Category Archives: Cloud Computing

How are we going to make Enterprise Cloud profitable?

The largest provider of enterprise software solutions, SAP, has made a bold statement on cloud. First it claims it will be the largest cloud provider in the world. Second it claims it will be the first large cloud provider to be profitable. Here is the article: SAP Sure of Profitability in Cloud Business – Co-CEO Snabe

I had a very open and honest conversation with an SAP Sales Director about this (who’s name will remain anonymous for obvious reasons) and he suspects that the Enterprise move to cloud will do a few things:

  • Expand the reach of software to encompass more markets
  • Reduce the cost of sale (or pay-per-sale) of new customers

Unfortunately these are based on two assumptions about cloud:

  1. Hardware costs are efficiently allocated. This means efficiencies in cost for servers, disaster recovery, network, infrastructure, etc. Amazon seems to be on the only ones who are doing this right and yet still have razor thin margins. I don’t see how this is reproducible model at Amazon’s scale and efficiency, while still competing with Amazon’s prices.
  2. The people developing the software continue to support the software going forward. Cloud isn’t just about economies of scale in hardware. We need to get our heads of the Industrial Revolution thinking – economies of scale aren’t possible with human information workers. Engineering software is not like engineering a kitchen cabinet. It’s a craft.

Remember enterprise licenses yield roughly a 90% profit margin on support and companies like SalesForce are still not profitable. A couple of scenarios I see playing out:

  • In order to get margins back in line with the previous ones the software will no longer be supported by the people who built the software. Customers will get disgusted with their poor support and just leave. This has happened in on-premise software, but the external exposure was mitigated by support teams (such as my previous role within SAP, where I served as a De-Escalation Architect).
  • Cost of sale must go down and therefore expensive middle-management (VPs mainly) will need to be cut out. Unfortunately this means large vendors such as SAP will have less clout when speaking it enterprise clients.

The challenges I see is that SAP is not following the Innovator’s Solution, which is to keep disruptive technology in isolation and are clearly they are trying to integrate it: SCN Blog – My Attempt to Explain SAPs Cloud Strategy  This would motivate a smaller company to keep better knowledge workers and build better efficiencies in hardware.

I still believe SAP should have invested (or outright bought) SalesForce half a decade ago, left it alone and then let it cannibalize itself.

Innovator’s Dilemma at its Finest – SAP, Oracle, and the Cloud

I wrote previously about how disruptive technologies will save SAP. However, it’s worth understanding the large dilemma that SAP, and Oracle alike, are facing and why it’s important to understand how success is made with innovation. Let’s first start by stating the definition(s) of innovation as coined by Clay Christensen from the Innovator’s Dilemma.

Sustaining Innovations: What all sustaining technologies have in common is that they improve the performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued.

Disruptive Innovation: Disruptive technologies bring to a market a very different value proposition than had been available previously…Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.

It’s clear – cloud computing has been disruptive to the enterprise space. As it’s popularity increases it will begin to “cross the chasm” and eventually become a clearly defined market. If you look at the early history of cloud computing (or actually really known as SaaS – Software as a Service) you’ll notice early adoption was quite low. No one understood why you would decide to use a CRM system hosted by someone else. Crazy right? It’s now starting to hit the bend in the hockey stick and is ripe for growth. In order to understand disruptive innovation, let’s look at first why this type of technology historically hasn’t been a sustaining innovation for Enterprise software houses:

  1. Both companies have not executed any real ability to create their own organic SaaS platform. SAP’s Business ByDesign has been around for about 5 years and hasn’t turned the corner yet.  I believe the reason for ByDesign’s failures were largely due to adding too many features too soon, and not really understanding how companies would use the technology. Yes, what I’m saying is that they tried too hard to create a product.
  2. SAP recently bought SuccessFactors for $3.4bn and Oracle has now bought both Taleo and RightNow.
  3. Cloud/SaaS solutions have done nothing to improve the performance of any existing technologies in the markets that SAP and Oracle have traditionally served, which is mainly large enterprise using on-premise software. In fact SaaS is about to eat their lunch.

Now let’s lay out why cloud is so disruptive:

  1. There is a different value proposition (hosted software, maintained by the vendor)
  2. It’s cheaper (straight forward subscription model), simpler (doesn’t require an army of consultants), and more convenient to use (have a web browser on your computer?)
  3. SAP is hurrying to use it’s RDS (Rapid Deployment Solutions) to combat and milk it’s existing on-premise software while it can
  4. SAP and Oracle make a staggering 90% profit margin on enterprise support. Even more interestingly, SAP is now trying to tell the market that they will be the first company to make the cloud profitable. I’m confused as to what core competency SAP possesses that will make that true. Throwing money at a problem doesn’t increase a profit margin.

