SaaS, Opensource and Web 2.0

A fascinating debate is starting to unravel about SaaS and the Opensource movement. (Hat off to Ben Kepes for starting it, as a fellow Kiwi I love seeing this kind of leadership). I really like the analysis and framework used by Sinclair Schuller. I totally agree with his statement that SaaS and Opensource are not mutually exclusive. In fact I think that they are natural bedfellows.

If you buy into Will Price’s analysis, SaaS companies could fundamentally benefit from the support and passion of Opensource development.  If you could reduce the time frame to liquidity from the 1.6x inhouse timeframes by having more developers involved, if you could reduce the amount of capital required by using the Opensource community surely this would be a great thing?

Bob at Smoothspan mentions some questions that would need to be worked out like how do you stop competitors using your code and multi-tenancy / multi version issues.

Bob’s points are valid, but to my mind they represent a dichotomy that exists in the SaaS / web 2.0 world.

“How can operate in a collaborative open world and still make money”

SaaS purports itself to be new world, but it still retains some old world traits.

  • The "secret source is in the code",
  • customer lock in is important",
  • you can’t have unlimited choice.

And frankly all of these are solid business reasons.

But couldn’t it be that the secret source is the customers you have, their satisfaction levels and happiness and willingness to recommend the SaaS to other customers. A critical part of this happiness is them having the ability to take the code and make modifications to it. To my mind one of the benefits of SaaS is ease of customisation.

Not being funny, but if you could get your ERP, CRM or even email customised and running perfectly for your business in a SaaS model using this kind of customisation and the usual plethora of widgets and modules the Opensource community has, why would you want to upgrade? You have the flexibility to change it with your business.

To my mind the key thing for this to happen though is a service delivery platform.

This platform would server as an aggregation point for the Opensource and wider ISV community.

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The benefits of this approach as I see it are:

  • You, as the SaaS company get the speed of development and liquidity benefits mentioned above
  • You, as the SaaS company also get a bunch of smart motivated people who are out there creating the perfect solution for specific verticals (multi-niching), thus making if fit for a much wider group of customers.
  • In some instances this could be the customer submitting their own version of the SaaS application optimised for their business. How powerful would that be? You could even attract SaaS customers into the ecosystem with the promise that if they do submit ‘their version’ they make some money on it.
  • You as the SaaS company get customers promoting the product on your behalf. If you follow the BT Tradespace model to its natural conclusion, you will have people within industry on a forum talking about your product! And this is really powerful as in my experience SMB’s normally don’t know what questions to ask, are under-informed about what the hooks are and completely overwhelmed by the amount of choice available.
  • The other benefits of forums, especially relevant for SMB’s is that they don’t have an IT department, and the way forums run down bugs or ‘how too’ is incredibly important to that segment.
  • If you did the rating thing for modifications or extensions in a Opensource way (check out Joomla.org), it helps when deciding on which  to install.

Force.com (Apex) is close to delivering this type of functionality, the missing bit is the open standards as far as I can tell.

This is all fairly new, I’m sure I’m missing some things out her but I can’t see too much downside

UPDATE: I thought about this more over lunch. If what i say above is true, the downside would be that the current prevailing SaaS model is wrong. The model above is more akin to software virtualisation in its delivery than the one big customised software platform… or am i wrong? 

Is Microsoft under threat?

On the face of it, yip. Microsoft has its challenges.

 

The media hype machine has been in full flight over the last couple of weeks due to two major announcements. Yahoo bought Zimbra and Capgemini gave Google apps a large endorsement by stating it would offer up that suite to its outsourcing customers. Then you’ve got the flack from the EU and the growth of ODF and freemium type services like Facebook and Youtube who offer among other things email.

In the vein of “Nothing makes news like picking on the big guy” here’s a few more links on the subject by Knowledge Wharton, and Times online. 

On top of that they’ve just launched vista. It took $6 billion and 5 years to build, and in launching this it shows a growing gulf between (one part of) Microsoft’s development cycles and the new world reality which is much more now, much more iterative. It also hasn’t exactly been that warmly received by customers I’ve spoken to who are now not only having to contemplate the expense and hassle of the Vista upgrade, they’re also having to upgrade their hardware to support this behemoth.

