The price is almost 4X McAfee’s most recent annual revenue. That’s very, very pricey in almost everyone’s view. I’ve read a number of columns by others which analyze this deal from various viewpoints.

 Let’s look at several potential rationales for this deal:

 Diversification into software and services

Intel can’t grow in PC semiconductors forever, and is very dependent on the semi business, which can be quite cyclical. Theoretically, attempting to grow by increasing software and services as a percentage of the business makes a lot of sense. But Intel hasn’t been very successful in the past in this very endeavor, which I’ll discuss more below.

 Technology synergies

Intel’s management has provided justification for this deal by talking about embedding security into its chips, as well as valuing highly McAfee’s embryonic security efforts in mobile devices and the cloud. I think these all have strategic merit–but are they worth anywhere near $7.68B?

 Cost synergies

While overlapping functions can lead to cost savings in many acquisitions, there are probably not a lot of costs to be taken out in this one. McAfee is a big company, in a different business than Intel’s core business. Sure, there may be some common functions like HR and finance that can be combined to some extent, but I don’t see cost savings to a material degree here.

 Use of cash flow

Intel generates a LOT of cash. They are one of the most successful tech companies of all times, and their PC processor business is nearly a monopoly, with terrific margins. So the cash is available, and it doesn’t make much sense to have it sitting in the bank earning 1%. THAT will kill your return on assets metric! It needs to be reinvested, or retuned to the shareholders…

 Growth

On the surface, buying a big software company could be a good growth strategy for Intel. Assuming as there is a good return on investment, then why not? It’s going to be hard for Intel to grow much farther in processors. About the only area big enough to make a big difference in their processor business is in mobile. This is a very competitive arena which they’ve failed miserably in to date.

 So that’s some of the reasons you might use to do a deal like this–but is that reality?

 The real reason deals like this happen

CASH: The biggest reason that this type of deal happens is because it can. In this particular case, tech companies like Intel want to be seen as growth companies. It seems to kill tech companies to pay their cash flow out in dividends. But once your company gets to a certain size, it’s hard to be a growth company. A lot of bad acquisitions happen in the process of trying to continue growth status past a reasonable point. But is this the best return on assets, or use of cash flow, for the stockholders?

 Why there is a good chance this acquisition won’t succeed

PRICE: Intel paid dearly for a very established security software player. They paid for the McAfee brand–but will they keep investing in it in the long run? History says that this business will eventually morph into “McAfee by Intel” and they “Intel Security Software”, if the business stays with Intel in the long run. Built into the price was also a large number of retail customers, a dealer and distribution network — but does Intel really want these things? If not, why pay for all of them?

 TECHNOLOGY: Listening to Intel, this seems to be a technology play–but McAfee is universally not considered to have the best technology in the space. They win to a great extent on brand and sheer market presence at this point–like many large companies. Since the price paid was very high–why not buy a smaller player with much better technology to integrate with silicon–for much less?

 CULTURAL FIT: Semiconductors and software are very different businesses. I’ve spent a lot of time in both. I have always said that the “Common Business Sense” that a management team falls back on when stressed, is a real problem when they are making decisions in an unfamiliar business. It doesn’t seem like brain surgery to manage a software business with a semi background, but there are subtle differences that tend to have massive consequences. Intel has bought a number of software businesses in the past–how many of them can you name? There is a reason for this, they tend to disappear in the large semiconductor bureaucracy and eventually wither away.

 Typical M&A ISSUES: Key McAfee personnel will have a tendency to “cash out” and leave after the acquisition. This is a normal issue in M&A, and when the acquirer is in a different space, this can be a particular problem. Possibly the fact that McAfee is already a large public company may reduce this issue. But if the real assets of a software company (the people) walk out the door, there isn’t much left for your $7.68B.

 In summary, I view this as a very questionable move by Intel. Intel has some very smart folks in management. Maybe they have some great strategic and tactical plans in mind, but if so, they’re keeping it all to themselves. For the stated reasons of embedding security in chips, mobile security and the cloud, they could have bought 2-3 innovative security software companies with bleeding edge technology–for a fraction of the price they’ll pay for McAfee. If this acquisition is to pay off, Intel will need to figure out how to leverage the McAfee brand, consumer franchise and distribution channels. I just don’t see this happening in the long run–I hope for Intel shareholders sake I’m wrong. Acquisitions are an area with room for a variety of opinions–what do you think?

 Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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 Today fundraising for a startup company is tougher than every. The Venture Capital (VC) business is in disarray, with the number of active firms in the process of shrinking. The financial crisis and general economic malaise has made finding capital from nearly every source more difficult, from traditional banks to angel investors. So if you’re planning on starting a company today, it might be time to get creative.

 Most of the ideas presented here are applicable to any type of company. But for those smart about it, a software-based business is one that can be started and grown with minimal, or zero, outside capital. This has always been true in the software business, but a number of developments have made bootstrapping even a more realistic possibility today. You will need to accept upfront that it can be done, and structure everything you do with minimal financial resources in mind.

 Successfully bootstrapping is tough if you’re a first time entrepreneur, especially for those that have been working in large companies, with all the trapping that come with that. But embracing the proper attitude early on is essential if you’re going to have to bootstrap your company, at least in the beginning. Let’s examine some tactics that can increase the odds of startup success:

 Understand early-on the level of capital you’ll have available

This is crucial. Most get going on their business, moving ahead and worrying about funding once they have a business plan, prototype/beta, etc. Only then do they put together an investor pitch and think about how much money to raise. But it can be really helpful to have a realistic view as early as possible how much money will be available to you in the early days. No question this is hard to do and by definition the result will be inaccurate. In reality, a number of things will dictate how much money you’ll have available: Management team reputation and track record, investment contacts, dilution philosophy, local investment resources, business model, IP, etc. The key point here is to do your best to understand how much money you’ll realistically have available at startup and early on….

