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  1. 1. Software Industry Outlook Moving Away From Legacy Vendors Because ofOctober 9, 2012 Functionality, Not PriceAnalysts Conclusion: We recently spent time with Sears CIO Keith Sherwell and CTOPeter Goldmacher Philip Shelley to discuss their innovative approach to IT at one of the worlds(415) 646-7206peter.goldmacher largest retailers. Over the past 2 1/2 years, Sears has systematically its spend with legacy tech vendors in favor of recreating the vast majority of its infrastructure using custom development and open source technology. TheJoe del Callar primary issue facing Sears was the reality that the current line up of technology(415) it had been using from its existing vendors wasnt able to keep up with the demands of the business. The benefit of its transition to a custom environment is a more nimble IT infrastructure that can better support the business at a materially lower cost.  Technologies of the Past. IBM mainframes and Oracle Exadata were two technologies described as too expensive and not flexible enough to adapt to the changes and seasonality of the business. Oracle RAC is being used only where absolutely necessary, and MySQL is seen as a compelling and viable alternative in most situations. The company is also moving away from Microsoft (Mail), Netezza (DW) and Greenplum (DW) in favor of open source solutions wherever possible.  Technologies of the Future. Sears is investing aggressively in Hadoop, Linux and Private Clouds. With a well thought out architecture and materially lower price points, these technologies are perceived as more flexible and cost effective. Sears has also been investing in IT personnel with advanced skills. Even with the increased investments in staff, the cost savings associated with getting off legacy technologies are perceived to be well worth it. Standardizing on as few technologies as possible is enablingPlease see addendum of IT to leverage staff across multiple requirements. ETL workloads on Hadoopthis report for important have helped Sears make big strides towards a "Single Source of Truth" thatdisclosures. was previously impossible. Sears is investing in high bandwidth connections to its stores and mobile, which should increase demand for Data mgmt and analytics.
  2. 2. Software Notes • Speakers: • Keith Sherwell, CIO, Sears • Philip Shelley, CEO, MetaScale and CTO, Sears • Over the last two years, Sears has been looking to modernize its IT • Sears is trying to modernize in a way that is not traditional (different price points, more up front engineering/manpower investment, cheaper infrastructure) • When Phil arrived at Sears three years ago, it was full of legacy infrastructure and software • Sears’ new emphasis is for standardization on open source, emerging technologies • However, Sears acknowledged there is a shortage of skilled labor in the marketplace • Reason for start of MetaScale subsidiary: help other large IT organizations adopt open source solutions, including Hadoop, by leveraging Sears’ internally developed skills • Technologies being supported (and learned) include Hadoop, Linux, private clouds at scale, etc. • On IT budgets at Sears: • Sears IT is working under a tight margin environment • Objective is to increase the value of its IT investments • Focusing on a strong foundation to provide customers solutions and services • New devices are replacing handheld devices from 5-10 years ago • Sears is replacing mainframes with a private cloud: more scalability, cheaper • New technology applications and infrastructure enables Sears’ multi- channel delivery and loyalty programs at a reasonable initial investment that will lower costs in the future • On whether old technology can handle new requirements • IBM mainframes would have been able to add new functionality, but cost is very high • Mainframes are less flexible as well, have to plan for scale, peaks/valleys in demand for computing (e.g., Holidays) • New technologies • Open source stack: removing traditional relational databases • Using MySQL as the primary transactional database, Oracle RAC as a last resort • Hadoop is being used for analytics2 October 9, 2012
