SAP vs Oracle – quick thoughts after #OOW09

Well, Larry finally told the world about Fusion Apps with some details. And he did it in Steve-Jobs-like “Oh, and one more thing” fashion at the end of the last big presentation at Oracle Open World 2009.

There are plenty of analysts posting plenty of analysis based on plenty of briefings and facts and NDA’s, and I don’t feel qualified or compelled to add my voice to that chorus. However, I’ve been doing some thinking about SAP Business ByDesign (ByD) and Oracle Fusion Apps (FA), and what might be the dynamics between these two offerings in the coming year(s).

ByD and FA have been in development for a very long time. Both have had huge amounts of R&D investment in them. Both build on even more years of investment in predecessors, and both are meant to use that experience and expertise with a much more modern technology approach.

As it turns out, based on information from the analysts, both offer suites of functionality with some significant gaps as compared to more complete “current generation” suites, particularly in areas like Human Resources and Manufacturing.

From a technology perspective, FA appears miles ahead of ByD. FA appears to have a very clean SOA architecture with separate orchestration and business process management, pretty good user interfaces, nice social features, RESTful API’s, and a more standards-based (e.g., Java) orientation. ByD, however, likely will have more functionality than FA.

ByD is targeting “the mid-market” customer, which SAP has described in the past as being from several hundred million dollars in annual revenues, up to somewhere around one to two billion dollars in annual revenues. ByD has been available for more than a year to a very limited set of customers, and SAP has been saying it will roll out ByD to a wider audience in 2010. According to Larry Ellison’s presentation at OOW, FA will hit the market, coincidentally or not, in 2010.

FA is targeting a variety of customer segments, but one notable segment is the installed based for the “Applications Unlimited” (or “legacy”) applications such as JD Edwards, eBusiness Suite, and so on – a very large fraction of these customers are in what SAP considers to be in the mid-market. These customers will be facing the end of life for their applications, along with a paucity of innovation associated with those applications and sky-high maintenance costs, so they will be natural candidates to consider a move to FA over time.

Some of the analysis written about FA has indicated that a move to FA from a legacy Oracle application will involve a complete reimplementation – some data will migrate, but the processes will likely have to be implemented “from scratch.” Given that these customers will be facing a reimplementation if they choose to “upgrade” to FA, it seems likely that they will also consider alternatives to a move to FA. For example, they may consider staying on their current products, but going off maintenance or switching to third part maintenance providers. However, there is another alternative that these customers are likely to consider: moving to a new product potentially from a different vendor.

You can be sure that SAP will be visiting these customers and pitching SAP solutions to them. Given the timing, and given that many Oracle customers are in what SAP considers to be the “mid-market,” ByD will be the solution SAP will pitch to many of these customers. And if Oracle pushes FA further “up-market,” you can bet SAP will bring ByD there as well.

If SAP goes head to head against FA using the current Business Suite product line, Oracle will clearly make a big deal over technology advantages in every competitive situation. While ByD is not as advanced technically as FA, ByD will be SAP’s best response to FA. For a while, large customers will be best served by SAP Business Suite or Oracle’s legacy apps, as large customers will have many requirements that will not be met by the relatively immature ByD and FA. Thus, initially, it appears inevitable that Oracle and SAP will be going head-to-head with these two products. So, what will happen when these products collide?

I think the most likely scenario is this: ByD in 2010 will be made to work well in a SaaS deployment model, and FA will have quality issues and functionality gaps and internationalization limits. If this scenario plays out, SAP may be able to convert a significant number of Oracle legacy applications customers over to ByD (and/or perhaps SAP Business Suite) in 2010 and 2011.

We shall see …

IBM vs. SAP and Oracle: part 2

Some correspondents have questioned whether IBM can really compete with SAP and Oracle in the applications business using the approach I hypothesized. Using an approach like BPM BlueWorks, IBM Global Business Services consultants can share processes (and the code to implement the individual “tasks” in those processes).

To put this in some perspective, IBM Global Business Services has 190,000 employees, according to Wikipedia. While not all of them are coding, bear in mind that this number is on the order of 10x the number of developers at Oracle and SAP. In addition, IBM has a large software division and research labs, also able to support the creation of these processes.

IBM need not create the basic financial and human resource core processes. They don’t even have to create the basic objects and the processes to maintain the connections between those processes. After all, those objects and processes already exist, for most customers, in their current, installed SAP or Oracle applications. Those cores do not need to nor do they benefit from change, which is why customers are so loathe to upgrade their cores. However, customers desire additional, high value processes on top of those cores – this explains the success of Siebel and i2 in the past, and Salesforce and SuccessFactors and Taleo and Lithium in the present.

