The Dynamics of A Software House’s One-Shot Growth
Wei-Yang Wang Ya-tsai Tseng
Department of Management Information Department of Business Administration,
System, Tunghai University, Taichung, 407,
National Kaohsiung University of Taiwan.
Applied Sciences 886-4-23590121 ext 3506
wyang@ cc.kuas.edu.tw yttseng@ mail.thu.edu.tw
Abstract
The pattern of one-shot growth is most seen in software industry. The purpose of this
paper is to understand the growth dynamics of a software house and to facilitate the
software house to manage its growth. This paper models a major domestic ERP
software house in Taiwan that is experiencing the one-shot growth process. Business
type-level packages and high quality service is the company’s secrets for its success.
With a good reputation for high quality systems and services, the company’s growth
strategy is to expand the market it serves by developing new kinds of packages for
more business types. However, how to balance the human resources requirements of
R&D sector and ERP project service for customers is rather difficult when long delays
exist everywhere in a software house. With the system dynamics model built, this
paper illustrates how the one-shot growth pattern is generated by the misallocation of
human resources in the process of quick expansions.
Introduction
Software industry is getting more and more attentions for its important role in
facilitating the development of knowledge economics. The market for various kinds
of software has been dramatically growing in recent years. Intuitively, it seems that
the high market growth rate of software requirements represents a high profit for
software houses. However, the fact is the survivals of most software houses are so
difficult that only 19% of them can survive for more than one year. And most of those
software houses that survive are diminished in a few years later (Giarratana, 2004).
The pattern of one-shot growth is most seen in software industry. Some researches
even claimed that only one or two software houses are to stay in the market
(Nambisan, 2002; Giarratana, 2004; Bernroider, 2002).
Some difficulties challenging the management of a software house is essential in
the software industry. Low entry costs and increasing marginal returns of software as
information goods consistently attract new comers into the software industry. New
comers can often eam a lot of revenues easily and quickly because of the high market
demands. But the growth of a software house’s revenue is hard to be sustained, for
global competitions, high knowledge-intensive, and rapid innovations and short life
cycle of software are contributing to the managerial complexity. In other words, for a
software house, entering the software market is just only the first step. How to deal
with the managerial complexity accompanying its growth is a more serious agenda.
Rather than discussing the formulation and implementation of growth strategies
that is general to all types of software houses or even to all kinds of industries, this
paper chooses to answer the question of how to manage a software house’s growth by
modeling the specific process that a software company has been experiencing. The
purpose of this paper is to understand the growth dynamics of a software house and to
facilitate the software house to overcome the one-shot growth problem. This paper
models a major domestic ERP (Enterprise Resources Planning) software house,
Company HAN in Taiwan. Like ERP software houses in other countries, Company
HAN faces severe competitions with world famous software companies as SAP and
Oracle. Rather than targeting on big business customers to sell expensive packages
with minor customizations, Company HAN is focus on SMEs market. Company HAN
penetrates into different industries by designing ERP systems that take into account
the industrial differences and develops specific ERP packages for different types of
business in the selected industry market. For example, one of the most successful
industry market Company HAN has is the textile industry. Company HAN develops a
series of ERP packages for each type of businesses at each stage in the textile supply
chain, including yarn spinning, weaving, finishing and dyeing, and cutting and sewing.
Because of Company HAN’s attitude in serving its customer with high quality
software packages and services, 50% to 60% customers keep good relationships with
Company HAN. While global software houses as SAP and Oracle are competing for
the big electronic and computer industry or other high technology industry customers
in Taiwan, Company HAN successfully eams its reputations for high quality packages
and good services in several traditional industries (ex. textile industry, steel industry,
and mechanical industry).
Company HAN started to operation at year 1996 and was indeed successful and
maintained high net income in the first three year. However, Company HAN is now
experiencing the so-called “one-shot growth” process. The growth of its net income is
stagnated and even started to fall from year 2003. With the system dynamics model
built in this paper, it is found that the growth dynamics of Company HAN is mainly
influenced by the interactions among marketing strategy, the R&D policy, and the
human resource management policy. Business type-specific packages and high quality
service is Company HAN’s secret of its success. With a good reputation it earns,
Company HAN’s growth strategy is to expand the market it can serve by developing
new kinds of packages for more business types. However, how to balance the human
resources requirements of R&D projects for developing new packages and the ERP
projects to offer customer timely and high quality services is rather difficult when
long delays exists everywhere in a software house. The following section details the
model structure built in this paper to explore the on-shot growth phenomenon. Some
simulations are experimented and suggestions for the company to overcome the
one-shot growth are proposed in later sections.
