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.
Back Office Perks Up
That normally staid bastion of conventional computing is perking up taking on subscriptions and cloud computing like candy. It used to be that when you thought about back office and cloud in the same thought you also thought about NetSuite. Truthfully you still do, they’ve been at it a long time and have produced a solid and well articulated suite of back office ERP, finance, and accounting software (and more) that runs a lot of companies, especially the international variety that keep books in multiple languages and currencies.
But over the last ten days other companies have announced partnerships and solutions that both challenge NetSuite’s position and point to an important new era in computing.
The new era has been percolating through all of this century. Ever since Salesforce starting selling “no software,” cloud computing and subscriptions have been stealing a march on conventional, expensive, and bloated on premise software. Each year these solutions became more powerful and ubiquitous. First they supported other subscription companies, then all sorts of companies, and now, with the advent of the platform, cloud computing has come to the development suite and the back office.
The back office! Ten years ago the mantra was “Not with my data!” but something happened. Certifications sprouted and cloud became normal and safe and with Salesforce’s leadership, kind of cool. On the back office side, NetSuite carried a similar message to the point that today cloud and accounting are no longer words that, when spoken together, sufficient to punch your ticket to a long rest in a rubber room.
The last week has seen a breakout of sorts for subscriptions, cloud, accounting, ERP, and platform computing. Zuora and Intacct announced a widening partnership that will deliver Zuora’s subscription billing, payments, accounting, and financial management solutions to Intacct’s 7300+ cloud accounting customers. Be aware that cloud and subscription are not the same. Intacct has been successfully delivering cloud based accounting services and giving NetSuite its fair share of competition for many years.
The addition of subscription power from Zuora raises the bar to enable Intacct’s conventional customers with subscription aspirations to support what can best be called hybrid business models. At the same time, the announcement also shines a light on Salesforce’s platform strategy. Zuora is a native application on Force.com and Intacct has developed powerful integration with the platform in general and the joint announcement says they’ll double down on that integration. For Zuora it means 7300 new prospects, for Intacct it means a major capability upgrade without breaking a sweat. But we’re not done.
Also today, FinancialForce, a native accounting system on the Force.com platform just announced their entry into the ERP market with FinancialForce ERP. As a native application on the Force.com platform, FinancialForce has completed the circle of front to back office solutions that began with Salesforce. With all of the available solutions, a company of any size or complexity can now support all of its enterprise IT in the cloud and via subscriptions.
I think the biggest news in all this is what will happen to conventional IT in the years ahead. Pessimists say that IT will wither as significant chunks of functionality decamp for the cloud but I disagree. IT has always been a major component of a company’s secret sauce. If garden-variety accounting systems, even those that support subscriptions, can be off-loaded to the cloud that’s fine.
As more enterprise solutions head for the clouds and budget ratios turn from capital expenses to operational, we should see a renaissance of in-house application development which will, importantly, drive new business processes, especially in mobile apps that will help users do more and better business and do it faster. That’s where the secret sauce is and will remain for the foreseeable future. Time to embrace it.
These foundational changes come at an opportune time as prognosticators think about what it will mean to have 50 billion devices hanging off the Internet in 2020. Devices will increasingly be non-human consumers of goods and services (especially for restocking) and producers of data and information. Their transactions will take fractions of a second, be automatic, and require the attention of the infrastructure we are building now with cloud and subscriptions.
So the significance of these announcements together with things that have been coming out in the last year all point to an important milestone. Conventional applications managed data but the new stuff with platforms, front and back office integration, workflow, and social media all point to building and managing better business processes. I think we’re close to the end of a long wave of technology invention and at the beginning of an era of its consolidation and application.
A Question of Granularity
There is a long simmering issue coming back to the front burner these days. It’s the question of best of breed software vs. a single system. I’ve been giving it a lot of thought and realized something.
The old discussion says that best of breed opens up application areas to greater competition from more vendors. This competition drives normalization so that everyone can build to the same open standards rather than proprietary architectures. This approach worked for the relational database and SQL, PCs and servers, and standardized programming languages just to name a few things.
