Future costs and Cloud

There are many subjects which I find tiresome but two which are starting to irritate me are the notion of Enterprise Cloud and Financial ERP. I'll deal with Enterprise Cloud in this post.

The shift from products to utility services inevitably incurs various forms of risks. These include disruption risks such as loss previous skillsets and political capital to transitional risks such as changes to governance and transparency of suppliers to outsourcing risks such as pricing competition and loss of strategic control.

A common, past method of dealing with transitional risks is the use of a hybrid model combining both public and private supplies. However, this is a transitional approach and should be undertaken with a view of moving to a future hybrid model of multiple public providers (i.e. a competitive market).

A transitional approach requires you to build in a way which is likely to be compatible with a future public market. For infrastructure this mean use of commodity components and in most scenarios an EC2 / S3 / EBS like interface. Hence my general support for open efforts like OpenStack (and to a lesser extent Eucalyptus).

Unfortunately, many applications are designed with the best practice for a product world i.e. scaling is about bigger machines, resilience is about N+1 and in general the focus is on reliable hardware. Best practice for a utility world involves resilience, scaling and failure modes built around software i.e. design for failure, distributed systems and chaos engines such as Netflix's chaos monkey approach. There is an inevitable cost of architectural transition from one set of best practices to another.

Obviously many companies don't like this architectural cost of change and hence want to minimise it which has given rise to the concept of the Enterprise cloud i.e. it's like cloud but without the commodity bit.

It should be noted that cloud is simply a result of a standard process of evolution that inevitably leads to operational efficiency through provision of a commodity. A consequence of this is it also enables higher rates of innovation for new business activities (such as big data) through the combined effects of componentisation and creative destruction. The upshot of this, is that you've never had a choice with cloud - it's just a question of when and the longer you leave it then the more you put yourself at a competitive disadvantage to others.

Whilst a commodity based private cloud (which can and should achieve much lower costs than public provision today) is a viable option in the short to mid term (depending upon scale), unfortunately Enterprise clouds don't move you along that architectural transition and here there's a real gotch'a. The problem is simply known as Jevons' paradox.

As competitors gain the benefits of more efficient commodity provision and higher rates of creation, this is unlikely to result in a reduction in IT budgets but instead more IT activities undertaken with everyone trying to keep up with each other. We've seen this for the last thirty years i.e. as IT has become more efficient, IT budgets haven't fallen but we've just ended up doing more stuff.

You therefore have to factor in that five to six years from now your architectural transition costs may well have spiralled by an order of magnitude due simply to the increased size of the estate. This can obviously be counter balanced with a simplification strategy, assuming your estate is already bloated but when considering Enterprise cloud, you must include this increase of architectural transition costs along with less efficient provision during that time due to a non commodity approach. Even private clouds are going to look dubious in this timeframe.

In most cases, Enterprise cloud will be a pretty unattractive option with ongoing and increasing costs.  It can however still be useful as part of a sweat and dump strategy for legacy environments i.e. you push the capital costs for legacy onto a provider with a view of dumping that part of the estate in the near term.

Why do I find this subject irksome? I simply hate repeating old ground and this has been covered many times before over many years. This is the last time.

-- 26th Nov 2013

Alas, I repeated myself.

Spotting the Next generation ...

For the best part of a decade I've worked on how business activities evolve from genesis through to products to commodity. As activities evolve then practices (such as management methods) that are applied also have to change which is why one size never fits all.

I've also demonstrated how this process of evolution creates a cycle, with commoditisation enabling further genesis (as in innovation of new activities) and the importance of inertia barriers in regulating this cycle.

These cycles also appear at the macro-economic scale and they're known as Kondratiev waves, however even more localised cycles (i.e. specific to an industry) tend to be associated with organisational change.

Hence with the commoditisation of the means of mass communication (i.e. the internet), new forms of organisation appeared known as Web 2.0. These companies had different activities, practices, strategies and structure to the more traditional, enterprise organisations that existed before.

In general terms, this cycle of evolution and its interaction with inertia barriers creates three economic eras - peace, war and build. During the peace era, sustaining change is particularly high, companies fight to maintain their relative position and inertia barriers to change help support the status quo.

The war era occurs when an activity evolves from one state (such as products or rental services) to another (such as commodity or utility services) and during this time disruptive change dominates whilst inertia barriers become a hindrance to survival. Companies literally are fighting to survive, often against their own internal culture and inertia to change.

So during the last IT war, caused by the evolution of the means of mass communication, these new web 2.0 organisations formed and the rate of disruptive change was high. Those traditional, more enterprise like companies that were impacted but survived the war had adapted and learnt many of the lessons of web 2.0. Today, social networking, social media, rich internet applications are the norm.

