I went through several RIFs while employed with Oracle Consulting. The key thing to understand is that Consulting was told, in no uncertain terms, that it had to meet the same operating margins as software and maintenance, ~40%. Consulting charges $200 – $400 and hour for resources to work on implementation, yet it had a hard time meeting these margin goals. That gives you some indication of how profitable on premise software and its annual maintenance fees are when a consulting division at these prices cannot keep pace!
Also, fewer and fewer are the organizations willing to spend top dollar for consulting help. In some cases you could hire two consultants for the price of one Oracle consultant and muddle through fine. This makes it more and more difficult for Oracle to maintain the margins in consulting that it earns in software and support. But customers have a point here. It’s not like the early days of ERP/CRM suites anymore. There are plenty of resources around now who understand these systems and who have done multiple implementations. Our NetSuite implementations for example average less than 100% of the price of first year licenses.
It’s important to understand, before heading into an on-premise software/implementation/support contract that the inmates have taken over the on-premise asylum and put the visitors, er customers, to work for them.
Salesforce.com on for example, and other SaaS firms, operate at much lower margins, under 10% in salesforce’s case and for NetSuite the operating margin is still negative. Businesses of all types should expect good operating margins, but does it really make sense to have operating margins approach 40%? This is a sign that the market is no longer competitive, that in fact a lot of on-premise software companies have locked in their customers and they can extract a pound of flesh as they wish. Not a good position to be in, if you are a customer.
How have they achieved lock in? Customers have spent so dearly to buy, implement and support the software over the years that all the players in the market know that to even suggest changing is waste of time. No one wants to have to bury the investment they have made in Oracle, SAP, Sage, Microsoft, etc.
Meanwhile small and medium enterprises are taking full advantage of less expensive software/implementation/support from a wide variety of SaaS vendors. It’s a real weakspot in the operations of many companies that they continue to escalate their commitments to on-premise software vendors that have done nothing but hustle them year after year. Oracle’s operating profits may be great news to the buyers and sellers on the stock market, but eventually the customers have to take notice and ask “Why are contributing to our own mugging?”
With the multi-tenant capability of SaaS, the vendor manages the upgrade process. Therefore, the client base is always on the latest release. Integrations between SaaS applications are therefore easier. But more than that, as SaaS vendors themselves roll out the integrations, they also manage the integrations. Take the example of NetSuite and OpenAir, or NetSuite and SalesForce.com. These integrations are generated and managed by the vendor itself. Were these three vendors offering on-premise applications, creating and managing the integration of the apps would reside with each individual customer.
Just think of it. Each customer hiring an employess or using an outside consultant to create the integration. But with SaaS applications, the integration must only be created once and then all customers, all running the same version of the SaaS, can use it. It’s a remarkably efficient way to perform integrations. And don’t even talk about maintenance. With home-grown integrations the authors were often employed full time to maintain the code. That is now off of the customer’s plate and back where it belongs – with the vendor. The customer is therefore the recipient of value based solely on the fact that are part of a larger network of SaaS applications. The vendors benefit from the same network effect.
As SaaS applications move upstream in the marketplace I look forward to the amplification of this SaaS network value. Larger companies for example will require HR Talent Management applications, applicant tracking and benefit management. As these SaaS offerings are integrated with Accounting and Service Resource Planning SaaS, like OpenAir, they also will benefit from this network effect.
NetSuite’s strategy in purchasing but not swallowing OpenAir whole, as some have worried, is now more obvious: NetSuite is stronger with OpenAir as an integrated SaaS than they would be if they simply incorporated OpenAir’s functionality into their own and moved on with a bigger, but less networked, Suite.
NetSuite offers of lower cost version for small companies, NetSuite Limited License Edition, but the limits are normally 5 – 10 users and my client wanted only one user. Does not seem like a big deal, and it wasn’t. NetSuite issued a renewal and the client now has the least expensive option until the market turns around and they can return to active operations.
I really did not think twice about the whole thing until I read the following today:
SAP (like Oracle) has so far refused steadfastly to accept partial maintenance cancellations. While this is (from the vendor’s point of view) quite understandable, it can lead to very unpleasant situations that are not without legal issues.
Case in point: a recent insolvency in Germany. A mid-sized company filed for insolvency and failed to revive the troubled enterprise. There are still orders that must be served but in a few months the lights will be out.
Most of the 350 users of their SAP system are gone. Only about 50 are left and, of course, the HR-system is required to pay the residual staff. Closer to year end, a few legal updates will have to be fitted to the SAP-HR-installation.
The administrator, in an attempt to make sure that staff can be paid, asked SAP to accept a partial maintenance cancellation for 300 seats – very appropriate especially in light of the upcoming increase for standard support.
