Tuesday, April 28, 2009

Does H.P. Need a Dose of Anarchy?
Published: NYT, April 25, 2009

This is a very interesting article not only on how a new approach at a major Silicon Valley company helped in a needed turnaround, but also, from our vantage point, how a very simple thought model helped the CEO manage a very complex situation. I strongly suggest reading the full article.

"IT all seems obvious when viewed through hindsight’s pristine lens: Hewlett-Packard didn’t need a reinvention. It just needed some fierce fiscal discipline to transform itself from a bumbling, lost soul into a well-oiled profit machine.

At its core, H.P.’s turnaround works against the natural order of things in Silicon Valley, where people talk about technology first and finances a distant second. The frenetic hunt for the next big thing has helped a select few endure decades of busts and booms, and they have always left it to the bean counters to obsess about the bottom line.

So it took a true outsider, in Mark V. Hurd, to engineer H.P.’s resurrection and to create the world’s largest technology company. Mr. Hurd, hired four years ago in the wake of Carleton S. Fiorina’s tumultuous departure as chief executive, forced a steady, boring diet of performance benchmarks, heavy-handed cost-cutting and data-mining down H.P.’s corporate throat." …….

The thought process model discussed in the article is:

What I love about the model is its simplicity and power. A leader must focus their thought process—choosing those issues that are most germane to the situation – and then really focus on addressing the multiple challenges through this lens.

Friday, April 24, 2009

Upgrading R&D in a downturn
Cutting research costs across the board in a recession isn’t smart. Companies should use R&D as an opportunity to make themselves more competitive.

McKinsey Quarterly, FEBRUARY 2009 • Christie W. Barrett, Christopher S. Musso, and Asutosh Padhii

In my opinion this is a fabulous summary of the criticality of managing portfolios that even become more important in these challenging times. Equitable sharing of the pain of cutting costs is not a viable strategy; it is more of an excuse to avoid some difficult conversations.

As the global economic downturn spurs companies to slash costs, many senior executives are intensely scrutinizing research-and-development budgets. In fact, R&D is a perennially attractive target for corporate belt-tightening rituals, since it doesn’t produce cash directly. Now more than ever, many companies are trying to generate quick savings—and to spread the pain of cutbacks in an equitable way—by asking their development groups to cut costs across the board.(there should be no equitability in spreading the pain—you need to align around where you want your company at the end of this period and fund those programs that will get you there and STOP the others)

Yet such tempting reductions starve and therefore delay promising projects while allowing unworthy “zombie” ones to linger. (Rita McGrath from Columbia aptly calls them the “walking dead”) Worse, wholesale layoffs destroy morale among the remaining staff and can even prod your very best development engineers, who are always in demand, to accept the severance package that may be on offer and move elsewhere. Companies should take a more strategic approach to cutting R&D costs, by using today’s difficult economic environment as an opportunity to upgrade the R&D organization’s focus, practices, and management. That path helps companies not only to cut their costs but also to raise productivity and speed up time to market—while positioning themselves for even greater success in the future.

For most organizations, the first step is to examine the R&D portfolio rigorously to accelerate the most strategically promising projects while canceling irrelevant or moribund ones. (Of all the work I have done with businesses, this is possibly one of the most critical exercises for eventual success and yet it is the most difficult to even get started) It would seem obvious that companies ought to be doing this all the time, but many resist because of the challenges therein. Portfolios often grow organically, for example, with little central oversight, so it can be difficult for senior executives at a large company to get their arms around the totality, let alone the expected value, of its R&D activities. Another challenge: targeting specific projects for elimination means having difficult conversations with the people who lead them. It’s far easier to ask for sweeping cuts—in a particular geography, a product area, or across the whole breadth of a global R&D group. (This sums it up!)

Many undermanaged and drifting underperformers survive these broad cuts, however. In large companies, such projects may even go unnoticed as changing market conditions undermine them. One leading industrial company, for instance, recently discovered, during a portfolio review, that the technology of a large project launched five years earlier had been eclipsed by the offerings of more nimble competitors.

