Predictions for 2011: getting ready to compete in real time

2010 was a transition year for the tech sector. It was the year when cloud suddenly began to look realistic to the large companies that had scorned it. It was the year when social media suddenly became serious business. And it was the year when hardware and software were being united as a platform – something like in the old mainframe days – but different because of high-level interfaces and modularity. There were also important trends starting to emerge like the important of managing information across both the enterprise and among partners and suppliers. Competition for ownership of the enterprise software ecosystem headed up as did the leadership of the emerging cloud computing ecosystem.

So, what do I predict for this coming year? While at the outset it might look like 2011 will be a continuation of what has been happening this year, I think there will be some important changes that will impact the world of enterprise software for the rest of the decade.

First, I think it is going to be a very big year for acquisitions. Now I have said that before and I will say it again. The software market is consolidating around major players that need to fill out their software infrastructure in order to compete. It will come as no surprise if HP begins to purchase software companies if it intends to compete with IBM and Oracle on the software front.  But IBM, Oracle, SAP, and Microsoft will not sit still either.  All these companies will purchase the incremental technology companies they need to compete and expand their share of wallet with their customers.

This will be a transitional year for the up and coming players like Google, Amazon, Netflix, Salesforce.com, and others that haven’t hit the radar yet.  These companies are plotting their own strategies to gain leadership. These companies will continue to push the boundaries in search of dominance.  As they push up market as they grab market share, they will face the familiar problem of being able to support customers who will expect them to act like adults.

Customer support, in fact, will bubble to the top of the issues for emerging as well as established companies in the enterprise space – especially as cloud computing becomes a well-established distribution and delivery platform for computing.  All these companies, whether well established or startups will have to balance the requirements to provide sophisticated customer support with the need to make profit.  This will impact everything from license and maintenance revenue to how companies will charge for consulting and support services.

But what are customers be looking for in 2011? Customers are always looking to reduce their IT expenses – that is a given. However, the major change in 2011 will be the need to innovative based on customer facing initiatives.  Of course, the idea of focusing on customer facing software itself isn’t new there are some subtle changes.  The new initiatives are based on leveraging social networking from a secure perspective to both drive business traffic, anticipate customer needs and issues before they become issues.  Companies will spend money innovating on customer relationships.

Cloud Computing is the other issue in 2011. While it was clearly a major differentiator in 2010, the cloud will take an important leap forward in 2011.  While companies were testing the water this year, next year, companies will be looking at best practices in cloud computing.  2011 will be there year where customers are going to focus on three key issues: data integration across public, private, and data centers, manageability both in terms of workload optimization, security, and overall performance.  The vendors that can demonstrate that they can provide the right level of service across cloud-based services will win significant business. These vendors will increasingly focus on expanding their partner ecosystem as a way to lock in customers to their cloud platform.

Most importantly, 2011 will be the year of analytics.  The technology industry continues to provide data at an accelerated pace never seen before. But what can we do with this data? What does it mean in organizations’ ability to make better business decisions and to prepare for an unpredictable future?  The traditional warehouse simply is too slow to be effective. 2011 will be the year where predictive analytics and information management overall will emerge as among the hottest and most important initiatives.

Now I know that we all like lists, so I will take what I’ve just said and put them into my top ten predictions:

1. Both today’s market leaders and upstarts are going to continue to acquire assets to become more competitive.  Many emerging startups will be scooped up before they see the light of day. At the same time, there will be almost as many startups emerge as we saw in the dot-com era.

2. Hardware will continue to evolve in a new way. The market will move away from hardware as a commodity. The hardware platform in 2010 will be differentiated based on software and packaging. 2010 will be the year of smart hardware packaged with enterprise software, often as appliances.

3. Cloud computing models will put extreme pressure on everything from software license and maintenance pricing to customer support. Integration between different cloud computing models will be front and center. The cloud model is moving out of risk adverse pilots to serious deployments. Best practices will emerge as a major issue for customers that see the cloud as a way to boost innovation and the rate of change.

4. Managing highly distributed services in a compliant and predictable manner will take center stage. Service management and service level agreements across cloud and on-premises environments will become a prerequisite for buyers.

5. Security software will be redefined based on challenges of customer facing initiatives and the need to more aggressively open the corporate environment to support a constantly morphing relationship with customers, partners, and suppliers.

6. The fear of lock in will reach a fever pitch in 2011. SaaS vendors will increasingly add functionality to tighten their grip on customers.  Traditional vendors will purchase more of the components to support the lifecycle needs of customers.  How can everything be integrated from a business process and data integration standpoint and still allow for portability? Today, the answers are not there.

7. The definition of an application is changing. The traditional view that the packaged application is hermetically sealed is going away. More of the new packaged applications will be based on service orientation based on best practices. These applications will be parameter-driven so that they can be changed in real time. And yes, Service Oriented Architectures (SOA) didn’t die after all.

8. Social networking grows up and will be become business social networks. These initiatives will be driven by line of business executives as a way to engage with customers and employees, gain insights into trends, to fix problems before they become widespread. Companies will leverage social networking to enhance agility and new business models.

9. Managing end points will be one of the key technology drivers in 2011. Smart phones, sensors, and tablet computers are refining what computing means. It will drive the requirement for a new approach to role and process based security.

10. Data management and predictive analytics will explode based on both the need to understand traditional information and the need to manage data coming from new sales and communications channels.

