Sightings in SaaS

Posts Tagged ‘small and medium enterprise’

In my last post I talked about how the Small and Medium enterprise IT market was fractured based on experience. There are the Newly Born who see opportunity in IT systems, the Reincarnated who have extensive experience with systems and keep bringing their knowledge to the startups they work for, and the Buried, who have buried costs in current systems and have never understood the need for better systems.

NetSuite, I maintain, has an excellent opportunity with the Newly Born and the Reincarnated, and I believe this shows in the client list, both ours and the larger NetSuite customer base.  So is there any chance to talk to the Buried, to get them excited about NetSuite, to bring them on board? And who do we talk to over there? The owner, the office manager, the IT guy?

One way to tackle the problem is to take a look at how the competition does it. Want a great example of business system marketing, read this article about Microsoft’s latest edition of Great Plains, from Mary-jo Foley of ZDNet :

(A quick PowerPivot refresher: Codenamed “Gemini,” PowerPivot is integrated with SharePoint Server 2010 and SQL Server 2008 R2. Microsoft is touting PowerPivot’s benefits as integrating “massive amounts of data on the desktop from virtually any source”: and the performance fast calculations and analysis on large data volumes.)

Like previous GP releases, the 2010 version will include a built-in connector allowing two-way information sharing between GP 2010 and Microsoft’s on-premises Dynamics CRM and its cloud-based and/or partner-hosted CRM Online offerings. In addition, by taking advantage of the presence functionality in Office Communications Server 2007 and its Office Communicator client, GP 2010 gives users the ability to right-click on a contact to send that person information with fewer steps.

Now, these two paragraphs may not seem interesting to you, and that would make you normal; however, if you are an IT guy at an SME, these are marketing gems. They are subtle and press all the right buttons. They don’t blare “look, long term job security!” but they make the point very well, indeed. In just those two little paragraphs there are 7 different products mentioned: PowerPivot, Sharepoint, SQL Server, GP, CRM Online, Office Communicator Server and Client. If you could get your boss to invest in this, you could buy that little cabin on the lake. May not have a lot of time to hang there, but you could own it.

The upshot is that it is useless to talk to the IT guy. He has no interest in hearing about a single, integrated system with no infrastructure. And the office manager, well that’s also probably a waste of time. They hate learning new systems, unless the current system starts creating unwanted overtime. That really leaves the owner. In some cases whenever the ownership hands over to a new person, son or daughter or buyer, there is an opportunity to talk to someone with some energy for the business who can see the difficulty of running an organization with a 100 data silos. The message?

The message has to be that NetSuite gets you out from under the thumb of your staff. Everyone who has ever been the new manager at an existing business knows what I mean. The current employees try to run you. They attempt, with all their wits, to box you in, to make you accept the current state of affairs as the only, the necessary state of affairs. “We don’t do it that way because it can’t be done that way.” They despise change. NetSuite generates change, and not just for the sake of change, but for the sake of better business practices, more measurable input and output, greater visibility and better decisions, including which employees to keep.

Every year, there are tens of thousands of SME’s that change hands. This is the secret passage into the market of the buried. There is a narrow window of hope for these companies. With some subtle marketing NetSuite ought to be able to talk directly to the new managers and let them know that there is a system that, together with their iron will, enables them to take back their business, get it on better footing, and grow it like they know it can grow.

Finding customers among the Buried is not easy. It requires the right message to the right audience. It also requires acknowledgement that a lot of the Buried are really lamp posts. But when they change hands, it’s a whole new opportunity.

There, done. It had to be said and now it has been said. I no more liked saying it than you liked hearing it, but the truth will out, and now it’s done. Take a deep breath.

By not only having a financial software company write a new version of their software on the force.com platform but by then entering into a joint venture with said company to market the newly combined CRM and Financial software product, Salesforce.com validates what we have been writing and saying these five years: To wit, it does not make sense for Small and Medium Enterprises, SMEs, to try themselves to patch together various applications when there are integrated products already on the market. Integrated apps, as in a suite, are an enormously beneficial idea for any company but especially for the SME who does not have the time, manpower or cash to build bridges from one app to another.

In our long experience it is only the largest enterprises that have the necessary resources to pull off the interfaces between applications, and even then it is usually not done well. And to be perfectly frank, integrated suites are not perfect either; I make no argument to the contrary. However, when you are making the decisions for your SME you do not have the luxury of considering a best-of-breed-applications-stitched-together-and-maintained-by-professional-IT-staff approach to your business. It is simply not in the cards. Even if it were you will have a hard time explaining to yourself, and any one else who might be listening, why so many organizations across the world and across so many industries have abandoned the best of breed approach for their core applications and gone to an integrated suite (Oracle, SAP, etc.).

When we talk to SMEs who currently have several key applications from various vendors running core functions in their company they normally run them in complete silos, using spreadsheets to paper over the disconnects. They have either abandoned their interfaces (we still have not met a company that uses the SF to QB interface successfully) or never even bothered with them. That’s reality.

Salesforce has evidently seen the light themselves. I will hazard the following prediction: Over time SF will sell their standalone CRM to very large companies who have large, direct sales forces, and they will sell an integrated suite to the SMEs of the world. They really have no other choice. They are being surrounded in the SME market by a ton of CRM competitors who have matched their functionality. Add to this NetSuite and SAP’s redesigned Business by Design due out any year now and SF really needs to both differentiate its products from the Zohos of the world and confront the integrated suites as they take market share in a world newly interested in cloud computing.

So bravo to Salesforce.com and the newly minted FinancialForce. It will be a presence in the market, I have no illusions about that. It also validates NetSuite’s long maintained position that an integrated suite is the key to running a better information system and finally a better enterprise.

It is being reported online that Oracle has started a significant RIF (reduction in force) process in their consulting division. ZDnet’s Irregular Enterprise  has a post about it today that brings up some good points. As a former Oracle consultant I wanted to weigh in as I think this is a worthwile subject to understand for folks thinking about on-premise software.

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?”