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Decelerating ByDesign

                          The Caution Behind Business ByDesign

Coming into SAP's Sapphire conference this week, a number of bloggers, tech analysts and Wall Street researchers were looking for answers around recent decisions on SAP's Business ByDesign product line. Business ByDesign is a relatively new offering from SAP and represents a huge investment by SAP in the Software as a Service (SaaS) space. During a recent earnings call, SAP executives indicated a more cautious approach to the continuing rollout of this product line.

After three meetings today with senior SAP executives, there is now more clarity around SAP's recent moves. We spoke with Henning Kagermann (outgoing CEO), Leo Apotheker (incoming CEO) and others. What we learned was:

• The product is not performing to the cost expectations the company had set for it and, as such, was not operating at the level of TCO (total cost of ownership) that the firm needed for it to be a profitable solution. A high TCO is not something investors or Wall Street would appreciate.
• The root cause of the higher than expected TCO was apparently related to two major items. First, the version of NetWeaver (SAP's development and execution software stack) being used by the Business ByDesign solutions is out of date and needs to be updated to version 7.1 once it's completed. When that's accomplished, the solution should run more cost effectively.  Second, the upgrade process (e.g., the upgrade from Version 1.0 to 1.1) turns out to need more automation so that fewer errors are made and human intervention is reduced. Human intervention triggers added costs and introduces potential errors. This creates quality and cost problems.

SAP executives admitted that their new on-demand solution encountered challenges the company had previously never encountered. First, SaaS was an entirely new space. Second, the company couldn't fully 'leverage their 35 year experience' in application software as these customers were not the typical SAP customer and the solution would be used differently than its prior on-premise solutions. One SAP executive said they "thought they knew this market" but that wasn't exactly true. Lastly, their development staff was caught by surprise as the they did not have the same level of control with this product as they have had with other product lines.

Business ByDesign has been an expensive development exercise for SAP. One source indicated some 2000 persons were involved in the creation of the product. While further development efforts are being scaled back, this has more to do with a planned development deceleration and a need to wait for the NetWeaver architecture to be implemented. In creating the product, one executive commented that the company made hundreds or thousands of assumptions (e.g., how quickly customer deals would occur, what response rate is needed for acceptable performance, the targeted TCO, etc.) and some of these assumptions now require a rethink.

Bottom line for Business ByDemand is that:

• sales will continue in six countries: France, US, UK, China, Germany and India but not beyond these for now
• the company will continue to focus its TCO reduction efforts on cutting the cost of hot-patching, hosting, upgrading and on-going operations. Moving their hosting centers to low-cost countries (for a labor arbitrage) is not being considered for now.
• the $149/user cost figure is being held. TCO will be reduced while customer cost will not be increased.
• adjustments by SAP should take 12-18 months to complete

The Oracle Facts I Wanted

Questions I Wanted Answers To At Oracle Open World

Unofficial Answers I Did Manage to Get

 

Before I meet with clients or software vendors, I take some time to develop: a number of themes to discuss; hypotheses regarding their business and business environment; and/or, projections around where their business may be moving.  Going into the Oracle Open World conference, I wondered about the following:

• Is Oracle Fusion becoming the next Microsoft Vista? Was Fusion becoming a hard to pin down solution with ever-shifting delivery dates?
• Can Oracle be genuinely innovative in its application software business?  Is Oracle attempting to buy innovation through acquisitions for the most part?  Will Oracle take a more aggressive approach to application innovation instead of pursuing a lot of technical innovation and some functional innovation around the periphery of its existing application products?
• Is the Oracle customer changing or has Oracle changed its view of what makes for a good Oracle customer?  Does the Oracle customer actually care about innovation other than technical innovation?  Are some groups of Oracle customers (e.g., PeopleSoft) happy with the pace of functional innovation occurring within Oracle?
• Where is the value in all of the Oracle rhetoric?  When you cut through the discussions of acquisitions, technology architecture, middleware innovation, virtualization and extensibility, will I hear anything that sounds like "Oracle will help its customers create shareholder value"?
• Who is Oracle worried about from a competitive perspective in the application space?  With SAP, other large aggregators (e.g., Infor), new entrants (e.g., Workday) and others working quietly in the background, which of these are clearly in Oracle's gun sights?

I did not receive direct answers to many of the above.  Access to Oracle executives was highly constrained for the Enterprise Irrregulars bloggers.  Furthermore, so many Oracle executives were well coached and stayed on message so well that one need only attend the first day's events to absorb virtually any material messaging that was to emanate from this conference.

As such, I and the other bloggers went straight to the customers and partners in attendance to hear their praise, concern and frustrations.

We learned that:

§         The definition of Fusion appears to be fuzzy.  Fusion for the most part defines the middleware components that are integral to Oracle's go-to-market strategy.  It is through the use of these infrastructure products that Oracle is replacing major pieces of its acquired application software portfolio.  The hope is that existing customers will be able to utilize their current applications indefinitely.  There is clear value in allowing customers to avoid costly conversions to an all new product line especially when the new product line does not offer enough functional differentiation to generate increased business value in excess of the migration cost.  That said, I can find no fault with this aspect of the Fusion strategy.  However, in discussions with senior partner executives and with customers of Oracle's applications, there is some concern, possibly significant, that Oracle customers are frustrated with the slow pace of development of an all new, consolidated, Fusion application product line.

