Children of the Revolution
Revolutions come in many forms. They can be violent and bloody and erupt amid the populace, like the Russian Revolution or the French Revolution. Or they can be slow burning and methodical, like the Industrial Revolution. The revolution that’s going on the applications software market at the moment is notionally more akin to the Industrial Revolution, but in practice may see as many casualties and as much political manouvering as the French or Russian versions.
Hosting, application service provision, on demand computing - whatever title is given to it, the undeniable reality is that the model for licensing and implementing and running software applications is changing. The traditional methods of licensing are giving way to new, more user-centric and potentially budget friendly approach. It’s an approach that makes perfect sense - and one that’s giving a few companies some serious corporate headaches as they try to adapt.
The idea of the ASP has been around since the mid-1990s, but is one of those ideas in the IT industry that famously is always set to become ‘the next big thing’, but somehow never quite made the leap. It was regularly argued that the problem was that the model was suitable for small and medium enterprises (SMEs) but not for large corporates. As such, the model was of little interest to the major enterprise players and as such gained little traction.
But circumstances have changed. That SME market space - so long overlooked by the Siebels, the Oracles and the SAPs of the world - is suddenly hot property. The enterprise contracts have dried up. The days of the multi-million, ten year global roll out are long past. As one CEO succinctly put it: “We became used to shooting elephants, but we’ve shot most of the elephants now so we need to shoot rabbits instead. Problem is, we’re trying to shoot rabbits with an elephant gun!”
Add to this, the increased pressure on corporate IT budgets and the need to squeeze all the fat out of an organisation, mix in the fact that the internet provides a viable global network on which companies are increasingly comfortable doing business and suddenly hosting looks like an idea whose time has finally come. The next big thing has arrived.
The basic principle makes perfect sense. If we want electricity in our homes, we don’t dig up the garden, build a generator and produce our own power. Instead, we go to a company that provides electricity, buy as much or as little from that company as we need and then pay a bill on a monthly or quarterly basis. If we need more electricity in any given period, we pay more, but if we then need less, we pay for less on a usage based subscription model.
That all makes economic - and common - sense. So how come we never applied it to our technology purchasing? Instead we went around obsessively building our own metaphorical generators in the garden. Companies invested millions in building their own data centres to run their own business applications. There was a move to outsourcing the management of these data centres to third parties, kicked off in the public sector, but by and large it was a case of DIY when it came to running applications.
The current hosting movement is not wholesale outsourcing. Nor is it on-premises ownership. It’s about taking all or part of your computing infrastructure and paying for it as a service rather than as a product. Instead of paying a fixed fee based on licences, you pay for as much or as little as you need at any given time according to the needs of your business. In the boom times, you scale up your demand; in the down times, you scale it down.
Makes sense? Again, the question must be asked, why then did we throw so much good money after bad for so long. Take CRM as a case in point. Millions of pounds and dollars and Euros have been spent on software, yet much of what has been spent sits unused on shelves according to figures from market analyst firm Gartner Group. It found that in a one year period, some 42 per cent of CRM licences were unused at an estimated waste of $1.2 billion that could have been spent more effectively elsewhere.
One of the reasons for this is the pricing model that most applications vendors have adopted over the years. Users have grown accustomed to having to buy in bands of licensed users - eg up to 50, 50-100, 100-500 and so on. That means they need to calculate not only how many users are likely to require access to a particular application, but also predict some slack so that they can add more on easily as needed.
Most companies err on the side of caution, particularly in good economic times. So a company that needs a 251 seat licence will end up buying a 500 seat licence because that’s the user bracket they fall into. that 249 of those seats are never filled is an unfortunate fact of life and one that is all the more irksome when the need for licences falls to 200 because of an economic downturn or the business going through a bad patch.
The biggest single selling point for hosted applications is the breaking of this practice. With a hosted model, companies only pay for the licences that they need and not for unwanted ones just because that’s the licence group into which they fall. But there are other reasons as well: the cost of ownership is reduced, commodity applications (like payroll for example) no longer need to be managed in-house and all applications can be accessed using a simple internet browser.
