Key takeaways:

• 2013e expectations decelerating
• Overall 2013e growth has been revised downward since our last survey, slowing to +2.7 percent for the financial year
• Both US and EU sentiment has declined since October. EU and US growth are expected at +0.7 percent and +3.6 percent, respectively, down from +1.2 percent and +5.1 percent.

Positive indicators:

• The decision cycle of CIOs has continued to shorten.

Cautious indicators:

• There seems to be a shift towards more aggressive cost cutting compared to our last survey, and the percentage of CIOs expecting budgets to increase has fallen materially
• Additionally, there appears to be more willingness amongst vendors to discount, which indicates a tough sales environment.

As always, the devil is in the detail, but before getting into that, it's worth reminding about macro trends.

It's noteworthy that, on this occasion, general weakness is reported in both the UK and US. This does not surprise. At the end of last year, many companies in both geographies closed for an extended period over the holiday season. This was unusual. Europe is used to taking a longer break, whereas the US often takes less time out. Last year, the timing of the main holiday meant that for many, there was little point in breaking up the weeks. In addition, consumer spending was not as much of a bonanza as brands had hoped. Add in a procession of high profile brand failures in the UK, and it is not hard to see why sentiment has fallen. Back to the details.

Morgan Stanley reported that weakness is not confined to any specific segment, but across the board (see illustration below).

The report draws attention to specific weaknesses in software, which the report authors described as:

Software spending growth (at 3.5 percent) is still expected to see the fastest growth in 13e, but this is the largest downtick (from 5.1 percent last survey). The data for SAP (OW) is slightly mixed, but still positive overall, we believe. ERP spending has fallen down the priority lists, but BI/Analytics, Cloud, and HR all remained strong, and the proportion of CIOs expecting to increase spending on SAP increased vs. the last survey.

The good news for some vendors is that spend on cloud technology, business intelligence, and HR are all expected to be strong areas, with cloud leading the field:

For the first time in recent surveys, Cloud Computing has placed highest in areas where CIOs expect highest increase in spending. In previous surveys, BI/Analytics has ranked highly and the results from this survey are in line with this pattern. Additionally, HR spending has increased in importance.

On the downside, consulting and outsourcing are the weakest areas of projected spend.

When Morgan Stanley looked at verticals, a mixed bag  emerges. Retail and financial services are particularly weak while business services and technology are reported as more positive.

My take for vendors

Nothing much in this survey should surprise.

• While high street retail may be weakening, and with no end in sight, online sales continue to take share. Businesses that start out online are far less likely to buy on-premise applications, although there are exceptions when those same businesses achieve large scale

• Financial services have historically been strong tech spenders as they see this as a differentiator, so weakness here is bad news

• The stronger verticals may be more optimistic, but they are more likely to opt for lower cost cloud solutions than on premise

• While it is easy to fall in line with predictions on functional spend, I see this as incremental and not transformational. Any benefit that vendors see in concentrating on those segments may well be useful to keeping products alive, but buyers will be far more savvy about investment levels. Have alternatives in mind

• Shorter decision cycles may be good for pipeline transformation, but expect pressure in price/value conversations

• The market for business intelligence solutions is changing rapidly. While this is a hard market to break at scale, I am seeing strong growth in areas that contribute to goal driven outcomes. Be prepared for tough questions in this area

• Presenting deployment choices will give buyers more comfort when considering how to spend their budgets. Have you got what it takes to present a coherent picture?

• Look for CIOs who are aligning themselves to LOB leaders. That provides the "spread bet" opportunity that improves the likelihood of winning deals.

My take for buyers

• It is no surprise that Morgan Stanley predicts aggressive discounting. If you're in the market, then bargain hard, but don't be tempted into bundling technology. That's lock-in by another name, and often carries hidden costs that don't emerge until very late in the deal.

• While tech analysts will argue that it is always worth spending on improved functionality you have to question whether you're getting the right bang for the buck. We are seeing more buyers prepared to compromise on functionality if that means faster time to use/adoption and at lower cost.

• Workday (financials) and Plex Systems (manufacturing) momentum, along with a generally improved sentiment to cloud solutions, should be a signal to look beyond incumbancy. If so, be careful to ensure you understand what you're buying into and that you have the right "apples for apples" kinds of comparison

• Outcomes that speak to goals should be the watchword. Vendors who can show case studies that talk to that topic are few and far between, but they can be found

• Budgets may be tight, and if you haven't already invested, then there is a risk that you take safe options. Businesses that invest in technologies that help transform for the digital age fare much better than those that don't. In other words, keep calm, but spend wisely

• Check out the smaller consultancies that cover multiple vendors. That's where the innovation can be found. The big boys are (mostly) locked into a model that is tied to ERP and other older technologies. They find it hard to transition to new models and may no longer offer best value.

From an email sent to me by the company:

• Largest new sales quarter in company history with 40 new client transactions closed in Q4

• $26.6. million in total Q4 invoicing, a growth of 61 percent over the same quarter a year ago

• $558.5 million in sales bookings backlog, an increase of nearly 42 percent year over year

• $43+ million in annual revenues for fiscal 2012, an increase of more than 30 percent year over year

• Expanded global capabilities and workforce in Europe, India, and Brazil.

The company now counts 550 clients, so given the forward bookings number and deferred revenue figure of $44 million, it is reasonable to assume that most of the company's customers are signing off on very long-term deals. Add in the fact Rimini Street now counts 69 of the Fortune 500 and 15 of the Global 100, this is bad news for the SAP/Oracle hegemony. At least for the time being. It could get worse.

The company said that its customer count: "includes eight Fortune 500 added in the fiscal fourth quarter alone, and 17 Fortune 500 and two Global 100 clients added in fiscal 2012." The overall numbers remain small in the scale of things, but then anything ahead of 10 percent in any market has to be a good number.

Rimini Street is largely attacking the Oracle installed base, and while it is no surprise to hear them going after the legacy Siebel, Oracle E-Suite, JD Edwards, and PeopleSoft customers, it was a surprise to hear that it is winning business for supporting Oracle Hyperion, a revamped business intelligence solution launched late last year.

An interesting nugget right at the end of the press release quoted Seth Ravin, CEO: "we will continue to execute against our business plan for 2013 as we help many additional Oracle and SAP clients achieve their support and budgetary objectives and prepare for our planned IPO." IPO?

As many followers of this market will know, Rimini Street is locked in a death match with Oracle over the legitimacy of Rimini Street's business model. Ravin has always been bullish on the outcome, so to start talking about IPO suggests two things:

1. The company confidently expects to win its argument, likely to be fought out in court later this year

2. Forecast revenue for 2013 must be in the $100 million range.

That last number is the figure most investors want to see as the benchmark before going public.

2013 looks like being a fun-packed year for the company--one to watch.

In 2011 and under IFRS rules, SuccessFactors reported subscription revenue of $243 million for the full year. For 2012, SAP reports $360 million. That's growth of 48 percent overall. Impressive, you might think. But then SuccessFactors' 2011 growth was 49 percent. I expected that SAP would do better on the full year given that one premise for justifying the eye-watering acquisition price was access to SAP's customers.