As long as IBM can keep those stable cores in place, IBM can develop high value processes as composite applications using WebSphere/Lotus without investing in core ERP. Fortunately, IBM has a practice in place to take over running your existing enterprise apps, guaranteeing a cost reduction every year, and without the large periodic upgrade costs of staying current with SAP and Oracle.

In summary, IBM will compete with SAP and Oracle for applications business, but not by trying to replace current SAP and Oracle instances (the way Oracle and SAP compete with each other), but instead by building on them as a platform.

How IBM will compete with SAP and Oracle in the future?

Would you like to know how IBM will compete with SAP and Oracle in the future? If so, check out IBM’s BPM BlueWorks site. Create an account, and make sure you read the terms of service:

By posting Your Content (or portions thereof) to the Community, You hereby consent to provide Community users the ability to download, print, distribute, perform derivative works or otherwise utilize Your Content.’ …The above licenses granted by You in Your Content are perpetual and irrevocable.

Community users may create derivative works and use them. In fact, you could imagine that IBM would create, under appropriate open source licenses, business processes in their BPM suite, and allow IBM Global Services or customers to use them, provided they run on IBM’s BPM suite.

Customers already have such models, created as they implemented their current ERP products in use. Many customers created these models in tools like ARIS or Visio, and it wouldn’t take much to migrate those models to BPMN, the standard and open language notation used and promoted by IBM – the notation used by IBM’s BPM BlueWorks community.

What would happen if IBM’s consultants used this tool, together with a BPMN tool from IBM, to create a library of processes (composite applications) that can run on existing enterprise applications? IBM would be able to build – and sell – these applications to many customers through their services arm. Many of these composite applications would implement high-value, cross-“silo” processes, such as recall management, financial modeling, sales and operations planning. These applications would be designed to be cross-platform, running the process in a BPM system but integrating into “legacy” SAP and Oracle applications.

IBM could either leave the “legacy” applications in place, or replace their functionality over time. IBM could even develop services to allow you to keep the legacy applications in place, managed by IBM at far lower maintenance cost than what SAP and Oracle want from you, and promise you a never-ending library of composite applications to help you drive business innovation from IT. In fact, IBM could promise – and deliver – such applications at lower cost, faster, and with more innovative functionality than SAP and Oracle. SAP and Oracle wouldn’t even know this was happening until it was a real threat to their maintenance revenue, upgrade process, and new application sales.

So, is this just speculation, or is this what IBM has been doing now for a couple of years?

WTF?!?

Do any of you who read this blog know anyone at Google who might care about this? I got the following e-mail tonight:

from Blogger
to dennis.moore@gmail.com
date Fri, Aug 21, 2009 at 12:27 AM
subject http://dbmoore.blogspot.com/ – ACTION REQUIRED
mailed-by blogger.bounces.google.com
signed-by google.com

hide details 12:27 AM (6 minutes ago)

Hello,

Your blog at: http://dbmoore.blogspot.com/ has been identified as a potential spam blog. To correct this, please request a review by filling out the form at [URL redacted]

Your blog will be deleted in 20 days if it isn’t reviewed, and your readers will see a warning page during this time. After we receive your request, we’ll review your blog and unlock it within two business days. Once we have reviewed and determined your blog is not spam, the blog will be unlocked and the message in your Blogger dashboard will no longer be displayed. If this blog doesn’t belong to you, you don’t have to do anything, and any other blogs you may have won’t be affected.

We find spam by using an automated classifier. Automatic spam detection is inherently fuzzy, and occasionally a blog like yours is flagged incorrectly. We sincerely apologize for this error. By using this kind of system, however, we can dedicate more storage, bandwidth, and engineering resources to bloggers like you instead of to spammers. For more information, please see Blogger Help: http://help.blogger.com/bin/answer.py?answer=42577

Thank you for your understanding and for your help with our spam-fighting efforts.

Sincerely,

The Blogger Team

P.S. Just one more reminder: Unless you request a review, your blog will be deleted in 20 days. Click this link to request the review: [URL redacted]

WTF? Yet another example of how a total lack of authentication and human decision making can result in strange and unsatisfying experiences for users. I have (according to Google’s Feedburner) about 178 subscribers to this blog, more than double the number of two months ago. The blog gets almost 10,000 visitors in the past month, and just under 2,500 clicks through links posted on the blog in the same time period.

