e-INSIDER

January 10, 2007

2006 Was Good -- Here's To A Great 2007
From Forrester Research/Merv Adrian

We live in exciting times. This issue pulls from the last quarter of Forrester's research, with a focus on spending in 2006, forecasts for 2007, and a few technology predictions made by Forrester analysts for 2007.

A Surprise In The US, While European Growth Continues: US GDP data for Q2 2006 contained a surprise for the tech market: The US Department of Commerce made major downward revisions to its estimates for US business investment in information technology goods for 2004 and 2005. Andrew Bartels documented the impact of this on our forecasts in "US IT Spending Summary: Q2 2006." He carried it forward in his Q3 update, when he detected a slight acceleration, and raised our IT outlook for 2007. With colleague Andrew Parker, Andy noted in "European Enterprise IT Spending: 2006 to 2007" that while the collective GDP of Western and Central European countries is greater than that of the US, total European IT spending still lags the US -- $565 billion in 2006 (448 billion euros) versus $721 billion.

On the other hand, growth in European IT spending is starting to match or exceed the US. In US dollars, European IT spending will grow by 5.1% in 2006 -- almost as high as the US growth of 5.8%. Andrew and Andy extended that work in "European IT Spending 2006: Country-By-Country," showing that the UK is now the largest market overall, although Italy leads in telecom equipment and Germany in IT consulting and outsourcing. The smaller markets are growing faster than the larger ones.

Forecast: $1.55 Trillion In IT Goods And Services In 2007: Despite the positive short-term outlook, caution is still the word of the day. Forrester has pointed to a current period of technology refinement and digestion with companies concentrating on adapting to the prior wave of technology innovation and eschewing aggressive investments. During these periods, business investment in IT is beholden to the fluctuations of the economy as a whole. Based on historical trends, the current period should end around 2008, and it is becoming clearer that Web 2.0 software-driven computing will likely lead the next charge. Software investment has been growing steadily over the past several years -- business investment has gained each quarter since 2002. But, it is still far too early to declare the dark days over. As the economy goes, so goes the tech sector, at least for the foreseeable future, and vendor strategists would be wise to keep this in mind.

The Forrester/ITAA US Tech Sector Index posted its best performance in five and a half years in Q3. The index rose 3.2 points compared with Q2 2006 and 6.7 points compared with Q3 2005. Global purchases of IT goods and services will reach $1.55 trillion in 2007, growing by 5% following 8% increases in both 2005 and 2006. A slowing US economy will pull down growth in IT purchases in the US, Asia Pacific, and the rest of the Americas. Total global spending on technology goods, services, and staff -- the global IT operating budget -- will reach $2.13 trillion in 2007, up 6% from $2.02 trillion in 2006. The lag effect of depreciation from prior IT investments keeps IT operating budgets growing despite slower growth in new purchases in 2007. IT budgets will be larger for 32% of recently surveyed executives at 700 North American enterprises, especially at firms with more than 20,000 employees. The remaining majority expects to hold steady. Only 10% overall expect budget decreases.

Forrester recommends that IT benchmark what is needed to maintain and operate the IT organization, systems, and equipment as a percentage of revenues. Our 2006 estimates for this benchmark metric are included in "US IT Spending Benchmarks For 2006." Putting it in the right context is critical, and the report provides step-by-step guidance for doing so.

What About Pricing? Hold On -- Bumpy Ride Ahead: Want to take advantage of new multicore servers? Bring a pricing analyst and a stack of product catalogs when it's time to buy software. Each major vendor has its own formula for dealing with multicore. Middleware vendors favor schemes that may raise current prices. Worse, they reserve the right to change the relative value of a processor core in the future, as industry-standard ratings don't exist. Multicore software licensing is the main new factor driving up the complexity of enterprise software pricing, but widespread use of virtualization techniques will soon make matters worse. IT sourcing pros must create new models and tools, such as the one included in this document, to ensure the best balance among software feature/function, IT cost predictability, and cost efficiency.

