The Software Industry and SaaS

A new coat of paint or a real Transformation?

Ideas may bring a business to life, but software is the engine that keeps it moving forward.  Enterprises large and small depend on software of one guise or another, though the underlying technology that this software utilizes has gone through a series of technology transformations starting out as Mainframe, Mini-Computer and Client-Server and then PC-network based solutions and evolving to Web accessible and now pure cloud-based solutions.  In each instance, quick-to-market native solutions started as simple applications requiring significant functional modifications or narrow functional solutions that became more robust over time.

As this has occurred, the changes have included the obvious – the delivery technology, the somewhat obvious – the major competitors, and the less obvious – the terms of competitive differentiation.

3 Flavors of Change

The hardware delivery infrastructure is obvious, so lets’ talk about the other two.  At every technology transition, as Clayton Christensen pointed out in “The Innovator’s Dilemma”, new players emerge – think Salesforce within the SaaS space.  While existing players are slow to leverage their resources and aggressively move forward until presented with no other choice, new players move in.  For instance, Oracle’s Larry Ellison spent an inordinate amount of time ridiculing the Cloud and comparing the movement to Cloud-delivered solutions to a clothing fad, though he was an initial investor in both Saleforce and NetSuite and his firm spent $1.5 Billion to acquire RightNow (10/24/11) and $1.9 Billion to acquire Taleo (2/9/12).  If he really believed what he said, he would have been better served to buy each of his employees a pair of Uggs and save some money.  Follow the money and ignore what Larry Ellison says.  He doesn’t believe it and you shouldn’t either.

The subtler and the less well understood change is the evolution in the terms of competitive differentiation.  The phrase “The Consumerization of the Enterprise” has entered the common lexicon, but what does it mean in terms of how enterprise software firms compete?  Over time the enterprise software industry developed into an interdependent network in which consultants created RFP’s that focused on esoteric capabilities and software firms diligently packed more and more capability into each new release, differentiating themselves along this progressively less relevant functional axis.  Most consultancies were less focused on usability or the simplicity of installation and organizational assimilation than they were on creating solutions that addressed every conceivable requirement – while also creating significant billable engagements.

Times have changed.  Functionality still matters, though a clean, self-evident interface, the simplicity of utility computing, the ability to provision as needed, manageability and ease of functional utilization matter more.  And these changes are transforming the landscape of the enterprise software marketplace.  When corporate executives can download (and start using) an application on their iPad while listening to your PowerPoint presentation outlining the options that your group is considering for the upcoming year, there is an expectation disconnect.

Each new technology paradigm has typically followed a predictable path:

  • new hardware capabilities became available
  • modestly capable software was developed and sold with a solid dose of professional services to make the software usable
  • the technology matured and the software became more robust, requiring fewer modifications and new consulting services were introduced to help drive revenues.

With the advent of SaaS, this is no longer the case.

Enterprises that adopt Salesforce don’t modify it, they use it.  As a clever provider of an expanding platform solution, Salesforce has nurtured a cottage industry of complementary offerings that cost-effectively extend their core solution while enhancing their marketplace clout.  This simplifies life for the buyer, lowers the cost for firms adopting these solutions and reduces the time to realized benefit for Salesforce users.  It also enhances the value of their core solution as the gravitational center of this expanding universe.  Salesforce has transitioned from a solution to a platform.

Evaluated against the experience of previous technology generations, this enhanced focus on their solution as a platform in which most of the elements are provided by third parties owes more to Microsoft and their very successful developer outreach approach than it does to the traditional Oracle or SAP model.

The sharply lower capital requirements for both Salesforce and their software partners fuels a diverse ecosystem avoiding what Hamel and Prohalad called the mediocrity and homogeneity of markets that have a “lack of genetic diversity”.  Whether you are the builder of the initial solution like Salesforce, a participant in their marketplace or an enterprise utilizing their solutions, you are collectively enhancing the network value of this ecosystem.  Build a platform, or plug in to one.

Oracle and SAP and the other big legacy players have a big challenge: re-architect their core solutions while publicly acknowledging the unfolding impact of SaaS which risks diminishing their core revenue streams, ignore (or belittle) the SaaS players while furiously reworking their offerings or dive headlong into the M & A business while harvesting their existing their existing product lines (see Oracle’s purchase of RightNow and Taleo).  Welcome to the best time for M & A that the enterprise software market has seen in years.

With Transformation comes Discontinuity

From a Vendor and Buyer perspective what will change?

  • LOB buyers driving the business without much (or any IT) involvement
  • Shorter sales cycles with sharply lower transaction values
  • Differing support requirements/expectations given the consumer mindset
  • Purchases made at the platform level (think Amazon AWS), rather than at the technology level
  • The rise of social media – whether software companies desire it or not – and the transparency that comes with it (smoke and mirrors are dangerous)
  • The increased importance of interconnected ecosystems.  Distribution matters.  Being a direct only player is dangerous (unless you’re Apple)

These (and other) issues are forcing enterprise software companies and systems integrators to rethink their business models.  Whether it is Oracle’s embrace of the channel or CA’s acquisition of several interesting Cloud vendors, these trend lines are starting to play out and the software industry is being fundamentally changed.

What are your thoughts on this evolution?  Has the software industry really changed, or is this just a licensing and distribution refinement?

I published an earlier version of this note on another blog that I maintain at John Francis


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