However, cloud computing - which is nothing more than the evolution of a wide range of activities from products (and rental services) to commodity (and utility services) - has initiated a new era of war.

The models predicted (and this is what we found) that there are three main forms of IT organisation in the wild - the traditional enterprise who have adapted, the web 2.0 players and a new breed of Next generation companies. The practices, activities, strategies and organisational memes of these Next generation are the ones which will tend to diffuse and dominate our industry.

The underlying framework, models and principles of how this works is part of a report I'm finishing for the LEF. Including in-depth surveys of over a hundred companies, it provides a reasonable hypothesis of organisation evolution across activities, practices and strategies. I say reasonable because it's more than postulation as there is data that demonstrates the pattern but this is not peer reviewed, the sample sizes are small and hence its only a reasonable hypothesis and requires a good dose of scepticism.

I'm not going to go through the report but I thought it might be useful to just comment on how to identify the Next generation in general terms.

If your organisation :-

• embraces change and is acutely aware of inertia barriers
• has primary goals based upon disruption of existing markets and growing ecosystems rather than a focus on profitability and growth into emerging geographical markets
• views commoditisation not as a liability but an opportunity
• operates through small, highly empowered teams building and creating services
• builds and exploits ecosystems by enabling others to build upon its services
• uses data analytics rather than metrics to determine action
• continually challenges and removes processes
• understands evolution and avoids one size fits all mentality
• builds distributed systems designed for failure that use commodity IT where possible
• considers itself to be as, if not more, efficient than Amazon
• games behaviour both internally and externally
• views culture as malleable and focuses on talent density
• views open source as a tactical weapon
• is seen by others to be simultaneously highly innovative, customer focused and efficient despite what Porter said on the subject

... then you're Next generation. If this isn't you, you're not. If you're not, then just hope this war doesn't stretch into your industry or that IT isn't a major barrier to entry into your space or this hypothesis is completely wrong.

I've provided a comparison between the traditional enterprise and the next generation in the following table.

Along with retail, media, travel firms and others who have already suffered in the last war - we should see software products & hosting, insurance and retail banking dragged firmly into this one.
Of course, along with this war era comes a build era, a golden age where the genesis of new activities flourishes and we see periods of frenzied growth.

The cycle is continuous, and the next major war after this one should be related to the commoditisation of the manufacturing process itself ... now, that'll be a big one. For me, this is personally important as it creates an opportunity to test the hypothesis.

What we should see as the means of manufacturing becomes more of a commodity (driven by 3D printing, printed electronics and hybrid printers) is a high degree of disruption in manufacturing industries as inertia barriers to change are broken by new entrants whose practices will be remarkably different from the existing players. The practices of these Next Next generation of company will diffuse and become the norm.

If this hold true, then I'll have enough to finally put the work up for peer review - having initial data (covering 4,000 data points), a hypothesis which describes a pattern from that initial data and has been preliminarily shown to exist in this current war through a survey (providing in total over 6,000 data points across 100 companies) and finally a pattern which is predictive.

If it doesn't and is falsified then it's back to the drawing board. The downside is I'll have to wait many years (possibly as much as a decade) before the next war starts ... if only companies were more like bacteria that I could grow in a lab.

Bye, Bye American dream ...

In the last fifty years wealth inequality has risen dramatically in the US, with real earnings (adjusting for inflation) increasing by 5% at the lower end of the scale and by 700% at the upper end of the wealth bracket. Not that inequality itself is a negative thing, it can spur ambition.

Unfortunately there is a strong correlation and causation between wealth inequality and intergenerational social mobility. Hence around the 1950s-60s, social mobility was around 12% in the US i.e. 1 in 8 of people in that era moved up (and down) a social class. If you were born into the working class around the 1950s-60s then you almost certainly know several people who have made it big, who have achieved the American dream, maybe you're one. Today, social mobility languishes around 3% i.e. 1 in 33.

Chances are that people born today in social working classes will see few of their contemporaries (if any) breakthrough to higher social classes.

In the US today, your future social class is not predominantly defined by your ability but by who your parents are and the opportunities they can provide you. As this spreads, the lack of role models for a change in class should become self reinforcing.

In short, if you're born today to a wealthy family, hey presto ... you're a success ... but if you're born today to a family of police officers (a noble profession in my view) chances of you becoming a CEO of a major corporation are pretty slim, certainly much less likely than it was for those born in the 50s or 60s.

I mention this because a friend made a comment that they thought that the concept of monarchy and class was over. Certainly in the UK we've suffered with poor social mobility and its impact on competition but even our social mobility is now better than the US. If anything, hereditary monarchy is alive, growing and becoming stronger in the US through hereditary financial monarchy. All Hail, the new Kings and Queens.