Nasty surprises like this are common. Our experience in industries such as automotive, energy and basic materials, high tech, and medical devices suggests that all but the most vigilant product developers could terminate one-quarter to one-third of their projects, liberating resources for redeployment. (I found the single most frequent reasons projects fail –outside of them being just bad projects- is the inability of the businesses to free the resources needed to win. These cuts are essential to create the budgetary head room required for project success while still meeting the short term financial goals.) How big is the opportunity? For a typical consumer-focused manufacturer with $5 billion in revenues and $250 million in annual R&D expenditures, the value at stake represents nearly 2 percent of sales. Such a strategic review frees up not only resources but also management attention, which a company can use to tear down silos, boost cross-functional collaboration, and manage R&D actively as a portfolio. (Could not have said it better!)

A chemical maker, for example, reduced the time to market of its top R&D project by more than 12 months and added more than $100 million to the net present value of its R&D portfolio. How? It killed three zombie projects, redeployed resources to accelerate the development of its most promising new product, and improved early-stage R&D collaboration between engineers and marketers so that executives could make better decisions about which efforts to finance.

Companies can also make their development efforts more effective by infusing them with lean-management principles. While lean thinking is commonplace in manufacturing environments, most companies, fearing that any effort to tinker with R&D systems might delay new-product introductions or dampen creativity, have only reluctantly applied it to them. In our experience, the meandering development timelines, bureaucratic roadblocks, and high levels of waste in the development processes of many companies do far more to dampen the spirits of top engineers than senior managers suspect. By seizing on the sense of urgency that difficult times create and challenging long-held assumptions about R&D processes, organizations can pinpoint the huge potential for improvement while sparking their employees’ creativity and energy.

An aerospace company, for example, used the conversations that a value-stream mapping exercise1 sparked to identify unnecessary process checks, wasteful approval requirements, and hidden bottlenecks in the flow of its R&D activities. Together, these problems lengthened development times by nearly 30 percent. Engineers found the exercise energizing and useful because it gave them their first opportunity to compare notes with other departments. It also initiated frank, fact-based discussions between engineers and senior managers about the causes of the bottlenecks and administrative delays that engineers observed in their day-to-day work. These discussions led to process changes that helped to increase the productivity of engineers involved in early-stage design activities by 25 percent. Such results aren’t unusual. Indeed, when large manufacturers focus lean teams on R&D, the teams often identify improvements that raise productivity by an amount equivalent to 8 to 10 percent of a company’s R&D costs while speeding time to market by up to 15 percent.

Finally, companies should view the downturn as an opportunity to upgrade their skills. While some R&D units are instituting hiring freezes and mandatory reductions, forward-looking organizations are searching outside for specialist talent in hopes of stealing a march on competitors. Some companies we know are proactively weeding out underperformers. A McKinsey study of the IT and business process outsourcing sectors found that top-quartile engineers were more than twice as productive as those in the bottom quartile,2 so a company that makes such moves can capture big savings quickly.

Notably, a few companies we know have explored their cost-management opportunities by redeploying talented engineers freed up through portfolio reviews. One automaker rotated some engineers into small, short-term projects, where—supported by functional experts such as purchasers and marketers—they looked for innovative, cost-saving ways to change products. These teams generated ideas, expected to be worth $2 billion a year, for modifying features, applying existing technology to new applications, and negotiating with suppliers for lower prices. What’s more, a few high-tech companies are capitalizing on the closer links between engineers and marketers to take a deep look at how much value consumers place on specific product features. One consumer electronics company, for example, used this information to modify a key product and reposition it into a higher-value consumer segment, ultimately increasing its gross margins by 30 percent.

Tuesday, April 21, 2009

Vodafone: Embracing Open Source with Open Arms
In lieu of acquisitions, the British wireless giant is pursuing growth by tapping outsiders' ideas for new goods and services
By Kerry Capell

This is an interesting article on a number of fronts: the importance of open innovation; the challenge of using M&A as the only tool to sustain growth; and the challenge of managing growth in large companies.

Vodafone (VOD) never put much stock in open innovation, or tapping outsiders for ideas. It didn't need to. The company, after all, had grown into the world's biggest wireless telecom operator on its own. But with such interlopers as Google (GOOG) and Nokia (NOK) starting to tromp on its turf, Vodafone became a convert. "We were a bit naive thinking everything could be done in-house," says Chief Executive Vittorio Colao. Now "the only way to create a fertile environment for innovation is to have open platforms and leverage them."

The clearest sign of Vodafone's new philosophy can be found on a Web portal called betavine. The site allows anyone from hobbyists to software pros to create and test one another's mobile applications, which can be downloaded on any wireless network, not just Vodafone's. While developers retain intellectual property rights, the British giant gets insight into the latest trends and ensures that new apps are compatible with its network. Vodafone itself used betavine to enlist those enthusiasts to test a software add-on that enables mobile broadband customers to access the Internet via Linux.