 Structure your business accordingly

….then design your business model to fit your prospective available funding. In reality, this rarely happens. Most design their business, and then try to raise money to fund it. As a result, for example, I see people start enterprise software companies, with complex products at high price points that demand a team of outside sales reps and field engineers with $150-250K comp plans. Most startups won’t be able to attract the funding to support this sales model. Or adopting a Software-as-a-Service (SaaS) approach, without planning for the added operational expenses required with a SaaS model, essentially taking on the role your clients IT department. If you can match your business model to your expected capital resources from the beginning, your chances of success go way up.

 Start while you’re still working

One of the best things a startup entrepreneur can do is to start working on your business while you still have a job. This is especially true of the technically-skilled software company founder. Many software companies have been started by a sole programmer, writing the initial product on his or her laptop while sitting at home in the kitchen. It’s one of the beauties of the software business; you can create a product with very little capital investment. Of course, care needs to be taken that you don’t use any of your employer’s resources or do anything on company time. Make sure that you aren’t violating any of agreements signed with your employer. But once you stop working to start up a new venture there’s no telling when your personal income will start flowing again. So do as much as you can, before cutting the cord with your steady income.

 Do it yourself and don’t be wasteful

Entrepreneurs often find that they can actually do things they never dreamed they could. When dealing with scarce capital, it’s critical to make sure that you actually NEED to pay someone else to accomplish a particular task before parting with your cash. This will lead to personally doing a lot of mundane activities that you don’t really want to do. But it’s important to take those duties on early on to conserve cash. Also try not to waste money on ANYTHING, not just labor. Count those paperclips! The corollary to this is when you really do need outside help, DON’T SKIMP and just do an unacceptable job internally. Bad marketing is an example of this for the technically-oriented founder. This can be truly penny wise and pound foolish, and can cost you much more money in the long run than you save in the short term. Recognize what skills you just don’t have that are absolutely critical to the business, and save money elsewhere so you can afford outside assistance in those crucial areas.

 Don’t reinvent the wheel

I referred earlier to it being easier than ever to build a software company with minimal capital. Development tools have matured to make development quicker than ever. Many target platforms have much less memory constraints, reducing the time needed to produce code that is extremely memory-efficient. There are many pre-built modules for standard functions available for a modest cost. Ten years ago it might have taken a half million dollars to build a quality website that you now can replicate for a few thousand dollars. As a software startup, make sure that you scour all pre-existing resources for things that you can use, before you build them yourself.

 Outsource and off-shore, if appropriate

Another area responsible for much lower costs in starting a software business is the potential for outsourcing/offshoring. This isn’t for every company or every situation, but where it makes sense, it can both reduce your costs significantly and expand the availability of critical development resources. While everyone would prefer the developers under their own roof, in many cases there just isn’t the right talent where the company is located–or the budget to fully staff with full-time, onsite employees.

 Don’t ignore international markets

A big area which most software companies ignore initially for their products is international sales. It’s natural to want to focus on your domestic market first. But doing this exclusively can cost you some excellent growth opportunities, even from the very beginning. This is particularly true for US-based companies. The US is the toughest market in the world. It’s the biggest, and the bulk of the software industry is located there (all looking at the US market first….). As a result, the competition is almost always less in non-US markets. So there is low hanging fruit to be had, plus you can partner in many markets with distribution partners whom have existing market presence, and can take on much of the marketing investment required to gain traction. All of this can mean an excellent return on a modest investment. Once you’ve invested so much to create valuable product IP (which is very “perishable”, by the way), don’t limit your return on that investment by focusing on a narrow geography, if at all possible.

 Don’t give up and enjoy the journey

Don’t ever give up prematurely. The most important thing is to keep grinding until you start to gain traction. Starting up and growing a software company is an exciting–and difficult–endeavor. Above all, I believe you need to be able to enjoy the journey, in addition to having your eye on the end prize–success. There will be difficult times where you need the willpower and stubbornness to push through. Often startup success is found by staying alive long enough for good fortune to find you.

 That’s my advice on starting up a software company and growing it in relatively tough times. Post a comment if you have your own experiences to add.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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 The VAR channel has been a major factor in the B2B software business for a long time. There are tens of thousands of VARs, most of them now focused on specific vertical markets. While it is still possible to find a horizontal VAR, in a market of any size you’ll likely find a nice number of VARs specializing on that segment of customers. As a result, anyone who is selling software (whether via traditional licensing or SaaS) would love to have this stable of key market influencers representing their product. Let’s take a look at the situation:

 Major SaaS strengths

•  Simplicity of startup for the customer – For many SaaS apps, getting started is as simple as signing up, obtaining a user name and password. Contrast this with the lengthy, complex and sometimes extensive setup and configuration period for some B2B apps. (This strength is a potential problem for VARs).
• Available from any web browser - This is one of the great capabilities driving the SaaS revolution. Of course, traditional apps can have a web-based interface as well, but SaaS apps by definition are web-centric. Browser-based apps can limit functionality in some cases, but is becoming less of an issue all the time.
•  Simplicity of maintenance for the vendor - This is a big one. With traditional on-premises apps, the vendor has to deal with “pushing” updates to the client, often into wildly varying hardware and software environments. With SaaS, the vendor presses a button and the new version is universally available to everyone. This is a huge advantage leading to reduced rollout costs for the vendor, and less pain for the client. (Also a potential problem for VARs) 
• Less IT infrastructure required by clients - Theoretically a company could nearly eliminate their IT department by adopting all SaaS apps. As a practical matter, this isn’t happening in companies of any size, and likely won’t. But any reduction in reliance on perennially overworked IT departments is usually seen as a good thing. (Potential problem for VARs, but also an opportunity)

 Major VAR motivations

 Sell Services (not products) – Contrary to the expectations of channel neophytes, VARs are generally seriously interested in products to the extent that they have the ability to generate service revenue for the VAR. (Early SaaS models eliminate many traditional service revenue streams)

 Secure ongoing revenue – VARs don’t own intellectual property(products) to stabilize long-term revenues as a rule, so they’re always interested in ways of “smoothing out” their business with predictable, ongoing revenue streams. (SaaS eliminates much traditional service revenue, but subscriptions open up new possibilities)

 Maintain client control – VARs are very sensitive about retaining control of the relationship with their clients. They view these relationships as hard-won, and without owning the intellectual property, they are probably the most strategic aspect of their business. (VARs shy away from vendors who try to wrest account control from them, and many new SaaS vendors have this “direct-first” mentality).