SAP refused to accept the partial cancellation. Either you cancel in full or you pay in full.
Ouch – that’s being damned miserable to a company that is experiencing possible end of life issues.
I know for certain that when our client moves back to full operations in the US they will have some loyalty to NetSuite, who cut them some slack when they really needed it. Why do companies not expect the same from the big on-premise vendors? I can’t say for certain what the psychology is that keeps so many taking it from these vendors for so long. But at some point there will be alternatives and I cannot imagine that some companies don’t finally say enough is enough.
First, let me say that SaaS metamorphosed over the past few years from a novel, even radical, idea and market disruptor to a mainstream technology component, one of many that companies of all sizes must consider. When we first started to blog many years ago we considered ourselves SaaS evangelists out on the frontier. Now we are just mainstream preachers and the flock is also more mainstream. Things change.
Witness this article by fellow Enterprise Irregular Phil Wainwright. Phil makes the point that NetSuite has now started to market its integrated suite differently:
Perhaps more SaaS vendors should take a leaf out of NetSuite’s book. Instead of going on about the lower cost and faster time-to-live of their solutions compared to conventional software, they should just point out that operating in the cloud is how business is done these days, and anyone whose business systems operate anywhere else is going to get left behind. It’s as simple as that.
There’s some truth here but it still seems hard to believe that we have now passed the tipping point for SaaS over on-premise software. But one wonders how this will flesh out over time. I don’t think that a lot of the large organizations that run Oracle, SAP, Peoplesoft, etc. are racing to rip and replace. The implementations of these products are not even finished in many cases and that is after years of effort. As I have written in the past, many of these systems are mere shadows of what they could be but management has seen so many budget and timeline overruns that they are very tentative to continue. On the other hand they have no appetite for declaring defeat either, especially to the board and the market. So they continue to pay the big bucks in annual maintenance and keep a low profile.
NetSuite has taken an interesting tack here, and perhaps it was born of necessity, but going after the small divisions of large enterprises running SAP and offering discount prices (= SAP Maintenance $) is good marketing and will eventually create a situation where NetSuite can surround SAP and convince management through use and adoption while at the same time continuing to mature as a software offering. NetSuite has made no secret of making SAP in hte mid-market their target.
Apart from this SAP strategy NetSuite is also taking aim at the services market, with the goal of creating a Service Resource Planning suite, SRP, to rival in the services market what SAP did in the products market. NetSuite has already made two acquisitions on the on-demand Professional Services Automation, PSA, market: Open Air and QuickArrow. The best of both of these companys’ offerings will play a role in the final product, I’m betting. CEO Zach Nelson drops a hint here. The bottom line is that NetSuite looks to move upmarket. After starting as NetLedger they have now a strategy in place that will over time move them into some very large enterprises.
Taking all of this in you start to see a market disruption, SaaS, coming together as a series of well planned strategies to build up into the market, each small step leading to the next. This is happening not only in the ERP/CRM space but also across the SaaS space – HR, CRM, E2.0 social enterprise tools, etc. This is very different from the strategy that Oracle and SAP used to go to market in the original ERP invasion of the 90′s. Supposedly SAP worked on their software for 20 years before bringing it to the market, and they went directly at the largest enterprises. They seem to have a similar approach with their SaaS offering which they’ve been tuning now for three years, running the risk of running out of people’s patience.
Oracle also started out aiming at the largest enterprises. I have to laugh when I think of my nine year career with Oracle. The software that we really needed on my first implementation in 1997 was finally ready 9 years later on my last implementation – a single time entry system that could feed payroll for employee wages and projects for billing and costing. I was the first to implement it for multiple modules.
NetSuite and other SaaS vendors are starting with less functionality and smaller enterprises and then rolling out more functionality as they move up in the market space. NetSuite’s stated goal is to become the SAP of the midmarket, and it is well on its way. SuccessFactors, another SaaS vendor, just sold a huge deal to Seimens AG in the HR space.
The point here is that SaaS vendors have necessarily rolled out sounder software, more methodically, than their predecessors. But the march of more and better functionality has become relentless. This is how they will finally beat a lot of the on-premise software vendors. The tipping point will go by quite unnoticed, unless of course we keep someone at the front who calls out ‘tipping point’ every fifteen minutes or so. It will be a fairly quiet revolution. Conventional software will go out not with a bang but a whimper.
At any rate, after going through the process of having it fixed by Ray and the boys for a mere $74 I caught up with an interesting article by Vinnie Mirchandani about using a local repair shop, like Nightingales, compared to a Dealership. It’s an interesting article, more so because Vinnie uses the Dealership/Corner Auto Repair comparison as a proxy for software support from the Vendor vs a 3rd party. I think the analogy makes sense, especially in terms of the interests of various parties.
