The internet, the great business facilitator.

I’ve just read a fascinating article by Tom Foremski  called “ The internet devalues everything it touches”. It raises some great thought provoking points, it’s also slightly off base.

Let me explain. The internet is what it is, a massive and cheap to use platform that connects together many millions or billions of users.  The value destruction component isn’t a function of the internet, it’s a function of how people are using it to disrupt entrenched business models.

If you look at the examples mentioned by Tom, they all relate to some form of distribution efficiency. The simple fact of the matter is that for digital assets, the internet is more efficient at moving stuff around than roads, rail, shipping or retail stores.  The take away is, that if you are involved in traditional distribution and the asset you move can be digitised, you are in trouble. You will be disrupted.

I think it is important to note that it doesn’t have to be value destroying, check out what Amazon has done to the book value chain. Sure they’ve brought down the price, but more importantly they’ve removed stages in the value chain and absorbed their contribution while eliminating their cost.  In effect they’ve made book retail more profitable, and because they did it, they took a larger piece of that profit…nice work if you can pull it off.

Amazon knows what its business is about

“The Business of Delivering Stuff

Amazon is a master of the supply chain”

That’s why they got into Kindle. The digitisation of print, combined with the (nearly) free distribution of the internet is in fact the perfect business model. It so grossly simplifies the distribution of the asset, that the profit pool expands even though the revenue might contract.

There are other examples of this in action. Many look like companies buying up companies to create vertically integrated solutions, but I think it is more about optimising distribution COSTS.

Level 3 bought the Content Distribution business of Savvis, which on the face of it looks like a vertical play. But when you look at who Level 3 already service (Youtube in particular), this looks less and less like a growth play and more like a play to optimise (content) distribution and its associated cost. I suspect that Level 3’s business case would have stacked up on the cost out alone and discounted any upsell!

Google today announced its intent to buy On2. Why? Well in the Youtube value chain Adobe flash became a cost liability (both in terms of licensing and processor). Google already has the massive distribution of the internet going on, so what do they do? They vertically integrate by acquiring an asset to streamline out some cost. The internet didn’t destroy that value, all it did was facilitate distribution.  Google can choose to absorb the cost as profit or pass it through.

The media companies will probably disagree with the above example, but then their historical value was in distribution wasn’t it?

To me this is just disruption in action, in this case the internet is the facilitator of the low cost business model.

SaaS in nappies

 

Think people, think…

 

Ben Kepes posted on cloudave.com about how both Salesboom and Netsuite are both aggressively targeting Salesforce.com’s customer base. This is bad strategy people, you need to think this through. Here’s why.

Firstly, think about who your competitor is? SaaS accounts for only 14% of the total CRM market. To me that clearly states that the SaaS competitors are the on-premise crowd. The ones with 86% of the market…. or the other $9bn dollars.

Secondly, think about what you are doing to the collective profit pool. Both propositions are cost based. So not only are you not growing the total SaaS profit pool by growing the market, you are cutting your own throats in  a price war that doesn’t need to happen yet. There is enough growth potential left in SaaS CRM for you to happily maintain your margins! If you keep this up you are forever trashing the profit pool. 

Thirdly, think about the global economic climate. Think about the recent announcements from SAP and how they are hurting, think about how the SaaS market could benefit from this perfect storm (I said it, Gigaom said it, Zoli said it). You have a fantastic opportunity to win SaaS Greenfield customers here, don’t pass it up.

Business strategy is a lot more than figuring out what your customers want, especially in a growth market. Looking at your peer (as opposed to competitor) organisations pricing should be done, but not only with a view to competition. Also to a view as to what signals are they sending here. If they put out a price that is seems high, it can mean they are saying we reckon there is a load of profit here, lets keep it that way. 

To this end I am sometimes of the opinion that SaaS companies are in their infancy in terms of maturity of thinking, let alone market position. This just seems a like a beginners error to me…

My advice to Steve Ballmer on SaaS

 

I kind of like the underdog, I think that is why I’ve been known to come across as pro-Microsoft.  I don’t think I am. I think I'm more interested in seeing some balance in the blogosphere and observing what might actually happen.

To that end, I think Microsoft have done a pretty average job (my editor tells me I’m not allowed to use the word crap) in the SaaS space to date. This is my thoughts on what I’d do to address that if I was in charge of Microsoft.

  • Drop software plus services (S+S) as a market term. I understand that you needed to give your channel a sense that they belong in the future. I agree it is arguable a better description of the future direction of SaaS and that into the medium term we’ll have hybrid cloud and on premises stuff. But what you don’t seem to be getting is that the continued use of this term isolates you. It creates confusion (and distrust) in the user community. It relegates you down the credibility ladder and you miss out on the whole coolness factor that SaaS brings. Get rid of it for now.
  • Focus on corporates. Lets face it, MS is only ever going to be moderately cool so trying to keep current in consumer is going to be a slog. Mobile will be the exception here. Another reason? Because all wealth is generated by businesses. Full stop
  • For God's sake build office so it can be delivered SaaS, truly SaaS.
  • Create a whole new division or company to build this web Office variant. This will get around the politics and revenue substitution paralysis. Do it fast too. Your channel are doing it as best they can by themselves, support them in supporting you.
  • Pick your chosen delivery method for SaaS. Partner or go direct, doing both is a recipe for disaster. You will either blow your marketing budget or alienate your channel. While you are at it, pick which part of the platform as a service play you want to be in. Is it a software platform? True PaaS or a hosting platform? My read on the economics of globalisation is that the localisation required to get around language and local data security laws means you should stick to software stacks. To that end I’d pick the Telcos as the local hosters of choice. I’d also start looking for training partners and integrators. Not even you guys can do it all, where is your ecosystem play? How are you going to make the most of the plethora of application developers who want to make the most of your distribution?
  • Get your pricing right, what you think has value (Outlook!!) now has a market price of $0. Get over yourselves and start thinking about the market and how you can make the most out of other applications and services. Be quick, time is short.
  • Capitalise on the fact that the only part of Google’s stack that never goes down is advertising. Their application play is a support disaster, they have no idea how to ‘be’ a software company. Get stuck in while you can
  • Sort out your version control and interoperability. One of the reasons schools are turning to Google is that they don’t have interoperability issues. No Mac vs MS debacle. Just make it easy for everyone to use your software.