 The Gap

 The problem as discussed in the above paragraphs is that the ways VARs traditionally make money (installation, training, integration, customization, support, client control) have been eliminated or severely reduced as opportunities by first generation SaaS vendors. Frankly, it’s never been easy for any software vendor to recruit VARs who are “active” with their products. The current situation sets up the typical first generation SaaS vendor as an arch- enemy to VARs. The SaaS vendors aren’t attractive partners due to the lack of potential service revenue (and often aren’t looking to partner), but are targeting the VAR’s customer base. To some, it looks like the end of the VAR channel for anyone running a SaaS-based company. Sound like a caution sign to SaaS vendors, one which makes the vendor focus strictly on direct selling? Maybe–but let’s explore a few ideas for changing the equation.

 Ideas on how to bridge the gap and attract VARs to your SaaS offering

 There are some forward-thinking SaaS who have been able to leverage the VAR channel for their companies. But at this point, they are few and far between. For many of the reasons stated in the above paragraphs, there is no established, tried and true model for attracting VARs to a SaaS offering today.

The biggest thing I’d like you to consider with respect to the sentence underlined above, is that when things are least established, there is the MOST opportunity for newcomers. Since there is no established perfect SaaS/VAR cooperative business model yet, no SaaS player is dominating in this still very influential channel. For a newcomer, this creates great opportunity and potential payback for creative approaches. Let’s take a look at a few such ideas to attract VARs:

 Design your SaaS offering from the ground up for easy customization and integration

Unfortunately I don’t see many SaaS vendors considering channel strategy when designing their first product. In the early days of SaaS, enabling customization and integration with other products was tough to do. Now the tools are there to make it very possible, but it’s a lot harder if you try to do it “after the fact”, once your architecture has been set and the first commercial release is done. This one step can be a huge asset when you are later trying to design programs attractive to VARs, and it can of course be a huge advantage with certain end users as well.

 Offer solid upfront margins, but focus on downstream revenue streams for your VARs

I recommend offering competitive upfront-sale margins, but going overboard here can be a waste of resources. Remember that VARs don’t build their business on upfront product sales revenue. Focus on finding ways VARs can make money dealing with you after the initial sale is complete. As an example, how about sharing downstream subscription revenue–but only if the VAR creates X amount of new sales revenue for the year? This is an example of a win/win which could lead to great loyalty to your offerings, tying the VAR’s interest to your business in the long run.

 Instead of building a large in-house consulting team, use VARs to help fill IT gaps for your customers

VARs have a lot of capability to offer services that your end users might require and demand. Rather than competing with VARs (and using scarce capital that could be deployed elsewhere), take a look at creating programs to utilize the best of your channel partners as your outsourced consulting team.

 Create a program to enable the outsourcing of upfront product training to your VARs

Initial product training is a great example of a “consulting service” to outsource to your channel. Most product groups see training as a necessary evil and an afterthought, often giving it away for free–while providing it with insufficient attention from the end user’s perspective. With the right tools, a VAR could turn this into a profit center for their business, reducing your utilization of key resources on a non-core activity, while tying the VAR tightly to your products.

 Be careful to allow your VARs to continue to lead in account management activities

In everything you do, keep in mind that the VAR is paranoid about account control (with good reason, unfortunately). Remember, you are in a business partnership with the VAR, and you need to trust them to do the right things for your joint business interests in the account. If you don’t feel like you can trust a particular VAR in this regard, don’t change your program to wrest account control from your channel. Stop doing business with that VAR.

I’m optimistic that adopting a few of these ideas can give you a leg up over the competition in building a productive channel business. I hope that you’ll find this article provocative, if not accurate in your view! This is an emerging, rapidly changing environment. Please post a comment with your own thoughts to expand the discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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 As in the hardware/software contrast above, revenue levels for different business models can be quite different. So it’s hard to generalize strictly upon gross revenue levels. But undoubtedly there are stages that every company goes through (startup to profitability, profitability to stable small company, stable small company to midsized company, etc.) which represent points of inflection in terms of the way a company operates. For example, you need quite a bit more formal process to operate a large company than a very small one. The methods of capitalizing a large company are very different from a bootstrapped or VC-backed startup. There are many more possible examples; I’m sure you get the picture. For this article we’ll focus on growth into the Mid Market stage.

 First of all, there is no perfect definition of a “Mid-Market” company. People have defined it many different ways: by number of employees, revenue level and many other factors. For the purposes of this discussion, we’ll define a Mid Market company as one having between 100 and 999 employees. . Let’s take a look at some of the major changes required to successfully grow from a startup to a mid-market sized company:

Hiring

As a startup or smaller company, you’re often restricted by resource realities with respect to who you can hire. Startups are often forced to hire people with less direct experience than they’d like, and pay them less than the going rate in cash compensation. You often can’t fill every hole, even all the ones that you think are critical. People have to wear two or more hats, and the type of people you can attract might be those that really prefer the small company environment, or are dreaming big dreams based upon the stock options. In short, it’s continuous compromise. As you grow into the mid market you have more resources to pay market rates, and are generally more attractive to a larger pool of employee prospects.

 But please, be careful–just because you can hire differently, doesn’t mean you should. I’ve seen folks get drunk on hiring at this phase, and get loaded down with overhead that makes running the business to optimal profitability much harder. There is also a tendency to go after people with big, blue chip company resumes, which can be very dangerous. If these candidates don’t also have experience in smaller companies, you’re setting yourself up for a very premature and inappropriate culture change. It’s important to guard against building a big company bureaucracy in a middle market company.

