Monday, April 19, 2004

NOTE: Formerly titled Global Sourcing/Offshore Outsourcing Alert.

Not that it really matters, but I've chosen "Monitor" for this blog's title because my blog has more editorial content than a typical "Alert" or "Digest" and I may start a subscription service comprised of reports (more later ...) Also, since I'm focusing on China (after all, I'm living in China), I opted for a bit more intellectual honesty and "narrowed" the title from "Global" to "China." However, the nature of my business (which is, for the most part, still in stealth mode) forces me to keep up with all significant global developments. (I even run a daily SDI tracking numerous Indian SIs.)


Message to Chinese SIs: How to Win!! -- Part II
(or, "But that was then ... : The ISV factor")

The takeaway from the last posting was the need for "secret sauce," albeit with an eye (or both eyes) on HCI. (Think differentiation.) I'm doing a bit of a dance and I'll get back to HCI (what I call "The SIGCHI Strategy," which is a "duh" for those readers who are fellow members of the ACM or IEEE Computer Society).

Of course, that was then (circa mid-90's). Fast forward past the bubble and burst nearly a decade to the here and now. The most significant difference over the past decade is the emergence of ISVs with Web-based applications (including the migration of client-server to Web apps). In today's environment, SIs with nothing more than secret sauce might land a few gigs -- probably a few DARPA (or related AFOSR/ONR/NASA/NSF, et al) gigs. One could argue that SAIC has developed a strategy heavily dependent on their secret sauce (and many/most SIs would claim that they, too, have unique flavors when in reality it might even be a stretch to say they have Neapolitan). Yet, the ISV factor cannot be UNDERstated.

Many (successful) SIs have developed their business models around ISV relationships. Their secret sauce is their key point of differentiation; however, THEIR CORE COMPETENCIES REVOLVE AROUND THEIR ISV PARTNERS. Hence, their marriage "strategy" is key to their success.

It is essential to select which ISVs are a best fit. And this may require some corporate soul-searching. Just because a SI wants to play in a particular space and with their dream partner, it doesn't mean that this can really happen. A maxim I learned at Stanford: Hope is NOT a strategy!

First, what can you leverage? Leverage is king -- unless you have a gazillion dollars for marketing. But you'll need several gazillion more dollars to successfully execute a radically new strategy. Leverage, leverage, leverage. If you've made a splash in a particular vertical -- even if it's only with one client and even just one project -- you may be able to leverage your victory into a sustainable campaign. Your victory may be in an immature market or in a sunset industry: So what. Again, try to leverage your victory(ies). Besides, it might be a relief not to be the 10,000th player chasing the financial services market.

Second, given a choice (assuming there is a choice), are some apps a best choice? For example, your firm may have experience in developing both CRM and portal apps. Well, which market is better and hotter? Perhaps resources might be better spent on portal opportunities. (Hey, if opportunity knocks with a $10 million SFA project, GO FOR IT! But don't hold your breath.) And think strategically. Let's see: Portal projects are often laden with ECM apps -- and the next evolution of enterprise content management will very likely be some form of Web services. Hmmm ... sounds like a good opportunity to me! And now for the ISV factor ...

Third, taking the above two points in consideration, which ISVs will let you shine? In reality, there is a more fundamental question: Which ISVs will give you the time of day? This may sound crass, but it's the reality of the game. You don't want to be the 500th partner for an ISV unless you can bring something truly unique to their party. And this uniqueness is rarely technical, but rather market -- as in VERTICAL market -- presence (although it could also be about market size, e.g, SMEs). My point: You may want to give serious consideration to developing relationships with lesser-known but highly regarded ISVs. (See who the IT advisory services like.) Just imagine how good life would be if you were BEA's 4th or 5th SI partner!!

In Part III, on to the HCI/ECM "interface." (Yes, a pun intended.)

News Monitor

Well, I want you to be the first on your block to read a hot-off-the-press report from Morgan Stanley. It's The China Internet Report (it's over 12 megs) and it's dated 14 April. You can also access the TOC and a presentation summarizing their Report. What their Report does NOT say says a lot. Namely, there isn't much in the B2B space. (A little bit, like Alibaba and Huicong/Zhongsou, but not much else.) I'm a B2B guy, but I still found it a good read; I really couldn't put it down -- and I had no option but to read it on a CRT display. (Long story, but my ADSL service is not yet installed in my new pad in Qingdao; I'm writing this at an Internet Cafe -- amidst a hoard of high testosterone youthful male gamers!!)

