Salesforce’s Pragmatism
Marc Benioff, CEO of Salesforce.com, has often said that tactics drive strategy at his company. That’s the opposite of what we think of regarding how decisions should be made especially in big companies. The image is often of high-level decisions being refined into finer grained activities until you have tactics. Much of this is encoded in the acronym GOSPA, which stands for goals, objectives, strategies, plans and actions.
So what’s going on when a high growth company like Salesforce decides to work backwards? Some might say that whatever it is should be continued because it works and while that seems like an easy answer, it is quintessentially pragmatic and there is much to say in favor of pragmatism especially when it is diametrically opposed to dogma. Nonetheless a little analysis wouldn’t hurt here.
This is all brought into high relief by last week’s announcement that Salesforce would buy a small human capital management (HCM) company, Rypple, and that Salesforce would next field a cluster of applications around HCM or HR which it named Successforce.
Critics immediately started by stating the obvious, that a single shot HCM application based on Facebook was not the rock on which to build a magnificent cloud based human capital application set. They were right, too, but the situation was like a very good hockey ref trying to officiate a baseball game. They missed the point by calling high sticking on the man in the batter’s box.
All of the major enterprise software vendors have at least one human capital or human resources offering. SAP just bought SuccessFactors for $3.4 billion, Oracle has PeopleSoft solutions and Workday, headed by PeopleSoft’s founder, Dave Duffield, is also in the game. The market is estimated at $6 billion annually, which represents a nice revenue stream for all vendors.
As the preeminent social software vendor, Salesforce bought Rypple, a social HCM solution and announced Successforce, at least in part as a means of showing that it intends to be a player in every niche that conventional software companies play in. Salesforce could do no less because it has to show that all application areas both conventional and some not invented yet are addressable by a cloud and social solution. This is a good and probably necessary strategy and though it may have been percolating along for some time, the tactical announcement may have been dictated by recent activity. The announcement also takes some of the spotlight off of the SAP-SuccessFactors activity.
Starting with a social aspect of HCM makes a fair amount of sense because in one stroke it says Salesforce is in the market and no one need ask if Successforce will leverage social media to support business just as the other Clouds do. Of course, the pressure is now on Salesforce to deliver broad HCM functionality, which may entail additional acquisitions or a rapid development process or both. I have no idea what the company’s tactics will be but I am sure they will reflect some pragmatic thought on their part.
Getting the Skinny on the Big Four
On an otherwise slow news week there was a story emanating from a Gartner analyst, Dennis Gaughan, at a recent Gartner talk in Australia that I found interesting on Business Insider.
The headline told the story, as good headlines often do. “What Microsoft, Oracle, IBM and SAP Don’t Tell Customers” identifies, in Gaughan’s opinion, the primary strategies or approaches to the market employed by the big four software companies. There’s room to quibble with this but there are also elements of truth. I hope you’ll click the link and read the rather short piece, here are the major takeaways.
- Microsoft mainly wants to protect its Windows and Office franchises
- Oracle products don’t really work well together
- IBM wants to take over your IT strategy
- SAP confuses customers with pricing
Got that? I wonder how many readers came away from the article saying, so?
Didn’t we already know this in our bones? And, more important, aren’t these simply strategies for locking in customers and getting the maximum footprint in customer data centers?
IBM has been running IT strategies at its customers for a very long time. That’s not new nor is Microsoft’s fetish over Windows and Office. Dynamics CRM has an Outlook interface because the company tells me, that’s where people spend their day and they already understand the interface. Fair enough, but do they understand the interface primarily because they’ve been trying unsuccessfully to use Outlook as a CRM system all along? Client-server was a boon for windows and cloud computing is a major threat. Why else is Microsoft trying to sell their idea of an operating system for the cloud?
And can anyone take Oracle’s claim of systems engineered to work together seriously? A few years ago the company said that customers should use their products as they come to minimize breaking systems. And when Oracle bought Sun they immediately extended the blanket to cover hardware. In last week’s column I quoted Dave Yarnold CEO of ServiceMax who wondered in print if the universal devotion to SAP’s ERP (and I must say ERP in general) might be sapping companies’ ability to creatively engage the marketplaces they serve.
