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Hi everybody, here we are in Austin, Texas at the 2008 TeleLogic user.

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Would you like to introduce yourself?

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Sure, I'm Scott Hebner and I'm the Vice President of Marketing and Offering Management at Rational.

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The last time we talked was at RSDC, back at the Swan and Dolphin.

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Beginning of June, yeah.

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That's right.

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And I was hoping, in the same way that we sort of like, when we were talking with you there,

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you sort of gave us an overview of the things, the announcements that you had at RSDC.

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Yeah, well I'll tell you, it's been an incredible year just in the transformation of Rational.

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So, first of all, back in February, we celebrated our fifth anniversary of being part of the IBM family.

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Oh, right, because you were acquired in '01.

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That's right.

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The end of '01 is when we announced it and in February of '02 was when it became, you know,

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five years and Rational has gone through, you know, already a pretty significant transformation.

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In fact, it's over three times larger than it was when we first acquired it.

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Right.

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Combination of growth, organic investments such as TeleLogic, right, or inorganic such as TeleLogic,

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as well as organic investments.

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So, we've certainly been looking at transforming what Rational is all about to customers.

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It has really come a long way.

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And if you look at 2008, first of all, we brought on TeleLogic, as you're hearing all about,

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which is a major investment in the so-called systems market.

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And you think about all these products out there that we all use every day.

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Airplanes, automobiles, medical devices, our cell phones, coffee machines, everything.

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Toasters.

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Toasters.

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You know, refrigerators that call for help.

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All these kind of things, the differentiation of those products and the actual innovation in them is coming from the software.

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Rational and TeleLogic is a lot more about expanding what Rational does rather than sort of modifying what it currently does.

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So, they bring us a pretty significant value to the customers that are these manufacturer products that software is becoming a key part of their products.

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More importantly over time though, you think about these products that have software in them are increasingly talking to the systems that run businesses.

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Like an automobile that may understand that its analog brakes or the pads are going low.

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You can call the dealer for help.

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Right.

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And then the dealer notifies you.

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So, you're hooking the product, right, the software, the product to the IT systems that run the business.

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Right, right.

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So, it all comes full circle.

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TeleLogic also brings with it a lot of other really important things for the traditional IT market.

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Also, like the system architect tool which is all about enterprise architecture.

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You know, real strong capabilities and requirements, definition requirements management.

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The thing that occurred was the rollout of the jazz platform.

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Right, right.

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Right.

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And that had been in development for quite some time.

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It has.

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It's been an open development effort.

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You know, in the open sort of like Eclipse was except a little bit more of a, you know, proprietary model behind it.

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But the idea is very similar which is to build this technology in the open, have the customers participate in it.

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Create it around open web standards so that everyone can participate and so that we can build a, you know, an ecosystem of companies that build into it.

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Not just IBM and its partners but also competitors.

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And the goal of jazz is really to help customers implement the business process of software and systems delivery.

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So if you think about most customers, they have a lot of software investments going on.

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Software has become a strategic asset to their business.

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The key to differentiation and innovation as we were talking about before.

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Yet, most customers don't feel they have a very well defined business process in place to help ensure that they're getting the ultimate value out of the investments they make in software.

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Right, right.

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Aligning that software with business priorities that are always evolving and becoming more agile.

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And in order to do that and to really improve the success rate of these software projects, which tend to be under 50%, right?

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Sure.

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Most companies you talk to, most studies show that less than 50% of the software projects actually meet the requirements of the end users or the business.

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Right.

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So there's a lot of improvement there.

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And a lot of it has to do with defining this notion of a business process, right?

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Which allows collaboration, collaboration across all the relevant people, right?

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It's automated so that you can improve productivity and quality, right?

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And you're able to report or measure the progress you're making against certain business outcomes so you can continuously improve.

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It seems like in this sense, the business process you're talking about is sort of the full management of the life cycle from sort of idea to creating the software.

