RBS Fiasco – A Harbinger of Things to Come?
Lead Analyst: Cal Braunstein
The Royal Bank of Scotland (RBS) group, which includes NatWest and Ulster Bank, recently experienced a massive week-long outage caused by an IT failure. Retail customers were unable to receive or make payments, thereby greatly impacting people's ability to process wages, mortgages, and other transactions; thereby damaging the bank's and people's reputations. The bank's retail customer account system utilizes CA Inc.'s CA-7 batch scheduling software. What should have been a routine procedure and straightforward upgrade fix by operations staff was unintentionally converted into a major catastrophe.
The story is that an operator running the end-of-day overnight batch cycle accidentally erased the entire scheduling queue. This error required the re-entry of the entire queue – a complex process requiring an in-depth understanding of the core system's processes and detailed knowledge of legacy software. All this had to be completed within the overnight batch processing window, which for most firms is tight and leaves little room for error correction and reruns. This proved to be impossible, especially as pent-up demand and payment instructions built up over time in the queue, causing other RBS systems, such as access to its online banking, to be out of service. Eventually RBS had to rerun the previous day's transactions before new ones could be inputted into the system. The delays and backlog of up to 100 million transactions fed upon themselves extending the outage over multiple days.
RFG notes that many observers pointed the finger at the bank's legacy mainframe systems – both the hardware and software. However, RFG believes this is not the real story. The vast majority of banks run their retail customer account systems using mainframes and legacy software every day and this is a rare event. RBS runs on System z servers, so one cannot claim it is using ancient iron that is outdated.
The real culprits are the bank's processes and personnel management. The multi-year banking crisis that RBS (and others) went through caused the firm to undertake cost cutting measures over the past few years. IT organizations were not exempt from the staffing actions and many of the IT jobs were outsourced to a team in India. Reports state that the person responsible for the error was part of this team but an RBS executive claims otherwise. Outsourced or not, two things are evident: the staff was inexperienced and not adequately trained for the task, and processes and procedures did not exist to quickly identify the problems and correct them rapidly. The issues here are not technology but people and process.
RFG POV: The RBS business environment is not unique. Because of the financial meltdown that began in 2008, banks, other financial institutions, and enterprises of all types have been forced to slice budgets across multiple years and IT budgets are no exception. For many companies this cost cutting continues. However, it does not mean that IT is no longer accountable and responsible for its actions – it has a fiduciary responsibility to keep the business running regardless of the disaster. RBS did not properly staff and/or train its operations crews and did not have appropriate procedures in place to prevent such a failure. In many organizations the procedures are not well documented and smooth operations are dependent upon the institutional knowledge and skills of senior staff and frequently when there are cuts, these high priced administrators/operators are the first to go. IT executives should proceed cautiously when "rightsizing" staff and ensure that key skills and/or institutional knowledge are not being lost in the process. Documentation tends to be an IT Achilles heel. IT executives need to ensure all procedures are well documented, tested, and staff is fully trained on them. As the proverb goes, an ounce of prevention is worth a pound of cure.
Big Buys Shifting Markets
Lead Analyst: Cal Braunstein
Microsoft Corp. announced two acquisitions – for $1.2 billion it bought the enterprise social networking vendor Yammer Inc. and Perceptive Pixel Inc. (PPI), a giant touchscreen maker, for an undisclosed sum. Elsewhere, Dell Inc. said it intends to acquire Quest Software Inc. for $2.4 billion while Ingram Micro Inc. is purchasing BrightPoint Inc. and Micron Technology Inc. is buying Elpida Memory Inc.
Focal Points:
- Microsoft pushed further into the enterprise arena by announcing its intent to purchase Yammer, a cloud services company that provides enterprise social networking, for $1.2 billion. Yammer is a San Francisco-based company with more than five million registered corporate users. Microsoft intends to fold Yammer into its Office Division but the unit will continue to report to the current CEO David Sacks. CEOs Ballmer and Sacks acknowledged Microsoft plans on integrating Yammer's technology with Office, Office 365, Dynamics (CRM) and Skype. Nonetheless, Microsoft will continue to offer Yammer as a standalone cloud service, too. Additionally, Microsoft has acquired Perceptive Pixel, a provider of large multi-touch displays for an undisclosed sum. The company sells 27-, 55-, and 82-inch LCDs and recently announced the first-ever simultaneous pen and touch technology for its devices. Microsoft has not made any statements about its plans for the unit. The New York-based company was founded in 2006 by Jeff Han, a renowned pioneer in multi-touch technology.
