How Executives Can Manage Recessions Through Innovation

Does it matter how executives
manage for a recession?
It is a tragedy if we loose Innovation in IT

Dr. Jimmy Schwarzkopf
Research Fellow
STKI
jimmy@stki.info
1

• Evariste Galois (1811-1832)
– accepted a duel with pistols (lack of
wisdom)
– spent the night before the duel in
writing down his mathematical
testament: theory of
transformation of roots in
algebraic equations (creating
science)
All Rights Reserved 2008@STKI Moshav Bnei Zion, Israel +972 9 790 7000 www.stki.info

Does somebody know what is going on??

All Rights Reserved @STKI Moshav Bnei Zion, Israel + +972 9 790 7000 www.stki.info

4

Facts
• The shadow banking system crashed taking
the whole world economy down.
– Asset comparison:
• Assets of regulated banking system … $10 trillion
• Assets of shadow banking system:
– Hedge funds ………….$ 2.5 trillion
– Investment Firms ….$ 6.0 trillion
– Other ……………..……..$ 4.0 trillion

Anything that does something like a “bank”;
Anything that has to be rescued in crises the
way banks are; Should be regulated as a bank

2008: financial meltdown in 5 steps
• Real estate “Bubble” all over the world
– The belief that everybody should own a home
– The belief that “real estate” value increases more than inflation.
• Converting mortgages into securities
– Wall Street bundled mortgages into securities, supposedly
decreasing risk, hard to assess the value of the loans.
• Cheap money via China
– The Chinese have high savings rates and that money was loaned
to the U.S. through the shadow banking system which used the
money to make bad loans, start 10,000 hedge funds, and drive
private equity.

5 steps cont.
• Subprime mortgages
– The securitization of mortgages bundled riskier loans (subprime
mortgages) with better risk loans.
– This strategy worked as long as real estate prices kept rising and
interest rates remained low.

• Quants and options
– Options were concocted by quantitative-driven financial analysts who,
in their models, failed to factor in irrational human behavior.
– The securitized debt was quot;insuredquot; via “unregulated” swap options.
– The result: flawed options models and flawed insurance.


• History is not facts, but ex-post narrative
• The past is very difficult to predict
• Humans cannot understand uncertainty
– Do not learn from the past
– Cannot understand a future mixed with chance
• “Our problem is not just that we don’t know
the future, we don’t know much of the past
either…”

HISTORY REPEATS ITSELF
not immediately, not identically

Uniqueness
Recurrence


Exponential Growth in logarithmic plot

www.KurzweilAI.net
10

The S-curve Flow of Economics

Financial
The Real
Economy
Economy
(moves
(produces
capital)
value)
VALUE:
production
Money/capital
of goods
and
services


4 Professors and 1 School
1. Profs. Prescott & Kydland
REAL ECONOMY CYCLES influenced by the technology
–
that converts inputs of capital and labor into output of
goods
Technology creates value, changes productivity and
–
produces cycles
2. Prof. Carlota Peres
Technological Cycles change “best business practices”
–
These cycles create explosive growth and change
–
Everything changes: the way we work, live, play
–
Technology influences financial markets
–

3. Prof. THOMAS KUHN :
Real economy and technology advance in a peaceful
•
way interrupted by violent change revolutions
PARADIGM SHIFT: A change in world view that calls
•
everything you know into question and each world
view is replaced by another
4. Prof. Joseph Shumpeter :
Innovation is the basis of technological change
•
through “Creative Destruction”
Markets do not know how to do Price Adjustments
•
for Technological Innovation
Produces also Financial Innovation (usually
•
unregulated) that tend to eventually burst

Austrian-School of Economics
government interventions: credit cycle theory
• Governments (central banks) tend to quot;artificiallyquot;
set interest rates too low for too long with wrong
regulations
– Low interest rates tend to stimulate borrowing
– Leading to an unsustainable quot;monetary boom“
(FRENZY)
– Financial institutions get caught in the frenzy
– Shadow banking system starts to “ease”
movement of money
– quot;credit crunchquot; quot;recessionquot; or quot;bustquot; – occurs
when this frenzy cannot be sustained.

