Michael Fauscette

Oracle moves to become the leader in Enterprise 2.0

In a series of announcements this week at Oracle Openworld it is clear that Oracle is making a strong move into Enterprise 2.0 enabled applications. Before this week, Oracle (and most of the other large enterprise software companies) was regularly criticized by bloggers, start ups and analyst as not understanding Web 2.0 and not building applications that incorporated the best of Web 2.0 concepts. So what are these new applications and does Oracle now "get it"?

First the announcements:

1. Oracle Beehive - open platform for integrated and secure collaboration. Beehive delivers integrated team workspaces, presence, calendar, instant messaging, and email.
2. Oracle Sales Campaigns and Oracle Sales Library based on the Oracle Social Applications Framework - sales applications that enable productivity enhancements via Enterprise 2.0 and Social CRM. These apps are a part of the new Oracle Social CRM.
3. Oracle Social CRM
4. Oracle Social Applications Framework - enables companies to share information within communities or throughout an ecosystem. The Framework controls access to Oracle Social Networks while enabling collective company data to work across multiple networks. The apps help sales and marketing to use social intelligence to improve sales performance.
5. Oracle Webcenter Suite - an open and manageable user interaction and portal platform that can help companies securely deliver extranet and intranet portals along with composite applications that integrate processes, content, BI, and information in a single user interface. The WebCenter Suite also enables delivery of Enterprise 2.0 services, like blogs, wikis, forums, secure search, and RSS feeds, through portals and communities.
6. Content enabled applications

In addition to the above releases Oracle also has built a dedicated Enterprise 2.0 sales force and expanded its internal use of Web 2.0 technology. For example Oracle announced a new support portal, My Oracle Support (aimed at personalizing support and making support more proactive) that will include a communities feature in its next release (in the next few months). In partner programs Oracle announced a new partner portal and new Web 2.0-like initiatives to increase collaboration and interaction between Oracle and the partners and partner to partner.

So does Oracle "get it"? Well, there is a lot of evidence that they do, just look at the number and type of announcements. Still, I suppose we'll have to see what Oracle's customers say and if they will vote with their $. You do have to wonder what this could mean for the multitude of Enterprise 2.0 start ups, I mean if a customer can get an Enterprise 2.0 platform from Oracle would they be willing to risk buying from a start up? And short of the start ups that might be interesting acquisition targets will the others be able to get VC funding? And lastly how will the other enterprise vendors react to Oracle's strong move?

Enterprise 2.0, Oracle, Social CRM, Software, Web 2.0

Oracle Openworld Update

Finally on Day 4 of Openworld (OOW) I'll get some time to provide an update. I have kept up a steady conversation on Twitter, but it's time to provide more information. This is my third OOW in three years as an analyst and the most obvious observation is that the overall messaging and strategy is consistent across the three conferences. Three OOW's ago was just a few months after the launch of the Applications Unlimited program and the first attempt to clarify and define the overall Oracle business strategy. In Monday's opening Keynote by Oracle President Charles Phillips he reenforced the overall messaging: Complete - Open - Integrated. From an applications strategy Complete / Open / Integrated translates to Applications Unlimited or a broad and comprehensive portfolio of industry solutions, SOA enabled (open standards) and integrated through Applications Integration Architecture (AIA). There are several key themes that are continuing across the applications strategy, investment in the horizontal suites, expansion of the vertical applications, development of more Process Integration Packs (PIP's) for integration and moving closer to Fusion Applications. Last year, Anthony Lye (who at that time was responsible for CRM On Demand, but now has responsibility for the whole CRM suite) showed the first of the Fusion Apps, mobile tools for sales people, and it turns out, gave us a glimpse into what has turned into a series of moves to rollout Web 2.0-like functionality into the enterprise. This year, with the announcement of things like Social CRM, a plethora of iPhone Apps ranging from asset management to expense reporting (which included a cool feature to automatically track miles driven based on the iPhone's GPS), Oracle makes a strong move into Enterprise 2.0.

