Who trapped VMWare in the innovators dilemma …and how do they get out

A great post on techcrunch by Ben Kepes highlighted just how trapped by their business model incumbents can become.

Who trapped VMWare? To me the answer is 3 fold.

  • Bad buyers

IT departments within large organization – are, generally speaking, paying little more than lip-service to the growing calls of a new generation of technology

Buyers, traditionally the IT department are rewarded to maintain the status quo, particularly with Cloud computing – a form of outsourcing.  This response is due to cludge of drivers….Reliability demands – any change pretty much leads to outages, having kit means having a job, arrogance – we know better than you, and fear or comfort with a current technology set, there is also some pretty nefarious stuff that goes on.  People with specific technology skills have made a lifelong career in being the only person who can make an app work…

The problem with lagard IT, is it reinforces to vendors not to change, and in some instances they will actively come out and sell against the new paradigm (Oracle anyone?). HT to Simon Wardley on the above adoption cycle

Unfortunately this leaves gaps in the market for new entrants…and this leads to disruption.

  • Bad management

Listening blindly to your customer, using dated strategy or financial models to new situations or simply telling your bosses what they want to hear, not what they need to hear all lead to reinforcing the incumbent business model.  Listening to the customer, particularly the ones above creates a false sense of security.  Eventually even the IT dept will adopt the new, with cloud its because they will eventually end up at a financial disadvantage, and then you are stuffed… and in the mean time, your mid-level managers have been vetting out any ‘radical’ new business idea, so by the time you need them, well its too late.  If you look at your bench-strength and its full of MBA’s…you are screwed. They are indoctrinated with the same playbook as everyone else (there is no differentiation when its the same)…. instead you should look for outliers, rogue elements because they are the ones who will create something truely new

Senior management is also guilty of not being true stewards of their companies.

“CEO’s are doing the best they can under the circumstances, but there are units in their organization that need to be protected, prices that need to be supported, sacred cows that can’t be touched …….Which is great, unless your competition doesn’t agree. …. When you are competing against someone who doesn’t have to worry about an existing business, they will almost always defeat you.” Seth Godin

Taking a short term view, protecting the old… taking the overt or covert approach of ‘walking back slowly’ you are ceding the future market and opening yourself to disruption…. true leaders stand up, make hard calls and do the right thing for the company long term….

Apple CEO, Tablets will canabalise PC‘s

SAP has said the same, Amazon has done it.    Get the point, great companies bite the bullet

  • The sharemarket

The incessant demands of the sharemarket to protect or grow existing revenues is idiotic.  The analysts community can’t deal with new business lines … “hard to value that new thing, not used to it”.  Shares slide on news that companies are investing in non-core business.  You guys need to take a look at yourself,  the GFC (which I hold shareholders at least partially culpable) proved the point that incessant demands for more drives bad behavior… and then if you don’t like what the CEO is doing, you agitate to reinforce the status quo… numpties.

  • How can they get out?
  1. Start planning for the future – look for the areas that are commoditising and build an ecosystem on top of it.  Get a lot of developers to innovate on top of that (cos you DO NOT have the skills to build the new thing) and watch for the winners. Cloudfoundry looks like a winner to me
  2. Stop listening to your customers…. start WATCHING your non-customers. They are likely already using precursor’s of the thing that will be your death nell
  3. Get an innovation program in place – agree to the incremental risk and potentially spend (not always), and distribute your effort across core, adjacent and transformational innovations
  4. Get different people with different skills working on this different initiatives. Your rogue elements are probably already leading the way, just give them direction and focus
  5. Capture ideas from the source, and get them unvetted.  This is normally the front line helpdesk.
  6. Allocate resources to innovation, stay the course – its a long game,  and don’t compromise. If it is annoying people you are on the right track
  7. Get to grips with canabalisation, internally and externally. The alternative is extinction.
  8. Be prepared to fail, don’t encourage it but do not penalize it either.  When you do, get another group of smart folks to look at the remnants, dollars to doughnuts there is something there, maybe they can make it work



SaaS providers, know your business.

A cross posting with Cloudave.com


I’ve always viewed SaaS as a disrupted technology, and I mean disruptive in the classical sense as outlined by Clayton Christensen.  Looking at the SaaS market though, I can’t help but wonder if the a good deal of SaaS companies don’t fully appreciate this.

By this I mean, they don’t seem to appreciate the macroeconomic forces they are playing with as well as the customer needs they are addressing.

