Lawrence Scott

Wednesday Mar 19, 2008

The Witch is Not Dead Yet

Jamie Dimon at JPMorgan is now a fitting successor to J Pierpont Morgan, or so says the NY Times on Wednesday, March 18. He's now known as James Dimon, a perhaps more fittingly formal moniker to a true "financial statesman" as he was described. But I digress.

Attended a Financial Times sponsored event on the financial markets today. Wow. George Pataki and Jerry Corrigan in the same morning. For those of you waking up on the other side of the world (figuratively or literally), that's the former governor of New York and the former chairman of the New York Federal Reserve Bank. Yup, some seriously big hitters. So sit a spell and take a load off. I'll be brief. It's not pretty.

I could wax poetic about interest rate policy (failures), credit analysis (blunders), or a financial institution (collapse). Instead, I'll spend two paragraphs (count 'em) on what happened next.

The morning started with the CEO of an esteemed French bank advocating that the US banking system assign all of its dubious assets to a new asset class, reclass them on the balance sheet, and with full Fed backing, finance them with new debt. Hmmm. I smell bailout like my hero Paul Krugman. Chief economists from two very high end financial institutions then opined about pro-cyclical (or not) fiscal policy (aka interest rate) adjustments. And an esteemed West Coast academic institution weighed in. For those of you unfamiliar with macro or even microeconomic policy, I can only say I was glad I was paying partial attention during undergraduate classes. And then the fun started. Punctuated by some poor guys pushing a climate change (and trading) agenda. Never saw two guys pushed off stage faster...

The esteemed former chairman of the New York Fed gave us a quick primer on what happens when the stuff hits the fan. But much more importantly, he indicated that he was offering his services to help solve this credit crisis contagion. And no one should kid themselves - this is now a full blown contagion. It has hit the fan, the wall, gone out the window, spattered innocent women and children, and now threatens the livelihood of far too many innocents. What struck me was that despite the Fed's 75 b.p. cut and the attendant and variously exuberant effect on financial names, we still have a very serious problem. Good news though - adults are stepping up to sort the problem. Adults with 40 years (or more) of experience. And that's a really good thing. I have only two words for the professionals: thank you. (And why did you wait so *&%$@# long?)

Okay, off that soap box. Heard some great examples of Web 2 in action in the FS market. First, how about using Facebook as your distribution channel for investment research? Is that Gen Y (or Z) or what? Second, why not move from the airport currency exchange kiosks to retail FX trading? I pushed a VC on meaty examples of transactional Web 2.0 and this was one popularized in Asia. Lastly, how about social lending in the peer to peer model? Sites like zoppa.com are growing like crazy. Finally, and here's a real stretch: Islamic finance as a play on the democratization of capitalism? Yes friends, you heard it here. PE groups being approached by Islamic finance units to promote a more equitable distribution of risk and reward. Traditional capitalism take note. Web 2.0 teams with your social networks and democratization of the Internet, take note too. You most certainly have kindred spirits in perhaps a corner of the world I have NEVER thought of.

Oh yeah, and the title. It was catchy, but perhaps not terribly relevant. Figured I was too obtuse with some of the others. Gotta figure out how to get more Google hits via their web crawlers...

Posted at 10:50AM Mar 19, 2008 by lscott97 in Sun | Comments[0]

Monday Mar 17, 2008

The Sound of One Hand Clapping

The notion of an Irish wake on St Patrick's Day seems a bit morbid but fitting nonetheless for the venerable institution known as Bear Stearns. Its fall from financial grace was swift and sure. Financial markets today are unsure what to make of the once proud and powerful firm's untimely collapse. Thursday night's news that the Fed and JPMorgan were stepping in to prop up Bear was a clear harbinger that the end was near.

The Bear Stearns that I knew in the 90s was aggressive and smart. It had some of the most sophisticated technology on Wall Street to measure and manage their exposure to the mortgage market. Their block desk was one of the best in the business. Their support for the emerging ECN segment made them stand out. But somewhere along the way, their appetite for risk got ahead of their capacity to manage it. And in the end, what many of us feared finally came to pass: the credit crisis brought down a Tier 1 player.

The capital markets have been tested by many crises. What has consistently impressed me over a 20 year career is how resilient the market is. We are now testing new lows, personally and professionally, emotionally and financially. Many will survive and perhaps even thrive in their new home at 270 Park Avenue. That said, the swashbuckler culture that, at times, characterized Bear Stearns is no doubt gone for quite a while.

