Beagle Research Group, LLC

Thought Leader Interview

Chuck Schaeffer is the founder and Chairman of Aplicor, a global software publisher of on-demand CRM and ERP cloud computing business applications designed for global middle market organizations.

Denis Pombriant: You started a cloud computing company that provides front and back office solutions.  What is it about the marketplace today that favors cloud computing?

Chuck Schaeffer: I think at a macro level the delivery of cloud based ERP and CRM systems clearly bring a disruptive change to the acquisition, deployment and support of business applications; however, it’s been my experience that the cloud value proposition varies a bit by region.  In North America, Europe, Australia and New Zealand, I found that customers are most generally motivated to leverage cloud applications to focus on their core competencies, acquire software solutions that scale up or scale down to support their business agility and replace CAPEX with OPEX and achieve predictable IT expenses.

In Southeast Asia, the Middle East and Northern Africa where I spent a fair amount of time, I found the top criteria to more closely be aligned with reduced costs, reduced IT staffing needs and reduced implementation times.  So I think different global regions have different challenges and opportunities and while they almost universally benefit from a common set of value proposition tenets, their unique situations tend to stack those benefits in slightly different orders.

DP: You’re the first person in the industry I’ve heard who took the time to do that analysis.  Generally when people talk about the benefits of cloud computing they just glom everything together and hope the customer will figure out what’s most important for them.

CS: Well, as you know I’ve spent a lot of time in Southeast Asia and throughout the Middle East, and their drivers are just different.  So there’s a short list of drivers that tend to get ranked differently.

DP: Cloud back office or ERP seems like they would be a hard sell because many companies don’t like the idea of storing their sensitive financial data off site.  How do you get around this issue?

CS: Well I agree financial data is sensitive but I don’t think it’s any more sensitive than what most companies view as their number one information asset, which is their customer lists.  The skyrocketing adoption of cloud based CRM suggests that companies can get the necessary confidence to put their sensitive data into the cloud.  I recognize that due diligence is required to gain that confidence and I generally recommend that they vet their vendors using what I call the three P’s — people, proof and past performance.

• People looking at everything from information security to system reliability.  When you are looking at information security, as an example, there have to be consistent tools and technology and overlapping levels of security, but having said all that it’s been my experience that information security starts and ends with people.  So looking at those people is the most important element.  Are they trained, seasoned and certified?

• From there look at the proof.  I think most cloud vendors would suggest that their infrastructures are secure but who are the independent authorities that have come in and done audits.  Have they received a SOX audit?  Have they received an ISO 27001 audit?  Have they received a NIST audit and attestation?  Who’s gone in as a recognized and credible authority, done the due diligence and ultimately said they attest to what the vendor says?

• And lastly, past performance: Have they had information security compromises in the past, have they incurred down time in the past?  Past performance is clearly an indicator of future performance.

So not withstanding the necessary due diligence at the end of the day the cloud delivers the same value proposition tenets; total cost of ownership, return on core competencies, accelerated time to market, business agility and other benefits for ERP as it does for CRM.

DP: Wow, that’s a lot and its very important.  But tell me something, one of the things I didn’t hear was the issue of transparency.  Here’s what I mean: this industry is very new and everyone experiences hiccups—it’s not unusual for a vendor to have down time everybody and goes through it.  Do you have any thoughts about how a vendor needs to be transparent and offer up to customers exactly what’s going on when the system’s doing well and also when the system might be down temporarily?

CS: I think that cloud vendors must be transparent if they’re to achieve credibility with a very on-line, very connected customer target market.  I think Salesforce.com several years ago really set the bar and ultimately today’s standard.  They incurred some early hiccups, had some repeated down time but they learned from that and I think they did two things well.  One, they upped their infrastructure, building in more redundancy and more high availability and ultimately built more data centers for failover and while that was important and reduced down time, they still had some down time.

So it was the second thing they did—they built trust.salesforce.com—to say maybe we’re not perfect but we will disclose to you in an open era, where we are down and when we are down and what we are doing to resolve it and prevent it from happening in the future.  I think trust.salesforce.com is an early benchmark, I favor it but it is limited because they only choose to disclose the last 30 days of performance.  I’d like to see them disclose the last two or three years of history but that’s just my take on it.  When I was at Aplicor [as CEO], we built something like it, we called it performance visibility where we put a number of performance benchmarks for our data centers including down time in an online portal where customers and prospects could view it and we could respond to their comments or inquiries.  So I think we’re going to see more of that.  I am frankly surprised that more vendors haven’t been more forthcoming or transparent but I think ultimately Salesforce has started something that will one day be a requirement to be in this industry.

DP: So you see this as a need and not all vendors have stepped up to it yet?

CS: Yes, and in fact I am surprised at how few vendors have stepped up.  NetSuite, as an example, in my mind is somewhere in between.  They do have a portal that discloses some information—down time or system unavailability—but it’s limited in information and in who can view it.  It’s certainly better than nothing, but again, I think cloud computing vendors are going to have to be much more transparent and much more forthcoming with their information if they expect to acquire customers on a mass scale.

DP: There’s a big and growing cost disparity between on premise and cloud based ERP systems today.  Also, the last major wave of new ERP system deployments happened about ten years ago for Y2K.  It strikes me that we might be poised for another round of deployments or upgrades as companies look to lock in some of the cost savings they can derive from implementing systems that incorporate the technology changes of the last decade.  Do you see this too?

