2010 what do we do ?

Dr. Jimmy Schwarzkopf
Research Fellow
STKI
jimmy@stki.info

http://drjimmystki.blogspot.com/
1
Dr. Jimmy Schwarzkopf’s work Copyright 2009©STKI 1
Do not remove source or attibution from any graphic or portion of graphic

2
Dr. Jimmy Schwarzkopf’s work Copyright 2009©STKI

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5

Presentation Agenda

1 The past year an “educated guess”

2 How does it matter in IT

3 Major changes in IT technologies

6

Presentation Agenda

1 The past year an “educated guess”

2 How does it matter in IT

3 Major changes in IT technologies

7

• Evariste Galois (1811-1832)
– accepted a duel with pistols (lack of
wisdom)
– spent the night before the duel in
Three Kinds of Learning:
writing down his mathematical
testament: theory ofthat (academic)
1. Knowing
transformation of roots in
2. Knowing how (applied)
algebraic equations (creating
science) 3. Knowing why (analytical)


• Evariste Galois (1811-1832)
– accepted a duel with pistols (lack of
wisdom)
– spent the night before the duel in
writing down his mathematical
testament: theory of
transformation of roots in
algebraic equations (creating
science)


Facts: financial meltdown in 5 steps


REAL ESTATE BUBBLES
• Real estate “Bubble” all over the world
– The belief that everybody should own a home
– The belief that “real estate” value increases more than inflation.
• SEPARATION of “loan agent” from “mortgage
holder”

• SUBPRIME MORTGAGES
• SECURITIZATION OF MORTGAGES
• as long as real estate prices kept rising and interest rates remained low.
• Wall Street bundled mortgages into securities, bundled riskier loans
(subprime mortgages) with better risk loans, decreasing risk, hard to
assess the value of the loans.
11

China Inc: USA T-bills Republic
• Trade with China turned out to be fair and balanced :
”They sold the USA poison toys and tainted food; the USA
sold them fraudulent securities “

• FLOATING EXCHANGE RATE ?. rise in the value of YUAN, would slow
the growth of exports; in terms of the dollar it had to be fixed, the
government had to buy all dollars and give Yuans to the exporters.
• Trade surpluses kept growing —acquired $2 trillion in Tbills
• DEEP STRATEGY behind accumulation of low-yielding Tbill assets?
• NO …
• today they plea that someone will rescue them from the consequences of
their own investment mistakes
12

Crime Inc.
• UN estimates organized crime’s annual revenues are
3% of the world’s GDP, over $1 trillion
– half in drug sales
– the rest in multi-service activities : control of legal and illicit
gambling establishments, arms trade, human smuggling, traffic in
body organs, car theft, prostitution and racketeering
• International Monetary Fund estimates that ILLICIT
FUNDS worldwide amount to:
– about $2 trillion
– These funds usually move into unregulated institutions


Credit Default Swaps
CREDIT DEFAULT SWAP (CDS or CDO)
• like insurance, buyer pays a premium and, in return, receives
a sum of money if events occur….. but :
• the seller need not be a regulated entity;
• the seller is not required to maintain any reserves to pay off buyers


The shadow banking system crashed taking
the whole world economy down.
Asset comparison:
• Assets of regulated banking system
– $10 trillion
• Assets of shadow banking system:
– Hedge funds ………….$ 2.5 trillion
– Investment Firms ….$ 6.0 trillion
– Other ……………..……..$ 4.0 trillion

Anything that does something like a “bank”;
Anything that has to be rescued in crises the way banks are;
Should be regulated as a bank


Does somebody know what is going on??


ECONOPHYSICS
• Rejects the traditional view of
the economy as a fully
transparent, rational system
striving toward equilibrium.

• Uses concepts and
mathematical models that draw
on complexity theory and
statistical physics to understand
economic, business and IT cycles
.

