Why Do Technology Firms So Often Fail? | casinodestnet.ga

I was recently invited to attend a Silicon Valley type technology gathering involving a number of computer architects that were leading the product discussion process and brainstorming on new technology driven business ventures. Sophisticated individuals would pitch ideas that would migrate to the technology realm. As the process and ideas developed, the architects mapped out the technology and the developers coded it. This was not a practicum, but rather a brainstorming session whose derivatives would lead to real business ventures. The team moved from concept to development without even thinking about the business viability. When I raised my hand and asked them how would this make business sense, and how they would monetize it? the look of blasphemy was abound. They went from brainstorming to implementation without answering the empirical question How do we monetize our product/service? I obtained the typical Silicon Valley answer, “we don’t know what this thing is yet, we can’t think about the money? Sadly this answer is codified in pop culture by the movie The Social Network.

This concept of not knowing what it is, is a key fallacy specific to dot com firms. They claim to be R&D, without knowing what they are researching. Do drug company such as Novartis waste millions of dollars on R&D without knowing what to expect of the drugs being researched? The factual truth remains, that if technology companies where more scientific in their approach to business and technology development, they would increase the probability of success and save Venture Capital firms and Angel investors millions if not billions in lost ventures.

With a more scientific approach to business development, Venture Capital firms would have the ability to move the standard deviation to success in their favor and increase the probability of success. Even with a fractional change, the Venture Capital firms could save millions in wasted investment.

Venture Capital firms must take notice of the paradigm shift within initial public offerings (IPO). Shareholders no longer care to invest in companies that have not proved their business viability. The failed IPOs of companies such as Groupon, Facebook, and Zynga all stem on the inability to monetize their business model. They are all amazing products with great social good, however, as Warren Buffet stated they are a business with poor economics. Let us juxtapose that with companies such a Google, and LinkedIn that monetizing their ventures.

Imagine as an entrepreneur opening up a bricks and mortar business and not knowing what this thing is, your landlord won’t even consider you as a tenant. You cannot open a business in the real world without knowing what clients you are targeting and what you are selling. Yes, you can change the menu or product line as you obtain feedback but ultimately you don’t go from a restaurant to a hair salon. However, in the dot com world, with its low barriers to entry, this model has become its modus operandi.

The dot com sector has matured in the past two decades, and has made great strides, but key business principles have yet to be adopted. Business plans and strategy are seen as burdens because “technology shifts so quickly.” Business models are negated because founders believe they are in uncharted waters. Let me assure you that models exist that can be adapted to this new venture, but they need to be researched and reviewed by individuals who have business development as their core competency.

One of the pushbacks that technology firms always give is that monetization is second to user base. In other words, growth is measured by the user base and not by money coming into the company. However, monetization is the true measure of a company’s value proposition. By having the ability to monetizing your business you are stating to the world, customers care enough to pay for it. There is no better way for a company to prove product viability than via monetization. Technology firms must wake up and realize that having high traffic volumes, or subscriber base is NO LONGER just enough, they need to have paying customers. Imagine if Comcast, Verizon, or AT&T all provided free cable or cell phone services to their customers and tried to pass it off to shareholders as an increase of subscriber volume with increased future value. Shareholders would punish them with a severe cut in corporate valuation.

Your company’s traffic base is only important, if that increase of traffic leads to customers purchasing at a price that you can make money. Going back to the brick and mortar business, having hundreds of customers come through the door yet not buy anything will not increase the value of the business or drive you to become cash flow positive.

One of the companies that dealt with the above issues was Evernote a cloud-based file sharing company. When Evernote started their main focus was the “freemium” model. At one point the company was less than 24 hours away from closing its doors when an investor from Europe contacted them via e-mail and stated that he loved their product and was willing to invest in the company. The company was forced to restructure its business. They kept the freemium model only because they were able to prove to investors that over 40% of their “freemium” clients became paying customers. Evernote was voted as one of the top companies within the tech-world in 2012, and they are cash flow positive.

Monetization should stop being the dirty word of dot com’s! Yes, companies require large sums of cash within their start-up phase, and yes they will not all be cash flow positive, however plans must be instituted to become financially sustainable. Your company can only be viable of customers are willing to pay for the product or services. The question that the founders of tech companies have to answer is IS THIS A HOBBY OR A BUSINESS AND CAN IT BE MONETIZED?

Do Boards Need a Technology Audit Committee? | casinodestnet.ga

What does FedEx, Pfizer, Wachovia, 3Com, Mellon Financial, Shurgard Storage, Sempra Energy and Proctor & Gamble have in common? What board committee exists for only 10% of publicly traded companies but generates 6.5% greater returns for those companies? What is the single largest budget item after salaries and manufacturing equipment?

Technology decisions will outlive the tenure of the management team making those decisions. While the current fast pace of technological change means that corporate technology decisions are frequent and far-reaching, the consequences of the decisions-both good and bad-will stay with the firm for a long time. Usually technology decisions are made unilaterally within the Information Technology (IT) group, over which senior management chose to have no input or oversight. For the Board of a business to perform its duty to exercise business judgment over key decisions, the Board must have a mechanism for reviewing and guiding technology decisions.