Breaking the billion dollar barrier: Kudos to Infosys. Infosys, which is India's second largest SI after Tata, said that revs passed the US$1 billion mark for the year ended 31 March. Infosys also announced that they will be setting up a U.S. subsidiary and hiring about 500 consultants, while IBM is heading in the other direction with more activity in India and Oracle is "looking in a similar direction". IBM's acquisition of Daksh eServices isn't exactly a pure SI play, but has been heralded as a trend-setting deal. On the heels of IBM's deal was Citicorp's acquisition of another Indian firm, e-Serve International. Bottom line: Expect a lot of similar deals, which I believe will provide a phenomenal opportunity for Chinese SIs over the next several years. In other words, being acquired is becoming a viable exit strategy for Chinese SIs. Maybe not tomorrow, but soon enough.

Overall, the market continues to look good for outsourcing, with 25% of Fortune 1000 CIO's planning to spend on offshoring services. According to the latest Morgan Stanley CIO Survey, IBM, Wipro, Cognizant, Infosys and TCS (Tata) will capture the lion's share of demand. What is interesting is there didn't seem to be much room for more than the eight largest suppliers: The "Other" response was only 2%!! As far as software apps are concerned, the honors for the most favorable change in spending priority goes to the always exciting "Windows 2000/2003 Upgrade" category , followed by security , portal software (see, I told you so!!) , and application integration . CRM came in 5th place, which is a good showing for CRM. Other Microsoft upgrades took the next two slots. Bottom line: There's still a lot of room for growth in the offshoring space, although targeting the F1000 might not be the best use of marketing resources if you're not a VARBusiness 500 player or have a truly unique, best-of-breed offering. Look at the strategies being deployed by IBM, BEA and Vignette -- and see how you might fit in. If we think offshoring is the next wave, let's not slight consolidation as an equally (if not more) important trend. And let me contradict myself (hey, it's MY blog). Financial services isn't such a bad sector after all, with offshoring investments projected to increase by 34% annually. (See a related TowerGroup piece published in The Financial Times.)

Beijing-based Sinocom Software Group, a contract software developer for companies such as NEC and Hitachi, is planning to raise HK$100 million in their IPO. Hence, being acquired is not necessarily the only exit strategy, although it's still a viable strategy even after an IPO. A source familiar with the deal stated that Japanese companies favor outsourcing software development to Chinese firms, drawing on the benefit of cultural similarities, as well as lower costs. This deserves comment. Frankly, I'm tired of hearing about the Korean and Japanese nonsense. This is pure laziness on the part of Chinese SIs. Learn English -- and make a lot more $$$/RMB!! I dare the Chinese SIs to put up their operating or net margins doing work for Korean and/or Japanese firms up against the margins of Indian or the offshore arms of American SIs doing work for American clients. BTW, forget the European or Canadian markets; they have separate issues. There is one advantage -- and a good business case -- for doing work for Japanese companies, however: Building credibility with U.S. CIOs. Not being able to speak English is no excuse; neither is the lack of cultural awareness. (BTW, these are two key arguments made against ITO in China.) The only arguments I'll buy for doing business with the Japanese and/or Koreans are the credibility and proximity arguments. And, I admit, the margins doing work for the Japanese or Koreans is probably a lot better than doing work for domestic (in China) clients. But relative to India, India certainly can't claim proximity as an advantage against China. I'll put up United 858 against any flight from India any day of the week!! Yes, the Japanese and Koreans may prefer China, but this does NOT mean that Chinese SIs should prefer Japan and/or Korea over the States. Laziness, pure and simple. The only valid excuse, as I stated earlier, is to build credibility among American CIOs. Bottom line: FOCUS ON PROFITS!! -- and the highest margins are with American clients, NOT Japanese or Korean clients. (Okay, okay ... yes, I know I need to learn Mandarin now that I'm spending most of my time in China. And I will. No double standard.) And heed this warning, too: Do NOT chase European business; it is a waste of time!!