Simple. Anyone else got any advice before I lick the stamp on this?

Does owning the customer matter in a SaaS world.

 

I recently had an interesting debate with someone about ‘customer ownership’ and how this plays out in a SaaS world.  Its perplexing because my verbal sparring partner has some great points, but the root of my unease with the whole debate was based on uncertainty about if it even matters anymore?

 

Lets look at the evolving SaaS reseller and integrator market.  A bunch of companies that have made money off selling, installing, integrating and managing on premise software have seen the writing on the wall and are looking at morphing their business models to support SaaS. In this case they still sell, but in the services are significantly different. The configure, training and provide 2nd level support.

 

The issue is that in the first instance, that customers was ‘theirs’. They held the core engagement and their walk away position was strong.  But in a SaaS world (Saleforce.com, or even Microsoft’s hosted exchange product), the SaaS provider holds the customer, they are no longer the integrators. So they can do the upfront work, but easily get disintermediated in the medium to long term. Imagine if Salesforce.com of Xero or whoever decided to increase revenue by building a consulting and training practice…what then for their channel partners?

 

My counter argument was that in a SaaS world you are on the line every day for great delivery. This includes the channel partner, if you don’t deliver then of course you can loose the customer. There is also a lot of relationship and customer knowledge etc that comes with the deal AND if you are dumb enough to be a one track pony then of course you are under more risk. What i mean is, if all you do is sell Xero or Salesforce.com and you haven’t thought about expanding your engagement into that customer with other services like change management etc then you get what you get.

 

What do you all think, Is customer ownership still relevant? If so how does it work in a SaaS world? Where do you stand on this? I think its important because a good channel model is going to be increasingly important to SaaS to counter the stagnant growth perceptions that exist.

 

 

Threat and organisations reactions to it

I recently attended a training course on getting the best out of teams by improving the managers skills. I was struck by impact of one of the modules in the course and its applicability to my parenting but also (and perhaps more attuned to you the readers needs) regulatory regimes and companies undergoing disruption.

 

The basic philosophy of the course was that as are 4 basic ways to change someone’s behaviour.  If you want them to do less of a certain behaviour you can either ignore (which stops reinforcement) or punish (direct consequence). It was the view that either will reduce the unwanted behaviour.

 

In terms of promoting or generating a type of behaviour, again only two ways existing. The most effective was reinforcement. You know this from your parenting. You go over the top when your toddler first walks and they keep trying.

The second method, and the one that i think has massive implications on business (if the agency is correct) is that of threat.  The statement that rang true to me is this.

 

If you use threat, you will in behavioural terms only get minimal compliance

 

That is to say, if you tell and employee that if they won’t get their bonus unless they do xyz, they will do xyz to a level that will only just meet the requirement. There will be no additional effort past that point.  

You tell your kids, “if you don’t clean your room no TV”. You get a rushed minimally compliant job.

 

How does this translate to business? Well if we accept the above hypothesis as true and you look at disruption then it has some really interesting consequences. First lets look at regulation.

 

Basically Governments impose regulatory control on an industry when after some ‘gentle coaxing’, that industry hasn’t done what the Government deems is ‘for the greater good’. That is they threatened the industry group (with more control), who respond but to a minimally compliant level, which of course disappoints.  So how does the Government react? They deliver the regulation, which forces companies to do a whole lot of stuff under threat of worse intervention…..

 

I’ve seen some of the documents…. “You will do this by date, if you don’t you will pay us $x million per day…“ Guess what the interfering Government is going go get? Minimal compliance that negates the intent of the regulation but delivers to the letter of the document…. Bet they’re surprised too….

 

A second example. To my mind you can transpose the word threat and disruption.  Right now there are a bunch of traditional ISV’s who are under threat by SaaS providers. How are thy responding??? Well those that who haven’t decided to embrace the change, only to react to the threat (like Microsoft, SAP & MYOB)  with minimal compliance. Doing just enough to get by and say ‘yip we’ve done this SaaS thing’. But the reality is a little ordinary (see Ben Kepes review of MYOB, and R/WW on Live)

 

Implications? Governments try incentivising the behaviours you want (either that or leave the market alone and let natural forces dictate). ISV’s, somehow you have to embrace the new technology and voluntarily let go of the old world. CEO’s need to start a process whereby the organisation decides to change and reinforce behaviours that drive that change. Trumpeting statements like “if we don’t change we’re gone” is only going to end up with crappy products.  Maybe this is another reason for the innovators dilemma.