The Yankee Group's Howard Anderson, unplugged!

Howard Anderson is the outspoken president of the Yankee Group, a teacher at MIT, and a venture capitalist. In this candid interview, Anderson shares his strong opinions about where businesses are headed in an Internet economy.

There are a lot of adjectives you could use to describe Howard Anderson, but “inhibited” is not one of them. As you may know, Anderson is president and founder of The Yankee Group, an IT research and advisory services firm that works with technology vendors and business. In this no-holds-barred TechRepublic Interview, Anderson details his views on the major issues facing CIOs today: Y2K, venture capital, the Internet in general, and e-Commerce in particular. Along the way, Anderson explains how the Internet divides companies into attackers, defenders, arms merchants, andcustomers. Where does that put your firm? Read on to find out.

Life at The Yankee Group
TR: How does one get to be president of an organization like The Yankee Group?
Anderson: You start it. I founded The Yankee Group. I was a 24-year-old kid out of the Harvard Business School, and I figured that I was unemployable, so I’d better start a company.

TR: Was it called The Yankee Group then?
Anderson: From day one.

TR: Did it have the same mission then as it does now?
Anderson: The mission changed. We were doing general consulting and then, a couple of years later, we started to concentrate just on technology and communications.

TR: How do you describe your mission statement now?
Anderson: World domination.

TR: How about something more day-to-day?
Anderson: Our job is to help the users of technology understand the new technology. Our job is to help the vendors of technology understand what the users do, and essentially be a front-end processor and an information switch. In some cases, our job is to demystify. Demystify the vendors to the users, the users to the vendors, the users to each other, and the vendors to each other.

TR: Did you have a mentor in your career?
Anderson: Nope. Mentors are highly overrated. You ought to rely on no one but yourself. The idea that a mentor takes you under his wing and gives you advice, I don’t believe it, and I think it’s fallacious.

TR: When you went to Comdex this year—where so many new products were introduced—did you personally learn anything new?
Anderson: No. First of all, we were presenting. It is always difficult to learn if your mouth is open.

TR: How about learning about new technology?
Anderson: No. By the time it hits COMDEX, Yankee Group should have assimilated the technology and begun to form some opinions. What it does do is reaffirm your biases, for example, “Yes, shrink-wrap software is dead.” We knew that. “Everything is the Web.” We knew that. “The Web is going to get better because tons of money is going into making it more effective.” We knew that. I go to COMDEX to see what the reactions are, as opposed to picking up on any single new technology.

About that Y2K problem…
TR: Speaking of technology, on Dec. 31 and Jan. 1, do you think business’ technology departments should be staffed?
Anderson: No. Put a few people there, but this is the biggest—how am I going to say this politely?—mind f—- that I’ve seen in my life.

TR: That’s polite!
Anderson: Y2K is a $600 billion problem. Where did that number come from? It came from a few misguided souls at [another analyst group] who figured out there were a trillion lines of mainframe code in the U.S. and a trillion frames of mainframe code overseas, and that each of these was going to take $.30 per line to look at and make Y2K compliant. In fact, it never was that big a problem. What has happened is that senior IT executives, realizing a good thing when they saw it, got extra funding from corporate to handle Y2K. Now what they actually did was work that they couldn’t get passed under the conventional budget, and they called it Y2K. If you give a two-year-old a hammer, everything looks like a nail.

So what has happened is that funding is over, and in fact it’s going to be kind of a big hullabaloo about nothing. Now there are some good parts about Y2K. By looking at a common enemy, the corporations began to cooperate. Oh, how the Internet changes everything.

TR: What do you see as the opportunity of the Internet?
Anderson: The new world is going to be comprised of four groups: attackers, defenders, arms merchants, and customers. If I am an attacker, I can use the Internet to get a very lofty place very quickly. If I am a defender, the Internet becomes essentially how I’m going to be attacked or the way that I’m going to counter-attack. Half the revenue from Otis comes from servicing elevators. Suppose another company says, I can service your Otis elevator and I can put sensors in those elevators that will jump on the Internet and tell me how the elevators are performing so I can repair them before they break. Well, if the attackers can do that, then the defenders in this case, bricks-and-mortar kinds of companies like Otis, had better do it first. The Internet essentially allows you to become a counter-attacker to defend yourself against attackers.

TR: What’s the arms merchant?
Anderson: The arms merchants are the companies that make the equipment that make it work. For example, Akami makes the Web work better. It puts a thousand servers out there, not one, so that your network doesn’t crash. There’s also Cisco, Sun, all the people that build the infrastructure.