 Business processes

Much like in hiring, there is often a tendency to want to add too much process, too soon. In fact, I believe this is the absolute biggest danger executive management needs to guard against during this transition. The CEO and senior team are usually very aware that the business is outgrowing its current level of checks, balances and controls. Inevitably there is a need for additional and more formal processes. The typical mistake I see is that instead of adding carefully and gradually, folks want to radically change the business overnight. The result is often a still-modest-sized business operating like one with 20,000 employees: Meaning operating VERYSLOWLY. Guard against this! Mid Market companies still need to rely on speed and agility to compete with the corporate giants, who have many more competitive advantages that you can’t yet replicate.

 Scope of target market

Around the mid market stage, a single-product or single market segment company may be running out of room to grow at the rates it has historically enjoyed. This is a day of reckoning and a danger point that stops many promising companies in their tracks. If you need to expand into new products or markets, make sure that you do so rationally. Don’t go out and acquire a company in a complete different business, because your investment banker thinks it’s undervalued and a great buy. Do “diversify” into “adjacent” markets, taking one of your existing technologies into a different market, or introducing a new technology or product category to your existing market segment.

 Capitalization

This is the stage where you absolutely need to hire a serious CFO with financial market savvy and connections. Many startups have someone with a CFO title whose background is really accounting and financial controls. Or possibly and outsourced, part-time CFO. This usually is fine up to this stage. But once you are talking about opening new offices, funding a new market focus or new line of product technology, the game has changed. The skill set of controlling the company’s simple expenses, dealing with angel and VC investors now becomes inadequate. The company needs someone that understands raising money in institutional financial markets, along with the contacts that go with that knowledge. Budgeting and controls will also start to become more decentralized, requiring a different financial management style, as the company continues to grow into the upper end of the mid market phase.

 Distribution and regional offices

As your business grows into new markets and product categories, your distribution system must often change and grow with it. This might be the time that you begin to open offices in all the key geographic markets of the world. But don’t do this “just because it’s time”. It should be done only for good business reasons, such as increasing marketing in countries where a distributor won’t or can’t do what’s necessary. It might also be the time that a single distribution channel business needs to become multi-channel. For example, a direct-only company adds retail or VAR channels. Again, avoid the temptation to do these types of things because your business has grown to a certain stage. It adds complexity and overhead to your business, so make sure there are sound business reasons for the change.

 Product Development

Moving to a different customer set or new base technology can have a profound effect on the product planning and development process. It is often at this stage that you must stop relying on a single set of market veterans or insiders, who have been successful in bringing out products due to deep, long-term domain knowledge in your original market/product focus. Now is often the time where there needs to be a bit more standardized product planning and development process, as you broaden both the number and scope of development projects.

 The bottom line is that as you grow out of the startup phase, the way your business operates necessarily will need to adjust to continue strong growth. The biggest danger here is trying to “get big” before your time. While the big blue chip companies are often envied, trying to duplicate their current mode of operation while you’re just entering the mid-market stage is probably the best way to ensure that your company will never reach that blue chip status. “Get big” in the way you operate cautiously–because once you’ve bureaucratized your business, it’s very difficult going back.

 That’s my take on going from a startup to mid-market. Share your own growth stories with us to start a discussion.

 Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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A long time player and sometime innovator in the mobile device marketplace, Palm was rapidly losing steam, market share and relevancy in the hyper-competitive Smartphone market. The company had staked its future on its new WebOS software platform and the recently release Pre SmartPhone.

 After a long period of decline due to an aging product line built on an obsolete software platform, the Palm Pre and its WebOS software was introduced to critical acclaim by industry reviewers and pundits. Had these introductions come a few years ago, they might have indeed turned around Palm’s fortunes.

 But competition in the SmartPhone marketplace has heated up to a white-hot level. After a promising early start, sales momentum of the new Pre products stalled, and this “last-stand” product introduction proved to be too little, too late. At nearly the first sign of Pre sales weakness top Palm executives began bailing out, while Telco partners quit promoting the product heavily, and it was also being dropped from the assortment of major retailers such as Radio Shack. The end was clearing in sight for this handheld industry pioneer.

In swoops HP to save what little shareholder equity was left. HP is on a roll, and in conjunction with their upward momentum they seem to be intent on acquiring everything available for sale, as well as competing in nearly every category of the technology business. This particular acquisition appears to me to be particularly high risk/high reward. It raises several key questions:

 Did HP pay too much?

Probably. The price HP is paying for Palm is about $1.2M, while most knowledgeable industry observers had placed the value below $500M. This is hard to understand for the casual observer, but you must remember that a company is worth what the highest bidder is willing to pay. Except for those on the inside of the deal-making, no one knows what the sizes of the competitive bids were. So it’s a bit pointless to speculate whether they paid more than they needed to. The better question is what is the intrinsic VALUE of Palm to a company like HP?

 A case can be made in this situation for bidding at a price that will prevent the transaction from dragging out. Software loses value quickly–especially in a fast-moving market like SmartPhones, and this is largely a software acquisition. Another big key to the valuation question is whether or not HP is able to hold together and retain the Palm team, especially the key developers. In most cases, buying a software business (which is the key asset of Palm) without the team is nearly worthless.

 Can HP compete in the SmartPhone business, and should they?

This is a huge question in my mind. Hewlett Packard is definitely becoming the 10,000 lb gorilla in the tech business. But even the biggest giants reach a limitation on resources, most importantly senior management bandwidth and market segment knowledge. IBM at one time looked much like HP today, competing actively in nearly every important technology market. Eventually IBM lost traction and did a painful restructuring focusing on services. Microsoft is huge and still dominant in software, but they’ve been far from successful everywhere they’ve invested. There are many examples in the tech business of competing in too many competitive markets at once. The often-used analogy (which still rings true) is to Hitler opening up a two front war by invading Russia. The old joke goes that had he been more focused, we might all be speaking German today. I am very skeptical of Hewlett Packard being able to win in all of the major markets they appear to be serious about at the moment.

 Can putting two losers together ever create a winner?

Not usually. I can’t think of a single high profile successful instance of this, although I’m sure it’s happened before. It usually doesn’t work in such a highly competitive market as SmartPhones, however. Palm was around 5% market share and fading fast.  HP is very successful overall, but its iPaq SmartPhone has less than .1% market share–I’ll bet most of you are shocked to hear that HP was even in the SmartPhone market prior to this deal! When there is a reason that both companies are unsuccessful, it’s very difficult to change the equation simply by combining. Mergers often create more problems then they solve, regardless of how good they look on paper.