EFBP or El Farol Bar Problem
• people considering going to the bar were
wondering whether or not it would be
overcrowded that night…………
• If everyone uses the same strategy for deciding
whether or not to go to the bar the bar will be
either full or empty each night.
• EFBP cannot have a standard, generally
agreed, “rational” solution because:
– If everyone acts rationally. Then everyone will lose.
And the pub will go out of business.
• What society needs. …is for everyone to act
irrationally, in accordance with whatever
personal hunch they have at that time


QUANTS
MATHEMATICAL MODELING OF
HUMANITY
• great undertaking of the 21st
century
• turned the world of content
into math, and turned
investment decisions into math


Prediction using mathematics
The POWER and the S LAW phenomenon, seems to be
applicable to a wide range of currently relevant economic
and technological outcomes, including financial crises,
industrial production, corporate bankruptcies
it can even describe how industry structures evolve.

22

23 23
www.KurzweilAI.net

‘Power curves’

• The power law
phenomenon seems
to be applicable to :
– financial crises,
– industrial production,
– corporate
bankruptcies
– IT spending


“The only function of economic forecasting
(STKI-IT forecasting included)* is to make
astrology look respectable”
John Kenneth Galbraith

* my additions 25

The S-curve Flow of Economics

The Real Financial
Economy Economy
(produces (moves
value) capital)
VALUE:
production
of goods Money/capital
and
services

26

Technologies that changed the way we do things

Productivity changes per hour worked


4 Professors and 1 School
1. Profs. Prescott & Kydland
– REAL ECONOMY CYCLES influenced by the technology
that converts inputs of capital and labor into output of
goods. Technology creates value, changes productivity
and produces cycles

2. Prof. Carlota Peres
– Technological Cycles change “best business practices”
– These cycles create explosive growth and change
– Everything changes: the way we work, live, play
– Technology influences financial markets
28

3. Prof. THOMAS KUHN :
• Real economy and technology advance in a peaceful
way interrupted by violent change revolutions
• PARADIGM SHIFT: A change in world view that calls
everything you know into question and each world
view is replaced by another
4. Prof. Joseph Shumpeter :
• Innovation is the basis of technological change
through “Creative Destruction”
• Markets do not know how to do Price Adjustments
for Technological Innovation
• Produces also Financial Innovation (usually
unregulated) that tend to eventually burst

29

Austrian-School of Economics
government interventions: credit cycle theory
• Governments (central banks) tend to "artificially"
set interest rates too low for too long with wrong
regulations
– Low interest rates tend to stimulate borrowing
– Leading to an unsustainable "monetary boom“
(FRENZY)
– Financial institutions get caught in the frenzy
– Shadow banking system starts to “ease”
movement of money
– "credit crunch" "recession" or "bust" – occurs
when this frenzy cannot be sustained.
30

FRENZY:
success, excess demand and GREED
SUCCESSES ATTRACT
of the new all available money towards
entrepreneurs… the technological revolution

…attracting even more Spectacular
profits

funds and preparing
and growing
capital gains

the inevitable collapse!!!
GREED:
makes many unprofitable Excess demand
projects appear viable… in the stock market
ASSET INFLATION


FIVE TECHNOLOGICAL REVOLUTIONS IN
230 YEARS

32

S curves for Economic progress
DRIVEN BY SUCCESSIVE TECHNOLOGICAL REVOLUTIONS

Technological
progress

Time
40-60 years

33

SOCIAL REVOLT

technology/economic cycles
Austrian
Degree
Perez new
INSTALLATION PERIOD Turning
Point
DEPLOYMENT PERIOD School
of diffusion
of the PARADIGM forecast

Institutional recomposition and role shift
technological
revolution MATURITY
“Creative destruction” SYNERGY Kuhn’s
Defeat of the old “boom”
financial capital
“golden age” to maturity
FRENZY growth and social benefits
production capital
ERUPTION
Schumpeter’s
? Creative
big-bang Next
destruction
big-bang Time
2O - 30 years ??? 2O - 30 years

The Age of Steel
and Heavy The Age of Information Technology
Engineering and Global Telecommunications
The Age of Oil, Automobiles

Bubble, Corporate scandals & 2008 Recession…
and Mass Production
1894-1920
MATURITY
1960-74
SOCIAL UNREST MATURITY

Depression 1930’s and WWII
Social unrest mature industries CHINA Inc.
1943-59 1968-70 to Third World
SYNERGY
Financial Capital Financial Capital
Post war
Regulations Golden Age Regulations
Break down Break down