At all OOW's there are a whole list of "announcements" and this year is no exception. One of the biggest announcements was for a new product line called Beehive. Beehive replaces the old Oracle Collaboration Suite (OCS) and provides a collaboration platform for internal management of all communication and collaboration channels. The platform provides hooks into a companies existing email or a replacement email system, presence, calendaring, IM, directory, phone, etc. and should pose an interesting alternative to other Unified Communications (UC) offerings on the market. Oracle has used Beehive internally for up to around 1200 employees for close to a year as well as supported several beta / new customer deployments to date. On the partner programs side of house Oracle rolled out it's new Partner portal and a host of Web 2.0 type tools for partner enablement. Another area of interest is the changes rolled out by Oracle's customer support organization around the new My Oracle Support. In its first release MY Oracle Support provides customers with a way to interact with Oracle and maintain current configuration information to enable more proactive and effective support. I learned from Global Support head Juergen Rottler that in a next release to come shortly over the next couple of months Oracle will up the level of support by providing communities around various customer segments. These communities will encourage P2P networking, sharing of best practices and issue resolution through the power of crowds.

Overall OOW this year is up beat and seems to have a lot of energy emanating from partners, customers and employees. The business strategy, growth through acquisition focused around more and better industry vertical solutions is fully baked and continues to drive growth. Oracle continues to invest in all major acquired brands and continues to innovate across those brands. Fusion Applications are coming, we saw, under NDA of course, several demonstrations that were very interesting. And this year, Oracle started on a path of demonstrating that they are Web 2.0 savvy and they are learning how to incorporate those concepts into the enterprise with offerings like Beehive, mobile apps, Social CRM, etc.

It isn't magic, just because it's SaaS it still won't implement itself!

With all the marketing hype surrounding SaaS and how easy it is to implement SaaS solutions it's no wonder that people start to think that with SaaS solutions all you have to do to implement is to give your staff the login URL. While there are some simple and really excellent point solutions offered in the SaaS model that don't require anything more than a simple orientation to the software and a basic discussion on how it's to be used, that is the exception, not the norm. As more and more complex solutions are offered in a SaaS model, it has become obvious that the services offerings around SaaS solutions must evolve to meet customer needs. SaaS solutions don't require all of the same services that would be necessary in implementing an on-premise solution, I mean, after all there's no infrastructure work, installs, etc. But customers still need to configure the software, modify their business processes to take advantage of the new software and train the end users. A lot of the value of a software solution is in the business process change and optimization that goes along with the software and face it, that doesn't happen without focus and effort, whether that's internally delivered services or external consulting.

The model for building and delivering SaaS services is however different, partly because customers expectations are different when SaaS is involved and partly because the process is, at least in part, different. Several System Integrators (SI's) have evolved a model for implementing SaaS very successfully, bluewolf for example. Vendors are also starting to talk about complete services offerings, Netsuite, for example, just announced a comprehensive services program called Netsuite Suitesucces.

So how are the implementation services for SaaS software different? I believe the simplest answer is that the services must map directly to the value proposition of the software (easy to use, easy to implement, short time to value, etc.). With that in mind, how do you optimize the services to match? The most successful design is simple, use short, fixed price / fixed scope package services that can be sold and consumed in short phases, so that the customer gets value quickly and can phase the delivery of different packages over time. The content, again simple, focus on process and training and the process must capture deep industry vertical expertise. This is the formula that works for SaaS.

Does it have to be multi-tenant to be SaaS?

I was sitting in the Oracle Applications Analyst Summit this week when a debate broke out over this question. Now this is not a new debate certainly but it is one that comes up regularly. It seems that our friends at Salesforce.com have done a very effective job at pushing this message, so much so in fact that many people believe that multi-tenant architecture is a part of the fundamental definition of SaaS. But is that really true? There are several software vendors that would not agree, including Oracle.

