So what’s the deal with Automation 2.0?

That’s my shorthand name for a wave of manufacturing investment that I believe is fast approaching on the horizon and will radically improve the capital, labor, and energy efficiency of all kinds of large scale manufacturing.  Having worked closely for years with vendors whose products are supposed to improve the global supply chain, I think Rockwell and their kin have something to offer that stands to trump most of what the ERP, SCM, CRM and other alphabet soup tech-vendors have given us.  The key is smarter, more flexible, more adaptible production equipment enabled with a stack of IT that will connect work centers within plants to all manner of input streams and output streams. 

It sounds familiar enough, and of course, lacks some of the glamour of fancy optimization or snazzy web services, but in practice this technology layer is ready for a breakthrough.  The hint I saw yesterday was in an 18 month old alliance with Dassault Systemes to do integrated product and manufacturing process design.  This notion, which is certainly understood by rival Siemens who went so far as buy UGS for its PLM and factory simulation capabilities, promises not just better plants, but better supply networks.  In isolation, design for manufacture and factory simulation are cool enough.  In conjunction with a platform that integrates ever smarter machinery with business flows outside of the plant and outside of the company, the idea can deliver multiplicative impact.

During our meeting the comment was made that manufacturing jobs may be going away, but the ones that remain are becoming very brain intensive.  Amen.  The whole idea of automation is to eliminate repetitive human labor with capital, and in the process, deliver more precision, repeatability, and control.  In an ideal world (post Automation 2.0) there will no longer be any dehumanizing, rote, pure labor jobs in manufacturing.  These will all be handled safely and efficiently by machines, leaving people to design new products, find and serve customers, and make business decisions trading off production and sourcing locations in sync with optimal balances of material prices, energy costs, and market proximity. 

What astonishes me still is the relative lack of excitement about this whole movement.  Admittedly, my colleagues at AMR (Roddy Martin, Simon Jacobson, Bill Polk, and PLM genius Mike Burkett) know alot more about this than I do, but I still wonder; why does it seem so amazing to me, and yet so mundane to others in the world of supply chain technology?  I started with a profile of Rockwell CEO Nosbusch to make a point about humility, and while I admire it, I feel compelled to give this guy some kudos for what has been done so far and a push to keep the good work going. 

Automation 2.0 can revolutionize manufacturing worldwide, and in the process free our children to pursue careers based on brains, not brawn.  Keep it up Keith.

Meanwhile, Hasbro just announced a deal with Discovery Communications to launch a children’s channel and is prepared to put $425M into the effort.  They also have a film coming out based on GI Joe from Paramount and video game deals with Electronic Arts that have increased sales of Monopoly by 40% in recent years.  Ralph Nader’s lobbying group is whining that the Discovery deal amounts to “nothing more than a scheme to deliver programme-length advertisements over television”.  Imagine how they must hate the GI Joe movie or the sinister addictiveness of online Scrabble!

The thing is, value happens when someone plays.  Whether they do so by watching TV or a movie or by gaming on their iPhone, the outcome is the same - pleasure for the consumer.  Hasbro isn’t just trying to get us to load up on stuff - they are trying to engage our sense of humor, curiosity, or competition.  Credit the creative geniuses of Pawtucket to understand this while also recognizing that technology and the global supply chain means alot more than track-and-trace IT systems.  The digital supply chain, which moves electrons is faster, cheaper, and for some products better, than the physical supply chain built to ship atoms.  AMR’s spring supply chain conference is all about this and its almost sold out.  I guess the supply chain folks see it coming.

“Five years ago there were no counterfeit phones.  You needed a design house.  You needed software guys.  You needed hardware design.  But now a company with five guys can do it.  Within 100 miles of here you can find all your suppliers.”

What has bugged me is the audacity and criminality of the Government who happily looks the other way as expensively developed technologies, industrial designs, and brands are flat out stolen.  One Vassar professor is even quoted in the story spinning this scandal as a virtue:

“Chinese grass-roots companies are actually very innovative.  Its not so much technology as how they form supply chains and how rapidly they react to new trends”.  Charming - reminds me of Napster as seen through the eyes of the music industry, or the go-getters out cutting down teak trees in Malaysia.  There is a reason we call it piracy.

But rest easy, poetic justice is coming to the rescue.  Remember the $1Trillion or so of dollar denominated debt held by the Chinese?  Well, after we print the trillion extra dollars it will take to undo our credit-sparked economic crisis those debts will be alot less expensive (to us) in real terms.  Think of it as a $500 billion bill being stuck on Beijing to pay us back for all the money that should have been made by Microsoft, Apple, Paramount, and Nike for their IP. 