IT Management Takes On Business Relationships, Moves From Relationship Management To Demand Management: IT execs that we surveyed picked alignment, governance, and communicating value as their top concerns. Still important are cross-unit business initiatives, migration to shared services, and the exploration of business process management (BPM) technologies as a way to formalize the management of business processes. IT will transform relationship management into IT demand management (IT DM), a standalone group reporting directly to the CIO and with a seat on the business units it represents. IT DM will synchronize the balancing of business' demand with IT's delivery through six project management office (PMO) processes: portfolio, pricing, performance, program, project, and positioning management.

IT DM will work with both business and its IT peers through an ongoing and iterative process that aggregates demand for IT services, represents the resources requested -- and their costs -- to the business, and helps optimize the deployment of IT resources over time.

New Videos Available: Watch video excerpts from Forrester's Technology Leadership Forum 2006. Highlights include speeches by George Colony ("IT To BT"), Laurie Orlov ("Boosting IT's Role In The Enterprise"), Julie Giera ("IT's Future As A Service"), and Alex Cullen ("Business-Focused Architecture"). Also check out the Q&A excerpts from guest speakers Steven A. Mills, senior VP and group executive of IBM software, and Nandan M. Nilekani, CEO of Infosys.

More Mergers: The frenzied pace of acquisitions continues. Oracle bought Sunopsis to compete in data integration and data management beyond an Oracle stack: a big win for former Siebel, PeopleSoft, and JD Edwards customers who now find themselves in the middle of a perhaps unwanted Oracle-dominated ecosystem. Motorola snapped up Symbol Technologies to round out its enterprise wireless portfolio with additional ruggedized handhelds, WLAN, and RFID products. Motorola must:
1. shrink development cycles in WLAN
2. plug mobile software gaps
3. retain and expand the RFID market
Cisco Systems and Intermec Technologies must make new partnerships or acquisitions to compete.

Infrastructure, Software Lead Spending Plans: Forty percent of firms plan to deploy Windows Vista within one year of its release; 58% plan to increase spending on wireless LANs. Hardware gets more new investment than operations and maintenance in enterprise IT infrastructure spending plans. Server vendor choices are stable, and server virtualization will grow. Storage priorities center on data retention and archiving. Automated server patch management and data center automation get a look.

In Europe, HP is the preferred server vendor in more than half of the enterprises. Sixty percent only have one server setup; of these, more than two-thirds are unlikely to change their supplier in the next two years. In software, improving integration between applications will be the top priority (27%), followed by upgrading security environments (21%) and adopting service-oriented architecture (SOA) (12%). Business intelligence will represent the top application purchase, and enterprise resource planning (ERP) will remain the top major upgrade, while messaging, email, and collaboration software will lead the pack for minor upgrades.

What's Next For Application Platforms? The major application server platforms (ASPs) are evolving; the future will be defined by SOA programming models for composite applications, rapid application change driven by metadata management, and business events. BEA Systems, IBM, Microsoft, Oracle, RedHat/JBoss, SAP, and Sun Microsystems are evolving their platforms in different ways and at different paces to meet these new requirements.

What's Next for Collaboration? In Microsoft news, updates are coming in unified communications, team collaboration, Exchange and SharePoint server manageability, on-premise Web conferencing, and audio/videoconferencing. What is the target? Higher information worker and IT productivity, business process improvements, and cost savings. Because 2007 releases will not yet be fully unified, IT architects should take extra precautions to minimize feature redundancy and avoid giving an information worker too many options. What's Next for Data Center Operations Management? IT operations has moved to center stage because of the importance of IT service delivery in a business world that is now dependent on all facets of technology. While operating costs are growing with technology implementation, the operability and manageability of infrastructure components has not made any significant progress for the past 15 years. IT operations is moving fast in the direction of improved management processes with the IT infrastructure library (ITIL) and advanced management technologies with business service management (BSM) and the configuration management database (CMDB). The first step has been to move from a technology orientation. Next, IT operations must introduce more automation so that IT operation management processes drive management solutions that function as support for processes, not technologies.
http://www.forrester.com

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Consumer Products: Five Predictions for the New Year
From AMR Research/Lora Cecere

A new year: time for reflection, time to plan, and time to look forward. Here I look at five macro trends I'm seeing in the 30 to 50 inquiries a month I get from consumer products (CP) companies.