§         With regard to innovations in the application software product line, customers should expect two forms of innovation for the foreseeable future.  Oracle will continue to embed more of the Fusion middleware into its acquired and legacy product lines.  Oracle will also continue to include smatterings of functional enhancements to each of its application lines as well as add additional industry/vertical functionality, too.  Exactly what Oracle is doing relative to building a single unified Fusion solution set of applications, was never made clear to me.  Briefings by two different Oracle executives listed a litany of enhancements to application products (e.g., G-log, Demantra, JDE Enterprise, JDE World, Siebel, Agile, Oracle E-Business Suite, PeopleSoft and others.  Highly innovative approaches to rethinking how businesses should use application software were not apparent.  In fact, Charles Phillips and I had a pointed exchange on that subject in a briefing he granted to the Enterprise Irregulars.

§         The Oracle customer is hard to pin down but it's clear to say that it represents a cross-section of the business software buying world.  There are examples to be found of customers who are very conservative, prefer to buy from market leaders like Oracle and are comfortable with a modest rollout of new technology innovations.  They are also present customers who prefer more rapid and innovative types of business and functional improvements.  Think of the PeopleSoft customer base here.  On average, it would appear that Oracle customers are relatively content with the company; however, in the margins, it may be the reverse that is true.  Oracle is clearly benefiting from high maintenance revenue and retention rates of its customers.  It is clearly doing enough to keep retention rates up but is it doing enough to give it long-term sustainable competitive advantage?  Time may tell more on that front.  Customer defections though may rise if application software users do not get more clarity around the future consolidated Fusion product line.

§         Value was clearly a missing in action component at this conference.  In one telling panel, five Oracle executives each recapped what they believed were the more critical messages for this year's show.  If I listened correctly, not one of the individuals used the word value.  After this panel, I approached an Oracle communications executive and relayed my concern about this to him.  Without compelling value propositions, net new sales of product in the marketplace will likely languish.

§         As to competition, it never came up.  It was irritating though to hear  claims like "world's best intellectual property, most complete end to end solutions". One of the Oracle execs admitted in a keynote address that many midsized firms possess approximately 1000 applications.  Large companies, he then added, may possess 10,000 applications. If that is true then it is hard to understand how Oracle can claim to have the most complete end to end solutions in six out of seven oil and gas companies or nine out of 10 of the largest professional services firms or all of the global 500 media and entertainment companies.  No one is better at turning marketing molehills into mountains than Oracle's marketing machinery.  But the reality is that the vertical industry solutions will need dozens if not hundreds of additional new applications before any discussion of complete end-to-end solutions is fundamentally true in the marketplace.

Bottom line:

Wall Street and technology buyers operate on two very different time frames.  Software buyers, such as those buying application software, evaluate a vendor on a 10+ year time frame.  Wall Street defines short-term in minutes or hours. Wall Street sees long-term only as far as the next quarter's financial results.

Wall Street should be pleased with Oracle's progress on its Fusion front today.  Its Oracle Unlimited program will keep maintenance rates up for the next couple of years.  High maintenance rates and a reduced urgency to create a single combined application product line should keep Oracle's R&D expenses in check and drive fat margins to the bottom line.

For Oracle's customers and prospects, they may experience a mixed bag of outcomes.  Some customers will get frustrated with the lack of a new Fusion product line and will begin to look elsewhere.  Customers are also sensing that real functional innovation is occurring in companies outside of Oracle. Buyers of technology like to go with leaders not fast followers or fast acquirers. I’m not sold that buying innovation is the best way to go in all cases.

For now, I believe it's fair to characterize Oracle as relatively successful in its technology innovations and less so in its applications.  Given the database roots of the company, this should be no major surprise to users of its products.

User Conference Overload

Bad Software Conference Activities We'd Like to See Disappear

#417 – The Shameless Partner CEO Stump Speech

What they say:

“Hi I'm _________ , CEO of _______. We’re glad to be part of the (insert software company name here) show and we're so glad to be a (choose one: gold, platinum, diamond, plutonium, uranium, zirconium) sponsor of this event.

            

            What they’re really thinking:

“We paid through the nose to get this infomercial slot with you.  Why you'll sit here and listen to me escapes us when we know you won't watch infomercials on TV at home.  You guys are real idiots.  You paid $2000 to come to this conference and we get to pitch woo to all of you captive listeners.  Hey, how about we give you a bag, a T-shirt and a hat so that you can wear our advertising too!). 

 

You know, we've been a strategic business partner of (insert software company name)’s for ___ years now.  Can I get a show of hands as to see how many of you already use our products?

 

 

“Crud!  No one here has even heard of us.  Guess I better dumb down my remarks -- obviously these aren't the high level executive buyers my Marketing department said would be here.

 

Or

 

“Crud!  They all have our products.  Now what do I talk about?  Why am I giving a product pitch to our existing customers?  I know!  I'll tell a lame/off-color/inappropriate joke and give the pitch anyway!"

 

First, I would like to start with a short video that highlights what some of our customers think about our firm.

 

“I hope they don't notice that we wrote the dialogue for all of our customers. None of them would say anything we could use unless we gave it to them on a silver platter.  My goodness! Who would have thought that our customers were so ugly, so gullible, and so inarticulate?"

 

As you know, our firm is all about (pick two: quality, leadership, value, low cost, innovation, or, customer satisfaction).  Since I became CEO, we have (doubled, tripled, halved) our expenditures regarding (picked two: customer service, research and development, global procurement, continuous process improvement, or, employee training).

