Wednesday, November 21, 2018

Dark Side of Cloud—How People and Organizations are Unable to Adapt and Improve the Business

Transcript of a discussion on how cloud adoption is not reaching its potential due to outdated behaviors and persistent dissonance between what businesses can do and will do with cloud model strengths.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: Hewlett Packard Enterprise.

Dana Gardner: Hello, and welcome to the next edition of the BriefingsDirect Voice of the Analyst podcast series. I’m Dana Gardner, Principal Analyst at Interarbor Solutions, your host and moderator for this ongoing discussion on the latest insights into hybrid IT and cloud computing.

Gardner
Many of our ongoing discussions focus on infrastructure trends that support the evolving hybrid IT continuum. Today’s focus shifts to behavior -- how individuals and groups, both large and small, benefit from cloud adoption.

It turns out that a dark side to cloud points to a lackluster business outcome trend. A large part of the disappointment has to do with outdated behaviors and persistent dissonance between what line of business (LOB) practitioners can do and will do with their newfound cloud strengths.

We’ll now hear from an observer of worldwide cloud adoption patterns on why making cloud models a meaningful business benefit rests more with adjusting the wetware than any other variable.

Here to help explore why cloud failures and cost overruns are dogging many enterprises is Robert Christiansen, Vice President, Global Delivery, Cloud Professional Services and Innovation at Cloud Technology Partners (CTP), a Hewlett Packard Enterprise (HPE) company.

Welcome, Robert.

Robert Christiansen: Thank you for having me, Dana.

Gardner: What is happening now with the adoption of cloud that makes the issue of how people react such a pressing concern? What’s bringing this to a head now?

Fits and starts 

Christiansen
Christiansen: Enterprises are on a cloud journey. They have begun their investment, they recognize that agility is a mandate for them, and they want to get those teams rolling. They have already done that to some degree and extent. They may be moving a few applications, or they may be doing wholesale shutdowns of data centers. They are in lots of different phases in adoption situations.

What we are seeing is a lack of progress with regard to the speed and momentum of the adoption of applications into public clouds. It’s going a little slower than they’d like.

Gardner: We have been through many evolutions, generations, and even step-changes in technology. Most of them have been in a progressive direction. Why are we catching our heels now?

Christiansen: Cloud is a completely different modality, Dana. One of the things that we have learned here is that adoption of infrastructure that can be built from the ground-up using software is a whole other way of thinking that has never really been the core bread-and-butter of an infrastructure or a central IT team. So, the thinking and the process -- the ability to change things on the fly from an infrastructure point of view -- is just a brand new way of doing things.

And we have had various fits and starts around technology adoption throughout history, but nothing at this level. The tool kits available today have completely changed and redefined how we go about doing this stuff.


Gardner: We are not just changing a deployment pattern, we are reinventing the concept of an application. Instead of monolithic applications and systems of record that people get trained on and line up around, we are decomposing processes into services that require working across organizational boundaries. The users can also access data and insights in ways they never had before. So that really is something quite different. Even the concept of an application is up for grabs.

Christiansen: Well, think about this. Historically, an application team or a business unit, let’s say in a bank, said, “Hey, I see an opportunity to reinvent how we do funding for auto loans.”

We worked with a company that did this. And historically, they would have had to jump through a bunch of hoops. They would justify the investment of buying new infrastructure, set up the various components necessary, maybe landing new hardware in the organization, and going into the procurement process for all of that. Typically, in the financial world, it takes months to make that happen.

Today, that same team using a very small investment can stand up a highly available redundant data center in less than a day on a public cloud. In less than a day, using a software-defined framework. And now they can go iterate and test and have very low risk to see if the marketplace is willing to accept the kind of solution they want to offer.

And that just blows apart the procedural-based thinking that we have had up to this point; it just blows it apart. And that thinking, that way of looking at stuff is foreign to most central IT people. Because of that emotion, going to the cloud has come in fits and starts. Some people are doing it really well, but a majority of them are struggling because of the people issue.

Gardner: It seems ironic, Robert, because typically when you run into too much of a good thing, you slap on governance and put in central command and control, and you throttle it back. But that approach subverts the benefits, too.

How do you find a happy medium? Or is there such a thing as a happy medium when it comes to moderating and governing cloud adoption?

Control issues

Christiansen: That’s where the real rub is, Dana. Let’s give it an analogy. At Cloud Technology Partners (CTP), we do cloud adoption workshops where we bring in all the various teams and try to knock down the silos. They get into these conversations to address exactly what you just said. “How do we put governance in place without getting in the way of innovation?”

It’s a huge, huge problem, because the central IT team’s whole job is to protect the brand of the company and keep the client data safe. They provide the infrastructure necessary for the teams to go out and do what they need to do.

When you have a structure like that but supplied by the public clouds like Amazon (AWS), Google, and Microsoft Azure, you still have the ability to put in a lot of those controls in the software. Before it was done either manually or at least semi-manually.
The central IT team's whole job is to protect the brand of the company and keep the client data safe. They provide the infrastructure necessary for the teams to go out and do what they need to do.

The challenge is that the central IT teams are not necessarily set up with the skills to make that happen. They are not by nature software development people. They are hardware people. They are rack and stack people. They are people who understand how to stitch this stuff together -- and they may use some automation. But as a whole it’s never been their core competency. So therein lies the rub: How do you convert these teams over to think in that new way?

At the same time, you have the pressing issue of, “Am I going to automate myself right out of a job?” That’s the other part, right? That’s the big, 800-pound gorilla sitting in the corner that no one wants to talk about. How do you deal with that?

