You had to believe this day was inevitable. Oracle announced it was buying NetSuite a cloud ERP provider with over 30,000 customers worldwide for about $9.3 billion. Oracle founder, Larry Ellison also had a large part in founding NetSuite including being one of its top investors. I have always looked at it as Larry’s experiment in cloud computing and I think that is key.
Eighteen years ago, when NetSuite got going, Oracle was already a very big company dominating the relational database market as well as the market for enterprise business applications. Oracle’s challenge then was best summed up in Clay Christensen’s book, “The Innovator’s Dilemma,” though it never mentioned Oracle or NetSuite explicitly. The dilemma being when should a successful company consider cannibalizing its own business to avoid enabling new entrants to the market to do the honors.
The dilemma stems from the fact that successful companies had, until the last 20 years, been loath to change their secret sauce, the thing that made them successful. But a series of disruptions initiated by cloud computing pioneers like Salesforce, showed that standing pat was as dangerous as playing with matches around your balance sheet.
So that was Oracle’s dilemma and you could see it unfolding as then CEO and founder Larry Ellison carefully launched what was then called NetLedger under the leadership of trusted lieutenants Evan Goldberg, CTO and founder, and Zach Nelson, CEO. NetSuite was a lifeboat strategy intended to provide a safe place to pour customers, cash, and expertise if the need ever arose.
As a startup NetLedger morphed into NetSuite and had far less overhead and bureaucracy to contend with than an established company like Oracle and so its innovation cycles were quick and nimble. Taking no chances, Oracle plunged ahead into cloud computing building its own platform and applications, which would eventually displace its traditional products. It also bought a slew of other cloud companies too because buying companies is less risky than trying to fund a similar amount of development in house.
So in this regard, buying NetSuite can be seen as just another cloud company acquisition by Oracle but it’s much more than that. It’s the culmination of long-game thinking—precisely the kind that few public companies can invest in today given the short time horizons of quarterly earnings reporting.
This long game approach is what critics lament is no longer practiced in the Fortune 500. But today, one of the founders of a Fortune 500 company (#77 if you are counting), a brash, fast talking, America’s Cup winning, technology industry showman, pulled a rabbit out of his hat. This shows that planning and execution still count for a lot in business if you know how to adapt.
Every innovation spawns its own set of issues. What happens when you have a lot of a good thing like cloud computing? You might get a Franken-cloud as some vendors are calling it.
Basically a Franken-cloud is what happens when you have multiple cloud-based systems that need to share data and run processes in your business. As recently as a few years ago, and there are plenty of legacy situations that fit this description, the same issues would have come from buying multiple best of breed applications and trying to knit them together. Much, if not most, of the overhead in contemporary IT comes from such situations.
It started with accounting. Maybe you had accounting software from one of the big vendors to which you added some special processing apps for your business’ vertical. HR or HCM apps operated off the accounting package too but you decided to buy your personnel apps from a specialist company. It was also responsible for supply chain, product lifecycle management (PLM) and other manufacturing systems. If you did consulting, there were specialized time and accounting apps for that operation too and then if you needed incentive compensation management for the sales force, it meant another app.
I am just getting started but you get the idea. With every additional app someone had to keep the versions in synch with the rev levels of your operating system(s) and database(s) and you might have had issues with the management tools you needed to run this system but different tools to run that system.
We easily forget the complexity of on-premise software when we get to cloud computing because so much of the hardware and OS/DBMS stack is managed by the vendor making it all a wonderful black box for your IT staff. But complexity is beginning to creep into cloud computing too. There are so many cloud apps these days that there’s a thriving business for integrators and integration tools. It also doesn’t help that a provider of hardware, operating system, and database in the sky calls its offering a platform too. These “platforms” give you the same control of the innards of the system that you had when everything was in your data center, but is that good?
The software platform changed all that for the better. If two apps are built to the same software platform standards, it’s almost like they were written together and the integration points are much less severe. But cloud apps based on two different platforms brings the bad old days back pretty fast.
