At Oracle Open World

Open World most resembles Forrest Gump’s box of chocolates in that there is such variety that you never know what to expect.  At any moment there is equal probability that you will be dazzled, challenged, delighted and perplexed.

This being journalism, perplexity reins as a dominant topic and perhaps the most perplexing thing about the meeting is the show floor which includes large booths from the heavyweights in the industry a.k.a. Oracle’s greatest competition and greatest customers, for example, SAP and Microsoft.  Salesforce.com’s booth sits long and narrow moored on the show floor like an aircraft carrier in a crowded harbor.

By the time most of you read this Marc Benioff will have spoken and we will at last have an answer to the question haunting the halls of the Moscone Center.  Why would Benioff speak at Open World, the user meeting of one of his staunchest competitors?

You can make all of the arguments you want about how Salesforce relies on the Oracle database to serve its millions of customers, you can invoke arcane game theory to explain this apparent cooperation among competitors if you like – after all the Nobel Prize in Economics was just awarded to two social scientists who studied this phenomenon.  Still you are left with an irreducible Why?

Benioff speaks at one today and may have an answer.

In CRM kudos have go to Anthony Lye and his team for their top to tail work with the Siebel and CRM On-Demand suites and the dogged determination to prove the necessity – even desirability – of hybrid premise-based and on-demand approaches to CRM.  I will not digress into a discussion of my oft repeated belief that this is a transition state on the way to full Cloud Computing in deference to my hosts and I only wish they would give up the sophomoric assertion that cloud computing is simply vapor.

The CRM team is bristling with innovations for large and small customers –announcing twelve new products, eighty customer driven enhancements, thirty-one new features, a REST API, CRM availability in Microsoft Outlook, and a new Siebel version coming this year.  I think there’s more but maybe my note taking is not so good.

Larry Ellison spoke on Sunday night — a cameo in Scott McNealy’s keynote.  Ellison made the expected and highly believable statements that rather than letting Sun sink into the, uhh sunset, once the merger is completed, Oracle would increase its investments in Sun systems beyond the hefty investments that Sun had been making.

Oracle’s stewardship of PeopleSoft, J.D. Edwards, Siebel and fifty-five other acquisitions (according to Safra Catz) provide the needed street cred here.  Ellison even had fun poking IBM about an internal program they call Sunset reminding all that one man’s sunset was another’s sunrise.  He then proceeded to announce significant benchmark superiority over Big Blue.  Some things don’t change, benchmark competition is one of them.

But Sunday was McNealy’s time to shine.  The justifiably proud Sun CEO rattled off a slew of Sun’s leading innovations in CPUs, memory and file management, operating systems, and, of course, JAVA.  Many of us forget how many devices run on JAVA code — without any “JAVA inside” branding — but it’s a lot and McNealy was happy to provide a glimpse.

Ellison will speak on Wednesday to conclude the meeting and my contacts keep telling me that my questions such as those about integrating the sprawling software suite will gain clarity then.  We’ll see.

Perhaps the most interesting moment of the show for me so far came on Sunday at the end of McNealy’s speech.  He showed a slide meant to sum up his experience at Sun as well as the operating philosophy the company has been run by.  The slide said we (Sun),

Kicked butt

Had fun

Didn’t cheat

Loved our customers and

Made money

(I am not a hundred percent on the last bullet, note taking again.)

McNealy concluded by saying of the merger of Sun and Oracle, “Larry’s going to like his new toy.”  The statement immediately put me in mind of Newton’s famous summation of his own career when he said near the end of his life:

“I do not know what I may appear to the world, but to myself I seem to have been only like a boy playing on the sea-shore, and diverting myself in now and then finding a smoother pebble or a prettier shell than ordinary, whilst the great ocean of truth lay all undiscovered before me.

I can’t think of a better description of why these very bright people work so hard to make electrons dance.  Sure, it’s profitable but at the end of the day it’s even better if the ride has been fun.

What is on-demand?

