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The Future of Enterprise Software: who gets the power?

I recently attended an industry conference called Software 2007 and was struck by the different approaches articulated and advocated by three very different industry leaders. What stood out from the conference and from the discussions by the leaders of these three companies were the dramatic changes happening in enterprise software. In this column I will use presentations by leaders of SAP (Hasso Plattner), Microsoft (Steve Balmer), and Salesforce.com (Marc Benioff) to explain the nuances that are impacting enterprise software. Each of these companies represents an inflection point of an era. Each of these companies gained leadership by innovating in a specific area that defined its market dominance.

• SAP gained market dominance by creating a complex all encompassing enterprise process environment that gave birth to the tight partnership between enterprise software and systems integrators

• Microsoft transformed the desktop and the office application into a dominant development and runtime platform for the masses

• Salesforce.com took the idea of timesharing applications from the 1960s and 1970s combined with the Application Service Providers (ASP) of the 1990s and brought a new level of commercialization leading to a new generation — software as a service.

All three companies are now at a cross roads. The question in my mind is how will these companies transform themselves to adapt their platforms and strategies for the next generation of computing? We are at a new inflection point for software that will test these and other industry leaders to adapt to the new economic and technological challenges that are starting to impact the market. The speeches by these three executives were emblematic but for what they said and what they did not say.

SAP’s journey to a flexible platform

Let’s start with Hasso Plattner, the co-founder of SAP who has been instrumental in proposing new thinking about enterprise computing. SAP was a revolutionary departure when it sprang onto the market. SAP took the concept of packaged enterprise applications and turned it on its ear. Rather than creating a package with a model for a single industry, SAP created an extremely complex and detailed model-based packaged environment that supported a broad set of enterprise functionality with more depth and breadth than other packages of its day. It offered two innovations – first, its software enforced predefined processes and second, it relied on systems integrators to do the implementation. With predefined processes, customers let SAP determine many of their business processes. Rather than following the traditional approach of owning both the applications and the implementations, SAP partnered with the big systems integrators that it trained to deliver services to its prospective customers. The depth and complexity of the environment combined with the business process reengineering wave catapulted SAP into a leadership role. It was a new and revolutionary model.

Over the years, SAP has moved to create much more than a collection of packaged applications. It has attempted to lead the enterprise software market by creating an underlying enterprise infrastructure — a middleware platform (NetWeaver) to create a platform that would serve a broad partner and customer ecosystem.

Plattner, one of the founders of SAP, is fully aware of the dramatic changes happening in enterprise computing and he is trying to ensure that his creation remains a major player as we move into the later half of the decade. His vision is good. He proposes a next generation platform that includes a modular design where there are exposed interfaces to the more-than-2000 services that define the SAP environment. Each service is a closed black box. The objective is clear: keep the inside functionality intact but make it easier for customers to use the services they need. While the process of modularization will help SAP’s complex development process, it will not dramatically change the complexity of the environment for customers.

While the modularization of SAP is designed to keep current customers leveraging the existing platform, Plattner understands the need to adapt to changing enterprise software requirements. Rather than trying to reconcile the existing platform with a radically new one, a new proposed software as a service model, the foundation for SAP’s future direction, will be targeted at an untapped market for SAP – the mid-market. In addition, he advocates for such innovations as in memory databases, incremental software releases, and a variety of user interfaces and navigation choices. All of these are good ideas and will help SAP to some extent compete in the future.

However, there is a catch. First, SAP’s installed base is a leg iron that will hold the company back. The company’s installed base of customers has invested a fortune in implementing and more importantly customizing its mammoth application environment. Each new release often involves a six months to upgrade, because of the complexity of the environment. This is despite the fact that SAP has done much work over the past decade to add more modularity to its code base. However, at the end of the day, the SAP environment will continue to be a complex and tightly integrated set of capabilities. I am skeptical that SAP can make enough progress in the mid-market with its next generation to make up for the complexity of getting a large installed base to move.

Microsoft: evolution not revolution: can it hold onto the franchise?

Like SAP, Microsoft is at a turning point. It came into the market as a maverick, attacking the status quo by pushing its dozens of office computers off the cliff and establishing its operating system platform as a defacto standard for end users. At the time that Microsoft began its climb; the traditional computing platform was monolithic and inflexible. Microsoft offered a level of accessibility and pricing that helped revolutionize the market. As the years have past, Microsoft has taken advantage of emerging technology trends and has managed to continue to assert its market might into areas ranging from database, to collaboration, and of course the office and windows franchise. But like SAP, Microsoft is at an inflection point.