 

“If only they knew what I really did.  Actually, we cut customer service and we don't really innovate anymore.  We buy innovation every chance we get.  Our core competency is putting pretty packaging on slightly improved products.  For this, we charge a premium price for this "added value".  We've got more problems operationally than ever before and I'm secretly shopping the company so that we can pawn this firm off on some even dumber acquiring firm.”

 

But seriously, customers like you are our number one priority.

 

“You know I was just telling our employees this same thing this week - Employees are our number one priority.  My number one priorities change every 30 minutes.  I tell Wall Street analysts that my number one priority is "meeting our financial targets".  I told those environmentalists picketing our building that “green initiatives are our number one priority”.  And, of course, I tell my wife she is my number one priority just like I tell my kids that they are my number one priority.  When you don't have any other priorities than number one, you really simplify your life.

 

And this of course means that we value you the customer.

 

“Actually, we just want your money. That's what we value. Cut us a check and go away. That's what we really want from you.  Don't call us for support. Don't call us for warranty support either. That just costs us money and that money comes out of my bonus and our shareholders’ dividend payments.”

 

Now because I really don't know anything about our products, I've invited several mid-level staffers to join me on stage and give you a brief demonstration of the things that we sell to you. So let's welcome on stage (CEO looks at notes in his/her hand because this is the first time he/she has ever met these employees) Jane Doe and John Smith.

 

Now Jane, tell us a little bit about the new revolutionary Software 9000 Elite with added Accelerators and industry leading Velocity Impenders.

 

I'd be delighted to sir/maam. In this release of the new Software 9000 Elite, we've added a number of enhanced capabilities. This product now slices, dices, makes julienne fries all in the comfort of your office.  And, for the next three weeks, we will be offering new customers a set of bamboo wok steamers, some random user manuals from a company we bought and much, much more.

 

Now wait a minute - can we really afford to offer all of this capability for the very low software as a service (SaaS) price of $259 per user per seat per function point per month?

 

“Why sure we can because this on-demand product doesn't work.  We’ll clean up on these suckers when we sell them gold and platinum support packages as well as thousands of hours of professional services work.”

 

Well Jane and John, this is been a great demonstration and I'm sure most everyone in the audience will want to learn more from you about this product. Can they see you in the exhibition hall?

Absolutely!

“We’ll be standing around giving away buttons/ink pens/mints/T-shirts/candy for the next four straight days. Please come and see us because we're going to be bored out of our minds.”

 

So let me conclude with another short video that highlights our (pick one: core values, what we’re giving back to the community, our employees, our executive team's commitment, our customers, our products, or, our quality initiative).

 

“Oh no, I just noticed I'm wearing the same suit and tie that I had on the day we shot that video.  But I do look better dressed than all those underprivileged children in the background.  In fact, I really do look studly on camera!  Wonder how many folks in the audience see me up here and think I am super-attractive.  Say, it’s a good thing I have a healthy ego.”

Upcoming Show - Human Resources Executive

                                    Shows Worth Attending

I'd thought I fire off a quick post re: technology shows I attend. I won't do the opposite (shows I avoid) as the list would be too long.

I do like the Human Resources Executive show that Bill Kutik puts together annually. I like this one for the following reasons:

• huge collection of HR vendors - There are more HR technology and functional solutions in one spot than anywhere else. I see all the standards (e.g., Authoria) as well as gobs of new vendors (e.g., last year Workday made their big splash at this event).
• access to HR executives and analysts - My colleague Jim Holincheck (www.blogerp.com) of Gartner is always there as are a number of other influencers and execs.
• the format of the show helps highlight differences in products.

This event is next scheduled for Oct. 10-12 in Chicago (see www.hrtechnologyconference.com).

I also attend :

• MR Rangaswami's excellent Software 2007 event at the Santa Clara Convention Center. This one is big and has everybody who's anything in attendance. (see www.sandhill.com)
• JRocket Marketing's Grape Escape - an invitation only gathering that is intimate where MR's event is colossal in size. Lots of analysts, great food and drink and quality one on one time with tech executives.

With vendors, I try to catch:

• Sapphire - the annual SAP event
• numerous other events when I can get them on my schedule. This year I've already attended events from Progress, Workday and others.

From non-tech firms, I also speak or attend a few events like:

• the REA-25 conference at the Univ. of Delaware last month. Great mind-expanding experience that really awakened me to how accounting transaction driven systems still are today and what must change going forward.
• Arizona State graduate school of business. I've given a number of talks here and at other grad schools. I like giving something back and this is something that do often (although it gets expensive!).
• Merrill Lynch's IT, Software and Internet conference - I caught this one this winter - great event - great tech execs and Wall Street analysts always ask solid questions.

Finally, here are some I'd like to get to if I can get the time, get invited, etc.:

• Supernova - Kevin Werbach puts this together and I keep getting conflicted out by clients or other travel. I'd really like to catch this one asap.
• Lawson & Oracle user conferences - I haven't caught or covered one of their events in eons. I'm overdue on at least one of these big time.
• Many mid-market vendor conferences - I enjoy meeting clients of these firms at these events. They've got a distinct set of priorities and perspectives that's often missing at events catering to really large firms.

