Software as services

There’s a received wisdom that SaaS adoption is taking place among a subset of companies that face substantial change. SaaS makes sense if you need to move fast, grow quickly, adapt to rapidly changing markets or, in some cases, foreshorten the disruption of consolidation or downsizing.

In the ERP space, the latest expression of this trend is seen in the adoption of SaaS in subsidiaries of large companies that want to quickly accelerate their business in emerging markets or get better real-time information from regional operations running outdated legacy systems. Both SAP Business ByDesign and NetSuite OneWorld are targetting this opportunity. I’m at NetSuite’s annual conference this week (disclosure: travel and accommodation funded by NetSuite), where the company has been celebrating its penetration of Fortune 100 accounts with this strategy, including global brands such as Johnson & Johnson, Proctor & Gamble, MetLife and others.

The corollary of this line of thinking is that the rest of the market will remain with the conventional software vendors — SAP, Oracle, Infor, even Microsoft who, bless their hearts, believe Dynamics AX is going to pick up business from their on-premise rivals. So here’s the rub. Exactly how many organisations are there today who don’t face substantial change? Exactly how large is the market for new software among companies that are happy to move and grow slowly, whose markets aren’t changing so much or who have plenty of time to consolidate and downsize? How many multinational subsidiaries are going to be upgrading their ERP because they’re in slow-growing markets and don’t mind waiting another year before they bring real-time information streams online?

The fact is, the nature of business today is such that no one has time any more to wait and plan for a conventional multi-month or multi-year on-premise implementation. The market for the old way of doing things is dying and SaaS is capturing more and more of all the businesses that will thrive in the future.

One of NetSuite’s many new product features announced in his SuiteWorld keynote today by NetSuite founder and CTO Evan Goldberg was ‘Multi Book Accounting’. “This is not so you can keep a separate set books for the tax authorities,” he joked. Rather, it’s for multinational businesses whose operations have to report under varying accounting rules. The underlying set of figures is the same, but the reporting rules about how to present the results can vary from one country to another. Keeping a separate set of books for each accounting regime avoids messy manual corrections and updates. It’s an important upgrade to NetSuite’s capabilities and will help the company win further successes in so-called ‘tier-2′ instances, where NetSuite is brought in to run subsidiary operations under a head office implementation of SAP or Oracle. [Disclosure: NetSuite has funded my travel and accommodation to be here].

Of course another way to run multi book accounting is to run two completely separate accounting systems in parallel. It’s not as elegant a solution, in fact it might seem a pretty bizarre thing to do, especially for a single accounting entity. But convincing evidence emerged today that SAP subsidiary SuccessFactors is doing exactly that. Regular readers may recall that yesterday I explored the apparently contradictory statements coming out of SuiteWorld here in San Francisco and the SAPPHIRE event running at the same time in Orlando. SAP has renewed SuccessFactors’ NetSuite licence, gloated one CEO. We swapped it out for SAP’s Business ByDesign in just six weeks, crowed the other.

What SuccessFactors CEO Lars Dalgaard may have forgotten however is that a SaaS vendor can easily check whether or not a customer is still using their system. Not to look up the actual data, you understand, which would be completely beyond the pale. But it’s generally good practice to have systems that allow you to track your customer’s activity on the system. If usage is dropping off, that’s often a useful forewarning that a renewal might not be forthcoming.

So it was that NetSuite’s CEO Zach Nelson met with analysts today ready to cite figures from yesterday’s usage reports. A total of 130 unique users had accessed the SuccessFactors NetSuite system he said, making 350 separate logins between them. COO Jim McGeever went further, adding that some of them had been in the invoicing module creating new invoices. It’s clear that, although ByDesign may be up-and-running at SuccessFactors, there are still a lot of users actively operating the NetSuite system. Evidently the transition has not been the six-week stroll in the park implied in yesterday’s press statement.

Unless, of course, SuccessFactors really has gone fully over to ByDesign while continuing to operate a phantom business on its NetSuite instance as a smokescreen to mislead its rival. Now that would be a really weird case of multi book accounting. But in this conference pantomime of claim and counter-claim, who can tell the real truth of the matter?

In other discussions, one analyst with experience of some of the world’s least scrupulous economies pondered whether the NetSuite management console incorporated a ‘kill switch’ that could be flipped to destroy the books in the event of a tax raid. No there isn’t, the company’s spokesman responded with a bemused expression. If there were, I suspect Lars Dalgaard would have flipped his by now.

