Breakout Session: DIGITAL RELATIONSHIPS: YOUR CONNECTED BUSINESS (Microsoft), with Dan'l Lewin, Corp. VP, .NET
Thursday, October 3, 2002 at 2:19PM Question to audience: where's the edge of the network? Wherever you are, about sums it up.
.NET commercial played...Dan'l is interested in the language used about doors and barriers. Slide: The Integration Imperative -- not particularly sexy, but what's going on under the hood is the weaving together of the necessary information. How do those who own and control and own the data authorize its use?
We're here in Silicon Valley, home of unfolding inventions. When the inventions get woven into what you do is when the integration imperative becomes clear. 20, 25 years ago, the core inventions that formed the Net were developed here. TCPIP, HTML, XML, etc. A "perfect storm" was going on here in the early '90's. The final evolution of the earliest stages of the information tech revolution were coalescing into general purpose knowledge worker productivity apps, desktop suites. $1,000 pcs available, all built for connectivity via TCPIP. HTML added a dimension distinct from what telephone connectivity could provide. XML begins to bring us back to distributed, network based computing -- full circle to the vision from 20, 25 years ago.
Clusters Define An Era. Enabling technology comes first, followed by a time of speculative exuberance, a crash, then a strong build out period when the technology begins to wrap around your life. This is when things get interesting. Today, the enabling tech is in place with processors, telecom, software, standards, the Net. Have radically changed or spawned genomics, GPS and how it's used (ex. -- inventory control unlike anything business has known), cell phones, PDAs. Little disruptive moments in time lead to big break-aways: Apple and its access to PARC's ideas about GUIs and disc storage.
We are in the middle of a time when revolutionary things are about to happen, but it's tough to see from here.
Islands Of The Internet. Today we have digital devices that are hobby-hard, not wrapped around your life yet. Lou Gerstner quote from the 2001 Annual Report: it's wrong to think it will be "back to business as usual" in the technology field after world economies recover.
XML Web Services Standards. Agreeing about how you use information securely from any machine, "that's really good stuff." "The value proposition is very compelling." This is where the really big integrators are going. See WS-I
.NET: Intended to connect people, systems and devices. Consider Boeing. They build a product that they OEM to American Airlines. Interactions between 50,000 entities needed to accomplish this. With standard protocols and interoperability, this is possible. The interconnection points are there. Microsoft looks at it starting with tools (servers), clients (any device).
The Sandhill Group in the Bay Area: business benefits and ROI drive most projects. System architectures will get built on top of the framework that everyone's working on now.
Financial services, ATM network. Currency is trust, a relationship at a higher level that is federated at the consumer level because the merchant doesn't trust plastic. It's not about the tech, it's about moving the information.
Business imperatives include getting connected, capturing value at all levels. Microsoft plans to focus on the connectivity, the software technology for connecting *your* world of information, people and devices. Whoever you may be. Business implementation playing a big role at this stage. It's not just Moore's law. We now have ever-increasing bandwidth everywhere. In the next 3-5 years the business framework will be built out. Software matters more than ever.
Q&A:
Question about role of IP telephony. Answer: it's huge. We look at it from the mobility products area, servers, desktops, voice-over-IP-conferencing, all that. The fundamental premise being everything's connected.
Is .NET an ingredient brand, and if you could change that would you? Answer: we reviewed the .NET stats as an initiative within the company about a month ago. Many people tack the label .NET on the services aspect alone, but the tools and other aspects are equally important. We made some mistakes and learned from the market that people wanted to operate those services themselves. Our next servers will allow this. This will mean a Ford could provide services for itself, then decide later on it wants to trust Dell. Let me reiterate there is no .NET group. It's part of everything we're doing.
ACCOUNTABILITY: THE NEXUS OF STRATEGY AND ETHICS
Thursday, October 3, 2002 at 11:59AM With Clay Christensen, Andy Grove and Walter Kiechel.