 Having said all this, there is some synergy here. There is a belief is that one reason the Pre wasn’t gaining much traction was Palm’s precarious financial position. No one wants to carry around a phone that could soon become an orphan. The HP acquisition should help immensely on that front. Hewlett Packard certainly has the financial might, industry muscle and influence to improve the position of a well regarded platform like the Palm Pre and WebOS platform.

 Will HP be patient and persistent enough to win in SmartPhones?

To me this is the biggest question. If you asked me 10 years ago I would have said no. As a former HP employee, at one time this wouldn’t have been the type of market that I would expect Hewlett Packard to have success. But since them I’ve seen the company persevere for decades as an also ran in the low margin, down and dirty PC business, and finally push Dell out of the top spot. There was a time when Dell (and a few others) used to laugh at HP in the PC market–but that ended a while ago.

 I’m convinced that this ever more powerful version of HP can succeed in SmartPhones if they so choose. But as discussed above, even in a giant company like this, can they win so many tough fights across so many difficult market segments? That is a different question entirely–and something may have to give. They might not be able to win on all fronts.

 Bottom line

The bottom line for me is that HP can probably muscle their way into the SmartPhone market if they want to bad enough. But can they do it while they also compete with Cisco in networking, IBM in services, and Dell in PCs–just to name a few? Even for a successful industry giant like Hewlett Packard is today, I believe in the concept of “biting off more than you can chew”. That is the real risk. One thing I think for sure is that this won’t play out quickly. Only time will tell whether HP ultimately has the market knowledge, patience, tenacity and will to win in this hit-driven and brutally competitive market. What’s your take on this high profile acquisition? Post a comment to rev up a discussion.

 Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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Regular readers of this Blog may notice a different look and feel this month. That’s because I’ve recently transitioned my Blog from Google’s Blogger platform to WordPress.

Like most software transitions, it’s been a bit of work, and somewhat painful. Thankfully being from the software industry I have a bit more technical savvy than the average Blogger. I’m sure there are more than a few non-techie Bloggers right now pulling their hair out as a result of the very same transition that I’ve just gone through – Because Google has made us do it.

By the way, I couldn’t have gotten through this painful transition to Wordpress without great support from my Hosting Provider, ITX Design. If you are looking for a new webhost, I recommend them highly. Good prices and GREAT technical support. Special thanks to Melissa and Paul in ITX Design tech support; I’d have been up a river without a paddle without their expert assistance. Now back to the discussion of Google’s true colors.

Is software really ever free?

I’d been Blogging using the Google Blogger platform since February 2005. If I’m not mistaken, Google had just acquired Blogger, or did so shortly thereafter. At the time, you could already host your Blog on Google’s Blogspot hosting service for free, but Google seemed happy to allow you to also host it on your own website if you wished. For anyone using a Blog to help build a long-term presence on the web, including increasing SEO on your website, there really was no choice in the matter. You have to host it yourself.

I always wondered why Google was doing stuff like this–providing software for free, with no apparent major return on investment. As a software executive, I always found “free” software from a commercial enterprise to be an oxymoron. I understood how Google would benefit if my site was hosted on Blogspot; Google serves ads on your Blog in return for hosting it for free, and I presume they are also gaining additional market intelligence by tracking visitor activity and behavior on Blogspot Blogs. But what did they gain from allowing their software to be used by people who were hosting their own Blogs?

Apparently, not enough.

Google’s weak excuse

Google recently announced that they would no longer support FTP (and therefore self-hosted Blogger Blogs), the venerable protocol used for modifying content since nearly the beginning of Internet time. I really shouldn’t be surprised, since about three years ago all the new features for Blogger have been available only to Blogspot-hosted installations. I found their stated rationale for their decision was really curious. Google’s statement indicated that FTP was soaking up an outsized percentage of their resources. HUH?

Sorry Google, but it’s a bunch of HOOEY. Let’s face it; FTP couldn’t possibly be that big of a strain on their systems. It’s ridiculous. First of all, only a small number of Blogger Blogs are self-hosted; the great majority of them are hosted on blogspot. And there aren’t more well-tested or understood protocols around than FTP.

I guess from Google’s perspective they could justify their actions by saying that they are eliminating a “free ride” for people who aren’t providing enough in return for their use of Blogger. But I have a big problem with that–no one forced them to offer Blogger as a self-hosted platform to begin with. They never said it was “introductory” in nature, or gave any indication that they abandon users in the future. Besides, what about all that “Do No Evil” nonsense, which is supposedly the company motto?

Was this evil?

So was this “evil”? That is in the eye of the beholder, of course. Evil may be too strong a word in this case–but this certainly wasn’t what I could call “good”. Google left a bunch of people high and dry, and the only possible reason they did it is to force people onto the Blogspot hosting platform so they can sell more advertising. That doesn’t fit my definition of supporting a free, open, non-proprietary Internet–which Google purports to be all about in most of their PR-oriented public initiatives.

If they were going to abandon people for their ridiculous, stated reason that FTP support was overwhelming them–then don’t let me use your software on my own website in the first place. I would have used WordPress or one of many other options in the first place, and would have saved myself a great deal of trouble. One reason I actually chose Blogger initially was because I believed that they would be around, and continue to support the platform. How wrong I was. I find this situation the definition of bait and switch, and one which has caused a bunch of people  a whole lot of grief.

It’s not Larry and Sergey in the Menlo Park apartment anymore…

I really don’t question the sincerity of Larry Page and Sergey Brin with respect to their “Do No Evil” credo. But Google is a very BIG company now, and “corporate” decisions usually aren’t based on morality. The bigger a company gets, the less likely any one person’s individual morality will effect any given decision taken within the company. There’s lot’s of pressure to make money in individual business units, especially in tough economic times, and as a company’s original differential advantage fades.