CS: Absolutely, Denis, the technology refresh cycle stemming back to the year 2000 is here.  I think prior to the turn of the century businesses on host based systems flocked to client server systems to beat the two digit date limitation.  At that time cloud based systems weren’t available, they originated right after the turn of the century so they weren’t considered in the rush to replace host based applications.  But now they offer a new value proposition that will make replacing most of those client server systems very appealing for many companies.

DP: Ok, now, that’s on the technology side but there’s a business side of change also.  I know your career goes back to a big accounting company and that your experience is far more than your time at Aplicor.  Can you talk about your experience and about some of the ways that business has changed since you’ve been involved in the software industry?

CS: I have clearly noticed that they business software cycles are getting smaller and providing significantly better value propositions with each iteration.  What I mean by that, when I was a young consultant in the late 1980’s I was implementing mainframe and host based business software systems—somewhat packaged systems such as MSA and McCormick and Dodge—which were very expensive and very inflexible but which ruled the market and maintained a life-cycle of over two decades.  In 1992 we saw the advent of client-server software systems, which decreased costs and increased flexibility and ultimately won overwhelming market share from the mainframe and host based predecessors.  Interestingly though at less than a ten year life SaaS and cloud computing are already starting to penetrate the client server solutions and are continuing double digit growth while client server is becoming stagnant.  So we’re seeing the platform life-cycles diminish dramatically as each iteration moves forward.

DP: You think there’s a practical limit to the software lifecycle?

CS: I think there is a practical limit but I don’t know what it is.

DP: You could say that with cloud computing you have the ability to completely do away with that kind of lifecycle thinking and just provide upgrades and updates as they are needed rather than dealing with major release schedules.

CS: Absolutely.  With implementation upgrades and adopting new iterations of software, whether it be point releases or new versions, there are still fundamental technology issues just within what we like to call the cloud.  One of them that you’re well versed on is isolated tenancy versus multi-tenancy.  Multi-tenant applications are extremely useful for pushing out new iterations in an almost constant evolution of the application with very minimal effort on the part of the company receiving the new upgrade.  Isolated tenancy offers a different value proposition, not quite the same ease of use or ease of upgrade process, but nonetheless as these cloud systems become services-hence the software as a service moniker—technology really does take a back seat and services really can be consumed easily.

DP: A lot has happened in the business world in the last decade and while no one has a perfect crystal ball as you look out at the next ten years, what are some of the things that you see that we would be smart to prepare for?

CS: Ten years!  Boy that’s a long time!

DP: It really is!

CS: I’ll tell you what I see in the near term and maybe we can speculate a bit further.  I think social CRM will cross the chasm from the early adopters to the early majority over the next twelve to twenty four months.  In CRM pundit circles, Social CRM is almost becoming passé but the reality is that business leaders are only now considering the strategic adoption of SocialCRM where they’re finally ready to make the move from education and experimentation to full scale implementation, measurement and continuous process improvement.

Another thing I hear from prospects and visiting customers is what I call the reallocation and merging of various CRM components.  I think the combination of CRM, SocialCRM, business intelligence and mobile will go through a two-phase process of reallocation and then merge.  At the Gartner Customer360 conference earlier this year Gene Alvarez suggested that the Operational CRM to Social CRM to business intelligence software market will go from 90 percent, 9 percent, 1 percent, respectively to 70 percent, 20 percent, 10 percent market allocation.  That suggests that transaction or traditional CRM will continue to hold the lion’s share of the market but that Social and BI represent the next growth areas.

I think Gartner and Gene are right on this allocation but at some point shortly after that I think there will cease to be an Operational CRM and a Social CRM and these solutions are going to merge and simply be referred to as CRM.

DP: I agree with you, that’s got to happen. I don’t know if you saw it but there was an interesting piece of research that came out of Harvard Business School within the last few months that surveyed 2100 companies.  The research asked two questions: first, do you have social media incorporated with CRM and, second, how are you analyzing the data that gets generated?  And to your point, the answers were that in the fifty percent range companies are adopting social media but much smaller percentages said they were using analytics for the data that gets generated.  It’s like analytics is the next thing that companies need to do, they’re not done yet just because they have social media.

CS: You know, I haven’t read that study but I am not surprised.  I think business intelligence or customer analytics—that’s been one of those things that was going to be the next big thing for the last five years and it hasn’t materialized in part because companies find the challenges of just implementing CRM to be eye-opening so the thought of doing more will shy some of them away.  But social media adoption does involve generating some very large volumes of data so BI might be the best tool for trying to make sense of social media or Social CRM.  And frankly we may find its actualization of predictions and its actual growth driven by the whole social influence.

DP: You think that BI could be social media’s killer application?

CS: I think it can be.  I think BI makes Social CRM justifiable because it makes it measurable and I think a lot of the holdouts on social media adoption do so because they can’t justify the business case—in large part because they lack measurement and BI can bring that measurement to justify the business case to make social media happen.

DP: That’s great.  Well I am out of questions, got anything you’d like to add?

CS: Maybe in a separate conversation we should talk about one of my passions and I know it’s one of yours too and that’s the idea of green technology and green data centers.

DP: Absolutely!  That’s an important topic. Let’s do it next time.

CS: OK