Co-CEO Jim Snabe told me that it took SAP six to eight months to bring SuccessFactors up to speed. He drew my attention to Q4 where there was significant growth that he believes will continue into 2013. He cited the ability to account for revenue from the likes of Pepsi, which signed a 300,000 employee deal right at the end of the year.

SAP has not delivered on what it said to us when we met Snabe a few days after SAP announced the acquisition.

Given what I know about SuccessFactors' pricing, that will mean something less than $8 million dropping into the revenue numbers. If SAP can continue that kind of momentum, then Snabe's concentration on volume growth may well turn out to be the right strategy.

Of deeper concern though is the reported segment profit. According to SAP's presentation, cloud gross profit contributed $237 million. In 2011, SuccessFactors reported $216 million or growth of a miserly 10 percent. Adjust those figures for sales and marketing cost and a reported margin of $64 million in 2011 turns into a loss of $70 million. That's a net movement of $134 million in the year. The whole cloud-segment revenue grew $120 million.

In other words, SAP has not delivered on what it said to us when we met Snabe a few days after SAP announced the acquisition. At the time, he said that SAP was convinced it could make SuccessFactors profitable.

Snabe's response is that this is a scale issue and that, in any event, there is no way for SAP to split out cloud R&D as it relates to HANA. Therefore, the numbers are skewed. Even so, he insists that SAP will meet its targets going forward and that the cloud unit will be more profitable than we are currently seeing.

If the company is successful given it is only projecting cloud at 10 percent of total revenue by 2015 and way off where the likes of Salesforce.com is today, then it will be the only company that has managed to make cloud apps profitable.

Turning to HANA, the company blew out its earlier guidance to achieve sales of $522 million. Excellent, you might think; and with aggressive targets for 2013, all the more to be pleased about. However, my understanding is that the year was made by a massive nine-digit deal done with one of the world's best-known retailers. Without that deal, SAP would have missed its HANA guidance by some distance. Snabe insists that isn't the case.

What's more, if you take a bare average of the 1,000 customers SAP claims have bought HANA, then the price it is achieving for this technology appears to be cratering. That should not be a surprise given that as a database, it has to compete with itself via the Sybase-acquired ASE, which I am told is being given away in some deals, plus the external competition from IBM, Oracle, and Microsoft.

Again, however, Snabe insists that SAP's "no discounting" policy continues to work. Instead, he says that in 2012, most customers were engaging in relatively small proofs of concept. He also says that most are stepping up to larger, enterprise deals and expects "a very high conversion rate" going forward.

Right now, the company is scrambling to build pipeline for 2013 with the emphasis on HANA being used to accelerate SAP's Business Warehouse.

As a sideshow, Vishal Sikka, the board member who describes HANA as "my little girl" is also reaching out to the broad developer community. This is meeting with some success but it is hard going to achieve market mindshare when companies like Salesforce.com already have significant momentum behind the Force.com platform.

To put this into perspective, revenue attributable to the Force.com is understood to be minimal in relation to the whole of Salesforce revenue. Even so, the vast majority of SAP HANA sales are to existing customers for the database-acceleration element rather than net new applications at this time.

Then we come to the core. Here, growth is in single digits overall with analytics accounting for "high" single-digit growth. Here Snabe says that going forward, the company expects the recently announced Business Suite on HANA to boost sales.

I find this hard to believe, at least for the short term. SAP customers have often invested many years into their SAP landscape largely with a view to achieving a stable state. They will not easily risk moving to a new platform, despite SAP saying that HANA provides a way for customers to massively simplify the landscape and attendant costs. Much will depend on early customers' success and my sense is that SAP will have to roll out credible stories by the time it gets to SAPPHIRE in May if Snabe's projections are to be met.

Many partners are viewing the SAP app store as a showcase rather than as a direct sales opportunity.

We didn't have time on the call to cover mobility where, once again, SAP reported good numbers. The problem I perceive here is that there are only so many customers who will pony up for Afaria, SAP's device-management offering, in what is already becoming a hot and competitive market.

Sanjay Poonen, the lead behind this segment, recently told me that he is confident the company can do well, especially when you take into account the growing number of mobile apps SAP and its partners are putting into the marketplace.

Again, I have reservations. Many partners are viewing the SAP app store as a showcase rather than as a direct sales opportunity. For them, the application is less important than the incremental implementation, despite the potential for achieving significant user scale. What we really need to see are some blockbuster applications.

On net margin, SAP is saying that it will get to 35 percent by 2015. Currently, margin is 31 percent, having fallen from 37 percent in 2011. Snabe says that the cost of acquisitions alone accounted for a full 1 percent fall and this cost will continue to impact SAP's results for years to come. Investors will have to get used to the fact that SAP will likely never return to the very high numbers reported in past years--but that is not necessarily a bad thing given the company's scale.

During the call, it was noticeable that SAP was not talking about market share in the way I would have expected. While all the talk of growth sounds impressive, my sense is that SAP is relying mostly on its existing customer base to get it to where it needs to be, recapturing customers in areas like CRM and growing the user base in HR and mobile.

The bigger question then becomes: how does SAP attract more new customers such that the incremental revenue has a noticeable impact on results? That is a question to which we will return.

I see things differently.

I wonder whether those who are deep in the trenches of BI -- whether SAP, Oracle or others -- have really thought through why BI has been such a Cinderella, despite its obvious allure?

When I first started studying BI in 1997, it was with a view to arguing how business could rid itself of the spreadsheet. My thesis was simple: spreadsheets are prone to serious error, specialised BI systems could eradicate that problem. Fifteen plus years on and we're still seeing massive spreadsheet use. BI, while valuable, has proven expensive, slow and often requiring the services of an already stretched IT to really make it sing.

I'd go so far as to say that there has been almost no innovation in this field since I first started reviewing Cognos, Hyperion, BOBJ, FX and a myriad of other players. Sure, we have speeds and feeds but duh?

As a side note, I would exclude SAS Institute from this band of rogues because they have been steadily but relentlessly concentrating on important use cases where the value is obvious - if expensive. Advanced fraud detection and prediction springs to mind.

Then I came across this post from Mico Yuk, self proclaimed SAP BI expert who identifies five things that BI people need to do in 2013:

#1 Superior Communication Skills... no longer a NTH (nice to have)

#2 Think ‘Mobile First’ approach... or Don’t Build

#3 Deployments are either Rapid... or a Waste of Time

#4 Make ‘User Adoption’ your ONLY KPI to Measure Success

#5 Adopt Mobile, Cloud, and Big Data... they’re here to stay!

I'm not going to ding Mico for her enthusiasm, BI is her bread and butter and from everything I hear, she is very good at advocating for customers. Instead, I wonder whether those who are deep in the trenches of BI -- whether SAP, Oracle or others -- have really thought through why BI has been such a Cinderella, despite its obvious allure? It's a question I have wrestled with many times, wondering why the spreadsheet remains so popular. The answer is always the same: the spreadhseet is accessible, readily understood and easy to manipulate.

And then I saw a solution that made me sit up. 

The other day Amit Bendov, CEO SiSense and I had a long converation about what his company is doing. SiSense is another of the many wannabe new generation BI companies that hopes to displace the incumbents. Normally I avoid these pitches because they tend to be very similar: we do stuff faster, we have great visuals, we put business problem resolution into the hands of users...etc. I've heard it many times. 