During his talk, Steve Balmer, Microsoft’s CEO seemed to recognize the impact of this transition time in the industry. Balmer admitted that the company is in the process of an important change. The original desktop-based model is evolving to encompass online services. This is where Balmer departs from some of the upstarts: he predicts that it will not be based on a pure Software as a Service model but rather a software plus services model. It is not surprising that Microsoft holds onto the desktop franchise model for both pragmatic and financial reasons. First, until we have a model where applications that live on the web can be used without connectivity, the desktop model will be essential. But, at the same time, it is clear that Balmer is feeling the pressure of both Google and Salesforce.com. Ironically, both companies look a lot like the Microsoft of the 1980s as it challenged IBM’s dominance in computing.

What will distinguish Microsoft in the emerging world of software? If you listen to Balmer, the differentiation will be on two fronts: providing customers with what he calls the “rich customer experience” – based on the requirement for a familiar and comprehensive end user desktop platform (i.e., Microsoft Office). Integration between Microsoft Office applications and back end applications has been a Microsoft’s objective since the mid-1990s when it began proposing that office applications become the integrated platform for a variety of desktop and server applications. This strategy has continued to evolve. For example, the joint venture with SAP has produced a front end environment called Duet that ties Microsoft applications into SAP’s backend platform. In essence, Office becomes a very rich and very expensive runtime environment for enterprise applications. The next frontier for Microsoft is trying to take this franchise and expand it to process and collaboration. Balmer sees this area as the white space in the market that Microsoft can call its own. Creating an environment that allows for ad hoc business process collaboration between the rich client environment and the backend business applications. Balmer points to the value of SharePoint and Exchange as Microsoft’s foundation platforms for collaborative business process management. And of course, Microsoft hopes to win some of that back-end application business with its Dynamics Platform (including offerings in ERP, CRM, and finance).

Like SAP’s Plattner, Balmer is focusing his strategy on evolution – not revolution. Balmer needs the Microsoft office and windows platform to remain strong and dominant to keep the revenue machine moving in the right direction. A radical departure would not be in the best interest of shareholders.

Salesforce.com’s goal of world dominance

While I saw many direct similarities between the positions of Plattner and Balmer, Marc Benioff comes at the software market from a totally different perspective. Simply put, he has nothing to lose. In 1999, Benioff left a comfortable position at Oracle to make his solo journey in the world of enterprise software. Benioff focused his aim at the idea of “no software” which of course isn’t true – it is very much software – just a different platform and business model. What made the SalesForce.com model was a combination of a different model for software that appealed to smaller companies that were happy not to have to buy a server and worry about support combined with the ease of use and navigation that set this software apart from other low end CRM products such as Act that had dominated the market for years. Without a legacy to protect, Salesforce.com was free to move in a revolutionary direction. Ah, but things have changed since those early revolutionary days. Now that Salesforce.com is a public company with revenues over $500 million, it is a solid and growing presence in the market. Benioff made it very clear in his sales pitch that he wants to follow in the footsteps of Microsoft and begin building a franchise around the Salesforce.com platform.

Watching Benioff at this stage in the company’s evolution was fascinating. The road forward is quite clear: Benioff is encouraging software vendors to build their own software on top of Salesforce.com’s infrastructure (why reinvent the wheel). The benefit to software vendors is clear to him – the vendor does not invest R& D in infrastructure or distribution. The vendor then markets its software from within the Salesforce.com ecosystem and pays a percentage of revenue back to Salesforce.com. The implication is quite significant for the independent software vendor who might use the Salesforce.com development environment including a language that looks like a traditional procedural programming language. It is no coincidence that Benioff’s ambition is to build a platform for computing that would rival Microsoft’s own. The danger, of course, is that Salesforce.com moves to fast out of its niche while reaching for the highest levels of platform leadership. Clearly, Salesforce.com has made a remarkable climb through its business model. However, it is still early days for the Software as a Service model. I expect that the company will face a broad set of competitors – both the traditional platform vendors as well as the revolutionary players who have nothing to lose.

So, who gets the power?

I was struck by the commonality of these three software power houses and how they each see their future. Although no one would mistake SAP with Salesforce.com or Microsoft, the companies are more similar than different. Each has created a dynamic franchise based on shrewd business planning and a little luck. All have recognized the value of their platforms and the potential for world dominance. The same power and depth that has led to their dominance can challenge their future. It is not easy to be revolutionary while keeping an installed base happy.

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