- Dell won the bidding war for Quest Software, a provider of access management, data archiving, database, performance and systems tools, with its bid of $2.4 billion. The purchase price was a 44 percent premium to its March 8th closing price – the date when the acquisition talks first began with Insight Venture Partners. Quest is based in Aliso Viejo, CA and, according to Dell, has 3,850 employees of which 1,279 are software engineers in its R&D organization and 1,440 are direct sales representatives. The company also brings along 4,000 channel partners, which were responsible for 40 to 45 percent of sales. Quest had revenues of $858.2 million in 2011, a year-over-year growth rate of 11.9 per cent but net income fell in half to $43.9 million. Gross margins are at 86 percent and the company has more than 100,000 customers worldwide. Once the deal closes, the Quest software should compose approximately 72 percent of Dell's software revenues.
- Ingram Micro spent $840 million for specialist wireless device and services distribution company, BrightPoint. Founded in 1989, BrightPoint had fiscal year 2011 sales of $5.2 billion, up 44 percent year-over-year. The distributor employs 4,000 people in facilities across 24 countries and claims to have 25,000 B2B customers worldwide. Company executives stated the acquisition enabled the firm to achieve its objective of expanding into the mobility market. Meanwhile, Micron acquired the bankrupt and debt-ridden Japanese DRAM manufacturer Elpida for approximately $2.5 billion. The acquisition doubles Micron's DRAM market share to 24 percent, second only to Samsung Group. With this purchase the DRAM supplier market is now limited to three main providers: SK Hynix Inc., Micron, and Samsung.
RFG POV: With Skype and Yammer Microsoft now has some heavyweight brand names in the cloud computing space that it can potentially leverage. These cloud services should help the company sell its other cloud services as well as its other unified communications offerings. However, Yammer will not be part of the upcoming Office 2013 release. When it gets folded into the Office roadmap has yet to be determined. The PPI deal appears to be designed to be incorporated into the Surface tablet product set. What makes this most intriguing is that Microsoft is building its own hardware products and may be planning to become totally vertically integrated. This shift may not sit well with the company's long-time business partners, thereby further narrowing the set of vendors that will offer Windows 8 smartphones and tablets. Microsoft is changing its business model and striking out into uncharted horizons, without ensuring it has its back protected by its channel partners. IT executives need to pay attention to the shifts in the business model and pricing arising from the new strategy so that the enterprise is not caught of guard when contract negotiation time arrives. Dell now has a $1 billion software business that it can add to its hardware products and services offerings. The Quest Software tools mesh well with the Dell brand in that they are good price performers and they are complementary to the other Dell software offerings. IT executives can now expect Dell to claim to be a full-service provider and sell bundled offerings wherever it can. In that software margins tend to be large, Dell can maintain its least-cost image through nicely bundled packages while applying pressure to the software margins of its competitors. IT executives should take advantage of Dell's move into the enterprise software management space. Consolidation continues apace in the channel and supplier markets as well, with the Ingram Micro and Micron purchases. This may be good news for the vendors but it may slow the drop in DRAM prices and may actually allow Ingram Micro to increase their prices through cross- and up-selling and bundling the services. With the base storage technologies of hard drives and DRAM memory consolidating into sets of three providers, the previous glut and drought cycles may be coming to an end and price cutting may become less dramatic. If this occurs, IT executives will end up spending more on storage than previously projected, which could strain budgets.
Trends: HPC, Programming, and Security
Lead Analyst: Cal Braunstein
IBM Corp. regained the top supercomputer ranking with the installation of its "Sequoia" BlueGene/Q beast at Lawrence Livermore National Laboratory (LLNL). According to job listing trends per Indeed.com, PHP and Python adoption is exploding. A recent Symantec Corp. study finds the expanded use of online file sharing is increasing the security risk exposures to small- and medium-sized businesses (SMBs).