First, what is multi-tenant and what's the difference between multi and single tenant software. In the simplest definition a multi-tenant solution is a solution that is offered / consumed by many customers but on the back end is a single shared infrastructure. The application is built to segment or partition each customers data so that it is private yet is operated on this shared system. The opposite of multi-tenant then would be single tenant, where a solution is deployed on an individual infrastructure for each customer. Simple enough. Our discussion this week arose when Oracle explained its three customer options for deploying SaaS solutions: 1. multi-tenant in Oracle's data center, 2. single tenant in Oracle's data center, 3. @customer, deployed in the customer's data center (customer manages the infrastructure, Oracle manages the application). At a glance @customer looks like on premise single tenant software but is it? Let's look at the licensing model and see if that provides any insight. In all three options the customer licenses the software in an ongoing subscription model. From a pricing perspective customers pay the same for single tenant and multi-tenant while @customer is less expensive (makes sense, the customer has to provide the infrastructure). So by Oracle's (and several other software vendors) definition tenancy doesn't make a solution SaaS or on premise.

To understand this view let's look at the two models and see what does make them different. SaaS solutions are by definition licensed in a subscription model. The customer pays a monthly fee that includes the use of the software, support, bug fixes and access to new versions of the software when available. On premise solutions are licensed in a perpetual license model, customer pays an up front license fee and then an annual "maintenance" fee that covers support, bug fixes and access to new versions of the software when available. So the two models are fundamentally different in the way the software is licensed. Are there any other differences? I'm not aware of any...

So why do several software companies use multi-tenancy as a differentiator? The claim has been that multi-tenant solutions were more cost effective for the customer, in other words the vendor would charge less because it would have lower infrastructure costs with shared infrastructure (as long as the cost savings is actually passed on to the customer, that is). Now I suppose that is true, as a vendor builds up infrastructure it would be less expensive to have shared infrastructure versus single infrastructure for each customer. Multi-tenant solutions are, however more expensive to develop, but that is up front vendor investment that, once expended is finished (which is one of the reasons that it is difficult for an on premise vendor to deploy it's software as a multi-tenant SaaS solution, there's a lot of upfront investment). But is this true for large vendors that already have a large scale data center(s) investment? What if the vendor offers both multi and single tenant solutions at the same price to the end customer, absorbing any back end cost difference in their own profit margin? Then is not customer choice a larger benefit than a back end infrastructure design that benefits the margins of the vendor?

Look at the value proposition of SaaS, easier to implement, cheaper and easier to maintain, costs spread over time versus large up front investment (OPEX versus CAPEX), these are not different in any of the three Oracle options. OK, option 3 might seem like it costs the customer more, but if a customer already has a large investment in a data center and data center resources, it might actually save them money to deploy in that data center but have Oracle maintain the software (and of course pay in a subscription model).

So the conclusion is multi-tenancy is not a part of the definition of SaaS, which is simply a licensing / pricing model, not an architectural model. SaaS is software consumed as a service in a subscription licensing model, that's it, no more.

SaaS, can pure-play vendors reach the same level of profitability as on-premise or hybrid software vendors?

Alright, first I promise that this is not another bash Lawson CEO Harry Debes blog, no matter how tempting that might be it would be just too easy and too much piling on...besides what could I say that hasn’t been said? If you haven’t read about it, try my friend Paul Greenberg’s blog.

This is a question that I’ve pondered for quite awhile as I’ve watched pure-play SaaS vendors grow and get traction in the software markets. First a few definitions are in order I think. When I say pure-play SaaS vendor I mean a software vendor that derives substantially all (I would have said all, but since Salesforce.com bought an on-premise software company recently I’ve added the “substantially”) of its revenue from subscription based licensing of its software products and the infrastructure necessary to run it. An on-premise software vendor then would be a vendor that derives substantially all of its revenue from SW products that are sold on a perpetual license + annual maintenance business model and of course hybrid vendors derive revenue from both models. Salesforce.com and NetSuite are examples of pure-play SaaS vendors, Oracle, SAP and Microsoft are currently on-premise but are moving to hybrid models.