On this occasion I was happy to speak with Amit because I know his previous track record at Panaya and his solution came recommended. (Hint to those who use this piece as a pitch launch. Read this part very carefully before applying digits to keyboard.)

SiSense technology is interesting. Like many others, the company is leveraging the benefits of an in-memory column store database. They are also using disc because in their experience with customers, some 80 percent of data is at rest and so doesn't need to be held in expensive memory. I'll sort of buy that. He then explained that they are seeing bottlenecks between CPU and memory so they are optimising for that part of the physical constraints that impact high speed operations.

But the proof has to be in the eating and this is where it gets interesting. 

Amit ran a live aggregation of around 3.5 million HR records on an 8GB RAM laptop streamed back to me over a GoToMeeting session from scratch. We went through data source selection, manipulation of what many will know as the star schema (all drag and drop/relate), and then running the aggregation. The entire process took under four minutes. That's impressive, but in this day and age, two minutes for the processing bit is hardly exceptional. It turns out that their longest run time so far is around 50 minutes on a multi-gigabyte record store. Again, quick but not exceptional. 

He then showed me a pivot table and pie chart, all created on the fly through drag and drop. The results were instant. Changes were near instant as you would expect of something held in memory. They are not the most beautiful visuals I've ever seen but they were instantly consumable and capable of being shared with whomever is in your network on any device. That got my attention. See image below:

From what I can discern, Amit's four minute demo provides a solid response to all of Mico's assertions. But there is more. 

Today, SiSense, along with many of the other new gen BI vendors, is playing at the lower end of the enterprise. They all having scale issues. However, as we walked through the customer list which includes pieces of Target and Merck, it quickly became apparent that usage is shaking out this way:

• Strategic for small and medium sized businesses
• Tactical for large enterprise

The reason SiSense, along with many others, can appeal to so much of the market is:

• The price points are radically different to the incumbent solutions. 
• The solution vendors are largely but not completely removing the ETL headache.
• Multiple data sources are not a problem - it's just more meta data.

However, this won't be the case forever. Amit acknowledged ETL and clean data remain important topics but he asserts it is only a matter of time before the new vendors figure out how best to overcome current limitations. He believes SiSense will be capable of taking on all but the very biggest workloads in less than three years. I'll park that for progress updates. 

I would argue that what we will see in the next two to three years is something like this as it relates to the new gen vendors:

SMBs will use BI to help: 

• Grow their markets through blended intelligence derived from public and private sources surfaced via vendor provided integrations
• Attack cost problems associated with small scale through better understanding of buy patterns
• Pro-actively manage flexible workforces to achieve optimal business performance based upon predictive analytics
• Do basic reporting

Large enterprise will use BI to:

• Work on business critical problems which today are considered tactical but take on increasing importance as value is proven
• Collapse time to decisions through the application of ubiquitous information sharing via in-memory based solutions that front end with HTML5
• Continue to see the incumbent players as providers of reporting for systems of record but will de-emphasize their importance
• Actively look for lower cost but more flexible solutions of the kind offered by the new gen players

The impact on the incumbents playing to large business is obvious but worth stating:

• Compliance-based reporting will remain a critical activity but become commmoditized. Buyers will consolidate their investments in systems upon which they have to report, growing their landscapes but using that growth as a lever to obtain better terms from vendors.
• High speed reporting will become commonplace so that today's inherent advantage of acceleration will rapidly diminish as something that can be sold as innovation. 
• The need for new classes of analytics with the emphasis on predictive modelling across vertical markets will force vendors to either invest directly or acquire the necessary expertise to remain competitive.
• Even though the proliferation of data aka big data will be hyped as a reason to invest, customers will increasingly question why they need to pay more when application volumes rise. The vendors in turn will need to prove value in order to obtain the big bucks. This will be much harder than they think as the smaller vendors catch up and possibly overtake on capability, scale up and out. 
• There will be a need for solutions that are able to sift through mountains of data very quickly, reducing the problems and cost associated with hefting petabytes of data.
• Saying you can shift zetabytes (or whatever new word is invented) will not be a badge of honor. It will be a signpost to huge cost -- that customers will avoid in all but the most extreme use cases.

Concluding comments

My concern with the new gen players is that they won't have the market scale to avoid being crushed by the incumbents. Amit has a stretch goal of reaching $100 million in revenue in a few years' time. That is a fraction of a what Oracle, SAP and others earn from this source today. However, we could see the collapsing of prices as the new gen players bite into the Fortune One Million and become market leaders by volume if not revenue. 

As far as I can tell, vendor-specific BI specialists are so fixated on their vendor that they are failing to see the new gen threat. It is all very well talking about adoption as job no.1, as Mico does; but if I can be sold in a five to ten minute demo then what chance do the big boys have with all the complexity they bring to the table? This is a massive risk for big players and their fans.

In short:  many of them need to get out more often and see what's happeining in the wider world. Studying the customer lists and uses cases of the SiSenses of this world might be a good start.

Like other PC hardware manufacturers, Dell's core business has been squeezed as tablets and mobile devices have started to take center stage as the device of choice for many in business and consumers alike. As someone who uses a variety of device but who principally uses desktop machines you might be forgiven for wondering what the fuss is about. After all, if your day is spent writing 'stuff,' creating multi-media content, entering invoices, manipulating spreadsheets or other CPU intensive activities, then the desktop really is the best tool for the job. At least for the time being.

However, that cannot mask the secular trends with which Dell has been battling the last few years. If you look at the following analysis of sales from Dell's latest reported revenue numbers (reading left to right from quarter to quarter):

It is clear that while server and networking are doing reasonably well, all other businesses are struggling. Dell has responded by attempting to exercise close cost control but there is no avoiding the fall in gross GAAP reported margins from Q3 FY12 of $3.5 billion to $2.9 billion. In short, Dell is in serious decline across its traditional markets and even those it has tried to bolster. 

Dell has also made important acquisitions in software as it attempts to transition from a hardware to a services business. But as the results reveal, the benefits these investments should bring are not (yet) coming through, adding fuel to a fire that is already burning underneath the company. 

In his analysis, Zack Whittaker says:

It's perhaps strange to think that considering we're very much past the worst of the global financial crisis -- the so-called "credit crunch" -- and while many startups and major technology firms alike -- including Facebook -- went public last year amid difficult economic times, some are pulling out of the public trading exchange and going private again.

It is not strange at all. It makes perfect sense. 

There are many possible responses to Dell's dose of the innovators dilemma. One is to stand by and watch as the market and share price crumbles. That's what has happened to RIM. HP is in a similar boat though that appears to be about appalling management meeting secular trends - a double whammy. The net result is that both RIM and HP have been mercilessly flayed in the media and markets. I have not heard the same loud voices talking in similar terms about Dell. They at least had the good sense to formally bring back founder Michael Dell. I say good sense because history is littered with companies that started to fail once the founders drifted away and passed over leadership to stewards rather than visionaries. Some will argue that Larry Dignan's prognosis that Dell's return was at best a stop gap has proven to be largely correct. My take is that it could have been a lot worse. So why should going private be good news?