Where is Intel on its voyage today? Andy Grove: We are in the midst of a structural transformation in the computer industry. The Internet is redefining software, communication, interaction. People, including ourselves, made some horrible miscalculations. Computing is going to be subordinated to the communication task. Intellectual property created and stored in digital form is also an important shift. Computing subservient to the connection role, product lines need to be refined to reflect. Can no longer rely in a business model on the fact that content will be analog. Publishing, newspapers -- the whole ecosystem is affected.
Turning to accountability: how do you respond to current concerns? Andy Grove is waiting for someone to come out with the new book, The Management Secrets of Tony Soprano. Tony's nemesis is Junior, his Uncle. Tony is constantly beset by management challenges. Their product is a little different than ours. Junior's advice to Tony is to take your bumps, make your mistakes. None of us has a real understanding of where we are heading. Investment, personal decisions don't wait for the picture to be clarified. Take your shot, clean up the bad ones later, bump of the managers you need to bump off, try not to get too depressed in the process. Try to keep your spirits up.
How do you achieve that management of emotional response? Part of that is self-deception, and deception becomes reality. After a while if you act confident, you become more confident. Act on your temporary conviction, and when you realize you were wrong, address it.
[Grove quips in response to a Clay Christensen question that he admires the sleight of hand of an accomplishe academic: when given a complex question he nods his head and puts another question back.]
Christensen asks a follow up on the confidence issue. Comes in part from the confidence placed in you by your own staff, their assurance that your interest is the interest of the corporation. Secondarily, if you have founded a business, you understand it implicitly, it's in your skin. If you're an outside manager, knowledge of the business didn't get you where you are, so you have to derive your confidence elsewhere.
Christensen: consider multidivisional companies like HP, Johnson & Johnson. Christensen is increasingly uncomfortable with their teaching model for MBA students. We exalt the virtues of data driven decision making; if a student posits something unsupported by the data, the instructor tears them to shreds. Maybe you can't teach intuition, but maybe you can.
Grove: [I'm missing alot here; Grove's mic situation is less than great.] The leader needs understanding and confidence in his convictions. A degree from Harvard, whether you learn anything or not, is invaluable to your income stream.
Christensen: present wave of corporate accounting scandals, consider in light of idea of principal-agent relationships "widely embraced by attorneys."
Grove: The unstated supposition in your question is that stock options are the means to solve the agency problem, line up the interests of management and agents. People who own 20% of the company don't need to overcome any more hurdles before they confront the agency problem. When you look at the use of stock options, you get different pictures depending on how many options are given to whom. This is the variable that distinguishes how they work. Bit by bit, boards are moving in the right direction. Began acting as consultants, advisory bodies. Corporate governance principles are exactly the other way around. The pro forma statement of corporate governance and the real life version are diametrically opposite. There's a movement from the advisory body model to the corporate governance model is happening. Hard to say how fast, how far. In general, Chairman and CEO are the same (85% or so of time).
Christensen: The data is always down in the company. Managers have to have intuition to find it, they know only what people choose to disclose. How to expect them to govern under those circumstances is a very big problem.
Grove: There's a lot of things you can do, all you have to do is speak up. Board of directors should be graded on participation. Chairmen need to stress getting a more active board.
I smell a new software technology coming that is going to make corporate governance a nightmare: governance by shareholder proposition. For instance, if today somebody says I don't like Intel being in X, get out, decisions may get made which are directionless. Institutional shareholders average 11 months in a stock, and own a large portion of all corporate shares. We're facing the business equivalent of day traders running corporations.
Q&A:
Richard Owens runs a corporate branding company, and asks about the notion of Intel as a brand, and an ingredient brand. How was that created, and where does it stand today? Will there always be an Intel Inside, or will it gravitate to something else?
Grove: It started 12, 13 years ago by a Harvard B school grad, director of corporate marketing, who recognized their point of differentiation was the microprocessor but they had no way to brand it. There's always going to be an Intel Inside, in my opinion, my forecast. There may be other things for us besides the microprocessor. The expenses related to the creation of the brand are one of the first on the chopping block; many times this has caused me to throw myself in front of the speeding train to prevent money from being cut. It was like herding cats at various times. Now the challenge that we have is people take it for granted, so refreshing it and giving it additional buzz is what we need to address.