I have an on-going conversation with an industry executive about the nature of on-demand, SaaS and Cloud Computing.  The central question is what is it exactly?  Our conversation is always thought provoking and I come away from it with at least some additional perspective.  Some times I think the discussion is incredibly philosophical like the question about a tree falling in the forest — does it make a sound if no one is there to witness it?

I was always flummoxed by the tree question.  Of course it makes a sound I thought.  But then my kids, who are musicians, explained to me that sound is the perception of certain energy waves emitted by the falling tree.  Kids!  When the tree falls it certainly makes those waves but unless an ear and therefore a person or some other animal is there to hear it the energy is never converted into sound.

So my conversation with the executive goes like that.  Is SaaS just application hosting with delivery through the Internet?  Is it SaaS if the hosting service is completely within the company?  Can a company with such an infrastructure support remote sites that way and claim to have its own cloud?

These are all good questions and they are issues that we are still dealing with.  The SaaS and Cloud Computing market is still so new that there are many issues like this that have not been nailed down yet to everyone’s satisfaction and they may never be.

It is my belief that you can’t separate SaaS or Cloud Computing from a multi-tenant architecture.  Over the years, and as I have written before, the difference between SaaS computing and conventional applications that are hosted have dwindled to a small core largely consisting of the multi-tenant issue.  Initially, conventional applications were client-server and hosting them meant using virtual private networks and high server overhead.  They were definitely not SaaS.

Vendors have done a good job of bringing those client-server applications into the Internet age — the user interfaces run in browsers like SaaS applications do, and some even offer the capability of multi-tenancy.  Some vendors have become good at offering a choice of hosting options to customers, so are then truly SaaS?  Are they candidates for Cloud Computing?

The answer is complicated, like the issue of sound and the falling tree.  First things first.  As long as a customer has the option of multi-tenancy then I think it’s not possible to call a solution SaaS or Cloud Computing.  In an optional setting like that the vendor still has to manage and maintain multiple versions of the application and with that comes all of the overhead and complexity of conventional computing.

Ironically, a vendor who offers the same software as both single-tenant and multi-tenant instances straddles definitions.  A customer using that software as a service in a multi-tenant mode is using a SaaS solution.  But a customer using the same software tucked behind another company’s firewall in single tenant mode is simply using a conventional solution and the same can be said of a company using a single-tenant solution in some other data center — that’s just facilities management.

As for Cloud Computing, I think it’s not possible for a company to have a private cloud.  A private cloud is like an old cell phone gathering dust on a shelf somewhere.  The very idea of the cloud is of a network, a communally accessed resource for accomplishing a growing list of personal and business pursuits.

I suppose a company could have and make good use of a private section of the cloud but there is a big difference here.  Private clouds imply many incompatible little networks and what good is that?  Recall that Metcalfe’s law says that the value of a network is proportional to the square of the number of connected users.

But I think the best way to come to terms with SaaS and conventional computing is through the business model.  True multi-tenant SaaS leaves the user completely unconcerned about the nitty-gritty of system ownership — the licenses, the versions, the compatibility, the hardware capacities — all of that is hidden and immaterial to user decisions about provisioning.

The multi-tenant SaaS business model is simpler and much less costly and for that reason it is catching on globally, especially in places where infrastructure costs are simply not affordable.  More importantly, though, it’s clear that multi-tenancy is the new standard because the business model is a better fit for the times and for the growing world market.

I expect that single-tenant solutions that look very SaaS-like will be around for a long time for several reasons.  Most importantly, there is customer demand — some customers are still not on board with the idea of multi-tenancy either for personal reasons or because of various restrictions.  Second, many vendors have not yet converted their technology and so they will continue selling what they have.  Third, some vendors’ business models can’t stand the strain of converting — it may still be too early to try to convince investors that a business model shift makes sense.

Business model conversion may prove to be the biggest obstacle.

Salesforce gives a peek at success

Salesforce.com took an interesting step in its evolution as a platform company today.  The company has been in the process of expanding its footprint over the last few years moving from an on-demand application for front office business practices to a Cloud Computing Platform with the intent of moving enterprise computing from the glass room to the Internet.  (They have also repeatedly added that they have no intention of exiting the CRM business.) Today they pushed further down that path with an analyst-only briefing featuring one of their customers — Fort Worth-based 20/20 Companies.