Alternatively, those supporting the solo idea say that for complex processing having a single throat to choke is a valuable asset. Who is right? Can the answer depend on a tiebreaker of sorts? I think the answer is beyond this question and ultimately comes down to a question of granularity.
In the software business we’ve seen the industry veer from one extreme to another. Early in a lifecycle, it seems, vendors merge and integrate systems to produce that single solution but it may be highly proprietary. Those proprietary systems are an emerging vendor’s best defense against a copy cat coming in and taking over.
Often best of breed solutions pop up when developers see opportunities to improve a process or even a sub-process to optimize it. The best of breed approach basically says that the monolithic solution can’t be great at everything and that customers deserve great. That’s true but the idea has a half-life because the longer a suite is in market the better it gets and at some point a critical mass of customers won’t even consider the alternative.
Today we see vendors like Oracle leading the charge for the single vendor idea saying that its products are engineered to work together. That would be the argument for the sole source. NetSuite argues from the same premise. But we also see companies like Salesforce with a massive ecosystem of partner applications that offer specialized apps that the company does not provide. Salesforce does deliver a very good development platform in Force.com and API that its partners use to develop their solutions. In this case I’d say that the Salesforce solutions involve such new processes that they are functioning like the early market vendor with a high walled garden while still offering aspects of best of breed.
This is a bit different from conventional best of breed in that the Salesforce partners more or less pre-integrate their solutions via the platform so that the only difference between a Salesforce application and a partner application is often whose fingers did the work. That’s why I would suggest that Salesforce’s approach is more like the single provider than the best of breed approach from just a few years ago.
So to me the question is not one of single vendor vs. best of breed. I think that’s a false dichotomy. Whether or not we realize it we’re all in a best of breed era and the only question is at what level of granularity? I don’t know anyone who seriously thinks that some level of best of breed is NOT a requirement today — there are simply too many demands and options to expect a single provider to do it all unless all the software companies of the planet merge.
The best of the best of breed solutions will arrive at an appropriate level of granularity that optimizes internal lines of communication within the system while incorporating external best of breed solutions at the periphery.
That dichotomy will be different from system to system. For example, CRM has done a good job of integrating several generations of applications including whole systems like call center and social media as well as specialized hardware like IVR gear to produce good solutions.
ERP seems to be different because the back office is a bigger thing that needs to coordinate many more moving parts. Frankly, I think the critical mass of application solutions is just bigger in the back office than in the front office. So the discussion of best of breed has to be qualified by which part of the business we’re referencing.
In ERP I don’t think you gain anything if you suddenly offer best of breed GL and AR distinct from accounts payable or some of the manufacturing systems like supply chain, product lifecycle management and similar things that need to be tightly integrated. On the other hand, HR was never that tightly integrated with the back office and it was more of a traditional offering that went with the back office because it paid people and the back office was where the money is. But these days with a proliferation of human capital management systems, training, hiring and things like them, the ties are less strong which has opened HR up to best of breed offerings for these newer functions.
Billing and payments is another area that has recently come up for best of breed renovation. When those functions were associated exclusively with manufacturing it all made sense. But today the proliferation of the subscription model has placed new demands on back office billing that it was not designed to handle. Subscription billing and payments has become a satellite of conventional ERP and truth be told companies like Zuora, Aria and all the others in this niche, do a better job of managing subscriptions than old style ERP can. So, again, we are seeing an area open up to best of breed approaches.
For me, you need to ask about the level of granularity at which you are viewing the business problem in order to determine the answer to the bigger question. Then, too, we haven’t even looked at the new business processes that are being glued onto the front office through social techniques. It seems like the majority of new business processes are going to the front office and the back office is largely settled business. Even subscription billing is looking more like a branch of customer service than part of ERP. So, the issue isn’t best of breed vs. an integrated solution, it’s more about how much best of breed can you handle before you have too many balls in the air. I think the answer is it depends.