As for the American Dream, to be brutally honest the last vestiges of this are standing outside Wall Street in a much derided occupy movement. Certainly there will be examples of people who buck the trend (i.e. 1 in 33 or less) and there is always the X-Factor or adoption by a wealthy family.

My only advice is that if you're born into a low social class in the US, blame your parents and learn to curtsey or doth your cap. If your're born into the high social classes, thank your parents, lord it up but watch those peasants - especially when they get hold of pitchforks.

Bye, Bye American Dream ... nice idea, shame it didn't last.

[As an addition : for those who want to learn more on this subject, a good starting point is probably the Applied Economics 2009 paper from Harvard University scholar Dr Dan Andrews on "More inequality, less social mobility"]

Is it time to reset?

Our economy faces unusual challenges due to the exceptionally high debt burden. In terms of Government debt this is represented through Gilts (Government backed securities of debt). The recommended solutions to our problems usually involved manipulation of the money supply in the hopes that somehow this will correct the underlying problems.

For example, in the UK the Government sells debt with Gilts then, through a wheeze known as Quantitative Easing, it prints money to buy back the Gilts it has sold. The net effect is that GBP is devalued (leading to commodity price inflation), the delta between buy and sell price is absorbed as profits by the counter party (normally a bank) and the entire distribution of wealth becomes further concentrated to the advantage of the counter party.

It would in effect be more cost effective (and honest) if Government's didn't sell and buy back Gilts but simply printed money to counter their shortfall. You'd still however be left with the issue of devaluation.

Now in an export led economy devaluation can help boost exports at the same time as increasing inflation. However, we're not an export led economy, so devaluation without direct investment leads to higher material costs, less profitability in internal markets and correspondingly cost reduction, weakening of the internal market, higher inflation and stagnation i.e. what the media call stagflation.

All of these problems are exacerbated by debt, inequality of wealth distribution etc. In the Eurozone we're seeing this shake out with Greece which faces either a decade or more of misery or default on the Government debt (i.e. gilts)

Now, a Greece default would be a disaster because it would be difficult to raise further debt and investors would be wary of trading with Greece. But wait, it's part of Europe ... the EU could always raise debt for it. I suspect this is why people are so keen for Greece to leave the Euro if it defaults. A country that defaults but then continues is not a message the market wants to hear.

Why?

Well despite media opinion, Government shouldn't operate for the benefit of investors but society as a whole and Gilts come with risk (albiet relatively small). Now if a country default and continued to operate, then the problem for the market becomes what if this idea extends? So let us extend this Greek idea a bit more. What if every country in Europe and ideally add in the US as well, simultaneously defaults on Government Debt i.e. Gilts and resets the debt to zero?

Well for investors it would cause one hell of a haircut and some banks would probably fail. However, those can be nationalised where necessary and measures taken to limit the damage. You'd certainly need some form of protective measures for those at the bottom end of society - hence tax raises would be necessary - and Government would need to co-operate to smooth out some of the fall-out.

There'd be lots of nashing of teeth, the markets would suffer turmoil whilst they reset but investment (in the case of shares, gilts etc) is always shorter term gambling and despite the losses the size of the EU & US means investment will still continue, possibly even flourish. It's worth remembering that market indices (FTSE etc) are also not a good indicator of the underlying economy despite the media's fixation on them.

I can't see there are actually any real downsides to a Europe and US default (bar the temporary turmoil etc) except for investors but such gambling inherently occurs risk and these are fairly unique circumstances. The Governments could always shore up the economy by direct Keynesian style investment as well.

Naturally, some would argue that this might collapse the USD / EURO / GBP against other currencies such as the Yuan. But the above approach wouldn't significantly increase money supply (other than investors dumping) and the Yuan isn't a free floating currency. Certainly against other countries they'd be possible devaluation but then given the size of the trading blocks the effect should be minimal over time. What about sanctions? Against Europe & the US - don't make me laugh.

Of course, some will argue it would spook investors so much that there'd be a collapse of investment. However, if the money was invested in Government debt it wasn't invested in longer term infrastructural goals which is what we actually need. Any investors sent to the wall would be quickly replaced by others - that's capitalism for you - and as for pension funds, well it's true that we'd need decent protective measures put in place to protect the poorest but beyond that not a great deal more.

I'm writing this because the UK Government is planning to give more taxpayers' money to the IMF who may contribute to the Eurozone bail-out (something which our Gov. said they wouldn't do) or in other words piling on more debt to help solve problems caused by having too much debt.

This is a cycle we need to break. Can I suggest we reset the market economy by resetting Government debt. A simultaneous default by Europe and US on all Government debt should do the trick.