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To maintain it.

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To deploying the software and then like pulling the loop back out and out to maintain it.

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Exactly.

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You think about any important business initiative.

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Right.

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Whether it be customer relationship management or supply chain or processing insurance claims if you're an insurance company.

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Customers have well-defined processes, right?

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You know, they have procedures, policies, decision rights on how to go about being effective with that process.

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And by being able to, you know, facilitate collaboration among the appropriate people at the appropriate time, off real-time information, automating how people work with each other in the workflow.

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Right.

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And being able to measure how it's going so they can continuously improve.

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And that's the foundational pillars of the business process.

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And so what Jazz does at a business value level is it helps provide a services-oriented architecture based on the web protocols that will allow customers to build and define and then adapt a business process on how they go about.

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Right, right, right, right.

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So they bring software that's so key to their business and maintaining that software and prioritizing the investments they make in software against what the business needs.

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And I think that's what's so fundamentally unique about Jazz.

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It really allows you to break down those barriers of organization, the barriers of the infrastructure, and the barriers of, you know, organization, if you will, or distributed people.

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It seems like a lot of the hope for Jazz and what it's geared towards is filling the gap between the raw tools that you use to write software and track requirements and bugs and just the sort of tools, if you will.

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And then there's always sort of, from that perspective over there, there's like the organization with all its concerns and the processes that it's running and everything.

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And then there's more of a connection and all the collaborative stuff to bring not only those two people together and have people working together more effectively across these two different silos, but even within those different groups to sort of pick up the slack for what people are actually doing, for sort of people interactions.

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Right.

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Which is just a more base way, I guess I'm saying, collaboration.

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Ultimately, the lesser collaboration is people working together.

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Collaboration gets the best minds coming to consensus.

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It allows you to make decisions and move quickly once they've been made.

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It allows people to work on a common set of information.

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I mean, how many times have you had a spreadsheet or a document sent to you and you're working with someone else.

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You find out later on that you have different versions and people are updating.

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You have 20 people involved.

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They're all updating different parts of it.

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And, you know, the ability for the system to keep all that in sync.

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Right.

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Increasingly in real time, based on a set of interactive models, right?

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How people are supposed to interact, who has the decision rights and so forth, will just improve productivity.

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It's going to improve the quality.

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It's going to improve the ability to really make sure that you're investing in the right things.

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And it's this notion of having agility, but with confidence.

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You know, be able to move quickly, but have the confidence to know that you have all the right people involved.

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And that you're infusing quality because of the automation.

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You're able to measure it and improve it.

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It's just sort of a more mature way to manage those investments.

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It used to be, and it still is, that an IT organization could be a collection of projects.

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Each project is aligned to a different line of business or a different business user within the company.

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But the holistic view of all those together and how the resources are deployed and what the status of the projects are against the business outcomes.

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Sure.

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And having that dashboard to understand where things are really working or where they're not and being able to adapt.

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Right, right.

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So Jazz gives us that fundamental infrastructure, dynamic infrastructure under the covers to kind of start to integrate the different tools that customers are already using.

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The different skills they're already using and take an incremental, you know, evolutionary approach to getting this all working together.

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Because obviously there's no, you know, you're not going to wake up tomorrow and boom, everything's going to work and you've solved the world.

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We're introducing all these new products.

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We announced 20 of them at the conference back in June, including Rational Team Concert, Rational Quality Manager, Rational Requirements Composer.

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And also the enablement or the integration of Jazz into our flagship products like ClearQuest or Rational Software Architect or BuildForge and so on.

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And as each of these become more jazz savvy, if you will, it gives our customers more of the ability to plug them together, get them to work together in ways that make sense to them.

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Not how we decide to point, point, point to point integrate them, but it gives them more flexibility.

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I think more importantly, it starts to really deliver this notion of it's about the rules, not the tools.

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Sure.

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Right?

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It's not, you know, tools without having a process or having a set of rules on how you interact with each other is not as effective as if you had, you know, the rules.