1920-29
Production Capital 1987-2008
FRENZY FRENZY
New 1971-87
regulations ERUPTION Internet
1908-1920 Roaring Transistors; computers; & Telecoms
ERUPTION Twenties analog instruments; mania
Oil and
automobiles (USA) numerical control

Mass production
ICT Revolution
Crash Bretton Woods 1971 and stagflation Starts with the
1929 Welfare State Intel Internet bubble
1908 Dr. Jimmy Schwarzkopf’s work Copyright 2009©STKI Marshall Plan Micro-processor 2008 Global meltdown
Ford Model-T Do not remove source or attibution from any graphic or portion of graphic

Israel in the Rankings


Amount of ‘big” IT (in Israel) instalations
has decreased in the last 3 years

40

But…. How bad is it?


How bad is this “recession” ?


Job Losses in USA

http://flowingdata.com/about-nathan/


Business survey: Total business sector
Data source: Bank of Israel Research


One of the lowest employment rates in OECD

Israel 2006


But using another stat:
percent fully employed adults

--4%


low per capita ($ USD) IT expenditure

IT spending in Israel is 2.71% of GDP
European Union IT spending is 3.3% of GDP
$ 600 USD <

European Union per capita spending on IT amounts to 1100 €

Dr. Jimmy Schwarzkopf’s work Copyright 2009©STKI 47 * IT spending data by STKI

GDP per hour worked (*5)… excellent
indicator but data is usually 3 years behind

IT Market change

Change in GDP per hour worked (*5)

48
* IT spending data by STKI 48

But in real time: State of the Economy
Index as an “indicator “ of IT investment
State-of-the-
IT market growth rate

economy index is
an indicator for
examining the direction
in which real economic
activity is moving, in
real time. (Bank of
Israel) 1 2

Deviation from the
trend is calculated via
the Markov-switching
model and enables the
turning points in the
business cycle to be
identified at an early
Deviation from the trend (*10) 1 2
stage. (Bank of Israel)

All IT spending data by STKI 49

Glint of Hope for IT Spending in
Second Half of 2009

The ChangeWave survey
was conducted May 11-12
1,939 respondents
involved with
IT spending in their
organization participated


Forecast: Goldman Sachs IT spending


Sales forecasts in USA


-”The world economy has avoided "utter catastrophe“
and industrialized countries could register growth this year”-
May 25, 2009 (Reuters) Nobel Prize-economist Paul Krugman

-”The global economy had come out of "free fall,“
offering hope of incipient recovery late this year”-
May 22, 2009 (Reuters) — OECD

-”The U.S. economy is stabilizing, but has a long way
to go to recover from its current recession “-
May 27, 2009 (Reuters) — Treasury Secretary Timothy Geithner

-”The pace of contraction in world economic
output appears to be easing and recovery
could begin at the end of this year”-
May 22, 2009 (Reuters) — OECD chief Angel Gurria

-”China's economy has already bottomed out from the economic
slowdown and entered a recovery phase ahead of other countries”-
May 22, 2009 (Yomiuri Shimbun) Kwan Chi Hung,
Senior Fellow of the Nomura Institute of Capital Markets Research


Don't get too excited about some
recent brighter economic news
It has been a cheerful couple of days for
those starved of bright economic news.
Hopeful statistics have been trickling
in from many parts of the world.

1.-signs that might point towards the beginning
of the end of the “Great Recession”.
2.-more sober analysis would suggest there is a
long way to go before recovery sets in.

IT market share (%) by INDUSTRY


Industries 2003-2009

All amounts in M$$USD
K USD

How recessions affected IT vendors

59

Recession cost reductions


‫מאז אוקטובר 8002 ועד מרץ 9002, הביקוש לעובדי הייטק ירד‬
‫בכ-%43. בהשוואה למרץ 8002, הביקוש לעובדי הייטק במרץ‬
36%-‫9002 היה נמוך בכ‬


A little history……….

62 62

When is the right time to change??


Frogs forecast “earthquakes”


Post-recession:
Create New Value Proposition ?