Gardner: Are we talking about private cloud, public cloud, hybrid cloud, hybrid IT -- all the above when it comes to these trends?

Public perceptions

Christiansen: It’s mostly public cloud that you see the perceived threats. The public cloud is perceived as a threat to the current way of doing IT today, if you are an internal IT person.

Let’s say that you are a classic compute and management person. You actually split across both storage and compute, and you are able to manage and handle a lot of those infrastructure servers and storage solutions for your organization. You may be part of a team of 50 in a data center or for a couple of data centers. Many of those classic roles literally go away with a public cloud implementation. You just don’t need them. So these folks need to pivot or change into new roles or reinvent themselves.

Let’s say you’re the director of that group and you happen to be five years away from retirement. This actually happened to me, by the way. There is no way these folks want to give up the range right before their retirement. They don’t want to reinvent their roles just before they’re going to go into their last years.

They literally said to me, “I am not changing my career this far into it for the sake of a public cloud reinvention.” They are hunkering down, building up the walls, and slowing the process. This seems to be an undercurrent in a number of areas where people just don’t want to change. They don’t want any differences.

Gardner: Just to play the devil’s advocate, when you hear things around serverless, when we see more operations automation, when we see artificial intelligence (AI)Ops use AI and machine learning (ML) -- it does get sort of scary.

You’re handing over big decisions within an IT environment on whether to use public or private, some combination, or multicloud in some combination. These capabilities are coming into fruition.

Maybe we do need to step back and ask, “Just because you can do something, should you?” Isn’t that more than just protecting my career? Isn’t there a need for careful consideration before we leap into some of these major new trends?

Transform fear into function 

Christiansen: Of course, yeah. It’s a hybrid world. There are applications where it may not make sense to be in the public cloud. There are legacy applications. There are what I call centers of gravity that are database-centric; the business runs on them. Moving them and doing a big lift over to a public cloud platform may not make financial sense. There is no real benefit to it to make that happen. We are going to be living between an on-premises and a public cloud environment for quite some time.

The challenge is that people want to create a holistic view of all of that. How do I govern it in one view and under one strategy? And that requires a lot of what you are talking about, being more cautious going forward.

And that’s a big part of what we have done at CTP. We help people establish that governance framework, of how to put automation in place to pull these two worlds together, and to make it more seamless. How do you network between the two environments? How do you create low-latency communications between your sources of data and your sources of truth? Making that happen is what we have been doing for the last five or six years.
We help establish that governance framework, of how to put automation in place to pull these two worlds together, and to make it more seamless.

The challenge we have, Dana, is that once we have established that -- we call that methodology the Minimum Viable Cloud (MVC). And after you put all of that structure, rigor, and security in place -- we still run into the problems of motion and momentum. Those needed governance frameworks are well-established.

Gardner: Before we dig into why the cloud adoption inertia still exists, let’s hear more about CTP. You were acquired by HPE not that long ago. Tell us about your role and how that fits into HPE.

CTP: A cloud pioneer

Christiansen: CTP was established in 2010. Originally, we were doing mostly private cloud, OpenStack stuff, and we did that for about two to three years, up to 2013.

I am one of the first 20 employees. It’s a Boston-based company, and I came over with the intent to bring more public cloud into the practice. We were seeing a lot of uptick at the time. I had just come out of another company called Cloud Nation that I owned. I sold that company; it was an Amazon-based, Citrix-for-rent company. So imagine, if you would, you swipe a credit card and you get NetScaler, XenApp and XenDesktop running on top of AWS way back in 2012 and 2013.

I sold that company, and I joined CTP. We grew the practice of public cloud on Google, Azure, and AWS over those years and we became the leading cloud-enabled professional services organization in the world.

We were purchased by HPE in October 2017, and my role since that time is to educate, evangelize, and press deeply into the methodologies for adopting public cloud in a holistic way so it works well with what people have on-premises. That includes the technologies, economics, strategies, organizational change, people, security, and establishing a DevOps practice in the organization. These are all within our world.

We do consultancy and professional services advisory types of things, but on the same coin, we flip it over, and we have a very large group of engineers and architects who are excellent on keyboards. These are the people who actually write software code to help make a lot of this stuff automated to move people to the public clouds. That’s what we are doing to this day.

Gardner: We recognize that cloud adoption is a step-change, not an iteration in the evolution of computing. This is not going from client/server to web apps and then to N-Tier architectures. We are bringing services and processes into a company in a whole new way and refactoring that company. If you don’t, the competition or a new upstart unicorn company is going to eat your lunch. We certainly have seen plenty of examples of that.

So what prevents organizations from both seeing and realizing the cloud potential? Is this a matter of skills? Is it because everyone is on the cusp of retirement and politically holding back? What can we identify as the obstacles to overcome to break that inertia?

A whole new ball game

Christiansen: From my perspective, we are right in the thick of it. CTP has been involved with many Fortune 500 companies through this process.

The technology is ubiquitous, meaning that everybody in the marketplace now can own pretty much the same technology. Dana, this is a really interesting thought. If a team of 10 Stanford graduates can start up a company to disrupt the rental car industry, which somebody has done, by the way, and they have access to technologies that were only once reserved for those with hundreds of millions of dollars in IT budgets, you have all sorts of other issues to deal with, right?

So what’s your competitive advantage? It’s not access to the technologies. The true competitive advantage now for any company is the people and how they consume and use the technology to solve a problem. Before [the IT advantage] was reserved for those who had access to the technology. That’s gone away. We now have a level playing field. Anybody with a credit card can spin up a big data solution today – anybody. And that’s amazing, that’s truly amazing.