Then you got the growing SaaS movement, of which Microsoft is a participant. This model clearly challenges the incumbent ISV’s business model. Added to that is the way many SaaS companies are going to market, saying SaaS is the end of Software and that companies like MS are the bad guys.  This Economist article discussed in detail the impact of SaaS on Microsoft and how they we embracing it.

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The most striking thing to me about the article, however was this graph. Look at the gap between the revenue and net income. What this says in simple terms (and correct me if I’m wrong) is that Microsoft is becoming increasingly unprofitable over time. Net income as a percentage of revenue (net profit margin) drops from about 40% in 2000 to about 29% in 2006.

Like I said, on the face of it yes, Microsoft has its challenges. Good.

Nothing galvanises a company more than a good challenge, and personally I think the world is a better place for having MS. I can remember the days when if you changed computers word processor files didn’t interoperate. When you needed to be able to make sense of DOS to actually do anything with the damn things. MS changed all that, some might say in the wrong (proprietary) way, but in general for the betterment of the user experience, and for a reasonable chunk of change.

So, does all this mean the end good times? No I don’t think so for a lot of reasons.

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Firstly Moore’s adoption curve shows that the mass market aren’t going to jump to new services soon (whether they be SaaS, opensource whatever). In fact, what it does show is that only 13% of the market are going to be innovative enough to embrace the technology any time soon (that leaves 87% who aren’t!!). I think people in the blogsphere often forget that there are a bunch of people out there who know very little about technology and hence, are no where close to adopting new technology.

Secondly market penetration / scale. This article by IT Director has some great graphs in it that clearly illustrate just how much dominance MS has. This has two benefits to Microsoft. The first is that there are a bunch of companies out there who have chosen MS as their technology for various reasons, spend a wodge of cash and (by basic human nature) aren’t like to fess up and say “we made a bad decision, buying MS was a mistake”. Businesses are innately conservative, and to that end MS is a solid bet.

Secondly scale. Scale is a really important dynamic an any industry.

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Scale gives you 3 basic things. Access to a market segment that your competitors cannot profitable service (the greyed out area). In a classic dynamic competitors would operate in the left side of this graph above the red line (literally), in a very red ocean. In any market where scale plays out, you normally have one scaled player with 65% of the market, a clear challenger with 20%, and then the rest fighting over the scraps. Scale also allows you to have cost (and therefore profit) advantages. Your unit price is cheaper, you make more. Finally scale makes you the most attractive to the partner community. Everyone wants to play with the dominant player in the market. This in turn has a couple of advantages. If you can, you get exclusivity (or as close to that as possible). You also get the most differentiation (you have the most options after all). By having exclusivity / differentiation you are the most attractive…lo and behold you then keep your scale…. All this is Telco 101. And as I’ve said previously, the best example of SaaS in the world today…is legacy Voice services (IMHO).

MS also has some other advantages. The revenue / net income graph is a little misleading because what it doesn’t show is the different segments, divisions and offerings MS has developed. They have a massive breadth of offering. So when I hear about companies targeting MS my first thought is “which bit”… It’s a pretty large elephant. It’s incredibly important to understand that MS has scale across a large number of offerings, OS, office, server, database, gaming, communications etc. And each of these sub-sectors are at different stages of their maturity and competitive threat. Like I said, attacking MS through Exchange doesn’t mean you are really taking on MS, just the messaging division.

I agree that SaaS plays like the Yahoo / Zimbra are something for MS to take notice off, and adjust too. But as I’ve said before, the web as a platform, SaaS nirvana won’t happen until someone aggregates the services together, until this happens it won’t be a really big threat to MS. And from what I hear, It’s MS themselves who are having a go at doing this aggregation (along with Google of course)

Another reason why the whole of MS isn’t under threat in my opinion is that MS, like all companies (and as its shown numerous times before) has the opportunity to get into even more markets. The ICA is a classic example. Here’s the dynamic. Right now, MS gets nothing of the estimated $1.2 trillion in Telco revenue. So any gain is good for MS. Because MS has no incumbency, no vested interest in maintaining Telco margins, they could rock into the Telco space with …gee I don’t know a soft-phone on every desktop (see the IT Director bit for how many that might be), completely tank the market (or margins), gain 1% of the market and still be a massive winner (I think that’s a cool 10 Billion dollars).