Not wanting to do Clayton a disservice, but I’m going to quickly summarise my understanding of disruption and how it occurs.

  1. There is an incumbent business model
  2. These incumbents enter into a cycle (arms race even) of continually adding features to their products in an attempt to keep adding value to the clients, and hence maintain their pricing.
  3. The cycle continues until you get to a point where the products are over spec’d compared to client NEEDS or even requirements, and accordingly over priced
  4. Then someone finds or offers an alternate product or delivery method, which is much cheaper and actually more suited to the clients  real needs
  5. The incumbents, talk to their clients (who have sunk investments and a political agenda to support their buying decisions) who say they aren’t interested in this new product approach etc. The incumbents completely miss the new trend, because hey…the customer base aren’t asking for it.
  6. The disrupter gains a foothold in a niche part of the market, gets scale over time and eventually becomes acceptable to the mainstream. They then enter the arms race cycle (they are the new incumbents), while the old incumbents struggle belatedly to meet the market…

Phew… all this is shown in this picture (from Wikipedia)


So back to today’s SaaS market and my assertion that many of the players don’t fundamentally get this economic and market dynamic. Here is what I see

  1. Many SaaS providers seem to be targeting the mainstream market, not the niche. You can tell this because they are going after current incumbent providers customers….
  2. They are over specifying their products. That is to say instead of understanding the niche’s absolute needs, they’ve attempted to offer  like for like functionality when compared to the incumbents product. My guess is because they aren’t targeting niches
  3. Their pricing isn’t disruptive… in some cases its not that cheap. Instead they are banking on other levers like speed to benefit, opex not capx and the other regularly articulated benefits of SaaS


Based on my assumption that SaaS is still early in its market cycle ( 2 minutes into the first quarter of the game ), by acting this way the SaaS companies are missing the greater opportunity and literally giving the incumbents a breather.

I know some SaaS providers aren’t playing like this, to those that are I would say this. Know your business,  

Step back, think a little, be the disruptor. Ask yourself

  1. Are we better suited competition head on with a SAP, Oracle or MS with their huge resources, channel and marketing engine, or going after those customers who have a more basic need, haven’t bought a product or literally hate the incumbent price model. I would contend that there are a bunch (the vast majority in some markets) of clients who’d love some basic HR, ERP or accounting products (for instance) who can neither afford the entry price or the ongoing maintenance and are ‘making do’ or deferring another year
  2. What features does this niche really really need?  I bet its not 30 massively configured modules requiring 50 servers,  and a team to implement and manage
  3. At what price can you offer this much simpler product?  Make sure its more than it costs you to make and ensure it’s a lot cheaper than the traditional providers. You need scale to win, price for the long term.
  4. Who can you pre integrate with to offer a broader offering (instead of building it all)

Thoughts on SaaS aquisitions

Over on Smoothspan, Bob asks the question “when do the SaaS acquisition games begin?”. This got me thinking, about the why, who’s, how and impact of acquisition on SaaS.

Firstly, I agree with Bob, the market is young & fragmented. The impact of this on acquisition is quite profound. People will acquire for position rather than to consolidate because the market is still growing. In a new growing market there are only two strategy plays that really matter. A race strategy (get the most customers as first as possible). Salesforce.com is doing this with its PaaS play. If you win the race you can turn the strategy into a position strategy (we dominate, have the most customers, are the most attractive to partners, new entrants, or have deep pockets for acquisition etc, have the most differentiation because of this is hence retain the position). Microsoft runs a position strategy for desktop apps.

Back to acquisition.  If you are already in the SaaS game, you are probably in a race strategy. Therefore if you have achieved a lead (to some degree) you may be looking to acquire to get further in the lead. Effectively buying customers or technology that will give you more customers (has a wow factor or fills out your stack & removes an objection). SF.com buying Kieden is an example.

If you are a SaaS player & haven’t got a lead, then you should be looking to be bought or you need to think about specialisation. You are loosing the mass market horizontal race so stop trying.

If you aren’t in the SaaS game, otherwise known as ‘being disrupted’, then you are looking to acquire a horse already in the race. The rumoured Oracle SF.com tie up is a good example of this.

If you subscribe to my two strategic views above, none of the acquisition moves are surprising. 

To me the most interesting part of the acquisition trend is what the acquirers do with the acquiree when they’ve got them. That is how well do they use the new asset to deliver on the strategy.  Both have they’re challenges.