Does this post mean I believe this is the right course of action? Well, unfortunately whilst the idea is interesting, the practice is virtually impossible. In order to exact such a change, the various Governments would need to agree and execute almost instantly to avoid investors dumping Government bonds on the unsuspecting public (or wrapping them up in some other complex instrument). I have doubts that our leaders are capable of such consolidated action. All it would take is one party to phone a friend and warn them to get out of Government bonds and the entire scheme would unravel quickly.

So, overall ... I agree with the concept but the practice is probably too difficult and it's much more likely that we'll settle for many years (or decades in the case of Greece) of austerity

Ecosystem & Porter

A common characteristic of Next generation organisations (as opposed to traditional) is their focus on ecosystems and the provision of platforms to support their growth. The purpose of such ecosystems is not simply some form of marketing exercise but instead a mechanism for managing the innovation paradox (i.e. the need to be efficient to compete today but also to be creative in order to compete tomorrow).

Consider the provision through an online API of a software system whether it’s SalesForce, Amazon’s AWS or PayPal’s x.commerce platform. These services are core utilities that the organisation is providing with the express aim of others consuming i.e. an ecosystem of consumers developing around the service.

The consumption of the service may represent general use or even novel and more creative uses e.g. the early provision of big data Hadoop systems on AWS. Since the genesis of any activity is uncertain (being chaotic) and likely to fail, then the use of utility services helps reduce the cost of failure and thereby encourages the creative pursuits of others. The larger the ecosystem, the more likely that creative models of consumption and the genesis of new activity will be occurring.

Naturally, if those activities are useful (i.e. Hadoop on AWS) they will spread through the normal process of diffusion. By monitoring the ecosystem’s use of your services this spread can be detected.
These factors enable a model known as ILC (innovate-leverage-commoditise) to be used (see figure below). Through provision of utility services and the development of an ecosystem, you enable others to create new activities at a lower cost of failure and hence encourage innovation to occur in the ecosystem and around your services. Through monitoring, you can leverage the ecosystem to identify novel activities that are spreading. An organisation then can either copy or acquire such activities and commoditise these to create further services that enable growth of the ecosystem and hence further innovation through componentisation effects.

For example, the introduction of AWS enabled others to build Hadoop on AWS. With the spread of Hadoop on AWS, Amazon introduced an equivalent utility service - Elastic Map Reduce (EMR) - which in turn has enabled novel activities to appear that consume EMR. And so the cycle repeats ...

Figure 1 - ILC model (click on image for higher resolution)

NB, I italicise the term innovation because I'm referring to the creation of novel activities i.e. genesis of an activity rather than the broad use of the word innovation which is applied to almost everything from feature differentiation to service provision of a pre-existing activity. See "The Abuse of Innovation"

It’s through models such as ILC that an organisation can simultaneously appear to be :-

• highly creative - by pushing such uncertain activities to a wider ecosystem
• customer focused - by leveraging the ecosystem to identify that which is becoming adopted
• highly efficient - by focusing on commoditisation

In Porter’s terms these Next generation organisations have a primary focus on a cost leadership (a best price) for provision of the utility service.

BUT they also have a strong differentiation strategy which is heavily influenced through creative pursuits of others within the ecosystem that develops around their utility service (i.e. genesis of novel activities being driven outside the organisation). This is why Next generation organisations often cite “enabling others to build upon our services” as criticial.

BUT they also have a strong customer focus strategy heavy influenced by adoption within the ecosystem (i.e. they leverage the ecosystem to identify activities that are spreading) and subsequent provision of these activities as further utility services.

In such cases, all three of Porter's strategies are being pursued simultaneously with the major nuance between these players is whether they use copying (a weak ecosystem play) or acquisition (a strong, reinforcing ecosystem play).

I mention this because "focus on customer, innovation or efficiency" is one of those truisms like "culture eats strategy for breakfast". It's a great sound bite but on closer examination, it doesn't seem to stand up to rigorous scrutiny today. The game has changed.

I'm currently collecting a selection of truisms and each one of them seems to leak like a sieve when exposed to rigorous study. The following are ones which in my view are all in need of serious re-evaluation :-

• You can't manage what you can’t measure
• You need to give customers what they want
• The best way to predict the future is to create it
• Avoid the commoditisation trap
• Business has only two functions - marketing and innovation
• Culture eats strategy for breakfast
• Focus on customer, innovation or efficiency

More QE madness ...

In the last five years, GBP has dropped in value by between 23-47% against the USD, EUR and CNY when Gold is used as the standard. GBP has taken a pasting. Our UK inflation during that time has been around 18% (based on CPI) but that's a basket of goods approach, as we've all seen basic commodity inflation has been much higher. You can pretty much put the entire inflation down to GBP devaluation.