I decided to do some basic analysis to see if I could start to understand what is happening to pure-play’s versus traditional on-premise vendors. This is somewhat complicated for a variety of reasons, pure-play vendors are at a much earlier maturity level and their revenue model is very different than the on-premise model that takes license revenue up front and then builds a recurring revenue stream around maintenance (support and software upgrades / fixes). The pure-play revenue model is built around a monthly fee from their customers with no up front license or on-going maintenance, and everything is included in the monthly fee, support, infrastructure and the software. The monthly fee is generally variable and is set by number of users and also may vary based on the functionality used. In addition, contracts for pure-plays can be 1-3 years (or possibly longer although I don’t know of any vendor that has managed to tie up customers longer than 3 years). With that in mind, what metrics would provide a meaningful comparison? I collected the following to use in this analysis. The data I took from Yahoo Financial rather than using IDC data for a couple of reasons but mostly so that it would be publicly available, tied to each companies reported fiscal year data (IDC tracks data on a calendar year basis) and so that I’d have matching employee count numbers.
Company---------annual revenue--profit---employees----rev / emp---profit / emp
Oracle-------------22.43--------------5.52----84,233---------266-----------66
SAP---------------10.24---------------1.92----51,447---------199-----------37
Adobe--------------3.16---------------0.72-----6959----------454----------103
Salesforce.com----0.75--------------0.02------2864---------262-------------7
Autodesk----------2.17---------------0.36------7348---------295-----------49

Note: Revenue & Profit are in Billions USD, Rev/Emp and Profit/Emp are in thousands USD.

I used Salesforce.com since it is the most visible of the pure-plays, has the highest revenue and has been public the longest. It is the smallest of the five vendors examined, still it does seem to be a reasonable comparison, as far as snap shots go. From a productivity stand point there’s no issue (using rev / employee...although it does seem like all of the vendors could use a productivity lesson from Adobe). SAP’s the least productive using this metric, Adobe the most, but in the middle the other three are relatively the same. Salesforce.com was founded in 1999 and really started to gain traction in 2001 so let’s say they have worked 7 years to get to this point. It does seem that there is a difference in the profit model for pure-plays versus more traditional vendors. It’s not surprising though, if you look at the differences. SaaS vendors, at least the larger ones today, have a large investment in infrastructure and operations that traditional vendors do not have. That changes the break even point and the profit model. And as a SaaS vendor scales up for more customers they have to continue to invest in infrastructure. This is driven by number of customers, bandwidth and geographic location. Depending on the pricing model, the SaaS vendor would, at some point overcome the investment costs and at least in theory, grow revenue more rapidly than costs...when they reach a certain infrastructure scale level.

Now don’t misunderstand me, I do believe that the value of SaaS deployed software to customers makes a compelling business case. I do believe that SaaS deployed solutions will continue to grow and more and more vendors will start to offer SaaS solutions. But the numbers and the concept makes me wonder if there are some tweaks to the business model that are necessary to build a reasonably profitable business. One thought is that maybe the applications business alone isn’t enough, which would validate Salesforce.com’s platform as a service concept. If they can build an ISV ecosystem that is using their PaaS then they would have a very leveraged source of revenue / profit that could rapidly outpace application revenue...guess we’ll see how that strategy plays out.

The second thought for a new pure-play would be to use an alternate method of gaining the necessary infrastructure. Rather than investing in its own infrastructure up front, use a model where it pays for the use of infrastructure from a third party in a scaleable approach that increases only when the revenue / number of customers increases. This model is currently available from IBM, which already had a size-able infrastructure, and from Microsoft for its distribution partners. This approach could lead to break even / profit much more quickly and at the same time leave the management of the infrastructure to industry giants that have the expertise, the highest level of security, scale, etc.

The last thought I have around this for now is that perhaps the hybrid business model offers a more profitable and more easily scaled model. All of the large vendors are moving to this, mostly because of market pull for them to offer SaaS solutions alongside on-premise software. Certainly I believe this matches the buying / deployment model that we are seeing more and more. Customers are using on-premise for some applications and SaaS for others, this trend started a few years ago and is increasing as more of both types of solutions become SOA enabled (and thus much easier to integrate). It’s still early in the evolution of the business model to tell for sure which answer is the best, but it is an area to be watched.

