Investment | Paul Wallbank - Communications Professional

Technology One and cloud computing’s gold rush

Technology One’s Adrian DiMarco has strong views about the outsourcing industry as he steers his company onto the cloud.

“Consulting companies are a blight on our industry” declares Adrian DiMarco, CEO of Technology One.

A quick way to rile DiMarco is by asking him about IT outsourcing as I learned during an interview at Technology One’s annual Evolve conference on the Gold Coast last month.

The 1600 enterprise clients attending this year’s Evolve conference illustrate Technology One’s growth since it was founded in 1987 out of DiMarco’s frustration with the multinational outsourcing companies.

“I used to work for multinational technology companies and as a young person I really used to want to work for them, I found it very attractive and I expected they’d be very attractive and cutting edge.”

The reality DiMarco found was very different; “I worked for them for years and found the opposite, just how bad and inefficient they were.”

“I really didn’t like what I was working with, the software we were using and stuff and I thought we can do it much better here in Australia. The idea was to build enterprise software.”

Moving to the cloud

Having built that enterprise software company DiMarco now sees his Technology One’s future lying in cloud services and empahises the importance of learning from the industry’s leaders.

“We looked at companies like Google, Salesforce, Facebook and Dropbox. These companies are the undisputed leaders in the cloud.

“One thing that we noticed was that you can’t get Google, Salesforce, Facebook from a hosted provider; you can’t get it from IBM or Accenture.

“The leaders in the cloud build it themselves so they are deeply committed to it, they run the software for their customers and they invest millions of dollars each year in making the experience better.”

“It is clearly what the cloud has always meant to be.”

DiMarco though sees problems ahead as vendors look to rebrand their products and warns businesses need to be careful about cloud services.

“It is the next big goldrush in the IT industry. IT companies, particularly service companies have over the last few years seen revenues decline so in order to find new sources of growth they are all targeting the cloud.”

Accountability and the cloud

The lesson DiMarco learned in the early days of cloud computing was that accountability is necessary when you’re trusting services to other providers.

“We had early customers that went to the cloud; we said ‘look, it’s a great idea and we think it’s the future’. They wanted to go with hosting providers and we thought it was a sensible decision and we saw a train smash, it was a train smash of epic proportions”

“They were running data centres overseas in Europe that had latency issues, performance issues and the customers were paying money after money after money.”

“The customer was getting a terrible performance and there was no accountability.”

“We couldn’t fix it because we had lost control over the customers.”

This lack of accountability is one of the reason why so many IT projects fail DiMarco believes, citing the notorious Queensland Health payroll project.

“Queensland Health again used this fragmented model; the party that built the software, which is SAP, used a third party which was IBM to implement it which meant no accountablity.

:That would never have happened If SAP had signed the contract, if SAP had implemented the software, which they won’t do, they would have known the risks that were being taken and they would have stopped that project and fixed it up.??“That’s the difference between our model and the competitors model.”

“They take no responsibility, they implement these systems, they charge a fee-for-service and they have open ended contracts – that’s how they get to be a billion dollars – and do you know who suffers? It’s the customers.”

Shifting away from consultants

DiMarco sees governments moving away from the consultant driven model that’s proved so disappointing for agencies like Queensland Health which creates opportunities for Technology One and other Australian companies.

“For the last fifteen years we’ve not been able to sell software to the state government. It’s just changing, we’re getting in there now, but it was a terrible problem for us.”

The shift from big consultants is a view endorsed by Sugar CRM co-founder Clint Oram who described how the software business is changing when he spoke to Decoding the New Economy last week.

Oram sees the software market challenging established giants like SAP, Oracle and Microsoft; “in the past it was ‘here’s my software, goodbye and good luck. Maybe we’ll see you next year.”

“If you look at those names, the competitors we see on a day-to-day basis, several of them are very much challenged in making the shift from perpetual software licensing.” Oram says, “it’s been a challenge that I don’t think all of them will work their way through, their business models are too entrenched.”

“Software companies really have to stay focused on continuous innovation to their customers.”

DiMarco agrees with this view, citing the constant investment cloud computing companies make in their products as being one of the advantages in the business model.