One might argue that devaluing GBP is good for exports, however the UK has a huge balance of trade deficit managing to clock up a record breaking £9.2 bn in Dec'10. Whilst exporters have raised some recent cheer, what has to be remembered is that the UK imports almost all its copper, ferrous metals, lead, zinc, rubber, and raw cotton and about one-third of its food, along with a whole range of finished goods. With the GBP down the toilet, the cost of these goods has risen dramatically and certain items just aren't luxuries.

So, who has made good with the collapse of the GBP and where did it come from? Well, the reason why GBP has been hit hard is basically because of monetarist policies such as quantitative easing and keeping interest rates low. Quantitative easing (QE) is the best wheeze of the two and consists basically of buying back debt we're constantly selling, at an obvious premium, and hence simply amounts to printing money and handing it over to banks. The monetarist delusion is that those banks will lend it out, increasing money supply, and hence magically all our problems will be solved. In reality it takes no consideration of capitalisation requirements, debt exposure, weakness of infrastructure, business cycle etc. The net effect is always bad for GBP.

Through financial engineering we've created a situation of increasing inflation (due to GBP devaluation through money supply manipulation) combined with a weakness in the economy as a whole since we're not bothering to directly investing in it and trying to combat the economic cycle. This combination gives us stagflation = stagnation of industry + inflation.

So who benefits? Well, a depressed GBP makes the stock market and housing more attractive to foreign investors. Hence the FTSE, though fluctuating, remains artificially high and London housing is undergoing a mini-boom. Hence some people in the city think we're doing well, when in reality they might be doing ok but the rest of country is sinking fast.

Of course, viable solutions to this problem which include increasing interest rates, direct investment in industry (rather than QE) etc will cause lots of short term pain for those with debts and exposure combined with haircuts for banks and investors. Rather than face this, we continue on a path of devaluing our future in the belief that somehow this can correct problems caused by borrowing too much from the future. It's like a drunk reasoning that the way to deal with their drinking debts and find the path to happiness is through selling a kidney and only buying methylated spirits.

So, does our current policy help us? Not a jot. The increasing focus on money supply will probably mean more QE. At the same time, the overall economy will continue to weaken, unemployment rise, tax receipts reduce creating a need for more cost cutting, cost of basic goods will continue to increase, export led business (without direct investment) will continue to flounder but at least the FTSE will look somewhat rosy until reality catches up with it and graphically demonstrates the error of its ways.

Eventually, if we keep on this route we will finally reach a tipping point and enter the world of hyper inflation combined with extensive contraction of industry. I can't think of a nifty combination of these terms, so I'll resort to, Hyper inflation + Contraction = "Zimbabwe" Economics. Of course, I use the phrase loosely here because to actually achieve the stunning results of Zimbabwe requires a very rare kind of recklessness (or more appropriately "wrecklessness") which is unlikely to be repeated.

I'm writing this so as we enter these more troubled times, can we please, please, please remember to round up all the monetarists and either lock them up in the Tower of London or ask them to provide the data which demonstrates why what they're doing makes sense.

Larry offers Hotel California ...

According to CW, Larry recently raged over Salesforce describing it as a roach motel and pleading the case for interoperability. He's just given a gift horse to some fairly smart operators and this time Larry's forgotten to fill it with any of his own soldiers.

First, some background which everyone knows already, so I'll keep it short :-

• Activities evolve and our industry has been shifting from a product to a utility service world. This has been clear for the last 6+ years, Salesforce knows this and they've been positioning themselves in that future space.


• Past success always acts as an inhibitor to future survival, it creates an inertia barrier to change. This is why Amazon and not some hosting company encumbered by an existing business model made the break into IaaS. This has been crystal clear for 4+ years. Salesforce knows this, it's why Oracle has been slow to react to the change.


• In this future world, competitive markets will become key to solving those outsourcing risks such as pricing competition, second sourcing options and loss of strategic control. Such markets will require multiple providers, access to code and data (i.e. standard data formats and APIs) and semantic interoperability. The latter point is only solvable with complex systems through running code and unless the market intends to be a captured markets (i.e. dependent upon one vendor) then that code will have to be open source. This has been clear for the last 5+ years. Everyone knows this just a lot of people refuse to believe it usually because of inertia barriers which have become institutionalised.


• Critical in this new world is the development of ecosystems as these enable a company to solve the innovation paradox and simultaneously appear more innovative and highly efficient. This has been blindingly obvious for 3+ years. More details on common models such as ILC can be found here. Salesforce knows this, they've been playing an acquisition game around their own ecosystem and sending market signals because of this.