Sapphire Conclusions #3

Future of SAP 

• Two diametrically opposed positions regarding the future of this powerhouse vendor.
• One view sees a smug vulnerable company ignoring emerging competitors
• Alternatively, another view shows a massive market leader that cannot be knocked off

Looking at SAP today, one sees a very confident, successful vendor that has moved to the top of the high-end vendor world. Sapphire 2007 was one of those events where the proof of market success surrounded everyone in attendance. The question there wasn’t “How will SAP become successful?” but rather “How can SAP remain a market success?”.

I debated the future of SAP in my head many times while at Sapphire. Here are my thoughts broken out into two distinct paths – one optimistic and one far less so. You judge which one works for you.

SAP – The Only Direction is Down

SAP and Oracle today remind me of the U.S. auto industry in the late 1940s. In the post-WWII world, General Motors and Ford Motor Company virtually ruled the automotive world. European (e.g., Volkswagen) and Japanese (e.g., Toyota and Mitsubishi) competitors were in bad shape and no match for the market and economic power that GM and Ford had.

Fast forward to today and we see that the fortunes of both GM and Ford have fallen. Why? History can be an instructive guide.

When GM and Ford were the two main choices, they expended a great deal of energy competing with each other and ignoring the broader, competitive market around them. At Sapphire this year, what did visitors see when they stepped up to the MARTA platform at Hartsfield International? You guessed it: Oracle banners. The two old-guard fighters are still sparring with each other. Just as GM’s problem isn’t Ford anymore, SAP needs to look beyond Oracle, too (and vice versa).

Sure, consumers benefit when two large competitors duke it out.  Yet, when those competitors fail to see the bigger competitive picture, these competitors themselves lose.

It’s time to take a look at Michael Porter’s Five Competitive Forces Model. All you B-School grads remember this one. If my memory is correct, the model shows traditional competitors in the center with customers to the right, suppliers to the left, substitute products above and new entrants below. In the ERP space, traditional competitors would include firms like SAP, Oracle, Infor, Coda, Agresso and others. Substitute products would include SaaS offerings like those from NetSuite, SalesForce and others. New entrants include Chinese and Indian ERP vendors as well as open source vendors. Suppliers could include systems integrators and their BPO offerings. Firms like GenPact also belong in this category as they can disintermediate the ERP vendors.

In the light of this model, one sees that competition is more robust than major ERP vendors might recognize and it’s certainly broader than what the traditional players demonstrate. But this picture belies even more intrigue.

Longer term, the value proposition offered by non-traditional vendors may dwarf that of traditional ERP players unless ERP vendors change their tune. The capital outlay of traditional ERP solutions is still huge. It costs way too much to install these products and the lost manpower and capital that gets poured into maintaining these applications is wasteful, too. This is why SaaS apps and BPO solutions are so attractive to Innovators, Early Adopters and now Early Majority customers.  Sure, Laggards will still buy traditional ERP but the smart money is moving to alternative solutions.

Walk around a traditional ERP vendor’s user conference and you hear the vendor shouting about dozens of minor upgrades to their product line. It’s like going to the auto show and listening to manufacturers brag about how many cupholders their vehicles possess. Cupholders are derivative improvements not real innovations (e.g., hybrid power plants for cars). What I’ve seen with the new platforms coming from traditional vendors is just technical innovation and not anything really amazing functionally.

Until the majors invest in enriching the data their software uses (i.e., more than just transactional data), redefine how processes should really work and bring some real imagination and leadership into creating an all-new way of doing work, then their sales will atrophy. More nimble and original competitors exist and they will take market share away.

Innovation is a huge requirement for traditional ERP vendors to get right today. Conversations with top leaders in these firms don’t leave me feeling like they understand just how innovative their firms must become if they are to dramatically change their solution set and the value they deliver (not just cost reduction).

My conclusion of the most negative view of SAP’s future is the following: SAP will be like General Motors. Once big and powerful but steadily losing market share as buyers migrate to better offerings. John DeLorean wrote his timely and highly predictive book “On a Clear Day You Can See General Motors” around 1979. His insight showed how insular and one-track the thinking in GM had gotten. Who knows, maybe I’ll pen a similar piece on the ERP space in a couple of years.

SAP – The Big Stay Big!

SAP and Oracle today are monsters compared to their sizes in the early 1990s. By most measures I’ve calculated, these firms are 12-25X bigger now than then. Any new entrant that wants to take these two on must either be crazy or in possession of some seriously disruptive technology.

The early 1990s was an important time as that was when the last major change in the ERP space occurred. It was when Unix/Client Server solutions burst onto the scene and caused new entrants like PeopleSoft to explode onto the market. This timeframe also hastened the decline of players like Walker Interactive, numerous AS400 vendors and more.

When big market changes occur, new entrants can blossom under the right circumstances. New entrants win when they offer a dramatically different solution that appeals to those firms willing to embrace innovative solutions. The same companies who bought PeopleSoft in the 1990s (i.e., Innovators, Early Adopters and Early Majority buyers) will take chances on these new entrants – but – only if they offer exceptionally new capabilities or price points.

SAP today is now like Toyota. Toyota has successfully crossed a major ocean and become the hottest car maker in the USA. It even makes a lot of its products domestically. SAP is going to stay on top because its R&D expenditures dwarf the total revenue figures of every competitor save Oracle. But that’s not the only reason SAP will stay on top for the foreseeable future. Other reasons include:

-          SAP’s customer base is full of Early/Late Majority and some Laggards. These buyers like ‘safe’ solutions and SAP is definitely safe

-          SAP hasn’t really had any blow out product failures. Sure, there have been some massively expensive implementations but the product does work. SAP may be the best tested ERP solution on the market. If quality standards don’t slip, who’s going to best them on this front?