In the set up Salesforce revealed some of the results from an internal customer survey of one thousand randomly selected companies from 25 industries.  Salesforce Vice President of Product Marketing for Force.com, Ariel Kelman, said that 27% of those customers had already built custom applications using Force.com the company’s cloud platform.

There is no way to verify the data but we know that Salesforce is a stickler for accuracy so the claim of nine times faster development and a 58% cost savings average sounded reasonable.  More interesting to me was the statistic that said the average company had built not one but five applications.  Clearly, the first experience was good enough to lead to more.

The top five application areas for the survey group in order were: analytics, project management, contract management, quote/proposal and event management.  The list is pretty long but what strikes me is that the AppExchange has pre-built products in most of the areas surveyed for so some explanation is needed for whether the developments started from scratch or were integrations with existing applications.  For example, the top category, analytics, is not something you’d think that a developer using Force.com would build from nothing.  More data here would be enlightening.

The top five barriers that customers surveyed faced with on-premise development resonate and they include ability to customize processes, lack of IT skills, poor requirements, lack of capital and integration costs.  The whole point of platform computing is to help reduce most of these needs so that, for example, companies that lack skills or capital can take on projects because they require less.

One thing that platform computing won’t help with directly though is the issue of poor requirements gathering.  For as long as there has been software we have lived with poor requirements but the good news might be that with advanced tools, planning can be replaced by iteration.  There is far less pressure to get it right the first time when you can easily make a change.

Then Mark Warren, acting CIO, 20/20 Companies, came on to describe how his team developed a complete order to invoice to payroll application for his company that specializes in high quality marketing and sales services.  The applications were impressive though the cost savings did not reach the 58% that Salesforce had announced.  Warren said his three-year cost for the Salesforce solution was about $1.7 million against the estimated $2.0 million for a .net approach.  Warren indicated that the Salesforce solution took only ten weeks to deliver compared to a .net estimate of six months or possibly more.  So the risk reduction was certainly an issue for Warren.

Finally, Force.com was not the only product in the configuration but this deployment shows how useful the platform was for integration.  In addition to force.com, 20/20 used Data Integrator from Pervasive and Crystal Reports from Business Objects for analytics.

There was no demo though Warren said they had met their objectives with the project.  This was a good first effort by Salesforce to bring to the world some indication of the power and real world capability of Force.com and certainly a customer relating his experience is valuable.  But it would be better in the future if some independent parties got to kick more tires.

Oracle and Salesforce duke it out in service

Market analysis firm IDC figures the market for service and support software will reach $4.2 billion before the end of the first Obama administration.  That’s reason enough for software vendors to want to be all over the market like a cheap suit, like white on rice, like a junkyard dog.  But as the market moves from on premise to on-demand you can expect the revenue potential to go way down.  That’s the beauty of on-demand computing — score one for the customer.

But whether it’s a billion or four, it’s still real money and enough to motivate lots of people’s behaviors so it was no surprise that both Salesforce.com and Oracle shored up their service and support offerings this week.  What was fascinating to me is that despite all the secrecy surrounding each company’s announcement, which I witnessed first hand, the two CRM titans managed to make similar announcements within a day of each other.

I attribute the coincidence to the simple logic of the situation.  Each company has built out very good offerings in sales and marketing and each is making its attempts in social media so it was time that each gave some attention to service and support.

To be rigorously fair, each company has devoted significant time and attention to the subject and each made announcements about intention and direction earlier this year or very late last year so it is no surprise that they decided to redeem their pledges and September is a great time to do just that.  So what’s what and what different?  Well…

Oracle announced integration between Oracle CRM On Demand and InQuira’s Web self-service applications.  The integration lets customers go seamlessly from self-service to live agent-assisted service, according to the press release.  This is a big deal because it enables customers to escalate their service requests and provide the service agent with a warm case full of basic information about the customer and the problem.  This completes a trip started with integration between Inquira and Oracle’s on-premise service and support systems.