Salesforce and ExactTarget in Deal
Holy moly Salesforce announced they were buying ExactTarget for a cool $2.5 billion this morning. The deal will do much to complete CEO Marc Benioff’s vision of a MarketingCloud to go along with the SalesCloud and ServiceCloud of the company’s core CRM suite.
Some would say the Salesforce and the entire CRM suite vendor corps have been late to the market in developing a robust marketing solution and I would be one of them. However, it needs to be said that the vendor community played things well by a lot of measures.
For the last five years with a depressed economy it was natural to concentrate on service since the name of the game in a slowdown is to protect your core business. That’s what a lot of CRM vendors did, they beefed up their service and support offerings building in elaborate social architectures that enable their customers to service their customers effectively and at lower costs than previous modalities.
Fast forward to this year and the economy is picking up steam and that means a more traditional approach to gaining new customers and an emphasis on sales and marketing. Sales we know had been the bread and butter of CRM so it was logical for the vendor community to go after marketing.
For years, marketing has languished as the largely independent stepchild of CRM. Marketing is widely acknowledged to be CRM but its business processes are very different from service and sales and for that reason many vendors always put off building robust marketing functionality into their CRM suites.
Instead, marketing has remained independent with companies like Eloqua and Marketo running their own shows. But Eloqua was recently bought by Oracle and Marketo had an IPO just a few weeks ago, Pardot was bought by ExactTarget, which I think made the acquisition much more attractive for Salesforce.
However, I see some yellow flags waving on this deal. First off, $2.5 billion bucks can buy a lot of development talent (and a good weekend in Vegas). This is an expensive deal and I wonder why Salesforce didn’t want to build the solution itself. They seem to prefer buying over building these days and while I can understand buying for strategic reasons, I have a hard time when I see making a purchase as the default position. And, speaking of acquisitions, the buzz around the industry I had been hearing was about how long Salesforce would let Marketo wander around without taking them off the street. Guess we know now.
Secondly, there appears to be a fair amount of overlap between ExactTarget and Salesforce especially in the analytics arena. If you back the analytics components out of the deal, then you have to ask how much more development there would have been to build something that was Salesforce native.
None of that matters now; the deal is done and except for the price tag (I am a flinty, tight fisted New Englander after all) there is a lot to like about the combination. Instantly Salesforce gets 6000 ExactTarget customers but then again many of them are already Salesforce customers too. The combination also comes with serious marketing chops given that Gartner gave ExactTarget high marks in its recent Magic Quadrant.
I think the companies this affects most are SAP, Microsoft and Sage — add in NetSuite too. With Eloqua and now ExactTarget in enemy encampments there are fewer marketing options for these companies. This could make Marketo the bell of the ball for these vendors though right now Marketo is well tuned to being in the Salesforce ecosystem but it is not exclusive to be sure. So maybe Marketo walks out of this with a clearer landscape and more market power.
At any rate, it will take a few months for the dust to settle but ExactTarget is already in the market and executing with Salesforce customers so for the most part it’s game on.
SuiteWorld reveals cloud computing ERP’s mainstream moment
NetSuite bloomed this week, in part because of a very well produced user meeting, SuiteWorld, held in San Jose but also because there can no longer be any doubt that the market for ERP technology is turning to the Cloud.
What was once unthinkable — that ERP could or would ever be delivered as a cloud solution — has been gaining acceptance over the last couple of years and NetSuite has been the most aggressive of ERP vendors at promoting it. According to CEO, Zach Nelson, the company’s revenues, cash flow and profits are up significantly year over year and the company is projected to operate at a run rate of more than $400 million by the end of its fiscal year.
Negative growth rates at other ERP companies, notably ERP enterprise leader, SAP, whose license revenues declined more than nine percent according to financial analysts from Barclays, speak volumes and contributed to the overall good news for NetSuite. Cloud based ERP is now a value proposition that competes so well that many companies are taking the plunge rather than renewing maintenance contracts with the ERP leaders.
