For the last decade or so, the world of enterprise software, which I’ll define as the programs that larger companies use to automate their basic processes, has been fairly monolithic and fairly predictable. Companies installed complex ERP-style systems in their own data centers or in data centers maintained by large outsourcers, and they paid hefty licensing and maintenance fees to the software suppliers. The strategies – and the products – of the major vendors were similar (though, alas, the code was far from interchangeable), and their profits were enviable.
This past week was an important one in the history of business software because it revealed that the monolith has cracked and the future is up for grabs. We saw in three almost simultaneous events – SAP’s introduction of its entirely reengineered Business ByDesign system, Salesforce.com’s rebranding and expansion of its Force.com software development and deployment platform, and Oracle’s announcement of strong earnings and an equally strong commitment to its traditional business model – the emergence of three very different visions of the future of enterprise systems. For the foreseeable future – five to ten years, anyway – competition in the market will no longer be between vendors selling similar products; it will be between vendors selling fundamentally different approaches to business automation.
Oracle, which has never been particularly sentimental or ideological about software, stands for the status quo. It believes that big companies will continue to buy and expand old-style client-server-age systems for a good long while, and it plans to be the preferred supplier to the market. Through acquisitions and share gains, it will milk the old model until the old model goes dry, at which point it will adapt to whatever new model comes along. In charting its strategy, Oracle is following the money, not the technology, as its CEO, Larry Ellison, made clear in remarks to analysts:
Our strategy for growth is to find a way to add more value to the same customers we already serve, which are the large end of the mid-market and large companies. What we’re doing here is moving beyond ERP to industry specific software … Our strategy: add more value, go upstream, sell industry-specific software to our existing customers, and we’ll watch and see how SAP does going after small companies. Especially with Software as a Service which we think is very interesting, but so far no one has figured out how to make any money at it.
Salesforce.com, which is the flag-bearer for Software as a Service, can afford to take a very different view of the economics of business software because it is not tied to the client-server model (and, indeed, wants only to destroy that model). Its intent is to shake things up, and its vision is, not surprisingly, the most radical of the three companies. It believes that basic business software should be rebuilt from the ground up, in Web 2.0 style, through the contributions of a broad set of developers and innovators – from its own staff, from its clients, and from independent software firms. Cohesion comes at the platform level, with a shared computing infrastructure, a shared database, and a shared programming language – all under Salesforce’s control. As Dan Farber writes:
Salesforce is taking the bottom up approach, opening up its platform in hopes that scores of developers will fill in the gaps of its incomplete set of applications with a broad variety of ERP and other business software that address every business market segment through the programmable Force.com platform and its AppExchange.
And then there’s SAP, the largest of the enterprise software players. Its Business ByDesign system represents a grand engineering feat, a translation of the father-knows-best, top-down ethos of traditional enterprise software development into the modular, flexible world of Software as a Service. Although initially targeted at mid-sized companies, there seems little doubt that this new system represents the blueprint for SAP’s future. Putting its faith in technology, and hoping that profits will follow, SAP is taking a very different strategic course from the steady-as-she-goes strategy of Oracle without embracing the pure, utility-computing, emergent-systems approach of Salesforce and its SaaS brethren.
How will the competition play out? I wish I knew. There are at least two unknown variables: the speed with which the SaaS model penetrates larger companies, and the ultimate profitability of the SaaS model. There are some indications that the adoption of SaaS is advancing more quickly than expected, but there are also indications that the hype may at the moment be getting out ahead of the technology. As for profitability, about all we can say is that Ellison is probably right: SaaS is unlikely to be as lucrative as the old licensing model that it’s replacing – which happens to be very good news for customers.
Whatever the future brings, this week has made one thing clear: After being stable for many years, the foundations of the enterprise software business are shaking.
Doesn’t oracle (or maybe larry ellison personally) own half of nesuite? I realize netsuite’s numbers are a drop in the bucket, but it still qualifies as a hedge.
SaaS has the disadvantage that customers are continuously vulnerable to change of service.
While buying the software and the hardware to run it is expensive, it does give you some change control because you can (at least for a while) keep legacy systems going no matter what forced marches your vendors try to put you through.
Here’s the middle ground where both kinds of vendors might head:
Enterprise software vendors could preserve their “control my legacy” advantage by offering virtual installations completely controlled by customers but hosted on scalable third-party platforms. Imagine Oracle as a service backed by Amazon EC2.
SaaS vendors could do the same by selling virtual appliances hosted on scalable third-party platforms, letting the customers to choose the pace with which they adopt new releases and features. Of course, they then incur ESV costs of supporting old releases, managing the release cycle, etc. But for many customers that might be seen as a good thing.
When there are multiple computing cloud providers, and provisioning among a pool of them becomes possible or realistic, that will be a new era in customer/service relationships – more competition, but more potential customers in a thriving later-adopter market.
Of the three companies mentioned above, in my mind the most interesting announcement came from SAP. Salesforce.com simply said they’re going to continue and deepen their focus on being a pure-play SaaS, and Oracle simply said they’re going to continue and deepen their focus on the traditional enterprise model. However, what SAP announced amounts to the beginnings of them trying to morph their business model from a pure-play on-premise software vendor to a “hybrid” vendor that provides both on-premise and SaaS options to customers.
Having been in charge of Siebel’s CRM OnDemand division at Siebel, and being the person responsible for getting Siebel to fully embrace the SaaS model while still supporting the traditional software model, my experience says that SAP is in for some extremely difficult challenges trying to support a hybrid model. You can read more details at my blog post at http://tinyurl.com/ytol4f, but the quick summary is that SAP will face four challenges that come from trying to change their corporate DNA. These challenges are:
1) (Fear of) Cannibalization
2) Addiction to License Fees
3) Channel Friction
4) A Product Feature Set vs A Service Mindset
When I started my company (LucidEra, a SaaS Business Intelligence vendor), it was very clear to me that I had to decide to either be a traditional software vendor, or a SaaS vendor, but not both. Trying to support both models under one roof leads to internal civil wars that can tear a company apart. That’s essentially what brought down Siebel.