Meanwhile on Wednesday, Salesforce redeemed a promise it made when it announced the acquisition of InStranet.  Salesforce said that it has successfully ported the technology to its cloud platform so that its customers can now use all of the cloud platform functionality such as user interface development and customization tools as well as workflow and approvals and its knowledge publishing capability.

To me Oracle’s announcement is more about service – and I think it’s important to tease apart service and support here.  Service being an issue that a customer has that can only be dealt with by the vendor and support falling into the category of how to use/fix a product.  Each is important and this in no way elevates one over the other, it’s just my observation.

Ok, the Oracle scheme takes a customer with a service issue from a self-service modality to an interaction with a live agent while preserving the thread of the interaction.  No more, “Can you give me your account number again?” and hopefully faster more accurate service.

The Salesforce announcement says that customers with how to use/fix issues can access the wisdom of peer users.  This is a good thing and a little brave on the part of companies who use it because it says a lot about the faith they place in their customers and ultimately the confidence they have in their own processes and procedures.  Using social media like Facebook, the Salesforce solution helps companies to gather input from customers and organize it through stack ranking and other crowd sourcing techniques to bubble up answers to customer problems.

Vendors like the Salesforce solution because it has a very low cost profile and customers should like it because it gives them the answers they need much faster.  Vendors should like the Oracle approach for very similar reasons.

Frankly it’s nice to see such heavy investment in customer service and support and the resulting benefits.  I think these announcements say a lot about the relative importance of keeping existing customers happy in today’s economy vs. the never-ending quest for new customers.  It speaks to the growing maturity of the CRM market and the growing clout that customers have.  Good for us.

On another note, Oracle is running a string of successes in CRM.  They’ve made some good numbers recently and they are generating some interesting products.  It has been a few years since Salesforce has been challenged to the degree that Oracle now challenges it.  Nonetheless, in two consecutive weeks with big announcements (last week was contact manager) Salesforce is the common denominator.  Simply put these guys are investing heavily in R&D and they have the goods to show for it and I would give the edge for raw sex-appeal to Salesforce.

But two weeks is just a snapshot.  Oracle Open World is coming in October, and Dreamforce is in November.  Expect some fireworks.

Contact manager competition heats up

There is a lot of unspoken information in last week’s announcements by Sage andSalesforce.com (NYSE: CRM)  about their respective contact managers. Each is creating a disruptive innovation that affects the other, and the symmetry of these dual and dueling announcements is frankly beautiful in a funny way.

To review, Sage announced the 2010 version — with new bells and whistles — of its flagship contact manager ACT!, and a day later Salesforce introduced its Contact Manager Edition (CME). On the surface, it looks more like Sage introduced its routine annual update and no more, while Salesforce jumped into a new market. However, if you look closer at the two situations you might get a different impression.

Price Competition

For a long time, Sage has been adding functionality to ACT! that has made it a very powerful and complete contact manager, and some would say that it crosses the line into SFA (sales force automation). If that’s so, then Sage has a major price advantage in the SFA market and can steal SFA business from any number of vendors, including Salesforce.

However, Salesforce’s CME announcement does to Sage what Sage has been doing for quite a while to SFA vendors. At a mere US$9 per month per seat, Salesforce CME is a no-brainer for individuals and entrepreneurs who want to keep track of customer information on-demand but whose businesses are small and do not require all of the functionality of CRM. ACT! could fit the same need and usually does, but now there’s price competition.

Both companies face other competition from vendors like Microsoft(Nasdaq: MSFT)  and Outlook, which is a virtually free, though limited, repository of basic contact information. But for our analysis, a customer still using Outlook or Apple’s (Nasdaq: AAPL)  Address Book is outside of the discussion.