As a brand, Dell is one of those companies that while commanding relative premium prices, offers the form of product guarantee that large enterprise wants. As a manager, you really don't want unreliable kit from a no-name source at any price. It kills productivity. And Dell does make some very good equipment. I have standardized on large Dell monitors as I have found them to be the best on the market for my purposes. But despite its many fans, Dell has to transform if it is to overcome the ravages of the broader market and transition to a new business model. 

My guess is Dell management has calculated that the cost of achieving that transformation and the steps it has to take in order to get there will be so painful and expensive that any attempt at achieving their goal while in the public financial gaze will almost certainly provide a substantial distraction. That's a significant part of HPs problem. Every time there is the slightest mistake, management time gets diverted to fighting the next PR fire instead of running the business. It is the kind of thing that leads to firesales and unpleasant endgames. I am sure that owning 16% of a company with a possible exit valuation at the mid $20 billion mark, Michael Dell does not fancy that prospect one bit. And he is right. 

It is far better to go through the transformation with the help of seasoned private equity but out of sight of public scrutiny. For all the bad press that PE gets, they do two things that are often missing in public companies and especially those that have strong entreprenmeurial DNA: they know how to exercise strong fiscal control and they know how to squeeze out waste that incumbent management struggles to overcome. 

That frees up the entrepreneurial managers to do what they do best: come up with business models that breathe new life into the company. That is what is happening at Infor. At Infor, PE provided the capital for roll up specialists to scoop up vendors that were struggling and then optimize their performance. From the end user perspective that usually translates into higher maintenance costs but more reliable software. Infor's investors were wiser. Once the main roll up exercise was over, they brought in Charles Phillips who is not only a roll up specialist from his time at Oracle but also a visionary about what can be done once you've optimized the business. That is a rare combination. We are starting to see the fruits of that transformation and I am confident that over time we will see Infor perceived as a much more important player than it appears to be right now. The groundwork is in place for an eventual IPO as well, which is the obvious next step and which Dell may eye years down the track. 

How might going private work for Dell? It is far too early to speculate in any depth but my guess is that an early exit from the consumer PC market has to be something to watch for. The same should go for any low end peripherals. If you are Larry Dignan then that's a no brainer. However, I am equally intrerested to see how Dell might leverage its position as a quality provider for applications that will require significant processing power long into the future. Here I am thinking both accounting and multi-media production, the latter becoming an important enterprise market as more businesses recognize the value of multi-media content creation they can control. Can it also consolidate on the slow but steady server market play? What about re-engineering for cloud storage and becoming the 'pizza box' provider in that segment?

But what of services? Here Dell has an assortment of assets it will need to both augment and optimize while facing stiff competition. This to me is where the most significant challenge lays. There are so many services available to business that Dell will need more than its brand if it is to successfully scale up and out. This could go in any number of directions so I won't speculate as I will almost certainly be wrong. 

If you believe the clock is ticking for Dell to go private and are in buy mode then I would not necessarily hold back. Sure, it can be a good price bargaining chip but it is important to remember what you're buying goes beyond the physical box. What's more, if history echoes loudly in these circumstances then we can expect that a rejuvenated Dell, while different in shape will remain a solid provider that should be part of anyone's short list. 

As always, sitting in the peanut gallery is easy. But what do you think? Let me know in Talkback.

I have read very little of the commentary around the SAP on HANA announcement. Instead, I, along with many others was asked to render an opinion in advance of the event. To put this in context, those asked are people who are often intimately involved with SAP on a day to day basis. The cross section of ecosystem participants in the pre-event consultations is impressive with SIs, analysts, SAP Mentors and customers all part of that process. To its credit, SAP listened and acted on some of the things I know were proposed. 

However, what was noticeable is that this announcement polarized opinion. On the basis of what we saw in Twitter 'sentiment' roughtly two thirds seemed to think it was a good move, one third were skeptical. Estaban Kolsky, who I wanted to get on camera (he had to leave early) was highly skeptical in some back channel conversations but started to see this as more than just a so-what incremental change. However, I did capture the views of our own Brian Sommer, Ray Wang, Harald Reiter (Deloitte) and John Appleby (Bluefin Solutions), the latter two also being SAP Mentors. The analysts were surprisingly positive and pushing SAP towards new things. The SIs were less than enthusiastic.

Elsewhere, Vinnie Mirchandani flat out dismissed it. I will not dissect his piece except to say that the arguments presented are based upon a set of myths about SAP that are rapidly dissipating - but perhaps not among the customers he sees and for which SAP has to do a much better job. That leaves me believing his assessment of this outing is flawed though not entirely fatal as will become apparent in my analysis.

While the event was in flight, DSAG (the German SAP User Group) came out with a statement where they said: 

Andreas Oczko, member of the board of DSAG: "We pushed for a pricing model which is based on the customer's added value. This means that SAP customers must now upgrade only those licenses which actually access the HANA database and they do not have to upgrade the entire license agreement. As far as licensing costs are concerned, the database for the Business Suite on HANA will now cost existing SAP customers exactly the same as the conventional databases. This will give each individual customer the chance to use in-memory technology at a reasonable price.” 

Marco Lenck, chairman of the board of DSAG: "SAP has adopted our proposals to setup the pricing model based on contract value and not on main memory usage. Due to the conventionally focused pricing, existing customers now have easy access to innovations in the HANA environment. SAP has responded customer-oriented to the core requirement of the DSAG. We believe that this will lead to a strong push in the adoption of the new technology."

These statements should be taken as a solid endorsement from a group that does not fight shy of voicing its adverse opinions. I will argue that while DSAG may think they have wrung 'concessions' they also missed an oportunity to drive SAP towards a different future.

The good stuff

First the good stuff. SAP is coming to market with beta customers, one of which was on stage. The product is available now. Development for Business Suite on HANA started in 2010 so to get this to the currrent state in less than 42 months is laudable by any standards. That used to be the benchmark for major releases. You can of course argue that this is little more. To do so though would be to deny the extent to which the table structures and 'plumbing' have been re-written and fundamentally simplified. 

In conversations with both Hasso Plattner, co-founder and member of the supervisory board, and Vishal Sikka, executive board member and the person driving this initiative, it is clear that SAP is engineering for its future but with the clear objective of lowering overall TCO as a response to market threats. This may sound defensive but is more than that when you consider that the company is offering much more than point solutions running in a real time environment. 

It is also clear that this represents a stepping stone for SAP that is similar to the manner in which Oracle is offering Fusion only in a fraction of the time Oracle took. Customers have choice, most (of the largest customers) will want to continue operating on premises for some years to come and with their existing database but when they do move to the cloud, it will be a private cloud or one managed by SAP. Me too? Perhaps but certainly something that SAP customers and especially CIOs will find comforting at a time when they are finding their carefully crafted IT landscapes being shattered by the incursion of SaaS plays.

The cloud fanatics (I am a fan but not a fanboi) will dismiss this as false cloud thinking but as Plattner pointed out in a closed conversation, the global companies that have remained loyal customers and which remain world leading brands, will not discard their investments for business critical business processes anytime soon. For which read at least five years. But that change will come and SAP has recognized it. Hence, while SAP does not say so in so many words, the company will have the BusinessSuite running on HANA in cloud environments in the not too distant future. In the meantime, SAP on HANA demolishes one of the cornerstone arguments for SaaS without requiring massive re-implementation. OLTP and OLAP now become one and real-time for the whole business transaction and output is a reality for SAP customers.