From the public policy angle (the PRC angle, NOT the U.S. angle), a few cities in China have done things right: They've promoted their Software Parks and have successfully recruited FDI. Besides the usual suspects (e.g., Shanghai and Shenzhen), Dalian should be added to this list. (Dalian is next on my target list as well.) I don't know what really happened during their seminar on Software & Information Services Outsourcing held last Monday, but the facts speak loud and clear: Dalian does it right!! How many Software Parks in China can count the likes of Accenture, GE and Nokia as tenants? Answer: Not many. Chinese public policy makers can learn from Bangladesh, no less. And it's not ALL about cost; don't underestimate and understate the quality of Chinese software engineers and programmers. Besides, in competition against India, it's unlikely wage inflation among Indian IT workers will dethrone India. Bottom line: Marketing, marketing, marketing. Salespeople have a motto: "Nothing happens until a sale is made." True. But the reality is that nothing happens until a lead is generated. Marketing, marketing, marketing. Think of marketing as metasales. And it is just as important for Software Parks as it is for companies residing in the Software Parks. If the incentives are purely cheap rent, deferred taxes, things like this, then the Software Parks with a marketing focus will win. (At this point, Dalian seems like the next Bangalore, although I still expect a much higher level of software development activity in Shanghai; Dalian's is simply more concentrated whereas the Pudong Software Park in Shanghai represents just a piece of the action in Shanghai.)

Now for some remarks for CIOs. First, offshoring is a viable option for the CIOs of SMBs/SMEs. (Note: The last article cited in this paragraph takes a different spin on this.) Second (and this applies to ALL CIOs), one advantage with India's SIs: They tend to understand the American legal way of business much better than China's SIs. From personal experience, I can say this is probably the rule, with few exceptions. Yes, IP is a key issue, but it goes beyond IP to a much more basic (and gut-level) understanding of the law. Third, on the minus side, there is the real risk of terrorism. I've thought about this for a long time, but was waiting until somebody else said it!! Let's be honest: An India terror threat is real. In China, not a worry. Terrorism might be a potential problem in certain parts of China (the West/Northwest), but it isn't a problem anyplace where any American firm is likely to do business. Get this: According to the director of the world's second largest insurance group's counter-terrorism and political risk unit, India is "up there" with Iraq, Columbia and Saudi Arabia. Want to read about an outsourcing disaster in India? To be fair, I could see the same thing happening in China. Bottom line: All size American firms should consider an offshoring option, albeit proceed with caution. And remember, Shangri-La is NOT in India!! ;-)

In the ongoing discussion about the impact of offshoring, I found a couple of humorous articles, both from respected dailies. The Wall Street Journal even cites an example whereby someone who lost their job as a programmer gets a promotion to a management position. (Were they serious about this? Yeah, one example out of how many horror stories.) And a American vendor -- with an Indian-American CEO -- claims that an end result of offshoring might be more sales jobs in the States!! (From The Boston Globe. To the Globe's credit, I believe it was a letter to the editor.) A couple of chuckles to close this section.

On (and Over) the Horizon

The current issue of New Generation Computing is a special issue on the convergence of two hot research areas: No, NOT cameras and phones!! I'm referring to something requiring a thought process , i.e., bioinformatics and grid computing, including a related presentation by Wilfred Li (Integrative Biosciences, San Diego Supercomputer Center, UCSD) on the Encyclopedia of Life Project. There is also a paper on OBIGrid; OBIGrid is a grid organized by the Japan Committee on Very Large Scale Biocomputing and the Initiative for Parallel Bioinformatics Processing. "Nano" is great, but not everything great is nano ...

In closing, an opportunity to ponder: Sarbanes-Oxley. Think ECM.


David Scott Lewis
President & Principal Analyst
IT E-Strategies, Inc. &

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Thursday, April 01, 2004

NOTE: To read a properly formatted version of this blog, go to I've noticed that the update sent by Bloglet looks ridiculous!! Also, if you have trouble accessing the hyperlinked articles, please go directly to this blog at One MAJOR problem: It looks like access to Blogspot blogs are blocked in China. If you can't directly access this blog, go through a proxy server.

Message to Chinese SIs: How to Win!!

I'm not sure where this post will end up, but I know where I want it to start. What I'd like to tackle is something near-and-dear to the hearts of many Chinese SIs, i.e., how to beat the big(ger) boys at the SI game.