There was a great piece of theatre on stage at SuiteWorld in San Francisco this morning when NetSuite CEO Zach Nelson revealed that the company had signed an important new customer from the computing world: its archrival SAP. The software behemoth’s newly acquired subsidiary, SuccessFactors, remains a NetSuite customer, Nelson revealed: “They just renewed their license for NetSuite. I’m really pleased to welcome SAP as a customer.” [Disclosure: NetSuite has funded my travel and accommodation to be here].

Over in Orlando, SuccessFactors CEO Lars Dalgaard, recently confirmed as a member of SAP’s all-powerful Executive Board, has also been on stage today revealing SAP’s newly minted cloud strategy. Dalgaard was not going to stand there without being able to say he runs his business on SAP technology. According to a press statement issued today, SuccessFactors rolled out a slew of SAP applications internally within a six week period following the acquisition. That included transferring its financials onto SAP’s Business ByDesign cloud ERP platform. It may have renewed its NetSuite license, but SuccessFactors is no longer using its NetSuite instance. [UPDATE 15:20 PT: According to NetSuite, several hundred SuccessFactors users are still accessing the system, so it seems the transition is still in progress. The love isn't flowing the other way, for it transpires that NetSuite shut off its SuccessFactors instance within a week of it being acquired by SAP.]

What I’m really interested in here, though, is the backstory. SAP nearly canned ByDesign recently, according to comments by co-CEO Bill McDermott. Was the platform reprieved when Dalgaard revealed the urgency of stripping NetSuite out of the Successfactors backoffice? Or was the NetSuite instance a bargaining chip that Dalgaard used to negotiate his new vision for for ByDesign, revealed on stage in Orlando today? That includes the creation of a new Financials OnDemand version that will be sold to SAP’s core large enterprise customer base. I can almost imagine Dalgaard banging his fist on the table, insisting on SAP offering a viable cloud app he can run his business on, saying that NetSuite will stay if he can’t get his way. Whatever his tactics, Dalgaard seems to have wrought a seachange in cloud strategy during his short tenure so far at SAP. Now that he’s running his business on the company’s own technology, he’s going to have a close view of how well it will work out in practice.

There was some sound sense — some controversy, too — heard from the stage at last week’s annual All About The Cloud conference in San Francisco. I’ll start with Michael Lock, VP Americas at Google Enterprise, whose cloud apps business he hinted is second only in size to Salesforce.com: “We don’t publish figures on this, but Google Enterprise is the second largest cloud-based B2B SaaS company in the world.”

He advised attendees at the event — mostly ISVs — to focus not on cloud but on what it enables: “Cloud is so last year,” he asserted. “The cloud is actually now the infrastructure and it is being supercharged by a whole set of technologies to make the cloud better.” Focus instead on developing apps with new features and functions that takes advantage of mobile, social and local, he said. “If all you’re doing is transporting the old features to the cloud, you’re missing the point … Think about these new trends that are supercharging the cloud. Do not pave the old cowpaths.”

Unfortunately, paving the old cowpaths is exactly what many enterprises appear to be doing when they attempt to implement cloud infrastructure. Treb Ryan, CEO of OpSource, has been getting in trouble with his company’s new owners, Dimension Data, for repeatedly saying that he doesn’t like private clouds. He did it again in his keynote speech last week, much to the dismay of colleagues out in the field selling private clouds to Dimension Data’s customers. But as Ryan went on to explain in his talk, it’s only certain types of private cloud he dislikes. Specifically, those that waste money because, in a nutshell, they follow the old cowpaths.

“There’s stuff being sold to enterprises for private cloud that service providers that have to run at a profit would never buy,” Ryan told the AATC audience last week. Out in the enterprise market, he explained, the big systems vendors and their global SI partners are specifying private clouds with sophisticated hardware platforms and complex management software that is designed for conventional enterprise computing environments. It’s complete overkill for a typical cloud infrastructure. As a result, he has heard of organisations spending large sums of money to implement private cloud instances that never get used when the operating costs become fully apparent. “For the first time, I’m seeing hardware turn into shelfware,” he concluded. “A large percentage of private cloud is designed to get more hardware and more software and shove it onto the customer’s shelf.”

I delivered my own take on private cloud in an analyst panel later the same day, succinctly summed up in this attendee’s tweet: “There are no private clouds, only badly run public clouds. Aka denial clouds.” Anyone that believes they can avoid the perils of the Internet today by building their own private cloud is living in cloud cuckoo land. Every enterprise IT infrastructure already touches the cloud at many points, I explained, whether it’s linking to mobile devices out in the field, supporting remote locations or simply operating websites and ecommerce. It’s pure denial to pretend against all the evidence that conventional approaches remain superior when almost every day there’s news of yet another enterprise failing to protect its infrastructure and data because it didn’t have its cloud act in order.

