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Storms Coming on the Salesforce.com Cloud Front

November 19th, 2012 by
Salesforce.com Cloudy Vision

Salesforce.com financial clouds

 

I recently ran into a post from a pretty well respected investor blog over at “Seeking Alpha.”  The basic takeaway is that the Salesforce.com cloud business is not all it is hyped up to be and that shareholders may be in for a seriously rude awakening [FN1].

——————–

The way it is described there sounds a LOT like Enron accounting.  They called it a Ponzi Scheme and here is how it works:

  • Employees receive stock options INSTEAD OF cash compensation for various raises, bonuses, etc.
  • Salesforce.com takes the DIFFERENCE in stock value that they gave to their employees (an expense under GAAP and IFRS) verses what it WOULD HAVE COST in cash and books THAT DEFERRED COST as actual cash flow.  Viola! Magical cash flow appears!
  • THEN they add the “saved cash flow” (deferred cost, i.e. Expense) to non-GAAP earnings as “profit” thereby doing a complete Enron to convert an expense into profit.

So, let’s sum this all up.  They issue more stock certificates, they provide them to internal employees, then they simply count the stock certificates as profit.  WOW!  That is some creative accounting. 

The post goes on to explain the shareholders have their share value diluted, not necessarily in dollar terms in the SHORT TERM, but most definitely in quantity terms in the short term.  It is only a matter of time before it all catches up with them however.  Their whole premise is the Salesforce.com Cloud sales model is unsustainable in the mid to long term.

An added expense to the shareholder is the dilution that these increasing stock-based compensations are causing. Every quarter, the share count is rising. So the shareholder is fooled in a double manner. By dilution and representing costs as profits.

They go on to add that while some investors may be fooled in the short term on the non-GAAP claims the GAAP numbers tell a story that the company may have some very serious storm clouds ahead.

Without deeper insight, instinct would tell you there must be a catch, simply by asking the following question: How can you raise cash by spending more than you earn? Spending more than earning is exactly what Salesforce.com is doing, as evidenced by the company’s increasing GAAP losses.

The summary is that Salesforce.com excludes the huge expense of stock based compensation to present NON GAAP profits (masking that this expense results in GAAP losses), but on the other hand they include it in their cash flow statement to present rising cash flow (masking that true cash flow from operations is falling).

Consequences of a Salesforce.com Stock Fall

A Salesforce.com stock slide would have significant ripple effects across all of the software space, but most aggressively on any of the cloud vendors.  Because it is such a high profile cloud vendor, and a high profile CRM software company, the effects would likely have at least some short term impact even on companies like SAP.  

 


 

[FN1] Salesforce.com Accounting Shenanigans Explained

http://seekingalpha.com/article/857361-salesforce-com-accounting-shenanigans-explained

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Where Does Agile Fit in SAP Projects?

November 12th, 2012 by
Agile on SAP projects

Agile SAP Success

After offering insight based on my personal experiences around “Agile Project Methods for SAP ERP Projects?” I thought it would be helpful to highlight a couple of areas where Agile does work.

  • Development efforts (i.e. coding)
  • Data conversions

Once you begin to move very far beyond these two areas you quickly encounter dependent work streams that need much more coordination.  Those additional dependencies make it difficult to apply Agile methods beyond development and data conversions.

While Agile tends to emphasize the 1 week to 1 month “sprint,” I would define a “sprint” in more of a completed requirements and planning package rather than a pure time-box approach.

Applying Agile Methods to ABAP Software Development and SAP Data Conversions

Development (ABAP, Java, or other coding)

Since Agile methods have been used for some time with small, discrete components of software development I won’t spend a lot of time there.  On a typical SAP project you will end up with a functional spec which defines the program requirements and a technical spec which informs the development details.  Even though the more typical “Agile Manifesto” method would not require the documentation it is well-placed on an SAP project.  In fact, it is foolish not to have it for long term support and maintenance. 

Development can work well for the Agile stages of build / prototype, demonstrate, gather feedback, adjust, and repeat.  The key here is to limit the number of these “Agile” cycles to no more than 3 for software development.  By 3 cycles I mean 3 completed cycles too.  This is not a demonstration with feedback that is only partially built.  If the feedback cycle is not completely implemented then it is not a complete cycle.  Even though Agile would consider these “sprints,” I would consider them a FAILED sprint if the requirements of the current plan, or the subsequent plans, are not fully realized in the prototype or demonstration.

SAP Data Conversions using Agile Sprints

With data conversions I suggest at least 3 complete cycles or “sprints” (not including a minimum of 1 mock go-live conversion, probably 2 or more if you can). 

  1. Build the initial conversion program to all of the requirements (again, partial requirements do not count as a full cycle).
  2. Pilot a test conversion with all data, no matter how much fails, and capture all necessary changes.  This will include data dependencies and sequencing.  At this point you will be lucky to achieve a 70% success rate when considering all of the data dependencies.  This step is not about getting things perfect but about identifying data and programming issues to resolve.
  3. Implement all SAP data conversion changes the conversion pilot exposes, script every conversion step and rough timings, and aim for a successful test target of at least 90%.
  4. Make additional changes and attempt to follow the scripted conversion, making adjustments to the conversion script where necessary, and achieve a goal of at least 98% conversion completeness and accuracy.

Once you achieve this level of conversion consistency it is ready for a mock-conversion.  These Agile “sprints,” or as they are starting to call them now “Scrum-ban” (as a spinoff of Kanban) will help to ensure a successful data conversion.

Conclusion on Agile ABAP Development and Data Conversions

Even with newly packaged Scrum, Agile, or other methods, on an SAP project there are so many moving parts and work streams to coordinate that there is no substitute for a good waterfall project approach.  Using “Agile-like” methods for the ABAP development or data conversions is not a substitute for good project management either.  Done properly this approach can work well as long as it is carefully managed along with the rest of the work streams.

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Building an Effective SAP ERP Delivery Organization

November 5th, 2012 by
Effective SAP Delivery

Effective SAP Delivery

There are generally 3 big components for improving SAP delivery.  These 3 components have the capability of improving SAP and technology delivery in general while impacting corporate business performance and marketplace success.

  • Delivery Approach
  • Delivery Methodology
  • IT Organizational Development

The following content is written with a focus on SAP, however it can be completely generalized to virtually any IT organization.

  1. A careful focus on the delivery approach is needed.  Here there are 2 key paradigms to focus on.  The first paradigm is service delivery vs. value delivery (SAP Service Delivery versus Value Delivery), and the second paradigm is software engineering vs. business process engineering (SAP Implementation Focus: Engineer Software or Business Processes?).
  2. A formal, structured, internal delivery methodology.  This should include a “checklist” of all project requirements including templates, tools, and resources for project delivery.  Because I know SAP I use it, however they have a powerful methodology which can also be generalized to virtually any IT project.  For more information see Why Use the SAP ASAP Methodology?
  3. A strong focus on IT organizational development.  The current “best practices” around IT Organizational Development includes a 3 tiered maturity structure:  Service provider, Business Partner, and Business Peer (Organizational Change Management Inside the SAP IT Support Organization).  The second part of that is a structured approach to creating the premier IT “Center of Excellence,” converged business-IT delivery organization (see SAP Service Provider to Business Peer Through Center of Excellence Maturity).  You can use 3 Development Phases for SAP Center of Excellence Maturity as a completely structured organizational outline.  It includes key activities and maturity steps.

Adopting these three pillars will create a great foundation for your company or organization for the long term.  They will also help immediately and transform your enterprise in the mid-term.

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