEO and other high-level executives who will cringe at the brutal criticism. But that's how customers feel -- and the company should use this knowledge to its advantage.

What are the final benefits? 1) More speed, 2) more ideas, 3) better products, 4) cheaper development.

Ode to 18-1

The only way I could pull myself out of post Super Bowl depression was through lyric therapy. Here is my inferior attempt at Keatsian tribute.

Ode To 18-1

As the snow settles over,
A wet-eyed New England.
And the Patriots fade,
Like a dying failed friend.

Let us all remember,
An extraordinary season.
Beyond logic, and history,
Beyond NFL reason.

Of the many fall Sundays,
When their game made us sing.
The perfection, great play,
As Tom's passes took wing.

Of all the adjustments,
And all the game plans.
And a ball-hawking defense,
In great red-zone stands.

They beat Big Ben,
Came back against Peyton.
Beat Rivers twice,
And escaped the feared Ravens.

The records they fell,
Without ever a loss.
Stolen away,
By Brady and Moss.

And all the O line,
Kept the offense on bright.
A wall of teamwork,
From Mankins to Light.

As the record it grew,
And the snow replaced rain.
Don Shula and friends,
Didn't drink their champagne.

The media brayed,
"We'll wait and see."
But Bill he steered clear,
Like his father's Navy.

Stop and think for a second,
Of all of the fun.
And how cool that it is,
To be 18-1.

Yes they didn't beat Eli,
Coughlin or Plax.
Who couldn't have won,
Without luck being stacked.

But they've something to shoot for,
In the year of 08.
Improve your record,
And prove that you're great.

Why Yahoo+Microsoft will help Google

Three reasons:

1) Google gets the best and the brightest from Yahoo. Why? Compensation. Microsoft, in a titanic mistake, eliminated stock options as an employee incentive early in the decade, replacing them with  much less lucrative and leveraged restricted stock. If you're a hot programmer at Yahoo, you'll get options at Google -- not at Microsoft. Aside from compensation, Google's culture, speed, lack of bureaucracy, location, lack of legacy will be big attractors of talent.

2) The confusion factor. Microsoft has never acquired or absorbed anything as large as Yahoo -- unlike Cisco it has no culture or processes around large-scale integration. Microsoft's tight programming ethic will be naturally suspicious of Yahoo and its culture of media and advertising. When the inevitable integration plans are drafted, MSN and the search gurus at Microsoft will defend turf. In a market defined by a quick pace, Microsoft will take years to get this integration right.

3) Governmental entanglement. Google knows how sensitized Microsoft is to government intervention in its business. That's why the company is lobbying in Washington for oversight and review -- a strategy that will place Microsoft back in the hands of regulators. Google probably won't stop the deal, but it will throw sand in the gears and prolong the process. In a war being fought at high speed, those few lost months could prove to be precious.