For an organization that had always fallen back on their big iron or infrastructure -- those processes they had as their competitive advantage -- that now has become a detriment. That’s now the thing that’s slowing them down. It’s the anchor holding them back, and the processes around it. That rigidity of people and process locks them into doing the same thing over and over again. It is a serious obstacle.

Untangle spaghetti systems 

Another major issue came very much as a surprise, Dana. We observed it over the last couple of years of doing application inventory assessments for people considering shutting down data centers. They were looking at their applications, the ones holding the assets of data centers, as not competitive. And they asked, “Hey, can we shut down a data center and move a lot of it to the public cloud?”

We at CTP were hired to do what are called application assessments, economic evaluations. We determine if there is a cost validation for doing a lift-and-shift [to the public cloud]. And the number-one obstacle was inventory. The configuration management data bases (CMDBs), which hold the inventory of where all the servers are and what’s running on them for these organizations, were wholly out of date. Many of the CMDBs just didn’t give us an accurate view of it all.

When it came time to understand what applications were actually running inside the four walls of the data centers -- nobody really knew. As a matter of fact, nobody really knew what applications were talking to what applications, or how much data was being moved back and forth. They were so complex; we would be talking about hundreds, if not thousands, of applications intertwined with themselves, sharing data back and forth. And nobody inside organizations understood which applications were connected to which, how many there were, which ones were important, and how they worked.
When it came time to understand what applications were actually running inside of the four walls of the data centers -- no one really knew. Nobody knew what applications were talking to what applications, or how much data was being moved back and forth.

Years of managing that world has created such a spaghetti mess behind those walls that it’s been exceptionally difficult for organizations to get their hands around what can be moved and what can’t. There is great integration within the systems.

The third part of this trifecta of obstacles to moving to the cloud is, as we mentioned, people not wanting to change their behaviors. They are locked in to the day-to-day motion of maintaining those systems and are not really motivated to go beyond that.

Gardner: I can see why they would find lots of reasons to push off to another day, rather than get into solving that spaghetti maze of existing data centers. That’s hard work, it’s very difficult to synthesize that all into new apps and services.

Christiansen: It was hard enough just virtualizing these systems, never mind trying to pull it all apart.

Gardner: Virtualizing didn’t solve the larger problem, it just paved the cow paths, gained some efficiency, reduced poor server utilization -- but you still have that spaghetti, you still have those processes that can’t be lifted out. And if you can’t do that, then you are stuck.

Christiansen: Exactly right.

Gardner: Companies for many years have faced other issues of entrenchment and incumbency, which can have many downsides. Many of them have said, “Okay, we are going to create a Skunk Works, a new division within the company, and create a seed organization to reinvent ourselves.” And maybe they begin subsuming other elements of the older company along the way.

Is that what the cloud and public cloud utilization within IT is doing? Why wouldn’t that proof of concept (POC) and Skunk Works approach eventually overcome the digital transformation inertia?

Clandestine cloud strategists

Christiansen: That’s a great question, and I immediately thought of a client who we helped. They have a separate team that re-wrote or rebuilt an application using serverless on Amazon. It’s now a fairly significant revenue generator for them, and they did it almost two and-a-half years ago.

It uses a few cloud servers, but mostly they rely on the messaging backbones and non-server-based platform-as-a-service (PaaS) layers of AWS to solve their problem. They are a consumer credit company and have a lot of customer-facing applications that they generate revenue from on this new platform.

The team behind the solution educated themselves. They were forward-thinkers and saw the changes in public cloud. They received permission from the business unit to break away from the central IT team’s standard processes, and they completely redefined the whole thing.

The team really knocked it out of the park. So, high success. They were able to hold it up and tried to extend that success back into the broader IT group. The IT group, on the other hand, felt that they wanted more of a multicloud strategy. They weren’t going to have all their eggs in Amazon. They wanted to give the business units options, of either going to Amazon, Azure, or Google. They wanted to still have a uniform plane of compute for on-premises deployments. So they brought in Red Hat’s OpenShift, and they overlaid that, and built out a [hybrid cloud] platform.

Now, the Red Hat platform, I personally had had no direct experience, but I had heard good things about it. I had heard of people who adopted it and saw benefits. This particular environment though, Dana, the business units themselves rejected it.

The core Amazon team said, “We are not doing that because we’re skilled in Amazon. We understand it, we’re using AWS CloudFormation. We are going to write code to the applications, we are going to use Lambda whenever we can.” They said, “No, we are not doing that [hybrid and multicloud platform approach].”

Other groups then said, “Hey, we’re an Azure shop, and we’re not going to be tied up around Amazon because we don’t like the Amazon brand.” And all that political stuff arose, they just use Azure, and decided to go shooting off on their own and did not use the OpenShift platform because, at the time, the tool stacks were not quite what they needed to solve their problems.


The company ended up getting a fractured view. We recommended that they go on an education path, to bring the people up to speed on what OpenShift could do for them. Unfortunately, they opted not to do that -- and they are still wrestling with this problem.

CTP and I personally believe that this was an issue of education, not technology, and not opportunity. They needed to lean in, sponsor, and train their business units. They needed to teach the app builders and the app owners on why this was good, the advantages of doing it, but they never invested the time. They built it and hoped that the users would come. And now they are dealing with the challenges of the blowback from that.