So, Franken-cloud is what some vendors are calling it when you recreate the kind of Byzantine amalgamation of integration in the cloud that you had when your business was strictly on-premise. But the big difference today is that Franken-cloud is optional; you don’t have to do this to yourself.
Avoiding Franken-cloud involves selecting platform first when you go to the market for cloud software and determining to stay true to that platform if at all possible. You might say that vendors have been trying this approach to lock in for a very long time, and you’d have a point. But where old school vendors liked to insist that all of your apps should come directly from their shops, staying true to a platform is simpler. With literally thousands of apps adapted to the standards of one or more platforms, you are free to pull together the best of breed solutions that your business needs.
This approach offers the best chance of avoiding all of those integration points because most vendors today have big ecosystems of partners that have written apps to the standards of their platforms rather than simply trying to integrate them with whatever’s popular. Even if two systems have not been integrated before, developing them to the same platform standards makes integration much easier.
You might say, well I have a mix of systems, some new cloud apps and others that are legacy systems. That‘s a tough situation but it’s anything but hopeless. Surviving Franken-cloud starts with picking a platform, which means finding one with an ecosystem of partner products that will support your business. Then, as you migrate your technology infrastructure to the cloud, stay within the ecosystem. You can still leverage the platforms’ integration capabilities to keep the legacy systems incorporated but over time the objective should be to simplify through leveraging the platform.
Franken-cloud is a manifestation of two things—new cloud technology and old style picking a vendor and figuring out integration later. Thinking about integration first, especially with the plethora of platform solutions available today, will ease the problem and make your business more agile because you’ll be able to change configurations to meet new demands easier.
Two weeks ago Zuora announced its first acquisition and a new product, Z-Insights. The acquired company, Frontleaf, will form the basis of Z-Insights and this marks an important moment for both Zuora and what it has called the subscription economy.
I’ve always been a fan of the subscription economy and feel that it has spawned a subscription culture in which people have been conditioned to expect subscription-like performance from all their vendors even the conventional ones. In my eyes this places greater emphasis on collecting and interpreting customer data to provide understanding of how well a business is performing against its customers’ expectations.
Hybrid companies—such as conventional businesses that are dipping toes into the subscription ocean will find the subscription economy eye opening. The subscription economy requires a different business model and it makes perfect sense too. If your customers only pay you a small amount every month and they can leave any time they want, you need to find ways to attract and hold them like never before. The old model that assumed full payment up front no longer works.
That’s the basic philosophy behind Z-Insights, a product designed to do the data capture and analysis that’s necessary in any subscription company. Z-Insights will begin appearing in the market pre-Dreamforce but here are the announced modules and my rough cut at what they do.
This module will be used to provide a real time view of the customer by aggregating and analyzing important customer data such as account balances, company data, demographics, recurring revenue, social data, and some use data. This is the kind of data that will help inform a subscription company about how well it is serving customers. Metrics based on things like use data and recurring revenue will, for instance, provide an understanding of a vendor’s footprint in an account as it nears renewal time. But that’s old school thinking. The purpose of using these insights should be to ward off problems year round, not just during renewal season. Used this way it can lead to the thing we all say we want—better customer relationships through better experiences.
The Zuora literature describes this as a window into what subscribers are doing but I think that misses something. I am a big believer in the idea of moments of truth, those times when a vendor has to deliver something such as assistance, advice, or information. This module will be most useful for seeing into moments of truth and informing actors about what to do. Also, I hope no one tries to use this module in Big Brother mode.
This module can be used in two very important ways—to drive sales and to better support moments of truth. In reality a purchase is just another moment of truth so all of this might collapse into one. But here’s the point. Rather than dealing with a small number of segments derived through a static analytics report, segments can dynamically offer a business views of what customers are doing such as new customers in the onboarding process or customers in danger of churn. Also, segments can easily include customers with older versions of a product who are therefore targets for an upgrade program.