TR: And customers are the fourth group?
Anderson. Yes, customers. It used to be if I offered poor service, someone might tell their five best friends. Now if I offer poor service, they can tell their 50,000 best friends. There is perfect market knowledge on the Internet. In the past, whole industries existed because of imperfect market knowledge. Now there’s perfect market knowledge. If I want a mortgage today, I don’t just go down to the three banks down the street from me. I can put my mortgage up for bid, and ANC Bank in Sydney, Australia, may buy it. So customers—business as well as consumers—have unprecedented access to the world, and the world to them.

TR: What do you see for the e-commerce scene for the next few years?
Anderson: There’s about 500 venture capital funds, and I expect easily a quarter of their investments to be in e-commerce, Internet, whatever. So let’s assume that’s going to be $5 billion a year.

TR: Have these companies figured out how to make money on their Web sites?
Anderson: No. It’s the largest amateur night in the history of technology.

TR: When do you predict that might change? When are they going to “get it”?
Anderson: They may never get it, but they may be bought out before they ever have to get it.

TR: By someone who does get it?
Anderson: Maybe. What the Internet’s turning into is seven keiretsu.

TR: What does that mean?
Anderson: I’ll give you an example and then I’ll explain it. The Sumatomo keiretsu in Japan: Sumatomo Ocean Freight, Sumatomo Marine Insurance, Sumatomo Bank, Sumatomo Heavy Industries, and NEC, which is Nippon Electric Corp. These companies all do business together. One owns 20 percent of the other. The other one owns 15 percent of the third. The third has their president sit on the other guy’s board. It’s a loose affiliation of corporations, and they do a powerful amount of business with each other. Now that’s the Japanese model. In the U.S. model, you’re going to see keiretsus like Kleiner Perkins and others. AOL is its own keiretsu.

TR: Would General Electric be part of that?
Anderson: No, Not quite. But what GE does now is tell every one of their managers that their compensation package depends on their having a viable Internet strategy. The key operative phrase inside of GE these days is DYOB: Destroy Your Own Business. This means that on top of your regular business—be it locomotives or light bulbs or capital—go build new businesses that are Internet-driven, even if those new businesses look like they’re going to poach from the old one.

TR: Is that what CIOs are going to be most concerned about in the next year to two years?
Anderson: Yep. CIOs are the victims and masters of double talk. On one hand, they play defense, which is, “I’ve got to protect my bricks-and-mortars. I’ve got to drive cost down.” On the other hand, their divisions are saying, “We’ve got to go build these new businesses.” So the CIO essentially sits in the middle, and he doesn’t know [what to do]. The real issue is, “What do I do here?” It’s usually the line-of-business manager who is pushing Internet strategy, not the CIO. After he decides what he is going to do, then the CIO comes in and tries to rationalize all the initiatives.

Let’s take the plastics division of GE, which itself is a $7 billion company. What should GE be doing within plastics? Do they have 10 initiatives? Do they have one initiative? Do they have 200 initiatives? Someone has to say, “We’ve got to find an applications development platform. Can we use a lot of this data we already have as opposed to just letting it sit out there? Can we use data mining?” I’ll give you an example. Let’s say GE is selling a new plastic resin to Wilson Sporting Goods to put in football helmets. In the old days, the salesman would go out with a little sample. Now, what he wants to do is have that engineer at Wilson jump on the Internet, look at the different chemical formulations, look at how they resist scratching and temperatures from -30º to 120º, so that they can begin to put that new plastic in the next generation helmet. Now that’s just one initiative of maybe 40 or 50 inside of GE. It’s that special programming. How do I do the data mining? How do I find the people who might be using Dupont resins and begin to substitute them for GE resins?

TR: Is data mining, then, one of the top things that CIOs will be most concerned about?
Anderson: Sure. That’s where I want to go to my CIO and say, “I’ve got all these initiatives and I need a data mining strategy. Is my data in the right form or should it be expressed in furlongs as opposed to customers uses or whatever.” That’s where the CIO can be of some help.

How the Internet affects traditional businesses
TR: You once said that the Internet is the major problem facing businesses today.
Anderson: Yeah. It’s also a major opportunity.

TR: Why do you call it a problem?