• With a large enough ecosystem, you can create network effects through aggregated data e.g. market reports. This can be used as a soft form of lock-in i.e. even if you open source an entire system, your service still maintains an advantage simply because of the number of people using it. In other words, you can be entirely open but in effect create lock-in (i.e. gravity) for your service because of the benefits that being within that ecosystem brings. This has been painfully obvious for the last 3+ years.

• Salesforce has also been playing a tower and moat ploy, building a tower of core revenue surrounded by a moat of high barriers to entry and devoid of differential value. Attacking Salesforce is a tough call for anyone, hence I suspect Larry's aim to make interoperability his calling card.

Salesforce has the ecosystem to play an aggregated data game i.e. free market reports for an industry based upon aggregated data or free comparison KPIs to your sales team effectiveness etc. Given the smart plays Salesforce has been making, you can bet your bottom dollar they've got lots of this in the pipeline.

Salesforce could also use open source as a tactical weapon in this space. They could open source the entire system and say "come and compete", "run it yourself" with full knowledge that those who build it for themselves and take the private road will eventually switch to public, whilst those setting up as public providers will lack the ecosystem and hence any aggregated data benefits. Salesforce is also smart enough to know that this game could be played against them, so they'll have to go down that route at some point. Hence you can pretty much bet your bottom dollar they've been working on this.

Larry has walked into a huge trap. He's just called out interoperability as the key differentiator for his service but as we all know the real issue is portability which requires semantic interoperability and running code. All Salesforce has to do is start launching more aggregated data services and open source the entire system under a banners of "Freedom in the cloud", "Run it yourself for Free" and Larry is left standing with the high cost proprietary service with no real portability (except between one licensed version of Oracle and another).

It's difficult to see how Oracle's strategists could have been more tweedledum or tweedledee as currently they are primed to become the industry's example of Hotel California (you can go anywhere you like as long as you're paying fees to Oracle?).

Now, open sourcing won't be easy for SFDC because they have an existing service, security professionals will be concerned over exposing security weaknesses, lawyers will have their usual collywobbles over IP and financial controllers will gasp at writing down a technology asset.

However Benioff like Maritz (you don't think CloudFoundry doesn't have a grand strategic purpose do you?) is generally a shrewd player. It all boils down to a question of timing and willingness to play the end game but we could be expecting checkmate to Salesforce in the near future.

Bad move Larry ... really bad. Oracle will be lucky to make it out of 2020 with this standard of play.

Bank Recapitalisation ... Pirate Style

After much ado, the European Union seems to have been badgered into emergency action in order to re-capitalise the banking system due to its over exposure to instruments based on sovereign debt and the reliance on the dollar. I'm not a fan of this, this is just another monetarists prayer to the altar of "no sodding evidence whatsoever" and as usual the taxpayer will foot the bill.

Naturally, there will be wormtongues who will claim it was a Keynesian approach when it all goes spectacular wrong ... that is par for the course for economic banter.

So given that we're going to re-capitalise the banks, let us at least try and arrange the situation in the interest of the taxpayer. First, re-capitalisation should be forced and not voluntary and the capital ratio set by Basel should be raised to 30%. Next the banks should be given two options - either raise the money yourself or borrow from us, the nice friendly EU.

Of course, being the lender of last resort, there will be a couple of strings attached to the capital we lend (oh and lend is the operative word). Hence :-

1. The entire capital lent will need to be repaid annually over 5 yrs at EU base interest rates or average EU inflation (whichever is higher) + 10%.
2. The EU takes precedence over all other debtors and the entire banks assets will be used to underwrite the loan
3. A sum of Bank equity equal to capital lent will be paid to EU as our "setting up administration fee"
4. Late payment will incur an APR of 200% plus a penalty of 50% on any remaining capital.
5. No dividends will be paid until the entire loan is repaid
6. Upon final repayment of the loan, another sum of Bank equity equal to the capital + interest + any late payment fees will be paid over to the EU as our "closing administration free"
7. If you don't like the terms then go raise the capital yourself on the open market.

Now, I'm not actually advocating such draconian terms but I'm arguing for the EU and our Gov to stop acting like they're just pawns in this global game and start acting like pirates. The banking system is an essential vehicle for our economic system but like all things, it should be managed in the wider interest of society.

Why I believe AAPL will crumble ...

Earlier this year, at the height of Apple fever, I made a bet that Apple will be in Chapter 11 by the end of 2017. I thought I'd explain my reasoning because it's not what most people would suspect.

First, the problem with Apple in my view was Jobs. Whilst Steve Jobs was outstanding at creative leadership, that is only part of the battle for creating a sustainable company. An exclusive focus on creative leadership always leads to failure as the genesis of new activities (i.e. innovation) might be high worth but it's unstable and uncertain.