Audience member: following up on the data predicting the trend, does the panel think we're seeing a trend toward deference to the science of managment replacing a founder's passion, intuition, the art of leadership?
Christensen: Yes, it's a problem. People are reacting to the data. We've had alot of bad intuition in the past, but you need to foster that to look into the future.
Grove: That is all true, and your question was asked in the context of business strategy. You're right, but there's more to running an enterprise, small or large, than strategy. The revolution in manufacturing techniques in the last 15 years has benefitted the U.S. economy incredibly, without changing strategy, by changing the manufacturing science. Strategy is important, but doing it is important as well.
VC Panel
Thursday, October 3, 2002 at 10:59AM We bloggers in the back of the room were too busy chatting when this panel started to pay too much attention to who's sitting where -- sorry! The general gestalt so far involves a hypothetical software startup. $10 million is too much in today's climate to invest in a software company, per Bjoern at Seimens $5 million may be too much. Appetite for investing at an early stage is low. Three million might make more sense in a partnership type scenario. The company needs to have a product. Not too interested in getting involved at the beta stage. What sort of patents are under your belt? Response from moderator: So you want to steal our IP? Collaborating on the IP is a pull. Question asked about the benefits of consulting with VC's: "You may get no cash, but you will achieve total consciousness."
[Of potentially greater interest -- Dave just circulated a flyer for dinner tonight and has more on Scripting: "Ask for the Bloggers at the maitre d's desk. I'll try to explain what that means."]
"I don't want to hear about the next really big thing. I'm very suspicious of the next really big thing."
But, Bjoern says excellent opportunities for investment at early phases exist right now. Danny says Wells Fargo is less interested in the ground floor now, wants to know you are established and already funded first.
Q&A: [Moderator: anyone have a business plan they want to pitch?]
How do you grow the leaders of startup, so that when they're ready to go to the next level they're prepared to manage in a different environment? Bjoern says in their portfolio there is generally a change of guard. Requires maturity and ego sublimation on the part of the initial managers.
Why aren't venture firms laying people off to the same extent as the investment candidates? Are they burning venture fuel to survive? If you look at the data over time and adjust for structural dynamics, this is an industry that will support $10 to $20 billion in investments per year. There are too over 8,000 vc professionals today; getting that number back to about 1,000 may be needed as well. The operating burn of the venture firms has not been adjusted to reflect a different environment. The general partners of these firms have all the power, and it will take awhile for the chaff to burn off.
What does the typical portfolio really look like? Siemens has about 75 companies, as well as other investments. Thinks they have an abnormal percentage of very successful companies. They have aggressively whittled, done triage, to separate the survivors. This started as a business of hunter-gatherers; things look different now.
Komisar, Zook, Cook and Foster Panel
Thursday, October 3, 2002 at 10:16AM (See agenda and speaker list for backgrounds.) Dick Foster has a story: Boris Yeltsin when asked to summarize the state of the Russian economy says "Good." When asked for a more indepth, two word description, he responds, "Not Good."
Creative Destruction: markets outperform coporations. Long term survival and long term performance are not the same thing. Foster chooses to take an investor return lens. It's harder to get rid of a business you already have than create a new one. J&J took steps to make the corporation more market-like. Today, Quest, Global Crossing, Tyco tells us what happens when controls systems are inadequate. Must control what you must rather than what you can.
Scott Cook re Intuit: Quicken is now less than 10% of the company's revenues. Quicken's business is not doing badly; it's just that other businesses are growing much faster. "I don't write books like these guys; I just try to do this stuff." Tax software: bought TurboTax, very fast way of generating tax forms on the computer. Then the "interview" process in the program insulated people from the forms; even better. Now they're working to obsolete the need to even type the data in. They're working to fill out your taxes for you. Those are examples of radical reinvention in your core business. Much of what they do in this area happens out of instinct or gut; what is conscious is the effort to see customers and customer needs in new ways.