There’s nothing surprising in this. Much the same thing happened in CRM and today all CRM vendors have some form of cloud computing solution that they can promote when seeking new business. They may say they offer hybrid approaches but if you review my last two posts on the subject — “End of the Beginning” and “IT’s Ethical Dilemma” — you might conclude that hybrids are not much more than a fig leaf for those who need to defend their on-premise virtue.
The reasons for the surge in cloud ERP can be traced to market dynamics. The early adopters and early majority buyers have spent the last dozen years buying and installing cloud ERP and now that they can prove success, there appears to be a stampede forming to bring the later adopters into the fold. This is also not controversial. If we’re passing the inflection point of this market, the second half will happen at about twice the rate of the first. My contention is that only very specialized and conservative companies will persist with exclusively premise based ERP roughly three years from now.
Of course this does not mean that premise based ERP will simply go away. Companies like NetSuite and Microsoft have developed surround strategies that might keep premise based ERP going for a while but I would be surprised if there were many net new premise based ERP implementations from here on. The condition will mimic mainframes. There are many still in service but who buys one these days?
All this is not to say that NetSuite is acing the exam, though they are the smartest kids in the class. I’d prefer to see them take an approach that recognizes the importance of best of breed strategies for one thing, and for another, their CRM stance is, to put it mildly, puzzling.
Company founder, Evan Goldberg, and CEO, Zach Nelson, both extol the virtues of SuiteCloud but mostly as a customization vehicle. In fact it is that but it is also a primary integration hub for partners and thus the moral equivalent of a platform in the Force.com mode. I suspect, though, that the company’s approach to SuiteCloud plus its messaging about offering a single integrated system is more out of respect for a customer base that consists of finance and operations people whose job is to make the trains run on time. Leave the swashbuckling social media, best of breed, and customer experience messaging to the likes of Marc Benioff and Salesforce.com for the time being, we have bigger fish to fry, I think, is the unwritten assumption.
Speaking of all things CRM, there was an interesting exchange between my esteemed friends Esteban Kolsky and Zach Nelson over NetSuite’s CRM position. Kolsky inquired at a press conference why Nelson paid so little attention in his keynote presentation to CRM (a true statement). Nelson returned serve and opined that the ERP system is the real customer relationship management system for the obvious reason that it contains real “customers” i.e. mortals who have placed an order whereas conventional CRM as we know it is really a prospect management system.
Messrs. Kolsky, Paul Greenberg, Brent Leary and myself might have begged to differ and in fact, the debate about the C in CRM was settled while Mark Zuckerberg was still in college. But let’s cut this baby in half. Nelson has a point about customers and given his company’s focus on eCommerce as a logical extension of ERP and its function as a customer facing solution, his argument does hold water.
However, this fails to explain how Nelson’s ERP customers handle, let us say, their proto-customers or prospects for that period of time when they are interfacing with a company, on its event horizon so to speak, but have not yet placed their first orders. For them the answer might very well be Salesforce.com, which explains the importance I attach to SuiteCloud and all the rest. I suspect it is also one reason that Accenture, Deloitte, and Cap Gemini have devoted practice areas to the cloud and NetSuite. Nice hat trick, Zach.
But that’s small potatoes in the big schema. For now let’s say that ERP is hard to do and this has contributed to NetSuite’s relatively slow start compared to Salesforce. Both emerged from a discussion in Larry Ellison’s office as legend has it but Salesforce is a multi-billion dollar company today while NetSuite has a run rate of about $400 million. ERP might be hard but its time in the cloud is at last here and I look for more good news from Goldberg, Nelson, & Company simply because it’s now their time and because they’ve done the hard stuff to make their solution viable in a demanding market.
From time to time I accept free travel and accommodations from vendors so that I can attend their conferences. You ought to know this by now but it bears repeating. NetSuite paid the freight FOB Boston and covered my expenses for SuiteWorld. It was an enjoyable experience that, nevertheless, did not influence my ability to write objectively about what I saw. What kind of analyst would I be if it did?