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In this case, you can think of jazz as being, you know, again, it's a business process engine in many ways.

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Sure, sure.

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It allows you to find that business process, adapt it in a very agile way, and yet allows you to start to integrate things together.

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When you're really abstract about it, it is a services-oriented architecture.

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You know, it is us implementing an SOA infrastructure so that our customers have that flexibility to define and implement a business process.

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Because after all, that's what SOA is all about, right?

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It's business process flexibility and business flexibility.

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Sure.

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So we're announcing all these new products.

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We're integrating our portfolio.

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I think we made a lot of progress there.

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You've got to keep in mind we're coming off a year where we grew 14% year-over-year in 2007, which was a couple times faster than the market.

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We continue to do quite well in 2008.

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And so I think all the engines are coming together and heading in the right direction here.

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Ultimately, we've become more than just a provider of software development tools.

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We've become a provider and a partner to our customers to help them drive greater value out of the investments they're making in software.

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Whether they build the software, whether they buy it, they can package the application like SAP.

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Whether they're outsourcing it, whether they're doing software as a service contracts.

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Right, right.

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It doesn't really matter how you got the software.

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You now need to manage that as a strategic asset.

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I think when the Rational came into IBM five years ago, it was about software development tools.

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Right, right.

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It was about practitioner productivity and automation at the group level, if you will.

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You know, the project group level or at the individual level.

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And obviously, we continue to focus on that, right?

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But we're building up and above that to become more of a strategic partner around the whole notion of managing the investments.

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Right.

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And everything involved in that so-called business process to ensure you're delivering the right software that the business needs.

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As Danny Sava, our general manager, always says, it's not just about building great software.

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It's building the right great software.

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Sure, sure.

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How do you know you're doing the right things for the business when the business needs are always evolving?

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Software becomes more of a company-wide or a more important thing or a more important strategic asset, if you will, to fully load up the adjectives there.

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For a company, I mean, essentially, you get an even stronger version of what we would call enterprise architecture now.

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Right.

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Where there's sort of that role and that concern of, like you were saying, not so much thinking about the development of the software and optimizing the software itself, but fussing about how that software is actually used in the company.

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Right.

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In the same way that you would worry about, you know, optimizing your sales force or optimizing this or aligning, you know, figuring out how you get other parts of the business to be the business.

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It's not just an automation investment.

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It's just, it's not something that automates your business.

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It's really what can really create the differentiation and the innovation of your business, which your competition is beginning to leverage, right?

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Your ability to get into a new market, say, you know, India or China or Luxembourg or whatever, I mean, you think about the way to enter into these markets is heavily dependent on your software, your web presence.

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Right.

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You know, the mobile capability.

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So, I mean, again, we talked about the hard manufactured products before.

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It really is becoming, you know, not to use an over-adjective word, but it's a strategic, you know, kind of investment that customers can get out of these assets.

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Well, you just mentioned about enterprise architecture and making sure you do the right things, not just doing good things, right?

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Right.

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Doing things really well.

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It's sort of the theme that you're going to see us start to really drive in the market this fall into 2009.

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And it's about this notion of helping customers drive differentiation with agility and with confidence.

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Right.

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You have to move quickly, right?

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And to have the confidence to move quickly and that you're doing the right thing and you're delivering the high-quality code.

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Because, again, that's how you get differentiation.

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There's three key pieces to doing that.

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There's the ability to analyze your business and analyze change.

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The second is that you need to drive greater consensus among your line of business leaders and your IT enablers.

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And thirdly, when you have that consensus, you need to make sure that your IT organization is actually delivering the right software with the right quality at the lowest possible cost.

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So take each one of those three.

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When you talk about analyzing change and being able to really get a good feel of what you need to do to be successful in a much more definitive way,

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that's where the enterprise architecture comes in, right?

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The ability to align the IT investments with the business priorities and to be able to analyze change of your business processes, how they work with each other.