The Piper will be paid.

So why do some executives think they can heard everyone into a conference room and direct the squabbling business units and departments to quickly improve business results?  Like any other high performance endeavor, this takes years of developing skills, capabilities, and organizational effectiveness.  Try to take a short cut and you may fall and be trampled miles before Heartbreak Hill.  You assess a business units readiness before rolling out the ERP system and likewise to succeed at global process improvement you need to assess your process readiness.

On a recent teleconference, a member of AMR Research’s SAP Peer Forum described their journey to what they called “process excellence.”  The global pharmaceutical company is subject strict regulatory requirements and President of Supply Chain was concerned that widely varied business processes across sites were not only inefficient, but exposed the company to significant compliance risk.  Over the next few years it established the three critical pillars of process readiness:

• Clear Goals and Process Governance – The top leader set the goal for globally harmonized business processes for efficiency, compliance, and ease of moving personnel between sites.  A process governance organization was built to drive consensus on common processes, define globally consistent metrics, direct IT projects to enhance processes, and strive for continuous improvement.
• Holistic View of the Process – Limiting the view of the process to ERP or a Six Sigma project is a recipe for underperformance.  Workers need every aspect of a process they deal with to be consistent.  The company coordinates the activity of many groups to ensure consistency of process across its multiple IT systems, manual activities, training materials, job classifications, and performance metrics.
• Business Repository and Tools – Maintaining this consistency across dozens of processes and communicating them to tens of thousands of global employees is impossible with simple documents.  Instead, the documents are brought together in a repository and a rich five layer process model links them.  Analytical tools are used to assess the impact of proposed changes and a process portal to make the process overview and training available globally.

The company is using IDS Scheer’s ARIS as the tool to support its process readiness efforts.  It is synchronizing it with Solution Manager on its SAP systems and linking training materials and its business intelligence systems in as well.  Similar tools exist in the Oracle E-business Suite, with the vendor reselling ARIS as Business Process Analyst (BPA) and building automated links between BPA and its Tutor process documentation and UPK training system. 

Just like I’m not going to run a Marathon without a lot of training, you aren’t going to improve your processes without attaining process readiness.  Over several years of effort, our SAP Peer Forum member has attained the capability of quickly implementing process improvements.  Less focused competitor may soon fall far behind.

The root of this is an exploding need among all players up and down the global supply chain to harness and leverage their intellectual property without giving up control or worse, having it hijacked and used against them.  An example is the kind of engineering intensive knowledge stored in the heads of thousands of soon-to-retire manufacturing process guys in the chemicals industry.  I talked to ExxonMobil about this and found they’re keen to solve it before the IP ends up sitting on a beach in Florida somewhere.  At the exact opposite end of the spectrum is the issue of managing IP for a company like Hasbro.  They have pure entertainment images that will manifest as profitable toys like Barbie, unless someone raids the files and dumps a load of cheap counterfeit knockoffs onto the market.

How do you capture, catalog, update, distribute, and otherwise collaborate on knowledge (i.e., IP) when it ranges from expertise to trademarks?  It turns out practically every technology vendor category has an answer for you.  Collaboration vendors from little guys like Jive to big guys like OpenText have a story.  B2B and EDI guys like Sterling Commerce, GXS, and Inovis are part of the puzzle.  PLM guys like Dassault, PTC or Siemens are certainly in the mix.  Digital Rights Management vendors have been thought of largely in terms of media and entertainment uses, but players like Adobe, EMC, and even Oracle (with its Stellent property) deserve a look on this front.  Plus the security vendors like Symantec, EMC and RSA need to be considered.  And finally, all the platform guys figure into the equation - IBM, Microsoft, and Oracle all appear across the board with “solutions” in each of these categories.

The net of it all is that manufacturers and retailers across sectors will absolutely need to handle the question of how IP works its way around the global supply chain.  One worry: letting Microsoft Sharepoint creep in as the defacto standard for management of IP in interenterprise collaboration.  Its so easy to set up and start using… it naturally links to your most familiar workspace, namely Excel, PowerPoint, and the rest of MSOffice.  But where is the control and scalability?  I’m not saying Microsoft can’t do it, just that renegade groups of employees doing it on their own will almost definitely end up making a mess, and possibly and expensive one.