The Model structure
With more than ten interviews with the CEO, marketing manager, several staffs
including programmers, system designers, and system analysts in Company HAN
individually in six months, a model describing what Company HAN has been
experiencing is built. All the variables and relationships are extracted from the three
interviewees’ verbal descriptions and have been accepted. The complete model
structure has been communicated major with CEO using both qualitative and
quantitative diagrams during the modeling process and after the model is completed.
The CEO is surprised to see a model precisely capturing their experiences. For the firs
time, the CEO clearly gets the whole picture of how the company operates and
realizes how the emphasis on R&D policy in human resources allocation leads to
downturn of the company’s profitability. In this paper, we first explain the model
structure and then discuss the simulation results to demonstrate the dynamics of
one-shot growth experienced by the company.
Figure 1 is the model’s overview. The model contains three major sectors.
Customer Projects Sector describes Company HAN’s attitude towards its target
market and those various kinds of projects it serves to customers. Package
Development Sector is about planning process to penetrate into new markets and
research and development process to develop new software packages to serve those
planned markets. Human Resource Sector abstracts the most critical human resources
in a software house. That is, consultants, programmers, and system analysts. Figure 1
illustrates the three major sectors and corresponding level variables. There are
interlocked relationships among the three sectors. For example, the target number of
business types to penetrate in Package Development Sector calls for the initiation of
specialized design projects in the Customer Projects Sector to investigate business
knowledge and accumulate related software experiences. With enough experiences
about specific new business types, new R&D projects are initiated to develop new
software packages for more business types. Besides, human resources required to
complete tasks in Customer Projects Sector and Package Development Sector are
reflected in the hiring policy modeled in Human Resources Sector. Further, through
the critical human resource allocation policy separated from Human Resource Sector,
customer projects and R&D projects acquire human resources with different priorities
set by Company HAN. Besides, revenues generated from Customer Projects Sector
also impact the company’s market expansion plan and its hiring policy. The three
sectors and human resources allocation policy are interlocked to generate positive and
negative loops. Following, the model structure is detailed.
Human Resource
Allocation Policy
Figure 1 the model’s overview
The customer projects sector
Figure 2 demonstrates the relationships between Company HAN and its
customers. Company HAN offers three kinds of ERP projects to customers. Package
projects are standard packages with minimal customizations. If customization is
needed for specific operational requirements after proper evaluations, an enhanced
project based on standard packages would be proposed to customers. Unlike package
projects and enhanced projects that contribute to Company HAN’s major revenues,
specialized-design projects are expected to accumulate required experiences and
“Average time to complete
anordinary project,
Figure 2 the customer projects sector
industrial knowledge about the new business types that Company HAN wants to step
into. In evaluating specialized-design projects, only those customers whose business
types or industrial characteristics are consistent with the new types of businesses that
the company attempts to penetrate will be accepted as specialized design projects. If a
specialized-design project is about business type that Company HAN has some
experiences before, then, the projects is most possibly requested and initiated by
interested customers. If Company HAN attempts to explore the knowledge of a
specific new business type with no prior experiences, then, few customers belonging
to that business type are interested and Company HAN searches for collaborative
businesses to initiate experimental specialized design projects.
With an overall understanding of Company HAN’s products, let’s turn to trace
the complete process from contacting a interested customer to the maintenance of a
customer’s ERP system. It is found that customers become interested in Company
HAN for two major reasons. One is the strong effect of word-of-mouth and the other
is the number of business types Company HAN serves. As mentioned before,
Company HAN offers customers differentiated packages for specific business types
and high quality services, most customers are satisfied with it services and keeps
maintenance relationships with Company HAN. It is illustrated in Figure 2 as the
three level variables of Package projects with maintenance, Enhanced projects with
maintenance, and Specialized design projects with maintenance. The more projects
under maintenances, the stronger the effect of word-of-mouth, in tum, the more
customers are interested in Company HAN. Besides, the number of business types
served by Company HAN determines the size of Company HAN’s target market and
thus affects the number of customers may be interested. The variety of business types
served also impacts the effect of the word-of-mouth, for the more the company can
serve, the more reputation it earns in the software industry.