Gardner: What you’re describing, Robert, sounds an awful lot like basic human nature, particularly with people in different or large groups. So, politics, right? The conundrum is that when you have a small group of people, you can often get them on board. But there is a certain cut-off point where the groups are too large, and you lose control, you lose synergy, and there is no common philosophy. It’s Balkanization; it’s Europe in 1916.

Christiansen: Yeah, that is exactly it.

Gardner: Very difficult hurdles. These are problems that humankind has been dealing with for tens of thousands of years, if not longer. So, tribalism, politics. How does a fleet organization learn from what software development has come up with to combat some of these political issues? I’m thinking of Agile methodologies, scrums, and having short bursts, lots of communication, and horizontal rather than command-and-control structures. Those sorts of things.

Find common ground first

Christiansen: Well, you nailed it. How you get this done is the question. How do you get some kind of agility throughout the organization to make this happen? And there are successes out there, whole organizations, 4,000 or 5,000 or 6,000 people, have been able to move. And we’ve been involved with them. The best practices that we see today, Dana, are around allowing the businesses themselves to select the platforms to go deep on, to get good at.

Let’s say you have a business unit generating $300 million a year with some service. They have money, they are paying the IT bill. But they want more control, they want more the “dev” from the DevOps process.
The best practices that we see today are around allowing the businesses themselves to select the cloud platforms to go deep on, to get good at. ... They want the "dev" from the DevOps process.

They are going to provide much of that on their own, but they still need core common services from central IT team. This is the most important part. They need the core services, such as identity and access management, key management, logging and monitoring, and they need networking. There is a set of core functions that the central team must provide.

And we help those central teams to find and govern those services. Then, the business units [have cloud model choice and freedom as long as they] consume those core services -- the access and identity process, the key management services, they encrypt what they are supposed to, and they use the networking functions. They set up separation of the services appropriately, based on standards. And they use automation to keep them safe. Automation prevents them from doing silly things, like leaving unencrypted AWS S3 buckets open to the public Internet, things like that.

You now have software that does all of that automation. You can turn those tools on and then it’s like a playground, a protected playground. You say, “Hey, you can come out into this playground and do whatever you want, whether it’s on Azure or Google, or on Amazon or on-premises.”

 “Here are the services, and if you adopt them in this way, then you, as the team, can go deep, you can use Application programming interface (API) calls, you can use CloudFoundation or Python or whatever happens to be the scripting language you want to build your infrastructure with.”

Then you have the ability to let those teams do what they want. If you notice, what it doesn’t do is overlay a common PaaS layer, which isolates the hyperscale public cloud provider from your work. That’s a whole other food fight, religious battle, Dana, around lock-in and that kind of conversation.

Gardner: Imposing your will on everyone else doesn’t seem to go over very well.

So what you’re describing, Robert, is a right-sizing for agility, and fostering a separate-but-equal approach. As long as you can abstract to the services level, and as long as you conform to a certain level of compliance for security and governance -- let’s see who can do it better. And let the best approach to cloud computing win, as long as your processes end up in the right governance mix.

Development power surges

Christiansen: People have preferences, right? Come on! There’s been a Linux and .NET battle since I have been in business. We all have preferences, right? So, how you go about coding your applications is really about what you like and what you don’t like. Developers are quirky people. I was a C programmer for 14 years, I get it.

The last thing you want to do is completely blow up your routines by taking development back and starting over with a whole bunch of new languages and tools. Then they’re trying to figure out how to release code, test code, and build up a continuous integration/continuous delivery pipeline that is familiar and fast.

These are really powerful personal stories that have to be addressed. You have to understand that. You have to understand that the development community now has the power -- they have the power, not the central IT teams. That shift has occurred. That power shift is monumental across the ecosystem. You have to pay attention to that.

If the people don’t feel like they have a choice, they will go around you, which is where the problems are happening.

Gardner: I think the power has always been there with the developers inside of their organizations. But now it’s blown out of the development organization and has seeped up right into the line of business units.

Christiansen: Oh, that’s a good point.

Gardner: Your business strategy needs to consider all the software development issues, and not just leave them under the covers. We’re probably saying the same thing. I just see the power of development choice expanding, but I think it’s always been there.

But that leads to the question, Robert, of what kind of leadership person can be mindful of a development culture in an organization, and also understand the line of business concerns. They must appreciate the C-suite strategies. If you are a public company, keeping Wall Street happy, and keeping the customer expectations met because those are always going up nowadays.

It seems to me we are asking an awful lot of a person or small team that sits at the middle of all of this. It seems to me that there’s an organizational and a talent management deficit, or at least something that’s unprecedented.

Tech-business cross-pollination

Christiansen: It is. It really is. And this brings us to a key piece to our conversation. And that is the talent enablement. It is now well beyond how we’ve classically looked at it.

Some really good friends of mine run learning and development organizations and they have consulting companies that do talent and organizational change, et cetera. And they are literally baffled right now at the dramatic shift in what it takes to get teams to work together.

In the more flexible-thinking communities of up-and-coming business, a lot of the folks that start businesses today are technology people. They may end up in the coffee industry or in the restaurant industry, but these folks know technology. They are not unaware of what they need to do to use technology.

So, business knowledge and technology knowledge are mixing together. They are good when they get swirled together. You can’t live with one and not have the other.

For example, a developer needs to understand the implications of economics when they write something for cloud deployment. If they build an application that does not economically work inside the constructs of the new world, that’s a bad business decision, but it’s in the hands of the developer.

It’s an interesting thing. We’ve had that need for developer-empowerment before, but then you had a whole other IT group put restrictions on them, right? They’d say, “Hey, there’s only so much hardware you get. That’s it. Make it work.” That’s not the case anymore, right?
We have created a whole new training track category called Talent Enablement that CTP and HPE have put together around the actual consumers of cloud.