Building the Australian software industry

For Australia to succeed in the software industry, DiMarco believes the nation has to encourage and celebrate the industry’s successes.

“It’s about getting people to believe in Australian software. I think the Aussie tech industry needs a lot more successes we can point to,” DiMarco observes. “I think that will create enthusiasm, excitement and a hub for the rest of the community to get around.”

“We gotta get some big scale companies with some high visibility and get them successful.”

For the future of Technology One, DiMarco sees international expansion as offering the best prospects with the company having recently announced a UK management team as part of its push into the British local government market.

Hopefully DiMarco’s UK management team won’t have to deal with the local management and IT consultants as they try to sell into British councils.

You can’t get there from here

What the world can learn from the failure of Australia’s National Broadband Network

I swore – mainly for my own sanity – that I wouldn’t discuss Australia’s National Broadband Network on this site anymore, today though the topic raised an interesting point about business leadership and project management that can’t be ignored.

Australian Communications Minister Malcolm Turnbull today released the Broadband Availability and Quality Report (PDF) along with the accompanying My Broadband website that identifies the nation’s telecommunications blackspots.

Extraordinary failure

“It is extraordinary that in six years of Labor talking about Australians having inadequate broadband they never bothered to do the work of actually identifying where services were good, bad or indifferent,” said the minister at the announcement.

Turnbull’s comments are correct, although the criticism is just as valid of previous Liberal and Labor governments who’ve all made incredibly poor decisions in the telecommunications portfolio without considering what was actually happening outside the ministers’ offices.

A bigger lesson though is that before commissioning a project the size of the NBN – estimates have put its cost anywhere between twenty and eighty billion US dollars – it’s a good idea to know where you are are and where you want to go.

Big Hairy Audacious Goals

To put the comments that follow into perspective, I was a supporter of the NBN concept although I thought it was a Big Hairy Audacious Goal.

In the shadow of the Global Financial Crisis the NBN project ticked all the boxes; it put cash into the economy, it employed an army of workers and upgraded Australia’s telecommunications network that had been neglected by thirty years of incompetent government policies mixed with incumbent telco greed.

Australia could have afforded ten NBNs during the mining boom of the 2000s; it was an opportunity to rebuild the nation’s ports, roads, railways, schools and tax system that all needed reinvestment and reinvention to meet the needs of the 21st Century.

Building a middle class welfare nanny state

Rather than reform the economy or build modern infrastructure, the Howard Liberal government decided to spend the mining boom’s proceeds on building a middle class welfare state.

Keen students of Australian politics crack a wry smile that the recently elected Abbott Liberal government, of which Turnbull is a member, proposes a paid parental scheme that will complete John Howard’s grand vision of a Middle Class Welfare Nanny State.

One of the tragedies of the populist and cowardly Gillard and Rudd Labor governments that succeeded Howard was neither had the courage to dismantle the Liberal party’s middle class welfare state.

At least though both Rudd and Gillard were prepared to make some big infrastructure investments, even if they weren’t fully thought through and chronically underfunded.

Failing to think through the needs, scope and costs of the project meant the National Broadband Network project quickly collapsed into a managerial mess exacerbated by the dribbling incompetence of the company’s executives, government officials and contractors, which bought us to Turnbull’s announcement today.

A project in search of a scope

The project’s failure is a worrying commentary on the abilities of Australia’s management elites in both the private and public sector, however the lesson for the entire world is understanding both where you are and where you want to go to is essential for a project’s success.

Spending on well planned and necessary infrastructure is good, but to avoid disasters like Australia’s NBN it’s good to start with understanding the problems you want to fix and a project scope that clearly identifies the work that needs to be done.

Unfortunately too many governments and businesses don’t know where they are or where their plans will take them.

Has the social media bubble popped?

Poor LinkedIn and Twitter earnings could be marking the end of the social media bubble

Last week Facebook’s stock soared after the company reported better than expected earnings on its advertising services.

It seemed that the social media sites had finally cracked the code on how to make money out of their billions of enthusiastic users.