Is there anyone reading this who knows how Google determined that my blog is “spam?” Is there anyone reading this who can ask someone at Google to ensure this gets resolved in the right way? I don’t get paid for this blog, and I don’t put advertising on it (so I don’t get paid by advertisers for it either), so I don’t want to pay for my blogging service – does anyone have a suggestion of a different free blogging service I should be using instead of Google Blogger? I feel like I should move to a different service with my subscribers now before Google decides I am the prince of darkness. Although I have a lot more activity on Twitter and The OracAlumni Network than on this blog, I still like having the blog for the opportunity to occasionally post my harebrained, semi-econometric theories. Suggestions, advice, or help greatly appreciated!

Just keeps getting better

Comments by Nicholas Carr (IT skeptic/critic/expert) and Hal Varian (Google’s chief economist) got me thinking about enterprise applications, and why there haven’t been any real killer apps for the enterprise for quite some time (since ERP?).

Hal Varian is a very impressive guy, with some very impressive thoughts, who appears to be be appropriately credited with perfecting a bunch of Google’s algorithms and using them to drive business strategy. In the interview linked above, he commented a bit on data, it’s value, and scale. Enterprise apps contain huge amounts of data, and the amount is continually growing. Strangely, much enterprise data is redundant – for example, when a business buys something from another business, both businesses capture the data about the transaction. Unlike in the consumer world, very little of the data is really analyzed in a way designed to increase knowledge, wisdom, drive strategy, or create value in any way. Using the example I just cited of a B2B purchasing transaction, the data is used to ensure the item is created, shipped, billed for, collected for, commissions paid, ledgers recorded, income tax paid, financial statements updated. The process is called “order to cash,” and that seems to be the beginning and end of it – when “cash happens,” that’s pretty much the end.

Nicholas Carr’s argument, in the link above, covers a lot of ground, but the really killer comment is:

“Ultimately, on the network, applications win if they get better the more people use them.” [His italics]

Wow! That really got me thinking. Can you name an enterprise application that gets better the more people use it? And by better, I mean “better for the user.” CRM may get better for the manager, and Purchasing might get better for the CFO, but does your CRM application get better for the sales or service person as more sales or service people use it, or as one sales or service person uses it more? Does your Purchasing application get better the more people request Purchase Requisitions?

I can think of only a very small number of enterprise applications that get better the more people use the application. SAP’s Community Network (SCN) gets better the more people use it, because participation captures and propagates issues, solutions, and ideas. I’m sure SAP gets revenue because of SCN, but it is presumably hard to prove that fact. However, SCN is a community with a bunch of software supporting it, not an enterprise application per se.

Lithium is an enterprise application very similar to SCN – it is a SaaS system that creates communities (“Customer Networks,” as Lithium calls them) for issues, solutions, and ideas. Lithium’s customers can also cross-sell and upsell items to their communities within Lithium. The more users, the better this application gets.

LinkedIn also gets better with additional use, up to a point. However, LinkedIn is perhaps more vitamin than migraine medicine, and people always pay more to solve a real problem than for a “nice to have.” SuccessFactors would see to have the potential to get better with use, but capturing job descriptions, relevant objectives, review language, and other related data, although I’m not sure if the system really does this. Probably some enterprise knowledge management tools get better with more use, although many of them seem to get overwhelmed when the use reaches even a modest level – you can’t find any item because it is obscured by many near misses.

Think of all the enterprise applications you know – do any of them get better with additional use? Do they mine data to project trends? Do they capture text to predictively enter it for you next time? Do they alert you when data show a pattern from the past (like a customer becoming a bad credit risk, or an employee preparing to resign, or a competitor gaining an advantage)? Do your enterprise applications get better with more use?

Shouldn’t they?

If you can think of any enterprise applications that get better with more use, please leave me a comment mentioning the application and how it gets better with use. Thanks!

SAP and SaaS

There has been a lot of chatter about SAP’s moves in the SaaS world, so I thought I’d chime in with my €0.02. I’ll leave off most attributions/references below, as you can google the citations yourself with Bing. :) Nothing below is based on any insider or proprietary knowledge I may have or have had in the past (after working for SAP from 2001 to 2007).