Brand loyalty is in for a street fight: The battle is waging: building retail chain loyalty versus consumer product brand loyalty. Retail brands like Best Buy, Target, Starbucks, and Wegmans have demonstrated the power of the retail brand loyalty, while retailers like Kroger are attempting to distinguish the customer experience through private label brands to support healthy eating.

The top question on our CP clients' minds: how can they win at the shelf and continue to build brand loyalty? The answer lies in rethinking front-office systems and processes to move to a market-driven culture from a marketing-centric one.

These processes will sense downstream customer preferences and shape demand from point-of-sale, loyalty, and demand insight data. We forecast that this will lead to investment in the following five areas:
1. Demand signal repositories (DSRs)
2. Systems for demand execution and sales forecasting
3. Demand visibility
4. Demand shaping response curve modeling
5. Front-office analytics

This is a major shift from the traditional front-office systems that targeted sales and marketing efficiency. Vendors will have to rethink their offerings. With no prepackaged software for the market-driven front office, look for SAP and Oracle fight for leadership, best-of-breed to proliferate, and new processes to develop.

And while the back-office technology landscape is mature and well defined, the demand-driven front office is just beginning. These shifts will benefit vendors such as DemandTec, G4 Analytics, JDA Software, Logility, Oracle (Demantra), SAP (Khimetrics), SAS, Teradata, Terra Technology, VeriSign, and Vision Chain as well as consulting partners like Accenture, Cognizant, Deloitte, IBM, and Infosys.

With a focus on the customer, complexity will be better understood: The above will lead to companies looking to reduce customer category confusion and improving the shopping experience. We see a resurgence of activity-based costing activities in budgeting and sales and operations planning (S&OP) processes as increasing numbers of companies target customer and product profitability.
This will help clarify good and bad complexity and will help to hone cross-functional processes. The shift will benefit vendors like Acorn Systems, Jonova, Chainalytics, and S&V Consultants.

Supply chain centers of excellence increase in importance: Three forces are coalescing to forge investments in supply chain centers of excellence: size, scope and maturity. Based on a recent AMR Research study of 110 CP companies in North America and Europe, 62% report the presence of a supply chain organization. We are in a transition, supply chain processes are maturing, and there is a shift from implementation to continuous improvement.

The average age of a CP supply chain organization is three years, the study showed, with 58% of companies surveyed saying they have less than two years of experience in supply chain processes. Supply chain organizations average 230 employees with major differences by region and size of the company. The maturity levels, size of the company, and growing importance of supply chain management to the business are behind this shift.

With more than 80% of CP companies completing ERP and advanced planning and scheduling (APS) implementations, scope is shifting to continuous improvement and away from system implementation. In parallel, companies have become more global. Now these two forces are demanding the following:
1. Development and certification processes to drive supply chain excellence
2. Defined processes to plan globally and execute regionally (definition of regional handoffs)
3. Defined processes for HCM planning for training
4. Development and mentoring of supply chain personnel
5. Determination of the right tradeoffs between make, move, and buy operations
6. Management of corporate processes for S&OP, supplier development, and new product launch commercialization

2007 planning will see new alternatives for SCM training and certification programs. The shift will favor products like Accenture's Supply Chain Academy and the SCM academic programs that have sprung up at Cranfield Institute, Harvard, Ohio State, MIT, Stanford, Wharton, and the University of Tennessee. We also expect sell-out crowds at our annual supply chain executive conference in Scottsdale, Arizona, May 30-June 1, 2007. Expect greater coverage in this area from AMR Research's consumer products team.