Anderson: Because my business can be destroyed by the Internet, and it can happen almost overnight. It doesn’t take too much to destroy it. Let’s take a bricks-and-mortar company that’s in retailing. In my retailing sector, whatever it is, could the e-tailers take 5 percent of my business? Yes. Well, if they can take 5 percent of my business over the next three years, how does that affect the bottom line? Well, it could probably take 20 percent off my bottom line. If it takes 20 percent of my bottom line, then what happens to my debt rating? What happens to my earnings per share? When will the Wall Street analysts begin to grade me not just on the amount and quality of my earnings, but on how much of my earnings are coming in because of the Internet? So you’re damn right it’s scary.

TR: Do you see companies where this has actually happened?
Anderson: You got the question wrong.

TR: Who hasn’t it happened to?
Anderson: It scares the hell out of everybody. I used to think that this was a conversation I would have once in a while. [But] I have one conversation a day on this subject, and it starts at 8:00 A.M. and it goes until 6:00 P.M. Every company I deal with, every company, is aware of and solving the problem.

What happens is that big companies go through four stages. Stage one: denial. “It can’t really affect us.” Then they turn around and say, “Our business is still pretty good, but look at these young upstarts.”

The next thing they go through is the second stage, which is anger, saying, “How could some of our customers leave us? Aren’t we doing a good job?” Let’s take E*trade, for example. I’m Merrill Lynch: “Yeah, I still kept Howard Anderson as a customer, but I’m kind of noticing that we’re not doing quite as much business with him anymore.” If they called me up I would say, “I kept my Merrill Lynch account. I’ve also opened an account at Charles Schwab, but Charles Schwab doesn’t do all my trades. But if it’s a straightforward decision, I can do my trades on Schwab.”

The third stage is grudging acceptance, which is, “Okay, my board of directors is on my ass, so I’ve got to do something. Okay, let’s have a Web strategy, but let’s not make it too good. Let’s hobble it because we don’t want it to encroach on our regular business.” Then what happens is, I’ve taken my boring catalog and now it’s a boring Web site, and no one comes.

Stage four is kind of giddy capitulation, which is, “Okay, we’ve got to go do something really remarkable here, and we’ve got to do it right away.” It’s about a three-year process to go through those four stages.

TR: What will some of the other concerns of CIOs be?
Anderson: Networks. Can my network handle it? Security is probably a minor concern. It was a major one a few years ago.

TR: Where do you see us winding up with all of this in the next 10 years?
Anderson: You’ve got three choices if you’re a big company. Choice one, and let’s call it the Merrill Lynch model: Do as little as possible as loudly as possible. Second choice, the Bank One strategy, which is to say, “Let’s go build our competitor ourselves and let them poach on our regular business and the market will decide. But, we’re not going to hobble our Internet strategy because we want to protect our bricks-and-mortar strategy.” The third model is the E-Schwab strategy: “I’m essentially going to destroy my old business and build a new one, and there’s no going back.” Those are three options companies have.

TR: Then that’s what’s going to shake out over the next 10 years?
Anderson: Yep.

What he does in his spare time…
TR: We’re setting a record rate for venture capital funding.
Anderson: Yeah, I know. I’m part of that industry. I’ve just raised a new fund for an incubator of new technologies in Cambridge. We’ve raised $50 million, mostly from the venture capital industry. In fact, the location is right next to MIT, where I teach. I’m also the founder of Battery Ventures, one of the larger venture funds.

TR: Since Internet startups are getting record amounts of venture capital money, do you see that trend continuing into 2000?
Anderson: Yep.

TR: And 2001?
Anderson: Sure. The returns are fantastic. We, being Battery where I’m a partner, put $5 million in Akami, that company I just mentioned, 15 months ago. What do you think it’s worth today?

TR: More than it was then?
Anderson: Two billion. So with returns like that, the pensions can’t give us money fast enough.

TR: What do you teach at MIT?
Anderson: “Entrepreneurs and the Internet.” I teach how to start new companies on the Internet. They told me the other day that I am now endowed. I asked them if I was well endowed, but they said no, just "endowed," Howard. That’s really the first professorship that MIT has gotten from the new economy. William Porter [founder and chairman, E*Trade] donated $25 million, and I have the endowed chair.

TR: What’s the chair called?
Anderson: The William Porter distinguished pooh-bah at the Sloan School of MIT.

About The Yankee Group
The Yankee Group is an IT research and advisory service focusing on analysis of the IT industry, helping clients with strategic planning, and forecasting of technology issues. It also conducts IT-related seminars and conferences. The Yankee Group analyzes the key IT experiences and research data generated by surveying hundreds of client companies. Headquartered in Boston, the Yankee Group has offices worldwide.
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