This week sees a different story as both Twitter and LinkedIn disappointed investors with missed revenues targets in their quarterly earnings reports.

Twitter’s blues

For Twitter the market reaction was merciless – the stock price dropped 24% – as a $500 million loss in it’s first quarter of trading on the stock market is not a good look.

In Twitter’s defense, all of that loss was due to the cost of acquisitions being booked by the company. In 2013 the social media site spent over $500 million buying out various advertising, curation and and analytics services.

The question now for Twitter is whether they can weld together a profitable platform from the collections of businesses they’ve acquired and start delivering a return to investors.

A miss for LinkedIn

LinkedIn has a similar bent towards acquisitions having announced its purchase of data analytics company Bright on the same day as its disappointing results, however the company’s undershooting expectations was because of lower than expected revenues.

‘Disappointing’ is an interesting word in the context of LinkedIn as revenues were up 47% over the previous year.

What possibly should have been more concerning for analysts than the headline revenue number are Linkedin’s soaring costs of doing business – both sales & marketing and product development costs were up 50% year on year – which cut profits by over two thirds.

The most worrying part of LinkedIn’s earnings miss is the company’s price to earnings ratio. Currently the stock trades at an eye-watering P/E of 1,000 which implies investors are expecting a lot more revenue into the business.

Over-inflated expectations

It’s hard to argue that social media stocks aren’t in a bubble with those multiples. Even Facebook trades a hefty one hundred times earnings despite its improved revenues.

Perhaps the simple fact is we’re expecting too much from social media services; they are good businesses, but maybe they’ll never be the fantastic profit machines that Apple, Google or Microsoft have been.

Lowered expectations – What is the future for Apple?

Where to next for Apple in an era of lowered expectations?

Last Friday I had a story in Business Spectator on the future of Apple in light of the company’s warning of a 20% fall in revenue next quarter.

The clear message from Apple’s executives was that the company is facing a terminal decline in iPod sales and the iPhone – it’s most profitable and highest selling product – is facing slower sales.

So the search is on to find something that will replicate the iPhone’s success, with the biggest candidate being the iWatch.

The problem with that is the entire wearable technology market is only forecast to be $6bn which is a seventh of Apple’s $42 billion profit last year, so the iWatch can never replace falling iPhone sales.

It may well be for Apple that the period of massive profits and growth is drawing to an end, it doesn’t mean the company is dying – for a start they has nearly $200bn in cash reserves and a healthy $150 billion in sales each year.

Short of Tim Cook unveiling something similar to the iPhone, the future for Apple is probably going to be a bit modest than past few years of huge growth, that’s not a bad thing.

Rather than being the end of Apple, it’s more a revision to the role the company has held for most of it’s existence – a high profit, niche business that sells on quality and brand rather than fighting in the commodity markets.

On looking foolish

Looking foolish is one of the biggest risks when taking chances in business. It’s something every innovator and entrepreneur has to consider.

Venture Capital investor Mark Suster explains why he doesn’t mind looking foolish with his choice of investors on his blog today.

One of the toughest things in life is taking the risk of looking foolish in front of your peers yet that’s what the real high risk inventors, innovators and entrepreneurs do with their ventures.

Light bulbs and the telephone looked ridiculous to many at the time they were invented and no doubt the inventor of the wheel or the Neanderthal who came up with the idea of cooking meat in a fire both probably received a far bit of scorn when they told the others in their tribe about their idea.

While Suster is talking about ‘moonshot investments’, even the most modest venture is going to attract scorn.

There would be few people who decided to buy a doughnut franchise, establish a cafe or set up a lawn mowing service who weren’t told by some of their relatives, friends or colleagues that they are doing the wrong thing and they should stick to their safe job in their cosy cubicle.

Should someone want to change the way doughnuts are made or lawns mowed, then they can expect even more naysayers laughing at them.

In this current craze about ‘entrepreneurship’ it’s easy to overlook the real costs and risks of running any sort of business. Looking foolish is another of those risks.

Having a thick hide is another useful attribute when you’re investing, running a business or changing an industry.

Startup economics

The failure of Everpix is a good lesson for any business founder.