The ICA is a good example of why I think MS will survive a long time. As I mentioned above,MS has shown that it can innovate and keep up over its lifetime. Gaming, the internet, databases, Management platforms, consumer portals, communications. All examples where MS was late (typical incumbent behaviour) but through its sheer market power has been able to win out. And this gets me to what I think MS’s real threat is. The people within the company. The Scobleizer puts it really well

But what is Microsoft doing to stay relevant? It’s like Microsoft has decided to go and spend the inheritance and not do any more work to stay on the bleeding edge…This week I learned another Microsoft employee is leaving to start his own company….These kinds of people keep leaving Microsoft because they see it isn’t living up to its potential and is frustrating to work inside of. It’s more fun to go join a small startup”

Its like that age old saying. Grandfather the entrepreneur, father the playboy, son the pauper. If MS doesn’t keep the culture, drive and vision that made it what it is, if it doesn’t get and keep the right people to do it, then it will be in trouble. The major threat to MS is internal. Sure competitors will come up with new offerings, disruption will occur, regulation and market dynamics and the other vagaries of any business climate will continue to impact them. But hyping up a bit of competition doesn’t constitute a major calamity is in the offering. So in my opinion, MS is here to stay for a while longer.

A Long post, sorry

Platforms, the multipurpose marketing vehicle?

Platform. This has to be the most confusing word used in the whole SaaS ecosystem at the moment. I don’t think I am alone in being a little confused by this, here’s why.

Force.com is a platform (apex and previously appexchange). There's a fair bit of noise about this one currently

Marc Andreesen did this piece on platforms, with the definitionA "platform" is a system that can be programmed and therefore customized by outside developers — users — and in that way, adapted to countless needs and niches that the platform's original developers could not have possibly contemplated, much less had time to accommodate.” And a more simple version

“If you can program it, then it's a platform. If you can't, then it's not.”

Richard MacManus alludes to the entire web being a platform, especially for web 2.0.

Bob at smoothspan has had at least three goes at platform plays (here, here, and one I quite like here). Bob suggests thinking about platforms like this.

A platform provides a framework on which applications written by others can be run.”

Sinclair Schuller at Saasblogs  even does a taxonomy and does a great job of describing the salesforce.com evolution with this statement “Initially, the platform was a robust API that allowed other vendors to tap into Salesforce.com’s powerful application model and build added functionality into it. Later, Salesforce.com moved away from this and created something known as the AppExchange, which became an ecosystem for CRM-aligned SaaS applications built on their platform. Recently, Salesforce announced a new, more powerful platform named Apex that supersedes all previous notions. Notice anything? They called each one of these a platform,
and to some level, rightfully so.”

The problem is, there's not a bunch of consistency in any of these definitions.

So, in the interests of firing up some debate I’ll have a go.

A platform to me is more than a a thing for programming so I don’t really like Marc’s definition, to me, that would be a programming language.

I think platforms do break down, but I think the break down into usage types

I think there are service delivery platforms. The little I know about Apprenda, would indicate that this is an example.

The next type are platforms that provide facilitation. A billing platform would be a good example, especially if this is plugged into another platform. Maestro or paypal are examples.

I think there are development platforms, Facebook and Force.com are these. They provide a ready made ecosystem for app developers. Recent moves by Microsoft would suggest they are heading this way too. Given they’re history with the SDK this is a very real platform

I think Force.com is a special case because it transcends my next category, integration platforms. By creating a platform that makes application integration easy you break down a major headache for customers and hopefully (in Salesforce.com's case) your core product.

I also think that there are single service or core product platforms. One of the most developed of these is voice (POTS). When you think of SaaS and success you really should factor in analogue voice into that. Other examples are the Galileo system.

Finally, I think platforms can be aggregators. Could you call Google a platform? Well kinda, maybe soon.  

The thing is, even this taxonomy don’t really work. What about communications, routing, hardware, storage, mobile device, operating systems….

Perhaps we should try to be a bit more granular, maybe we should step away from the cliché? I don’t know. I do however agree with Sinclair. I think ‘creative marketing’ has meant the term is overused, and that creates confusion.  I’d argue that confusion shouldn’t be the aim if you got something solid to say….