We have a similar situation at SightLines. When a prospect interviews us about NetSuite implementation they often ask why should we use SightLines instead of the vendor’s own professional services group. Our answer is straight out of the corner auto repair playbook: We only answer to you, the client, and your needs, not corporate’s; and since we are a small consultancy, not employees of a large company, your reference means a lot to us – it’s how we build our business.
Having been an Oracle Consultant for Oracle earlier in my career, I can relate to the interest in having the software vendor handle the implementation. Oracle used to ask prospects “Who knows our software better than us, Oracle?” Well, actually, a lot of smaller consultancies knew Oracle as well or better than Oracle’s own consultants because they had been at it longer. Oracle tended to hire and train the newbies while the small solid consultancies brought in experienced users and trained them in consulting.
If you are looking for experience and for a consultant who will look out for your interests more than the software vendor’s folks then look at an independent consulting firm. They often have well trained, experienced people who not only want to complete the project on time and budget, but also want to delight the client and perhaps pick up a reference along the way.
The question is a good one, let’s be honest. As companies like SF.com and NetSuite move upmarket they are bound to hear more questions of this kind from prospects in all markets. In other words, it’s not unreasonable to ask these questions. On this blog, in its last incarnation, we wrote about this topic often, but with, as I now realize, a bit of a chip on our shoulder.
We always argued that forcing SaaS vendors to answer these questions was unfair because no one ever asks these questions of on-premise software vendors. There is some justification for this defense, but I don’t think it really stacks up, all things considered. If an on-premise vendor ceases to exist, the customer has some ability and time to put together another solution and migrate, etc. But if you lose your SaaS provider you’re in some deep water.
So what is to be done? The question of business continuity came up again when my fellow Enterprise Irregular, Vinnie Mirchandani, questioned a post by Frank Scavo. I respect both of these gentlemen a good deal, especially now that several industry players got involved in a debate on both Frank’s and Vinnie’s posts. Some of the ideas were excellent and should be more widely circulated. Here they are in a nutshell:
The ideas are across the board as you can see, but what finally has to be answered is what works and what is affordable. In my mind this leave the first two option as both workable and affordable, and the last two fall off as unworkable, the escrow idea, or simply not affordable – the on-premise, vendor managed solution.
If I had to choose one idea I would select the Trust. SaaS providers could set aside $5 bucks per year per user into a trust that would pay to continue maintaining the software for a full 6 months in the case of vendor insolvency, or to restore the service in the case of data center emergency, etc. This makes a lot of sense to me and I hope that SaaS providers start thinking along these lines in the near future. Regardless of what they finally come up with, it’s important to take this whole contingency planning/business continuity issue seriously. In the end, serious businesses are taken seriously.
On the other hand, it’s really discouraging to see some of the on-premise pimps show up on the comments as well. You can tell some of these writers are not technology professionals but simply the pr types/hacks spreading around the FUD. I think in some ways it is the presence of so much FUD that makes SaaS providers avoid this issue. Put that issue aside though and meet the challenge head on. That’s the best way to win in the end.
Howlett is a self-acknowledged curmudgeon when it comes to technology. He, like many of us, has seen a lot of things come and go over the years, and much of it was useless. Of the Enterprise 2.0 hype he asks what are the activists’ interests; the company, the brand, the product or the community? His answer is simply that most Enterprise 2.0 enthusiasm is really all about the community and I tend to agree. The use of an internal community may not be a bad idea but community alone does not new products make. Nor does an external community create brand. It may help on the edges to connect to customers, but people buy a product because it has an excellent reputation, especially if they have purchased the same product before.
Social networking tools may find some traction in knowledge based businesses, but the bulk of our economy is still product based businesses, and in these environments hirearchy still rules, as it must, Howlett argues.
At any rate, community already exists at most companies, regardless of social software. Visit any popular restaurant in my area at lunch and you will see groups of designers and engineers sharing meals and discussing work. Is social software going to change this, or even enhance it? Hard to see that.
Then I just read an article in the NY Times about people leaving facebook. This is new and interesting. I often wonder myself about facebook and its long term prospects. I emailed the article, by the way, to my daughter Haley and her response was “Who cares?” She uses facebook as a matter of fact, and all of the conversation swirling around it seems like wasted breath to her. My feeling is that facebook in her life will eventually occupy the same realm as pokemon, Buffy the Vampire Slayer, Gilmore Girls and sleepovers – fond memories all.