Missing from the list of vendors with a solid pitch here is SAP.  The ERP backbone of choice for so many companies may have a stranglehold on transactions, but they lack punch when it comes to interenterprise collaboration, relying on partners like Seeburger and Crossgate.  This may seem a sideshow in Walldorf, but every industry is beginning to see the value of stuff that is presently flying around the digital supply chain, largely unsupervised.

I’d love to hear ideas on how best to map out a strategy for this problem.

If the breakup holds who wins?  How about Hewlett Packard.  Not only is H-P a titan on the scale of IBM (actually bigger), it is also great at running an integrated global supply chain (see Tony Prophet of H-P explain what they do at our upcoming conference) and positioned to do alot with Java and the R&D pool by applying it to a huge range of consumer and business computing applications.  A similar argument can easily be made for Cisco Systems.

If cooler heads prevail the IBM-Sun combo will go ahead.  There wasn’t much keeping the two sides apart over the weekend and the logic of the deal for IBM includes a lot of potential benefit for IBM customers looking for better systems links - a solid stream of profit opportunity that Big Blue has to like.

Today, IBM is best thought of as a services and software company with a computer hardware division. In 2008, services and software represented 79% of IBM’s revenue and 82% of its pre-tax income. In contrast, hardware represented only 19% of revenue and 9% of pre-tax income. The Sun acquisition would undoubtedly boost IBM hardware revenue and might improve hardware profitability, but the positive impact to IBM’s services and software businesses could easily dwarf these benefits.

Java makes Sun shine for IBM

In addition to its sizeable hardware business, Sun has some strategic software assets, including the Java programming language, the Solaris operating system, and several open source technologies, including the MySQL database management suite. Solaris and the open source technologies are unlikely to make significant contributions to IBM’s software or services revenue, but by owning and guiding Java, the company could create a sustainable competitive advantage over some of its largest services and software competitors.

Java has flourished while Sun hasn’t. Nearly every major middleware and enterprise application vendor (with Microsoft the exception) has built key applications using Java and has plans to build more. By extension, nearly every major corporation relies on Java for some part of its core business processes.

Sun has realized little revenue from all this love for Java. In 2008, the company recognized only $200M from its Java software, an increase of only 0.5% from the year before. As a hardware company, Sun struggled to turn Java into revenue and profit. Unlike Sun, IBM is in a prime position to monetize that asset.

IBM looking to bask in it

IBM is a leading provider of Java-related software and services and could use Java to drive top- and bottom-line growth. The company derives billions of dollars of revenue from Java today. It doesn’t disclose financial results below the divisional level, but AMR Research knows the company’s Java-centric WebSphere business is one of the four pillars of IBM software group’s rapid growth over the last decade. And major portions of IBM’s services business are also tied to Java, including its WebSphere and service-oriented architecture (SOA) practices, as well as parts of its SAP and Oracle applications practices.

By owning and guiding Java, IBM would have a legitimate claim to being the best place to go for Java software and services, which will create a defensible advantage for the company. Unlike Sun, which lacked the channels to sell its Java expertise and software, IBM already blankets the Java market. By owning Java, it could increase its win rate in this massive market and drive billions in additional revenue and profits. Surprisingly, IBM’s software and services divisions could be the primary drivers behind the Sun acquisition as well as the reason for the high price per share discussed in all the rumors.

Acquisition could put Oracle, SAP on the defensive

A larger issue is the impact this will have on the $67B enterprise application software market. While many smaller enterprise software vendors might cheer IBM taking ownership of Java, Oracle and SAP may see this as a strategic threat to their middleware and applications businesses. Java became the dominant language for new enterprise applications thanks in part to Sun’s quasi-open source method of controlling Java’s direction, called the Java Community Process.

No doubt, IBM would be careful to preserve the appearance of Java as a vendor-neutral standard, but SAP and Oracle may not be willing to tie the future of their billion-dollar applications businesses to a language owned by IBM. Sun wasn’t much of a threat to Oracle or SAP, but IBM is a different matter. SAP and Oracle could attempt to block IBM’s acquisition on anti-trust grounds, or splinter the Java standard by building their own versions.

Overall, this acquisition could be a very good financial move for IBM. It promises to boost all of its major businesses and create fear, uncertainty, and doubt in some of its biggest competitors. Ultimately, this may be a masterful play for the enterprise software and services market, not the server and storage market. By controlling Java, IBM may be able to dominate the infrastructure for most of the world’s enterprise applications, making the hardware side of this deal look like an afterthought.

