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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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Create SAP Convergence Instead of Business to IT Alignment

April 4th, 2011 by
Convergence is the answer beyond business to IT alignment in the SAP organization

Business to IT Convergence

This is part of an ongoing exploration of creating an SAP or Technology “Center of Excellence” within your enterprise.  For the background and key insights on this approach see the Series on SAP Competency Center or SAP Center of Excellence .

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The real future of technology is for IT to integrate with business, or in other words to “converge” business and technology.  The idea of “aligning” with business is too weak of a statement to define what IT and SAP must do within the enterprise to generate significant ROI.

Think about it, during the course of an SAP project the focus is on integrating the enterprise into a single data repository with dependent process chains.  Somehow that same level of integration is not required of the business and IT after you go live.

Product Convergence Lessons for Next Generation SAP Organizations

Convergence, convergence, convergence, what do I mean by convergence?  The idea behind convergence is the enabling of business with technology so that the two can not be distinguished from each other.  It means the lines between business and IT departments must be deliberately blurred.

Although the following examples are about product convergence they are great illustrations for how business and IT should integrate, or “converge” their functions.

  • ARPAnet which was created by the U.S. Defense Department’s Advanced Project’s group eventually became the Internet.  This was originally an advanced data and communications “fabric” that could withstand a nuclear war and route both data and communications in the event whole areas of the network were unavailable.  That back-end technology was later combined with early graphical software to create the public Internet as a global information resource never seen before in human history.
  • E-mail was a convergence of network technology with hardware, communication protocols, and then combined with software applications.  These combined to create a new form of communication which has transformed both business and social structures.  That convergence has extended to the Internet for various forms of “webmail.”
  • The advent of the personal computer and its increasing power made the way for decentralized processing in the form of “client-server” based applications.  Central business functions and tools could run on a server but each user’s experience and application needs could be tailored at their individual workstations.
  • ERP applications such as SAP’s ERP suite were made possible by the need for a centralized source of data, at the intersection of databases, network technology, and software user interfaces.  “Cloud” based applications or Software as a Service (SaaS) were an extension of that convergence to include remote hardware sourcing and access through the Internet.
  • Social media was the next “extension” of collaborative technologies.  They converged the Internet’s ability to connect people with software applications that allowed people to communicate in new ways. LinkedIn, Twitter, Facebook, and others are moving forward by connecting people to share more information in real time.

Look at most of Apple’s products.  For many years the Mac PCs and laptops only had marginal market share, while it is increasing it was their other products, their “convergent” products which produced explosive market penetration.  What was the difference?  It was convergence, the convergence of the customer experience with the things people use (see Business Strategy and IT Strategy to Reproduce Apple Innovation ).

What is Really Different About Apple Anyway?

Since Apple is so successful today we will look at their example.  The iPhone, iPad, iPod, all have one thing in common–, they took the idea of usability around the convergence of several technology streams to the next level.  Apple leveraged technology, communication, and entertainment to create something MORE than just a Graphical User Interface (or GUI), they created something useful for entertainment.  Apple products are a pleasure to use–, they created a “user experience.”  In the iPhone, even with its irritating lack of integrated e-mail calendar integration, it is a powerful business and personal communications tool which would have been considered a miniature PC a few years ago.

Apple didn’t really invent anything new.  Apple found that place of “convergence” with quality technology products and user experience

Apple didn’t invent the cell phone, portable music (remember Sony’s Walkman?), Internet data delivery (think, music sharing streaming software).  What Apple did was converge these technologies with a great front-end and delivery system.  Or as Steve Jobs has said, they “put a Mac in a cell phone.”  Apple also went one step further, they sought to own the entire content delivery infrastructure and the hardware architecture for their devices.  For the iPod it was the music delivery system (think iTunes), for the iPhone and iPad it was the extension of iTunes to add an Application store, etc.

That is an example of a product convergence that has had huge market impact.

Business and IT Convergence Can Transform Your Company

If we take this product concept one step further and apply it to IT and Business there are ways to bring about “convergence” in the IT enabled enterprise.

Business-technology convergence and business-technology management are terms that spring from a simple idea: Technology is a means for achieving business objectives; therefore, managing business and technology together provides significantly better results than managing them in separate silos. By converging business and technology management, enterprises can nimbly respond to changing marketplace dynamics, technology evolutions and competitive pressures—capabilities that are especially important during an economic downturn. [FN1]

[C]onverged enterprises know when to change the rules to maintain a strategic advantage over their competitors—and to sense and respond to changes in the marketplace.

I am a strong advocate for the convergence of roles between business and IT–, how will the IT organization know and understand the business “rules” without participating directly in business?

The best convergence candidates are likely your power users or super users who participated in your SAP project.  They come from the business but have exposure to the system and the challenges around IT.  The IT folks should also work in the business areas to become “super analysts.”  They need to know and understand how business actually gets done so they can figure out the best way to apply technology for business objectives to be addressed.

Completing the SAP Convergence

On top of the business users being integrated into IT and IT integrated into the business, the steering committee must not be disbanded.  This need cannot be stressed strongly enough.  That group of senior level business individuals are a key part of the “glue” for a successful and ongoing transformation of the business.  They are one of the critical ingredients for convergence to occur.

If you continue to develop your key business users and maintain your steering committee you have a power organization structure in place to build on convergence of business technology. For more information on the importance of continuing involvement by the steering committee long after the SAP project has gone live see my previous post on Using Your SAP Steering Committee for Business Transformation .

