Part of the lifecycle of any product category is that the margin dwindles as that category becomes a commodity, and businesses must seek other ways to make money.

It happened to photocopiers, the machines, especially the largest, commercial machines are sold at no margin or even a loss. Money is made through consumables [toner, paper, etc] and services - maintaining the machines.

It happened to PBXs, and even network equipment. The market is still trying to adjust to this. Customers don't like paying directly for engineering services that were once covered by fat gross margins. The main reason I was brought into the Williams Cos. [NYSE:WMB] as Executive Director was to help then CEO of Williams Communications Solutions, Garry McGuire, to devise a business plan that replaced the almost nonexistent margin on their main product lines with margins from professional services. Garry left, the new CEO listened to the old-time sales VP's and WCS was sold a year later.

It is happening now to computers and even software.

Scott McNealy, CEO of Sun Microsystems, said it at the D conference, in not so many words.

"[Scott] said Sun no longer has the pricing luxury it once enjoyed -- that Sun now really has to work for the dollars it takes in."
[Via Dan Gillmor's "McNealy's Straight Talk"]

You also see this with the increased emphasis on services from companies like Sun, IBM, Oracle, HP and even Novell with its purchase of Cambridge Technologies.

The commodization of software, and the impact of open source projects on that process, has also been one topic of our discussions with Bernard Golden, CEO of Navica.

This is where the conversation really gets interesting. Will the profit margins on all software become slim enough, that open source is a practical path? Especially with the economies of community development, testing and support? What business models will develop so that traditional software companies, software as a service companies, and open source projects will be viable business enterprises when folk are no longer willing to pay "brand name premiums" for software? What services will customers be willing to buy directly, and how will third-party companies compete with or support the software producers? What pricing models will survive, especially with the impact of services from India, Philippines, Russia, etc? The next five years are going to provide a proving ground for all these questions.

Wilson Ng, at "Reflections of a Business Driven Life" has written about department head behavior that is reminiscent of his children's behavior: blaming others for one's own shortcomings. Mr. Ng points out the he sets goals for each department, and allows some shortfall to be blamed on others, "But if you are only hitting 30 or 50% of your goal, then the problem has to be you". I don't think that this the corporate culture that Mr. Ng necessarily wants, from his other posts.

I've managed teams since 1978 and P/L or companies since 1985. I've never encountered what Mr. Ng has. I think this is for two reasons. One, I build teams. I've been lucky or hopefully, skillful, in bringing together people who respect each other, who are willing to work and play together. Two, I set goals for the organization, and work with each group to set goals that match and support the organizational goals while playing to the strengths and interests of each group. There can't be any finger pointing, as everyone understands how their individual goals fit into both their career and group goals, and how those fit into the organization's short-term and long-term goals.

We've actually been helping customers use blogs to achieve these objectives as well. Internal blogs can be a great tool, better than a discussion board or a wiki or a "suggestion box" to garner consensus. This doesn't mean that the organization is a democracy. Businesses aren't. They must remain focused. But the folk in the field, technical or sales; the folk doing the work, internal or external; have great perspectives. A good leader, or a good consultant, listens first, decides and then delegates. I think that this is the true purpose of setting those goals in the first place.

Clarise and I had the opportunity to attend The Leadership Forum and University of California Club of Santa Clara County (a Cal Alumni Association Chartered Club) presenting an evening seminar: "Emerging Opportunities in Open Source Technologies"

Moderator: Raj Rao, Former VP Program Management & Operations,
Peoplesoft (Former Sr. VP Product Management &
Marketing, BroadVision)
Speakers: Bernard Golden, CEO, Navica
Mark Towfig, VP Engineering, NexTag
Date: Wednesday April 13, 2005

The perspective demonstrated by Mark Towfig on his company's use of open source struck a chord with me. It was very reminiscent of the corporate attitude that has IT departments build all their software rather than buy packages. Like a Fortune 500 company for which we did a data warehouse in 1999 building a large, unwiedly and unworkable inventory management and order fulfillment tool using Pick Basic and a Universe database in 1998, when Dr. Pick died in 1985.

It seems there are now three types of IT corporate cultures, build, buy or modify Open Source. I pointed this out during the first speaker's [Bernard Golden] talk. Oddly enough, Towfig had that statement on a slide as the new choices facing companies. But he didn't recognize it as a corporate culture, until I asked the question. It's a new thought.

Are there now three types of IT cultures? Is modification of open source projects becoming an established way of doing business, right up there with build and buy. The other choice, outsource or "offsource" was never mentioned. But it some ways, that is a separate decision. Software as a Service versus buying software licenses is also a separate decision.

Overall, the speakers were interesting. The subject certainly is. Unfortunately, the discussion during the presentations was so engaging that the panel discussion was canned. That's a shame. I had several questions that I was saving up. But I'll blog about those another time.

Back in December and early January we spent a lot of effort responding to an RFP to do BPR in conjunction with the roll-out of an electronic document management system. On Friday, we received word that the RFP had been cancelled.

This is even more disappointing than when the low bid wins, even if the proposal isn't viable. A lot of effort by a lot of people in a lot of companies, for no result. Sometimes, heavy drinking looks like a good idea.

But instead, we spent the weekend with a new puppy, ok, not a REAL puppy, a new RFP on which we've been working.

Wish us luck.

I keep seeing signs that the economy is getting worse.

1. Acquaintances and friends who were caught up in a RIF, or in a series of RIFs from one company after another, starting in 2001, are either still out of work or in a much lower paying job - often outside their chosen career path.
2. Construction workers can't find jobs as their current projects finish; projects that were started in 2001 through 2004 based upon a permit process that started in 1998 or so.
3. Restaurants and retail shops are closing, often after more than a decade of being in business.
4. Businesses are cutting back in services or quality, whether making a joke of customer service, or restaurants using lower cost ingredients [e.g. salads that used to be all yuppie greens - baby frisee, oak leaf lettuce, arugula, etc are now iceberg lettuce with a scattering of the more expensive stuff on top].
5. Salaries offered to those lucky enough to get a new job in their field are more suited to someone with 5 years of experience, not the 15 or more years garnered by the person being hired.

What started out as a burst bubble in the high tech industry [mainly IT or telecoms related] quickly spread to other high tech areas from physics research to pharmaceuticals and many things in between, and is now affecting all areas of the economy, in the USA and spreading to other areas of the world. This isn't just in the silicon valley, as I hear similar stories from folk in the midwest and the east coast, as well as Australia, ASEAN & EU countries.

Innovation, multiple revenue streams or product lines, and partnerships are the key to survival in such an economy, for individuals, businesses of all sizes, and even government services.