-          SAP may or may not be strategic but a lot of ‘C’-level executives think it is. Personally, any software that your competitor can also own can’t be strategic. Worse, if your competitor bought it years before your firm did, it’s definitely not strategic. Purchased software is rarely strategic but if you think SAP is to your firm, who am I to disagree.

-          The vastness of SAP’s product line precludes anyone from launching a competitive offering. It would cost billions to match SAP’s solution set and I don’t see any VC’s willing to pony up that kind of money.

-          ERP is a sticky software product (not unlike a lot of web-sites) and SAP is the stickiest solution out there. We can expect more attrition from SAP’s competitors than from within SAP itself.

-          SAP customers stay with SAP a lot longer than most technologies. Check it out – most firms retain their ERP solution longer than most marriages or employment terms last. In fact, most SAP implementations outlast several CIO careers and server platforms.

One of the SAP executives at Sapphire made this especially terse but relevant point. He said “competitors are consolidating the past while we’re innovating the future”. While I don’t believe that all of their innovation efforts are as expansive as they should be, SAP will be hard to dislodge from the leader’s board.

Sapphire Conclusions #2

Building Applications With Convergence in Mind 

• SAP Joins Others in Next-Gen Apps 
• Will These Apps Be Competitive for large enterprises?
• Technical innovations are not enough if TCO reductions are to occur

Great software companies design new waves of application software by betting on the convergence of new technologies being available when the new applications come to market.

Microsoft and many other personal computer application software vendors have relied on ‘convergence’ to develop market-ready, technically relevant products for years. They’ve counted on Moore's Law (i.e., the doubling of transistor count/chip every 18 months), dropping memory prices, faster processor speeds, etc. to make personal computers ever more friendly to computational-intensive, storage-hungry, memory consuming applications. It’s because of convergence that we cannot run new applications on older PCs. They just can’t support them. Gamers love convergence-built apps because that’s how the best graphics, fastest animation and killer effects get built into the newest games. Unfortunately, if you want the latest gaming experience, you have to upgrade (or replace) your PC.

Convergence has been a force in business applications, too, although the effect of these changes seldom appears in as pronounced fashion as it has in personal applications. Remember when apps vendors shipped those fat-client solutions of the 1990s? Those apps relegated tens of thousands of green-screen dumb terminals to the junk heap.

Today, vendors (e.g., Workday, SAP and possibly others) are creating a new generation of applications that are betting on convergence. These new applications are betting heavily that:

-          memory prices for servers will continue to plummet

-          OS addressability for memory (is already huge with 64-bit) will continue to grow

-          Flash and in-core memory will supplant fixed media (i.e., hard drives) for most I/O operations

-          Web 2.0 will supplant Web 1.0

These same vendors are also hoping that users will:

-          continue to grow their appetite for analytics and BI/BPM capabilities

-          want to connect more non-transactional data sources to their applications

-          seek more flexible solutions

Vendors that plan for convergence will not build client/server applications (those are so passé). No, these vendors will construct solutions that utilize an amazing amount of memory-resident server database storage. Initial solutions will likely start at 100 gb of memory; however, we should quickly expect 1 terabyte in-memory databases within a year or so of these new applications coming onto the scene.

In conversations with SAP executives (at Sapphire 2007), industry IT analysts and others, the advantages of this new design are:

-          Speed – in-memory databases are capable of substantially faster access times due to a lack of rotational delay and seek time. This can make search functions routinely occur in sub-second timeframes and not seconds or minutes. It also eliminates the need for secondary data stores (like data marts) to perform specialized searches.

-          Compression – in-memory databases can apparently be compressed/ decompressed without incurring the delays found in compressed RDMS records. Again, this permits more records in memory and without sacrificing speed for space. One executive indicated that 16:1 compression was achieved in one production database.

While the in-memory database is one of the more interesting features of these new product designs, it isn’t issue free. These systems require care so that no data can be lost in-flight or when power fails. There is a chance that data will be updated in core memory first but a degree of latency is possible before the update also occurs on an attached hard disk. Until data is stored in a permanent location/media, it is vulnerable.

The convergent environment must also support video, wiki/collaboration, voice and more. The whole Web 2.0 checklist is part of this vision. Much has been written about Web 2.0 but I’m still not sure if the vendor community knows how to translate these into business purposes.

An even bigger problem with the new convergent vision is the continuing obstinacy of software vendors when it comes to the usage and incorporation of outside data to enrich the value of applications for users. For example, when I asked one senior SAP executive about their plans to include data other than transaction data in their new applications, I was told that they would leave those decisions up to systems integrators. It seems that innovation to them may be limited to technical innovation not functional innovation.

This is a shame. If I were a procurement user, I’d want live feeds with current commodity prices, econometric forecasts, etc. I want that data so I can better decide how much to buy now, whether I should hedge, etc. But, the systems being planned for now are probably going to forego this information.

