The Blog

  • September 27, 2006
  • Keeping up with on-demand

    Someone recently asked me who I thought was ahead in the on-demand market.  That’s a hard one.  As far as I am concerned there are no right answers to a question like that and such a seemingly innocuous question raises more questions than I can answer.

    For starters I don’t even think it is a single market at this point.  Certainly, from a financial analysis perspective you could look at it as a single market—you can track revenues for this type of software delivered as a service, note the growth rate and compare it to the growth rate of the enterprise or SMB software, if you like—but from a functionality perspective, we’re way beyond that.  There are simply too many applications now available as on-demand solutions.  Jeff Kaplan at ThinkStrategies tells me he tracks a list of about forty different types of on-demand software and some of them compare to each other like apples and watermelons.

    Nevertheless, from other angles, the question of who leads is very important if only to provide backlighting to show who is trailing.  Let me explain.

    For a long time, I have been comparing on-demand solutions to other disruptive innovations that have taken place in the software industry over the decades.  The importance of disruptive innovation as an event is that it changes the game.  It’s like an asteroid hitting the earth 65 million years ago.  It causes massive upheaval and dislocation but eventually equilibrium is re-established and then things remain fairly constant until the next big shift.  Without a disruption, there is no telling the trajectory of history would be.

    At this moment every company in the software business is playing out a scenario in the disruptive innovation story.  Some are innovating like mad, identifying and in many cases creating new niches that they are rushing into ahead of competitors to establish new markets that will serve them for years.  Others are taking a more cautious approach, waiting for clearer signals from the market and their customers.  Still others are cautiously dipping a toe in the water trying to have a position in each camp by co-opting part of the on-demand message while re-positioning their legacy products as quasi-on-demand fare.

    Very often we only look at parts of the big picture—the technology is cool and slick and it does things we never thought possible; or we see that customers like it and that the new technology has numerous cost advantages over the legacy approach and we think, why would anyone want the old stuff?  To understand each company’s motivations, you have to look each one’s business model. 

    In a disruptive innovation a business model might be the hardest thing to change because it is not simply some abstract bit of philosophy.  The business model is the driving force for how a company makes money and how it invests scarce resources to build infrastructure which can mean the products themselves, the sales force and the type of selling the company engages in, and numerous other pieces of investment to support all that.  Changing technology paradigms is the easy part; changing the way you make money—and most importantly, the way your investors expect you to continue making money—is the tough part. 

    Changing the business model is a harder nut to crack than rent and alimony, maybe that’s why every disruptive innovation seems to sweep a whole new cadre of vendors into leadership positions in the industry.  I think we’re at a leadership transition point right now in the software industry.  The established vendors are still strong but they are under increasing pressure from the insurgent on-demand players who can deliver solutions quickly and effectively and at very low costs compared to the big guys. 

    On the other hand, some on-demand vendors are still fighting to dispel the idea that they are not ready for prime time quite yet.  While that’s going on, larger vendors are fighting holding actions designed to offer a bit of on-demand’s benefits—especially lower costs—while preserving their hold on the market, their revenue streams, and, yes, their business models.

    In capitalism we don’t really have many good mechanisms for enabling companies to retool and change their business models.  You can make cosmetic changes that rarely stem the tide of change—many try, but few are able to go far enough and most end up caught in the no man’s land of bankruptcy.  You can take yourself private, but that requires a long time horizon and lot of capital; for most the costs are frequently prohibitive.  Finally, you can persevere in doing what you have always done, but eventually the company stops meeting financial expectations and becomes ripe for a buyout.

    We have already seen some vendors introducing on-demand strategies designed to keep their customers engaged by giving them a flavor of the new paradigm without causing massive dislocations to their businesses.  I expect we will see more as legacy vendors try to redefine on-demand to meet their needs. Unfortunately, these hybrid solutions rarely work out and customers who try to insulate themselves from change ultimately have to change anyhow.

    So who’s ahead in the on-demand market?  My guess is it’s the customers who clearly see the writing on the wall and who make plans to transition to the new paradigm in an orderly way.

    Published: 17 years ago

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