By annie shum | February 17, 2010
Original article appeared in SandHill.com By Jeffrey M. Kaplan, THINKstrategies Feb. 16, 2010
SAP’s executive shake-up shines a spotlight on the challenges faced by traditional ISVs to simplify their products for a SaaS- and cloud-driven market.
The resignation of Leo Apotheker as CEO of SAP is the latest example of the escalating pressures facing legacy software executives as the industry undergoes fundamental and traumatic changes driven by rapidly changing customer preferences and intensifying competition. In short, customers are demanding that software vendors “Keep it simple, stupid!” Those ISVs who can clear away the complexities, and create simpler solutions and go-to-market strategies will be in the best position to survive and thrive in the coming decade.
In a conference call with analysts and press, SAP’s Co-Founder and Chairman of its Supervisory Board, Hasso Plattner, said Apotheker’s resignation was driven by growing dissatisfaction among customers in response to SAP’s failure to bring new products to market and decision to increase its maintenance fees, as well as a recent employee survey which also found growing discontentment among its own staff. Plattner summed things up by saying that SAP isn’t a “happy company” at this point.
This isn’t a surprising development given the cascading challenges facing SAP. Although the downturn in the global economic climate can be blamed to some extent, the real culprit behind SAP’s decline has been the accelerated growth of the Software-as-a-Service (SaaS) market driven by growing customer dissatisfaction with the costs and complexities associated with traditional, on-premise applications. SAP has been in denial regarding the significance of the SaaS movement and the seriousness of customer disenchantment. It hoped that this trend would subside, or that its customers would eventually return to the ‘comforts’ of conventional software. SAP is finally recognizing the market realities – SaaS works and organizations of all sizes want more of it.
Plattner is now acknowledging that SaaS and the broader cloud computing model are a valid alternative to traditional software and data center systems. He also admitted that these ‘on-demand’ alternatives pose a significant challenge for SAP. However, he and the rest of the company’s leaders may still be misreading the messages they are getting from the market when it comes to the right path to SaaS success.
For example, during his conference call with press and analysts to explain Apotheker’s resignation, Plattner boasted that the company is making progress bolstering its BusinessByDesign SaaS offering by developing a new in-memory database. While this technological innovation may differentiate how SAP’s SaaS solution operates, SAP isn’t likely to convince many customers to adopt BusinessByDesign because of the nature of its database unless it can translate the value of this new technology into business benefits, such as quicker time-to-value.
It’s the Business Value
In his book, Behind the Cloud, Marc Benioff admits that salesforce.com’s major architectural innovation-software multitenancy-has not been the primary driver of its success. Instead, it has been the business benefits derived from multitenancy – a lower total cost of ownership (TCO) coupled with a higher return on investment (ROI) – which has driven customer demand and salesforce.com’s success. In fact, Marc Benioff recounts in the book how salesforce.com’s first release of its SaaS solution tried to match the functional capabilities of Siebel and failed dismally to gain customer acceptance because people were not looking for another complicated CRM application. Instead, they wanted a simpler, easier to use solution-not one that just matched Siebel feature for feature at a lower cost.
Once salesforce.com discovered this customer preference for greater simplicity, it dramatically changed the way it designed, packaged, priced, positioned and promoted its solution to emphasize this differentiating quality.
The Need for “Simple”
Despite Salesforce.com’s tremendous success, many legacy ISVs continue to dispute the viability of the SaaS movement by suggesting that large-scale enterprises will not accept a ‘simple’ solution to meet their complex corporate requirements. All you have to do is visit salesforce.com’s website or attend Dreamforce to see the fallacy of this thinking. Delivering a simpler solution hasn’t limited salesforce.com’s ability to sell into the enterprise, as well as small- and mid-sized businesses (SMBs). Instead, it has made it easier for customers of all sizes to grasp the potential benefits they can derive from salesforce.com’s increasingly flexible capabilities. And, it has made it easier for salesforce.com to scale its operations to compete with the established vendors worldwide.
Now, SAP’s customers are demanding simpler solutions which can more quickly and economically fit into their operations. Of course, simplifying the complexities of SAP’s legacy applications is no easy task. For starters, migrating to SaaS entails re-architecting SAP’s application design, redesigning its go-to-market strategies; and restructuring its revenue recognition models. These challenges are compounded by concerns about product cannibalization, as well as worries about alienating SAP’s channel partners.
In sum, SAP is facing a classic ‘innovator’s dilemma’. They must confront a perplexing array of technological, organizational and competitive challenges or watch their empire disappear. Yet, many of SAP’s executives are still convinced that the company’s long-term survival is predicated on proving that customers can’t survive without a ‘sophisticated’ solution which accommodates all the complexities associated with their legacy systems and traditional business requirements.
Simplicity Drives SaaS Growth
The only way SAP, or other legacy software vendors facing the same challenges, can untangle themselves from these complexities, is by adopting a simpler way of thinking.
Henry Ford demonstrated the power of simple thinking by pioneering highly standardized manufacturing principles with the Model-T. Japanese and Korean automakers have used these same principles to leapfrog American manufacturers. Salesforce.com took this idea and applied it to the software industry using multi-tenancy as its software chassis. Now, a proliferation of SaaS players is applying the same principles in nearly every segment of the software industry.
Despite SAP’s claims, SaaS-based ERP vendors are experiencing tremendous growth in response to escalating customer acceptance. For instance, Plex Systems recently reported that its 2009 recurring revenue grew 31 percent over 2008, and its EBITDA profitability also grew 21 percent year-over-year. And, what makes Plex Systems’ results even more impressive is that it is focused on mid-tier manufacturing companies which have been hit hard by the downturn in the economy and are generally risk adverse when it comes to technology.
And, that’s the point. Companies in nearly every industrial sector are investigating and adopting SaaS alternatives because they are fed up with the costs and complexities of traditional software and systems, and can no longer tolerate the inefficiencies of legacy hardware and software in today’s tough times. More importantly, THINKstrategies’ research has found that they are overwhelmingly satisfied with the measurable business benefits they are gaining from SaaS when they make the move and are encouraging their peers to join them.
This success is fueling a ‘cloud rush’ which has spawned the newer Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS) tiers of the cloud computing movement. Today’s cloud computing leaders, starting with Amazon, are applying the same principles promoted by Henry Ford to compete in the increasingly price-sensitive Web-centric world. A variety of increasingly powerful enabling technologies are permitting once complicated data center operations to be transformed into highly efficient, scalable, economical and self-provisionable resources.
Creating successful SaaS, PaaS and IaaS solutions isn’t simple. It entails the right combination of technologies, skills and strategies. It depends on a sophisticated engine governed by many automated processes. But, what every successful cloud vendor has in common is a simple message, value proposition and user interface. These attributes remove the ‘friction’ in the sales process, as well as the adoption process. They also increase the likelihood of customer success, which is the key driver of corporate purchase decisions in today’s tough and uncertain economic climate.