Instead of continuing to pave the old cowpaths and hoping the Internet will go away, enterprises should be building infrastructure that learns from the best practice established by today’s leading public cloud operators — and if they can’t they should run their IT directly on public cloud platforms. The back end will still be private to their administrators, but if it is built to rigorous public cloud standards, it will meet all the economic, performance and compliance requirements they need while delivering all of those crucial emerging capabilities Lock discussed in his presentation. That of course is what Ryan means when he doesn’t like private clouds, and it bears out a sentiment originally tweeted more than a year ago by Adrian Cockcroft, cloud architect at Netflix: “There is no technical reason for private cloud to exist, it’s all $, FUD and internal politics.”

Can technology save Europe? Voters’ rejection of austerity in last week’s elections in France and Greece have spurred new efforts by European policymakers to find ways of fostering economic growth that will pull the continent out of its banking and financial crisis. Cloud computing is one sector that’s under close scrutiny by officials at the European Commission in Brussels and at many national finance and business ministeries as a potential catalyst for growth. A recent study by Boston Consulting Group found that the Internet economy in the G20 nations will grow by an average of more than ten percent annually over the next few years, and is especially crucial for growth in the crucial small and medium enterprise (SME) sector. No wonder policy makers want to maximise their economy’s share of that upside.

But could their enthusiasm prove counter-productive? I was reminded of a conversation I had at February’s DLA Piper European Technology Leaders Summit in London. A lawyer and academic who works closely with the Commission on plans for regulation told me he was “fearful because they are so enthusiastic about technology” as a driver of economic growth. He conjured up the arresting image of the tech industry as a lovable puppy being literally smothered by an over-enthusiastic new owner.

The problem is that policy makers at the Commission see regulation as a way of encouraging innovation. But the enthusiasm to act may result in regulations getting drafted without sufficient consideration for the burdens they place on new and existing participants. “There is a danger that they are going to suffocate it with too much regulation,” he warned.

This risk will probably be one of the themes of discussion at an event later this month designed to shine a spotlight on the cloud computing industry across Europe. EuroCloud Day is taking place simultaneously on May 23rd in ten European cities, with shared keynotes broadcast to all venues by the EU’s Digital Agenda Commissioner Neelie Kroes, and speakers from SAP and the Chinese Institute of Electronics. These shared sessions will be interspersed with local sessions at each venue. Participating EuroCloud countries include Italy, the Netherlands, UK, Germany, Austria, Hungary, Slovenia, France, Portugal, Denmark, Sweden and Finland.

The London event, which I’ve organised in my role as chair of EuroCloud UK [see disclosure], will focus on success strategies for cloud start-ups. Held at the new Google Campus in London Tech City, there are keynotes from Alastair Mitchell, CEO of cloud collaboration vendor Huddle and Tien Tzuo, CEO and founder of subscription billing provider Zuora, plus a panel of UK cloud founders including Duane Jackson of Kashflow, Piers Linney of Outsourcery, Tim Barker of DataSift, Jimmy Gasteen of Precursive and Bernard Dallé from Index Ventures. Registration is free to cloud start-up founders and EuroCloud members.

One of the curiosities that strikes me when listening to debates in Europe about how to stimulate growth is that they often follow a path that would seem very out of place to a US audience. They tend to be heavily focused on what government agencies can do to foster innovation and growth. Whereas in the US, the assumption is that the market takes care of that and government has no role to play. Certainly the upsurge in tech startups in London’s Tech City has been a good example of private enterprise making its own way in the world, with the UK government only recently taking an active interest in stimulating further development. We need to get the balance right to make sure the innovation puppy will not suffocate but thrive and grow.

My ears prick up whenever I hear people talking about the works of Ronald Coase in the context of cloud-based business models. Coase inspired the title of my forthcoming book on the topic, Frictionless Enterprise, for reasons I first alluded to in this March 2008 blog post:

“According to Coase’s theory of The Nature of the Firm, enterprises form to avoid the transaction costs of buying services or other inputs from other organizations. But that was in 1937. Modern communications, in particular the Web, have reduced the friction costs of doing business with outsiders at the same time as increasing competition — to the extent that it’s now often cheaper to use an outside provider than an internal resource.”

Given my interest in understanding and mapping the emergence of frictionless enterprise, I was intrigued to read the latest blog post by start-up mentor and investor Allen Morgan. In Uber, Airbnb, et al. explained — The ‘Crowd-scaled’ Business Model, he writes, “The kernel of the, if not the entire, answer lies in the work of Ronald Coase.” Especially when I discovered the article because of a tweet by Rand Schulman, who briefed me for the InsideView story that prompted that March 2008 post. That’s serendipity for you.