So many people have recently jumped on fb but what value have they really found there? I’m still looking for it. I have no idea where the value is. I found a former teacher of mine, actually he found me, who has developed an embarrasing habit of impressing the hell out of very young women (former students). That’s not good. I also found an old college friend who appears to still, well, be in college. Most of the photos on his page were taken in a bar. That’s not good either. Several family members have recently ‘friended’ me and that’s nice, but it would be better to see them in person, frankly. Reading the remarks of their friends on their ‘wall’ leaves me feeling like a stranger.
I like community and have joined many over time. But there is also a place for hierarchy in the business world. I don’t believe that communities can carry a business forward. In the personal realm, if I want to know you I should want to spend some time with you. Facebook does not fill the void of distance, or lack of time, or cash, or inclination.
But FUD continues. Last month I read a blog post that tried to throw ice cold FUD on NetSuite’s acquisition of QuickArrow, a software service in the ‘professional services automation’, or PSA, market. I thought it was strange, especially given the source of the article. Essentially, they tried to link NetSuite to Oracle, and suggest that QuickArrow would be rolled up into NetSuite, its client list assailed and treated recklessly, like this is possible in a SaaS business when clients can walk at any time. I was going to write about it then but felt that I would be just promoting the problem, not solving it, so I let it go.
But I did scratch my head about it a bit. After all, NetSuite has already purchased OpenAir and continues to support customers who do not use NetSuite financials, who use only OpenAir. But the real chutzpuh was the suggestion that NetSuite would take the ‘low road’, whatever that is, while the writer churns out a post with nuclear amounts of FUD. Really? There was a line about something his company was up to in the same PSA market, but without more details I whistled by it.
As it turns out, this company has much to worry about in NetSuite’s acquisition of QuickArrow and OpenAir. They have a PSA offering of their own now. So this was the reason for the FUD. They are a direct competitor with NetSuite. That’s fine. There should be several companies in this market as PSA is an important and underserved market. But why all the FUD? After I read the post again and then read a new post about the new PSA service I still do not understand what they offer, but I have a really good idea of what they are not – NetSuite. They give no indication of how their PSA offering enables any type of billing transaction, or profitability analysis, or anything else that might be important to a company running a large professional services staff. But we do know that they are built on salesforce’s force.com platform. That’s it; that’s their entire claim to fame, what some other company built.
For the life of me I cannot figure out why people get so focused on the competition that they forget to make even an attempt at explaining their own offering and its advantages. Does running on force.com really offer such an outstanding advantage that you needn’t tell us anything else? What is the force.com advantage, by the way? Well, building a hardware and software infrastructure is difficult, so rolling out new code on an existing platform is easier. So this is great for the vendor, but what does it do for the client? Nothing, that I can tell, and I read the posts twice. Having poured all of his energy into his illuminating article about NetSuite’s reincarnation as the grim reaper, the author had none left for prospective clients of his new service. Desperation makes intelligent people do stupid things, honestly.
You only have so many opportunities to connect with people. When you do have a new service announcement take advantage of it, explain, be gracious and intelligent and people will respond. Honestly, let’s stop with the junior high antics of poking out competitors in the eye and running away. It not only makes you look stupid, but it reflects poorly on all of us.
If you would like to read the posts that got me started today, you can see them here. You have been warned about gangly junior high boys with more energy than good sense.
During our conversation he let it be known that he had solved the issues of managing an on-premise system – he hired the guy from the software company who had installed it and trained his staff. I had to admit that he had a solved a pesky problem; he had a full time person devoted to running and maintaining his business system. I thought, at least he understand the importance of this system to his business. But how would it impact your business if you were able to use the cost of the IT guy in other areas, like marketing or additional sales staff? How about someone to develop a partner channel for the business?
Every once in a while someone points out the obvious and makes it all too clear what the actual cost of on-premise systems is, like Richardson did today. In the case of the IT guy, the real cost is in the lost sales opportunities that the business owner passes up every day, week, month that he pays someone to support his system.
I have attended several of these in the past and I always find it interesting to hear how a particular company uses NetSuite for their business. Every company is different and NetSuite has the flexibility to accomodate a great deal of complexity. So if you are thinking that the cloud might be the right place for you, then this might be the right webinar to attend.
The most important question facing the company considering an ERP system, whether it is a replacement or a first time purchase, is ‘Does this system fit my business?’ It is a daunting question to answer, and most companies realize over time that the better question is ‘Is this system flexible enough to meet my business needs, not just today but in the future as well?’ It is impossible to meet all of a company’s needs out of the box, so flexibility is key. I’m sure that in this webinar you will hear a lot about flexibility. I hope you find it an hour well spent.
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