A redesign of innovation and growth strategies: The past six months, I have poured over many CP studies on IT spending, including the joint AMR Research / Consumer Goods Technology (CGT) tech trends study, the Grocery Manufacturers IT study (research provided by IBM), and the annual AMR Research study on CP IT spending. One finding in the studies is consistent: while interest is high in improving new product launch processes and fueling growth through innovation, PLM technology ranks low in planned spending. Why? The answer is simple. CP companies, today, are focusing on process redefinition (for more, see "DDSN in Consumer Products: Rethinking Processes for Time to Market").
This process shift includes building design networks, targeting total lifecycle management instead of new product launch, the use of demand insights to design new platforms and business models, and a focus on commercialization excellence. Coverage of this process evolution will be a core theme of our research for 2007.

Rethinking IT strategies: With continued pressure on IT spending and the reduced spending on software (see "Consumer Products Outlook 2007: Protecting the Brand and Thwarting Competition Are Top Priority"), the IT organization is moving from a world of project implementation to process innovation.
As companies implement market-driven front-office platforms, demand and supply visibility systems and networks, and systems to better use data, software becomes less mature and implementations carry greater risk. As a result, project management offices (PMOs) will rapidly adopt stage-gate like processes for the testing and progression of software implementations, with a growing role of line-of-business managers in funding and making go/no-go decisions.
With these changes, the following trends will continue to play major roles:
1. IT outsourcing of non-critical business functions will increase.
2. Shared service structures will mature with a focus on serving the business.
3. More effective use of data will take precedence over transactional efficiency.
4. Adoption of software as a service (SaaS) will grow in demand and supply networks, while service-oriented B2B processes will grow in importance, with data synchronization being the foundation for promotion and price synchronization.

Wrap-up: 2007 is shaping up to be a busy year. We look forward to working with you and your teams to understand these trends and forge them into business opportunities for the new year.
http://www.amrresearch.com/

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A New Year's Resolution to Improve Sales Forecasting
From AMR Research/Robert Bois

As more manufacturing companies continue to introduce Sales and Operations Planning (S&OP) processes into the organization, many sales organizations are now feeling the pressure to increase sales forecast accuracy. By its nature, S&OP is the translation of upstream demand data into an actionable operational plan. Because input from sales typically starts an S&OP cycle, expectations are higher than ever for sales forecasts to play a bigger role in the overall demand forecasting process.
Many of these companies have now adopted sales force automation (SFA) or CRM as the system of record for sales. But these applications typically rely on the sales force manually entering a forecast percentage for each prospect, records that see little rigor in their active maintenance.

A surprisingly large number of companies still rely heavily on an array of spreadsheets to build a final sales forecast, further introducing human error as well as bias into the equation. This mismatch between process and technology often results in problems with accuracy and consistency in sales forecasting.
While the negative consequences of poor sales forecasting are numerous (ranging from production shortages to mismatched investor expectations), the reasons behind poor sales forecasting frequently relate to a few core issues:
Objective bias in the forecasting processes
A lack of consistency between processes and methods
Poor visibility across distributed sales information

The S&OP process fundamentally addresses these issues further down the demand planning process by use of a consensus forecast. However, if the sales forecast going into the consensus forecast were more accurate, reliable, and consistent, the resulting consensus forecast would then be more accurate.
Companies have a number of techniques they use to address the above issues, including sales training (typically to a methodology), incentives, and sales tools (such as SFA or CRM applications). Each approach has its limitations, however, and often serves more effectively to fix a symptom of a sales or forecasting problem than the root cause.

Process and training: Many of the traditional sales methodologies such as Miller-Heiman, solution selling, or value selling focus on improving sales effectiveness, reducing sales cost, and increasing sales volumes and revenue. While some (like Miller-Heiman) do have an aspect of sales forecasting improvement, it is seldom a primary value proposition within these sales frameworks, and the general expectation of these programs is to increase sales, not forecast accuracy.

Many companies begin by hiring sales consultants to assist in the development and refinement of sales processes, or the adoption of a standard sales methodology. While sales training and methodology frameworks often derive good short-term results, sales professionals tend to revert back to old behavior over time, and as turnover in personnel occurs, adherence begins to decay.