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[FN1]  http://www.baselinemag.com/c/a/Business-Intelligence/The-Value-of-Convergence-236013/




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What are SAP Best Business Practices Anyway

March 7th, 2011 by
Key types and distinctions of SAP Best Business Practices

SAP Best Business Practices

Over the last couple months I’ve seen a few posts developing a debate around the use of software “best business practices.”  The basic takeaway is that if everyone uses the standard delivered “practices” there is no competitive advantage.  While this may be true for many software applications there are two things with SAP which causes this idea to be misleading.

Many of these commentators fail to recognize that SAP refers to different things as “best business practices.”  The key types of SAP best business practices involve the processes included in the SAP software itself– software supported business processes.   Then there is the management and integration practices around software alignment to business — or the whole Business to IT Alignment dynamic which focuses on business value. [FN1]

The posts and comments complaining about “best business practices” I refer to are the ones where the authors complain about software supported business processes.  The common denominator I find in all of these authors’ complaints is they have little or no exposure (let alone experience) with SAP.  Their commentary is a bit misleading because of the depth and breadth of options available to any SAP customer.

SAP Best Business Practices for Business Software Integration

Few of the “best business practice” detractors are aware that SAP best business practices are far more than just the software business processes you put in scope and implement.  SAP’s best business practices include structured decision making and governance around applying software solutions to business (shocking isn’t it!) [FN2].  The whole idea behind these types of “best business practices” are to find ways to gain tangible benefits from the application of technology.  By identifying value based governance and project criteria you can achieve measurable Return on Investment (ROI).

Use of SAP’s Best Practices for Speeding Time to Benefit [FN3]

Best-practice value identification, transformation, and measurement approaches include:

– Incorporation of business case objectives throughout the project lifecycle
– Communication and documentation of process objectives and project success criteria
– Use of both existing and new program-specific financial and operational key performance indicators, based on the business case objectives, to measure project success.

The points above come from the SAP literature.  If you look at what SAP is proposing in those points you will see a company that is encouraging accountability to the business in the implementation and integration of its software.  Unfortunately few of the SAP implementation vendors or partners encourage this type of accountability.

SAP as a business software company spends over $1 BILLION Euros a year on Research and Development (R&D) (or over $1 Billion US).  That is to support both types of “best business practices” and is more than nearly all of SAP’s competitors generate in gross revenue each year [FN4].  Is it any real surprise that most of these complainers do not work with SAP?  Many of them are from competitors.

SAP Software Supported Best Business Practice Process Design and Setup

The SAP software supported best business practice processes generally refers to a broad type of functionality that the application contains.  For example, in the automotive sector, on the materials management side, it means that you have special functionality for JIT (Just in Time) or Forecast schedule agreements.  Along with that it also includes “sequencing” for automotive manufacturers and suppliers to guarantee that components and assemblies are delivered to the production line in exactly the order the OEM manufacturer builds them.  This is industry specific business process functionality.

In that one small example, what is not “understood” by many of the best business practice software process detractors is that there are literally dozens, if not hundreds of individual and granular system setup options for how each step of that process works.  On top of that there are also dozens, if not hundreds of master data points between the vendor, materials, pricing, and other possibilities that directly influence how the steps of that process are carried out.  So in a generic sense you have SAP “best business practices” processes in the form of industry accepted JIT and Forecasting along with automotive specific sequencing.  The details of how you execute that functionality can be finely controlled along the way without custom coding.

Conclusion on SAP Best Practices for Business Processes

The example just provided above is one small processing example of hundreds of processing options, within one single industry vertical.  SAP supports over 20 major industry verticals covering industries as diverse as Chemicals, Public Sector (government), Retail, Pharmaceuticals, Consumer Goods, Healthcare operations, Hi-Tech, Services, Aerospace and Defense, etc.

Even though SAP offers a “best practice” setup library with documentation on system settings to support specific business processes, they are a starting point.  The SAP documentation and resources do not cover all of the fine details of setup that only experience brings.

The ability to finely tailor or “tweak” system settings to meet a particular need or requirement, with hundreds, and in some cases thousands of variations, means that two companies using the exact same functionality can create entirely different processes to support different business strategies.  Together with that you have dozens or even hundreds of master data settings which rely on this system setup to create a virtually unlimited set of options.  And then before building some completely separate, stand-alone application there are user exits (or enhancement points in ECC versions) to program very specific requirements.

In the end an experienced consultant can guide you through the process of making the finely detailed adjustments to handle nearly any requirement with a minimal amount of custom coding.  And that is where true “best business practices” intersect with IT. Combine the right consultants with proper project or task governance and you have an optimal solution for the least Total Cost of Ownership (TCO).  Together with reduced TCO you gain real Return on Investment (ROI) with the application of “best business practices” surrounding good governance to create business solutions with IT (rather than IT solutions for business).

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[FN1] This site focuses more on “best business practices” related to business and technology alignment. There are any number of great resources for the business process related topics so another site would add little benefit.  In fact I’m not sure anyone could compete with SAP’s own “SAP Community Network” (or SCN, http://scn.sap.com ).

[FN2] SAP Executive Insight Series (September 7, 2009).  Accelerate Value Creation: The Virtuous Cycle of Using Technology to Maximize Business Value.  http://www.sdn.sap.com/irj/scn/index?rid=/library/uuid/70fa08b0-cf81-2b10-a396-89d18932fbd0&overridelayout=true (retrieved 4/23/2010).

[FN3] SAP Executive Insight Series, pg. 6, 2009.

[FN4] SAP Annual Report for 2009.  Review of R&D Operations.  http://www.sapannualreport.com/2009/en/annual-report-2009/review-of-operations/research-and-development.html (retrieved 3/05/2011).




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