Market Disruptors

In The Innovator’s Dilemma, Clayton Christenson described the phenomenon of disruptive innovation in which a new entrant to a market disrupts a well-established vendor by providing a stripped-down product at a lower cost. The reasoning is that the established product vendor has, over time and because of increasingly demanding customers, over-engineered a product to meet the needs of the most demanding users. The disruptor enters the market with the advantage of having a smaller product that meets the needs of a large segment of the population and an upper price limit of the established vendor.

It is never a problem for the challenger to make money below the cost level of the incumbent, and frequently the incumbent flees the lower end of the market to chase the more profitable customers up market. That’s what Salesforce did to Siebel and what it is attempting to do with Sage right now in the contact manager space. However, Sage is more or less doing the same thing in SFA. ACT! is not a full-function SFA product, but it has a lower price point than even a Salesforce, Oracle (Nasdaq: ORCL) , Siebel or NetSuite subscription, and it offers a lot of functionality that many SFA customers might find adequate.

There are many complications having to do with the idea of product line cannibalization — each company has an SFA/CRM product with better margins to protect, for example. So Salesforce limits its CME offering to two users; if you need more, you need SFA, they believe. The same is true for Sage. SalesLogix is their full-function CRM package with SFA. So neither company can swing for the fences with their disruptive innovation strategies. Success for either of them at the low end would result in some takeaway business from the other guy, but it would likely hurt the house brand SFA too.

Room for a Third?

There is a danger in this thinking because it leaves the way open for a third competitor to enter the fray unencumbered by a need to protect an up market product. I am not sure such a vendor exists — at some point you get to the top of the food chain. Nothing hunts lions other than humans, but that’s a different story.

It’s hard to say which vendor has an advantage. Salesforce has well over 1 million seats deployed, and ACT! has about 2.9 million licenses under maintenance contract. Salesforce is a sales  and marketing juggernaut, and Sage sells through a channel that is the envy of many vendors in the space.

This situation is the picture of yin and yang and should be entertaining to watch. Meanwhile, the competition definitely benefits the customer.

Contact management war revival

Two days in, September has been a busy month for contact managers.  I haven’t seen this much activity in years.  On September 1, Sage announced its ACT! 2010 release and then Salesforce.com dropped a small bomb — as of today they’re into the contact manager space too.

Contact management has been a poor cousin to sales force automation (SFA) for many years.  Initially, there wasn’t much difference between the two.  Contact managers were sort of a subset of SFA which tracks deals, opportunities and leads as well as contacts.  For many sales people, the choice — if the choice was theirs to make and not the company’s — was largely one of work style.  You could organize your work around the stair-step categories or just glom it all together in a contact manager through your own system of user defined fields and notes.

Real SFA also offers the important ability to connect to the broader CRM suite thus making the information collected by the sales person more useful and available to the rest of the company.

The two announcements — so far — this week blur some distinctions and to a degree trade roles of the leading vendors.  Sage has been around for a long time and ACT! has gone through several ownership changes but has resided with Sage for many years.  The ACT! 2010 release is a luxury edition, if you can call it that, which includes integration with Facebook, Twitter, LinkedIn and Plaxo.  Sage has also introduced an optional integrated subscription-based E-marketing service, a very nice and new user interface and fully customizable opportunities to support multiple sales models.

All told, this isn’t the stripped down contact manager that was introduced in the late 1980s and you might quibble about whether ACT! 2010 is really a contact manager or if it has crossed the line into SFA territory.  I don’t know.  I am a realist and not too interested in theoretical issues like that.

Interestingly, Sage went out of its way to benchmark the new UI with a Keystroke Level Modeling study conducted by Measuring Usability, LLC.  The company claims in its press release that the new UI achieves up to 35% better productivity than competing products.  Clearly the company invested significantly in the new release to send a message to its 2.9 million users and any competitors, that contact management is a viable category and one that it intends to compete aggressively for.

You could say similar things about Salesforce.com today.  The company had been testing a small version of its SFA product for some time and the announcement of its Contact Manager Edition culminates that process.  There are several advantages that Salesforce brings to the table with its approach including its increasingly popular Cloud Computing Platform and easy migration to full CRM capabilities if and when the customer chooses.