Incentives are another way sales managers try to steer sales behavior. However, the delicate balance between a simple compensation program and an effective one can be difficult to achieve or maintain. A classic example is a sales force compensated solely on revenue, resulting in overselling, unprofitable deals, and forecasting based strictly on revenue, rather than units. Some companies have instituted compensation programs (or just as often compensation withholding programs) that require forecasts to match actual sales within a certain tolerance (usually 5% to 10%). However, this often results in sales offering less pipeline visibility for fear of forecasting inaccurately.

The third technique is the use of software tools ranging from desktop productivity (MS Excel) to SFA and CRM. While software applications often have good tools for getting distributed information to sales managers more quickly, they often provide little to no incremental value to the sales user, resulting in adoption problems. Software tools also have a propensity to create a lack of trust, since many sales people feel the information they are asked to provide to the system reduces their inherent value to the company or makes them more easily replaceable.
While each of these techniques addresses some aspect of reducing bias and improving consistency and visibility of sales activities, none fully addresses all of these core issues. In fact, with regard to sales consistency, none of the above tactics alone can solve the problem. But in combination, the use of a sound sales methodology baked into sales tools can combine to affecting a positive long-term change.
AMR Research has met with dozens of manufacturing organizations that have had some level of success in improving sales forecast accuracy through each of these tactics. However, few have employed all three. The key to long term success and true change management is a balance between process and incentives built upon a technology layer that both supports and measures ongoing performance.
http://www.amrresearch.com

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RFID: Close At Hand
Aim Global/Bert Moore

In 2006, much of the media attention focused, justifiably, on Gen2 UHF and longer-range RFID tags for use in logistics. As we enter 2007, however, equal attention should be given to applications a little "closer at hand" -- in fact, in your hand. Integration of RFID readers into cell phones and PDAs, along with advances in sensor-enabled tags and the growing interest in Near Field Communications (NFC) applications and sensors, might see an entirely new RFID model emerging: personal RFID.

Imagine going to a grocery store and having your cell phone assure you that the bag of frozen chicken breasts you're holding remained frozen from the time it was packed until the time you picked it up. Or having your refrigerator call you to remind you that the jar of salsa at the back of the middle shelf has reached it expiration date. Or walking past a display and having it send your phone a toll-free number you could call for a discount coupon or special offer.

While some of these applications are a bit futuristic, they represent ideas that are currently being developed or tested.

The foremost of these applications is in Tokyo's famed Ginza shopping district where a test of RFID-enabled tourist information will begin in January. RFID tags affixed to lamp posts and other features will provide tourists with directions, information on restaurants and shops, and other information to make their visit more enjoyable. Tourists can use their own cell phones or rent prototype readers.

Samsung is developing a prototype refrigerator to read RFID-tagged food items that can monitor contents and note depleted or expired items and send a message to your cell phone or PDA.

Some hotel rooms are beginning to include RFID readers that respond to cell phone signals (programmed at the front desk) that will eliminate the need for room keys or key cards (and the potential to misplace them).

RFID readers in cell phones are also being tested for vending machine purchases in Korea.

Health benefits for the consumer could also be provided -- and not just in the area of pharmaceuticals. As food allergies become more common, RFID shelf tags that list product ingredients could be read by cell phones or PDAs that would look up all the variant names and descriptions of ingredients to which a consumer might be allergic (or to automatically warn of any product that contains them).

Advances in battery technology may some day allow cost-effective sensor-enabled RFID tags to be affixed to items to provide critical information to the consumer, from temperature-logging for perishable goods to shock-sensing for sensitive electronics and fragile items.

For many of these applications, NFC tags are the likely choice because users would want to discriminate easily among, say, closely spaced shelf tags or advertisements. They would have to be close to the tag to read it and, most likely, would have to make a conscious decision -- or establish "rules" -- to read tags.

That is one of the most important aspects of all these ideas -- they put the reader, and therefore control, in the hands of the consumer. In other words, RFID would become another modern convenience for the consumer, not an intrusion into his or her privacy
http://www.aimglobal.org


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