Nope, sorry, nothing really new here. As they might say in court if you’re an IT executive, you knew or should have known all about this. But what is new is that this kind of news or information is surfacing and it is surfacing at a time when people are thinking differently about their futures and companies are trying to keep up.
The legacy systems of the twentieth century that mediated the manufacturing economy have proven inadequate to the task of keeping up with the increasingly mobile and socialized customer. Moreover the customer is increasingly turning to the cloud and to subscriptions for all manner of things that were once considered products but are now delivered as services.
The news in the article I quoted is not that the big four have tried for a long time to—legally—control their customers. The news is that Gartner said it and the speaker acknowledged that the information was culled from Gartner’s experience with its own customers. To the best of my knowledge Gaughan has not been reprimanded for speaking bluntly and Gartner has received no law suits for the honesty, but it’s early.
No matter, what this indicates to me combined with other things I’ve been reporting on are two things. First, IT customers are getting restless and starting to speak out. This may be the beginning of a cascade. Second, the vocalized dissatisfaction rising in the market may indicate a turning point in the paradigm.
Paradigms are remarkably stable. They may crumble for a long time accumulating pressure for change but never reaching a tipping point. But then, seemingly without warning a catastrophic event causes a shift. There is nothing foreordained to the effect that today’s big four will be tomorrow’s. They have big installed bases and tremendous market presence and that might delude some people into thinking that they are too big to displace.
Alternatively, though, major market shifts don’t happen because the leading vendors fail. They happen when the leaders become irrelevant to the problems they provide solutions for. We haven’t been a primarily manufacturing economy for a long time yet our enterprise software is built to support it. Hand in hand with the irrelevancy of the old regime, the free market boasts a huge number of vendors with robust solutions that are more relevant to the moment.
Multiple economic drivers are in place and that should make the new year very interesting indeed.
Beyond Legacy ERP
There was a guest post on the Forbes Magazine blog last month that I can’t get out of my head: “For Enterprise IT, Time to Move Beyond SAP.”
For the record, I am an ERP dilatant — I know about it but don’t follow it with the same passion that I follow CRM. And as far as SAP (NYSE: SAP) is concerned, I have rarely met a bunch of smarter business people who are also rather nice. I have no issues with either, but as an observer of macro trends, this was a surprising article for several reasons.
First, someone else wrote it. The headline sums up my observations about ERP, but until I read the post by Dave Yarnold, CEO of ServiceMax, I thought I was unique in that line of thought. Glad I am not.
Second, and more interesting, is Yarnold’s assertion that legacy ERP has been an impediment to business, at least in recent years. That really got me, because I thought that was my mantra.
Third, it points to the cloud and modern technologies as the emerging solution.
It all goes quickly to the business model of the 21st century: services on demand. Vendors — at least the smart ones — are looking for ways to convert their product-centric businesses to services for some very good reasons. When you sell a service, like software for example, we all know the customer is liberated from the need to purchase hardware, operating systems, middleware, database and applications. Customers are also liberated from the need to hire high-priced talent to administer and maintain all that technology.
I hate to sound happy about reducing demand for all those talented people in the middle of a recession (I know it ended a while ago, I’m just waiting to feel it). But that’s what businesses and economies do. If something can be shown to be extraneous to the business’ core mission, you must reduce or eliminate it or you will become uncompetitive as a result.
It’s not just software that comes as a service either. Some of my favorite examples are the companies that were profiled in The New Yorker about a year ago that provide wardrobe as a service. If you like Gucci bags or designer clothes but can’t afford to own, these companies will provide articles of clothing as a subscription.
But let’s get back to the impediment for a moment. According to Yarnold, who was speaking about a colleague, “He’s an IT veteran who has been running SAP software since the ’90s, who came to the realization that the efficiencies it afforded them have completely eliminated the creativity, growth and innovative thinking the company once prided itself on.”
That’s bad enough, but Yarnold goes on, “Companies had to conform their business processes to the way SAP’s rigid software ran. Much of the uniqueness that enabled companies to differentiate themselves was squeezed out in the name of SAP. I can’t even guess at the number of meetings I’ve had with senior company leaders over the years where creative new business ideas were shelved because ‘it didn’t fit into SAP.’ Is it possible that this long-term adherence to the SAP way has in some way been at the root of the lack of creativity, competitiveness or the loss of manufacturing jobs we now bemoan in our economy?”