How much upgrade or up sell business Salesforce generates over time is a question without an answer now.  Contact managers tend to support two very different segments — small users like entrepreneurs who intend to stay small and for whom CRM would be overkill and large sales groups that are disconnected for many reasons from the rest of the company.

The later group might include the sales team of a partner in an indirect channel, for example.  Such groups rely on internal lead generation and OEM marketing programs that are fairly detached from day to day selling.  I am not saying this is a good idea, just reality.  The first group, entrepreneurs and similar people, keep their own counsel and may not do much formal marketing preferring instead personal relationships, so they don’t need CRM.

Nonetheless, the recent announcements by Sage and Salesforce serve to blur many distinctions.  ACT! is a high-end contact manager these days capable of taking on some of the less complex SFA functions and Salesforce, with its upward compatibility now reaches from the smallest to the biggest users.  Salesforce may have an advantage in pricing at nine dollars per seat/month but at that level the cost differential is much less than a daily latte and I doubt it will affect many buying decisions.

NetSuite summer announcement

The headline on the press release read: “NetSuite Offers Sage Partners Major Incentives to Begin Growing their Business on the NetSuite Cloud” and I figured, it must be summer.  For the last few years, Sage has announced an offer like this.  For the last couple of years it was a take away program for salesforce.com customers.

I like NetSuite, they offer a good package of ERP and CRM software delivered as a SaaS service.  They’ve made a lot of smart moves in the last couple of years including their IPO (which was not just smart but brilliant) and an apparent decision to move up market from their original SMB focus.

Going after larger companies made sense because I think NetSuite found out that their then target market didn’t have all of the resources — human and financial — needed to implement such an all-encompassing suite of software.  Though the product is good, any ERP implementation comes with a great deal of thought work that’s needed to rationalize business processes before automating them.  I think some small companies just choke on the effort.

Now it looks like NetSuite is trying to go after the SMB space again, this time with a full court press on Sage’s partners.  Just as I like NetSuite I like Sage too.  As a company Sage certainly has product and partner issues, but any company does.  What’s interesting to me about the NetSuite PR is the hyperbole it exudes.

Though the PR has several quotes from Sage partner take-aways the text is over the top.  One paragraph starts with, “NetSuite expects this program will find a warm reception in a Sage channel partner community wracked with fear, uncertainty and doubt about the future of on-premise applications…”

Wracked with fear?  Really?

I have to say I used to wonder about Sage too and about when they’d get their SaaS act together.  They’ve been late to the party, but not AWOL, they have products, especially in the CRM world.  Lately, though, I’ve concluded that Sage might know something about the space that I’ve been missing.  It’s a rather conservative market from the perspective of new product adoption.

The obvious success of SaaS in CRM may be enough to move the ERP partners but maybe not.  Undoubtedly some will move, the PR is proof of that.  But building a successful partner program is something that takes a great deal of investment in time and money.  And although NetSuite has been in the partner business for some time already, I think they’ll have to execute very well to make in-roads here.  It’s a conservative market and it’s summer.  In a recession.

As the Zen master says in an old joke, “We’ll see.”

Commoditization

Dan Jenkins, a venerable writer for Sports Illustrated and author of many novels about sport (he wrote Semi-tough, for example), coined one of my all time favorite Texas-isms.  It was a beautiful way of describing something just bordering on impossible.  In one of his books a character says that something is “Tougher than rent and alimony.”  I have long ago lost the context but even today rent and alimony are my acid test of true difficulty.

I never thought it would be possible to exceed rent and alimony for their sheer descriptive power and I believe that time will bear me out.  But to that nifty phrase, I feel compelled to add another idea because it is my observation that there is nothing more difficult than watching a product line commoditize knowing full well that your company must change while being totally unable to.  If nothing else, rent and alimony wins on brevity.

If change was easy in business, then everyone would be doing it but the fact is that it is a Herculean task.  Why else would so many major software companies watch as on-demand technology got better and better while doing nothing or next to nothing to embrace the new delivery model?