Again, some will argue 'false cloud' but for core processes, SAP is correct in thinking that the feature and function requirements are done and that for new applications, SAP only has to ensure that the data can be exposed and that ancillary systems and new applications can access that data as and when needed. This makes sense for SAP customers. I imagine similar logic makes sense for Oracle customers who are offered deployment 'choice' albeit on the Red Stack. 

At this point I'd argue this describes what SAP means when it talks about the ability to move forward to a more modern architecture 'without disruption' and explains why it will prove attractive to early adopters.

Vinnie's argument about the 'Gold Stack' is half baked. I do not see a coherent assessment of the business and financial impact this architecture provides. For its part, SAP has yet to articulate clearly how simplification of the SAP landscape using HANA translates into real savings alongside Sikka's 'incredible' opportunites.

There are far fewer moving parts, it should be much more reliable, i.e. less brittle and could also mean dramatically reduced regression testing. Colleagues who have experienced the joys of Solution Manager (sic) will smile wryly but having listened to the arguments and watched the reactions of SI representatives, it is clear SAP is determined to make those benefits available to its customers. I know for instance of one SI who is talking about an average full implementation of existing large scale Business Suite customers on EhP6 making the transition in less than nine months. 

This is going to be very bad news for SIs who have have been used to a diet of one, two and three year upgrades. Yes there will be hardware procurement which adds cost. Yes, there will be relicensing that will give negotiators occasional headaches. But net-net, there is no reaosn to assume that customers will be worse off financially while being in a position to reap both implementation and operational benefits along with future benefits that come from the new classes of application that HANA promises. 

The super cynics will argue that SAP has not done enough to show the money on this but I have seen enough figures to at least convince me that for once, SAP is not only serious but determined to help its customers get what they were promised rather than see their landscapes ossifying. What's more, the new class of SI that HANA is attracting will outsmart and outpace the big boys very quickly. That will represent what today is an untold story but one that will bring into question the entrenched SI model. 

I still push back though and say that when I see customers talking in the excited tones I hear from Salesforce.com and Workday customers then I will believe what I hear as a genuine proven reality.

Here I think SAP has an opportunity to convince customers beyond the handful of enthusiasts that SAP on HANA is worth talking about publicly. At this stage it is an incremental improvement but one where the step is much more beneficial than has been the case with recent upgrades. 

SAP and the innovators dilemma - an opportunity missed

So where did SAP miss? I believe the company missed the opportunity to solve the problem of the innovators' dilemma which has been bedevilling them the last seven years. During our private conversations, the question of pricing and economics was top of mind.

Some of us are of the view that HANA as a database provides the opportunity for SAP to break the market deadlock that exists between itself and Oracle while at the same time solving the relatively slow adoption of HANA among SAPs large customer base. We are of the belief that SAP should bundle the database but charge more for the new applications and especially those that deliver quantum value. I have seen apps that I would willingly recommend carry a seven or eoght figure price tag because the use cases are so obvious and painful that the price would absolutely be justified. However, HANA is a database and while speedy, it is in a class of technology that has become commodotised. It is infrastructure the cost of which is collapsing left and right.

If you recognize that as a fact, then it is a small step to shrugging and offering customers more than cost parity for that part of their SAP landscape. SAP and some analysts say this would lead to accusations of dumping for which the company could get into trouble. On stage, Plattner said the company does not want to fall into that trap. And knowing just how powerful SAPs legal department has becomes then it is understandable that the company is shy of going down that road.

But seriously, if customers were offered that opportunity can anyone honestly see a court upholding a situation where customers pay more for something they could have bundled at a better price? That would be insane and totally undermine the concept of market competition as I understand the term. More to the point, I don't see anyone bitching at Salesforce.com's Force.com platform which is pretty much free of cost (by comparison) but which serves as a powerful on ramp for hundreds of thousands of applications in the Salesforce.com catalog. You cannot convince me that Salesforce.com does not draw a significant amount of core business uplift purely because the AppExchange provides the add on applications customers need. And what is that? A database. 

Concluding thoughts

SAP is naturally cautious of protecting its customer base. It has to as it finds itself coming under increasing pressure from the SaaS players and, over time from the players who offer low cost platforms. While Vinnie talks enthusiastically about Amazon economics as a proxy for pricing, he misses the fact that Amazon's cloud cannot handle large scale businesses. The comparison therefore is based upon a false premise for SAP's core customers but does not preclude SAP from taking the cost bull by the horns and swinging for the fences on this topic. However, this does not negate the subtext of Vinnie's snark: SAP needs to be much bolder. The good news is that some of its most enthusiastic 'fanboys' are pushing the company hard at very senior levels to do exactly that. And as many will know - these things take time at a company of such size. 

SAP's top few thousand customers may well remain loyal in this next wave of transition but it is that vulnerable middle tier where things get really tricky. In my view SAP missed a unique opportunity to do something that would be truly disruptive and allow it to start getting serious scale for HANA adoption. Price parity for the database may be welcome and an interim necessity but it isn't enough. 

Even so, I am looking forward to see how this pans out. The engineering teams should certainly be congratulated and let's not forget we are now seeing an SAP that is coming to market with new solutions and the first customers at the same time. That's something entirely new and should impress customers used to the yawning chasm that has previously existed between announcement and delivery, let alone implementation.

UPDATE: UK&I SUG commented in similar terms to DSAG as follows:

"It's great to see that SAP has listened to the feedback we provided as part of SUGEN and incorporated that into the pricing strategy. We've been used to paying for databases in a certain way, so it's great to see that SAP providing similar licensing options. In terms of the solution itself, it looks great. In the first instance I'd expect those organisations that have a real need for speed to look at migrating. I'm sure new customers will also welcome the news as it simply gives them more database options," said Philip Adams, Vice Chairman of the UK & Ireland SAP User Group.

Disclosure: SAP paid my T&E for attending the Palo Alto event

This holiday season I took the opportunity to guzzle air miles and booked a long haul to Cape Town, South Africa. For those unfamiliar with geography it's best to think about it as the last stop before Antarctica.

My expectations were low as I had no clue what the country would hold and thought of it as one of those bucket list places you only ever visit once. What an eye opener. Whatever follows is bound to be skewed by limited experience. Even so, I got the firm sense this is a country on the move yet one that enterprise vendors ignore at their peril. 

Over the years I've visited a clutch of countries in North Africa but have never seen them as anything other than interesting holiday destinations. None have captured my imagination other than wondering at the beauty of the Sahara desert and then musing how much solar power could be generated from this otherwise inhospitable part of the world. However, South Africa was an altogether different experience. My sense is that it is the people that make the difference. 

There is no escaping the fact that South Africa is a country that, to the outsider, is horribly conflicted. I was told that 64 percent of black South Africans continue to live in extreme poverty, more than 19 years after the de facto ending of apartheid. The vision of poverty and luxury side-by-side jars the senses. The wait staff at my hotel cannot live without the 10-15 percent tips that are not foisted upon the individual but are, nonetheless, encouraged.