Focal Points:
- IBM took back the top slot in the supercomputer rankings with the LLNL Sequoia installation, which delivered 16.32 petaflops of sustained performance running across the 1.57 million PowerPC cores inside the box during a Linpack benchmark run. Sequoia has a peak theoretical performance of 20.1 petaflops. To deliver the 16.32 petaflops IBM claims it only consumes 7.89 megawatts. The IBM supercomputer shifted the K massively parallel Sparc64-VIIIfx machine built by Fujitsu Group for the Japanese government down to number two. The Fujitsu Sparc machine had a sustained Linpack performance of 10.5 petaflops against a peak of 11.3 petaflops but it consumed 12.7 megawatts. Sequoia is 2.5 times as energy efficient as the Sparc K. IBM now has five of the top 10 high performance computing (HPC) engines. 372 of the processors, or 74.4 per cent of those on the list, are based on Intel Corp. Xeon or Itanium processors, down slightly from the 384 HPC machines on the November list. The latest Top 500 list has 58 Power-based processors, up from 49 six months ago. There are also 63 clusters based on Advanced Micro Devices Inc.'s (AMD's) Opteron processors, unchanged from last year.
- According to Indeed.com companies are embracing the Web to reach customers and employees and are therefore turning to the programming languages and technology stacks made popular by companies such as Facebook Inc. and Google Inc. Current programming languages such as C++, Java, and .NET will still be the primary languages for enterprise applications but the scripting languages will dominate the Internet. The below chart produced by Indeed.com shows the variances in job growth rates. Aside from the Internet movement another key reason for the adoption of PHP and Python is the movement to open source. Python appears to be a run-away winner because of its design elegance and framework simplicity. The next most used languages are Java and then .NET.
- Symantec released the findings of its 2011 SMB File Sharing Survey of more than 1,325 SMB organizations this week. The survey results found SMB employees are increasingly adopting unmanaged, personal-use online file sharing solutions without permission from IT. These behaviors are making organizations vulnerable to potential data losses and security threats. A Symantec executive observed that a staggering 71 percent of small businesses that suffer from a cyber attack never recover. 74 percent of respondents who adopted online file sharing did so to improve their productivity. Respondents also cited risk concerns included sharing confidential information using unapproved solutions (44 percent), malware (44 percent), loss of confidential or proprietary information (43 percent), breach of confidential information (41 percent), embarrassment or damage to brand/reputation (37 percent), and violating regulatory rules (34 percent). However, only half of the respondents stated they would go to IT for help with sharing large files while only one-third expressed interest in utilizing an already existing IT solution. 14 percent now report the average shared file size is greater than 1 GB. Additionally, more and more people are remote. The survey found that about 37 percent of SMB organizations will have employees working remotely, up from 32 percent today.
RFG POV: IBM views the HPC market as only one component of the technical computing markets that it is aggressively pursuing. It has almost half of the HPC market but is in second or third place in the other sectors. With Power Systems once again proving their value at the high end, IBM will seek to differentiate itself with both Power and Intel systems in the other markets where Dell Inc. and Hewlett Packard Co. (HP) are the top competitors. Since IT executives can expect IBM and others to market and sell their solutions to end users directly as well as to IT, IT executives should be communicating with peers as to why IT should be involved in the decision-making process. The shift to PHP and Python will continue to gain steam as companies find these solutions are economical and easier to develop and maintain. This may cause religious wars in some organizations. IT executives need to keep staff focused on the business value of solutions and not on protecting legacy domains and skills. While the Symantec study only looked at the SMB organizations, there is also significant unauthorized use of file sharing amongst large enterprises as well. This is not just an IT issue…it is a corporate policy and governance issue and should be address from both angles. IT executives need to take a leadership role in driving awareness of the problem, gaining buy-in from other executives, providing internal solutions, and communicating the challenge and solutions to employees.
On the Mobile Platform Horizon
Microsoft Corp. announced it will brand its own Windows 8 tablet designed to compete with Apple Inc.'s iPad while also offering PC-like flexibly and connectivity. Elsewhere, Apple's new MacBook Pro sheds weight and gains a high-resolution display. Lastly, Research in Motion, Ltd. and Nokia Corp. have their businesses unravel a bit while they try desperately to reinvent themselves.
Focal Points:
- In an announcement that came as a surprise to most observers this week, Microsoft showcased its new Surface tablet design in hardware that will be Microsoft branded. Not to be confused with a tabletop touchscreen design of the same name from the company a few years back, the tablet-sized Surface comes in two flavors running different versions of Windows 8. The mainstream Surface runs Windows 8 RT and is powered by ARM-based processors from Nvidia Corp. while the higher-end version will run Windows 8 Pro and uses Intel Corp. Ivy Bridge processors. Both devices will feature 10.6 inch screens, have built-in kickstands, magnetized screen covers that double as keyboards with a touchpad, and USB ports for connecting to peripherals. The Surface running Windows 8 RT will come in 32 GB and 64 GB storage variants, has dimensions similar to Apple's iPad at 9.3 millimeters thick, weigh 1.5 pounds, and is priced to compete with similar tablets. The Windows 8 Pro version will weigh more and be priced higher than the Windows 8 RT offering and will offer 64 GB and 128 GB storage sizes. Though a firm launch date was not announced, availability for the ARM-based Surface should coincide with the Windows 8 launch in October and the Pro version should begin within a few months thereafter.