Everything at Google must support advertising, in some way shape or form. Otherwise, I’m sure it very hard to justify the expense. There are a whole bunch of managers beyond original two founders are making big decisions now, and I’m pretty sure that the decision to eliminate FTP support from Blogger didn’t even make it very high up Google’s management totem pole.

So does Google really “Do No Evil” at this point? Did they ever, or was it just bluster or marketing? In my mind, this is a question that’s very much still open to debate. My personal feeling is that they are just a big company like many others, run by people with a variety of agendas–and a lot of presure to maximize profits. That doesn’t always lead to what everyone considers “good”.

So that’s my personal experience with Google–what’s yours? Many of you have your own experience with or thoughts on this industry giant; post a comment or a question to activate a discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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Outside the US, India has a rich history and deep resources in software development.

Brazil, China and Eastern Europe also are emerging, low cost development centers. All of these areas are better know for outsourced software development services, however, and are only slowing emerging as homes of actual product-based companies. China and the “tigers” of Southeast Asia are known as low cost manufacturing (and in some cases low-cost development) centers.

Canada is promoted by many as the best place in the world to conduct software development, due to aggressive tax credits and other government incentives.

Israel has become an important center of networking and security development.

The point is, I could probably write a book on the many places tech companies thrive. But in the interest of brevity, I’ll use US-based locations as examples in this article, while discussing what regional attributes in general are important to consider when locating a new operation or complete company.

Labor cost considerations
This is obviously, very, important. But I contend that it’s not everything, especially in the tech business. You still need access to all of the key components that make a software or technology company successful–regardless of cost. Having said this, where in the country you locate can have a pretty major effect on your cost structure, and therefore your competitiveness over time. If for example you decide to locate in the Bay Area, you will be paying the highest salaries, rent, etc when compared to just about everywhere else. You may believe it is worth it, and of course there are strategies such as outsourcing that can be used to reduce some of that cost disadvantage. But it is important to understand what effect location will have on your cost structure, and plan for that effect.

Product development resources
Generally the most important consideration with respect to product development resources is to locate in an area where there is access to the talent flowing out of engineering colleges. This might be a major metro area, but it also could be a smaller city (with the advantage of lower overall costs) which is the home of a major university. For example, most of the Big Ten Universities have small tech clusters located in their regions, even though they are mostly located in smaller cities. It also helps to be located in an area where developers WANT to live–warm weather and recreational opportunities tend to dominate this aspect of discussion. Another factor is what type of developer you’re looking for. For example, if you’re involved in the wireless business, you will be hard-pressed to find a stronger preponderance of development talent than you will in San Diego. If you decide to locate in any area where your access to developers is limited, outsourcing is no longer an option but a necessity, and will play an important role in your success or failure.

Management resources
Access to management resources is strongly correlated with whether or not a region has a critical mass of tech companies. As a result, the Bay Area is superior to anywhere else with respect to the overall depth of management talent. But I think this is often overplayed (especially by those residing in the Bay Area!). There is arrogance by some in the technology business that says if you don’t live in one of the major tech centers, you couldn’t possibly be a top-notch tech executive. The reality is that not every talented person wants to live in the Bay Area or Boston, so they executive talent be found everywhere. If you’re putting together a startup, only a small cadre of senior executives is needed to launch successfully.

Lifestyle preferences
This is an important consideration, and a highly variable and very personal factor. I contend that it’s important to be happy if you’re going to be successful in business, at least in the long run. If you’re a skier, it might be great for you to locate operations in Boulder, CO. If you love the beach or are a tri-athlete, San Diego is a great choice. If you love cultural activities New York or San Francisco might be ideal. If you’re all business all the time, you can’t beat Silicon Valley. Know who you are and what you like, and set yourself up somewhere you won’t regret in the long run.

Outsourcing
Outsourcing today is a factor that can be the great equalizer with respect to locating your company. For example, you strongly desire to locate in the Bay Area because of the overall tech business climate, access to capital and senior management talent, but are worried about development or manufacturing costs. Done correctly, strategic outsourcing can overcome those issues.

Where do the traditional high tech centers of the country rank for you?

Here’s my ranking:

Before anyone screams that I’m short-changing their area, this is obviously VERY subjective. This is my take, and what is important is that you create your own grading system before deciding where to locate your operations. Some may consider a smaller area which isn’t a traditional tech center to be an IDEAL location. Others might feel that Bay Area is a great place to live. A lot of this is simply personal taste.

What’s the most important location attribute?
The one most important consideration is the preferences of you or your team! What’s key to keep in mind as you make this decision is to think globally and long term about what’s important. The beginning of a new company business unit is an opportunity to start with a clean sheet about what’s important for the business, as well as the founders personally. Don’t just start up you new business in a location because “you’re already there”, maybe because the parent company is there, or you just lost or quit an employee position. This decision will have many implications down the road, and once you make it, your flexibility to overturn it will be much more limited in the future. The bottom line is that while geography should play a role in your decision, no place is perfect; you can start up and successfully run a tech company just about anywhere is you plan up front.

What’s your view on where’s the best place or most important attributes to starting a new software or tech business? Leave a comment and clue us in.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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If only it were so. Unfortunately, many tech companies new to the channel find out the hard way that you will fail by taking the word “seller” in the VAR label too seriously. For those of use with experience in the VAR channel, you know that it is still incumbent upon the vendor to create end user demand for their product. Yes, you need to market to VARs as well. And you will take whatever “push” you can get from the channel. But you must have an active promotional program aimed at end users for a realistic chance at channel success.