Yet after talking to people of all colors, creeds and background, it was apparent to me that this is a place of great hope and vision for the future. It was best epitomized by one trader I met in Stellenbosch who said: "South Africa gets a bad rap for all the political stuff but for all the problems, it is a great place to live and work." I don't doubt that is true for many. 

Listening to the harrowing stories of those who have suffered under the apartheid regime was heartbreaking, yet the message of hope could not have been louder. Personally, I find it incomprehensible how any oppressed people can be as forgiving as the black South Africans appear to be. Yet the friendship, curiosity and constant smiles from a people who have endured so much is something that will live long in our memories. But what of technology?

Some six months or so ago I was discussing the future of mobile with a senior SAP executive. I suggested that Africa is a continent that has to be ripe for investment. It met with a lukewarm response. Now I get why. The telephony infrastructure is very unevenly distributed and in South Africa and the maximum available data speed is pitifully low when compared with the best in the world. According to Skyrove, daata speed in South Africa ranks 93rd in the world. My experience is that Wi-Fi access, while good in some places, is extremely expensive. It is a hard fact of life that without a fast Internet, it is difficult to imagine how any vendor would be seriously tempted to invest in this country. Having said that, I saw many obvious opportunities. 

Contrary to much of what I have seen written, the majority of people I saw were using smartphones. While Apple doesn't have an official presence in the country, there is independent representation. I saw a packed iStore at one of the shopping malls and there are plenty of phone sales outlets vying for trade - some of which were touting the latest Samsung devices. I saw plenty of instances of QR codes being used in imaginative ways to both promote products and provide useful information. The hotel staff was totally at ease with using the Internet to both search and book visits while 'chip-and-pin' credit card machines are the norm. The overall experience was on a par with anything I have found in northern Europe and, in some cases, better than the US. 

The week before we arrived, Absa, the country's largest retail bank announced:

South African bank Absa and payment innovations company Thumbzup have signed an agreement to launch a mobile payment device, Payment Pebble, which will enable small businesses and entrepreneurs to accept debit or credit card payments through smartphones or tablets.

Payments will be made through a world first, plug-in device called "The Absa Payment Pebble", the bank said in a statement last week.

"The Absa Payment Pebble" is a small card-reader device that can be plugged into the audio input on any mobile smartphone or tablet and used along with a mobile application.

The country has an active mentorship and funding program for young innovators and everywhere I went I met  Africans eager to become better educated. Curiously, they were not looking to Europe or the US for those opportunities but were hoping to remain close to their homes and families. That's a good thing because the more people who become better educated and remain in country, the better the chances of the country making significant strides towards a better life. This in a place where there are eleven official languages and everyone seems to be at least bi-lingual.

One example for mobile opportunity is for the ice delivery trucks that service the bar and hotel trade. Mounds of paperwork accompany delivered goods but I saw as an immediate need for mobile management. 

Any assessment from just over a week spent in a country for the first time has to be superficial and this is no exception. But having had the experience of a lifetime, I am eager to return and see other parts of a country that both stirs the imagination and restores ones faith in the goodness of human nature. 

Oh, and if you think that this is just the musings of a star struck out of towner visiting a new country then check out what some Etheopian kids did with an Android device. (Kudos to Greg Chase.)

Images by author

Poring over enterprise tech in the context of constant PR/AR happy talk is a stressful business. Aligning claims to reality is often difficult if not impossible. Taking time out and away has allowed me to read other material, take a peek at some consumer trends, reconnect with people and generally gain a fresh perspective. Sadly, it has meant that with few exceptions, I see organisations of all stripes making sometimes dumb and sometimes dumber choices. 

If we are to believe the anal-ysts (and I most certainly don't a lot of the time), then 2012 was the year when 'big data' - whatever that means, social - again whatever that means and mobile started to take on real meaning as enterprise imperatives. In each category there were some outlier examples of genuine effectiveness but the vast majority of enterprises are far removed from those 'trends.'

For example, while many larger vendors want to get in on the big data trend, I see almost no evidence that consumers are responding in a manner that fundamentally changes their behaviors. I will acknowledge that Google has entered the mainstream lexicon as I heard people of all ages, including some very spritely Scottish pensioners, talking about 'googling' on their handheld devices as a method of finding things. But from what I could tell, most could care less about Twitter or Facebook as places to share experience. 

As I occasionally dipped into Twitter I could not help but be struck by the sense of desparation for attention among those who mindlessly tweeted over the holiday season. Depressingly, it was the same old faces pimping the same old stuff in a stream of contrived positivity. There were however moments of levity. A TV game show question asked about the controversy surrounding the hashtag used to promote a Susan Boyle album in November. The PR clowns overseeing that venture came up with #susanalbumparty. Read the wrong way it immediately becomes borderline unsafe for work but hilarious nonetheless. This glorious selection headlined in The Guardian amply demonstrates how stupid some businesses really are. 

The flipside is that I am shooting myself in the foot with an argument based upon the impact of viral effects. Maybe so but then Brits have always been up for a good laugh, mostly at some celebrity's expense. In any event does all this nonsense actually make any difference to consumers beyond the obvious entertainment value? I'm not convinced. Needless to say, I see a lot of unfollowing in my 2013 future as I try remove what now feels like ketchup laden spam from my Tweetstream. 

Facebook was more tolerable though the emphasis seemed to be more on fun and highly personal stuff than anything a brand could likely latch onto with any credibility. What I did find objectionable though was the insertion of status updates that use the identities of people I have 'friended' to tell me how much they love some brand or other. I know this to be patently absurd so why annoy me?

Then we come to Trip Advisor. This, along with Booking.com has to be among the most egregious sites on the planet for promoting delusional thinking. I had a lousy experience at a restaurant and wrote it up on TA. That took a full week to appear. The great experience I had at a hotel was up in less than 36 hours. Go figure. I had a grump about this on Twitter and guess what? Those who chose to respond are mostly saying they don't trust reviews on these types of site.

I believe they do add value but only if you are prepared to dig through all the reviews and not just concentrate on the happy talk these sites showcase. Is the trade off worth it given the extent to which ADD seems to have gripped so many? In my case it is a mixed bag. The truly exceptional spots have lived up to their billing but the minute you move away from the top five percentile then it becomes a lottery. 

Gamification in the consumer world may be alive and well, Trip Advisor, Booking.com and others may be wildly successful commercially, but they are foolling no-one in the long term. If 2013 doesn't put an end to the nonsense then I hold out little hope of seeing enterprise using these types of tool in anything other than a cynical manner. 

Then we come to websites generally. You would have thought that after 21 years of having tools with which to build stunning websites that organisations would be doing a pristine job of attracting customers. But no. Over the holiday season I found the BA.com website was down or only partly working on numerous occasions. Jurys Inn, a small hotel chain based in Ireland sent out a discounted promotion for those willing to sign up to their loyalty plan a few days after I booked a long stay at one of their places. Unsurprisingly, I didn't get a response when I emailed a complaint. The mobile site was just a mess, having a sign up link that kept returning me to the mobile home page when using an Adroid device. The hotel staff didn't know anything about it. And let's not forget how HR Access managed to spread holiday season cheer with this blooper.