When an interested customer proposes a request of ERP projects, Company
HAN starts to evaluate if the company is able to meet the customer's requirements.
Company HAN deliberately considers the operational characteristics, requirements of
ERP systems, and the possible difficulties during collaboration process to arrive at a
decision. The evaluation delay is about six months. Averagely, only ten percents of
evaluation projects continue to the next stage. Among these projects, 40% of them are
classified as package projects, 50% of them are enhanced projects, and 10% of them
belong to specialized design projects. Company HAN expects to complete a project in
twelve months regardless the project type. To satisfy the expectation, Company HAN
allocates human resources according to the difficulties a project may face. Normally,
specialized design projects are the most difficult projects, then enhanced projects, and
the least difficult projects are standard ERP package projects. Besides, the initiation of
new customer projects may be postponed if the human resources required to complete
those projects in time are excess of the human resources allocated in customer
projects and related services. Details about human resources allocation policy are
discussed in a later section.
The package development sector
As other software houses, Company HAN’s major income is from the sale of
packages and related services, including package projects and enhanced projects.
Software packages have the advantage of low variable cost thus to distribute the high
development cost over large volume of sales. Hence, the development of new
packages implies not only the increase of the business types served but also the
enlargement of the company’s marginal profits. Figure 3 illustrates how Company
HAN develops new packages and enlarges the business types it can serve.
Increase of specfalized design
projects fornew business types
enue Business types under
Business types to be explored investigation and R&D Business types served
Multiplier of
to growth
“f business types
served
BusingSs types start Incre:
to bd investigated
Incryse of business
tyfes to be explored
Growth strategy
: Required cases
Copaffetion of specilized per business type
design projects
Packages to be R&D R&D packages Packages developed
@
Increase of packaghs to be R&D
Increase offnew packages
Increase of f&D packages
Estimated error of
delay time to initiate R&D delay time RED productivity
Required cases R&D packages Acceptable new R&D projects
per business type
Figure 3 the package development sector.
To develop new software packages, Company HAN first sets the target number
of business types to be extended to by taking into account the revenues it may earn in
the future and the expectation of future economics. The more revenue the company
gets, the more optimistic and confident HAN’s managers are and the more financial
support can be allocated to develop new packages. Company HAN’s expectation of
future economics is based on the number of interested projects it may attract. Because
the company offers high service quality and has a good reputation, managers believe
that the changes of interested projects are strongly impacted by the overall economics
of those clients’ industrial environments.
As denoted in Figure 3, two different flows are initiated to implement the
expansion plan toward new markets. One denotes the number of business types the
company serves and the other denotes the number of packages it develops. Research
and development department investigates which business type is more proper to
penetrate in and triggers specialized-design projects to accumulate related experiences
and knowledge. At least three specialized design projects have to be completed in
advance. Afterwards, a research project is initiated to study how to general those
accumulated experiences to develop standardized software package for a specific
business type. An R&D package is the package that requires further examination of
the information system’s architecture, the program code, related documents, the
implementation process, etc. to develop a standardized package for a specific business
type. Averagely, an R&D package requires 24 months to be completely developed into
a standard ERP package that is ready to be sold. Due to the constraints of human
resources, not all research projects can be investigated right away when accumulating
enough specialized- design projects experiences. Some packages may be waiting to be
studied and developed.
The human resource sector
Figure 4 demonstrates the two flows of consultants and programmers.
Consultants, including junior consultants and senior consultants, are responsible to
implement software packages into client companies. With enough experiences, a
junior consultant becomes a senior consultant. In the company, senior consultants take
the responsibility to train junior ones. But under the situation of high workloads,
learning from senior consultants is less possible and thus increases the delays for a
junior consultant to be well trained. Both senior and junior consultants may quit their
jobs when the work stress is too high.