Leaving the functional innovation to systems integrators is a mistake that has gone on too long. Systems integrators are not motivated to lower the TCO of applications. Rather, their internal reward systems celebrate those executives who deliver huge billings to clients. No, if vendors want to seriously reduce TCO and improve the value of their applications, they must deliver a total solution that is functionally advanced and capable of being installed for little money. Anything else is mere lip-service. Only offering technical innovation is a partial solution at best.

The newness of these architectures and solutions warrants that vendors release these products first to small enterprises. Why? A small business might be able to buy a memory laden server and still not totally max-out its capabilities. As time goes on, more powerful servers will be created and their ability to serve the mid-market and beyond will be assured then.

Convergence therefore will initially be felt by smaller firms. Larger firms will have to wait a while later.

Sapphire Conclusions #1

Getting to Know the SAP Customer

• The traditional SAP customer is alive and well
• New SAP solutions must attract a very different kind of buyer
• Traditional users, who used to value the strict structure of SAP of old, now apparently want a more agile product. That’s SAP position but the reality is that these buyers will still want more of the same.

On the flight to Atlanta this last Sunday for Sapphire 2007, I sat next to an executive who shared with me why his firm has spent a princely fortune implementing SAP. He was the CIO of a Fortune 500 firm that has had difficulty becoming a single, coordinated global firm. His firm hired a major systems integrator who has expended thousands of hours of effort and billed tens of millions of dollars implementing SAP to help make this change happen. 

This conversation took me back – way back to my Accenture (nee Andersen Consulting) days where I advised countless companies on what high-end software to buy or run away from.

In the 1990s, I encountered a number of firms whose users wanted the flexibility and features of best of breed solutions but whose management wanted the suite that SAP offered. While I could see the wisdom of either decision (given the right circumstances), I would occasionally run into an executive (often the client CEO) who had a sense of logic that I found troubling then and still feel bothered by it today.

SAP – The Sword and the Shield

For some CEOs, the conformity that an SAP implementation imposed on an organization was a good thing. If you were a CEO who ran a loose confederation of legal entities, product lines and functional groups and you wanted your firm to be a single-minded globally competitive juggernaut, you want a unified (not fractured) software solution.

To be a global CEO, one needed:

-          an organization that has a consistent data architecture (e.g., Can we all agree on what ‘customer’ means in our company?)

-          systems that operate in real-time (e.g., Why does it takes weeks/months to close the books around here?)

-          little redundancy in the systems (e.g., Why do we have a different accounts payable solution in every country that we operate in?)

-          clear, concise information throughout the enterprise (e.g., Why don’t our people in one division/location ever share information with staff in other parts of the firm?)

-          etc.

To the global CEO, SAP was a dream come true. It had an exceptionally broad product line with applications/modules in almost all verticals and worked in most geographies. Competitor’s products were often either lacking in vertical depth, global coverage or application suite completeness.

Systems integrators were all too happy to help these soon-to-be global CEOs and bring their systems and organizations into shape. 8, 9, 10-figure consulting fees were not unusual.

What global CEOs paid for with the joint SAP-Systems Integrator solution was:

-          a massive change management effort that the CEO did not believe was possible without outside intervention

-          a significant data cleanup and standardization project

-          a material reduction in the number and variety of systems being supported

-          scale economies

-          an opportunity to improve the quality, velocity and access to corporate information

What the global CEO was also doing, in many of these cases, was:

-          implying that his/her own staff was incapable of pushing this type of change through the company

-          signaling that a decentralized, laissez-faire IT approach was no longer wanted or valued

-          indicating that power was being re-centralized and concentrated. Decisions were now going to be made globally (not locally, divisionally, or by product-line). A command and control environment is being phased into the company.

In contrast, a CEO could be a global CEO if he/she had political savvy, a clear and compelling vision for the company and a plan for how IT in the new business economy should work. Trouble was, there weren’t either enough of these leaders or those that existed lacked the time, patience and knowledge to develop global firms with non-SAP solutions. You can make a global solution out of best of breed components. But, to do so, you need an architect with clout.

The CEOs who used SAP in this fashion weren’t necessarily selecting the best solution functionally or technically, they were selecting SAP because of its ability to affect change in their firm. They used SAP as sword (to force change on their own employees) and as a shield (to justify how their firm would become a stronger, global competitor).

The Sapphire Experience: Customers Haven’t Changed

Just about every software vendor’s user conference has that moment where the vendor welcomes one or more major customers up on stage and gives them some kind of award. A lot of mutual backslapping occurs where the vendor’s EVP of sales whips up the crowd to congratulate some poor unfortunate for having spent a kingly fortune with the vendor and some systems integrator.

I guess we’re supposed to be impressed when a company sinks a pile of cash into a software deal. I’m not. I’m uncomfortable with this and the spectacle that goes with it. Why? If I were the CEO, VP of Investor Relations, CFO or other position with that software customer’s firm, I’d be embarrassed to let the world know that our firm just set a record for IT spending. Destroying shareholder value is not a good thing. How would you feel if a car dealership wanted to highlight you as the customer who overpaid the most this year?

The users that should be showcased at these events are the ones who spent a pittance and got a ton of value. Morever, the focus should be on highlighting the customers who were able to figure out a lot of the change management challenges on their own and actually solved them without the use of consultants or a strait-jacketing piece of technology.

