End of the Beginning
In “IT’s Ethical Dilemma” I wrote about the challenge of having a new product and selling the old one. If the new product offers benefits of better, faster, and cheaper — and what new product doesn’t? — then how is it ethical to sell the older, less performant, and probably more expensive one?
Well, the answer is easy in a free market. First you cut the price, which is natural given the creative destruction that’s taking place thanks to your new widget. Then there’s the customer’s preference for the older, more trusted product. The older product is safe, it’s had the bugs knocked out of it and the customer perceives it as less risky. So selling the older product is actually pretty easy, in fact the customer buys it more than the vendor actually sells it. Sales people like that.
But there’s huge peril in that approach. I was reading “The Rise and Fall of Infrastructures — Dynamics of Evolution and Technological Change in Transport” by Arnulf Griibler on the plane the other day making my way to San Jose and SuiteWorld, and it made me think about our market.
Now, Griibler is not a household name and the book dates back to 1990 so there’s that to consider. But he writes about something that just melts me — the interface between innovation, entrepreneurship, and massive societal change. Call me what you want, it’s fun. Anyhow, Griibler’s book is about change in the transportation industry over centuries starting with canals and progressing to railroads, roads and things driven by internal combustion engines, and air transport.
He’s not always right. From today’s vantage point he got air transport only partly right as the next thing in transportation. He didn’t foresee the spike in energy prices and the funk that air travel has gotten itself into. He also didn’t see that the Internet would become the disruptor of air travel. You would have needed a pretty good crystal ball in 1990 to foresee that the ‘Net would spawn social media and that people would conduct meetings on it reducing the demand for air travel. But that’s the procrastination business, warts and all.
One of the very, very interesting findings that Griibler discusses is what happens to the standard S-curve near the end of a typical market trend. We are used to thinking of the S-curve of most trends as symmetrical around the inflection point (see picture). But in his research Griibler found that wasn’t the case. The waning side of the curve, the top half, is only about half as long (in duration) as the top. The later adopters accelerate adoption and cause the completion of the wave very quickly. He uses the term “seasons of saturations” to describe what Joseph Schumpeter observed decades earlier. According to Griibler: “Schumpeterian ‘gales of creative destruction’ (i.e., organizational readjustment processes like bankruptcies or intensive mergers), a lack of productive investments as a result of the saturation of traditional markets and uncertainty about the characteristics and investment opportunities of the new emerging paradigm prevail (Page 274).” Feels like today in many respects.
So, what does this have to say about the software industry and selling the old product or IT’s ethical dilemma? Simply put it says that we always have less time to convert from the old paradigm to the new one once we get to the second half of the curve. Part of the reason that things accelerate is that at mid-point we are in a transition state and markets hate indecision so they move quickly once the new pattern seems inevitable.
I wrote “IT’s Ethical Dilemma” because I could see this coming intuitively but Griibler gives us the empirical understanding. To net it out I think you can expect cloud computing to accelerate from here, even in markets that might not be prone to adopting it, like ERP.
Consider this press release headline that crossed my desk this morning from NetSuite as it gears up for SuiteWorld. “GARTNER NAMES NETSUITE THE FASTEST GROWING FINANCIAL MANAGEMENT SOFTWARE VENDOR GLOBALLY, Market Shift to Cloud ERP Fuels NetSuite’s Rapid Growth in the UK, APAC and the Rest of the World.”
So think about this: Cloud computing got started as SaaS and Salesforce and NetSuite are among the leaders of the rebellion still standing. For a decade no body took them very seriously. The other vendors did very little to move their applications to SaaS beyond employing browser front ends. Finally, they got some of the religion and today most are offering a hybrid solution that will run in the cloud or in the data center. There is also a thriving new industry emerging for infrastructure services that will run standard single tenant applications elsewhere to provide the illusion of a cloud.
If Griibler is right then the ten or so years that were the first part of the S-curve for cloud computing will be followed by a period that’s about 5 years long in which the late adopters consolidate their seasons of saturations. I figure the five year clock has been ticking for two years that have been recession tinged and so the five year play-out might be a bit longer.
My conclusion though is that one of the riskiest things you can do right now is to ignore cloud computing and by extension the social, mobile, and analytics waves that come with it. Once you’ve fully amortized those servers, things are going to change rapidly.
NetSuite Takes OOW Stage
This week Zach Nelson, CEO of NetSuite, a.k.a. Larry’s other company, took over the Marc Benioff chair as guest antagonist but given the relationship between the companies the vibe was more sedate. For instance, no one went to the talk at the Lam Theater in Yerba Buena Gardens wondering if Nelson would be controversial or if he would utter the words, “We come in peace,” as Benioff once had. That much was a given.
Nonetheless, Nelson served roughly the same purpose as Benioff; he was the emissary from the cloud. He functioned as a third party thought leader pointing off in a future direction that Oracle itself could not for various reasons. Nelson’s direction and his talk cemented one of the key elements of cloud computing for large enterprises contemplating — what to do about the growth of increasingly expensive and hard to maintain ERP systems. In an era where data and decision-making are continuously being pushed down the chain of command conventional on premise ERP has a flexibility problem and that was the subject of Nelson’s talk.