That open-arms strategy may be the way more companies will go in the current economy. Like many industry leaders, Vodafone got to the top largely through acquisitions, buying interests in two dozen phone companies around the world in the past decade, including a 45% stake in Verizon Wireless in 1999 and 70% control of Ghana Telecom last year. The purchases were made mostly to add customers, revenue, and sheer heft; innovation was an afterthought.

But these days, with little stomach for megamergers, companies are relying on existing assets to get bigger. Coming out with new goods and services makes this easier—especially if outsiders chip in with ideas, as Vodafone and other trendsetters such as Apple (APPL) and Nokia are doing. "Smart companies have found that open innovation helps them reduce costs while preserving growth options for the future," says Henry Chesbrough, executive director of the Center for Open Innovation at University of California-Berkeley's Haas School of Business.

Vodafone's shift in strategy coincides with a change in leadership. Colao, 47, moved up from deputy CEO of the company last July. His predecessor, Arun Sarin, prided himself on his wheeling and dealing, moving into such emerging markets as Turkey and India while divesting units in such tapped-out markets as Japan and Sweden. Colao sees his role as making the most of current assets instead of inking big acquisitions.

Scale clearly gives Vodafone an edge. With 289 million customers in 27 countries, the $35 billion company has had no trouble finding help from outsiders who'd love to sell to at least some of this population, too. Among its collaborators: Dell (DELL), which has joined with Vodafone to design laptops and low-priced netbooks with built-in wireless broadband access over Vodafone's network.

Operating subsidiaries and affiliates are becoming another source of new revenue generators. Take M-Pesa, a service that allows people without bank accounts to transfer money by text message. Developed by Kenya's Safaricom, in which Vodafone has a 35% interest, M-Pesa has grown to 5 million customers since its launch in Kenya in 2007. The service is now available in Tanzania and Afghanistan, and analysts expect it to be rolled out in India and South Africa soon.

The telecom's next breakthrough may be in the emerging field of mobile health. In December, the company's in-house venture capital arm paid an undisclosed sum for a minority stake in t+ Medical, a British outfit that uses mobile phones as medical tools. Patients with diabetes, for example, transmit information such as blood glucose levels to their doctors, who, in turn, can order changes in treatment based on the freshest data.

Meantime, betavine's ad hoc collection of software writers is producing new apps. Vodafone customers in Germany and Britain can now access real-time train arrivals and departures. In Britain, they also can tap an Amazon.com (AMZN) "widget" personalized with their account details and a second widget with showtimes for movies. Betavine, says Emeka Obiodu, a senior analyst at London telecom consultancy Ovum, "is the most elaborate example of open innovation among all the wireless providers."

A full-fledged apps store may be next, say some analysts. Already, France Telecom's Orange and 02, a British wireless company owned by Spain's Telefónica, run their own app stores. Vodafone would be competing not only with these other network operators, but with Apple and BlackBerry maker Research In Motion (RIMM). Colao says only that he's investigating ways to expand business.

Vodafone's biggest challenge is its size. Its unwieldy corporate structure, with dozens of subsidiaries, joint ventures, and equity interests spread around the globe, makes integrating new products and services tricky. "Every CEO of a large company faces the problem of how to make innovation flow across the corporate hierarchy and borders," Colao says, "and I won't claim we have cracked it." Vodafone also is grappling with how to roll out its new offerings as far and wide and fast as possible, while tailoring products and services to suit each market.

But a decade of empire building, the widening embrace of open innovation, and the global slump may put Vodafone right where it should be. "In the current economic environment, operators, technology firms, handset makers, and application developers all need each other to make sure true innovation emerges," Colao says. "We want to be the guys who make it possible for developers to work with everyone."

Friday, April 10, 2009

I.B.M. Withdraws $7 Billion Offer for Sun Microsystems
Published: NYT, April 5, 2009

The important part of this article is WHY IBM is going after Sun Microsystems. M&A is a component of organic growth when its intent is building the Capability Platform needed to better compete in a target market segment.

I.B.M. withdrew its $7 billion bid for Sun Microsystems on Sunday, one day after Sun’s board balked at a reduced offer, according to three people close to the talks.