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If you change this one, how does it affect that one?

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You know, you can model the effect of change on your business outcome.

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You can be more predictive about the impact that IT would have on the business, right?

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Exactly.

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So you can explore different options that you have without actually taking the risk of really making those changes.

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That's where products like Tel Logic System Architect comes in, right?

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And you'll see us focusing a lot on that.

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The second one about the line of business leader and the IT enabling organization to become more integrated or more, you know, drive greater consensus.

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More friendly with each other.

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Yeah.

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At least a mind meld, right?

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Right.

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It's one of the same priorities.

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And that's where the importance of collaboration comes around the line of business leaders, the business analysts, and the IT organizations, and the operational team.

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So how do you drive collaboration among all the right people to make the right decisions and to really begin to define the right requirements?

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A lot of customers have requirements management software, right?

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And management of the requirements to make sure they get implemented.

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But they all feel from what I've been hearing and what we see in the market data is that they want to take a much bigger role in defining the requirements in the first place.

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Right, right.

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To meet the right requirements in a much greater degree of granularity.

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Right.

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In fact, I saw a recent survey where 50% of customers were unhappy with the results of their outsourced software project.

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And, you know, and that's probably not because the outsourcer didn't do a good job.

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It's probably because of the requirements in the service level agreements.

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Right, right.

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People having difficulty expressing what they want is what it gets down to.

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Exactly.

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So how do you really start to express what you really need, what you really want?

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Right.

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It first takes the consensus among the business leaders and the IT and the operations people on what really can be done at that level of granularity.

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What we're going to be driving in that space is this new offering called Requirements Composer.

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Right.

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Which is another jazz-based offering.

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So it gives you the three tenets that we talked about before of a business process, right?

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Drives the collaboration increasingly in real time.

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It automates how you interact with each other.

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Sure.

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To improve productivity and the quality of what comes out.

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And they're able to kind of measure and report against progress against certain metrics or business outcomes.

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And then track that you actually got what you want and people are executing against that.

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And then something's happening.

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Right.

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So you take that requirements definition capability that this jazz-based requirements composer provides.

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And then you integrate that with what we have with Requisite Pro and with Tail Logic Doors.

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Right.

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Right.

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Which then is integrated into the broader application lifecycle management platform.

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I think we have a pretty strong story on how we can help customers really make sure they're getting the right requirements into this.

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The third one is, okay, once you've got the requirements defined, then you need the IT organization to actually deliver.

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You need to actually do the work.

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Do the work with quality.

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Right.

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Lower cost.

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With greater predictability.

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And that's where the automation really becomes important, right?

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Of this business process, you know.

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How do you make the decisions on what to do?

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What bugs?

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You know, what do you prioritize?

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Who has the decision rights?

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Right?

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All that manual stuff today that's somewhat error-prone could be automated.

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Right.

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Proved quality.

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It gets you more results sooner because you're eliminating a lot of, you know, wasted work and rework.

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And then, again, the ability to measure in real time against progress against what you're trying to achieve.

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So the ability to automate, drive greater collaboration, and the whole reporting of the application lifecycle management infrastructure

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in the software development or software sourcing process, if you will.

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Right.

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It's really key.

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And that's where products like ClearQuest, ClearCase, you know, Rational Team Concert, Rational BuildFords, Rational Asset Manager.

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Right, right.

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The production side.

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The production side.

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The production side.

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Further integrated and further enabled to this process, this dynamic process engine.

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Right.

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So they're all being jazz enabled.

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So now they can be integrated more effectively.

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That's going to drive a greater degree of confidence that the IT organization can deliver on the requirements that the business has defined through the requirements definition and composing.

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Right.

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Which is really based on the bigger plan of how to deploy the IT resources that the enterprise architecture has helped you define after you analyze the challenge.

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Right.

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So you take those three major things, the enterprise architecture and really driving, you know, a better ability to analyze what needs to be done and deploy those resources.