  3. 3. Software• Oracle costs • Putting petabytes of data in an Oracle stack is extremely expensive • The kind of workload needed by Sears cannot really be handled by Exadata • Retiring Exadata systems, moving to a highly-distributed SQL cluster • Get better scalability from new MySQL systems• Staffing costs • Have to build a resource strategy combining permanent employees, contractors and offshore resources • For what Sears needs, only about 0.2 employees are available for each available job opening, despite high unemployment • Sears has a large data center and staff in India • Recognized that other companies have similar staffing issues, and hence Sears is attempting to mitigate this by starting MetaScale • Will develop talent as part of the MetaScale business • Many of its employees are becoming leaders in the open source community • Up and coming developers are more familiar with the open source environment • Many developers nowadays participate in open source projects• Maintenance costs • Increasing internal skills and standardizing on a very rigid, limited set of technical parameters • Stack is open source • Getting rid of solutions from Microsoft, Oracle, Netezza, Greenplum, IBM • Each of these systems needed different maintenance and staff for support • Standardization allows the company to leverage existing staff across requirements for the department• On interest from other companies • Seeing interest in MetaScale’s services at events that Phil has spoken at • Phil believes we will see a gradual ramp in demand rather than a big explosion• SAP is ostensibly interested in integrating with Sears’ open source solutions (Sears had presented at Sapphire)• Sears is investing in high-bandwidth network connectivity at all its stores• Sears expects to take 2-3 years to move its legacy technology to its private cloud • Expect this to transition to pick up speed in the future • Sears has already migrated one of its key apps to its private cloud infrastructure, replacing a service provided by a company that was using ExadataOctober 9, 2012 3
  4. 4. Software • Sears is currently evaluating several big applications on IBM because of needs for better speed and scale • E.g., had a mainframe application that could handle 1,000 txns per second, but it failed when higher throughput was required. Re- implemented using its open source private cloud stack with positive results • The application layer is the most complex to move • ETL • Sear’s aim is to have a single source of truth in Hadoop • Will not move data off of Hadoop unless completely necessary • Sears has a “hub-and-spoke” architecture where analytics systems pull data directly from Hadoop • Getting rid of ETL processes improved performance, improved latency of data • E.g., An ETL job went from hours to minutes • E.g., Trees of ETL jobs make data more and more stale. Eliminating these ETL trees make data more timely/relevant • Vendors • Strategy is to be as void of vendors as possible • Use open source MySQL • Use Hortonworks or Cloudera Hadoop distributions • Use open source flavor of RHEL (only pay RHT occasionally) • Dropping HP-UX and AIX (2-year job to get rid of AIX) • Will use some JBoss (when needed) • Will use some Oracle (when needed) • Using an open source email solution (dropping MSFT) • Will continue to use some TDC • Five-year outlook • State of adoption of open source and Big Data technologies depends on the industry in question • Every industry/organization approach the solutions with different business needs (e.g., needs for support) • This is also driven by costs • There will be a gradual migration to open source solutions like Sears • MetaScale has a high-speed trading company and a healthcare company that it helped scale using Hadoop/open source solutions • The healthcare company used to use Exadata • On data warehouse systems • Greenplum preceded arrival of Keith and Phil4 October 9, 2012
  5. 5. Software • Other than costs, the issue with Greenplum was that data was getting stale as it was transferred from system to system • Sears still has Teradata for the more complex analysis • TDC’s Hadoop connectors and adaptors do not work particularly well • Sears is at the same level of engineering as EBay and other e-commerce companies, so it is able to develop its own technology as needed • Not planning to do any columnar stores in TDC • Using MySQL’s Infobright columnar store in lieu of TDC columnar stores. Effective at up to 1TB • For larger data sets, using Hadoop’s technology (HBase) directly • Status of transition after two years • Cloud infrastructure has been put together • Will finish the infrastructure over the next year • Migration to the private cloud will take several years, more deliberate to ensure nothing breaks • Analytics to begin next yearStocks mentioned Stock / Ticker Closing Price (10/8/2012 Cowen and Company Rating IBM / IBM * $213.58 Outperform Microsoft / MSFT $29.78 Outperform Oracle / ORCL $31.18 Neutral Red Hat / RHT $54.41 Neutral SAP AG / SAP $71.63 Underperform * Stock covered by Moshe Katri Source: Cowen and Company October 9, 2012 5