Few application companies make it to the $1B mark.  And even fewer make it to the $2B level.  In fact, there are only three companies there today — SAP, Oracle, and Intuit.  And Intuit is questionable in the enterprise applications category as QuickBooks represents about 20% of the company’s $3.1B in 2008 revenues.  If we stretched the definition to include business intelligence/performance management, we could add SAS to the very short list ($2.267B in 2008). 

Believe it or not, the only other companies to cross $2B were Siebel Systems and PeopleSoft.  Siebel made it to $2.1B in 2001 before beginning a precipitous decline that stopped when Oracle bought the company in 2005.  Likewise, PeopleSoft crossed $2B in 2001, too, and dropped slightly below that mark for a few years before acquiring J.D. Edwards in 2003.  The company was later bought by Oracle, too.

Looking back at history, i2 Technologies crossed the $1B line on the basis of its meteoric rise in supply chain planning software.  Siebel and PeopleSoft made it twice as far on the strength of their creation of the CRM and HR software markets, respectively.

Salesforce.com has made it this far by proving the viability and vitality of the SaaS market.  It has done it for the most part by leveraging sales force productivity applications.  How much further can it take sales force automation?  Are there another 55,400 more customers to sell?  Or, does it need to expand into other productivity sectors like human capital management?

The company has also been able to get this far because of the lack of a serious competitive threat from SAP and Oracle.  The industry’s two largest vendors have given the SaaS/cloud vendors a free ride for the past decade.  While both offer SaaS or On-Demand versions of CRM, salesforce.com has had little trouble selling around them.

This will change this year.  SAP and Oracle are planning to offer suites of products encompassing CRM, HCM, and procurement.  While executives at the large vendors remain concerned about the poor or non-existent margins relative to on premise deals, their field sales forces are screaming for affordable products that can be implemented relatively quickly.

Marc does have a couple of advantages that his predecessors didn’t – his Force.com platform and AppExchange.  To date, there are more than 200 “native” applications being developed that extend his software into new areas like financials and HCM.  He can leverage the data collected by his AppExchange site to see exactly which of these third party applications are gaining traction by looking at downloads and test drives.  This provides a natural, target-rich environment for acquisitions.

Still, even with those advantages, he needs a lot of luck and a good economy.  Much of his success has been due to the company’s strong momentum.  I would hate to see him stumble and end up like Siebel or PeopleSoft as a trophy on Larry’s wall.

The addition of the contract management solution means Zycus is a full sourcing suite contender against Ariba, BravoSolution, Emptoris, Iasta, Oracle, and SAP.

The contract management product is timely as organizations struggle for compliance while reducing costs, and ensuring item and service availability.  Facilitation of contract visibility and across the enterprise means connecting the dots between the cost and availability of products and services to the income statement with potential balance sheet liabilities.  Contract management solutions, such as Zycus iContract, are a determining factor in the connections and relationship of the enterprise and supply.

With Zycus new contract management solution, Zycus continues its powerhouse journey.  The solution is a strong alternative to pricier ERP products. In this economy, best of breed continues to advance, which begs the question, what will the ERP vendors do to counter and stop the movement to best of breed?

I spent time with Brad Wilson, GM of Microsoft’s Dynamic CRM team, and some executives from Avanade, Microsoft’s BPO/SI joint venture with Accenture.  Microsoft and its larger SI partners plan to put some serious weight behind xRM in the coming months.  But wait, what’s xRM?

xRM describes applications built on Dynamics CRM that don’t use the CRM application functionality.  xRM (the “x” implies it can be used to underpin a variety of industry or use-specific applications) has tight integration with the Microsoft stack — .NET, SQL, et al — and will also, along with the Dynamics CRM app, likely be available as a cloud-based resource via Azure. 

Dynamics CRM is targeted to business users that have customer interactions: the obvious sales, support, and marketing teams.  xRM, on the other hand, will target the developer community: systems integrators and business process outsourcing (BPO) firms, ISVs, and internal development teams.  You could argue that the Dynamics CRM team is returning to Microsoft’s traditional roots of selling development environments to, well, developers. 

Who will they compete with?  Salesforce.com’s Force platform, which also aims to provide developer resources on the cloud for non-CRM, industry-specific applications.  IBM’s cloud initiatives.  Probably Google Apps, SAP (who purchased Coghead to get into the platform space), Oracle, and possibly Amazon.  There are also a small handful of other vendors that see the future in cloud-based applications.