If you can segment, then you really ought to be able to communicate with appropriate messages through appropriate channels and that’s what triggers does. Since you can define the segments you want to focus on, you can be very specific in the targeting and thus very precise about the message you deliver. This module will also enable you to select the right channel or even help you deliver a message in your app.
Finally there’s a dashboard. No self-respecting platform provider can deliver major functionality like this without a dashboard and none should. But this dashboard will contain the metrics about the information that a subscription vendor cares most about. Let some other app such as CRM tell you how close you are to making your number, this dashboard should focus on moments of truth and early warning signs.
Finally, what’s most interesting about Z-Insights is how much ERP-oriented data it collects and then re-directs to front office processes. This is an idea that’s been talked about for a long time—ever since CRM was first called ERP for the front office. We’ve seen a lot of people put a stake in the ground to say that ERP is the essential suite, that CRM is somehow derivative. But over time CRM has only grown while ERP is showing signs of evaporating as individual modules move from the back office to attach to the front office. In a world where subscriptions rule it’s inevitable that all systems and their data will bend in the direction of the subscriber. Z-Insights is, so far, the most concrete example of a system to support this.
It takes prodigious amounts of moola to launch a company these days and that’s especially true when trying to insert a new idea into the collective consciousness. Salesforce spent well over $100 million to convince us that SaaS CRM was real, Zuora has raised nearly 2X that amount defining the subscription economy, and cloud ERP is following suit.
Today FinancialForce, a cloud ERP provider based on the Salesforce1 platform announced a financing round of $110 million from lead investor Technology Crossover Ventures (TCV) and Salesforce Ventures, Salesforce’s corporate investment group. This follows on the heels earlier this quarter of smaller investment announcements by CPQ providers Apttus, and Steel Brick. So what does it all mean?
I think you need to pay attention to the concentration of money and deals in a tight space of ERP and related back office apps. They’re all cloud companies and it strikes me that the investment community is making a decision about ERP granddaddy SAP in the process.
SAP has tried several times to bring forth a suite of front and back office solutions based on modern cloud technology and they’ve been only modestly successful. Microsoft has made greater strides in bringing its multiple ERP products closer to the cloud but progress has been measured. Time’s up and small ERP providers like FinancialForce, IntAcct, and not so small NetSuite have been gathering strength over many years. The economic conditions are right and the market is, I think, making a call that there’s no more runway for legacy ERP vendors to get to the cloud; it’s time to seek out the next generation of solutions.
The succession plan for replacing legacy ERP is well under way with a surround strategy that first positions cloud ERP as a helper application that can consolidate data, process it, and feed it up to the legacy system. This is a meta-stable state and will eventually result in the surrounding solutions supplanting the legacies, achieving over time what a much despised rip and replace would ordinarily accomplish without all the wailing and gnashing of teeth.
Much of this is still in the future but for now, FinancialForce has taken an important step in preparing for a larger role in what is likely to be a big fight. The objective of the fight will be to secure stable cash generating relationships for many years to come.
Finally, more than once Marc Benioff, CEO Salesforce.com, has said he had no interest in building ERP but it looks like ERP is coming to his company regardless via the powerful platform technology, Salesforce1, that his company provides. Apttus, FinancialForce, Steel Brick, and other financial apps all coexist with Salesforce1 and some, like FinancialForce, are completely rooted there. Their success is also great validation for the platform.
I’d really hate to be a legacy ERP provider today.
There is a business problem that comes up in the life of every company and these days, it seems that a lot of companies face it at once. It’s the question of how to transition from one business model to another without clobbering your current revenue flow. Even if a company’s executives really want to change their model the reality is that the current model, as clunky and outdated as it might seem, is still generating revenues and profits so there is always a faction that says, not yet.