As consultants, programmers in the company include junior programmers,
senior programmers, and system analysts. Programmers and system analysts are
mainly responsible system designs, system developments and system standardization
to develop packages. To be promoted to be a system analyst, a programmer has to
accumulate lots of programming and project management experiences. Usually, the
Delay for hiring
senior consultants
bility of proddctivity /” Total productivity
Multipler effecdef work of programmers
load on hiring conSyltants Junior consultant Senior Ronsuttants, System analysts
@
‘Tal producti
avaible for new procts
\Total productivity required
Junior fonsultant for current projects,
JunjorConsultahts hired
Junior constants
becoming seni
Multiplier effect of work stress,
‘Time delay fo junior on senior consultants’ leave
consultant tobe Segior
Delay for hiring
junior consultants
Human resduces gap HyGn resources
ted in evaluation
lof junior
consultants quit
Normal turn over rate
of junior consultants Multiplier effect of work stress Multpler effect of
Con junior consultants’ leave work load on learning ric load of dych
Multiplier effect of iy Gee Multipler effect of work
load on hiring phegrarmme) load on hiring consultants
J umior prograi Total productivity ie
ior programmes
of prograramers Systemansiysts
J unior programmer hired a pectin 7. ma
: ts Multiplier effect of work
bechming senior say 3 lultiplier effect of wor
load on hiring programmers
Delay for hiring y
junior programmers
Average time Yor Syunior SA's tum over rate
Nut junior
z quit Programmer tolbe se files
prograr Average time for &genior
Normal tur over rate programmer to be
of junior programmers = nearer =
lormal turn over
Multiplier effect df learning on iaeiter erect ot ese an!
pl 9 te of programmers work load on learnin
junior programmbr's turnover ilodd on estring ‘.
Multiplier effect of work stress Sere me renleeming
on junior programmers’ leave Adjustment time Multiplier effect of work stress.
: on senior programmers’ leave
Change of time for learning
Figure 4 the human resource secto
productivity of a junior programmer is quite low and the work assigned to him or her
is not so heavy as to senior programmers. To be an experienced, a junior programmer
relies heavily on leaming from experienced colleagues. Thus, when experienced
colleagues are under the status of high workload, the opportunities to learn from each
other decrease delays the time for a junior programmer to become senior and the time
for a senior programmer to be a system analyst. Furthermore, to junior programmers
eager to learn programming skills, recognizing the time available for learning is
scarce will make them choose to quit.
The human resource allocation policy
Average §cale of
specialized degign projects
Increase of R&D package
Akeptable flew specialized
design projects
Average“time to\complete
a projec!
Average sci of Average time to Average sce of
R&D projects cgmplete a R&D project Acceptable new Package pfojects
age projects
Acceptable hew
R&D projects Availapfe productivity
f ts
new projec! Acceptable new Average scale of
Increase of specialized design enhanced projects enhanced projects
rojects for new business types
ie se Available’ productivity
for R&D packSges
Average|scale of Total prdductivity
specialized dsign projects of programmers 3
Avesagfe time to complete ity of productivity
a project
productivity
Ailajfle for new projects
Acceptable number of strategic
System analysts
specialized design projects , us
Total productivity required
Junior eqnsultant for current projects
Human resources
invested in evaluation
Figure 5 the human resource allocation policy
As common software houses, Company HAN measures its productivity by
man-month that can be calculated directly by summing up all human resources (a
junior programmer's productivity is only 1/4 of a senior programmer). According to
the company’s policy, the allocation of human resources to customer projects and
R&D projects has to in advance reserve the required productivity for evaluating
potential customer projects and for completing currently running customer projects.
Afterwards, human resources are allocated to R&D packages. Customer projects, like
package projects, enhanced projects, and the specialized projects are the last priority
to get human resources. The priority to allocate human resources is demonstrated in
the Figure 5.
The dynamics of Company HAN’s one shot growth
Figure 6 is the simulated time patterns of package projects, enhanced projects,
two kinds of specialized projects, and net income. Though we have no actual data to
demonstrate how the simulation result is close to the reality, the examination and
acceptance of those simulated time pattems from the CEO and the other two
managers convinced us the model’s credibility to demonstrate Company HAN’s
experience. In Figure 6, the behavior pattern of Net income illustrates the one-shot
growth the company confronts. Based on a qualitative causal loop diagram that is
simplified from the quantitative model, we explore the dynamics of the one-shot
growth. We first examine the basic growth engine that drives the company to earn its
income at the initial stage (from month 1 to month 45). Then, we illustrate how the
company’s growth strategy and R&D policy lead to the stagnation of the company’s
(from month 46 to month 60). Later, how the company is trapped into the situation of
losing its market and being incompetent to change the situation (from month 61 to
month 120) is further discussed. Feedback loops corresponding to the three stages are
plotted to facilitate readers’ understanding.