All of which leads me back to something Phil Fersht wrote leading up to the holiday season: Why have we become such crappy managers? He makes the point that:

While we can bemoan the poor progress in talent development, for which an alarming portion of the US corporate sector is now responsible, I believe there is a deeper message in all of this:  not all firms are “dropping the ball”, they simply do not have a vested interest in the future development of many staff, and their management layer doesn’t have the time to train junior staff.  Many have taken the attitude that they can replace poor performers with high-performers, if need be.  Moreover, many are also viewing their sourcing relationships as opportunities to downsize their current workforces (such as the recent Citigroup announcement).

What? And this after vendors like SuccessFactors have been assiduously touting talent management solutions? Sadly I have to agree with Fersht's assessment. In a conversation with a procurement manager overseeing many millions of spend, it was impossible to make him see that home working might be preferable to outsourcing. Here's the gist of the conversation:

Me: Home working could be a useful way of developing a flexible yet well qualified workforce.

He: But then you can't check on what they're doing

Me: You mean you can't create measurable outcomes as a way of knowing they've achieved their goals?

He: Yeah but at least with outsourcing you have SLAs.

Me: (thinking) Groan....

On another tack I argued that the only thing driving perocurement was the requirement to cut cost:

Me: It is well known that the principle job is to get 25-30 percent cut from any tender. So everyone pads them. 

He: But we have a transparent process where there is an even playing field. 

Me: And what, precise difference does that make given what I've just said?

He: It means that everyone has an equal chance and we get the best deal. 

Me: You honestly believe that? Ever heard the world 'value.'

He: Sure, we know we get best value for money.

Me: How do you know that given the massive waste that is on the public record regarding your sector?

He: We are hitting our spend targets.

Me: (thinking) Groan reprise. 

That set the scene for another Twitter conversation. In one direct message, a colleague reminded me of the time when a health service analytics specification included the need for five sex options: male, female, formerly male, formerly female and undetermined. 

My holiday season was packed full of those joyous tidbits. But on a more serious note, if we are breeding nations of idiots and jobsworths then what possible use can there be for social, mobile and big data beyond helping brands feed pap and crap? I guess the upside is that people like me get to laugh at them, much as millions did at this German idiot.

It all makes Jackass seem tame but with little respect for the building of a truly talented, able and valuable future generation. It is a dangerous trend that, like it or not, is being facilitated by technology many anal-ysts and their vendor paymasters think is the greatest thing since sliced bread.

I'm going to come at this from a single dimension; that of the developer and new apps that either hold potential or which are proving to be of genuine value to customers. 

The 'old' SAP was insular, often hallmarked by a desire to excel at software engineering but only provided that engineering emanated from its own labs. The expression 'not invented here' fits very well with that mindset and was a constant source of frustration for partners. This year, SAP recognised that it cannot be the innovator of innovators for all its customers. The world is moving far too quickly for any single vendor to realistically claim that title. Instead, it is comfortable with helping get technology into the marketplace as quickly as possible and then seeing what happens. 

SAP also understood that HANA, the topic it relentlessly pursued at every AR/PR opportunity, has to be much more than 'speeds and feeds.' As a database replacement it may have some mileage but its greatest potential is as an engine that encourages the re-imagining of applications and the invention of entirely new classes of app. The company gets that and it was with that in mind that I, along with my video partner Jon Reed, have spent the last couple of months finding customers and partners who are doing interesting things, mostly on HANA but also in mobile.

The net result is some 50 plus videos, most of which are now either in production or available on the web. Just to be clear, SAP commissioned us to produce roughly 65 per cent of the video output. We retained complete freedom around what we chose to shoot, how we chose to shoot and the questions we chose to ask. We believe the results give solid insights into what the market makes of SAP and what is happening as a result. 

What did we find? What follows may surprise.

• Some of the really cracking innovation is coming from some of the smallest developer shops. The smallest group we found was just four people but then you could count this loner as an extreme outlier. 
• While SAP is usually associated with business to business, I noticed that one of its start up developer partners have been recognised as developing cool technology among those who are more closely associated with consumer activities.
• It doesn't fight shy of taking its technology into schools and seeing what can be achieved by those who will follow in the years to come. It's a great idea and well worthy of praise.
• Contrary to popular belief, SAP can get its technology into developer shops that many would categorise as 'sexy.' 
• SAP has not been afraid to invest significantly in partners who show potential, regardless of whether they are well known or just starting out. They have gone from nothing to 150 invested startups in less than six months. How many VCs can say the same?
• On the customer front, those who have gone beyond HANA POC are deriving significant benefit. This example which talks of €80 million in improved cash management is one that makes the eyes pop. And that's just one benefit mentioned in the conversation. 
• A surprising number of customers have been into mobile for years but even they are finding genuine value from SAP's mobile technology offerings.
• In an age where we're supposed to be 'always on' SAP technology is helping customers which cannot always be 'on' but which still require a mobile solution. Which would be 99% of the business population in my experience. 
• Great eye catching design isn't limited to the agencies and creatives to which many vendors are turning in their attempts to be more user friendly. This practical yet pleasing example shows something of what I mean. 

SAP has spent a lot of money on high touch initiatives that have got it this far. Those will need to scale next year and that is causing some head scratching among its executives as they try figure how best to take this nascent ecosystem of enthusiasts and turn them into a power house of innovation around which everyone can profit. Some have ideas about how this might happen. 

One surprise - at least to me - has been the lack of solutions coming from the SAP Mentor community. Yes there are some and they're often interesting. But I expected to see a much higher representation from this set of SAP enthusiasts than is the case. I wonder why but have no concrete answers?

Cynics will argue this vignette is nothing compared to say the ecosystem of developers working with the likes of Salesforce.com. Well, if numbers are what matters then sure. Instead, I'd push back and argue that SAP can (and is) taking the best of these developer examples into accounts that Salesforce.com can only dream about. I'd equally argue that some of the examples we have seen are truly groundbreaking, offering value that falls squarely into the 'transformational' camp. Others keep us safe in ways that would be impossible without the kind of technology SAP is offering. 

SAP has shown that even with a limited set of examples, it sees 'the art of the possible.' The big question now is how it uses its considerable resources to help a 'thousand flowers blossom.' It strikes me that the start it has made bears the hallmarks of a company that is genuinely changing to reflect a new reality in the 21st century. It is one that all but the most die hard cynics will welcome given the difficulties that all super tankers face when steering a fresh course. 

So with those glowing words in mind I look forward to seeing what happens in the New Year. What else? There's plenty of things to critique but on this occasion I'd like to close out my SAP commentary for 2012 on something of a positive note and leave the carping to others. 

Up until the late summer, my son was holding down a reasonable job that went alongside his studies. He was far from rich but getting by. Just. In recent weeks that job has become much less secure as demand for the business he works for has collapsed. He is in his final year at university so making a good grade will be the difference between being seen as a worthwhile post grad person and a so-so ran. It is the way of the world. Yet the business outlook is far from certain. 

As an arts student he needs the best kit he can get. I don't just mean a Mac Book (he has my last MacBook Pro cast off), we're talking inks, paints and paper. Those costs are not inconsequential. His tutors say his work is let down by the fact he is using medium grade 'stuff.' Yet in the UK there are no funds to help kids trying to get through their degree for this kind of material. I am sure there are many other 'trade' students in similar situations. Student loans are barely enough to keep body and soul together let alone buy materials needed to complete studies. It's a seriously messed up system that will see him in years of debt after he gets whatever degree he achieves. 