So what are the best marketing approaches to support channel sales activities? If depends, of course, on the specifics of your product, market, price point, etc. But let’s take a quick look at some popular promotion methods used in conjunction with channel sales. I’ll break it down into three basic categories:

End user demand creation

This is first and foremost the most critical activity. It’s an unfortunate fact that most new players in the channel don’t understand this initially. Many have to learn it through a painful hands-on lesson, which sometimes leads to rejecting use of the channel outright, due to spectacular failure. It may be counter-intuitive, but it doesn’t even matter whether you establish end user demand for your products by selling direct or via the channel. The important thing is that with few exceptions there needs to be serious interest in your products at the end user level if you’re to successfully sell through VARs. In fact, it’s almost always necessary to be successful selling directly to end users, before you can hope to have a successful VAR channel for your products. Almost any end user marketing method that fits with your product type and budget can be used to create this demand, but here are some commonly used promotional types:

• SEO (Search engine optimization)
• PPC (Pay per click) advertising
• Press relations
• White paper marketing
• Targeted online banner advertising
• Direct mail, but traditional and email
• Social media marketing (Blogs, Twitter, Linkedin, Facebook, etc.)
• Trade shows

VAR recruitment

In addition to creating end user demand, you’ll also want to market directly to VARs, to get them interested in actively working with you and your products. An important point to remember is that the VAR channel is very large, and generally segmented into many vertical categories. So however you approach them, don’t waste time (yours or theirs!) by contacting VARs who aren’t doing business in your target end user segments. Here’s some common recruitment approaches:

• Direct email through available VAR lists
• Phone campaign using available lists
• Internet research with direct email or phone approach
• Trade Shows (VARs frequent them, and it’s a great opportunity for personal contact)
• Have a highly successful product with strong end user pull (VARs will find you!)

Cooperative marketing with the channel

Lastly, once you’ve created end user demand and recruited enough VARs to have a “program”, you need to establish standard methods of working with your new partners to create and fulfill demand. VAR programs come in all shapes and sizes depending upon the market, and I’ve seen a wide variety of promotional opportunities included in these programs. One of my personal favorite “getting started” methods is to offer to pay for and execute a direct mail campaign (blind to the vendor, if necessary) introducing you and your product family as a new partner of the VAR. Below are some promotional activities that are very commonly included in VAR programs:

• Co-op advertising/promotion with the vendor provides funding for approved VAR-executed promotional programs up to a set percentage (3-6%) of sales of your products
• Free or discounted demo units
• Special pricing for large opportunities
• Co-selling with your in-house sales force
• Deal registration
• Additional discounts for completing product training, certifications or maintaining premium support levels
• Co-branded product literature and other use of the vendor’s logo
• Website and catalog listings of authorized or “preferred” VARs
• Rebates for volume sales (not recommended; fraught with danger)
• Vendor-funded introductory direct mail campaign

That’s my quick primer on successfully promoting your products for sale through the VAR channel. Many of you have your own experience in this area; post a comment or a question to activate our discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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I wrote previously about “The End of Customer Service” back in May, 2008. With people pinching pennies due to the great recession, it doesn’t appear that things have gotten any better.

The impetus to write further on this topic came from a recent, painful personal experience. The source of my pain was DIRECTV.

Troubling developments for a long-time customer

I have been a DirecTV customer for roughly 13 years. This is a long time for a relationship with any consumer products or services company. I initially fell in love with the programming offered by the company, especially they wide variety of sports. I still find their programming compelling. Initially, I also found the customer service and support to be first rate in the beginning. Unfortunately, over time the level of service has declined from first rate to astonishingly bad.

The level of customer service began slowly deteriorated about five years ago. I suspect that it did because the company was struggling to show a profit. It appears somewhere in that timeframe management of the company transitioned from a customer-orientation to focusing strictly on short-term profitability. This led to some short-sighted policies, which I believe could eventually lead to the death of this company.

A long series of customer service and equipment incidents over the last several years left me so frustrated that I decided I could no longer remain a customer, and became resigned to finding another TV service provider.

The final straw

My last customer service experience was what put me over the edge. I had payed $400 for an NFL programming package, only to find 2 games into the season that one of my two receivers was no longer capable of receiving this premium programming. It wasn’t really a technical issue, but a decision by DirecTV to no longer support this specific programming on that type of receiver. The receiver worked fine otherwise, and in fact had some key features not available on the more contemporary DirecTV models of comparable capability. I had paid good money for the receiver and had given the company a large premium programming fee for the NFL package that year (and many previous years), and I had not been told prior to renewing football subscription that year that the receiver would no longer receive this programming.

A few years back DirecTV had come under the control of Rupert Murdoch, which led to an equipment partnership with one of Murdoch’s affiliated companies. I have one of these as my primary receiver, and it contains some of the worst software I’ve ever seen in a consumer electronics device. Because of this, I would have preferred to continue to use my old receiver, which works great. But I wanted to be able to access my expensive NFL package on my second receiver, and I felt that I was at least entitled to one that could do this without losing other features important in my current receiver–at not cost, given the circumstances.

What ensued was a Keystone-Cop like series of customer service episodes punctuated by poorly trained service reps, extremely long phone-support hold times and multiple equipment shipments back and forth. I won’t bore you with every detail, but it started with an initial call which required 15-20 re-dials just to get through to the “hold” point, followed by a 1½ hours wait time. I’d like to say that was the worst part of the experience, but things actually went downhill from there.

At the end of this saga, I knew more about the internal customer service processes and procedures at DirecTV than most of the representatives I spoke with. It wasn’t hard; most of them seemed to be clueless. Some of them were good people trying hard to help me–others just didn’t caret. But many were inexperienced or poorly-trained, and nearly all of them were overwhelmed by the sheer complexity required to accomplish even the simplest task. Long story short, my simple request for a replacement receiver that would leave me happy paying DirecTV in excess of $100 every month was never fulfilled.

Even the CEO couldn’t make it right

It was at this point I’d had enough, and was resigned to the fact that I needed to change TV service providers. It wasn’t what I wanted–I felt I’d been pushed into a corner by the company’s arrogance and incompetence. But first I needed to blow off some steam, and so I wrote an email to the DirecTV CEO, detailing my painful experience. To his credit, he immediately and personally responded, apologizing and agreeing that what happened to me should not have happened. He asked if he could still make the situation right, and promised to have his personal representatives contact me to fix the situation. I was pleased by his reaction.

I was quickly contacted by a member of the DIRECTV Customer Advocate Team, a small top-secret group that you wouldn’t be aware of if you hadn’t interacted with the highest levels of company management. She was very nice and understanding, and told me that she was empowered to do just about anything that was required to make me a happy customer once again.