1: Package projects 2: Enhanced projects 3: Specialized projects for 4: Specialized projects for —_5:Net income
old RED projects; new R&D: prgjects
pooo00
poo05
Sooo0
60.5,
Month
Figure 6 Simulated one-shot growth
The growth engine for flight
In software industry, the start of an ERP software house is often accompanied with
standardized ERP packages for selected industries. The standardized packages may be
offered by big international software companies, such as SAP or Oracle, or be
developed by the software house alone. Company HAN is the latter case. The
company is set up by a group of senior programmers and senior system analysts who
are very knowledgeable about textile industry. The company decided to target at
textile industry and initialized several specialized-design projects to develop ERP
packages and accumulate necessary experiences and knowledge via customer projects.
As specialized-design projects for the development of ERP packages are completed,
Company HAN-owned brand ERP software is developed. Because the packages
developed are specific to the level of business type, the company takes into account
more details about various kinds of customers and thus offers higher service quality to
customers. Company HAN attracts its customers mainly through the effect of
words-of-mouth. The more customers are interested in Company HAN’s services, the
more project evaluations requests are proposed. Both the number of package projects
and enhanced projects increase. Due to the company’s high service quality and skillful
personnel, most customers continue their maintenance relationship with Company
HAN and thus strengthen the effect of word-of-mouth. This is the major growth
engine underlying the growth pattern of the company’s net income from month 1 to
month 32. (shown in Figure 6).
Software
rae
Packages
Interested Under R&D 5
Comes *\
a Effect of Specialized Design Projects
Word- of Mouth for Potential New
Customer Requests to
+ Pakcages
Be Evaluated ‘
loop 1 +
(+)
2 Business Types to Be
Projects Investigated
inctease of New os
Customer Projects vA a
Target Number of New
Business Types to Extend
Figure 7 the growth engine for flight
The expansion strategy resulting in stagnation
To Company HAN, the success just discussed encouraged it to develop more
high quality packages. The company believed that the development of software
carefully designed for specific business types is a correct decision. Loop 2 and loop 3
in Figure 8 illustrate that the impacts of the increase of Company HAN’s confidence.
When the company was such confident of its positioning strategy, it was aggressive to
expand the number of business types to expand market size. The company thought
that as long as enough specialized-design projects were completed, they could start to
attract more customers, including earlier adopters of packages under R&D and
common customers with developed software. In addition, the initial success brought
the company lots of money that not only strengthen the company’s aggressiveness but
also offered financial supported to both R&D activities and customer projects. In
Figure 8, loop 4, loop 5a and loop 5h illustrate these financial reinforcing effects to
the company’s expansion strategy.
+
Productivity Allocated for
loop 5a Developing New Packages
(+)
*
Productivity Allocated Software
for Customer Projects Packages
foop 3
Total Productivity . ut
‘otal Produc +
+ ‘) aoe ~<+——__ Packages
TES Under R&D
4! Specialized Design Projects
Customer Requests to for ae New
Be Evaluated loop 2 ae
W +f
“ Business Types to Be
Hiring Thcrease of New Investigated
7 Customer Projects i -
* Confidence to Develop Target Number of New
+ New Packages Business Types to Extend
Financial Status (ays eee oa
(4)
Figure 8 the expansion strategy resulting in stagnation
The five positive loops shown in Figure 8 together compose the company’s
expansion strategy. At the first glance, it seems to be a good strategy to take the
company to a higher growth. However, things were not so smooth in the company.