For at least the last year various vendors have been talking about their two tier strategies in which they provide a second layer of ERP support or they cooperate with other vendors to do so. Nelson used his time to describe the advantages of using a product like NetSuite in a variety of ways that demanded a second tier of ERP.
For instance, a large multi-national company might use a second tier of ERP systems to capture local or regional data, convert currencies and adhere to local regulations before rolling the results up to corporate in a more tidy bundle. The two tiers could in practice be all NetSuite but Nelson’s point was to also support heterogeneous environments in which Oracle or SAP might be the corporate standard.
Finally, an question that is on lots of minds during a merger, acquisition or sale of a division is what to do about the financials. I have to confess that this is not top of mind for me but I can understand how it can be for the principals. Nelson’s point is that his product, by virtue of its cloud residency, can spin up a company very quickly and enable the separation or merger as the case may be.
The two tier strategy is a happening thing and I expect that we will hear more about it over time and not just from ERP vendors. Much the same argument could be made for front office conversions. As multiple conventional CRM systems begin to age out we might see SaaS CRM vendors trying to ease the transition for their own products.
Finally, two tier provides other benefits to companies such as limiting the growth of conventional ERP and initiating a transition that will move some to the cloud eventually and away from big ERP systems. That’s what Oracle can’t say on its own because as much as it would like to surround SAP systems with NetSuite and eventually convert them, it would not like to see the same thing happen with, say, Microsoft ERP surrounding and ultimately ejecting Oracle from an account. NetSuite has an inside track right now because it runs a complete Oracle stack which will make conversion easier while keeping it all in the family.
Zach Nelson’s talk was a success. He presented an appealing vision of ERP in the cloud and for that I think it’s a lock that he’ll be invited back.
OOW Keynote, Larry Ellison
I honestly thought I was going to have to wait longer to hear anyone from Oracle talk about seriously focusing the company’s hardware and software lines on the Cloud. True, they’ve been saying cloud-like things for a couple of years but the pronouncements were features and functions that added something to the cloud discussion without going “all in” as some others in the industry have said. But last night CEO Larry Ellison did what I’d forecasted last week in a way that is uniquely Oracle but nevertheless a good, defensible (and somewhat debatable) position.
Here’s what I said last week in my forecast,
It seems this family of hardware (Exa-hardware) is built and optimized for very big jobs involving terabytes of data and gazillions of users. That’s exactly the kind of stuff the growing cloud computing movement might gobble up. Currently data centers are masses of commodity servers in racks running feverishly but without a layer of sophisticated management that would optimize their utilization and reduce costs…
And,
The next logical step would be to endorse the Exa-hardware as a sustainability tool for a power hungry planet. I’m looking for some sustainability messaging from Oracle and it could even happen…
And,
Sustainability is not alien to ideas like mobility, cloud, social and analytics, you can’t separate them. I think if Oracle wants to maintain its leadership position with many of the largest companies in the world, it needs to put a stake in the ground and become a thought leader here…
So last night, Ellison took aim at the cloud and announced Oracle 12c a database for the cloud that supports multitenancy, if you want it, and he announced the Oracle Private Cloud running on Exa-hardware and delivered as a tight bundle to customers who want to get to the cloud, simplify their lives, and not fret about managing all that stuff. He also announced Exadata 3, which can hold up to 26 TB of data – “All your databases.” The cool thing about Exadata 3 is that the 26 TB is all silicone based memory, it doesn’t count the spindles that are rapidly becoming secondary in a high performance enterprise environment.
He made some traditional arguments about the cloud being more efficient and economic and at some points came close to claiming credit for inventing it. Truth is he did have a hand in inventing modern cloud computing as a very early investor in Salesforce and NetSuite and as the Zen master for Benioff and Nelson. But his skin in the game had been relatively minimal.
Now, while there is plenty to like from a sustainability perspective, it should be acknowledged that what got announced is a bunch of half steps designed to get enterprise data centers into the cloud without much disruption. I think this means that Oracle, for the moment (which will be about a decade) will not be aggressively selling the virtualization that comes with multitenancy and as a result there will still be a great deal of wasted power and underutilization in some cloud data centers.
But in a decade we could see a switch flip and everyone will get religion about power consumption and pollution and the switch to virtualization will happen very quickly because some very large companies will have been prepositioned for the change.
Actually a decade might be a long time and 6 or 7 years might be more like it simply because Oracle has many competitors going to the cloud, most notably Salesforce, and that will accelerate the timetable.
The next step, which has to come this week, will be for the company to shift gears to software – cloud based software – that makes the cloud even more attractive. Look for this to happen especially in the CX Summit or whatever they are calling it, on Wednesday. That will be the day that Anthony Lye talks a lot about how the companies he bought last year – like RightNow and ATG and others – are making the Oracle cloud a serious competitor.
Achilles’ heel is still Fusion. What’s up with Fusion?