Ultimately, I’m scared largely for SAP, and less scared for Oracle. Why? First, SAP is really damn good at selling on-premise software. This is one of the most important aspects of Clay Christensen’s theory on innovation. The firms that are most successful at sustaining innovation are also the least likely to succeed in disruptive innovation. Second, from my talks with sales/pre-sales/etc people at Oracle, their products largely operate in silos and tend to compete with each other. Yes, this already happens between Hyperion, JD Edwards, PeopleSoft, etc. So culturally they will embrace an internally competing technology much easier than SAP can.

On a somewhat related note, Mike Eacrett, VP of HANA Product Management in SAP Labs, talks about thinnovator’s dilemma for SAP HANA:

“We’re trying to manage disruption,” said Mike Eacrett, vice president of product management for SAP HANA at SAP Labs in Palo Alto, Calif. “It’s the innovator’s dilemma,” Eacrett said, “figuring out how to take advantage of new opportunities while managing change.”

I’m not so worried about the success of SAP HANA because the product was built largely out of a group within SAP (and from the Hasso Platner Institute) that has been known to be very autonomous from the rest of the business. This is exactly what Clay Christensen offers as a solution to the Innovator’s Dilemma – an autonomous group that acts solely without discretion of the overall firm. It could theoretically be seen as a sustained innovation in that is improves performance on an existing and established market (databases). The big question will be: if cloud consumes on-premise software, than where will HANA sit?

The truth is, SAP is in an identity crisis. It’s largely been seen as an organically growing giant. It’s now spent nearly $10bn+ over the last half decade on acquisitions and it simply cannot be the organic juggernaut it once was. This is largely due to the externally facing pressure from disruptive technologies. What’s worse is it still boasts it’s ability to innovate using its €1.7bn cost (2010) on R&D as justification. Again, the firms that are so certain about growing their portfolio of sustaining technologies in an existing market are largely in a worse position to support disruptive technology.

So what’s the solution? Simple. Well, simple for me to articulate, but not simple for SAP and Oracle to execute. As Christensen says:

“Survival depends on being able to disrupt yourself. Once you let others disrupt your business, you are heading down the path to death.”

In other words, SAP’s cloud computing division (led by Lars Dalgaard) has to aggressively compete against SAP’s own on-premise software. It has to act completely autonomously. Dalgaard is a visionary with some quirky and non-traditional management practices. Which is why I think he’s perfectly suited to lead the charge. But will SAP’s top Executives give in to the Street and become another software graveyard or take a short term hit for long term growth?

What do you think? I’m interested to hear others’ opinions on this.

EDIT: Changed some sentence structure in the second to last paragraph. Didn’t make sense before. EDIT2: Changed to ByDesign, not ByDemand. Good thing I don’t get paid to be a full time editor. 

Disruptive Technologies Will Save SAP

SAP’s ecosystem is in itself an absolutely massive market. Therefore SAP relies heavily on it’s partners to provide consulting services, conduct sales, and manage large scale implementations. There are three largely disruptive forces to this ecosystem and interestingly they all can be seen in SAP Business Intelligence:

  1. In Memory Technology
  2. Cloud Computing
  3. Mobile Applications

In Memory Technology – There is a huge market for OLAP and data-warehousing . The BI market is a multi-billion dollar industry. The in-memory technology (BWA and HANA initially) is largely disruptive to the way we store and report on data. SAP’s CTO Vishal Sikka commented on this by saying:

Together with our partners and customers, SAP is breaking down the boundaries between real-time events and real-time business decisions

SAP has made a strategic goal to eventually replace all reporting in the enterprise by use of the HANA (High-Performance Analytical Appliance). Many of my blog posts will centered around the evolution of this.

Cloud Computing – The buzz around cloud computing is absolutely crazy right now and for good reason. Unfortunately there are huge concerns for large enterprises to productively adopt the technology. For example: Big name firms form alliance to drive cloud standards Interestingly there is a large market for non-productive solutions, such as pre-sales, testing, proof of concept, etc. What’s even more interesting, SAP itself has been “eating its own dogfood” and has been utilizing cloud services for nearly 3+ years now:

Mobile Applications - Mobile applications represent a fundamentally different way that we interact with software. In enterprise ERP we often see feature rich (and subsequently clunky) applications. This is as SAP says “a game changer” as it not only means that there is a whole new way of developing software, but also their is a renewed focused on how we use enterprise BI applications.

So why will these save SAP? Three reasons:

  1. In-Memory: Other database/warehousing solutions are much faster than SAP’s current offering (such as NoSQL, Hadoop, MapReduce, etc) In-memory speeds this up.
  2. Cloud: IT infrastructure costs have grown enormously out of control. Cloud reduces that.
  3. Mobile: The adoption of mobile is quickly making itself into mainstream enterprise. Business is now done on the go. Mobile aids that.

The convergence of many of these technologies represents both a scary and opportunistic time for myself and the technologies SAP supports. It will be interesting to see how it all plays out and I’m glad that SAP has embraced disruption.