I hate to say it but perhaps the market for almost any form of risk is illiquid. If so, then it's a true Greek tragedy because firms like Bear helped create new markets by methodically and brilliantly chopping up cash flows, assigning them different risk profiles, and then packaging and selling them. Firms like Sun aided that process by providing powerful workstations for quantitative calculations and then later, when "the network (became) the computer," delivering even more powerful capability via server technology. That said though, this post is about Bear.

No doubt it's a very quiet day at 383 Madison Avenue. To colleagues and friends, my sympathies on the end of an era. To JPMorgan, please be diligent stewards of a valuable, albeit broken, asset. To the markets, use this opportunity to reprice risk not mis-price it (again). And now a moment of silence as we listen to the sound of one hand clapping.

Posted at 05:53PM Mar 17, 2008 by lscott97 in Sun | Comments[0]

Thursday Mar 13, 2008

Natives and Immigrants at the Digital Border

I had a chance recently to hear the CTO of a large institution for higher education talk about his customers (also known as college students). It was an enlightening conversation. Personally, I am at the tail end of the boomer generation and because I work at a technology company, I like to get independent validation of how consumer behavior is shaped by next generation technologies.

One of the first slides depicted the difference between "digital natives" and "digital immigrants". Simply put, "digital natives" have grown up with the tools that today make technology nearly ubiquitous, always on, and personally accessible. And the "immigrants" are those from another galaxy. So in a tribute to Jeff Foxworthy, if you print your email or call someone to ask if they got your email, you must be an immigrant!

Why is this relevant? I framed a presentation I made recently in the context of social networking as a fundamental behavior change (notice I did not say technology) that "immigrants" who run today's financial institutions must confront. More fascinating to me by this higher education CTO: the difference between outgoing seniors and incoming freshmen was distinct and discernible. Translation: the velocity of change in consumer behavior is accelerating. And so the Web 2 consumer segment is evolving and morphing. A new banking customer two years ago will have a different set of needs than the one who graduates this Spring.

So what are the implications for my business and my customers' business? They are probably captured best in a summary of a conversation I had with a senior guy at a Web 2 early stage start up on a recent flight from San Francisco to Boston.

- One third of his target market turns over every 90 days
- After six months, they abandoned their current software development platform and are now rewriting entirely
- They won't own their next generation of infrastructure; they plan to lease capacity (from a Sun customer, phew!) and utilize a dynamic provisioning model
- PayPal may well be their preferred payment platform
- Social networking is the fundamental model for their approach to the business opportunity they plan to exploit

Bottom line: it is a wholly new world. Immigrants like me will struggle to keep pace with natives like Brian above. Financial institutions would do well to respect the lessons here. And many thanks to natives like Brian - I hope you'll let me keep my passport!

Posted at 03:24PM Mar 13, 2008 by lscott97 in Sun | Comments[1]

Thursday Feb 28, 2008

Iron Maiden, Trust Communities, and Disruptive Behavior

Just another day in the life... Dinner in Mexico City and who do we see? The rock group Iron Maiden shows up at the hotel where we are eating and we get filmed as part of the entourage. Wonder if we will be able to sell it to HBO? Better bet is a YouTube appearance I suppose. And that brings me to Web 2-enabled disruptive consumer behavior.

Interesting discussion at breakfast. Who do banks compete with at a consumer level? In this age of social networking, the answer is not readily apparent. Here are a few things to think about.

Traditional competition: Other Banks and FS Providers
Banks fought for a slice of the consumer pie (deposits, loans, other services) via better branch placement, ATM locations, convenience, superior product pricing, etc. Do consumers still shop that way? I suppose... but ask your teenager (a.k.a. next generation of financial services consumer) how they decide what and where to buy.

The missed wave: Non Bank Financial Players
No, I'm not talking about the credit card companies (but ignore this scenario at your peril). I'm talking about that dreaded six letter company, PayPal, now owned by that happy and highly profitable four letter company, eBay. The banks had their chance to own PayPal and they took a pass. Now what happens to the remittance business? It goes to the low cost provider of a "trusted" payments service. Case in point: two weeks ago I had a chance to go skiing outside Zurich, but my credit card would not work so I asked a friend to pay for my lift ticket. I reimbursed him in Euros (he lives in Germany) for the Swiss Franc-based lift ticket via my credit card-linked US dollar PayPal account. No muss, no fuss. Think about that Mr. Banker... By the way, lift tickets in Switzerland are much cheaper than in the US.