Business advisor Ivan Plenty’s in-depth study of the viability of failed photo sharing startup Everpix with some useful lessons for business owners in any industry.

Everpix shut down last November having run out of money despite getting favourable reviews from the tech press and in an unusual move, the founders put the company’s financials up on GitHub.

As Plenty points out in his analysis of Everpix’s finances, the company was unlikely to ever break even and it’s a lesson to every business owner on the importance of keeping an eye on cashflow and understanding where the venture’s break eve points are.

One of the key take-aways from Plenty’s analysis was that the base costs of the business were too high and even in the best circumstances it was unlikely that venture would have succeeded.

A good business plan would have helped the founders understand this problem and it illustrates why rigorously developed cashflow forecast is a great tool for a manager or proprietor.

The Silicon Valley investment model

The ultimate objectives of a company’s management are always important when considering the success or failure of a business; what objective is the business working towards?

In Everpix’s case, it may well have been the Silicon Valley Greater Fool model was a likely end, with good software and a growing customer base the company could have been attractive to a buyer.

Were that the objective of Everpix’s founders, the company was under-capitalised as management couldn’t afford either the burn out or the PR and marketing team essential for raising the venture’s profile with key investors.

Under-capitalisation is one of the greatest problems for any new business and its clear that Everpix didn’t have the equity to scale the way it needed.

Capital on its own though isn’t a panacea, from Ivan Plenty’s analysis the indications are that Everpix’s fate would have been the same, but more drawn out.

Everpix’s failure and the numbers behind it are a good lesson for anybody thinking about starting a business — numbers matter and businesses live and die by them.

Dangerous liaisons – the risks in government support

Government investment money isn’t free or easy as a UK entrepreneur found.

“I coulda bin a contender” is the first thing that comes to mind when reading The Register’s story on how the iPhone could have been a British invention.

However the tale of British engineer Andrew Fentem and his struggles with the UK investment bureaucracy is a warning to all of those who think that government support programs are an easily solution for getting ideas to market.

Fentem’s story is a common one around the world – an inventor approaches a government agency which agrees to support the project and then bogs the entire venture down in paperwork and bureaucracy.

In some respects this is understandable as bureaucrats and politicians are deeply risk averse, which is fair when taxpayers money is involved, with the result that justifying an investment is going to be more about ticking boxes and meeting criteria rather than genuinely helping projects succeed.

During my short stint in working for a government agency every week would see at least three people contacting me about taxpayer support for their businesses.

Most of the time there was no godly reason for the government to give these folk a penny and it took the few diplomatic skills I have to politely break the news they had little prospect of getting a grant or subsidy.

Some approaches though were very good projects but usually I’d warn the inventor or entrepreneur that any support the state government would give them would come at the cost of spending hours completing irritating paper work.

My advice was that driving a cab and living on noodles for six months to raise the capital would be a better investment of their time than dealing with grey suited bureaucrats like me.

This advice didn’t always go down well, but it was better for both the taxpayer and the entrepreneur in the long run.

Well thought out government programs can do a lot of good for businesses or inventions that might not otherwise come to fruition, although many of the success stories probably have as much to do with the calibre of the public servants running the scheme as they do with the programs themselves.

In the case of Andrew Fentem and his touchscreen technology it’s almost certain that the folk at NESTA were out of their depth and far more comfortable with subsidising trips to Las Vegas for circus clowns, which in itself is a valuable lesson for governments on defining programs and supervising agencies.

Raising funds for any business or invention is a tough game anywhere in the world and assuming governments are an easy way to find money is as flawed as any other misconception about building a startup.

The moral is government money in neither free nor easy if you’re an inventor or an entrepreneur.

How important is public transport to smart cities?

Public transit systems may be essential to a city’s success in the 21st Century.

One of things that stands out when discussing economic development with city governments is the importance of public transit for towns aspiring to be smart cities.

This was particularly notable in interviewing Gordon Innes, CEO of London and Partners, about British capital’s building upon the legacy of the 2012 Olympics and its quest become the digital capital of Europe.

At the centre of these developments is public transit, something mentioned by both Innes and Laurel Barsotti of the City of San Francisco.

