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.