At the same time, you now have an operations person involved with figuring out how to architect for the cloud, and they may think that the developers do not understand what has to come together.

As a result, we have created a whole new training track category called Talent Enablement that CTP and HPE have put together around the actual consumers of cloud.

We have found that much of an organization’s delay in rolling this out is because the people who are consuming the cloud are not ready or knowledgeable enough on how to maximize their investment in cloud. This is not for the people building up those core services that I talked about, but for the consumers of the services, the business units.

We are rolling that out later this year, a full Talent Enablement track around those new roles.

Gardner: This targets the people in that line of business, decision-making, planning, and execution role. It brings them up to speed on what cloud really means, how to consume it. They can then be in a position of bringing teams together in ways that hadn’t been possible before. Is that what you are getting at?

Teamwork wins 

Christiansen: That’s exactly right. Let me give you an example. We did this for a telecommunications company about a year ago. They recognized that they were not going to be able to roll out their common core services.

The central team had built out about 12 common core services, and they knew almost immediately that the rest of the organization, the 11 other lines of business, were not ready to consume them.

They had been asking for it, but they weren’t ready to actually drive this new Ferrari that they had asked for. There were more than 5,000 people who needed to be up-skilled on how to consume the services that a team of about 100 people had put together.

Now, these are not classic technical services like AWS architecture, security frameworks, or Access control list (ACL) and Network ACL (NACL) for networking traffic, or how you connect back and backhaul, that kind of stuff. None of that.

I’m talking about how to make sure you don’t get a cloud bill that’s out of whack. How do I make sure that my team is actually developing in the right way, in a safe way? How do I make sure my team understands the services we want them to consume so that we can support it?

It was probably 10 or 12 basic use domains. The teams simply didn’t understand how to consume the services. So we helped this organization build a training program to bring up the skills of these 4,000 to 5,000 people.

Now think about that. That has to happen in every global Fortune 2000 company where you may only have a central team of a 100, and maybe 50 cloud people. But they may need to turn over the services to 1,000 people.

We have a massive, massive, training, up-skilling, and enablement process that has to happen over the next several years.

Gardner: I’m afraid we’ll have to leave it there. We’ve been exploring how a large part of the disappointment with cloud-based business outcomes has to do with outdated behaviors and even persistent dissonance between what line of business practitioners can do and what they should do with their new cloud strength.

And we’ve learned why making cloud models meaningful businesses rests more with the people, change management, and talent management than just about anything else.


Please join me in thanking our guest, Robert Christiansen, Vice President, Global Delivery of Cloud Professional Services and Innovation at Cloud Technology Partners, an HPE company.

Robert, thank you so much. I really enjoyed it.

Christiansen: Thanks, Dana. I did too. I hope to come back again.

Gardner: And thanks also to our audience for joining this BriefingsDirect Voice of the Analyst hybrid IT and cloud computing strategies interview.

I’m Dana Gardner, Principal Analyst at Interarbor Solutions, your host for this ongoing series of Hewlett Packard Enterprise-sponsored discussions. Thanks again for listening.  Please pass this along to your IT community and do come back next time.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: Hewlett Packard Enterprise.

Transcript of a discussion on how cloud adoption is not reaching its potential due to outdated behaviors and persistent dissonance between what businesses can do and will do with cloud model strengths. Copyright Interarbor Solutions, LLC, 2005-2018. All rights reserved.

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Friday, November 16, 2018

How a Business Matchmaker Application Helps SMBs Impacted by Natural Disasters Gain New Credit

Transcript of a discussion on how data-driven supplier ecosystems enable new kinds of matchmaker finance relationships that work rapidly and at low risk for small- to medium-sized businesses in need.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: SAP Ariba.

Dana Gardner: Hi, this is Dana Gardner, Principal Analyst at Interarbor Solutions, and you’re listening to BriefingsDirect. Our next digital business innovation panel discussion explores how a matchmaker application assists small businesses impacted by natural disasters in the United States.

Gardner
By leveraging the data and trust inherent in established business networks, Apparent Financing by SAP creates digital handshakes between lenders and businesses in urgent need of working capital financing.

The solution’s participants -- all in the SAP Ariba Network -- are putting the innovative model to good use by initially assisting businesses impacted directly or via supply chain disruptions from natural disasters such as forest fires and hurricanes.

To learn how data-driven supplier ecosystems enable new kinds of matchmaker finance relationships that work rapidly and at low risk, we are joined by our panel, Vishal Shah, Co-Founder and General Manager of Apparent Financing by SAP. Welcome, Vishal.

Vishal Shah: Thank you, Dana.

Gardner: We are here too with Alan Cohen, Senior Vice President and General Manager of Payments and Financing at SAP Ariba. Welcome, Alan.


Alan Cohen: Thank you. Great to be here.

Gardner: And we lastly welcome Winslow Garnier, President of Garnier Group Technology Solutions, LLC in San Diego, California.

Winslow Garnier: Thank you, Dana. I appreciate it.

Gardner: Vishal, what’s unique about this point in time that allows organizations like Apparent Financing to play matchmaker between lenders and businesses?

Small-business finance savoir faire 

Shah: The historical problem that limited small businesses from accessing financial services with ease was lack of trust and transparency. It’s also popularly known as the information asymmetry problem.

Shah
At this point in time there are three emerging trends and forces that are transforming the small business finance industry.

The first one is the digitalization of small businesses, such as from digital bookkeeping systems that are becoming more affordable and accessible -- even to the smallest of businesses globally.