Finally, many, if not most of the big cloud computing companies are running fault tolerant data centers using conventional racks of blade servers and disks. That’s giving us 3 to 4 9’s of reliability but I think before we can hope to get to the 7 to 9 9’s that will make cloud truly ubiquitous and universal utility grade computing we’re going to need some re-architecting. Regardless of what you might think of Oracle’s approach to the cloud, the hardware is an appealing approach for that alone.
Oracle likes to message that 20 out of 20 of the top banks/pharmaceutical companies/whatever, use Oracle and it wouldn’t surprise me if they’re going for 10 of the 10 biggest cloud companies. That will take some work and given the multiple levels of competitiveness and lack of love between the players, that might take even more than a decade to happen.
NetSuite’s Big Moment
This spring has seen a raft of software company events and announcements and they’ve been good meetings full of real news and important new developments. It is as if these companies bided their time during the worst of the recession building new product, thinking about the future and how customers will use their technologies. It was time well spent.
This week SAP, NetSuite and others have held meetings and more good news seems to be emanating from their conferences. I attended the NetSuite SuiteWorld event in San Francisco and that’s what I want to write about here.
For at least two years most ERP vendors have been championing the idea of a two tier ERP strategy. I’ve heard messaging from Microsoft, Oracle, SAP and NetSuite and, plus or minus a few wrinkles, the idea is that conventional ERP built for the late twentieth century is tired. But rather than scrapping the huge investment in blood sweat, toil, tears and a not inconsiderable number of dollars, most companies deploying new ERP will be doing so in ways that surround the original deployments rather than replacing them.
That was the story up to last year and it was a good and logical one. Vendors loved it. Two tiers made the old system with its high maintenance charges a fixture for at least another decade while giving everyone a chance at new business. For customers, few thought ERP was broke and even fewer had an appetite for fixing it. But many did have serious needs to fill in what old ERP lacked — the social, mobile, cloud, big data issues that won’t go away. To this you should add commerce, which will bring us current.
One of the hidden themes running throughout the software industry today — a theme that no one other than me, I sometimes think, ruminates on — is the high cost of energy required for doing business. Escalating transportation costs factor into the social, mobile, cloud etc. alluded to above as well as what I’m going into next.
So back to the present, San Francisco and SuiteWorld. In his keynote today CEO Zach Nelson unveiled a comprehensive approach to ecommerce running off NetSuite’s financials called SuiteCommerce. Now, NetSuite has been offering ecommerce solutions for many years and they already have successful customers running commerce sites (about 2,800) off their financials and integrating other important modules like their warehouse system.
The difference today is in emphasis, partners and application development tools from NetSuite that brings everything together in a solution set that aims the company at being a significant player in a new generation of integrated and flexible back to front office systems. Parenthetically, this is how disruptive innovations take root which should provide no comfort to the major ERP players basking in their apparent good luck.
In announcing SuiteCommerce, NetSuite has added a third tier to the conventional ERP wisdom. The major difference between two and three tiers is the emphasis on reaching customers through the commerce solution and the recognition that NetSuite, at least, owns two out of three levels.
This has big implications for all businesses. As Nelson correctly pointed out, the demand for some of this new commerce approach will not come from you and me but from the devices we use to run our lives. The fridge is out of beer so it signals the store or at least my personal device to remind me to pick some up. The car needs service — already a cliché but nonetheless an important reality — so it negotiates a service appointment. On and on it goes.
The Internet of things will be much bigger than the Internet of people and the Internet of things will be a major acquisition portal for business and consumers as well as a major user of automated commerce technologies. Commerce solutions that make it easier for people to buy and receive products through efficient channels is a great first step.
Back to transportation costs. The Internet of things will be instrumental at consolidating demand and ensuring that supply arrives in the most efficient way, easing the transport issue all the way up the supply chain. Of course, the Internet of things will also enable actions that have no commerce involvement and it’s important to recognize but not to delve into here.
What makes SuiteCommerce appealing is the “something for everyone” approach. NetSuite’s financials can act as a data hub funneling necessary product and pricing data to user interfaces including their own as well as third parties. The financials, shipping and invoicing technologies provide the critical single source of the truth that has become a NetSuite mantra. And powerful tools make it possible for developers and business users to make or modify commerce systems at, well, the speed of business.
So there’s a lot to like coming from NetSuite today. Earlier, the company announced revenues of nearly $70 million for the last quarter and the CEO repeated his guidance that the company would generate $300 million in the coming fiscal year. While he was at it, Nelson also announced new partnerships with Grant Thornton, and Deloitte’s sprawling digital business group. So there will be plenty of help on the implementation side, which is most important in the two or three tier approach in dealing with the very large companies that are beginning to flock to NetSuite.
I can’t say that three or even two tier solutions were on my radar when I first contemplated SaaS for ERP. Honestly, I thought ERP for the cloud was an exercise in squaring a circle. But it seems like the industry has a plan at last and innovation continues at the margin where NetSuite is carving out quite a position for itself.