  1. SAP does not have a strong history in SaaS, and it does not have a great track record with its flagship effort there (Business By Design, or BbD). Nonetheless, SAP has some experience with SaaS via acquisitions of products/companies like Coghead and Frictionless Commerce.
  2. Traditionally, SAP has held that SaaS was for small enterprises (“small” is what SAP calls anything below €500M per year in revenue or budget), and that large enterprises would not stand for off-premise software due to its difficulties in customization, integration, and security.
  3. SAP has also held that SaaS and hosted are pretty much the same, and SAP has claimed that multi-tenancy is a red herring. Hard to believe, but SAP invented a convoluted architectural distinction called “mega-tenancy,” which was basically single tenant in nature. Opponents argued that multi-tenancy was the only way to scale SaaS, at least in a way that was economically viable. Currently, SAP contends that BbD is ready to ship except that it is not yet profitable enough (aka not yet economically viable); SAP has yet to reveal publicly whether it still holds that multi-tenancy is not needed for SaaS viability. Incidentally, SAP’s on-premise architecture is not multi-tenant (for most SAP products). It is no easy task to take a huge product and rearchitect it from single- to multi-tenancy.
  4. For a long time, SAP called BbD the “business process platform,” indicating that it was a good environment for building and deploying new processes not included in SAP’s software. SAP also had a “technology platform” in NetWeaver (NW). John Wookey’s new effort has been publicly stated as being based on the Frictionless Commerce code, not on BbD (but I believe Frictionless is based on NW), so SAP has chosen a different “business process platform” from the one the company has put so much effort and investment into. What does that say about BbD? Incidentally, Frictionless: multi-tenant.
  5. Lest it seem I am all “gloom and doom” about SAP and SaaS, let me dispel that perception. John Wookey’s strategy is quite brilliant. SAP’s detractors claim that SAP cannot afford to move to the subscription pricing business model frequently associated with SaaS. Nothing could be further from the truth. Today, SAP’s revenues are primarily NOT from software licenses. In fact, it is common for customers to get large discounts (say 80%) off license, followed by approximately 20% per year (based on list price) annual maintenance beginning in the second year of the agreement. This is equivalent to a 20% per year (every year, including the first) pricing for the customer, which is more or less a subscription model. With an enterprise license, it is not possible to recognize all the revenue up front if the customer pays SAP for any implementation services (not sure if SAP is not involved in the implementation, and not sure of the percentage of implementations in which SAP is involved), so SAP ends up recognizing over more than a one year period in many cases already. With SaaS, there would be no appreciable change in revenue recognition for SAP. However, for customers, there would be the potential of a much lower up front cost (less customization, less hardware and non-SAP software licenses), with much higher ROI, so presumably customers would adopt more software faster with SaaS than with only an on-premise option. And SAP is targeting large enterprise SaaS at “edge” applications, many of which customers were not buying from SAP in any case, so this gives the potential for additional revenue for SAP. Especially since customers are not buying SAP’s on-premise software in droves anymore (down 40% year over year last quarter, I believe).

Just some Monday morning thoughts. Anything I missed, got wrong, totally blew? Let me know … thanks!

When (and Why) to Accept Less Than Pmax

In my first blog entry on enterprise solution pricing, I described a model for understanding the drivers of pricing, from the customer’s point of view (but for the benefit of vendors). I also introduced some ideas that may help vendors obtain a higher price from customers – and hopefully, deliver more real value to customers in the process.

But, just because a customer is willing to pay a certain amount for an enterprise solution, does that mean the vendor would be stupid to take less?

No.

In fact, the model itself shows the seeds of ideas for why a vendor should almost always be willing to offer customers a lower price – in exchange for something more valuable than (immediate) money.

As a reminder, the pricing model I suggested for enterprise solutions goes like this: the maximum price a customer is willing to pay is based on four key factors:

  • the fraction of the customer’s benefit that this particular customer is willing to pay to any vendor (aka whether the customer considers vendors to be opponents or partners),
  • the customer’s perception of the probability of success of the project to implement the solution,
  • The customer’s perception of the competitive differentiation of the vendor’s solution as compared to substitutes (including direct competitors, DIY, and “do nothing), and
  • the net benefit available to the customer as a result of implementing the vendor’s solution (total benefit less implementation and evaluation costs).

The lower any of those four key factors, the lower the price the customer is willing to pay.

So, why should the vendor be willing to offer the customer a lower price than the maximum the customer is willing to pay? After all, you won’t often find customers willing to pay a vendor more!

Some things are more valuable than money

Simply put, some things are worth much more to a vendor than to a customer. In the transaction itself, the money is worth more to the vendor than to the customer – at least to the actors in the transaction. The enterprise solution salesperson is usually compensated not at a fixed salary, but instead on an accelerating commission basis. If the salesperson achieves say 0% to 80% of their quota (target for sales, usually on a quarterly or annual basis), they often get paid a very low base salary and a very small commission. From 80% to 100% of quota, the salesperson gets an “accelerator,” giving her a higher commission rate for those sales. At 100% of quota, the salesperson is paid their “target comp” (target compensation) – the compensation amount in their contract or offer letter. After 100%, things get interesting, with many companies offering the salesperson a “kicker” for higher sales. If an account does business with the company after a change in salesperson responsible for the account, generally the prior sales rep will get no commission for the sale. Things are a little more complicated in most comp plans, but – trust me – your salesperson is highly motivated to close the deal this quarter. And this motivation goes straight to the top of the company.

