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Are we falling into Web Bubble 2.0?

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23rd Jan 2008
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Is there a danger we could find ourselves caught in the Web Bubble 2.0? Andrew Armstrong believes that that the software industry can avoid this scenario by learning from the successes of ERP, the failures of CRM - and applying the "P" to sales performance management.

By Andrew Armstrong, Callidus Software

It is a widely-held notion that enterprise software, as it has traditionally been known, is dead. The same conventional wisdom that doomed much of the enterprise software market has now embraced the shift from software to services. Therefore, we need to understand the component parts of this new Software as a Service (SaaS) paradigm and how it came to be.

It is only by seeing which parts are the inevitable spin to manipulate perceptions and which parts take advantage of changes in the landscape of economics, technology and business needs that we will see what models can work for which markets. We must also understand these components if we want to avoid the Web Bubble 2.0.

Let's consider the real economic climate, and today's real business needs as a way to root out a few of the pitfalls and red herrings ahead. If we learn our lessons, there may be a very bright future for both software and services ahead.

Economic climate

The market for software, while not bad by historical standards, is no longer being driven by the twin afterburners of the internet bubble and the Y2K crisis. CEOs (except those running traditional software companies!) are not waking up in a cold sweat from nightmares about grad students taking over their businesses overnight by "disintermediating" them via the internet.

Companies are no longer seeking to add new information technology toys to their arsenals regardless of the cost or risk. In short, we have moved out of a distorted bubble and back into normal times, not bad times.

Many great enterprises have been built in normal times, so we should not despair. However, we must recall the old formulas involving return on investment, customer satisfaction and barriers to entry. They had been long forgotten, at least for a time, as the intervention of the "twin afterburners" made them temporarily obsolete. Today, they are once more essential to success.

Good old ROI

Return on investment (ROI) forces us to deliver results such that the healthy green curve of return exceeds the red curve of expense/risk as soon as possible and by as wide a margin as possible. Under the twin afterburner economy, the expense/risk curve could be ignored with impunity because the return curve was assumed to be infinite due to the mysterious workings of the new economy.

photo of Andrew Armstrong"Siebel sold a system that was very expensive and risky to install. Once the normal economy had returned, the expense/risk curve was seen to be way above the return curve and companies lost interest."

Andrew Armstrong

In fact, the stock market returns during this time did defy conventional economics in just that way. In our new, normal world, we must take these curves into account and ensure their proper trajectories. For markets offering limited return curves, a strong focus on lowering expenses and risks is essential.

The latter is one of the forces behind the success of SaaS companies and the demise of Siebel Systems in CRM. Because CRM systems are only about managing process and collecting the opinions of salespeople, they never truly delivered on their promise of safeguarding and enhancing the productivity of salespeople. They are useful tools, but their promised return curve never materialised.

At the same time, Siebel sold a system that was very expensive and risky to install. Once the normal economy had returned, the expense/risk curve was seen to be way above the return curve and companies lost interest. Salesforce.com, for example, has radically repositioned that expense/risk curve so that even (or some would say, especially) small organisations could be successful with CRM.

Customer satisfaction

Customer satisfaction follows the ROI forces closely. That statistic on average CIO tenure being so short is an indicator of poor customer satisfaction. All of the CIOs can't be that incompetent all of the time. Some blame must fall to the software and those who were installing it. The cost of installing enterprise software ballooned out of all proportion to the license costs, and the latter were supposed to be a true reflection of what the software would bring in benefit.

Analysts estimate that it costs anywhere from $5 to $7 per $1 of license sold to install most enterprise software. Any scenario that unbalanced is going to be fraught with risk, expense, and much opportunity for unhappiness which all lead to low customer satisfaction. Customer satisfaction is the subjective institutional memory and fallout of bad ROI.

"Salesforce.com identified a market where customisation could be dispensed with. There has been little value shown in doing extensive customisation of CRM systems because it isn't the details of the sales process that matter."

Here again, the SaaS folks have an answer. By moving the software out of the data centre the customer can no longer see how the 'sausages' are made. By insisting on a one-size-fits-all approach, much of the potential for dissatisfaction is self-selected away during the initial sales cycle, and the risks inherent in custom coding are eliminated.