Morgan’s post focusses in on the emerging online brokerages that enable individuals to rent their homes and rooms, vehicles and rides and why that’s challenging the business models of long-established traditional corporations like the hotel chains, town car operators and so on. He points out that, while Coase foresaw that modern communications technologies would help traditional enterprises scale better, he didn’t realise they would also enable the emergence of (what I would call) new frictionless enterprise models:

“While such technologies allow ‘command’ structures to scale better, technology also has an interesting, cross-cutting impact, and this is what underlies the growth in ‘crowd-scaled’ businesses,” writes Morgan. “We’re seeing the first green shoots of ‘firms’ that can grow in a capital-efficient manner to a significant scale using ‘contract’ structures rather than ‘command’ structures.”

So while emerging technologies such as social networks, modern communications, smartphones, mobile apps and increasing user comfort with them (what Morgan calls “the Big 5 Factors”) can further enhance the efficiency of industrial-era command-style firms, we may be missing a much more important development, says Morgan. Those same technologies are enabling disruptive innovation pioneered by new breed of information-era contract-based businesses. And while Ronald Coase may not have predicted them, his theory still explains why they’ll thrive. It’s because in our hyper-connected, digitally embedded, software-driven modern world, the transactional costs of marshalling and pricing resources from an almost limitless sea of autonomous providers have fallen lower than Coase could ever have imagined possible.

It hasn’t happened yet. It’s another of my predictions. But it suddenly struck me this week, as I read about the latest developments in cloud networking. Five or so years from now, the day will come when Cisco will have shrunken almost to nothing, eaten by software.

Marc Andreessen’s phrase, “software is eating the world,” coined for a Wall Street Journal article last August, succinctly captures the single most important trend in our world today — not only in computing but in the entire field of business. It’s the driving force behind the rise of what I call frictionless enterprise — the new way of working and doing business enabled by software that leverages the connectivity of the Web plugged into the power of today’s intelligent electronic devices.

At the beginning of the week, I read Cade Metz’ Wired article about Nicira, under the provocative title, Mavericks Invent Future Internet Where Cisco Is Meaningless. It was an eye-opening introduction to the emergence of the new field known as software-defined networking (SDN): “a new breed of computer network that exists only as software, a network you can control independently of the physical switches and routers running beneath it … a world where networks can be programmed like computers.”

I wondered why the industry has decided to call this SDN when a much more resonant term would have been networking-as-code. It’s exactly analagous to the infrastructure-as-code movement in the world of servers, powered by software like Chef and Puppet, which turns entire server farms into software-defined metadata that can be reconfigured at will. The cloud giants like Amazon, Google and Facebook have long since implemented this approach in their data centers, allowing them to run on custom specified, cost-efficient server hardware that they don’t have to pay brand-name premiums to buy. Knowing that, I’m persuaded that the Wired article is spot on when it implies they’re now doing exactly the same with networking, which is why Cisco faces a big challenge:

“Many of the world’s largest web companies, including Google, are already buying cut-rate networking gear directly from manufacturers in Taiwan and China, making an end-run around the Ciscos and the Junipers. With Nicira providing a virtual networking platform that works with any gear from any vendors, [Nicira's CTO] Casado says, this trend will only continue. The Ciscos and Junipers, he says, will become less and less important.”

Of course Cisco is aware of these developments and later in the week news emerged of its $100 million investment in SDN startup Insieme, along with an option to buy the company outright for $750 million. Om Malik gave his verdict on the leaked memo that was the source of this news under the excoriating headline, Cisco memo: We can’t build anything: “when I read this memo, I see a company making a tactical admission that it has become so big, so bureaucratic and so broken that it cannot count on internal teams to build any ground breaking products.”

If anything, my take is even more pessimistic than Malik’s. Cisco’s proven track record is that it simply can’t do software. Over the years, I’ve become increasingly frustrated as I’ve watched the company flounder with a series of massive failed initatives. There was its long-forgotten venture into application-oriented networking back in 2005. Most disappointing of all was its failure to make anything much of its acquisition of WebEx.

The truth is, Cisco is a hardware engineering company and the only thing it knows how to do well is to define a need, capture it in embedded logic and then profit from dominating a locked-in market. That may still work in the client device market (as Apple continues to demonstrate) but the days are vanishing fast when you can get away with it at an infrastructure level. Software is eating that world and Cisco is on the menu. One day, we’ll look round, and it will be gone.