For companies of a certain size - particularly SMEs - the cost benefits of this approach are self-evident. Of interest now is what the reaction of the larger enterprises will be. Siebel’s partnering with enterprise players such as IBM and BT is a shrewd tactical move in cracking that market. It’s also likely that many larger enterprises will see the future as a hybrid approach. Mission critical applications will remain on premises, but subsidiaries or departments will take a hosted approach. This hybrid model appears to play to the strengths of those vendors with a large on premises installed base, wheras the onus on pureplay hosted vendors will be to demonstrate that they can integrate with existing systems.
There is one name that is guaranteed to send shivers down the spines of software executives and that name is John Cullinane. Today Cullinane is a barely remembered figure outside of certain circles, but in his day he was the Larry Ellison of his time. He was founder and CEO of Cullinet, a database company that was Oracle before Oracle was invented. Cullinent’s IDMS database was used by enterprise customers the world over.
The technological approach that Cullinet took was flat file or heirarchical data management, an approach which was supplanted by the move to the rows and columns techniques of relational technology. With the emergence of relational database technology, start-ups such as Relational Technology Inc (later Ingres) and most notably Oracle came into existence. They offered a new model and a new approach to data management.
Cullinane’s reaction was to rest on his laurels. Relational technology would not achieve mass adoption, he predicted. Customers were content with the heirarchical approach to data management. Like an IT version of King Canute, Cullinane set up his throne on the edge of the relational tide and was promptly swept away. Cullinet lost market share and eventually folded into the then rapacious arms of Computer Associates, while the leaders of the relational revolution went on to dominate.
No-one wants to be John Cullinne. This has almost become a bad thing in the software industry as every vendor rushes to claim a foothold in whatever the currnet ‘big thing’ is. No software supplier can see a bandwagon trundling past without throwing itself on to the back and fighting for a seat. Most of these bandwagons lose their wheels very very quickly, but no-one can take the risk of missing their seat on the one that goes all the way.
That said, there have been some recent examples of ‘Cullin-isms’. most notably from Tom Siebel, CEO of Siebel, which made a tentative approach to the hosted market a few years ago with its Sales.com venture, only to pull out relatively quickly. "It makes an intuitively comfortable argument, but for some reason, it's just not how people want to buy software,” declared Siebel.
By 2004, the company has changed its stance completely. It has hosting religion and it has it bad. "It's highly likely that [in 2004] we will be the world's leading provider of hosted CRM,” declares Siebel today in the wake of signing On Demand partnerships with both IBM and BT. As a company, Siebel has seen the light and is determined to conquer this market in the same way that it conquered the licensed CRM market in its day.
So what’s changed in the market? Oracle began talking about hosted software in the mid-1990s with CEO Larry Ellison a devout believer. But for companies such as Oracle, the core business and recurring revenue comes from a different source - in Oracle’s case from the selling of its flagship database product. The impression with Oracle has always been that hosted software is a nice idea, but not top priority for the salesforce.
Not that Ellison can be accused of not putting his money where his mouth is. He not only personally invested in a start up called NetLedger (now NetSuite) which offers hosted CRM and ERP to SMEs, but he also encouraged one of his lieutenants - Marc Benioff - to set up Salesforce.com, a rival to NetLedger, Ellison had a stake Salesforce.com until his majority ownership of NetLedger became too much of a conflict of interests.
Salesforce.com must be the critical, market changing factor. It is a pureplay hosted application company with none of the legacy baggage of Oracle or Siebel. It offers software as a service. Customers pay as they go, pay for what they want, don’t pay for what they don’t need. The timing was right, the marketing has been right and Salesforce.com’s David has been rattling the cages of the software market Goliaths.
At the start of this year, Tom Siebel came out with one of the most brazen attempts at rewriting history in a long time. When asked about Salesforce.com’s plans to float on the stock market, Siebel insisted that he couldn’t comment as he didn’t know much about “that company”. Given that this is a man who has seen many of his senior management defect to “that company” and who famously insisted two years ago that there was no way that Salesforce.com would be in business in a year’s time, this sudden lack of awareness was perhaps surprising - not to mention completely unbeliebable.
The reality is that Salesforce.com has legitimised the model. It may not end up as the biggest company in the space, it may not be the market leader, it may not survive in the long term, but it has set an agenda to which the more established players are now working. Again timing has helped. Companies like IBM see On Demand computing as a valuable revenue stream going forward and as such are reinforcing the basic concepts that pure plays such as NetSuite and Salesforce.com have been preaching - but on far lower marketing and advertising budgets.