What I saw at Sapphire 2007 reinforced for me that the SAP customer of the 1990s is still here and may be the life blood of the company. In a compelling exchange with Hennig Kaggerman, he and I discussed how a client has spent $1 billion (USD) on a SAP implementation. He admitted that some firms would be better off spending $4 billion on a new manufacturing facility than $1 billion on implementing their software. One of these capital decisions can deliver decades of value via the products it produces for sale. The other is a cost of doing business. He’s right about this choice.

In the same conversation, we both discussed how some executives are buying SAP solutions because of their need to make their firms global juggernauts. He agreed that they need a lot of systems integrator time/effort to affect the scale of change their firm requires. In other words, the old and new customers are still the same.

The SAP Customer Profile

Jason Busch (www.spendmatters.com and www.azulpartners.com ) and I have spent a fair bit of time assessing the IT sophistication of large global companies. We have developed a database of the top 3700 firms globally. In that database, we created proxies for the Geoffrey Moore Chasm categories (i.e., Innovator, Early Adopter, Early Majority, Late Majority and Laggards).

For more than 20 years, SAP has been a favorite of the Early and Late Majority. It’s also hot with the Laggards, too. In contrast, PeopleSoft had a large number of Innovators, Early Adopters and Early Majority buyers as customers.

What Jason and I have learned is that the large SAP customer:

-          is conservative

-          likes to buy from the market leader

-          can be patient to a fault. They can wait years for SAP to develop a capability that other vendors already possess.

-          travels in herds. They like knowing that they’re buying the same solution others in their industry have acquired.

-          wants competitive parity not competitive advantage.

-          approaches change tepidly

Now, the customer demographics and psychographics may change and this could be something to watch.

The New SAP Customers

SAP leaders repeatedly discussed how SAP’s customers want their businesses to become more agile, more innovative, more successful and faster at adapting to change. This apparently will be true whether these are large firms (the traditional clientele of SAP), Business One customers, A1 customers or A1S customers.

There’s something ironic in all of this. Here is the poster child for rigid software trying now to be positioned as an agile solution to large and small companies.

Small companies, from my experience, are quite agile to begin with. They move with incredible speed and often owe their continued existence to the fact that they can respond to changing customer needs far faster than ossified, bureaucratic, disorganized larger competitors. To date, small firms have made do with minimalist, low-end functional IT solutions and have created all manner of technical and non-technical workarounds to overcome systemic limitations. Any new solution for a small business will have to be:

-          very low cost

-          capable of phenomenal adaptation capability

-          vertically relevant

-          straightforward

As SAP executives describe A1S, this solution will have a lot of pre-defined functionality, few(er) configuration options to speed up implementation time, and eventually a broad catalog of vertical bolt-ins.

As customers go, the A1S customer will not be the same as the large R/3 (or current NetWeaver) buyer. Just as the Business One customer is different from the R/3 user, so will the A1S buyer be different. The reason for this is straightforward: different size businesses have very different business needs and systems wants.

For the traditional SAP target market (i.e., Global 2000 firm), these buyers should be quite content with SAP today. They’re getting a well-tested product from a company with a pretty good track record for delivering a quality software product. The only downside for these customers is delivery pace for new products. As SAP’s product line has grown, the time to develop and test new/modified products seems to have grown as well. Several people I spoke with at Sapphire bemoaned the lateness with which some functionality is due to arrive.

Conclusions

Annual events, like Sapphire, cause all of us to reflect on the changes over the last year and beyond. They make us take note of progress and new market conditions. Specific to the SAP customer, I must conclude that:

-          The high-end customers are, surprisingly, unchanged. I’m not sure they’ve gotten more or less sophisticated. However, the point may be moot as there are so few large firms left that aren’t SAP customers.

-          Prospects of the small business persuasion are quite different from the traditional SAP buyer. I’m still not convinced that SAP is totally ready to attack this space. Yes, it’s lining up channel partners; however, I’m more concerned that SAP’s big, expensive image will bleed into and stall sales in the low-end of the marketplace.

-          Some prospects will still be attracted to other solutions. SAP competitors who are attractive to Innovative and Early Adopter segments (e.g., Workday) will continue to find opportunities to compete. The speed with which these firms are delivering new solutions to the marketplace will likely give them an advantage.

-          ORCL customers, no matter how good Fusion is/becomes, will be more vulnerable to defection to SAP than vice versa. Too many ORCL customers still refer to the software they use by its pre-acquisition name (e.g., Datalogix, JDEdwards, Peoplesoft) and their loyalty to ORCL may be suspect to some degree. SAP customers have clearly drunk the Kool-Aid and won’t be changing for the most part. Think of SAP customers as 3^rd generation Republicans while Oracle/PeopleSoft users are ‘Independents’.

Software joinery at work

Bill Gates calls the gap between personal productivity and business application software the "last mile" in productivity. In this guest blog excerpted from KiteBlue, Jyoti Banerjee assesses if the gap has been bridged.

The use of portable computing, mobile connectivity and the Internet has changed the way we work over the past decade. However, the organisations we work in, with few exceptions, still work in the same way as they used to ten years ago. Business processes may have got automated along the way, but the engagement between person and process has not changed as much as the changes in personal productivity.

This past week Bill Gates focused attention on what he calls the “last mile of productivity" in his keynote at the Convergence 2006 event in Munich, which he describes as the gap between personal productivity software and back-end business systems. In other words, the  gap between people and process.

What is different about Gates’ solution is the breadth of vision employed in bridging this productivity gap. Of course, we are talking about Microsoft - whose record in translating vision into reality can be likened to a patchwork quilt that has a few squares missing - so we need to be careful about assessing when the vision translates into reality. More about timelines later.