Who will be the aggregators in a SaaS world

I promised myself I’d follow up on a previous post about who will disrupt old world ISV’s. Ben chipped in with some really salient comments which I’ve copied here.

 

Don’t forget to add to your list of companies that might disrupt as those who are in the value chain of the internet, and have every telco, isp and enterprise in the world as customers, and are all looking for more ways to gain revenues from end customers. ie the ones who actually make the internet work. Alcatel-Lucent, Ericson, Cisco,  Nokia. You might think of them as equipment vendors, but one thing is for sure, they know what is happening out there and have access to the network at a control layer that no software company will ever get”

I replied, essentially saying that there is massive potential for dis-intermediation here for Telco’s. Ben answered again with

“That’s right, and like every value chain, there are margins to be squeezed all the way. Who’s to say that the end game isn’t left with only Cisco and Google, and Alcatel and Microsoft, and Ericson and Apple as partners for example. ….. What I can’t see is actually the value that a Telco (or other aggregator for that matter) add to that equation as SaaS standards and protocols make integration of apps and networks seamless to the user” (my emphasis added)

Now I think I addressed the aggregation point with my previous post. In fairness to Ben I think he was talking about aggregation in 1.0 portal sense. Ie you just act as a gate, without reframing the content.

Ben and I dropped into and IM conversation in which we argued about this some. Ben took the position that unless Telco’s shored up their SaaS value proposition they’d get done like a dogs dinner because systems, technologies like widgets would effectively automate the value chain, thus neutralising the value that an aggregator would have. 

I argued against this. Stating things like automation cannot overcome the archaic and undocumented business rules. For example, if you look at different banks lending rules on a mortgage, you will find that 1) they are all different, 2) its not always formal, 3) the system can be circumvented if you know how. 

I also said that aggregators would be able to provide value in an increasingly complex and fragmented world because your everyday business would be overwhelmed by the choice available (if they aren’t already). And that there was real value in someone providing THE application or a shortlist which worked well for xyz vertical. 

So it was with great interest that I saw these two articles this week. The first by David Berlind is about BT’s new SaaS offerings. Clearly showing that an ISP has a play in SaaS. ISP’s are actually in a pretty good place to get into this type of play for a lot of reasons. Apart from the ability to bill, build platforms etc. One other reason has leapt to me over the last week. All ISP’s offer email. And given aggregation is about getting users back to a site again and again so you can offer them more, is there a better way do this than through an application you use 20 times a day? UPDATE; I just picked up this feed about Yahoo acquiring Zimbra. (Looks like the words out in the ISP community…. SaaS is in )

The second, (a bit more abstract) discusses how Google *MAY* buy some US mobile spectrum. This would be classic Telco dis-intermediation. They won’t have the content, they won’t have the identity or billing, and they won’t have the access. Google would become both the ISP and the SaaS provider. A really interesting play, and until I saw this from David Berlind it was out of context for me,

"Perhaps the other question raised by providing services at the onramp (as opposed to along the highway) is to what extent this move by BT and similar moves like it by other ISPs may force Google to engage more deeply in the onramp (ISP) business."

Other aggregation plays exist too. MS Live is one companies attempt to do this on their own. Not many companies have Microsoft’s resources at their disposal so I don’t see tis being that common unless you get an opensource equivalent movement going. 

Salesforce and perhaps Facebook with their Platform as a Service plays could do this if they could insinuate themselves into the value chain and appease the vendors / offer them enough value to do so.

Another aggregation play would be for someone to do the work for a specific vertical. Health, retail, legal etc. They all have some basic needs (horizontal) which are common like HR etc. But then you could as a smaller player do the aggregation for them. This lends itself heavily to the web 2.0 user generated content play because you could then get a community of recommenders and word of mouth working for you. 

Finally, and looping back to Ben's comments. The people that provide the fabric of our communications infrastructure, could partner with ISV's and content providers directly. These guys have potentially more chance to do this than you're average Telco / ISP. This is because of a couple of reasons. They ARE the onramp that David mentions above. Secondly, because just about every Telco / ISP on the globe has followed the global mantra to cut costs by outsourcing. All of the smarts that a Telco think's it owns, aren't really theirs at all….they belong to the likes of Cisco and Alcatel Lucent.  As Ben said, Telco's really need to shore up their value or they are goneburger…..