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And then being able to really tune in on what the requirements need to be and consensus across all the right people.

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And then you help automate and help drive a greater degree of discipline in the actual execution or, as you said, the production teams.

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Right.

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Those three things can help, you know, go back to the top level message, which was, you know, delivering that differentiation for your business with greater agility, you know, and with more confidence that you're doing the right thing.

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The whole big wrapper around that is, you know, achieving greater value from the investments you're making in software.

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Right, right.

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That's why you go through all the three rungs of trouble to get to actually something that's actually, like, that's profitable for you, essentially.

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Right.

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That does what you want.

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Contrast that from five years ago when we were talking about Rational.

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It was about software development productivity.

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Absolutely.

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Right.

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It was about your project teams being more effective in producing higher quality.

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Right.

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And then it was about requirement management.

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I mean, it was about the production side of things.

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Right.

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Because you titled it, which I think is appropriate, right, is about being more effective in producing it.

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And now we're sort of adding to that, not only helping you do it well, but actually doing the right thing.

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Right, right.

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So a good example of this is one of the hottest markets out there today, which is application compliance, particularly around security mandates.

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Right.

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Which are very industry vertical.

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So one good example of this is the payment credit card industry standard or PCI.

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Sure, sure.

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So any business in the world that allows credit card transactions on their website, right, in any country.

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So it's Visa, MasterCard, Discover, and Amex, American Express, that are managing this mandate, have to be PCI compliant or they will either fine you or revoke your credit card privileges.

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Right.

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And so I think there's a lot of customers out there running around saying, well, you know, when they get their letter from Visa, which by the way, that IT person doesn't get the letter.

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It's the business guy saying, you know, we're going to fine you $500,000 if you're not PCI compliant.

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Right.

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And so they run around, well, what is PCI?

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Do I have a problem, right?

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I mean, it's the fear of the mandates in the environment that hackers have produced, not necessarily the hackers.

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Sure, sure.

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It's a business thing.

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And so what we're finding is customers are doubling down on making sure that they're implementing these protective compliance mandates like PCI, like HIPAA and healthcare, like the Federal Information Securities Act if you're in banking.

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Right.

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They're all, you know, the Child Protection Act.

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And so they're starting to implement those now.

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But what they're finding that is that if you try to make those updates after it's been deployed, it can cost you up to $16,000 per defect.

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Right.

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Where as low as $25 if you do it earlier in the development cycle, perhaps when the developer is actually programming, right?

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Sure.

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And so that's a good example of really having a business outcome in mind when you're developing the software.

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What's it going to be used for in thinking about things like compliance mandates?

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Because not only do you lower the risk to the business by doing that, but you're going to lower the cost because ultimately you're going to have to, you know, make sure it's secure and compliant.

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I think compliance is a great example of the kind of like very pure requirement, if you will, that's imposed on software that has nothing at all to do with sort of the technology behind it.

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And it's often difficult to get to something as sort of a purely business oriented, if you will, and that has such a strict deadline.

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It's such an imperative to get it done as compliance.

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I think customers are starting to drive the implementation of these protective mandates for business reasons as much as the big old bad hacker going to come steal data.

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Sure, sure.

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And again, that goes back to really having a business outcome in mind as you prioritize your software development investments because if you start thinking in that mindset, you're going to start thinking that compliance and energy efficiency would be, you know, the whole green thing would be another example.

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Think about that earlier and earlier in your requirements cycle and therefore your development cycle.

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Right.

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Because ultimately, if you try to address it later in the cycle, it's just going to cost you more and more money.

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It sounds like there's an exciting sort of year ahead of you guys then.

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Yeah.

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That'll be fun stuff.

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Well, great.

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Well, thanks for taking all this time to talk with us.

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You bet.

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The sort of grand tour update.

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I look forward to six months again.

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That's right.

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Well, we'll talk to you soon.