There’s a confusing dynamic happening in the software industry caused by the inexorable shift to the cloud. Even before you can get into the analysis you need to identify which cloud(s) you’re thinking about (infrastructure, apps, platform). Also, once you’ve done that you need to decide if you’re partial to technology or financial analysis. It should be no surprise that either approach alone gives only half the picture, so you really need to engage on both fronts.
A big topic right now centers on whether vendors are growing their revenues fast enough to claim leadership positions in the cloud. If not, what happens to those not growing fast enough to satisfy the finance guys. Oracle is a case in point and the company has been subject to a lot of financial analysis that finds the company lacking. How you evaluate revenues, especially in comparison to peers helps you figure out the price of a share of stock. But it’s very hard to get to an apples-to-apples comparison.
As one recent post on Seeking Alpha declared, “Oracle’s ability to adapt to the decline of the on-premises software business and the rise of cloud/SaaS remains in question.” To which I say maybe because the analysis is only partly revenue related. Of equal importance is the changing revenue model—taking in incremental revenue rather than a big license fee.
Moving to the cloud changes the business model, not just the product and too often I see financial analysts applying old financial models to new technology and business models and it doesn’t work well.
For most companies the easiest customer to re-sell or up sell is one you’ve sold to before but migrating your installed base to the cloud is anything but easy if you sold them legacy solutions. The effort is more akin to selling for the first time. No decision which can be frustrating in any sales situation is just as prevalent in an installed base as it is in the general market even for an incumbent vendor.
So in the horserace that some financial analysts insist on handicapping, a pure cloud vendor will usually look better than a legacy vendor moving there. But on top of all that, when your analysis is based on revenue growth you can get spurious results. Even if a legacy vendor induces an existing customer or a group of them to convert, the revenue impact is likely to be a short-term reduction because we recognize cloud revenue over time, not all at once.
We are unarguably in a transition-state so we see a mixed industry. But if you go down the road a few years to a time when the major conversion from legacy to cloud is over, the whole industry will look more uniform and comparisons will be easier.
But it will also be a more fragmented market than we have now. Software vendors will have many complex relationships between themselves and infrastructure vendors and it will be far from unusual for Brand A software to be running on Brand B infrastructure even though both brands might offer both software and infrastructure.
All of this suggests to me that the real plain of competition will have to change. It will change because the vendor communities want to avoid the zero-sum rut that markets invariably head towards in a commoditization push that leaves the survivors competing for pennies when they once competed for millions.
That’s why I see the industry morphing into a utility where a small oligopoly controls most aspects of the market, usually under some form of regulation. A utility won’t care much about infrastructure, for instance, because it will all be the same from the perspective that it adheres to standards.
The electric utility industry is a fitting example. Electric devices are agnostic over how power is generated or whether it comes from next door or a thousand miles away though some customers might prefer greener or cheaper solutions. But vendors in the supply chain take responsibility for adhering to and maintaining standards so that the product is uniform.
It’s doubtful at this stage if any of the enterprise software vendors will stub a toe getting to the cloud. Each has a unique path to travel that’s based on history and legacy constraints. At this point, rather than comparing vendors in what is a very disparate market, it might be wise to look more at year-over-year comparisons and similar measures that track a vendor’s progress against the goal. Revenues and revenue growth will, of course, always be important but the handwringing that goes into quarterly analysis and that emanates primarily from looking at a still emerging market and seeing a long established one, obscures reality and benefits no one.
Business devours technology in an effort to get ahead in an unwinnable arms race. Often the technology is designed to support the status quo, which is a problem because almost by definition an arms race can only be won by leapfrogging the competition and even then the gains will only be temporary. So it is with the digital disruption and that’s what fascinates me about it.
To break down the messages that I am hearing, we live in fast changing times motivated by new digital products and their adjacencies entering the market almost daily. Virtually all of your competition is adopting new technology and the only prudent thing is to adopt the same technologies. But the real question is what are we going to do with this stuff?
But too often we only consider what the new technology is good for after we buy it and have our first disappointments along with the inevitable buyers’ remorse. That’s the heart and soul of the hype cycle and most often it’s the way new technology enters business. True, an early purchase is necessary for early adopters often figure out the best use of a new technology only once they buy it and play with it and their success is essential to driving early majority adopters to make the same purchases. Are you an early adopter? Of course eventually the technology commoditizes and virtually everyone buys the new thing.
The digital disruption might be different in two important ways. First everything is changing at once and, second, without a clear understanding of the need and utility of new innovations it could be a long time before some of them are adopted.
Back in the good old days, the fact of computers was revolutionary enough to disrupt large sections of life and business. But for a very long time a computer was simply a storage and retrieval device. Records that were once paper based became mere components of databases. We got over the concern of losing data and at the same time, moved out huge numbers of file cabinets and their contents. Good.
Today, though, computers have become small and powerful enough to do much more than record retention and systems of record are rapidly giving way to systems of engagement and, now, to systems of intelligence. This is where we are and it’s why we need to pull up for a moment and reconnoiter and figure out where we’re going.
Systems of intelligence pose the real and intriguing possibility that they can participate in business processes with, or in place of, humans. The natural concern as I, and many others, have documented is the loss of jobs if and when this catches on.
However, I think the real opportunity for intelligent systems won’t be in enabling business processes to go human-less; the real opportunity is for these systems to begin doing jobs that have gone unfilled and that’s what business agility is all about.
Forrester analyst, Craig Le Clair says there are ten dimensions to business agility and from what I can see they all need support from systems of intelligence. Some have that support today while others need it and, most importantly, they all need to interact system-to-system, intelligence-to-intelligence. According to Le Clair’s 2015 article in Forbes,
“Two are market dimensions: market responsiveness and channel integration. Three are organizational: knowledge dissemination, digital psychology, and change management. Five are process-focused: business intelligence, infrastructure elasticity, process architecture, software innovation, and sourcing/supply chain.
I can honestly say that I don’t understand all of these dimensions and few of us do at the moment. But it’s duck soup to see that systems of intelligence will be required to sit on top of all of it, with the possible exception of BI. Little of this makes sense if you’re still living off a business model that touts sustainable differentiation.
In the agile era just ramping up, companies seek temporary advantage, race to exploit it, and move on when the vein has been mined out. Agile businesses need to be concerned with issues of governance, knowledge dissemination, infrastructure elasticity and all the rest. That’s why my point is that the digital disruption might be real but it is also a harbinger of a new agile business model. The two go hand in hand.
So before you run out and buy the next new digital thing because everyone else is, consider your business model and whether you need to refactor it. Chances are that when you do enter the technology market you’ll make better purchase decisions and you won’t wallow in the hype cycle. That will be a good test of how agile you really are.