The second force is the financial industry innovation. The financial crisis of 2008 actually unlocked new opportunities and created a developed industry called FinTech. This industry’s strong focus on delivering the frictionless customer experience is the key enabler.

And the third force is technological innovation. This includes cloud computing, mobility, and application programming interfaces (APIs). They combine to make it economically feasible to gain access to financial information about small businesses that is stored in today’s digital bookkeeping systems and e-commerce platforms. It's the confluence of these three forces that solve that information asymmetry problem, leading to both reduction of risk and cost to serve small businesses.

Gardner: Alan Cohen, why is this new business climate for small- to medium-sized businesses (SMBs) a perfect fit for something like the SAP Ariba Network? Tell us how your business model and business network are helping Apparent Financing with its task.

Cohen: Think about it in two ways. First, think differently about combining the physical and the financial supply chains. Historically, the Ariba Network has been focused on connecting buyers with their suppliers. Now we are taking the next step in this evolution to better connect the physical with the financial supply chain to provide choice and value to suppliers about access to capital.

Cohen
The second piece of it is in leveraging the data. There’s a ton of excitement in this world for artificial intelligence (AI) and machine learning (ML), and I am a big proponent of all of that. These are going to be awesome technologies that will help society and businesses as they evolve. It’s super important to keep in mind that the strength of the Ariba Network is not just its size -- $2.1 trillion in annual spend, 3.4 million buyers and suppliers -- it’s in the data. The intelligence drawn from this transactional data will enable lenders to make risk-adjusted lending decisions.

And that real data value goes beyond just traditional lending. It also helps lenders assess risk differently. This will help transform how lending is done to small and medium-sized businesses as time evolves.

Gardner: Some of these trends have been in the works for 20 or 30 years but are now coming together in a way that can help real people benefit in real situations. Winslow, please tell us about Garnier Group Technology Solutions and how you have been able to benefit from this new confluence of financing, data, and business platforms.

Rapid recovery resources

Garnier: Garnier Group Technology Solutions provides intrusion detection, installation services, security cameras, and Wi-Fi installation primarily for corporations and municipalities. We are a supplier and an installer with consistent requirements for working capital to keep our business functioning correctly.

Garnier
A major challenge showed up for us in late 2017 when the Southern California fires took place. We had already ordered product for several installation sites. Because of the fires, those sites actually burned down. The time needed to recover from already having spent the capital, plus the fact that the business was no longer coming our way, created a real need for us.

We previously looked at working capital lines and other resources. The challenge, though, is that it is fairly complex. Our company is really good at what we do, but we are not good at finding financing and taking the time to interview multiple banks, multiple lenders. The process to just find the right type of lender to work with us -- that in itself could take four to six months.

In this case, we did not have the time or the manpower to do the due diligence necessary to make that all happen for us. Also, on a day-to-day basis, in dealing with large corporations, we can hope to get paid in 30 days, but in reality that doesn't happen. But we still need to pay our suppliers to maintain our credit terms and get delivery when required by making sure they get paid on the terms that we have agreed to.

We were fortunate to then be introduced to Vishal [Shah at Apparent Financing]. From that point on, he turned into a one-stop shop for us. He took what we had and worked with it, under the SAP guidance. That helped us to have confidence that we were working with a credible source, and that they would deliver on what we agreed to.

Gardner: We see that SMBs can be easily disrupted, they are vulnerable, and they have lag times between when they can get paid and when they have to pay their own suppliers. And they make up a huge part of the overall economy.

Vishal, this seems like a big market opportunity and addressable market. Yet traditional finance organizations mostly ignore this segment. Why is that? Why has bringing finance options to companies like Garnier Group been problematic in the past?

Bank shies, Network tries

Shah: Going back to early 2008 when the global financial crisis started, there was a lot of supply in the market and small businesses did not have to struggle as much to get access to capital.

Since then, banks have been faced with increasing regulatory burdens, as well as the fact that the cost to serve SMBs became much larger. Therefore the mainstream banks have shied away from lending to and serving this market. That has been one of the big factors.

The second is that banks have not truly embraced the power of technology. They haven’t focused on delivering customer-centric propositions. Most of the banks today are very product-centric organizations, and very siloed in their approach to serving customers.

The fundamental problems were, one, the structure of the banks and the way they were incentivized to serve this market. And secondly, the turn of events that happened post the financial crisis, which effectively resulted in the traditional lenders just backing out from this market, significantly reducing the supply side of the equation.
Banks have not truly embraced the power of technology. They haven't focused on delivering customer-centric propositions. Most banks today are very product-centric and siloed.

Gardner: Alan, it’s a great opportunity to show how this model can work by coming to the rescue of SMB organizations impacted by natural disasters. But it seems to me that this is a bellwether for a future wave of business services because of the transparency, data-driven intelligence, security, and mission-critical nature of SAP and SAP Ariba’s networks.

Do you see this as I do, as an opening inning in a longer game? Should we be thinking newly about how business networks and data-driven intelligence fosters entirely new markets and new business models?

SMB access to financing evolves

Cohen: Absolutely. I see this as the early stages of an evolution. There are a few reasons. One is ease. Winslow talked about it. It can be very hard for small businesses to access different banks or lenders to get financing. They need an easier way to do it. We have seen transformation in consumer banking, but that transformation has not followed through into business banking. So I think one opportunity is in bringing ease to the process transformation.

Another piece is trust. What I mean by that is the data from SAP and SAP Ariba is high-quality data that lenders can trust. And being able to trust that information is a big part of this process.