I suspect that making the technical argument for change is the easy part of the equation and the hardest part is dealing with shareholders.  As shareholders — and we are all shareholders — we play an interesting game of self-deception.  We intuitively know when change is needed but, nonetheless, we also know that often times, stock in a public company would crater if the market determined that a company’s business model was to suddenly change so that it would make less on purpose.

Far better to let the air out of the balloon in a slow deflation than in a burst.  In a deflation we all play a game of false hope, maybe the balloon will magically re-inflate, maybe we can break even and get our money back — maybe, baby.  In reality it is a one-way trip to exhaustion.  Rather than taking the decisive steps needed to save the company, albeit as a reduced revenue machine, we persevere tinkering with the old products and old business model hoping to forestall the inevitable.  More nimble competitors nibble at our undersides.

There are any number of examples today of companies or even whole industries that could greatly benefit from changing business models despite the negative potential for their share prices.  The first is the newspaper industry.  We are at a silly point in the evolution of news delivery where papers are owned by large corporations that seem to want to protect their business models more than their businesses.

Newspaper readership is in decline in America (though not elsewhere) and parent corporations are nonetheless loath to do anything to change the model of printing the news.  They give away their content on the Web afraid of charging for it despite the evidence that doing so can be profitable (the Wall Street Journal) and that recent surveys show readers are more than willing to pay for content delivered electronically.

I hear the loudest analysts say that electronic content delivery would not replace the revenues from print, but I hear very little about cost reductions in labor, transportation and printing.  There is a solution to this, which is to simply wait until the print news business further deteriorates.  Then some of the largest newspaper corporations might qualify for a federal bailout or the further reduced projected revenues of dying business might balance out with the prospects of the new paradigm.  Conversion would then become a “no-brainer” with no irony intended.

The second example is the software industry and I fear that the American software industry — the jewel in our high-tech crown — might go the way of newspapers.  For despite the fact that we have wonderful examples of forward looking companies like Salesforce.com, NetSuite, RightNow, Google, Facebook and hundreds of others crafting the software paradigm of the twenty-first century we still have too many conventional software companies watching their stock prices.

The conventional companies are big and form the backbone of global computing.  They have names like Oracle, SAP and Microsoft and while some are making good efforts to convert their business models, the tasks are great and some have barely started.  Kudos to Oracle and Microsoft for increasingly offering SaaS solutions.  You can debate whether their solutions go far enough or if they are simply extending the old paradigm but they are making progress.

Microsoft worries me at the operating system and office automation products levels though.  Google’s announcement that it was building a stripped-down operating system that gives small computers just enough functionality to get to the Internet is brilliant though it remains to be seen whether they can deliver.  Microsoft now finds itself on the other side of an equation from its position as the disrupter of mainframe markets.  In the 1980’s we were told that nothing had the power to stop mainframe computing but somehow client-server networks took over.

At risk is Microsoft’s deep penetration in desktop operating systems and office products.  Google has a plan to deliver it all over the Internet — free — which could be a big problem for Redmond.  Of course Google has to deliver but the sheer number of vendors in the SaaS space means that even if Google fails in the attempt, there will be other challengers.  It’s not impossible, but it is rather hard to beat free, so what does Microsoft do?  Wait for the threat to materialize or take action?

The standard playbook says stand pat but as playbooks go it has a disastrous track record.  Time, as they say at Apple, to think different.

Words of wisdom

“If you can’t make money at it, you don’t have a business, you’ve got a hobby.”

Words of wisdom from my dad.

I was surprised by the mini-storm that blew up over Salesforce’s apparent decision to charge ISVs, SIs and other forms of developers for support using their development environment.  Two primary arguments have cropped up, one that support ought to be free and the other that it’s hard to make money if you can’t charge 22% for service.

OK, let’s tease these things apart.  Free support is a good and noble idea and it is encompassed in the basic premise of on-demand or cloud computing or SaaS or whatever you choose to call it.  Subscribe to the application service and you have the right to call in as many times as you want to ask dumb and not-so dumb questions.  In Salesforce’s case, they won’t tell you how to sell but they will help you untangle the differences between leads, contacts and opportunities.  Then they will probably direct you to some of their basic level training.  That’s only fair.