Bridging the gap

In computing terms, I have been waiting for the day when we stop going to the software and the software comes to us instead. Gates’ last mile vision is the first step in getting the software to where we are. Let me explain how in three ways.

One, in combining personal productivity (Office 2007), desktop infrastructure (Windows Vista) and ERP/CRM business applications (Microsoft Dynamics) into a single visual and functional grammar, the user is able to take advantage of business software without the complex, proprietary, training-intensive interactions of current and previous examples of business software. I remain unconvinced about the individual worth of Vista and Office 2007, compared to their predecessors. But combine them with Dynamics and the result is much, much stronger.

The user gets role-specific business information delivered to the desktop without needing to access the business applications that create and store that information. Further, the user can interact with and act on that information inside their personal applications, and still engage with integrity with the business processes that are captured in the line-of-business applications. In practice, this means that the sidebar in Vista can be populated with, say, real-time data from the CRM system – the user can interact with the CRM data inside their Office system, without needing to login to the CRM application.

Secondly, the deep integration between Office and Dynamics is extended by online services. Dynamics CRM is already available as a hosted product via Microsoft’s partners. Now Dynamics ERP has been added to the mix. Next year both products will be available as hosted products direct from Microsoft. Interestingly, as the code base is identical to the one used “on-premise,” it should be possible for medium enterprise with multiple locations to mix and match in-house products with hosted services.

(Personal aside cum plea to Microsoft: on-premise is a nothing word – it means zip. At least, not in Europe. Please do not compound the dismembering of the English language by semi-literate geeks by using premise when you mean premises – they sound similar but they mean completely different things.)

Finally, the Dynamics offering is enriched by online services that bring new internet capabilities to users of business applications. For example, Dynamics CRM customers can integrate keyword marketing with Microsoft adCenter into their online marketing campaigns. And Dynamics AX customers can use eBay as an online sales channel, allowing placement of stock items on the auction channel, as well as downloading financial details for sold items.

Visibility
How much of this exists today? That is much harder to answer. We will have a better idea when Windows Vista and Office 2007 release later this month. The last mile of productivity will be bridged more effectively when we can see next year's hosted versions of the CRM and ERP applications, as well as what Microsoft calls Dynamics snaps: mash-ups that combine Dynamics information with Office 2007 and Windows Live internet services.

The technologies discussed here are not exclusive to Microsoft. Others who expose web services APIs in their business applications should also be able to integrate with the desktop and online services. Ultimately, for the user, the most authoritative bridging of the last mile will come when their need for awareness of the business applications that work in the background will slip away to near-zero. This is not a pipedream, as vendors can already start building custom or vertical applications that exploit the deep integration between Vista, Office and Dynamics. The user can concentrate on the custom software and not worry about visibility of the ERP or CRM suites.

Where HR Software Investments Are Going

                HR Tech show Recap

I stopped in at Bill Kutik's HR Tech show (actually, it is a LRP event but Bill's the wheel behind a lot of it).

Here are fast recap points based on a guy who's been to four of these shows in New York and Chicago:

• Interest in Dave Duffield's new company was huge. The Workday (www.workday.com) booth had a modest seating area to showcase their new HR product line. The interest was way beyond SRO as attendees were spilling over into the exhibit areas of 2-3 other exhibitors. According to Dave and Amy Ziefang (the Workday Marketing exec), a bigger announcement is coming out in the next couple of weeks.
• Overall size of the exhibit space was tremendous. I honestly can't recall seeing this many HR vendors together for a long, long time. It felt like 1999 all over again.
• Talent Management solutions are clearly huge right now. Now I know what VCs and others have been funding the last couple of years. That's the good news. The bad news is that there are so many of these talent management solutions now that many of these new vendors will likely not last long.
• Another hot area is employee or prospect verification solutions. Walking through these exhibits you'd think every firm is inundated with neer-do-wells, criminals and people with lots of deep, dark secrets. There are plenty of solutions to choose from and let's hope we see lots of growth in rotten employees out there.
• Also on the talent management front, I spoke with the Monster folks (www.monster.com) and they've got a talent management solution, too. For a brand that's synonymous with job board (and cool Super Bowl ads), it looks like Monster's footprint is expanding. Can the brand do likewise?

Very good show and a strong turnout.

Big HR Show Coming Up

        Kutik's HR Show

Every year Bill Kutik, et.al., puts on a real nice HR conference  (www.HRTechnologyConference.com) and this year's event is coming up on October 4-6. I've been to several in the past,a panelist at one, etc. I was impressed that this year Bill got Dave Duffield (now with Workday) to give him a quote: " World's Best HR Conference on HR Technology". That was nice of Dave and I'll add my ten cents and by saying it probably is, too.

I thought I'd give Bill a plug for this event. He was an original investor in a dot.com adventure that Vinnie Mirchandani (www.dealarchitect.typepad.com) and I did years ago. Bill's show has a number of HR gurus there that I've known for years (e.g., Namoi Lee Bloom) and some who even worked for me (e.g., Jim Holincheck, now with Gartner, and author of the blog: http://blogerp.typepad.com/hcm_research/ ).  I know the venue well (Chicago's Navy Pier) and it makes for a nice show of this size. If you're into HR technology, this is probably the biggest get together you can catch.