The deal’s collapse after weeks of negotiations raises questions about Sun’s next step, since the I.B.M. offer was far above the value of the Silicon Valley company’s shares when news of the I.B.M. offer first surfaced last month. Sun, an innovative pioneer in computer workstations, servers and Internet-era software, has struggled in recent years and spent months trying to secure a suitor.

With I.B.M. and others shying away from a deal, a bruised Sun could be forced to continue pursuing a solo business model whose prospects have been questioned by many analysts.
Had it bought Sun, I.B.M. would have become the dominant supplier of high-priced Unix servers and gained the rights to a number of popular business software franchises, including the Java technology used on many Web sites. The deal would have also helped I.B.M. compete against the hardware breadth of rival Hewlett-Packard and given it some momentum to combat Oracle’s ever-expanding business software empire. However, I.B.M. also faced the likelihood of antitrust reviews tied to the stronger positions in Unix servers and mainframe storage that it would have gained under the deal.

Wednesday, April 08, 2009

Company 'Federations' to Share Data
The next step, beyond corporate alliances and employee swapping, may be collaboration on infotech systems
By Jena McGregor

This is an interesting twist on what we call building the Capability Platform. The critical issue going forward is how a company can develop new products/services/solutions in a rapidly changing, more highly uncertain business world. How do we increase speed, reduce cost and risk.

Companies have long formed alliances and joint ventures. Recently, they've come together to swap employees, a practice Google (GOOG) and Procter & Gamble (PG) have experimented with to share expertise.

The next wave could be "federations." In such arrangements, companies can exchange much more than their knowledge, profits, or workers. They share access to parts of their info tech systems. Today the practice is common between such business partners as employers and their 401(k) providers.

But some tech experts believe federations could have a far broader impact when it comes to cross-company collaboration. Frank Modruson, chief information officer at Accenture (ACN), says his company recently gave Microsoft (MSFT) employees access to its collaboration software. That means staff can find, chat with, instant message, or videoconference with any employee at the other company. Modruson says he has received eight requests from clients in the past month to set up a similar structure with Accenture, up from none in January.
Federating the same software between two companies is fairly simple. But opening up systems that involve multiple applications and dozens, if not hundreds, of companies is much more complex. That's not happening yet, but it should, says John Hagel, co-chairman of Deloitte's Center for Edge Innovation. Companies increasingly design products and run supply chains with large groups of specialized partners. "For the companies that can figure this out," says Hagel, "it's a massive opportunity."

And federated IT systems could be the building blocks for ad hoc ventures that pop up for specific projects. Accenture's chief scientist, Kishore Swaminathan, sees federation as a way to handle sudden spikes in demand or share data between agencies in criminal investigations. Ideally, he says, "it could be turned on and off instantly."

Monday, April 06, 2009

Hewlett-Packard Computes the Value of Bright Ideas
Hewlett-Packard changed the typical formula for measuring a company's investments in innovation against overall sales and profit targets
Business Week, March 23, 2009
By Cliff Edwards

This touches on the never-ending question of choosing the right metrics for R&D spend.

Business leaders are often vexed by research and development spending. How much money do you put into R&D when it could be 10 years before you see a payoff as products hit the market?

Hewlett-Packard (HPQ) CEO Mark Hurd has pushed hard to take guesswork out of the equation. Since arriving at HP four years ago, he's developed one of the most quantitative approaches to R&D in the tech industry. The strategy has helped HP keep its footing during the economic downturn, even as rivals like Dell have struggled. "They have the gold standard," says James Andrew, head of the global innovation practice at Boston Consulting Group.

The key is linking R&D spending to specific product lines. Of the $150 million that goes into HP Labs, the company allocates the money based on where it expects the biggest payoffs. To standardize across a product line that includes everything from printer ink to giant server computers, HP uses a metric it calls "R&D productivity," which is research spending as a percentage of gross margin. A standard desktop computer with low margins may get one or two innovative features. But a laptop, with fatter margins, would get more flash, such as touchscreen technology and cool design materials. "We try to focus a bigger percentage of our overall budget on game-changing types of technologies," says Hurd.

HP's investments in things like multi-touch technology have helped it surpass Dell as the world's top PC maker. Hurd says more standout technologies are on the way, including gesture-based controls, so you can point at your PC to launch a music or photo program. "We [are] trying to get innovation to the highest level we can," says Hurd.