Salesforce, as we all know, also has this on-demand development environment and with it you can build any number of database applications and reports or integrate with whatever else there is in the universe.  At that level, you are playing with the innards and you are dealing with an application that the vendor — i.e. Salesforce — has no control over.  It’s like me putting a turbo on my Honda.  I am free to do that but, understandably, my dealer won’t be happy to see me and all warranties on the power train would, I am sure, be toast.  From then on, if I need to get anything fixed I will probably become a regular caller at Tom and Ray’s NPR show, “Car Talk”.

It seems to me that charging for support when people are using the development environment to make new applications or even new functionality is like putting the turbo on my Honda and it is fair (though I might quibble with the pricing structure).  Supporting smart people building applications in this new environment requires smart people, gear and real estate on the other side.  That has to be paid for.

Now, as far as pricing is concerned, I do believe they (Salesforce) need more than pricing for levels of service and response time.  They also need to build out a matrix for small, medium and big developer customers.  That’s only fair given that the more developers you have the more support you’ll need.  Spare me the argument that your developers are smarter than mine.  Sheesh!

Finally, my friend Barney Beal wrote recently that “Oracle CEO Larry Ellison and many an SAP executive have long maintained that the SaaS business model can be very difficult to turn a profit with. One would imagine it’s especially difficult if you can’t charge those maintenance fees of 22% of net licensing…”

That’s true as far as it goes but keep in mind that even though Salesforce is now a successful CRM provider, making a few bucks, the company is a neophyte in the application tools business.  It gets confusing because it’s all one company but if Salesforce CRM was a distinct entity from Salesforce the tools and hosting company, I think most people would not expect the nascent company to be profitable.  In company and category building eras, few companies make money though many are cash flow positive.  Oracle and SAP didn’t make a ton of money when they were new either.

Last point, it’s especially hard for conventional software companies to make a profit in on-demand but there are different reasons for that which include fundamentally different business paradigms.  Conventional companies are bloated compared with the on-demand companies that I have seen.  Their structural costs are higher.  I find the whole idea that on-demand companies can’t be profitable to be nothing more than the wrong paradigms are being applied.

So all of this brings be back to dear old dad — you have to make a profit.  I don’t have a problem with what Salesforce is doing as long as there is adequate value being exchanged.  Of course I am just an analyst in all this.  No customer likes a price increase or the imposition of a fee when something had been free and some feathers may need to be smoothed here.  Because the other thing you need to have to call yourself a business and not just a hobby is happy customers.

Salesforce charges partners for service

Effective May 1, 2009 and with a 60 day grace period, Salesforce.com will begin charging its developer partners for support.  I have not seen a press release but I have a data sheet on the offering. 

Some people have questions, mostly of the “Is this appropriate?” variety.

I think it is provided there is adequate value exchanged and that remains to be proven.  But generally, developers and partners are usually well versed in the basics of the technology.  Their questions tend to go deep into the bowels of the beast and for that reason a company like Salesforce needs to staff up with smart professionals who know the product and its limitations at a deep level.  That’s a service worth paying for.

The grace period starts today and the fees start July 1, 2009.  There will be three levels of service — Partner Premier, Partner Basic, Single Cases and Community.  Fees range from free to $24,000.

As a practical business issue, the charge for this kind of service is simply a cost of doing business and the target audience, ISVs and Systems Integrators/Consulting Partners will use the information they receive from the program to serve customers and generate revenue.

I suspect that there will be some complaining about the new fees, but who wouldn’t charge for such a service?  I can see a point if a small partner needs fast turnarounds on some questions but doesn’t have the ability to pay the premium price.  Some pricing brackets may be needed simply because larger partners are likely to use services more frequently than smaller partners.

These fees are ultimately a good idea and they may encourage the target audience to get training for their personnel.  Perhaps they will be able to lower their dependence on support services with more training and that would be a good thing for all parties.