Dick Foster re his book: to talk about a dominating management philosophy in a new business is foolishness. There's too much going on. At the next stage companies start reflecting on the nature of their success -- "a very dangerous thing to do." They begin to attribute their success to themselves, call in the MBAs and everything gets rationalized. Finally, if you make it through that stage, at the top of the food chain you're the expert. You need neither answers nor questions about your business; "psychologists would call this state denial." Once you're their, you miss the opportunities to "sell to the non-consumer." (See Clay Christensen.) What to do about this? Be aware. Ask yourself questions like "what business should we divest this year?"
Chis Zook: redefining the core. Remember the book Groupthink. Examined fundamentally problematic decisions. The stronger they wanted to achieve something, and the greater the egos, the more they tended to screen out data antithetical to what they wanted to achieve. Ideas about how to change: roles of outsiders (board of directors constantly pushing on management assumptions).
Scott Cook: Intuit brought out a product in '92 to do accounting and blew the launch badly. But within a month they had a central innovation: this was the first accounting software with no accounting in it. Small businesses wanted nothing to do with "accounting" in their accounting software. By paying attention to customers, Intuit got dragged into eliminating accounting from Quickbooks when they realized customers were using Quicken to do their books in the workplace, and returning all the accounting software that was full of traditional accounting features.
Dick Foster: minimum number of people needed for a bureacracy to develop is One. Must be aware and combat it.
Chris Zook: non-core businesses that are undermanaged are worth paying attention to. Example: Carter's, babyware. Company was handling all aspects of production, and all in the U.S. Their core strengths were the brand, and their baby sleepers. "Remember the power of fewer things." What is repeatable, what should we focus in on? Have to be unsentimental, unwed to the past. [DMH aside: we're talking primarily about law firm clients here, but all this translates to managment wisdom law firms would do well to heed as well.]
Randy Komisar asks panel about HP; how do you see the Compaq acquisition and other HP activities in terms of managing from the core? Chris Zook: 80-90% of value pre-merger was in printer business; that had become the core. Compaq's core was PC's -- 1/10th of HP's overall business value. Dick Foster: HP has maintained continuity and survived. They couldn't have come under more pressure, yet they hang in. Scott Cook comments he has a hard enough time running one business, let alone someone else's (ha ha).
Q&A: recurring theme seems to be issue of ego. Seems to be a movement among institutional investors to examine the humility factor. Your thoughts? Scott Cook discusses companies with humble, noncharismatic leaders. Such folks are likely to lead with questions, rather than answers (coffee cup: "When I Want Your Opinion I'll Tell You What It Is"). Chris Zook has just completed 20 case studies and CEO interviews, out of which he gleaned this: even more observable than humility is what peoples' experiences have been. Near (corporate) death experiences, times of crisis. He wonders whether too much unbroken success without experience of failure is a dangerous thing. Dick Foster notes that there are alot of humble people who should not be CEO's, but it's equally easy to see where arrogance will lead to disaster.
Another question: for Scott Cook, how has Intuit defined its core business? It doesn't.
Dave Winer asks about near death experiences; there's alot of that going on here in Silicon Valley now. I.e., Yahoo needs to make money to survive and flourish after the near-death experience it's having now. Scott Cook responds, let's take Amazon, also came up in period of go-go growth. Bezos said when trend to investing for growth changed, his company would change. When it came time to focus on operations and profitability, Scott wondered whether Jeff could lead in this entirely different way. They'll soon be profitable after all costs. The essential element to make that happen is the leader.
Next up:
THE REALITY FACTOR: MAKING THE SMARTEST BETS NOW, with
David Strohm, Partner, Greylock
Bjoern Christensen, President and CEO, Siemens Venture Capital
Danny Peltz, Senior Vice President, Wholesale Internet Solutions, Wells Fargo
Tim Rohner, Managing Director, Bell-Mason Group and co-author, The Venture Imperative