So what are the strategies of the ‘big players’? Who is likely to win out and who will fold? A mile high vew might be as follows:
Siebel - market leader in traditional on premises CRM. Recent convert to hosted model. Signed up with big hitters in the form of IBM and BT to drive service into the market. Also made strategic acquisitions of hosting firms to bolster its own capabilities. There are clear positives in Siebel’s brand recognition and its heavywright partners, IBM and BT. On the downside, the dependence on BT and IBM could become a problem long term, hence the acquisitions. But the acquisitions in their own right mean that there are mixed messages about future direction. The IBM and BT deals are for WebSphere-centric customers only. Despite a high profile alliance with Microsoft, there are no plans for a similar offering for .Net.
Oracle - veteran of the hosted market, but to date it’s been difficult to get any firm evidence of how well the company has performed. Its biggest reference site is itself, having “eaten its own dog food” a few years ago. But the hosting operation has had multiple incarnations over the years and multiple name changes, Currently Oracle Outsourcing, the party line is that the previous years have been preparation and market education time and that now the time is right. The firm’s most recent set of financials include a claim that hosting is on the rise.
Salesforce.com - the leading pureplay vendor. A great marketing and branding operation has won the company high profile attention. Unlike most of the other vendors, Salesforce.com thrusts happy-to-talk customer references out all the time with only a couple of examples to date of customers that are not satisified. The company has had the advantage of being privately held and as such its financial information and other company details have not been as visible as those of the Siebels of this world. A lot has been taken on trust, but as the company heads for the stock market more information will become public than ever before. Its biggest positive remains its CEO Marc Benioff - who has the best of Ellison without many of the excesses - but the company has also ensured that it puts a top level management team in place - although at times it looks like a Siebel survivors reunion. The recent poaching of Patricia Sueltz from Sun Microsystems is a significant coup that points to future enterprise ambitions for the company.
NetSuite - somewhat overshadowed by the PR success of Salesforce.com, NetSuite is nonetheless a viable and potent SME contender. CEO Zack Nelson is another Oracle illumni while Oracle CEO Larry Ellison is the majority shareholder. This is arguably a weakness that the company needs to address - that of building its own identity. Is it an Oracle subsidiary? No - this is a personal investment by Ellison. Does it benefit from marketing resource from Oracle? Not really, although it does resell the Oracle Small Business software. The company has scored some significant successes in the US and is now entering the UK market in force with the appointment of a new country management team. A previous relationship with BT ended last year - prior to that BT had resold the product set on NetSuite’s behalf. Looking ahead, the biggest challenge for NetSuite appears to be getting its voice heard above the hype and noise that will be generated during the forthcoming Salesforce.com floatation. More than any other company, NetSuite faces the challenge of not becoming Ingres to Salesforce,com’s Oracle - the solid, functionally rich product, overshadowed by greater glamour and hype.
Microsoft - to date, the dog that hasn’t barked. A new player in the SME applications space, but one with scarecely concealed long term enterprise amibitions, Microsoft Business Solutions does not plan to offer a hosted solution itself. The company sells its applications via the channel and it will leave hosted versions of its software to its partners as well. Interestingly Microsoft senior executives shoot down all talk of a Siebel/Microsoft hosting deal akin to the one that Siebel has with IBM, although Siebel executives choose to be somewhat more elusive on the subject. Microsoft’s biggest challenge will be in building up a suitable group of partners to provide hosted versions of its applications over a short enough period of time to ensure that it does not miss the boat. On the other hand, this is Microsoft so it may be that whenever it decides to put itself into play, it will succeed through sheer force of will.
PeopleSoft - PeopleSoft got into the hosting market relatively early by forming partnerships with specialist SP firms. The company has about 11 existing partnerships with so-called pure play ASPs some dating back to 1998. It has recently added to its hosted software offerings the applications it acquired through its JD Edwards buyout, now known as PeopleSoft's EnterpriseOne and World product lines. It also introduced new service levels for all of its hosted services, dubbed "value," "enhanced," and "ultimate." But while the hosting market is growing quickly, it remains a small percentage of PeopleSoft's overall business, according to company executives - and PeopleSoft has plenty of other problems to worry about in the near term without engaging too greatly in a new market.
What They Say...
Insight Exec has spoken to some of the market leaders in the hosted CRM sector. Their views can be found at: