is disruption inevitable?

Reading the mainstream press you would think so… “hey we’re going out of business because we got disrupted”….Kodak, Dell, Borders…. all poster child examples of it…

But is it inevitable?

I think the first thing to get clear on is what is disruption. I summarised it (a long time ago using Clayton Christensen’s model), But it is light on an incumbents inertia to change (hey, i’ve learnt a bit since then). It appears that product disruption is slightly more granular…
There ARE unpredictable technology advances ….but in writing this, I was struck by how hard they are to identify… to me there aren’t really that many. I’m thinking truly revolutionary stuff – the printing press, electricity, 3D printing, the wheel, lasers.  I think they are truly disruptive because they caused a large discontinuity in the natural evolution of the product.. For instance, could companies who make eye glasses have reliably picked lasers would compete with them (LASIC), do builders/OEM think 3D printers are a threat to them?  For printing its an evolution, for them… thats different.

swardley

Being disrupted by unpredictable market change is part of business BUT ….. being disrupted by a predictable market change is a sign of woeful strategic failure

But then there is a bunch of things that are labeled disruptive (including by me), but really are predictable. Digital printing (kodak invented it), streaming content, cloud computing, IP telephony…. all predictable evolutions. Failure in these instances is a management failure…but its more convenient and easy for management to blame disruption or an outside force, than it is to accept responsibility.

Inertia…it definitely exists, i’ve pushed against it for years. But again its a scapegoat kind of word. All change is hard, changing the what a company does, how and why .. the fundamentals is even harder. But given the stark choice of obsolescence, or taking on hard stuff.. what are you gonna do?

How to deal with predictable disruption is also pretty well documented, (he’s my quick summary). However it is not convenient, easy or without risk… CEO’s prefer not to battle politics rather than fund a step out, they’d rather milk the cash cow than canabalise their existing revenues. (interestingly, hard ass CEO’s of great companies do this)

Is attitude more important than technology?

I’ve been thinking for quite some time about what you have to do to be successful in cloud computing and SaaS. The more I think about it, the more I think that the attitude of the company is this defining characteristic.

The technology, while no small feat to get right, just seems inconsequential when compared to the attitude of a company.

The attitude defines how the company behaves, it gives it focus and unity. It gives clarity about what that company will and won’t do, and how it does it.

I personally think that the {mosimage} logo Salesforce.com used defined SaaS, especially as they strived to make the market. By taking on the entrenched software model they gave their staff a clarity of vision the majority of vendors lack, their sales channels knew who and what they were selling against, their clients knew what they were offering.

{mosimage} ProWorkFlow,   while also being SaaS, are different. The small amount of dealings I’ve had with them struck me by their clarity of purpose. They are proud of their lean model, they were crystalline about their direction and what they would and would not do technically. 

When you compare this to the clumsy attempts of Microsoft, Google or SAP you have to wonder what is holding them back. It’s not for want of clever people, or money, or mindshare. 

I believe its their attitude, they're either trying to do this ‘cloud stuff’ on the side, or their hearts aren’t really in it.  

Thoughts?

Darwinism

My partner and I have been talking about Darwinism a lot with respect to our businesses.  We think  this recession represents a huge opportunity to well operated business.

Think about it, in really good times, just about anyone can survive, make money and stay in business. But when the environment becomes more difficult, only those businesses who are business who are best suited to the conditions will survive. Best suited can mean a lot of things, ability to adapt, better run, have a stockpile of resources etc.

An analogy describes this in natural terms. Two Lion’s share one hunting ground when times are good and there is plenty of game around. When drought hits, the weaker Lion falters and eventually starves. The stronger Lion survives because they’re better suited and now has the entire hunting ground to themselves. When the drought breaks, this Lion still has that entire patch.  

The point is, that if you play this right, you can not only ‘survive’, you can come out the other side in a much much stronger position.

Applying this theoretical approach to the real world, take Ben Kepes sarcastic post about SAP. If a competitor like Netsuite could prove to the market that they are by far a better proposition and actually put SAP out of business or so severely damage them that they retrench to a niche. The upside is huge, only one player in the field to win all the business. (I’m not suggesting this is likely BTW).

If you buy into the SaaS proposition, then this is the opportunity this ‘recession’ now affords you.  Check yourself out, do you have what it takes to not only survive, but to profit from this situation?

If you are in old world businesses like my partner and I, how does this apply? Are your nearest competitors struggling? If so, what can you do to make it even tougher so that when the tide turns you are the only game in town.

Some might view this as harsh, but survival of the fittest binary.  Which one are you going to be?

SaaS is here to stay.

Ok, lately I’ve been grumpy, a curmudgeon by Smoothspan’s definition. Apologies, two kids under 3 can do that to you. So in a new vein, I wanted to point out a few things to the SaaS naysayers.

This 'thing’ isn’t a fly-by-night phenomenon. It is a trend that has been underway for nearly a decade. Take a look at the formation dates of Salesforce.com, Netsuite etc. Same as Google near enough! No one’s saying search & online advertising are flights of fancy.

SaaS companies are making serious money these days. Salesforce.com is the largest, right now they are a billion dollar company. That puts them inside the top 25 largest software companies in the world (interesting that SFDC doesn't show in that list). I’m guessing, but I would say at 43% they are the fastest growing of those 25 too…. By the way, just for those who think SAP is growing annually by the entire SaaS market. They are only 8 x bigger than salesforce.com & last I heard I struggling in these ‘tight’ financial times. The same times that salesforce.com grew by 43%.. . .

The market as a whole is going gangbusters. Growing at 20% CAGR according Gartner, and is currently a $6bn industry. An industry that big isn’t an ephemeral thing.  Size matters. Market penetration matters. This report shows just how much it matters in he US market.

Some key findings include SMBs spent USD 3.2 billion on SaaS applications in 2007, compared to USD 5.3 billion on packaged software; by the end of 2008, more than 55 percent of businesses based in North America will have deployed at least one SaaS application, with Europe close behind at more than 40 percent; and the SaaS market in Asia will reach USD 1.6 billion by 2010, with a CAGR of 66 percent.

Hype Cycles are often used against SaaS, “oh look, you are just on the peak of inflated expectations”. My answer, no… more like on the  slope of enlightenment. How? Well the much maligned (and deservedly so) first iteration of SaaS was the ASP play. Yip, that was the first crack at this market, and yes it did disappoint. BUT technology and business models have moved on, and are now at the point where the faults of the ASP model aren’t valid anymore. Some purists are likely to take issue with this whole statement, but think about it… it is the evolution of the business model.

Investment in SaaS is an indicator of its maturity. There are oddles of cash being thrown at the SaaS market. Even more compelling is the movement of incumbent software companies into the space (Microsoft, IBM, Siebel, SAP, Symantec, CA – all in that top 25 by the way). When these guys move you can assume that the market is mature and becoming mainstream.

Momentum is changing in the blogsphere too. I use Google Alerts as a tool to catch stuff I don’t normally subscribe too. I’m amazed how many posts I see defining or describing SaaS, trying to pin point why it’s a winning proposition, or what makes SaaS so different. Things that were going around 18 months ago are being re-litigated much to my  frustration. The imperturbable Ben Kepe ’s helped me to see that this was the journey, mainstream or even laggards catching up. Now these alerts say something different. To me they mean momentum, to me they mean mass acceptance, collective awareness of SaaS is happening.

But the most compelling factor in this whole diatribe, the one irrefutable truth is that customers believe in SaaS and are voting with their dollars. The proposition may vary slightly, but the appeal of rapid deployment, low up front costs, and lower ongoing costs and for what you use is just too compelling.

So to the SaaS detractors, check the facts, you cannot argue with those. SaaS and on-prem will co-exist. I don’t believe that you will ever eradicate on prem software. But when you take emotion, job preservation and ‘doctrine’, SaaS is an easy choice for many applications. For that reason, SaaS here to stay….

Where incumbents go wrong

A guest post from the unreasonablemen.net

I saw this from Ovum analysing SAP’s Q1 financials. There are a couple of take outs from this that really struck me with respect to SaaS and incumbent business models.


1) the company is still growing its core business (double digit growth no less).

2) The SME product group is going gang busters 18% growth

3) they’re SaaS offering is not performing (now there’s a surprise!)

4) they are going to address this by only focusing on selling SaaS (wait for it…..) into those markets where they have been successful selling on prem… uh oh!

Lets break this down a bit.

1) SAP are selling a heap of core enterprise apps, solutions (services) and mid market core app.

From the aggressive growth this you would have to postulate that the focus of the company is on … core stuff with big numbers. That’s like heroine. Try to stop using that and you are going to have withdrawals…stock market, staff and customers….

2) They’ve decide to “…. focus for the remainder of 2008 on Germany, the US, France, the UK and China, where most of its existing customers are located” and “SAP will reduce its “accelerated investments” in Business ByDesign this year by about €100m – a decision prompted by the slow uptake”

Basically selling SaaS into those very markets (and companies) where they’ve already sold on prem solutions to, but with a 'lesser' product. This is a multi faceted strategic faux pa, and they aren’t alone is doing this.

This whole situation highly reminiscent of a conversation I had with a leading SaaS CRM vendor. My contact had actually set up a meeting with Seibel in an effort to coach them on how to be more successful. He’d done this because their performance in the SaaS space was so woeful it was (in his opinion) damaging the growth of the SaaS market.