You know where this goes. It’s the story of the boiled frog. It starts with the animal sitting in a pot of tepid water when the heat gets turned on and the frog slowly fades into drowsiness rather than realizing the danger and hopping out. Or so it goes. I have never run the experiment.
We pride ourselves on our large brains and all that they have created. In the last several millennia we’ve built tools and intellectual constructs that give us ways to think about all sorts of things. We’ve been so successful that according to some scientists by some point in 2014 human knowledge will be doubling about once every eleven hours.
Regardless, we still have a challenge when it comes to shifting business models and there’s nothing more trying today than figuring out how to shift from a model that makes and delivers things for a price, to a model that makes things but delivers them incrementally over time, a.k.a. the subscription model. That’s because collecting the money in the second transaction looks nothing like collecting it in the first. Along with the basic act of collecting goes a long list of other important issues like continuously nurturing customers so that they continue to consume what you are delivering.
There’s also accounting for the revenue flow. And then there’s the kicker — most businesses in this situation have decided to branch out into subscriptions while still maintaining their tried and true accounting systems. But the finance and accounting systems in place don’t “do” subscriptions very well, and that might be an overstatement.
But according to a recent study by The Economist magazine’s Intelligence Unit, the issue of collecting the money involved in subscription transactions was only the fourth biggest worry for executives surveyed. Number one was lack of internal co-ordination and second was the technical aspect as in how do we integrate these seemingly disparate ideas so that we can have a single, integrated, and accurate view of the business?
Well, the simple answer is that you need a system for that. Sometimes our big brains, inventiveness, and the sheer joy of tinkering prevent us from taking on solutions right in front of us. I am of course talking about the all to human propensity for using spreadsheets to plug all kinds of business problems instead of biting the bullet and getting a real system.
Many years ago companies used spreadsheets in lieu of CRM systems because they were readily at hand and enabled smart people to model sales processes within them. Alas, a model is not the thing itself and too often a model won’t stand up to volume, which is what happened with spreadsheets in CRM. Among their many shortcomings, spreadsheets don’t have databases and the models they represent are ill equipped for high volume operations.
Fast forward to the subscription economy and you can see the same trouble. Companies getting involved with the subscription model sometimes use spreadsheets as their sub-ledgers feeding into the company’s general purpose ERP system. This tends to work well enough for the company’s first few subscription customers but if the subscription model becomes successful, the spreadsheets can represent a not so happy, happy problem. At least the auditors aren’t happy.
This is preventable. The initial impulse to use spreadsheets as a sub-ledger perfectly models the situation many businesses find themselves in when they adopt subscriptions and they should be applauded for this. But no business can stay in spreadsheets for very long because it turns out that the subscription model is not simply a new way to bill customers.
Subscriptions, really are a business model meaning they have to be accounted for throughout the customer lifecycle including first discovery of a business problem, evaluation, the sale, product use, customer nurturing and bonding, and, most importantly, customer advocacy. It does no company any good whatsoever to do the early stages of the lifecycle well only to fall down on bonding — which too many companies do.
Subscribers expect their vendors to be with them in their moments of truth throughout their lifecycle journeys. The penalty for not being present is attrition and churn but the benefit for doing things right is renewal and advocacy. Luckily, subscriptions throw off a great deal of data that subscription vendors can analyze so that they can meet their customers within those moments of truth. But a spreadsheet won’t catch that data. A spreadsheet can contain today’s data but without a database it can’t tell you about yesterday so that you can predict tomorrow and successful subscriptions are all about predicting demand and meeting it.
This is where lifecycle subscription management systems come in. These systems started out as simple billing and payments solutions but the gap is widening between them and more advanced systems that provide a range of financial, accounting, and database services that make them appropriate for enterprises beginning the transition from conventional models to subscriptions. A system like Zuora, for example, provides the technical integration with popular ERP to enable an organization to co-ordinate its subscription business with its conventional model. That’s why I am advising my clients to evaluate solutions like Zuora as they take their first steps into the subscription economy.