What are a customers SaaS strategies going to look like?

One of the things I’ve become quite conscious of over the last week or so due to project I’ve been working on is that the preponderance of commentary regarding SaaS is scarily absent of customer input. I’ve been as guilty as the next guy about doing this, so hey mia culpa.

What I mean by that is that there a bunch of stuff that ISV’s have made up like the reasons customers buy SaaS, but not a lot from customers themselves.

Here’s how I got to this realisation.  I was catching up on my reading and saw this from Bob at Smoothspan.

For those Enterprise vendors that still haven’t figured out the SaaS conundrum……  You need to have a SaaS strategy now.” 

But my mind transposed some words (ok I mis-read it ) and I interpreted this as 

“ if you are an enterprise …. You need to have a SaaS strategy”

…. Lights on, ephiphanic moment.

So what are a customers SaaS strategies? (Incidentally I think by answering this I also answer the question of  Has SaaS come of age ?”)

Well first up lets look at what a customer are doing. Right now I don’t think many of them have such a thing as a SaaS strategy. If you are lucky, some will have a IT plan linked to a business plan…and that document might have things like speed to market, reduce costs etc. And those statements might lend themselves to SaaS as a solution to that business problem.

I believe that there are some customers looking for point solutions. As Ben pointed out in a previous post, they have a problem, they find a solution, SaaS may well be the best fit so they solve one business problem with this. Examples of this are plentiful, my current employer is a big SAP house, who choose salesforce.com for its CRM because speed to launch primarily.

Some CIO’s who are embracing SaaS may have a plan to fix the chaos of their IT applications by pursuing a SaaS strategy. That is they’re in a big hole through a bunch of legacy investments, and the way forward to give the business what it demands is to embrace SaaS. Large companies do this in traditional outsourcing, so its not unrealistic to see the same strategy applied here.

Other customers may take a more analytical approach, identify their ‘crown jewels’, even get really clear about what they are as a company, choose which bits of IT are critical to them being that company, and which bits do they not have the resources to manage, aren’t doing well or can give to someone much more skilled. Then over time they will move to a SaaS model. (it doesn’t just mean SaaS is the only option).

Some smaller customers, start-ups, early adopters or SaaS companies themselves may make the leap to have all their applications as SaaS. This is obviously easier if you don’t have to migrate or have a culture that is SaaS ready. And I think you could do it. But you would have to self aggregate the applications together to make this real. And that’s the rub.

Amy Wohl puts it perfectly

There is no possibility that customers, particularly enterprise customers, are going to agree to buy dozens of individual SaaS applications from individual very small vendors and then try to deal with their different user interfaces and APIs to say nothing of how to provide any level of interoperability. “

Under these conditions, its actually impossible to have more than a point solution SaaS engagement. By definition you can't have a strategy at all, only a series of tactical plays.

Until a number of SaaS plays are aggregated together to have a common look and feel, its going to be really difficult to have a SaaS strategy. And for that to happen you are going to need Amy’s B model (SaaS as a platform). If you doubt me, have a think about MS office. In its distinct parts, the individual applications probably aren’t the best in class, but because they are all virtually the same to use and navigate anyone with a bit of nous can figure it out. Don’t believe me? Try to navigate through SAP when your computer based learning is Microsoft centric. Its plain weird, illogical and difficult. Where is Lotus notes now without the other suit of applications?

Another example, if you’ve ever used a Nokia mobile, you know that you can pick up just about any Nokia mobile and drive it. Again, challenged with this concept? Think about that old Nokia gag when you got hold of a mates phone and changed the language to something other than english. If you were smart you could still navigate your way out cos it is all the same!

Ben Kepes found this bit about how ISV's are focusing their attention. Many of them SaaS oriented. I'm willing to bet that they not many have a similar look and feel unless they are build apps to work with existing MS desktop applications.

Ok, I’m labouring the point, but its my belief that until someone starts aggregating SaaS apps together and presenting them in a standard way, SaaS adoption won’t become more than a tactical point solution.

So, Have I answered the question? I think so, Customers SaaS strategies will continue to be point solution based for a while yet. Adoption will be dependant on their needs and risk profile.