But it is the self-selection piece that is missing when the Siebel's of the world claim that installed software as one-size-fits-all is easy. And so the religion performs the useful service of protecting the customer from their own worst tendencies.

Unfortunately, the idea that you can have any colour you want so long as it is black is not a long-term stable solution to the issue of deployment and customisation. People like customisation and personalisation. In fact, it is one of the alternate paradigm shifts that drove the sales of MP3 players - "why can't I have exactly the music I want instead of what some record producer thinks I should have?" Businesses must do some things differently in order to differentiate.

As luck would have it (more on luck later), Salesforce.com identified a market where customisation could be dispensed with. There has been little value shown in doing extensive customisation of CRM systems because it isn't the details of the sales process that matter. It is simply the mindset that there should be some kind of rigorous process. Overly literal imitators of Salesforce.com's model need to be careful that their market will not require customisation either.

Successful software, or services, must be difficult to copy

Barriers to entry is the last economic component to consider, but it is one that the SaaS community has not yet assimilated. In the wake of the dinosaur-killing mass extinction event, the furry mammals haven't had much opportunity yet to compete for dominance in the food chain. The time to compete is coming though. With every venture capitalist in the land and many shareholders and analysts clamouring that SaaS is the road that must be travelled, there is a gold rush beginning to take root.

Soon, there will be many who want to poach each claim that shows any promise at all. Salesforce.com is a particularly juicy target. It may be that they have sufficient momentum that brand will become their essential barrier to entry. They are attempting to use the AppExchange concept to create a network effect barrier to entry, but that will take many years if they're able to get there at all.

Ironically, the very forces the early SaaS players have harnessed to their advantage have eliminated the barriers to entry that can be so important to long term success. With no customisation, indeed as little investment as possible to adopt these products, and with their data entirely accessible via the internet, it's hard to see why the commoditisers will not ultimately themselves be commoditised by hungrier vermin that come along later. The jury is still out on what effective barriers to entry will work, and therefore what the barriers to entry will be for this model.

Business needs

Somewhat related to economic climate is the idea of business needs. Are there any big problems left to be solved, or is the time and energy better spent providing ever cheaper solutions to the problems we've already uncovered?

One of the great tragedies of the enterprise software empires is that they became gradually disconnected from the idea of solving real business needs as more demand was driven by Y2K and internet disintermediation fears. Many important business needs remain unsolved to this day because they weren't sexy enough or didn't benefit from the 'disruptive-force-du-jour'.

"To achieve the levels of success that have been enjoyed by the ERP players, and to kick-start an entirely new phase in enterprise software and services, sales performance management focused vendors need to deliver the planning promise to the revenue problem in a proactive way."

Supply chain and product lifecycle management seemed like big new spaces that were enabled by the new internet ethic. In fact, they were interesting spaces, but did not apply to a large enough market despite being useful to companies almost in direct proportion to how much they resembled Silicon Valley thinking.

CRM promised to solve the revenue growth problem, which is a big problem, but they only delivered the ability to collect the opinions of sales people and to monitor their adherence to the sales process. These were poor proxies to the revenue growth problem.

One way to look at this issue of problem solving is to go through the financial statements of companies and ask what has been done to improve the outcome of each line item. Huge markets have been created around the line items that have to do with manufacturing, for example. Enterprise resource planning is the epitome - and it is no accident that SAP as the premier player, is strongest among manufacturers.

The distinction between the idea of enterprise resource planning and customer relationship management is also strangely resonant. Planning implies some ability to proactively influence the outcome, and that is exactly what ERP systems are all about, at least for manufacturers. Management by contrast implies an ability to react to what is happening, and this is exactly why CRM has not solved the problem it set out to.

To achieve the levels of success that have been enjoyed by the ERP players, and to kick-start an entirely new phase in enterprise software and services, sales performance management focused vendors need to deliver the planning promise to the revenue problem in a proactive way. Instead of looking at opinions about what might happen, we must focus on using the powerful compensation carrot to drive future behaviour based on what was learned from past results. This is exactly what was done in ERP, and it represents a bold new opportunity to address an important business need that has rejected the best attempts of the CRM movement.

Andrew Armstrong is vice president and international general manager of Callidus Software.

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