66

So what do we do in the “New Era” ?


Business Process Innovation
High
Improve: SURVIVE Innovate : GROW Invent: CHANGE
Business Performance
Contribution to

2012
4Q 2009 2011
2010
2010

2009
Low

Redo Existing Rethink Redefine
Processes Business Business
68

70

“Wealth in the new economy flows directly
from innovation, not optimization”
Kevin Kelly
Wired Magazine

71

Inclusive Knowledge Society with
Multiple Compensatory Safety Mechanisms
20th century: 21st century:
Mass Production Economy Information & Service Economy
DIVERSITY
HOMOGENEITY HYPER SEGMENTED MARKETS:

SEPARATION OF INTEGRATION OF MIND /HAND
MIND AND HAND Knowledge Worker
Blue collar White collar T education

Work TIME and PLACE
of WORK

Revenue, profit Revenue, profit, ROY
and ROI and RISK

UNAVOIDABLE CAPACITY FOR
ENVIRONMENTAL ENVIRONMENTAL
DESTRUCTION PROTECTION


Can you see the difference??
• BEFORE
– We sold “products”
– We “productized” services

• NOW
– We will sell “services”
– We will “servicerize” products


What will happen here?
• pay for service and
get free phone?
• pay for phone and get
free service?
• pay for use of
application and
content and get free
phone and service?


Hyper Segmented Markets
Long Tail Vs. Pareto Law

95.5%

76

Hyper Segmented Markets
Long Tail Vs. Pareto Law

77

No balance between work and leisure (home)
• Prof. Ragnar Frisch
– time the most precious resource an individual has
– very difficult to find balance (impossible)
• Prof. Israel Kizner
– A market with men unable to learn: in other words
COMMODITY PEOPLE… needs a group of outsiders
T PEOPLE who are able to perceive opportunities
– This group of entrepreneurs…notice profit
opportunities that exist because of the initial
ignorance of the original market participants and
that have persisted because of their inability to
learn.
78

People as “commodities”


BLACK SWAN

So the black swan doesn’t have feathers. The black swan
is an event with three properties:

1. its probability is low, based on past knowledge.

2. although its probability is low, when it happens it has a
massive impact.

3. people don’t see it coming before the fact, but after the
fact, everybody saw it coming. So it’s prospectively
unpredictable but retrospectively predictable.


21st century: affects firm performance:
RISK and UNCERTAINTY
Humans cannot understand
uncertainty/risk

Figure out how to measure RISK,
manage it and hold managers accountable for it.
Just as revenue growth, productivity and profit .
83

Enterprise Risk Management
• According to any “new age” theory:

– Management proposes OPTIONS to
the CEO/Board and also shows the
RISKS each of them carries.

– Risk also changes with TIME

– This process is called:

“ENTERPRISE RISK MANAGEMENT”


Development of the
risk management function
1990s 2000s 2010+
Focus on loss Focus on Focus on link to Focus on stakeholder
performance &
Aligned to business drivers

prevention governance & profitability
capital efficiency
reporting Focus on Integrated
alignment to Risk & Value
Focus on risk objectives Management
quantification

Integrated
Performance Management

Institution-Wide
Objectives-oriented Risk Management
Risk Management

Value-at-Risk

Risk Monitoring
& Reporting
Risk Control
Frameworks

Integrated across risks / businesses

Enterprise Risk Management

Customer Demand Shortfall Cost Overruns
24
Accounting Irregularities
Competitive Pressure
Management Issues
M&A Integration Problems
Supply Chain Issues
11
Product Issues
12 Foreign Macro-Economic
Customer Pricing 7 7
7
6 Commodity Prices
6 Loss of Key Customer
4 3 Interest Rates
2
2 1
1 1 1
0 0

Strategic Operational Financial Hazard

58% 31% 6% 0%

Competition in services?
Business Process Improvement
New Business Model

87

CIOs will do BPI in 2009
IT of
Competitor
Value Business
1
ERP captured Process 1 Market
by
verticals