Salesforce.com buys InStranet

Tuesday, August 19, 2008

Salesforce.com announced today that it acquired knowledge management software vendor InStranet on Aug 4th. This acquisition is interesting for several different reasons. Salesforce.com, who as we know started as a sales force automation (SFA) solution and over time rolled out a full CRM suite, has for the last 2 years, focused its’ efforts on rolling out and growing a platform as a service (PaaS) offering and growing a partner ecosystem. Many analyst believed that they were mostly neglecting their core products to do this. This announcement would seem to contradict that thought, as a KM offering is a key feature to its customer service and support offerings (one could argue a much needed enhancement).

The second reason that this acquisition is interesting is that InStranet is an on premise software vendor. Considering the noise salesforce makes around
, well, it is a bit ironic. To be fair the InStranet management did state up front that InStranet did have a multi-tenant on demand version on the roadmap. Salesforce plans to continue to offer the on premise version and develop a SaaS version that should be released sometime in its FY2010 (Feb 2009 - Jan 2010). Salesforce also plans to continue to support InStranet’s on premise customer base indefinitely.

Partner ecosystems

Monday, August 18, 2008

Let’s face it, the partner model of most large software vendors is in a state of rapid change. There are a host of reasons for this change ranging from the new, emerging business models like SaaS, to simple market economics, but the change is real. I suppose we’ve used the word “ecosystem” off and on for a few years and it definitely falls into the “trendy” word bucket (and we applied the term to everything from customers to partners). Nevertheless, the use of the term seems to fit where we’re going with our view of the software partner program model.

I’ve blogged and talked a bit about P2P networking already so I won’t go back through that topic, but I do want to look at the shift to a vendor led ecosystem. The point to point partner model that is by far the most prevalent one applied to alliances, partners and channels models is becoming much less effective. Several leading software vendors have started using the ecosystem term to describe their partner programs, including SAP. Even more traditional firms like Autodesk are starting to understand that their current models are not as effective as they could be.

So what’s a software ecosystem and why do we care anyway? Wikipedia defines an ecosystem: “denotes the physical and biological components of an environment considered in relation to each other as a unit” This definition starts to get to the importance of the word and what we mean by applying it here. The key to the ecosystem model is “interdependence” (and not codependence, by the way). This is where the P2P effect is most pronounced and programatically the largest change required by most vendors. IBM has a very developed P2P model / program called ValueNet. Other vendors are starting to develop programs that encourage or even facilitate P2P solution development and go-to-market. This interdependence changes the interaction model of the partners and the importance of that interaction. If the success of my business is really tied to the success of several other businesses, and in fact to the success of my customer as well, my priorities have to shift. And this is not just a shift in strategy, my business tactics are also different. My go-to-market plans are different and even my sales compensation models have to change and align with my new business plans.

We’re still in the midst of this shift and will be for some time, but look for this change to accelerate over the next 2-3 years. The partners and vendors that embrace this shift will gain competitive advantage. The ecosystem model will have an added effect of causing partners to coalesce around several large “centers of gravity” as we move to vendor mega-economies around the major software vendors like Oracle, SAP, IBM and Microsoft.

Hybrid Partners?

Thursday, August 7, 2008

In the software partner world there are Value Added Resellers (VARs), distributors and Value Added Distributors (VADs), System Integrators (SIs) and Independent Solution Vendors (ISVs); at least that’s the way the world was organized (and yes, I’m sure there are a few other partner types that I just slighted but you get the idea anyway). In general the roles that each of these partner types played were pretty clear. For example VAR’s sold software and sometimes offered basic services like installation and training; SI’s generally offered more complex implementation and integration consulting; and ISV’s developed and sold software build on a software vendor’s platform.

A funny thing started happening a few years ago and I see it happening more and more often. The traditional lines are eroding and a new partner type (or types??) is emerging. The three business models are, in many cases growing more and more alike. SI’s, for example, under considerable margin pressure over the last several years, are reselling products and also building their own software offerings to give them unique value (often vertical specific value) for their customers AND increase their overall deal margin. VAR’s are adding more and more advanced consulting capabilities to round out their offerings and we are seeing more VAR’s build and sell their own software solutions. This too was a reaction to revenue and margin pressures. the same pressure pushed the ISV’s into expanded offerings as well. The lines are continuing to blur as more hybrid business models emerge. The new partner is much more of a vertical focused 1-stop solution shop.