Innes sees public transport as essential to London’s growth, “it’s absolutely critical to the physical growth of the economy.”

“In the run up to the Olympics nine billion was spend in upgrading the tube and Dockland Light Railway and that opened up all of East London’s economy in way because it wasn’t accessible or attractive for businesses.”

“Stratford now is the best connected train station in Europe,” declares Innes. “That part of the city and around the Docklands is much more accessible and that’s bringing in investors. It wouldn’t have happened if the transport infrastructure wasn’t there.”

In San Francisco, Laurel Barsotti sees a much more subtle advantage for the city in having, by US standards, a comprehensive public transit system in its bus, light rail and subway system.

“A lot of the entrepreneurs creating those companies are concerned their employees see people using their products,” says Barsott. “They want them riding the bus to and from work and see people interacting with their products.”

While in Barcelona, the public transport system is forming part of the local Smart City program where bus stops are Wi-Fi base stations and a fundamental part of the town’s communications network.

For cities, it may well be that having decent public transit systems is going to be the competitive difference in being a key part of the 21st Century economy.

Those parts of the world not investing in transport networks may find they are being left behind in the new economy.

Shops of doom

Some locations are the kiss of death of businesses.

“Location, location, location” is the mantra for real estate investors and property speculators, that rule is just as true for those setting up a shop or cafe.

When you pay attention to the retail strips or malls in your suburbs you’ll notice how some locations are doomed to fail.

The featured picture in this post is what should be a good location in the centre of a dining strip in an affluent Sydney suburb. Just fifty metres either side of the premises are successful and long running cafes.

However this spot has had five different business fail in the last three years and in the past decade hasn’t had a single stable tenant.

The question is what causes this? Is it because the landlord’s are greedy?

In some cases it is, the featured premises had a stable tenant in a very nice and well priced fish restaurant for many years. When the landlord jacked up the rent, the seafood cafe moved out and the place has struggled ever since.

Something many people have mentioned to me over the years is how difficult they find it to negotiate on price with landlords over commercial space with the owners very reluctant to budge on rents.

Often, the letting agents are prepared to throw in sweeteners like fitout costs, rental holidays or paying utilities but it’s very rare that the headline rent will be negotiated down.

Part of this could be due to the properties being valued as a multiple of their monthly rents; so if the leasing rate falls, so too does the property value which is bad news for the landlord and their bank.

When landlords get too greedy properties lie vacant for a long time. A good example is nearby to the featured property.

The bike shop that occupied this unit for about 12 months moved out over two years ago and before that it had been vacant for a long time. Despite being on a busy commuter strip in an affluent suburb, it’s a lousy location with poor visibility, truly awful parking and lousy amenities.

In a genuine free market the rent should fall until a business that can operate in such a low turnover location can afford it, that no entrepreneur can make the numbers work indicates the asking price is too high.

Although even the cheapest rents won’t help a truly blighted location which is why it might be a good idea to ask around the local shops and residents to see how a location has performed before signing that lease.

It would be a shame to doom your business because of a lousy choice of location.

How did San Francisco become the darling of the tech scene?

Regular visitors to San Francisco would notice how the city has changed in the last few years.

Companies that were setting up in Silicon Valley are now basing themselves downtown, the business community is energised and the seedier parts of the town are looking substantially spruced up.

To understand the change I interviewed Laurel Barsotti from the City and County of San Francisco as part of the Decoding the New Economy series of video clips.

Laurel is the council’s Director of Business Development and we discussed how the local government has worked with the community and business leaders to drive San Francisco’s economic growth.

The shift from Silicon Valley

A striking change in the tech industry is how the startup focus has shifted from Silicon Valley fifty miles away to downtown San Francisco. Laurel puts it down to a shift in the priorities of the sector.

“I think we benefited from a shift in the tech industry, being much more focused on design and user experience,” says Laurel.

“The people who are investing in that are people who want in San Francisco and people who want to live and work in the same city.”

“A lot of the entrepreneurs creating those companies are concerned their employees see people using their products, they want them riding the bus to and from work and see people interacting with their products.”