- Apple updated its MacBook Pro notebook this week by showcasing a slimline 0.71-inch aluminum unibody design more similar to the MacBook Air than the model it replaces. The MacBook Pro's "showstopper" is the inclusion of a 15.4-inch "retina" high resolution display similar in clarity to those on Apple's latest iPad and iPhone models. Apple has decided to drop its 17-inch display MacBook Pro and is expected to introduce a 13-inch variant with the retina display late this year. Being in the top position in the MacBook line, new models will feature quad-core Intel i7 Ivy Bridge processors, battery life lasting up to a claimed 7.5 hours, memory configurations between 8 GB and 16 GB, solid state disk (SSD) storage in three flavors ranging from 256 GB to 768 GB. As with most Apple hardware designs, the notebooks are not designed to be user-upgradable and require specialized tools to service or upgrade the battery, RAM, and SSD. Pricing starts at $2,199 for the model with a 2.3 gigahertz (GHz) processor, 8 GB RAM, and 256 GB of flash storage.
- Both RIM and Nokia suffered votes of "no confidence" this week as the companies struggle to survive in evolving smartphone and tablet markets. A Toronto-based equipment supplier for RIM announced that it is discontinuing manufacturing services for BlackBerry devices over the next three to six months and will take a $1 billion charge due to unsold equipment. The smartphone company's response was somewhat evasive as it noted making "changes to our supply chain as part of wider efforts to improve the efficiency and cost effectiveness." As RIM continues to prepare for the launch of forthcoming BlackBerry 10-based devices slated for release in October, the company said it will shed around 2,000 jobs – 11 percent of its workforce – to save $1 billion by its 2013 fiscal year. Similarly, Nokia detailed a series of sweeping changes that included shedding 10,000 jobs, reducing research and development efforts, and replacing some senior executives. Moody's Investors Service, Inc. slashed Nokia's credit rating to "junk" after the announcement.
RFG POV: Microsoft's new Surface tablet is a Hail Mary to bolster support for the company's Windows 8 platform across smartphone, tablet, and PC screens. As Windows 8 offers the same Metro UI interface and compatibility for UI designed apps across platforms, the company hopes that the flagship Surface offering will get users and enterprises excited enough to begin adoption en masse. Surface itself is compelling in both Windows 8 RT and Pro variants; however, it is the Pro version with its notebook-replacement capabilities that are the most compelling for enterprise users. Though Microsoft's hardware history is littered with failures including the Kin smartphone and Zune music player, the Surface's design is a compelling one particularly with the inclusion of full-fledged Office apps. The company is way behind competitors Apple and Google, Inc. in developing its app ecosystem and will need to invest heavily in developer subsidies to ensure the mobile devices are a hit. IT executives can hedge their bets by sticking to a pilot of the Pro version only as it supports all mobile and desktop applications and should limit usage of the RT version until use cases prove themselves. Apple's new MacBook Pro is a genuine thing of beauty with its slim all-aluminum casing, large retina display, and extremely portable 4.5 pound weight. The company's push forward with design has removed several desirable features including an on-board optical drive, Ethernet adapter, and Firewire port. Those corporations supporting "bring your own device" (BYOD) philosophies will no doubt see new MacBook Pros in the enterprise, but mainstream enterprises will wish to avoid the notebooks for all but a small percentage of staff. While it is attractive and functional, IT executives will find that enterprise Mac acquisition costs are double those of Windows-based products and that support is more costly and complex given the closed design. Lastly, the continued challenges facing RIM and Nokia are likely just at the precipice of what it holds for the firms. Both lost their thought leadership position years ago, and while BlackBerry still retains a small league of supporters in security-minded firms, Nokia's loyalty is all but gone. Supplier and cash challenges will plague both companies for the foreseeable future and both have their pinned their hopes on glorious rebirths coinciding with the launch of new operating system platforms in the fall. IT executives should recognize that these Phoenixes are highly unlikely to rise from the ashes and while product support and valuable assets including patents and networking technologies may live on, both companies have expiration dates.