This brings me back to the good 'ol days of 1995-1996 when I was brought in as the President and CEO of Presence Information Design. In a previous life, Presence built the Mars Observer Camera. Yes, Presence (under the name of Altadena Instruments) built a camera-on-a-chip for an interplanetary probe. We used to joke that it didn't necessarily take rocket scientists to build Web sites, but we had rocket scientists building Web sites! Presence built the first site with shopping cart ordering (and for a local Pasadena company selling chili sauces). Presence also designed the first Java-based game, this time for the TV show, Tales from the Crypt. In the gaming arena, we pioneered "live" gaming similar to Jeopardy for Sony's Game Show Network. We also invented the whole notion of state ID. I was personally selected as a presenter at the first JavaOne conference and Presence engineers were noted in the trade press for helping debug aspects of Java code. We launched a true VRML (virtual reality) site for Fujitsu, set up a plethora of webcams for Disney, built the site for id Software (makers of Doom), and did lots of other very cool stuff. At 37, I was the grandfather of the company!! Most of our engineers were Caltech alumni/ae. (Presence was located in Old Town Pasadena, only a couple of miles from Caltech.) Shoes were optional, hours were EXTREMELY flexible, and one guy name Ben used to dye his hair a different color each week!! Geeks we were -- but proud geeks. No technology was too great for us to overcome. Frankly, I've never worked with a more brilliant group of engineers and artists, from my partner who went on to become the CTO of, to a guy still in the space biz (and part of my LinkedIn network), to another who spent many years with WiReD magazine. Even though the hours were quite flexible -- as was the attire -- I could ask these guys to invent sunshine and they'd have it for me the next morning (no pun intended). Of course, we had networked Doom as well as working arcades in our loft -- and lava lamps on many desks (mandatory in the mid-90's). It was the relatively early days of a graphical Web -- wonderful days, to be sure.

So why all this history about Presence? Because I believe the lessons that we learned apply, in large part, to strategies that may (perhaps should) be used by Chinese SIs. The cultural elements are different, to say the least. But I believe there are lessons to be learned and shared. When I came on board as "Acting President," we had five employees. We grew into the largest Web systems integrator in Southern California during 1995-1996, topping Paul Grant's company. But how did we grow? What did we do? What lessons were learned? And did we hit a home run -- or a grand slam?

The fact is, we did hit a grand slam. Presence managed to become the lead contractor on the largest outsourced Web site development project in the entire world circa late '95-mid '96. The $20 million project was for a group within Pacific Bell (now part of SBC) called, "At Hand." Presence was the prime and two very notable SIs/Web design firms were subs, including none other than CKS. But what was more amazing is that we managed to not only top CKS, but took the honors (and contract) away from EDS and Andersen Consulting (now Accenture). Just think, a bunch of wild-haired Caltech grads beat out EDS and Accenture!! So how did we do it?

First, we proved that we knew project management. This was easy, after all, Presence built the Mars Observer Camera for NASA -- and interplanetary probes have rather inflexible launch schedules. But this isn't why we won. Certainly EDS and Accenture had similar project management capabilities, albeit of a different type. However, their project management skills were actually more appropriate to the task at hand: Large-scale software development versus designing and building part of an interplanetary probe!! So why did we really win?

This goes to core competencies, perhaps even the related concepts of strategic intent and expeditionary marketing. I think that executives too often focus on core competencies, yet forget strategic intent (a precursor to core competencies) and expeditionary marketing (which often follows from core competencies). Okay, so enough Stanford Business School gibberish. Why did we really win?

Presence was able to defeat EDS and Accenture because we proved that we had much more knowledge in enhancing a user's experience. Sounds simple in words; not so simple in practice. If the project would have required best-of-breed integration or even a fairly complicated B2B marketplace, Presence would have lost. But portals -- where a lot of today's action remains -- are much more focused on the user experience. Because of the Caltech and academic aura/genius of Presence's engineers, we were NOT shy about tackling the latest and greatest in just about every single aspect of a user's experience. Squish the spiders -- the first Java based game. Navigating the chili sauce company's online catalog. Tracking the Japanese explorer (courtesy of Fujitsu) in a VRML environment. We even developed our own development language which was similar to Perl. (We called it, "Guppie.") Presence tackled the hard stuff and succeeded -- and was able to defeat the staid software engineering environments of EDS and Accenture. Matter of fact, Presence was in talks with the Xerox Parc spin-out which was recently acquired by Microsoft. We called our entity, Shared Reality, Inc. (SRI, of course). Persistent objects was the name of the game and luminaries such as Pavel Curtis, the inventor of MOOs, was the head techie on behalf of Parc. We even had a guy from NASA's Jupiter collaboration project (true collaboration, not like Lotus Notes) working for us.