No Real Competitive Sales
difference in value Differentiation Prospect

IT of
Competitor Value Business
ERP captured Process 2
2
by
verticals


CIOs will do BPI in 2009
IT of
Competitor
Value Business
1
ERP captured Process 1 Market
by
Best verticals
Projects
Business
No Real Competitive Sales
difference in value Differentiation
For Prospect

IT of Practices
Competitor
2
ERP Value
captured
by
2009/10
Business
Process 2

verticals


Key challenge for new IT:

Information moves
where needed
and
not
everywhere it can

2009-11: BI and DATA MINING

Data
Warehouse
MDM


Post-recession IT


The IT ecosystem:
COST OF DELIVERING versus COST OF BUYING

Dr. Jimmy Schwarzkopf’s work Copyright 2009©STKI 94 * From SYMANTEC

The IT ecosystem:


Factories get to nearly full utilization….
IT should also…..


Datacenters today have 30% utilization

100s different
Energy waste Software
products

30% max in 25%
Storage utilization
Utilization x86 servers

Ala-carte
telecomm Hundreds of
services Enterprise
Processes 98

Managing the IT capability
• Utilization is all about:
– Virtualization
– Automation
– Standardization
– Provisioning
• Things to do :
– ITIL, CoBIT, ISO 17799 (discipline & efficiency)
– IT system performance management
– Application Rationalization
– AGILE project development

Standardized Equipment
Economies Of Scale

100

Application Rationalization
• An assessment of applications will
show what applications have to
canceled and which should remain.
• If usage continues, then which have
high HATMAA and which do not:
– LOW HATMAA need special tools and
re-training
– HIGH HATMAA need tool for constant
reinforcement
Which applications are over
supported and which under
supported.

Standardized Services
Economies Of Scale

“Application Image” is a sum of
infrastructure services and software
services needed to deliver an IT
product

Two types of IT services:

1. Infrastructure Services or Ensembles
2. Software Services or Mashups

102

Service-Oriented Infrastructures

Infrastructure Services


Service-Oriented Architecture


WOA (mashups) vs SOA: evolution


The MASHUP “dream”
MASHUPS
(BPM) Process Manager

MDM
assembly engine
Master data manager

Enterprise Integration Bus

Front- & Workflow
eBusiness Financial
Backoffice Management
System System
System System
Legacy CRM SCM
System System System


The new Service-Based IT

107

Traditional versus Cloud


Delegating the Power to the Cloud


A huge paradigm shift is underway


Cloud example
CLOUD Services SQL
MAIL Workflow
Access Data
Security Portal
Control
SaaS
ERP

CRM
STKI
drjimmys@gmail.com Raanana Yoni

Mail CUTTER
EDM
jimmy@stki.com DRP*
Hosted at XXX New York Karen

Post-recession:

114

It’s Time for Every Organization to Ask:
“Which Path Will We Choose?”


Computing Platform Lifecycle


Platform vs. Open vs. Reliable
• Obama staffers
could not work:
a "generation" gap
in technology
• Looks like the Bush
administration, like
many organizations
worldwide, used
old reliable
Microsoft


end of commodity hardware
• HP/Dell typically pay $60 to
$150 for Vista
• Can use the older Windows XP
for roughly $15 for netbooks
(until 10/2009)
• HP/Dell make only about $20 in
profits on a $400 netbook
• Windows 7 : pricing from $50 to
$350 (Windows 7 Home Premium $200 )


1980 -2010 Platform Lifecycle


Innovation will come from?


Industry in a Box


Other ecosystems: blackberry


iPhone Ecosystem:
40 million devices and 50,000 applications


Ecosystem:
Information access & analysis
Exploding volumes of 1. Tools for finding and
digital information (video,
audio, images, text,
making sense of the
transactional data, etc) information.
2. Tools for data
cleansing.
3. Tools for minimizing
duplication.
4. Tools for storage
management.
5. Tools for backup
management.
125

Industry in a Box


Industry in a Box Companies


What will they do ?????


Software: M&As expected


66% of HP is hardware (most commodity)
80% of IBM is focused on software and services

Which is the right “NEW” IT vendor business model
???????