Financial Economic Cycles Based On
Technological Innovation Cycles

TECHNOLOGY FINANCIAL
INNOVATION
ECONOMY
ECONOMY
CYCLES
CYCLES


S curves for Economic progress
DRIVEN BY SUCCESSIVE TECHNOLOGICAL REVOLUTIONS

Technological
progress

Time
40-60 years


FIVE TECHNOLOGICAL REVOLUTIONS IN
230 YEARS


FRENZY:
success, excess demand and GREED
SUCCESSES ATTRACT
of the new all available money towards
entrepreneurs… the technological revolution
Spectacular
profits
and growing
capital gains
GREED:
makes many unprofitable Excess demand
projects appear viable… in the stock market
ASSET INFLATION
…attracting even more
funds and preparing
the inevitable collapse!!!

technology/economic cyclesAustrian
Perez new
PARADIGM School
forecast
Degree Turning DEPLOYMENT PERIOD
INSTALLATION PERIOD
Point
of diffusion
of the

Institutional recomposition and role shift
MATURITY
technological
“Creative destruction”
revolution
Defeat of the old
SYNERGY
financial capital
Kuhn’s
“boom”
“golden age” to maturity
FRENZY
growth and social benefits
production capital
IRRUPTION
Schumpeter’s
Creative
? Next
destruction
big-bang
big-bang Time
2O - 30 years 2O - 30 years
???

The Age of Steel
The Age of Information Technology
and Heavy
and Global Telecommunications
Engineering The Age of Oil, Automobiles

Bubble, Corporate scandals & 2008 Recession…
and Mass Production
1894-1920
MATURITY
1960-74
MATURITY
OCIAL UNREST

Depression 1930’s and WWII
Social unrest mature industries CHINA Inc.
1968-70 to Third World
1943-59
SYNERGY
Financial Capital Financial Capital
Post war
Golden Age
Regulations Regulations
Break down Break down

Production Capital 1987-2008
1920-29
FRENZY
FRENZY
New 1971-87
Internet
IRRUPTION
regulations
& Telecoms
Roaring
1908-1920 Transistors; computers;
mania
Twenties
IRRUPTION analog instruments;
Oil and
(USA) numerical control
automobiles

Mass production
ICT Revolution
Bretton Woods
Crash Starts with the
and stagflation
1971
Welfare State
1929 Internet bubble
Intel
Marshall Plan
1908 Micro-processor 2008 Global meltdown
Ford Model-T

Historical Records (1771 – today)


Inclusive Knowledge Society with
Multiple Compensatory Safety Mechanisms
Service Economy
Mass Production Economy

DIVERSITY
HOMOGENEITY
HYPER SEGMENTED MARKETS:

INTEGRATION OF MIND /HAND
SEPARATION OF MIND AND
Knowledge Worker
HAND
T education
Blue collar
White collar

CAPACITY FOR
UNAVOIDABLE
ENVIRONMENTAL
ENVIRONMENTAL
PROTECTION
DESTRUCTION


FEATURES OF THE CURRENT PARADIGM SHIFT
“SERVICES”


Which road should we take ?
Alice came to a fork in the road.
“Which road do I take?” she asked.
“Where do you want to go?”
responded the Cheshire cat.
“I don’t know” Alice answered.
“Then” said the cat,
“it doesn’t matter”. Lewis Carroll, Alice in Wonderland

25
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Reinvest in
human capital


No balance between work and leisure (home)
• Prof. Ragnar Frisch
– time the most precious resource an individual has
– very difficult to find balance (impossible)
• Prof. Israel Kizner
– A market with men unable to learn: in other words
COMMODITY PEOPLE… needs a group of outsiders
T PEOPLE who are able to perceive opportunities
– This group of entrepreneurs…notice profit
opportunities that exist because of the initial
ignorance of the original market participants and
that have persisted because of their inability to
learn.
All Rights Reserved 2008@STKI Moshav Bnei Zion, Israel +972 9
790 7000 www.stki.info

need people that can talk business terms


29

People as “commodities”


Generation C is here
Co-Creators

Cash
Control

The birth of
Generation C
(T people)
Communicate Connected
Creativity

Creative Class
Content
Conversation
Community
Channel
Consumer 2.0
32

Shift to a
solutions economy
From product to service
and commoditization of IT
What are customers
trying to solve?
“Less stuff*… more service”
* if “buying” then commodities


Can you see the difference??
• BEFORE
– We sold “products”
– We “productized” services

• NOW
– We will sell “services”
– We will “servicerize” products


What will happen here?
• pay for service and
get free phone?
• pay for phone and get
free service?
• pay for use of
application and
content and get free
phone and service?