Due to the delays in assuring the properness of product strategy and planning desired
number of business types to penetrate into, required specialized-design projects for
packages of new business types did not start immediately when prior R&D projects
were completed. Furthermore, because of the antecedent condition of market
expansion was enough customer projects, the human resources required to complete
those customer projects shrank available productivities for new R&D projects. Time
delays for the initiation of new R&D projects are lengthened! The combined result of
positive loops and time delays in market expansion was the postponed but
exacerbating number of new R&D projects and corresponding specialized-design
projects. Time pattern of specialized-design projects for new R&D projects depicted
in Figure 8 demonstrates such an effect. Because of the postponement of new R&D
projects and related specialized-design projects, Company HAN did not have new
software packages to serve new customers while the market of specific business types
in textile industry had been saturated. Package projects and enhanced projects started
to decrease and net income was stagnated during the period from month 33 to month
60. The company was hard to sustain the growth!
Vicious loops worsening the problem
Because Company HAN’s ambitious to expand the variety of business types was
not only strengthened by its confidence and rich financial support but also
exacerbated by the time delays, the company was quite aggressive to invest in
developing new software to expand its market. As shown in Figure 6, the peak of the
time pattern of the expansion was much higher than the previous wave. The
company’s speed of expansion was much faster than the speed of hiring new
employees. Due to the higher priority for R&D projects than customer projects in
allocating human resources, the human resources allocated to customer projects were
insufficient to complete those projects on hand. Workloads to complete present
projects arose and acceptable number of new customer projects decrease. Two vicious
loops, loop 5 and loop 6 depicted in Figure 9, demonstrate the impacts of arising
workloads on attrition rate. Loop 5 states the increase of attrition rate inducing from
high workloads and work stress, while loop 6 demonstrates the increasing attrition
due to less opportunity for junior employees to get training from seniors under the
situation of high workloads, especially for junior programmers who were eager to
learn. Arising attrition further led to result in the decrease of total productivity and
thus the available productivity allocated to customer projects. The problem of human
resource shortages was worsened! In Figure 10, it shows the high workloads of each
kinds of human resources and attrition rate. Note that the senior programmers’
workload was much higher than other kinds of human resources, which was caused by
high tumover rate of junior programmers!
Productivity Allocated for
i Developing New Pack
Productivity Allocated #2 OPIN NAN aaa’
for Customer Projects +
Software
jp Time for Complete An Packages
[Total Productivity R&D Package Project +
+ 7 Interested Packages
Customers UnderR&D _ +
Human Resource Way? mn f ;
we NS) | helen Sea
- Be Evaluated Pakcages
Juniors’ Training ii
Received from Seniors of
Ns 4.
Hiring ibey New Customer Business Types to Be
+ w 4 Projects Investigated
Work Load a
Target Number of New
Financial Status~ + Business Types to Extend
Figure 9 feedback loops limiting the growth
1:Average workloads of
fg junior consultants
oo
oo
or
2:Average workloads of 3: Average workloads of 4: Average workloads of 5; Attrition
senior consultants system.designers senior programmers
60.5
1 30.25 90.25 120
Month
Figure 10 simulated workloads and attritions
In confrontation of such a circumstance, Company HAN kept allocating human
resources to R&D instead of customer projects because of the high sunk costs of R&D
packages once abandoned (Shapiro and Varian, 1999) and the long R&D lead times
(Hilmola et al., 2003). All company HAN did to solve the labor shortage problem was
to hire more personnel. However, delays existed in hiring appropriate persons and
total productivity did not retumn to required level immediately. To the company, the
human resources shortage problem propagated to marketing sector. The number of
acceptable new customer projects based on the available human resources decreased.
Financial status began to fall. Fewer and fewer financial support was available for
hiring personnel! The road to solve the human resource shortage problem seemed to
be longer. The shortage problem finally propagated to the R&D sector, for the
insufficient human resources also restricted the amount of productivity available for
R&D projects and the delay time to complete R&D was lengthened! The lengthened
R&D time implied that human resources were occupied in R&D projects for longer
time. Less customer projects result in less money that the company could earn!
loop 5a +
(+)
+ : x _a— Productivity Allocated for
Productivity Allocated Developing New Packages
for Customer Projects ag!
Joop 5b) *
co +
> Software
-_ Time for Complete A\ Packages
_— R&D Package Proj
- ae Packages +
Total Productivity Coy Under R&D
# loop 6
1“ es) er xs Specialized Design Projects
Customers for Potential New
+, Eifect of Pakcages
Customer Requests to Word-of- Mouth #
Be Evaluated +
‘capt loop 2
(+) 7 Maintainance \ ‘
Projects ‘usiness Types to Be
Investigated
increase of New ait vest
Customer Projects +
Target Number of New
- Work Load“ Business Types to Extend
Contidence to Devel +
loop 4 g op New Packages
Financial Status. \’
Figure 11 casual loop diagram of the one-shot growth
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