The key issue, they were targeting their existing enterprise customers with their SaaS offering, BUT only when they have failed to sell the on-prem version…. To put this in context, Seibel’s sales approach is approach their existing customers (who they’ve convinced to buy expensive on prem stuff), try and sell them more expensive on prem stuff, and when they loose the deal go …well we’ve got this SaaS thing that’s cheap… nice!


So what are the problems with this approach?

1) you are damaging your brand. If like SAP you are the king of the heap in a market, known for a certain thing, why risk damaging this with a competitive offering

2) The way you sell this is different. SaaS isn’t the cheap and cheerful part solution, it’s a fully functional alternative that has its own value proposition that needs to be properly articulated in order to be successful

3) Saleforce skills and rem. The only way to change this is to change the way your sales teams sell and are rewarded. They sell what you pay them to sell!

4) Sharemarket. The sharemarket isn’t exactly enamoured with the idea of you tanking your cash cow revenue stream. They only dislike that only marginally more than large investments in new technology that fail and essentially eat into their payouts. No way are they going to support you doing this long term unless you can show it’s a stonking success. Neither Seibel of SAP have done that.

In years to come, do you think students will read case studies on how not to embrace a disruptive technology that include SAP, Seibel or Microsoft?

Is Larry right to stay On-demand focused?

I think Larry Ellison knows what he’s about.

 

I must admit, I’ve been thinking a bit about the commentary about oracle not getting into SaaS because there's more money to be made in on-premise. Because of this  I re-read Phil Waineright’s post about how Oracle was spurning SaaS for ERP easy pickings.

The thing I noticed second time around was that the quote wasn’t from Larry, it was in fact from the Information weeks reporter and was her interpretation of what Larry said.  So I went searching for another article and found this one which presents a channel centric, less sensationalist view of what Larry actually said.

The interesting thing is that the high points Larry mentions, are almost exactly the same as Steve Singh in his really insightful interview with Bob at Smoothspan.

 

“ Steve:  This is just one guy’s prediction.  I don’t believe large companies can make the conversion.  Forget their genetic code.  How many will take the pain?  Companies won’t reinvent themselves. 

Think of taking a $40B company to On-demand.  The value of the business will go through huge negative change.  It will get crushed.  Cash flow will get crushed.  You have to layoff.  The transition is really hard and its very sudden.

If you’re north of $100M its hard.  Over $1B its impossible.”

Overlay that with Larry’s points about building a new channel, marketing to new customers, and the cost of building an entirely new code set and you could call Larry’s statement that it would be “enormously challenging” the understatement of the year!  You could as a shareholder also say that it was good decision and correct corporate governance. 

The two largest software companies to try and do this are of course SAP and Microsoft. From what I can gather from press coverage , they haven’t exactly been successful todate.

So then (bearing in mind I am a SaaS advocate), why then is everyone bagging Larry? 

 

Managing disruption

I know, its an oxymoron. Key part of that word being moron. The titbits of news that has gotten me to this post is the latest about SAP SaaS (and here) offering A1S. (although they won’t call it SaaS)

The key bit of this news is that SAP think they can launch a mid market play using A1S, service about 100 000 customers, while not cannibalising their existing revenue streams. Cool, looks solid, some leading edge consultants will be nodding their heads sagely saying SAP have indeed found a niche… they’ve missed a critical point tho. Its complete nonsense.

Disruption is just that, a radical break with the current. Incumbents don’t like disruption because its almost certainly an extraneous force impacting on how they do business. Would MS or SAP with their fantastic margins on software licensing deliberately disrupt themselves? Hell no!!!, they’ve been dragged into this kicking and screaming. (as an aside David Berlind does a great job of explaining how these companies keep their revenue streams intact but misses the point).

That is to say that they’re reactive, that things outside their control are impacting them. If they don’t have control, how are they going to manage this disruption? No chance. Its like saying we can control this wildfire. This break with reality isn’t just limited to Software companies, Telco’s are big into this at the moment as well with VoIP, media companies with content. You get the idea

The intricacies of the SAP offering seem to be quite vague. But there are already a couple of things that scream out to me that they haven’t quite got it right.

Firstly, the name A1S. What the hell? The worlds moved on, product codes aren’t marketable anymore.

Secondly according to AccMan “SAP is very coy about A1S which has now been in development for some 3 years”. That just screams uh oh to me. If you can’t build it fast is it what you are good at? Can you meet the fast charging continually in beta competitors? No chance

Thirdly and again from Accman “SAP will have to put considerable resource into a business model with which it isn’t wholly familiar. It has already set aside $3-400 million for this effort.” That’s a tonne of money. Given that they don’t have anything in the market yet wouldn’t that get some alarm bells ringing. Any start-ups out there, what could you do with $400mill?

So lets zoom back up. Those three examples, combined with the ‘we won’t cannibalise’ statements point glaringly to a complete misunderstanding about what it takes to compete in SaaS, to put it bluntly SaaS isn’t in SAP’s DNA.