The next wave: Telco's
What's the most ubiquitous consumer device? Yup, the cell phone. And who manages your cell phone account - the carriers. With the advent of Near Field Communications and related wireless technologies, why not be able to use your phone for Over The Air (OTA) provisioning of an e-wallet? It's happening in Asia and parts of Europe today and will be coming soon to the rest of the world. By the way, with the billing sophistication of the telco's, I am more than confident that they'll figure out how to manage the netting process that banks use today, say in the RTGS process. The settlement mechanism for wireless roaming looks interestingly like the netting process banks employ.

The X (or Y) factor wave: New Media Companies
Yup, it's the nightmare scenario. I know why Google and Yahoo (and Microsoft) have been in the search business. I just wasn't sure about the longer range plan. Ask a question, get an answer. Ask questions and get the right (or a desirable) answer often enough and you tend to build up trust with the provider of that answer. All those questions mean consumer eyeballs which translates to a trusted community. Community equals a market segment (or many of them) with highly targeted and specific buyer profiles, a marketer's dream. Google bids for wireless spectrum. GooglePay is launched. The Android phone appears. Okay, too far fetched? Try this scenario instead.

Proximity marketing (SMS message to your mobile device while you're walking through the airport, sponsored by Google) leads to personalized product promotion (24 hour travel insurance underwritten by Google-vetted insurance carrier) with real time pricing ($1 policy for traveling anywhere in the US) completed via mobile micropayments utility (charged to your cell phone account, just like the SMS message, and settled via GooglePay). Monetization of trusted community is now complete. There's a bank in there somewhere, but I'm just not sure they are getting their fair share... Or perhaps this one is too far fetched as well?

Hey Iron Maiden guys, when will you be streaming your music over the web and allowing me to listen via my home wireless music system or other wireless consumer device, and paying for it via my mobile e-wallet? So there you have it: the convergence of finance, telcos, and new media via Web 2-enabled disruptive consumer behavior. Now off to see if we made it onto YouTube yet.

Posted at 03:27PM Feb 28, 2008 by lscott97 in Sun | Comments[1]

Thursday Feb 21, 2008

Buying, not Selling

Spent time in Europe last week with a number of account teams and their customers. Heard a comparison from a customer's perspective of relative priorities of technologies and the same prioritization from vendors. Here's a summary of some of the more interesting bits.

Greatest Disparity
By more than 2:1, vendors were pushing Business Intelligence (BI) solutions. Fewer than half as many of their customers thought it as important.

Greatest Shocker
By an order of 5:1, customers were more inclined to rate Web 2.0 as a higher priority. We are seeing banks embrace Web 2.0 less as a product play and more as a process play. It's less about what you are marketing and more about how you are marketing and to whom.

No Surprise
Storage was a dead heat. Both vendors and customers felt this was a priority. Phew!

Greatest Disparity #2
Again, in a 2:1 delta, vendors felt SOA had a greater impact than their customers. Are vendors sending the wrong message here, or are the difficulties of implementing enterprise SOA finally pushing firms to reconsider their strategies?

No Surprise (Sort of)
IT Governance, Compliance, and Business Software (ERP, CRM, etc.) were closely aligned, although in all cases, the customers attached greater importance than the vendors.

Greatest Disparity #3
In a testament to mobile computing (aka Blackberries, etc.), the topic of Unified Communication held the greatest nominal delta for customers and vendors. By more than a ratio of 5:2, customers saw this area as problematic, more so than vendors wanting to offer solutions.

So the question is this: are we selling what customers are interested in buying? In some cases the answer is "yes", but in others, it's a clear "no". And it seems that while customers are focused on how to make the operations run efficiently and with the least risk, vendors are pushing forward with new technologies (the "shiny penny" syndrome). I'm still reeling in shock over the Web 2.0 comparison.

Do's and Don'ts

In this same session, we had a senior IT executive give us the benefit of his experience with account management. It was a great insight into "how the other half lives". Here goes, with apologies in advance to those of you in the know as I have modified portions to protect the parties involved.

Account Management Do's
1) Do focus on long term relationships
2) Do promise only what you can deliver
3) Do build credibility by occasionally providing solutions which result in lower profit/revenue
4) Do solve the customer problem first, then talk about compensation
5) Do talk about your customer challenges, not yours (!)
6) Do be brave and demo your new products live

Account Management Don'ts
1) Do not focus on short term revenue
2) Do not show up at client with nothing to say
3) Do not take the blame if it's not your fault
4) Do not deflect the blame to others during a crisis (solve the problem!)
5) Do not change the RFP process by selling higher (it will come back to bite you - IT managers have long memories)
6) Do not behave as a localized company when your customer is global

Yup, lots of this is common sense. Common sense begets candor which begets credibility which ultimately begets commitment. The best practices above are really about a "customer first" mentality. We need to be relentless in our customer-centric approach. It's more about "buying" and less about "selling".