If you are a SaaS provider on your own infrastructure (platform) then you are going to be forced with the challenge of integration. This is different from ’making them work together’ which should be fairly easy given that AJAX & webservices are cornerstones of SaaS & there are many instances of this around. But integrating two applications & databases onto the same platform is a big challenge to me. Identity management, billing, reporting, management ,  the DNA of the code itself make this a challenging task.

If you are a SaaS provider on a platform like Apprenda or SF.com then the integration task is easier, markedly easier. All (ok most) of those technical details go away because you are already integrated in the backend.These two plays also have the benefit of culturally being aligned behind SaaS, having a channel & billing model that is optimised for SaaS perhaps most importantly management. & remuneration models that support SaaS.

Legacy providers have a different set of challenges once they have acquired. Do they integrate it into the they’re legacy product like the S+S by Microsoft play? how do they run the business, how do they sell it , how do they manage the cannibalisation or disruption of the legacy business if they’ve bought an app in they’re existing space (Siebel & SF.com for instance). Perhaps even more importantly, how do they maintain focus on SaaS while running a legacy business.

Those who read my blog will know that I’m very hot on this. In my opinion if you don’t run the startup separate from the legacy, then the mothership will negativity impact the new entity.

Here is the analogy. Farming. Farmers know that the game is cyclical, that the tree’s that provide the most produce now are only good for a limited time and that they need continuously have new crops or replacement tree’s coming on board.  Those tied to cash crops for survival understand that they are in big trouble. Over farming means that eventually the tree will wither. If you continue with this behaviour, you will turn your land into a dessert (the Sahara is an example). Continuing on with this analogy. Those farmers that do have replacement tree’s usually grow them in a separate paddock. They do this so that the new plants have the best chance to thrive. The seedlings get the appropriate attention and aren’t shaded by the large trees.

Not rocket science and yet business continuously fail to adhere to this most basic wisdom. They often throw their innovation centre in with the rest of the business and expect it to survive (read the innovators dilemma for examples). When the harvest comes due (i.e. reporting season), these companies  run to the big revenue levers and neglect the startup, so it fails to hit its numbers and disappoints. Why? The people who know how to look after big tree’s often don’t know how to look after seedlings, or even worse see the seedling as a threat and actively work to stunt its growth.

All of this points to the obvious decision not to integrate the new SaaS acquisition into the legacy business. If the legacy business is serious about winning the race in the SaaS game, leave it alone. Let the SaaS business come to you with they’re requirements & give your legacy business targets & remuneration models that support this race.

State Owned Networks

Sorry to keep banging on about Rod Drury, but his last two posts have been in my humble opinion bang on.  

 As i’ve stated before it is naive to expect a publicly listed company to fund a nations core infrastructure. Isn’t that what governments are for? (As an aside, how many of the detractors of Telecom’s broadband services are shareholders? Interesting dichotomy there).

Rod’s argument that robust connectivity to the rest of the world is essential to our survival as a nation is fundamentally correct. Despite the work of people like Rod, Pete Jackson and a lot of others, our economy is still fundamentally primary sector based. That is, the same as just about every other 3rd world country in the world. (if you don’t believe me check out Statistics NZ. Of the top 9 export categories, ALL of them are primary products… nice. ( I mean what other country in the world has adverts in prime time TV to become a dairy farmer!!! Hello!)

 So how to transit further up the food chain, well you start moving into service industries. Ops, well because we are physically isolated from the rest of the world, that means creating things instead of provide traditional services. Creating things that add value to primary products or are unique, like gee i dunno, software?

 Which gets us nicely back to topic, how can we when we are so physically isolated compete? Well we do have a bunch of smart people, entrepreneurship seems to be in the water and luckily enough for us there's this trend call SaaS coming which means we could actually deliver services all around the world from home. Nice, sounds great. All of this is being done, but Rods point is that if we want to explode this, ie exponentially grow our services the links we have and the economic metrixs used by a publicly listed company to decide on whether or not to invest in more fibre aren’t going to cut it. They would actually inhibit this expansion (some would argue they already are).

 Fast links to the rest of the world alone won’t do it in my opinion but it will help. Culturally we need to think global (don’t start a business thinking it’s a NZ entity), we need to think tertiary sector, we might need more than the pittance of innovation funding we currently get. A decent savings culture that would free up funds for VC would also help. But it is a good start.

 I also agree with Rod (and know this better than most) that it would actually do the incumbent providers good to loose the network. It might be the catalyst they need to change as a company. Either that or they will be superseded by someone who could adapt (see the innovators dilemma to see how this works) , either way progress will be made.