  6. 6. Software Addendum STOCKS MENTIONED IN IMPORTANT DISCLOSURESTicker Company NameIBM IBMMSFT MicrosoftORCL OracleRHT Red HatSAP SAP AG (ADR) ANALYST CERTIFICATIONEach author of this research report hereby certifies that (i) the views expressed in the research report accurately reflecthis or her personal views about any and all of the subject securities or issuers, and (ii) no part of his or her compensationwas, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report. IMPORTANT DISCLOSURESCowen and Company, LLC and or its affiliates make a market in the stock of IBM, MSFT, ORCL, RHT, SAP securities.Cowen and Company LLC acted as exclusive financial advisor to Perceptive Pixel, Inc. in connection with its sale toMicrosoft Corporation announced on July 9, 2012.Cowen and Company, LLC compensates research analysts for activities and services intended to benefit the firmsinvestor clients. Individual compensation determinations for research analysts, including the author(s) of this report, arebased on a variety of factors, including the overall profitability of the firm and the total revenue derived from all sources,including revenues from investment banking. Cowen and Company, LLC does not compensate research analysts based onspecific investment banking transactions. DISCLAIMERThis research is for our clients only. Our research is disseminated primarily electronically and, in some cases, in printedform. Research distributed electronically is available simultaneously to all Cowen and Company, LLC clients. Allpublished research, including required disclosures, can be obtained on the Firm’s client website, information on any of the above securities may be obtained from our offices. This report is published solely forinformation purposes, and is not to be construed as an offer to sell or the solicitation of an offer to buy any security inany state where such an offer or solicitation would be illegal. Other than disclosures relating to Cowen and Company,LLC, the information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purportto be a complete statement or summary of the available data. Any opinions expressed herein are statements of ourjudgment on this date and are subject to change without notice.Notice to UK Investors: This publication is produced by Cowen and Company, LLC, which is regulated in the UnitedStates by FINRA and is disseminated in the United Kingdom by Cowen International Limited ("CIL"). In the United Kingdom,‘Cowen and Company’ is a Trading Name of CIL. It is communicated only to persons of a kind described in Articles 19 and49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. It must not be further transmitted toany other person without the consent of CIL.Copyright, User Agreement and other general information related to this report© 2012 Cowen and Company, LLC. Member NYSE, FINRA and SIPC. All rights reserved. This research report is prepared forthe exclusive use of Cowen clients and may not be reproduced, displayed, modified, distributed, transmitted or disclosed,in whole or in part, or in any form or manner, to others outside your organization without the express prior writtenconsent of Cowen. Cowen research reports are distributed simultaneously to all clients eligible to receive such researchprior to any public dissemination by Cowen of the research report or information or opinion contained therein. Anyunauthorized use or disclosure is prohibited. Receipt and/or review of this research constitutes your agreement not toreproduce, display, modify, distribute, transmit, or disclose to others outside your organization the contents, opinions,conclusion, or information contained in this report (including any investment recommendations, estimates or price6 October 9, 2012
  7. 7. Softwaretargets). All Cowen trademarks displayed in this report are owned by Cowen and may not be used without its priorwritten consent.Cowen and Company, LLC. New York (646) 562-1000 Boston (617) 946-3700 San Francisco (415) 646-7200Chicago (312) 577-2240 Cleveland (440) 331-3531 Atlanta (866) 544-7009 London (affiliate) 44-207-071-7500 COWEN AND COMPANY RATING DEFINITIONS (a)Rating DefinitionOutperform (1) Stock expected to outperform the S&P 500Neutral (2) Stock expected to perform in line with the S&P 500Underperform (3) Stock expected to underperform the S&P 500(a) Assumptions: Time horizon is 12 months; S&P 500 is flat over forecast period. COWEN AND COMPANY RATING ALLOCATION (a) Pct of companies under Pct for which Investment Banking servicesRating coverage with this rating have been provided within the past 12 monthsBuy (b) 55.7% 9.2%Hold (c) 41.9% 1.7%Sell (d) 2.4% 0.0%(a) As of 09/30/2012. (b) Corresponds to "Outperform" rated stocks as defined in Cowen and Company, LLCs rating definitions (see above). (c)Corresponds to "Neutral" as defined in Cowen and Company, LLCs ratings definitions (see above). (d) Corresponds to "Underperform" as defined inCowen and Company, LLCs ratings definitions (see above). Note: "Buy," "Hold" and "Sell" are not terms that Cowen and Company, LLC uses in itsratings system and should not be construed as investment options. Rather, these ratings terms are used illustratively to comply with NASD and NYSEregulations. October 9, 2012 7
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