I could easily say: 'Go get more work' except there isn't any. So as I sit back making out payments to try help him through I am really, really sad. 

For all the great technology we supposedly have at our fingertips it seems that as a nation - in my case UK - we're incapable of providing the basics to encourage those who will come next. Regardless of trade or profession, that's a dangerous situation. 

So I say to you Mr Banker, Mr Telco, Mr Food Retailer...Mr....shame on you for putting short term, quarterly proft in front of safeguarding the future of your long term business and the generations of those who have to follow. 

Never have I seen such a poor outlook for those who will follow in my footsteps. It's heartbreaking. 

If it wasn't for the fact ZDNet is a 'family friendly friendly' title I would be much, much harsher. Those who know me on Twitter and Facebook know what I mean. 

Rant over. 

WSJ: When were you first made aware of these allegations?

ML: We were not made aware. We have been ambushed. The first we knew was when the press release came out at around 1pm U.K. time.

POV: HP alleges criminal acts. In the UK, where HP claims to have informed the Serious Fraud Office, I would expect to see people brought in for immediate questioning based upon information held by the police. Lynch says he knew nothing and has not been approached by any regulatory or enforcement body. Strange. 

WSJ: You have seen the allegations about irregular accounting practices , price inflation, presumably everything was cleared by auditors, you were a FTSE 100 company?

ML: We were audited on a quarterly basis. It was Deloitte who knew the company well. We had 10 years as a listed company; during that time Deloitte would have had their work reviewed by the various boards. Of course H-P did what its senior management called “a meticulous due diligence” involving hundreds of people that was highly intense, involving KPMG Barclays as BARC.LN -1.30% well. They threw everything at it.

And of course they have run the company for four quarters, they have been doing the books.

The figures are just mad. You are talking about handing them an asset worth $12 billion and they are saying $9 billion of that they are taking off. That would be such an obvious massive thing with 300 people and all these firms doing due diligence, how could you possibly not spot it?

POV: This is where things get very messy. It's not clear whether Lynch received any PR advice but he has got the numbers wrong. The Autonomy related write down is $5 billion. That shouldn't surprise. Most drive by analysts made the same basic mistake. Even so, he sets up the auditors and possibly the investigative accountants to take a fall by deflecting responsibility to them. 

Francine McKenna, who understands this world better than most says that all of the Big Four audit firms are involved one way or the other. I am of the view that Deloitte (Autonomy's auditors) and Ernst & Young (HP's auditors), will be feverishly checking their professional indemnity insurance policies and calculating their share of the compensation that HP will likely seek in the future. Assuming of course that Whitman is around long enough to exact recompense. Right now, all the audit firms are hiding behind 'client confidentiality' and saying nothing.  

WSJ: Do you have any concept how they arrive at these figures, or where this is coming from?

ML: No. The only concept I have of it is that it does seem to be coincident with them releasing the worst set of results in their 70-year company history.

I think what has happened here is that they have got themselves in a mess.
They did the acquisition of EDS, they had to write that one down. They had to write Palm down. When Autonomy was acquired it was done by a CEO who wanted to get rid of various divisions of that business and lead with software.

He was ousted in an internal coup d’etat. From that point Autonomy was at odds with the divisions that were in power.

There was a series of mismanagement steps. They lost hundreds of the talented people at Autonomy. The whole management team basically went out of the door. Sadly they are left with the results of having destroyed all that value.

Now they are trying to cover it up with this big write off.

POV: Now we're into the hubris of pointing to post acquisition mismanagement. If you think this sounds familiar then you wouldn't be wrong. HPs failed acquisition history is well known. It all adds up to a defense that Lynch is building.  I should point out that while not named, he is an obvious candidate for questioning as the Autonomy accounts clearly state that he was running the ship pretty much single handedly when it came to making the big decisions. Anyone who thinks this would not involve revenue recognition is naive.

Elsewhere, commenters point variously to Autonomy's past history of changing the revenue recognition game from time to time. AllThingsD tries to set the financial irregularities into three easily digested buckets. It's never that simple. Some argue that the UK method of accounting is sloppy. Silicon Angle's John Furrier claims: 

Autonomy basically overstated their product revenues by including the service revenue as product sales at the time of the sale...Many companies try this move, but in this case, HP was handcuffed by UK law...

... What Autonomy did was hide from HP the future service revenue and put it as product revenue at the time of the sale.  In other words, Autonomy recognized all that “future” service revenue as product revenue when the “booked it” instead of over the 12 months it “serviced it,” as accounting standards dictate.

This is a fundamental lack of understanding between “bookings” and “revenue.”  Mike Lynch can deny all he wants, but stupidity isn’t a defense for the crime.  This can be viewed as a deliberate act to deceive HP in overstating the value and foreclosing future service revenue, which HP might have calculated as “synergy” to the deal.

UK accounting rules are different to the US but they don't allow companies to get past the revenue recognition rules applied to service or more generally on what is known as the 'fair value' test. If Furrier is correct then there is a genuine problem for Autonomy, its leadership AND the auditors. HP doesn't get off so lightly either. 

This problem should have been almost immediately apparent to HP upon completion of the acquisition. It would have had costs against which it could not book revenue coming out of unfulfilled contracts in both the unended quarter prior to the 2011 year end plus costs going into the early quarters of 2012. If you believe that, then HP's argument that it knew nothing until a whistleblower stood up some six months later is baloney. Futhermore, HP's efforts to unravel the deal after Leo Aptheker left as CEO would suggest the board was already deeply concerned prior to consummation of the deal. 

However, as Vinnie Mirchandani alludes and to which I can attest having listened to some creative arguments why past rev rec issues emerging from due diligence in an acquisition are NOT important, the US system of revenue recognition is a mess. It is easy to screw up and makes a laughing stock of SOX intentions. The reliance upon non-GAAP earnings in quarterly reporting is a farce, reflecting an engineered method of pacifying financial analysts while confusing investors. Is it any wonder that we see a steady stream of restatements, fraud accusations and the like? 

None of which excuses Meg Whitman, CEO HP but rather leaves her with more questions.

• Can she explain why she was prepared to sign off on the Autonomy acquisiton as part of the HP board at the time yet had the company feverishly looking for ways to unscramble the deal after Apotheker left?
• What was it about the deal they so disliked after Apotheker left the building that wasn't apparent beforehand?
• Surely revenue recognition and services revenue in particular would have been prime targets given the difference in the application of accounting rules between the US and UK? Regardless of difficulty did no-one spot problems?
• Is HP now trying to convince us it received written assurances that turned out to be wholly false or based upon false premises a la Satyam? Did anyone examine contract content? 

Whether you believe Lynch is right or that HP has solid evidence of material financial misdeeds, the current balance of sentiment appears to be that HP royally messed up. The share price has cratered to a 10 year low. The HP board still looks dysfunctional. The handling of this latest set of revelations has hardly been pristine. HP's latest woes only add to a long term tale of tragedy. It's all rather sad.