 “has SaaS come of age”. Nope, by adding another vendor to the mix like SAP it hasn’t. Does add some credibility to the market tho and that can't hurt.

                                                                                                    

 

Who will disrupt the old World ISV business?

This post kind of builds on my last about blue ocean’s for SaaS and an excellent parallel piece of work by Bob Warfield at Smoothspan on creating game reserves. The problem I have with both of these posts is that they contend that there is old world software companies and new world software companies battling it out to be the winner of the software dollar. (To reinforce this point see the bunch of blogs over the last week which Ben Kepes provides a good summary on if you are interested).

Perhaps because of where I work I’ve got a slightly different perspective. I’m wondering if the companies that are going to disrupt the Software industry are actually ISV’s at all. That is not software companies.

Not many people classify Google as a software company, If you ask, most would say they’re a search company. To quote Bob at Smoothspan

I mean, Google is a frickin’ search company and how hard is it to add search anyway? “

Some would say that Google is an advertising and if you look at their finances its hard to disagree. The thing is, they are massively threatening to software companies (just ask someone at Microsoft). Google have in fact created a blue ocean for themselves.

Other companies not typically on the radar for disrupting software companies revenue are Telco’s. Leveraging their infrastructure, massive customer basis and in some cases their ISP plays, they too can disrupt. Don’t agree? Have a think about email. Why on gods green earth do we pay MS for exchange when there are oooodles of ISP’s offering mail?

Hosting companies like www.Godaddy.com are also doing this.

What about social networks, www.Facebook.com has its applications

In this post Bob Warfield says

“Starting up a new SaaS business inside a big Old World ISV has got to be one of the most difficult Intrapreneurship plays out there.”

This is something that I agree with wholeheartedly. I agree with the fiscal reasons Bob mentions, and would like to add more like:

  • installed customer base inertia – if you ask your installed base, the ones who you successfully convinced to do the inhouse thing (or fooled), they aren’t gonna say to you do SaaS, what a great idea.
  • DNA – you have to think and act very differently when you do services instead of software.
  • Shareholders – imagine if MS or SAP announced to the market that the business model it uses to bring in billions a year is flawed
  • Systems, processes and channels

 

So coming back to the crux of this. I would assert because of all of these factors, and competitive pressures in their home markets, a bunch of other players see the SaaS market as blue ocean and potentially pose a much greater threat to incumbent software companies than new world Software companies.  And because they don’t have to deal with the baggage listed above, aren’t lumbered with the title “Software”, they can focus on the “ as a SERVICE” part of the bargain. And as I’ve said before, to me, that’s what SaaS is all about.

Thoughts?

 Update:  I love this from Bob at Smoothspan   It might take a couple of reads but theres something in it

 

How can you create Blue Oceans with SaaS

Blue Oceans

 

There’s been a couple of interesting posts lately on SaaS, how they can bring down their sales and marketing costs (a really interesting take by Sinclair at SaaSblogs) and a taxonomy of what a SaaS companies value (by Ben Kepes) is. 
To me both posts point to a clear need to differentiate yourself, or to use the parlance of Blue Ocean Strategy, play in the blue ocean (underserved by current market offerings) rather than the red ocean (where you compete on price and bleed).

Sinclair and Ben both point to SaaS offerings that are basically doing the same as existing offerings (SaaS/s , ROF or my preferred version SoSaaS according to Phil Wainwright)

The simple fact is that none of these SaaS plays are doing anything new. They should have a large sales and marketing budget, they are undifferentiated and quite frankly are fighting an uphill battle (I suspect on the back of SaaS business model hype).

So what constitutes a good SaaS play in terms of a startup, investment or a good company to join.

Well here are my 3 cents

1)      The service delivered does something that doesn’t already exist (Sinclair’s swarm based marketing in his post is a great example)

2)      Its something you can sell to an individual and have them make the purchasing decision, not a committee

3)      The implementation isn’t disruptive – no data to move around, nothing to install ideally

4)      Not tied to a geography, can be consumed anywhere there is a network. This is often missed by north American companies but boy do kiwi companies get it

5)      It works well with entrenched software investments

6)      Customers can configure it to their needs

I’d be interested if others think there are more. But to me if you pull this off, you are definitely playing in the blue ocean. Then if you are successful you will get copied  and have to do it all over  again.