The problem for Apple started in my view from a major strategic blunder - it didn't open source iOS, it didn't feel it needed to, it was building the entire stack. By not doing so it enabled Android to thrive. Apple gave oxygen to the formation of a competitive ecosystem of hardware providers to develop around Google's new weapon (and Google had every reason to do this because of the threat that IOS exposed to Google's value chain of data).

As that ecosystem develops, Apple will find itself in a stand alone innovation game against it. The pressure will build for ever more outstanding and exciting breakthroughs in technology which Apple has delivered with the iPad. Unfortunately, this pressure will continue and such breakthroughs by their very nature (chaotic) are uncertain and every company in this position before has failed.

Take Commodore and the Commodore64 which was vastly more influential than the iPad. The C64 transformed a world where computers were rooms owned by huge corporations into personal computers. In terms of consumerization, the C64 was dramatic.

Commodore and Apple both tried to lead this new world through constant innovation but were hammered by the more commodity based ecosystem approach of "IBM PC compatible". Commodore died and Apple barely survived but unfortunately it seems to have failed to learn that lesson.

So once again, we find ourselves in a world where Apple is pushed into the high risk stand alone innovation game against a growing, more commodity focused, ecosystem. That ecosystem will enable rapid innovation of higher order systems, it will outstrip Apple once again and I suspect that Cook (the new Apple CEO) knows this.

The only viable defence against such an ecosystem play is to build a bigger ecosystem (which is tough as a stand-alone) or to buy up the supply chain and use patents to slow your competitors. The latter Apple has done but such moves only slow the change, they don't stop it.

It can give you breathing space though to find that next breakthrough or to work out how to build a bigger ecosystem. However, the problem is often expectation i.e. your customer expect that breakthrough continuously.

I've not listened to Apple's latest press release but if its lacks any breakthroughs and dazzling tech (which I strongly suspect) then markets and fans will slowly turn against Cook and cry "bring Jobs back". Markets always do this, they always want more of the past.

Into this current fray, Amazon will certainly push with its normal approach of commoditising an industry and building an ecosystem around itself. If Google and the greater ecosystem around Android have been waiting for this moment, then they'll shortly strike at Apple - a flood of patent attacks.

Apple will start to turn inwards and the market pressure on Cook will intensify. They'll go from looking for that next breakthrough to needing it. Culture will start to change, it may start to buckle.

Apple's core business will be undermined by the commodity players whose technology will rapidly catch up and overtake, assuming Google can get them to work in a common interest. Soon Android devices will be everywhere. If Apple's patent and supply chain protection measures fail, if a concerted patent attack against Apple is successful then this will happen sooner.

At this point, with margins under pressure, markets under attack, the gloss peeling off the Apple logo and the culture starting to decline then the markets will go after Cook - "it was his fault" they'll say. Of course it wasn't Cook's fault, Jobs made the blunder with an excessive focus on creative leadership creating a high margin but unsustainable business.

Cook might pull out a miracle and maybe they've got some tech they've been keeping back in preparation to dazzle. Maybe he'll help Apple create that sustainable company which balances both innovation and commodity by dealing with the constant flow between them.

I doubt it, markets never think that hard nor give that much time. Cook is more likely to end up as the next Leo Apotheker ... and as for Apple well it didn't learn the lesson first time around, I don't suspect Google and Amazon will let it have a third go.

That's my view, that's my reasoning and that's why I made my prediction. Of course, the prediction assumed Jobs would still be the CEO and maybe Cook can change things by correcting those errors. Should be interesting to find out.

-- Update 13th February 2014

One of the key parts of the above scenario depended upon an aggressive share buyback in order to sustain market value / perception. I was expecting this to be around $100 billion. It turns out that buyback is much less than I anticipated (around $54 billion in the last two years) though Icahn was pushing for closer to $90 billion. This cutting back on the buyback is a fabulous move and gives AAPL a lot more breathing room. Cook is doing an excellent job.

-- Update 17th January 2015

Cook still continues to perform an outstanding job. There's the usual grumbles about the "lack of innovation" along with certain investors demanding a "larger cash buy back" but Cook has played a strong game, focusing more on the growth of the ecosystem, using supply chains effectively ... it's all good. Really impressive and adds many years to that company.

-- Update 30th April 2016

Cook has been truly remarkable. Apple is in a stable and strong position. Obviously some investors are unhappy about not getting big share buybacks or the lack of stellar growth but since they are just interested in a quick buck who cares. Well done Cook. Exceptional.