Transformation of IT:
CIO priorities for 2009
1. Cost reduction 9. Storage virtualization
2. DRP/BCP 10. Desktop virtualization
3. Server virtualization 11. Data De-duplication
4. Server consolidation 12. Governance, risk
5. BI/DW management and
6. Security compliance
7. CRM 13. Self-service
8. WAN Optimization/ 14. Mainframe
application optimization
acceleration 15. Open Source
134

The new Economy


METAweb: web 3.0
Connecting “INTELLIGENCE”

136

New “search engines”


Post-recession:

138

In a battered economy, free
goods and services online are
more attractive than ever.
METAweb
New
So how can the suppliers make
Business
Model
a business model out of
nothing?
139

WEB 1.0: Media companies put content in the
web and push it to users
.

Low content variety
Content production is slow and expensive

Professional authors Managers
Create content based on what they Hand-manage publishing
think people want businesses
Push! Push!

Users = consumers
Users consume professionally
produced content

140

WEB 2.0: New platforms allow users to
generate content themselves

User generated content High content variety
Blogs, videos, photos, music etc. dramatically increases, while
technical quality goes down.

Authoring platforms
enable everyone to publish!

Web2.0 managers
are hand-managing the
platforms

Professional authors
can still publish, but are competing
with – everyone!

Users = authors
users generate content
141

WEB 2.0 in business


Croudsourcing: Markets 2.0
• Traditional market 1.0 model: Traditional Market 1.0 Model
central organization serving many
individuals
– Large-scale impersonal markets
– Low preference expression
• Market 2.0 model: flexible dynamic Market 2.0 Models

capital allocation systems that provide
democratic, more immediate, low-cost,
affinity-directed capital Many: One
Peer finance

– Benefits to individuals: freedom, One: Many
Affinity purchasing
convenience, preferences articulation
– Benefits to groups: virtual aggregation
of group power to conduct transactions Many: Many
Prediction markets
Peer philanthropy

143

Books you should read: crowdsourcing

144

METAweb = web3.0
user generated (mind) business

A simple idea:

a technology so effective that
every mind can make a living
of its creativity, instantly.


METAweb: Business platforms empower
everyone to become a (media) entrepreneur
Business tools
Full scale media management tools for everyone
User generated content
Blogs, videos, photos, music etc.
User generated business
Premium content, advertising, e-commerce

Authoring platforms Business platforms
enable everyone to publish! Everyone can manage

Publish Build business

Users = entrepreneurs
users generate business!
146

So what are the differences ?

web1.0
web2.0
METAweb
Creation Delivery Management

147

When will be stop “imitating paper”?

The Austin 7 was produced
from 1922 through to 1939
by the Austin Motor Company.

The Karl Benz Patent Motorwagen (or
motorcar), built in 1885, is widely regarded
as the first automobile, that is, a vehicle
designed to be propelled by a motor.


What do I use ????

• No longer need a • Blogs:
memory • IT related
– Google • Economics
– Yahoo • Musical taste:
– Wikipedia – ITunes
– Twitter • Books and others:
– Amazon
• Personal Information • Social Capital
– Smartphone tells me – LinkedIn
about birthdays, phones, – groups
addresses
– Xing
– Facebook
149

Study by Prof. Granovetter shows that
weak links are better than strong
• Strong Links: More
motivation to help you,
since they know you
better
•Weak Links : Likely less
overlap with leads you
can easily get elsewhere

Most job referrals come
through those who we
see rarely: old school
friends, former co-
workers, etc.

Lifecycle of a “social network”


What do you use ?

Social
Technographics™
Josh Bernoff, co-
author of Groundswell

153

Post-meltdown REVOLUTION
4The real, long-term change is just beginning
The revolution may have
to be felt, and anyone thinking about our
started in a garage in California
economic future should consider this:
• access to information is a democratizing
but it has already crossed
forceText here
Your Your Text here

every border
• makes it inexpensive and easy to collaborate
and share information.
moving as freely
• even the smallest companies can now have
around the globe as a cloud
as big a presence online as a multinational
corporation

Thank you

Dr. Jimmy Schwarzkopf

http://drjimmystki.blogspot.com/

jimmy@stki.info

2010 what do we do ?

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