I wouldn’t go that far — you can’t lay everything at the feet of SAP, and this analysis does not take into account life before SAP. Companies bought it because it solved a business problem (let’s call it “legacy ERP” because there are other vendors in the space, like Oracle).
Legacy ERP, like all products you can mention, was designed and built for a particular place in time, specific business needs and processes tied to manufacturing. If legacy ERP no longer meets the need, it’s because business changed. We’re a services economy today, and about 70 percent of GDP is tied to services, not manufacturing. Companies like Zuora go even further and have called the present model “the subscription economy.”
Subscriptions enable businesses to change more rapidly, and the above-mentioned “creative new business ideas were shelved because ‘it didn’t fit into SAP'” are a reality.
The subscription economy is real. In this world companies like Workday and Zuora have taken prominent positions, and the marketplace is taking note. This morning, Zuora announced its Series D financing as well as increasing its footprint in Europe. The company raised US$36 million in new funding, including money from Dave Duffield, founder and coCEO of Workday, and Marc Benioff, chairman and CEO of Salesforce.com (NYSE: CRM). Also, in the first three quarters of this year in which Zuora had a presence in Europe, the company announced that it has $2.5 billion in contracted revenue from its early customers.
Legacy ERP might still control the market, and it may take a long time for the upstarts to gain significant share. A comparison with Salesforce is instructive. Salesforce was a key reason Siebel topped out as a $2 billion company, though it was many years before Salesforce gained the same revenue level. In the same way, the presence of Zuora, Workday and companies like them indicates the high water mark for legacy ERP.
Legacy ERP is ill-suited to the demands of the subscription economy, and it is comparatively expensive. As the ERP replacement cycle gains steam, no vendor, incumbent or otherwise, should take its position in an account for granted.
Mark Twain once quipped, “Everyone complains about the weather, but no one does anything about it.” We could say much the same about legacy ERP, but now it appears that there are credible alternatives coming on line.
ERP’s Disruptive Moment
At Dreamforce Zuora, like many other emerging companies allied with Salesforce.com, decided to hold a user group meeting. As long as the customers jointly held by Salesforce and Zuora were in town the logic went, why not have them in for a day of education, listening and a pep talk form the boss.
It was a fine idea. Customers came to San Francisco a day early to hear Zuora CEO Tien Tzuo tell his audience that conventional ERP would be dead in a matter of a few years. He used the word dead too. Such an outrageous statement could have easily been taken as so much hyperbole from a leader who had raised tens of millions in venture funding and showed the world a new way to bill and collect for subscription services, which are increasingly coming to dominate the economy.
Tzuo’s statement began to look significantly less flamboyant and even on track on Tuesday as he and Workday c0-CEO Dave Duffield announced an alliance between their companies to drive some nails into ERP’s coffin. Workday financials and Zuora billing and payments is a solution that will help enterprises take the steps they need in order to compete in what Tzuo calls the “subscription economy.”
Xxx The step requires a big change in business model for many companies as they pivot and begin to sell their output as services rather than products. Unlike products services can be changed fluctuating according to need. But until now, there was a limited number of ways that companies could bill and receive payment for their wares and the software — from companies like Oracle and SAP — that supports one time product transactions is not easily turned to billing for subscriptions.
The drive for demand for subscriptions can be traced to two key events — the social revolution boiling around us and the economic funk we’re in. Social media like Twitter and Facebook has given people a new understanding of the “power of now.” We expect instant answers from the connected universe, rapid solutions to problems and just in time information and increasingly we’re expecting that kind of response from our vendors. If we buy something online we expect to adjust the purchase and amend the conditions of use as often as we need to. We’re also broke. As individuals and companies we might be able to afford the monthly payment but not the bolus of cash required to buy things. Together, these two phenomena are driving the need for subscriptions.
What’s a company to do?
The only thing a smart vendor should do is to say, “Sure let’s do business with you the way you want to interact with us.” Simple right? That’s where the billing system comes in. Companies wanting to get into the subscription economy have to deal with balky back office billing, payments and financial systems that don’t make this style of commerce easy.
Realistically, if you can’t bill and collect for your output you can’t realistically engage with your customer as your customer wants. Many companies are trying to make their obsolescing billing systems play in this new world but it’s like death by a thousand paper cuts.