Why proprietary software is mathematically more evil than open source

As we all know, proprietary software costs time (t) and money (m). Hence,

Proprietary Software = m.t

However, we also know that time is money. Hence,

Proprietary Software = m^2

However money is the root of all evil. Hence,

m = (Evil)^1/2

By substitution we can show that,

Proprietary Software=((Evil)^1/2)^2 = Evil

Ok, so proprietary software is evil but is this more evil than open source? Since open source only costs time, it is therefore obvious that:-

Evilness of Proprietary Software = (Evilness of open source)^2

As a function of cost, then :-

Evilness of Proprietary Software per $= (Evilness of open source)^2/0

i.e.

Evilness of Proprietary Software per $= (Evilness of open source).infinity

If we hypothesise that open source isn't evil then :-

Evilness of Proprietary Software per $=0.infinity = 1

In other words, proprietary software is infinitely more evil than open source and even if open source isn't evil then proprietary software still absolutely is.

Next posts include ... Mathematical proof of why patent lawyers suck your soul dry and why clothing concepts in a cloak of mathematics doesn't make them right.

Culture eats strategy ... where's the data?

I find irksome the management mantra that is commonly spouted of "Culture eats strategy for breakfast" because no-one ever seems to be able to justify the statement with data. I thought I'll pen a few thoughts on this.

An organisation consists of a mass of people, activities and practices combined with reserves of physical, financial, human and social capital. It's the interaction of the former three which impacts the latter either positively or negatively.

Culture results from the interaction of people with social (e.g beliefs, values, reputation) and human (e.g. skills, knowledge, myths) capital. In much the same way, the business itself can be described through the interaction of people, activities and practices with various forms of capital.

Strategy, is simply a plan of action, an intention and an aim e.g. it's the act of trying to achieve a particular goal or result. Either something has a strategy or we leave it to chance, randomness and accident.

We often talk about product strategy, marketing strategy, business strategy and organisational strategy but equally (if not in many cases more) important is cultural strategy. If you don't aim or plan to develop a particular culture, you'll end up with something by accident and that is not necessarily a good thing.

In recent years, the creation, building, "gaming" and planning of culture has become an increasingly more visible topic. Few have highlighted this trend as much as Zappos and Tony Hseih's work on delivering happiness. Be under no doubts, you can plan to build a specific culture.

Once a culture has formed it can certainly impact what business, product and marketing strategies you can effectively deploy in much the same way that past product strategies often impact future product strategies through inertia such as concerns over cannibalisation etc. In some cases, a future product strategy may require you to plan a new culture by spinning-off a group from the main corporate body.

As a rule of thumb your future strategies are impacted by today's strategies.

Whilst I can see some modicum of merit in bland arguments such as culture trumps products in certain industries, the culture eats strategy argument appears entirely misguided because you can plan to create or change a culture. Your strategy might require you to create a new group, to focus on happiness or to game the system - it doesn't have to be random or accidental.

To cut a long story short, the "Culture eats strategy" statement hypothesises that :-

unplanned, random and accidental [lacking strategy] culture eats for breakfast having a plan, intention or aim [for culture].

... I'm sorry I don't buy that, especially unless backed up by considerable amounts of data to counter examples such as Netflix and Zappos which show the opposite.

The counter hypothesis is that having a strategy for culture, organisation, business, product, marketing etc is better than not having one i.e. strategy eats all for breakfast, lunch and tea. In other words having a plan of action, aim or intention to achieve a goal is better than relying on randomness, accident and fate to do the same.

Now, the counter hypothesis would appear to be an obvious truth which is dangerous in itself. So, I'll start the process of collecting data and let's find out whether the "Culture eats Strategy" brigade have a leg to stand on. I doubt they do but then I might be pleasantly surprised.

Strata Conference

The O'Reilly Strata Conference NYC has now finished and I have to say it was a blast. The standard of speakers, corridor chat and the general environment was exceptionally high. If you're interested in speaking, they've already opened up the request for proposals for the Feb'12 event, so get writing.

There was something magical about the event in NYC created by a convergence of people, technology and ideas. I haven't seen a conference with this much buzz and excitement since ETech. You can guess that I was truly impressed, it was O'Reilly at its finest and that's a tall order given the very high standard of their conferences. If you missed the conference, then you can find many videos from the event on the O'Reilly channel.

I was also fortunate enough to be asked to speak, the video of my talk is below. In my session I covered commoditisation, innovation and the role of big data by examining some of my new research into the evolution of organisations. As per normal, the title of the talk is my usual Situation Normal, Everything Must Change and the talk itself is different from any other previous example i.e. the title applies to the talk itself.

By the way, if you have enjoyed my talks and you're interested in helping out with my research then please take 20 minutes to complete my online survey, as that would be really appreciated.

OSCON 2010: "Situation Normal, Everything Must Change"