Posted at 05:28PM Feb 21, 2008 by lscott97 in Sun | Comments[0]

Tuesday Feb 12, 2008

Teams and Dreams

The one good thing about a Monday early morning flight to San Francisco is that it tends to refocus the mind at such an early hour. It also dulls the pain when your football team loses the championship game after going undefeated through the entire season and the playoffs. As I sat in the barber shop chair this afternoon, the great bit of wisdom I heard was this: "No one else has ever been able to claim they went 18-0." Indeed, that is the ONLY way to view a disappointing end to an otherwise thoroughly enjoyable 18-1 season.

So why do I relate this story? On occasion, the veil of excellence is pierced by a misstep. Several years back Sun took its eye off the ball on Wall Street. And as a result, a competitor emerged in the OS space who has enjoyed a very profitable run at Sun's expense. Well, no more. I'm happy to report that after our run of excellence and that misstep, we are back on track. Yes, I am talking about Solaris in capital markets. Sun has had a focus for the past 12 months now on regaining our leadership position. From the recent announcement that Reuters has licensed our Java Real Time technology to a series of customer wins at brand name firms, our commitment to our core IP as a way to demonstrate engineering innovation and industry leadership. And the recent news that Forrester had established Sun's operating system bet had paid off in the European banking community pointed toward a relentless commitment to excellence. Something a football team can relate to!

At last week's Sun Analyst Summit, numerous Sun luminaries talked about delivering on our commitments. And our recent acquisitions position us to crack new markets, with new customers being the lifeblood of any commercial organization. As importantly, we talked about growing through partners and strategic partnerships. Sun's work with Reuters, Intel, and Cisco is an assembly of four of the industry luminaries to solve for the challenges of ultra low latency in an era when millisecond increments have been replaced in some instances now by microsecond metrics. So the ability to measure, tune, and predictably deliver orders to the securities market is of paramount important. And it is through a close collaborate partnership such as this one that Sun will grow, our customers will benefit, and we will collectively demonstrate industry leadership. And Solaris is a critical part of that solution.

So collaboration and teamwork are fundamental tenets of any organization's success. Single-minded focus on a goal usually permits you to achieve your intended result. Sun has and will continue to team aggressively to achieve our goal of participation on the network. Our partners and customers recognize and value of this approach. And our philosophy tends to be "1 + 1 = 3". Same goes for the result.

And oh, yes, the Patriots did lose the US football Super Bowl. Kudos to the NY Giants who played an excellent game. So as our professional baseball team returns to the diamond after a championship run and our basketball team enjoys the best record in the league, all of our competitors need to know one thing. No one remembers who finished second. We certainly won't. Wall Street, Sun is back and won't settle for second place again.

Posted at 04:59PM Feb 12, 2008 by lscott97 in Sun | Comments[0]

Thursday Jan 24, 2008

Credit Hangover

Last time around I talked briefly about "toxic cocktails". This morning we are officially experiencing what can only be termed the "credit hangover". While the Federal Reserve attempted to apply the "aspirin" of cheap funds, everyone knows that there is no quick fix to a headache that rages from periods of excess. And that's exactly what we now face. A recovery period.

Two weeks ago in New York we were discussing how we should approach firms in this era of revalued assets, bruised balance sheets, and humbled egos. Is this a time to push virtualization? Only if it results in cost savings. Is this a time to emphasize innovation? Only if it results in cost savings. Is this a time to discuss our open source strategy? Only if it results in cost savings. Are you getting the message?

One message was clear to all of us: discussing change for its own sake is a sure recipe for being shown the door. So what are some of the practical implications of the sub prime crisis on our industry and how should we respond? The best answer came from global banking leader Carl Morath. As firms write down their assets, the income impacts are obvious. More importantly, it becomes crucial for banks to become highly efficient. Translation: make the myriad customer interactions you have every day as cost effective as possible. Where do banks experience cost? In the call center.

How many of us have "zeroed out" of a financial institution's touchtone IVR system? My hand is up, can you see it? Each time I do that, it costs that institution an average of $15 for me just to say "hello". And I hate paying service fees (again, don't we all), so it becomes even more critical for my interaction with the institution to be automated yet "personal". Enter the voice platform. We are seeing a number of firms convert their legacy call center touchtone systems to automated voice response systems. So better customer interaction technology actually yields a 30 percent reduction in the "zero out" phenomenon (statistics courtesy of our friends at Genesyslab.com). And that's cost savings.