But – and this is a big one – some things are more valuable to the company than your money. Remember, the maximum price the customer is willing to pay is based on four factors. On the customer’s perception of those four factors. A vendor will often be willing to accept a lower price in exchange for help in closing more deals with other customers, faster, at a higher price. Any customer can help the vendor to accomplish this goal – by offering to provide some kind(s) of testimonial(s), case study(ies), sales reference(s), or even to help better understand the benefits of the vendor’s solution(s). By providing this help, the customer helps the vendor to raise Pmax in other deals. This kind of help can raise other customers’ expected probability of success, their expectations about the net benefit available, and even the perceived competitive differentiation of the vendor’s solution, thus raising the price other customers are willing to pay.

Think of it another way, for those “mathy” folks out there. The vendor is trying to maximize EBITDA (within certain constraints, such as stability of sales and earnings, acceptable levels of risk) over the long run – or at least that’s what their legal, fiduciary responsibility requires of them. Assume “P” in these articles is the price paid adjusted for the time value of money. Let’s call the price paid by each customer P(i) (read “P sub i”), and the costs associated with that customer C(i). The vendor wants to maximize the sum over i of [P(i) – C(i)]. If a lower P paid by a particular customer can be made up by and overcome by a higher P paid by other customers, then the vendor should be willing to reduce P so that it is less than Pmax – if the vendor believes the customer will follow through on the commitment to help, and if the vendor believes the customer’s help will actually raise P for other customers, and if the vendor believes this customer’s help will be less costly and/or more beneficial than trying to get the same help from another similar customer.

The time value of money

In economics, we are taught to understand a concept that was clearly understood by Popeye’s friend J. Wellington Wimpy, who famously said “I will gladly pay you on Tuesday for a hamburger today.” Money is worth more to someone who has none, than to someone who has enough. This is known as the time value of money, and is something generally understood by anyone who has ever had to calculate the net present value of something, or who multiplied their monthly mortgage bill by 360 to see what their house really is costing.

As we established above, the salesperson is the person who is put under the most pressure by the time value of money. Any customer who offers to accelerate a deal into the current fiscal period for the vendor is likely to earn a substantial discount for his trouble. Most enterprise software business is closed in the last few weeks or days of the fiscal quarter, and nearly half of the license sales part of the business (for traditional, non-SaaS vendors) is done at the end of the fiscal year’s last quarter. Subscription pricing, and the compensation plans for sales reps in most SaaS companies, discourages this type of deep time pressure and its attendant discounts, but customers working with more traditional vendors can use the end of a fiscal quarter or year to obtain a lower price.

The flip side of this is that vendors really do not like to take less money than they believe is fair for a solution, and the sales team is compensated on total revenue (and sometimes profitability), so the vendor is also dis-incented from making pricing concessions. Generally, the vendor would prefer to offer additional “seats,” products, or services to maintain the price of the deal. There are internal control mechanisms, like forecasts for each deal and deal reviews and approval processes, that also aim to discourage discounting. After all, if one customer earns a discount, then Ray Wang will learn of it and every customer will ask for an even steeper discount in the future!

Market share

A really smart professor, Subi Rangan of INSEAD, advised some colleagues and I on a project about pricing models once. He advised that companies that can command a pricing premium often will offer products at a lower price for one or both of two reasons: to increase market share, or to grow the market. When a vendor can offer a product in a competitive market with a hard-to-copy way of offering a greater benefit, less project risk, or an important competitive differentiation, that vendor can increase market share by offering their product at a price below Pmax.

One last thought

One idea that has not been well thought through by me (or by others I’ve found) is the notion of the benefits that can be created when the customer and vendor work together in partnership. Every customer says they want vendors to be their partner, but few will fairly share the rewards or benefits the vendor brings. Similarly, every vendor says they want to be the customer’s partner, but few will fairly share the costs and risks, at least in the enterprise solutions space. I hope that someday, in this industry, vendors and customers, salespeople and purchasing people will walk hand in hand in partnership, raising the prices paid by customers, but greatly – disproportionately – increasing the benefits obtained by the customer. Perhaps not as inspiring as the Revered Dr. Martin Luther King, Jr., but a lofty goal for us all, nonetheless.

As always, your thoughts, issues, ideas, critiques, and contributions are greatfully welcomed.