For the new economic paradigm:
CFO or CIO create value?

“Wealth in the new economy
flows directly from innovation,
not optimization”
Kevin Kelly
Wired Magazine

New ways: IT & Business value
Business Value
Cloud Computing (Late 2000s)
Infrastructure
Value
SOA & Web Services (Early 2000s)
Services
Packaged Applications (Late1990s)
Internet (Mid 1990s) Software
Relational DBMS & BI (Mid 1980s)
Std. Hardware Interfaces (Late 1980s) Hardware
Consolidation / Virtualization (Late 2000s)
Component
PC Processors (Early 1980s)
Value
Character Format (ASCII) (Late 1970s)


In STKI summit 2009 we will answer:
IT Operations Sourcing
IT Investment Perspective
Enabler
Cost
In-house Outsource

Technology Position
Interoperability Standards
Vendor Specific Industry Standards Follower Leader

Development Preference
Hardware/Software Selection
Many Vendors Few Vendors Build Buy

Scalability
Legacy Perspective
Leverage Replace
Multiple-Smaller Fewer-Larger

IT Development Sourcing Transactional Data
In-house Outsource
Distributed Centralized
Processing
Analytical Data
Centralized
Distributed
Distributed Centralized


Discretionary vs. Nondiscretionary

What percent of your total IT budget
is devoted to:
• non-discretionary items
• infrastructure,
• support and maintenance
• discretionary items
• new capabilities
In a recession how much of the
discretionary budget is cut
and how do we use the rest Source: CIO Magazine
“The State of the CIO” online survey, January 2008
in order to innovate????

36% devoted to providing
new capabilities?

40
40

IT and the meltdown:
capitalization and cash flow
• IT budgets will rise without some
fundamental change in the
approach
• To take advantage of this
metamorphosis of IT we need to
find new and different ways of
being able to scale and innovate :
– without scaling labor costs
– using existing “assets”

All Rights Reserved 2008@STKI Moshav Bnei
Zion, Israel +972 9 790 7000 www.stki.info

How to increase discretionary budget?
Services? On-demand? Multi-tenancy ? Subscriptions?
Represent “disruptive” change ?
YES
CLOUD COMPUTING, METAweb, HATMAA,
and SOA
are basically new “disruptive” ways of delivering
Information Technology
based on scalability, re-use
and new sourcing options

New age management books


Competition in services?
Business Process Improvement
New Business Model


CIOs will do BPI in 2009

IT of
Competitor
Value Business
ERP captured Process 1 Market
1
by
verticals

Competitive
No Real Sales
Differentiation
difference in value Prospect

IT of
Competitor Business
Value
ERP Process 2
captured
2
by
verticals

45

CIOs will do BPI in 2009

IT of
Competitor
Value Business
ERP captured Process 1 Market
1
by
Best Projects
verticals

Business Competitive
No Real Sales

For
Differentiation
difference in value Prospect

Practices
IT of

2009/10
Competitor Business
Value
ERP Process 2
captured
2
by
verticals

46

So what do we do in the “New Era” ?
Business Redefined
Model Business Model


Business Process Innovation
High
Improve: SURVIVE Innovate : GROW Invent: CHANGE
Contribution to Business
Performance

Low

Redo Existing Rethink Redefine
Processes Business Business

2009-11: BI and DATA MINING

Data
Warehouse
MDM


Implementing a Balanced Scorecard
A balanced scorecard converts:
– organization’s value drivers,
• customer service
• innovation
• operational efficiency
• financial performance

–to a series of pre-defined metrics

50

Governance and Risk
• definition became
confused with
obeying the law

• “ENTERPRISE RISK
MANAGEMENT”

Enterprise Risk Management

Customer Demand Shortfall Cost Overruns
24
Accounting Irregularities
Competitive Pressure
Management Issues
M&A Integration Problems
Supply Chain Issues
11
Product Issues
12 Foreign Macro-Economic
Customer Pricing 7 7
Commodity Prices
6
7
Loss of Key Customer
6
3
4 Interest Rates
2
2 1
1 1 1
0 0