Customers get a more effective interaction with their provider and the financial institution reduces its costs while preserving a customer relationship. Who'd have thought that superior customer interaction would be the antidote to the "toxic cocktail"? Well, perhaps not the antidote, but at least a painkiller.

Speaking of antidotes and cost pressures, do yourselves a favor and check out Sun's thin client technology. You know, the little machines with the Java card that identifies you to the machine? One of our West Coast clients has determined that our thin client technology will become the centerpiece of their data center consolidation strategy. Yes, you did not misread this last sentence. Virtualizing the desktop in a wide area network (WAN) environment all of a sudden frees up an organization from needing to decentralize application infrastructure on a regional basis. Combine that with the security benefits (military grade) and cost benefits (20 year MTBF) and all of a sudden you've got a winner. The real kicker though was the WAN performance. Many thin client solutions work well in traditional LAN environments. Ours delivers exceptional results in a low and high speed WAN environment. We use it every day at Sun; I have a Sun Ray at home and will pop out my Java card, head to New York or London, and pop in my Java card. No laptop to take through security. No file locations or names to remember. Stay tuned for some information on how and where you'll be able to see this in action. And finally, please remember two words: "The Incredibles".

Lastly, a few words on diversification. I've been pinged by the leadership at Sun to opine on the global market collapse. Here's a secret: when everyone runs in one direction, you should walk in the other. I sense that panic has set in and that anyone who reacts now is probably doing themselves a disservice. None of us have all of our eggs in one basket, neither personally nor professionally. We have a diversified customer portfolio which is served by a diversified product portfolio. Small customers and large ones alike do business with us every day in every part of the world. They did not take out a high risk mortgage. True, they might be affected by one (see Bank of China's planned write downs). But they have a diverse portfolio, no different than their peers in the rest of Asia, Europe, or the Americas. So yes, this is bad right now. But if you have a well-diversified asset (product or customer) base and you are prudent with regards to debt (manage your risk), you (and we) will come out of this "crisis" in reasonable shape.

Posted at 05:45PM Jan 24, 2008 by lscott97 in Sun | Comments[4]

Friday Jan 11, 2008

2008 Resolutions

HNY 2008. Headline reads "Credit Repricing = Budget Cuts". True or False? While we are seeing some evidence of negative impact from asset write downs, many firms have insulated themselves successfully from the down draft caused by the subprime mortgage crisis. Just spoke to a VC who said "we are adding 12 months of runway to many of our firms' business plans". Translation: economic slowdown. If there was ever a definition for "toxic cocktail", it's the CDO. But on to more interesting topics.

In the category of "Long Overdue" is thin client technology. That's the capability to manage an end user computing environment from a more centralized or server-based infrastructure. Many customers employ Windows-based desktop environments. Maintenance costs can be a killer. And with Europe (and slowly North America and Asia) going to a carbon-neutral economy, all of a sudden taking all of those dead desktops to the "dump" is not so cost effective. We are seeing geometrically expanding interest in our thin client Sun Ray technology. And at a 4 watt power draw, not a bad pitch for energy conservation! Check it out.

In the category of "SaaS News You Can Use", I still see lots of chatter, but not many applications that matter. Our colleagues at Salesforce.com seem to be one of the few who have perfected the art (and I'm certain I'll now get multiple posts objecting to this characterization). Would love to hear about other SaaS business applications out there in user land. What's the challenge? Is it cost to develop, customer adoption, ability to integrate, or what?

In the category of "Open Source or Open Wallet", the market has a definite bias toward software infrastructure as the premier open source candidate software category. One of the more interesting offerings in this area comes from www.alfresco.org. Those guys over in London have built a killer enterprise content management solution on the FOSS model. What I hear is that perhaps the evolution of software is SaaS for end user applications and FOSS for infrastructure applications. So if SaaS is really a "utility pricing" model, then SaaS and FOSS are opposite sides of the same coin. Both are "pay for use" business models, no?

In the category of "Surround or Subsume", legacy platform refresh seems to be in vogue. Again. Perhaps. At Sun we coexist with the mainframe every day. Our tape storage business relies on lots of mainframe data archival demands. Our software integrates applications and authenticates users. But a number of firms are re-evaluating the mainframe. I could say "SOA what?" but I won't (that's a tale for another day). Instead, stay tuned for an interesting approach to enterprise class transaction processing.

Finally, in the category of "Lean and Green", congratulations to Citigroup on their recent award for their new, eco-friendly data center in Germany. No doubt your colleagues around the industry are "green" with envy. Sorry, could not resist! But speaking of green, check out Sun's Green programs. Green is definitely the "new black"