Sunday, March 05, 2006

The Enterprise Software Chasm

The SaaS Summit in Napa Valley this past week was a very interesting and well organized event by OpSource. I'm sure Amy Wohl and others will cover it and you may also want to read http://boassobusiness.blogspot.com/. Rather than providing redundant viewpoints, I'd like to comment on 1 particular topic: I call it
"The Enterprise Software Chasm"

Tien Tzou from Salesforce.com made a very clear statement about the On Demand world and the death of the enterprise software sales model. He said, and pretty much everybody nodded their head agreeing that this new world is a "Google World" - an inbound world where inside sales people are the heroes and the traditional and very expensive direct sales model is vanishing away. VCs in a later podiums discussion at the same conference agreed and pointed to the successes in the SaaS world with short sales cycles and large number of users. The traditional enterprise sales model with their traditional long sales cycles is something investors would no longer accept.

Future software investments go into those companies who build a product, bring it to the market and if people pick up on it - this is considered success. No more outgoing sales and definitely no long sales cycles. If you need to mess around with a customer for several weeks - stop it and find customers who buy it because they like it. Well, a very logical and from an investors point of view very economical strategy.

This, and previous discussions with various investors lead me to believe that there are only 2 companies on the planet that will continue to invest in the enterprise software model: SAP and Oracle. That also tells me that with no other engagements and investments, SaaS for the enterprise market is at least 5 years out - enough time for both SAP and ORACLE to reengineer their respective companies and make them ready for a SaaS oriented enterprise business. New innovations for enterprise software will therefore not be seen on the market before 2012. Since 2003 almost nobody invested in enterprise software anymore - despite the fact that enterprises still exist (and I'm sure we do not expect enterprises to go away any soon - but read on). This development will create a big chasm between enterprises and smaller more agile companies who will be able to use latest Information Management tools (on demand and omnipresent). The SMB part of the world may actually catch up more than normal simply because of tools, systems and methodologies which are not available for a complex enterprise.

The point I'd like to make is that this interesting development may change the face of our business society in a rather unexpected way. It is not because the technology couldn't be available - it is because there is no investor who is interested in an enterprise play, dealing with the fact that enterprises have different needs to modernize their business and need people who have the patience to work with 10 different departments at the same time and analyze business impact of a software that may be run within a 20 Billion $ company and be used by 20,000 people in very different capacities. This has nothing to do with "stubborn and old sales guys who can not adopt", it also has nothing to do with “IT old timers” who are unable to take on new technology. It is about the complexity of an enterprise and in order to reduce complexity for the users and increase simplicity of processes - the tools to make it happen will most likely become even more complex - and at least right now nobody want to invest in it.

SaaS is becoming a demarcation of a growing chasm between enterprise software and any other software.

Regardless of the reasoning - the SMB market has an unparalleled opportunity to grow and compete with the dinosaurs. I use the word dinosaur not as an often used term for something old – but to draw a parallel to evolution where larger and more complex beings were replaced by smaller, highly agile and flexible ones. If a company spends $20 Million every year on IT in order to run it and customizes those solutions so far that it is no more economical to update, did that company reach a point that sheer size made it less competitive? Is it a point even so operations and production is highly optimized, the brain of that entity is no longer capable to evolve any further? Is the Enterprise Software Chasm an early warning indicator that super complex global enterprises after decades of mass consolidation by acquisition are in great danger? Did the gigantic acquisitions in the Automobile Industry here in the USA that ended by having only 2 massive and barely profitable companies left over, proven to be a mistake? The reason for the car industry consolidation was the believe that so many car manufacturers have no chance to survive because they don’t have the critical mass. Today we have more car manufacturers on the planet than 1950 – and today there are percentage wise way less US cars in the country than 1950. Porsche is one of the smallest car manufacturers on earth – yet one of the most profitable.

The Enterprise Software Chasm can not be crossed for quite some time. I wonder what dynamics and evolutionary effects it will have on the SMB space – and the "Porsches" of the other industries.

3 comments:

Zoli Erdos said...

Axel, Could not agree more ... the SMB space will be a fast growing market for SaaS in the years to come. Other then the technology changes, for the first time now it has become economical to reach/serve this market.

Eric Mattson said...

Axel,

Glad to see you're still blogging.

Personally, I think that the enterprise market will evolve from the bottom up using the technologies listed like the ones in this interesting article.

I'll also interested to see how this shapes up.

Eric
MarketingMonger.com

Anonymous said...

Funny to extend your article with - www.foged.org.

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