Changing the tax code

Like Barcelona, the Global Financial Crisis shook the city up, “with the economic downturn our whole city made jobs a top priority.”

Part of that review focused on the disadvantages of basing a business in San Francisco.

“It was bought to our attention that we were the only city in California that taxed stock options.” Laura says, “companies that wanted to go public were having to leave San Francisco to afford it.”

“We did an entire revision to our tax code which showed to investors they could count on San Francisco to be business friendly.”

Regenerating communities

Along with the problem of city taxes, the city was facing the problem of regenerating blighted neighbourhoods and the administration decided to address both problems together by offering incentives for businesses to setup in the mid-market district – I’d been warned not to call it ‘The Tenderloin.’

“We had a neighbourhood that was facing a lot of blight and we had not been able to successfully increase business and we had companies like Twitter telling us that our payroll tax was causing them problems and making it hard for them to grow in San Francisco,” Laura tells.

“So we combined those two problems and made it so a San Francisco company was able to move into a neighbourhood that needed more investment and business and it would be able to save some money while helping us improve the neighbourhood.”

The future for San Francisco

A common point when talking to city leaders and economic development agencies around the world is the focus on building a diverse economy and Laura sees that as part of the future for San Francisco.

In that vision includes manufacturing, biotechnology and tourism along with the internet based industries that are today’s investment and media darlings.

The focus though is on the city’s residents and how life can be improved for everyone, not just the business community and high tech investors.

“We are really focused on creating an economy for all,” says Laura. “We want to remain as diverse as possible.”

“Every San Franciscan, from no matter what socio-economic background, has a place that they can be.”

Abolishing the service visit

Will the internet of things change the way we service our cars and industrial equipment?

“Service used to be an act of damage control,” said Salesforce’s Peter Coffee at the recent Dreamforce conference. “You are bleeding brand equity until that problem is fixed.”

Coffee’s view is that the internet of things is an opportunity to delight the customer with proactive service that allows companies to fix customers’ problems before they happen.

Zero planned maintenance

Taking this idea further is GE’s Chief Economist, Marco Annunziata, who sees the internet of things as an opportunity to introduce the concept of Zero Planned Downtime where there is no need to stop machines for scheduled repairs and maintenance.

“A lot of the maintenance work is done on a fixed schedule,” Annunziata. “You end up wasting time and money servicing machines that are perfectly fine.”

“On the other hand you might miss that something is about to go wrong between two maintenance periods.”

“The idea of the industrial internet is that by gathering so much data from these machines themselves – plus having the software to analyse this data – you will have information that flags to you when intervention is needed.”

Annunziata’s view is that connected machines won’t need to have regular service intervals, instead of insisting a car has an inspection every ten thousand kilometers where the tyres are replaced and the oil changed, often unnecessarily, the vehicle need only be called in for maintenance when its sensors flag that a part or consumable needs attention.

Finding the benefits

While that can mean big savings for car owners, it’s in fields such as aviation, mining and logistics where the greatest benefits of Zero Planned Downtime would be found.

For businesses it’s another example of how they will fall behind if they don’t invest in modern technology as those who invest in newer, connected equipment will be able to reduce downtime and maintenance cost.

How achievable Zero Planned Downtime is in many fields remains to be seen, not least because of regulatory hurdles in sectors like aviation, however the idea does promise to change the business model of companies that depend upon service revenue.

Thorstein Heins’ brave parachute jump

Blackberry CEO Thorsten Heins leaves with a big payout and investors with a headache.

Six months ago I wondered if Blackberry CEO Thorsten Heins was the world’s bravest executive?

It turns out his bravery wasn’t rewarded as Blackberry’s brave attempt to reclaim their smartphone market share failed and now their hopes of a private equity takeover has failed with Heins announcing his resignation.

Heins is still a risk taker though with Business Insider reporting that he may have forgone up to fifty million dollars in termination payments.

Still he walks away with several million dollars, so life isn’t too hard for Thorsten.

For Blackberry though the struggle continues with the company hoping to raise a billion dollars through a convertible note issue. It would be an investor braver than Thorsten Heins who takes that offer.