So here's my point. If you're a smaller company without the resources to compete with an EDS (or a Wipro, for that matter) on a level playing field, change the game!! Let your engineers "play" and push the frontiers of what can be done to enhance a user's experience. This might be a bit of VRML. It might mean avatars. It might very well mean software agents. (I was the chair of the Web Session held during the First International Conference on Autonomous Agents. Don't underestimate what can be done with software agents. Amazon's recommendations don't happen out of thin air!) It may also be more "mundane" things, such as adaptive personalization (beyond the ordinary stuff we see on a lot of sites), semantic computation for a Q&A system (a system which works with Chinese, too), and even taking advantage of grid computing environments. And, how about variations on XML and autoCAD for designing state-of-the-art interactive interfaces? BTW, I may occasionally touch upon these subjects and may even provide links to key reports and articles, but since I plan to do consulting in this area, I probably won't say too much in this blog. Tidbits, perhaps, but not much more. Readers of this blog are much more likely to get my take on something like HP's Smart Office initiative than you are on "SmartClients" developed at the Swiss Institute of Technology (even though the research being done at the Swiss Institute of Technology's Human Computer Interaction Group is much more interesting -- and may have much greater potential in providing a Chinese SI with a competitive advantage). Stay tuned for more ...

A must read: The hot-off-the-press "Offshore Location Attractiveness Index" published by A.T. Kearney. Get it; read it; take it to heart. Overall, China was in second place. (Of course, India came in first.) But China beat out Malaysia (3rd place), Singapore (5th place), the Philippines (6th place), and all other Asian countries. China is considered weak, however, in its business environment, which consists of IP protection, cultural adaptability, infrastructure and country risk. (I believe the A.T. Kearney ratings were fair: Country risk ratings were lower for Israel, South Africa, the Philippines, Vietnam and Russia.) No surprise, but language was cited as a major weakness for China. Yet, the report states, "English language proficiency is another skill gap receiving attention. For example, some Shanghai elementary school students receive math and science instruction in English." Good for China!! Now it's my turn to learn Mandarin!!

Okay, some other brief takeaways. The enterprise applications market may have a pretty good year. Well, at least some Indians think so. Chinese SIs may also want to investigate working with certain e-services suites, although the Gartner report doesn't take into account branding. EAI work: A great place to look for high(er) margin projects. You may want to consider getting active in the EAI Industry Consortium. Net markets might be another opportunity in China. A lot has been learned by mistakes made in the States. Also, I believe that Net markets are a more natural fit for firms accustomed to pricing wars, which is something that many (most) U.S. suppliers avoid(ed) like the plague. (In reality, combinatorial auctions and other emerging forms of B2B auctions will solve this problem, even in the States.) In the Chinese electronics marketplace, enter GXS and good 'ol E2open -- one of the surviving U.S. Net markets. For "fun," read the article from MIT Enterprise Technology Review on India's brain drain.

Lots of stuff on speech technologies. I'm yawning again!! But there were some POTENTIALLY significant announcements, from IBM, from Microsoft and from the W3C. Microsoft as a viable CRM vendor? You've got to read this and another story for yourself! (Both are from Computerworld, which I generally respect.) I'm going to stick my neck out and buck a trend: Even though converged devices don't do very well in surveys, I'm a believer. Of course, I own one, too -- and can't really imagine how I'm going to get by in China without a converged device. One idea is to tie the knot between Wi-Fi and IP telephony. Sounds good to me. Computerworld reported something similar from CTIA Wireless 2004, along with an increase in smartphone sales.

On a timely note, there is a lot of speculation as to what will happen with Microsoft after the recent EC ruling. Let's just say that not all are convinced that the ruling poses a significant setback for Microsoft. Besides, open source is NOT a panacea. (More on this in a future posting.) I always say, "stick to your core competencies." Try CRM with SCM and you might as well put a loaded gun in your mouth and pull the trigger. Of course, there are two sides to this story.

Now for some fun stuff. A potential ISV partner to keep in mind is Mark Logic. They have some cool stuff and are finally out of stealth mode. Always good to be early to an ISV's party!! More fun stuff: Is India getting too expensive? Also, don't be surprised if China's military pushes for some innovative software technologies. A lot of the best IT technologies were (and are) funded by various U.S. military organizations. Let's take one example: The Internet!! China's military may follow a similar course of action.

Finally, some outsourcing "gotchas" from Computerworld. Well, since I'm moving tomorrow and leaving for China on Friday, this will really be my last blog for at least another week or so.


David Scott Lewis
President & Principal Analyst
IT E-Strategies, Inc.

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