Finally, like with any network, being able to connect businesses with lenders has to evolve -- just as Ariba has connected buyers with suppliers to transact. This is a natural evolution of the SAP Ariba Network.

I am very excited. And while we are still early in a longer journey, this process will fundamentally change how business banking is done.

Gardner: Winslow, you had an hour of need. Certainly by circumstances that were beyond your control. You heard from Vishal. What happened next? How were they able to match you up with financing, and what was the outcome?

Garnier: The really unique thing here is that we were able to submit a single application to allow us to have offers by more than one lender. We decided on and agreed that it made sense select Fundation as the lender of choice.  All the lenders were competitive, but Fundation had a couple of features that were specific to our business and worked better for us.

I have to tell you, at first I was skeptical that we would get this done soon enough. At the same time, we had confidence -- having worked through the SAP Ariba Network previously. Once we submitted the application, we stopped looking for other resources because we felt that this would work for us. Fortunately, it did end up that way.

Within 30 days we were talking with lenders. We received a term sheet to understand what would be available for us. That gave us time internally to make decisions on what would work best. We closed on the transaction and it's been a good working relationship between us and Fundation ever since.

Gardner: Is this going to be more than a one-shot deal, a new business operating model for you all? Are you going to be able to take a revolving line of credit and thereby have a more secure approach to business? This may even allow you to increase the risk you are willing to take to find new clients. So is this a one-shot, band aid -- or is this something that’s changed your business model?

Not just reparations, relationships 

Garnier: Oh, absolutely. Having a revolving line of credit has become a staple for us because it’s a way to maximize our cash flow within our business. We can add additional clients now and take on new jobs that we may have still taken on, but we would have had to push them out later in time.

We are able to deliver our services faster at this point in time. And so it is the absolute right solution for what we needed and what we will continue to use over time.
Having a revolving line of credit has become a staple for us because it's a way to maximize our cash flow within our business. We can add additional clients and take on new jobs.

Gardner: Vishal, it's clear that organizations like Garnier Group are benefiting from this new model. It's clear that SAP and SAP Ariba have the platform, the data, and the integrity and trust to deliver on it.

But another big component here is to make sure that the financing organizations are comfortable, eager, and are gaining the right information to make their lending decisions. Tell us about that side of the equation. How do organizations like Fundation and others view this, and how do you keep them eager to find new credit opportunities?

Shah: If you think of Fundation, they are not a typical bank. They are willing to look at any e-commerce platform and any technology service providers as new distribution channels through which they can access new markets and a new customer base.

Beyond that, they are using these channels as a way to market their own products and solutions. They have much bigger reasons to look at these ecosystems that we have developed over the years.

In my view, traditional banks and lending institutions look at businesses like Garnier Group using what I call the rearview mirror. What I mean by that is lenders mostly base their lending decisions or credit decisions by obtaining information from credit bureaus, which they believe is an indicator of past performance. And that good indicator of their past performance is also taken as an indicator of good future performance, which, yes, does work in some cases -- but not in all.

By working with us, lenders like Fundation can not only look at traditional data sources like credit bureaus, they are able to also assess the financial health and the risk of lending to a business through alternative data sources like the one Alan mentioned, which is the SAP Ariba supply chain data. This provides them an increased degree of confidence before they make prudent lending decisions.

The data in itself doesn't create the value. When processed in an appropriate manner -- and when we learn from the insights the data provides – then our lending partner gains a precise view of both the historical business performance and a realistic view of the future position and future cash flow positions of a small business. That is an incredibly powerful proposition for our lending partners to comfortably and confidently lend to businesses such as Garnier Group.

Gardner: This appears to be a win, win, win. So far, everybody seems to be benefiting. Yet this could not have happened until the innovation of the model was recognized, and then executed on.

So how did this come about, Alan? How did such payments and financing innovation get started? SAP.iO Venture Studio got involved with Apparent Financing. How did SAP, SAP Ariba, and Apparent Financing come together to allow this sort of innovation to take place -- and not just remain in theory?

Data serves to simplify commerce 

Cohen: Like anything, it begins with the marketplace and looking at a problem. At the end of the day, financing is very inefficient and expensive for both suppliers and lenders.

From a supplier perspective, we saw this as an overly complex process. And it’s not always the most competitive because people don’t have the time. From a lender perspective, originating loans and mitigating risk are very important. Yet this process hasn’t gone through a transformation.

We looked at it all and said, “Gosh, how can we better leverage the Ariba Network and the data involved in it to help solve this problem?”

SAP.iO is a venture part of SAP that incubates new businesses. About a year-and-a-half ago, we began bringing this to market to challenge how things had been done and to open up new opportunities. It’s a very innovative approach to challenge the status quo, to get businesses and lenders to think and look at this differently and seize opportunities.

And if you think about what the SAP Ariba Network is, we run commerce. And we want the lenders to fund commerce. We are simply helping to bring these two together, leveraging some incredible data insights along with the security and trust of the SAP and SAP Ariba brands.

Gardner: Of course, it’s important to have the underlying infrastructure in place to provide such data availability, trust, integrity, and support of the mission-critical nature. But in more and more cases nowadays, the user experience and simplicity elements are terribly important.

Winslow, when it came to how you interacted with the process, did you find it simple? Did you find it direct? How important was that for you as an SMB to be able to take advantage of this?

Garnier: We found it very straightforward. It didn’t require us going outside of the data we have internally. We didn’t have to bring in our outside accounting firm or a legal firm to begin the process. We were able to interface by e-mail and simple phone calls. It was so simple. I’m still surprised that, based on our previous experiences, we were able to get this to happen as quickly as it did.