Strategic Operational Financial Hazard

58% 31% 6% 0%

Another question….
• How many systems has IT created (last 15
years) that do the same function?
• How can I re-use ???
• Have to do an ASSET inventory
• Then an assessment:
– what we can use as services (SOA)
– what we can get to work as is but BETTER
(HATMAA)

Service-Oriented Architecture

Composite Applications

54

The SOA “dream”
Enterprise Portal
(BPM) Process Manager

MDM
Portal as assembly engine
Master data manager

Enterprise Integration Bus

Front- & Workflow
eBusiness Financial
Backoffice Management
System System
System System
Legacy CRM SCM
System System System
55

HATMAA: definition
• Training, assimilation, implementation,
rollout,etc: are change management processes.
• Change management that helps users change
working processes.
• HATMAA: is the measurement of the change
process success.


Underutilization of applications?
• An assessment will
show what applications
have high HATMAA
and which do not
• LOW HATMAA need
special tools and re-
training
• HIGH HATMAA need
tool for constant
reinforcement


The new
computing
utility


A huge paradigm shift is underway


Delegating the Power to the Cloud


The new Service-Based IT

T6 T2
T1
T3 T8
T7
T5
T4

Gateway
T8
T7 T2
T7 T8
T6
T3
T1 T1 T5
T4 T2 T3 T4
T5 T6
Applications Infrastructure
Services Services

Puzzle Builder

All Rights Reserved 2008@STKI
Moshav Bnei Zion, Israel
+972 9 790 7000 www.stki.info
61

Cloud example
CLOUD Services SQL
MAIL Workflow
Access Data
Security Portal
Control SaaS
ERP

CRM
STKI
drjimmys@gmail.com Raanana Yoni

CUTTER
Mail

EDM
DRP*
jimmy@stki.com
New York
Hosted at XXX
Karen

Path to Innovation ?
Client/Server & Cloud
App Server
Computing
Platforms

Source: 3rd party analyst surveys
Source Salesforce.com Customer Relationship
Survey conducted in Feb. 2008, by an
independent third-party CustomerSat Inc.

64

It’s Time for Every Organization to Ask:
“Which Path Will We Choose?”

A process of mutual shaping
in a constantly changing context

New
Business
METAweb
Model


METAweb


METAweb: Markets 2.0
• Traditional market 1.0 model: Traditional Market 1.0 Model
central organization serving many
individuals
– Large-scale impersonal markets
– Low preference expression
• Market 2.0 model: flexible dynamic Market 2.0 Models

capital allocation systems that provide
democratic, more immediate, low-cost,
affinity-directed capital Many: One
Peer finance

– Benefits to individuals: freedom, One: Many
Affinity purchasing
convenience, preferences articulation
– Benefits to groups: virtual aggregation
of group power to conduct transactions Many: Many
Prediction markets
Peer philanthropy
All Rights Reserved 2008@STKI Moshav Bnei Zion, Israel +972 9 790 7000 www.stki.info 68

Books you should read: crowdsourcing

Stop 'Aligning IT With The Business'
Connect With Customers


Social Technographics™
Josh Bernoff, co-author of Groundswell


I have outsourced part of my life
to external cognitive servants:
• No longer need a • Musical taste:
memory – ITunes
– Google
– Yahoo • Books and others:
– Wikipedia – Amazon

• Personal Information • Social Capital
– Smartphone tells me – LinkedIn
about birthdays, phones,
– Xing
addresses
– Facebook

71

Study by Prof. Granovetter shows that
weak links are better than strong
• Strong Links: More
motivation to help you,
since they know you
better
•Weak Links : Likely less
overlap with leads you
can easily get elsewhere

Most job referrals come
through those who we
see rarely: old school
friends, former co-
workers, etc.

METAweb REVOLUTION
4The real, long-term change is just beginning to be felt,
and anyone thinking about our economic future should
consider this:
• access to information is a democratizing force
• makes it inexpensive and easy to collaborate and share
information.
Your Text here Your Text here
• even the smallest companies can now have as big a
presence online as a multinational corporation
The revolution may have started in a garage in California
but it has already crossed every border
moving as freely
around the globe as a cloud
74

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