The subscription business model runs on thin margins and relies on automation for everything from selling to service to billing and payments. If you need to insert human labor into any of this such as to make all the changes and upgrades that people expect today work in your billing system, then you end up running an unprofitable subscription business, and who wants that?
So that’s the disruptive moment. Old billing systems and an increasingly restive customer base beginning to move to new and nimble competition all signal a need for a new business model. The model exists but the software that enterprises now have doesn’t support the new model.
ERP is ripe for disruption and ironically I’ve heard some of them talk this year about the need to deliver their systems in a SaaS model, but that misses the point. In addition to using SaaS principles for their technology, ERP vendors need to build product to support SaaS and subscription services. They aren’t doing a very good job of it and that is why the Workday and Zuora announcement is so important.
End of the On-Prem Paradigm
Uber analyst Dennis Howlett over at ZDNet wrote a piece ruminating on the Gartner Symposium and colleague Larry Dignan’s summary of the meeting, “Enterprise IT: Here comes that deer in the headlights look again” that is well worth reading. Together the articles wonder aloud how much time there is between now and the paradigm shift that will make so much of enterprise computing obsolete and even risky for enterprises to invest in. Mixing metaphors, another way to put it — how long before the cloud vendors inherit the earth?
Speaking of Dignan’s effort, Howlett writes:
He opens the analysis with:
While Gartner is urging creative destruction, I can’t help but be skeptical. If everyone could re-imagine IT and blow up old systems to delight customers, there would be no losers in the corporate world. As we know, there are plenty of losers and there will be thousands of companies that flop at people-centric system design.
I can imagine similar thoughts coming from many colleagues. How many times have I crapped on the idea of Enterprise 2.0 aka social enterprise?
But in the real world, IBM can’t find enough bodies. Accenture can’t keep up, Deloitte and Capgemini are both very busy. And that’s just in their SAP practices. SAP is about to confound the market with a great Q3. I’m betting Q4 will be a blowout. Oracle got Fusion out the door this month. Who says the incumbents are in trouble?”
Add to this the Workday-Zuora announcement this week from Workday Rising, a user conference, that the two companies would deliver an integrated and cloud based billing, payments and financials solution that will run circles around Oracle and SAP financials in the subscription business and you don’t need Tom Hanks to tell you, “We have a problem.” Tien Tzuo, CEO of Zuora, did the honors when he said that conventional ERP was dead.
So why the upbeat financial results from the likes of SAP? To answer this we need to take a small detour to the clouds. Let’s look at airplanes, specifically the Lockheed Constellation.
The Constellation was/is a gorgeous aircraft with beautifully sculpted lines. It’s design dates to the post-war period and its heyday was the 1950s. The Constellation was something of an apex of aeronautical engineering offering speed, range, and the ability to carry lots of passengers. It also had the most advanced engines in the business at the time — piston engines and those power plants made it the end of the line. It was the last iteration of piston-propelled aircraft soon to be over taken by jets — the new paradigm.
It is no surprise that SAP posted good numbers in Q3 and, as Howlett says, it will probably do so again. But SAP and Oracle are building Constellations and the strain in the implementation system he alludes to in referencing IBM, Accenture, Deloitte and the rest, exposes one of the Achilles heels of on premise computing. It is as damaging as the workload and expense of keeping a piston aircraft flying. Add to all this the other major deficit exposed by Workday and Zuora and you realize that the dominant positions SAP and Oracle have held are disintegrating.
The on-premise paradigm is effectively over. It will stick around for a long time but we will only see it shrink. The businesses with the smart money are getting out of on premise and trying to figure out the models they need to survive as cloud companies.
The paradigm has been under attack for the last ten years but the incumbents have always been able to fend off the competition, mostly because the attacks were one-dimensional. Incumbents could deal with arguments that cloud solutions were less costly, easier to maintain or better to customize or integrate, but when all that comes together with the complaint that the on-premise solutions were made for a manufacturing rather than a services and subscription market, all bets are off.
Tien Tzuo was right, the on-premise paradigm is effectively dead. Yes, it will take time to convert and yes, the technology conversion comes with a business model conversion or at the very least a big modification. It’s also mandatory. We’re moving into the jet age.