Gardner: Vishal, how do you account for the ability to make this simple and direct for both sides of the equation? Is there something about the investments SAP has made over the years in technology and the importance of the user experience?

How do you attribute getting from what could be a very complex process to something that’s boiled down to its essential simplicity?

Transparent transactions build trust 

Shah: A lot of people misunderstand the user experience and co-relate that to developing a very nice front end, creating an online experience, and making it seamless and easy to use. I think that is only a part of the truth, and part of the story.

What goes on behind that nice-looking user interface is really eliminating what I call the friction points in a customer’s journey. And a lot of those friction points are actually introduced because of manual processes behind those nice-looking screens.
What goes on behind that nice-looking user interface is really eliminating what I call the friction points in a customer's journey. A lot of those friction points are actually introduced because of manual processes behind the nice-looking screens.

Secondly, there are a lot of exceptions -- business exceptions -- when you’re trying to facilitate a complex transaction like a financial credit transaction.

You must overcome these challenges. You must ensure that customers and borrowers have a seamless customer experience. We provide a transparent process, accessible to them so they know every single point in time: Where they are with their credit process, are they approved, are they disapproved, are they waiting on certain decisions, or are they negotiating the deal with the partner?

That is one element, we bring in an increased level of transparency and openness to the process. Traditionally these services have been opaque. Historically, businesses submit applications to banks and literally wait for weeks to get a decision. They don’t know what’s going on inside the four walls of the bank for those many weeks.

The second thing we did is to help our partners understand the exceptions that they traditionally encounter in their credit decision process. As a result, they can reduce those manual exceptions or completely eliminate them with the help of technology.

Again, the insights we generated from the data that we already had about the businesses helped us overcome those challenges and overcome the friction points in the entire interaction on both sides.

Gardner: Alan Cohen, where do you go next with this particular program around financing? Is this a bellwether for other types of business services that depend on the platform, the data integrity, and the simplicity of the process?

Win-win lending scenarios 

Cohen: Simplicity is, I think, first and foremost. Vishal and Winslow talked about it. Just as you can get a consumer loan online, it should be just as simple for a business to get access to capital online. Make that a pleasurable process, not a complex process that takes a long time. Simplicity cannot be underrated to help drive this change.

When it comes to the data, we’ve only scratched the surface of what can be done. We talked about risk-adjusted lending decisions based on transactional information. What we’ll see more of is price elasticity, around both risk and demand, come into play as banks help to better manage their portfolio -- not with theoretical information but through practical information. They’ll have better insights to manage their portfolios.

Let’s not lose sight of what we’re trying to accomplish: Broaden the capital availability to the community of businesses. There are so many different types of lending scenarios that could happen. You’ll see more of those scenarios become available to businesses over time in a much more efficient, cost-effective, and economic manner.

It’s not just a shifting of cost. It will be an elimination of cost -- where both parties win in this process.

Gardner: Winslow, for other SMBs that face credit issues or didn’t pursue revolving credit because of the complexity, what advice can you offer? What recommendations might you have for organizations to rethink their financing now that there are processes like what Apparent Financing provides?

Garnier: If I take a step back, we made the classic mistake that we should have put in place a bank line of credit prior to this event happening for us. The challenge was the time needed for the vetting process. We would rather pursue new clients than spend our time having to work with the different lenders.

Financing really is something that I think most small businesses should pursue, but I highly recommend they pursue it under something like what Apparent Financing has arranged. That’s because of the simplicity, the one-stop portal to find what you are looking for, the efficiency of the process, and the quality of the lenders.


All the folks that we ended up speaking to were very capable, and they wanted to do business with us, which was really outstanding. It was very different from the pushback and the, “We’ll let you know within the next 30 to 60 days or so.” That is very challenging.

We have not only added new clients since we put in the revolving credit, but our DUNS score has improved, and our credit-rating has continued to improve. It’s low risk for an SMB to look at a platform like Apparent Financing to see if this could be useful to them. I highly recommend it. It’s been nothing but a positive experience for us.

Gardner: I’m afraid we’ll have to leave it there. You have been listening to a sponsored BriefingsDirect digital business innovation podcast on how new financing applications are assisting small businesses impacted by natural disasters.

We have heard how leveraging the data and trust inherent in an established business network like SAP Ariba has allowed Apparent Financing by SAP to create a digital handshake between lenders and businesses in ways that just weren’t available before.

So please join me now in thanking our guests, Vishal Shah, Co-founder and General Manager of Apparent Financing by SAP. Thank you, Vishal.

Shah: Thank you, Dana. My pleasure.

Gardner: We have been joined by Alan Cohen, Senior Vice President and General Manager of Payments and Financing at SAP Ariba. Thank you so much, Alan.

Cohen: My pleasure.

Gardner: And thanks as well to Winslow Garnier, President of Garnier Group Technology Solutions LLC in San Diego.

Garnier: Dana, thank you.

Gardner: And a big thanks to our audience for joining this SAP Ariba-sponsored thought leadership discussion. I’m Dana Gardner, Principal Analyst at Interarbor Solutions, your host and moderator. Thanks again for listening, and do come back next time.

Listen to the podcast. Find it on iTunes. Download the transcript. Sponsor: SAP Ariba.

Transcript of a discussion on how data-driven supplier ecosystems enable new kinds of matchmaker finance relationships that work rapidly and at low risk for small- to medium-sized businesses in need. Copyright Interarbor Solutions, LLC, 2005-2018. All rights reserved.

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