So how does this play in the P2P networking world that I’ve discussed in some detail? While on the surface the two seem contradictory I don’t believe that is the case. I believe that we are seeing two unique ways to solve the same issue. In the one hand some partners are building off their core competencies and establishing solution networks to provide the 1-stop solution for the customer and on the other, some partners are expanding their core competencies to include the full offering under one roof. It will be interesting to observe these two models over the next few years to see if there is a clear advantage to one or the other.

P2P, Building a solution

Thursday, July 31, 2008

The concepts behind P2P networks are not new, and more progressive partners have used the approach for many years. The term and its more widespread adoption are new as are the software vendor programs that facilitate partners building P2P networks. Most partners in the not so distant past resisted P2P networking, mostly because of the perception that they were giving up some business rather than gaining an advantage. This was especially true of Value Added Resellers (VARs) whose business models often included a smattering of activities ranging from the software sale through SW installation, customer training, light SW customization and tier 1 support. In some ways this “we’ll do anything” attitude was a precursor to providing a full solution.

Now VAR’s are starting to talk P2P and to develop collaborative solutions. This is a significant step and serves customers and the VAR business well. IDC’s research shows that partners that engage in P2P networks increase revenue and profits significantly (Insight, Doc #207912 / Jul 2007, Charting the Partner-to-Partner Business Model: IDC Focus Group Findings, By: Stephen Graham, Darren Bibby, Paul Edwards). So how does a partner build a P2P solution offering and what should the partners involved look for in the relationship? First let’s understand what’s desirable in a P2P network and then we can look at the details. P2P solutions are market (in other words customer) driven. They solve a business problem (or several problems) and are focused on the customer. They are most often focused on an industry vertical (or sub-vertical) and are built to be 90% out of the box solutions. The network then, must provide the necessary components of a full solution; industry vertical software, vertical process knowledge, implementation expertise, customer relationships, etc. What we often see is a combination of a VAR and an ISV...but the network could also include a system integrator if the VAR doesn’t have the vertical process expertise to work through the customer issues.

The key elements of building the successful P2P network are:
-Trust - the network most often evolves from existing relationships
-Legal framework - a trust relationship is not enough, the partnership must be built on a sound legal and formal framework
-Everyone participating in the network must behave like a node, including the vendor.
-Build the partnership on a sound financial basis. It’s essential that all participants clearly understand the financial implications and advantages of the relationship.
-Focus on the customer problem / opportunity.
-Get involved in networks that utilize your core business assets / strengths (which of course presupposes that you know your core strengths)

Software Partner Peer to Peer Networks

Monday July 28, 2008

As we hear more and more dialog around software vendor ecosystems and less about point to point partnerships the need for developing some “best practices” to enable peer to peer (P2P) networking is becoming much more important. Over the last 2 or so years P2P networking has gotten a lot of attention by software vendors, software partners and ultimately software customers. Why all the attention? I think there are several factors that are driving this change in partner go to market strategy, including shrinking profit margins, changes in customer buying behavior and a realization on the part of some partners that P2P networks work directly to increase revenue and margin. Several leading technology research firms have published data that demonstrates the increased business opportunity that results from these networks.

In looking at “best practices” in P2P networking we should look at several different areas. Software vendors have, in some instances provided tools, infrastructure and support for building and operating P2P networks. Third party partner organizations like the International Association of Microsoft Certified Partners (IAMCP) are also providing infrastructure and direct support of P2P networking. There are several good examples of vendors facilitating partner collaboration and joint solution offerings. IBM has a program called ValueNet that was established to provide an online environment for partners to collaborate on joint solution offerings. IBM not only provides the infrastructure but also helps with marketing and business development.

Several vendors are running trials using online communities to help facilitate P2P networking, including using 3D virtual worlds like Second Life. Several leading companies are using or have tried Second Life over the last two years for everything from virtual events and trade shows to partner training. Here’s IBM's current use of Second Life.

P2P networks are here, they’re becoming more sophisticated and are generating strong value for both vendors and the partners involved. Because of their solutions focus they also provide good value for customers, which, after all is the point.