A recent example where this sort of oversight would have helped was the Enterprise Resource Planning (ERP) mania of the mid-1990′s. At the time, many companies were investing tens of millions of dollars (and sometimes hundreds of millions) on ERP systems from SAP and Oracle. Often these purchases were justified by executives in Finance, HR, or Operations strongly advocating their purchase as a way of keeping up with their competitors, who were also installing such systems. CIO’s and line executives often did not give enough thought to the problem of how to make a successful transition to these very complex systems. Alignment of corporate resources and management of organizational change brought by these new systems was overlooked, often resulting in a crisis. Many billions of dollars were spent on systems that either should not have been bought at all or were bought before the client companies were prepared.

Certainly, no successful medium or large business can be run today without computers and the software that makes them useful. Technology also represents one of the single largest capital and operating line item for business expenditures, outside of labor and manufacturing equipment. For both of these reasons, Board-level oversight of technology is appropriate at some level.

Can the Board of Directors continue to leave these fundamental decisions solely to the current management team? Most large technology decisions are inherently risky (studies have shown less than half deliver on promises), while poor decisions take years to be repaired or replaced. Over half of the technology investments are not returning anticipated gains in business performance; Boards are consequently becoming involved in technology decisions. It is surprising that only ten percent of the publicly traded corporations have IT Audit Committees as part of their boards. However, those companies enjoy a clear competitive advantage in the form of a compounded annual return 6.5% greater than their competitors.

Tectonic shifts are under way in how technology is being supplied, which the Board needs to understand. IT industry consolidation seriously decreases strategic flexibility by undercutting management’s ability to consider competitive options, and it creates potentially dangerous reliance on only a few key suppliers.

The core asset of flourishing and lasting business is the ability to respond or even anticipate the impact of outside forces. Technology has become a barrier to organizational agility for a number of reasons:

o Core legacy systems have calcified
o IT infrastructure has failed to keep pace with changes in the business
o Inflexible IT architecture results in a high percentage of IT expenditure on maintenance of existing systems and not enough on new capabilities
o Short term operational decisions infringe on business’s long term capability to remain competitive

Traditional Boards lack the skills to ask the right questions to ensure that technology is considered in the context of regulatory requirements, risk and agility. This is because technology is a relatively new and fast-growing profession. CEOs have been around since the beginning of time, and financial counselors have been evolving over the past century. But technology is so new, and its cost to deploy changes dramatically, that the technology profession is still maturing. Technologists have worked on how the systems are designed and used to solve problems facing the business. Recently, they recognized a need to understand and be involved in the business strategy. The business leader and the financial leader neither have history nor experience utilizing technology and making key technology decisions. The Board needs to be involved with the executives making technology decisions, just as the technology leader needs Board support and guidance in making those decisions.

Recent regulatory mandates such as Sarbanes-Oxley have changed the relationship of the business leader and financial leader. They in turn are asking for similar assurances from the technology leader. The business leader and financial leader have professional advisors to guide their decisions, such as lawyers, accountants and investment bankers. The technologist has relied upon the vendor community or consultants who have their own perspective, and who might not always be able to provide recommendations in the best interests of the company. The IT Audit Committee of the Board can and should fill this gap.

What role should the IT Audit Committee play in the organization? The IT Audit function in the Board should contribute toward:

1. Bringing technology strategy into alignment with business strategy.
2. Ensuring that technology decisions are in the best interests of shareholders.
3. Fostering organizational development and alignment between business units.
4. Increasing the Board’s overall understanding of technological issues and consequences within the company. This type of understanding cannot come from financial analysis alone.
5. Effective communication between the technologist and the Committee members.

The IT Audit Committee does not require additional board members. Existing board members can be assigned the responsibility, and use consultants to help them understand the issues sufficiently to provide guidance to the technology leader. A review of existing IT Audit Committee Charters shows the following common characteristics:

1. Review, evaluate and make recommendations on technology-based issues of importance to the business.
o Appraise and critically review the financial, tactical and strategic benefits of proposed major technology related projects and technology architecture alternatives.
o Oversee and critically review the progress of major technology related projects and technology architecture decisions.
2. Advise the senior technology management team at the firm
3. Monitor the quality and effectiveness of technology systems and processes that relate to or affect the firm’s internal control systems.

Fundamentally, the Board’s role in IT Governance is to ensure alignment between IT initiatives and business objectives, monitor actions taken by the technology steering committee, and validate that technology processes and practices are delivering value to the business. Strategic alignment between IT and the business is fundamental to building a technology architectural foundation that creates agile organizations. Boards should be aware of technological risk exposures, management’s assessment of those risks, and mitigation strategies considered and adopted.

There are no new principles here-only affirmation of existing governance charters. The execution of technology decisions falls upon the management of the organization. The oversight of management is the responsibility of the Board. The Board needs to take appropriate ownership and become proactive in governance of the technology.

Do Boards need a Technology Audit committee? Yes, a Technology Audit Committee within the Board is warranted because it will lead to technology/business alignment. It is more than simply the right thing to do; it is a best practice with real bottom-line benefits.