Apparently she was empowered to do anything except fill my very simple request.

She offered me a lot of things, many which were desirable. But I was a bit stuck on principle at this point; I wanted to be able to watch my expensive NFL package on a second receiver with comparable features, with no additional money out of my pocket.

She told me she could take care of this, but with one big condition: I’d be locked in to 24 additional months with DirecTV. Apparently, any new equipment sent to a customer automatically triggered this additional 24 month commitment, which no one had the power to override–no exceptions.

Complete idiocy–and very bad business

Here there is a customer who has stayed with a company for 13 years and loves their programming, but has been treated badly by customer service, and feels wronged. Making him happy is going to cost you probably $25 extra to send him a premium receiver instead of a basic one. He’d like to find an excuse to stay, but ready to leave due to frustration. The response is to try to lock him in for 24 months against his will?

I was wondering: are there any managers trained in Marketing at DirecTV? Is there anyone in upper management that has actually ever dealt with a customer? Or are they all accountants?

So for all the software developers and manufacturers out there, what are the takeaways from this customer service tale of the absurd?

Takeaway Lessons

Your product/service isn’t everything – I still love the DirecTV programming, but will be leaving because everything else surrounding it has turned bad.

Train your people – There is often a lot of turnover in the customer service department, and it’s easy to skimp on training for people that might not be there too long. If you don’t want to ruin your brand, Train & Retain! These folks ARE the company to the customers calling for help.

The customer is king – regardless of how desirable your offering is, the customer has alternatives. Treat him badly, and he will vote with his feet–its human nature.

Lock customers in with value, not contracts – that’s where you’ll find loyalty and long-term profitability. 24 month contracts will only create animosity with your customers–and represent a big opportunity for
an upstart, more customer-focused competitor.

Don’t be arrogant – Regardless of your market position, if a customer truly has been treated shabbily, swallow hard and do whatever it takes to make it right. Install a customer service culture of taking care of the customer, almost regardless of direct costs. The hidden costs of angry customers are very high from word of mouth and other bad publicity–especially in the Internet Age.

Don’t let your accountants set Marketing and Customer Service Policy – As described above, the easily traceable short-term costs savings which are the focus of the financial guys, will be overwhelmed by less obvious negative effects on future revenue, due to damage to your brand.

So that’s my sad story, and hopefully some valuable lessons for all of us as we formulate marketing and customer service policies. Do you have a customer service story of your own, negative or positive? Have a different view on the state of customer service today? Share with us in the comment section below.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

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However, while I don’t want to overstate the case, but I do believe we are on the way to recovery. This has strategic implications for software and tech companies.

A look at the positives:

Stock markets on the rise–The Dow Jones Industrial average is up nearly 65% in the last nine months. Tech stocks in particular have been strong: the benchmark NYSE Arca Computer Technology Index is up nearly 95% in the same period. This is from a very deep bottom, of course. But it adds considerable wealth increases optimism, which usually leads to positive momentum.

Search firms are adding their own staff– ExecuNet’s benchmark Search Firm Hiring Index has increased the last two quarters, after many quarters of decrease. This is a nice indicator of expected increased hiring by businesses overall.

Worldwide employment on the rise — Manpower, Inc.’s Global Employment Outlook Survey for Q1 2010 states that the employment outlook is mostly positive in the Americas and Asia-Pacific, while still somewhat mixed in EMEA. Labor market strength in Asia-Pacific, which is becoming increasingly important as a consumer market, is expected to return to levels similar to before the global downturn.

VCs still have lots of money to invest — After sitting on the sidelines in fear (like everyone else with money in their pockets) during this great recession, Venture Capitalists are starting to poke their heads out among the economic green shoots. They were sitting on huge amounts of capital that was raised in the pre-recession bubble environment, much of which is still not invested-but still accruing management fees. I have heard that there are now many limited partners filing lawsuits as a result of their funds lying fallow, which may stimulate an acceleration of VC investments in the coming year.

IT spending is forecast to rise — After several down years and a very bad 2009, Garner is projecting an increase in excess of a 3% in IT spending worldwide in 2010. This is very important, and a bullish signal for the tech sector heading into the New Year.

The IPO market window appears to be opening — Security software company Fortinet had a very successful offering in November. Meru Networks, a supplier of wireless LAN solutions, announced today it planned to raise $86M in an initial public offering. IPOs tend to drive increased capital access up and down the food chain, and that window has been closed for some time. If it opens significantly, that bodes well for growth in the software and tech sector.

No more bubbles – at least anytime soon

We’re not heading toward another bubble anytime soon. It appears we’re headed for moderate, but hopefully sustainable growth as a result of our two catastrophic burst bubble in the last decade. Government debt, commercial real estate and inflation potential are concerns in the long run, but appear to be manageable in the near term.

What should tech companies do?

First of all, don’t be stupid and increase spending if your situation doesn’t support it — credit is still very tight, and access to investment capital still remains below typical levels of the last decade. So make sure your plans are supported by cash flow, or in the case of early stage companies, at least access to reasonable levels of debt financing or investment capital.

If you are able to spend, it’s a great time to grow fast or take share from competitors — when the economy is just starting to take off and buying is accelerating, act before your cautious competitors have come out of their shells.

In general, companies tend to be too conservative in their investment and hiring plans — Take note that hiring tends to peak at the apex of an economic cycle, just before growth slows or turns negative. In fact, many experts consider strong hiring a leading indicator of an economy that’s lost its momentum. I’ve never been a fan of hiring just because you have the money and growth rate to support it. This is a leading cause of bloated cost structures and bureaucratic, slow moving organizations. But most companies are pretty lean in staff after several years of recession. So if you really do need people, it’s more productive to hire them now as we begin an up cycle, instead of waiting until the very end of it as so often happens.

That’s my forecast and advice for the software and technology business sector as we enter 2010. What’s your forecast? I’d love to hear it. Post a comment or shoot me an email to add your own spin to this discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil via email at info@pjmconsult.com.

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