The bottom line is that 2011 will be the year where the seeds that have been planted over the last few years are now ready to become the drivers of a new generation of innovation and business change. Put together everything from the flexibility of service orientation, business process management innovation, the wide-spread impact of social and collaborative networks, the new delivery and deployment models of the cloud. Now apply tools to harness these environments like service management, new security platforms, and analytics. From my view, innovative companies are grabbing the threads of technology and focusing on outcomes. 2011 is going to be an important transition year. The corporations that get this right and transform themselves so that they are ready to change on a dime can win – even if they are smaller than their competitors.

Eight things that changed since we wrote Cloud Computing for Dummies

I admit that I haven’t written a blog in more than three months — but I do have a good reason. I just finished writing my latest book — not a Dummies book this time. It will be my first business book based on almost three decades in the computer industry. Once I know the publication date I will tell you a lot more about it. But as I was finishing this book I was thinking about my last book, Cloud Computing for Dummies that was published almost two years ago.  As this anniversary approaches I thought it was appropriate to take a look back at what has changed.  I could probably go on for quite a while talking about how little information was available at that point and how few CIOs were willing to talk about or even consider cloud computing as a strategy. But that’s old news.  I decided that it would be most interesting to focus on eight of the changes that I have seen in this fast-moving market over the past two years.

Change One: IT is now on board with cloud computing. Cloud Computing has moved from a reaction to sluggish IT departments to a business strategy involving both business and technology leaders.  A few years ago, business leaders were reading about Amazon and Google in business magazines. They knew little about what was behind the hype. They focused on the fact that these early cloud pioneers seemed to be efficient at making cloud capability available on demand. No paperwork and no waiting for the procurement department to process an order. Two years ago IT leaders tried to pretend that cloud computing was  passing fad that would disappear.  Now I am finding that IT is treating cloud computing as a center piece of their future strategies — even if they are only testing the waters.

Change Two: enterprise computing vendors are all in with both private and public cloud offerings. Two years ago most traditional IT vendors did not pay too much attention to the cloud.  Today, most hardware, software, and services vendors have jumped on the bandwagon. They all have cloud computing strategies.  Most of these vendors are clearly focused on a private cloud strategy. However, many are beginning to offer specialized public cloud services with a focus on security and manageability. These vendors are melding all types of cloud services — public, private, and hybrid into interesting and sometimes compelling offerings.

Change Three: Service Orientation will make cloud computing successful. Service Orientation was hot two years ago. The huge hype behind cloud computing led many pundits to proclaim that Service Oriented Architectures was dead and gone. In fact, cloud vendors that are succeeding are those that are building true business services without dependencies that can migrate between public, private and hybrid clouds have a competitive advantage.

Change Four: System Vendors are banking on integration. Does a cloud really need hardware? The dialog only two years ago surrounded the contention that clouds meant no hardware would be necessary. What a difference a few years can make. The emphasis coming primarily from the major systems vendors is that hardware indeed matters. These vendors are integrating cloud infrastructure services with their hardware.

Change Five: Cloud Security takes center stage. Yes, cloud security was a huge topic two years ago but the dialog is beginning to change. There are three conversations that I am hearing. First, cloud security is a huge issue that is holding back widespread adoption. Second, there are well designed software and hardware offerings that can make cloud computing safe. Third, public clouds are just as secure as a an internal data center because these vendors have more security experts than any traditional data center. In addition, a large number of venture backed cloud security companies are entering the market with new and quite compelling value propositions.

Change Six: Cloud Service Level Management is a  primary customer concern. Two years ago no one our team interviewed for Cloud Computing for Dummies connected service level management with cloud computing.   Now that customers are seriously planning for wide spread adoption of cloud computing they are seriously examining their required level of service for cloud computing. IT managers are reading the service level agreements from public cloud vendors and Software as a Service vendors carefully. They are looking beyond the service level for a single service and beginning to think about the overall service level across their own data centers as well as the other cloud services they intend to use.

Change Seven: IT cares most about service automation. No, automation in the data center is not new; it has been an important consideration for years. However, what is new is that IT management is looking at the cloud not just to avoid the costs of purchasing hardware. They are automation of both routine functions as well as business processes as the primary benefit of cloud computing. In the long run, IT management intends to focus on automation and reduce hardware to interchanagable commodities.

Change Eight: Cloud computing moves to the front office. Two years ago IT and business leaders saw cloud computing as a way to improve back office efficiency. This is beginning to change. With the flexibility of cloud computing, management is now looking at the potential for to quickly innovate business processes that touch partners and customers.

The lock-in risks of Software as a Service

I started thinking a lot about software as a service environments and what this really means to customers.  I was talking to a CIO of a medium sized company the other day. His company is a customer of a major SaaS vendor (he didn’t want me to name the company). In the beginning things were quite good. The application is relatively easy to navigate and sales people were satisfied with the functionality. However, there was a problem. The use of this SaaS application was actually getting more complicated than the CIO had anticipated.  First, the company had discovered that they were locked into a three-year contract to support 450 sales people.  In addition, over the first several years of use, the company had hired a consultant to customize the workflow within the application.

So, what was the problem?  The CIO was increasingly alarmed about three issues:

• The lack of elasticity. If the company suddenly had a bad quarter and wanted to reduce the number of licenses supported, they would be out of luck. One of the key promises of cloud computing and SaaS just went out the window.
• High costs of the services model. It occurred to the CIO that the company was paying a lot more to support the SaaS application than it would have cost to buy an on premise CRM application. While there were many benefits to the reduced hardware and support requirements, the CIO was starting to wonder if the costs were justified.  Did the company really do the analysis to determine the long-term cost/benefit of cloud?  How would he be able to explain the long- term ramifications of budget increases that he expects will come to the CFO? It is not a conversation that he is looking forward to having.
• No exit strategy. Given the amount of customization that the company has invested in, it is becoming increasingly clear that there is no easy answer – and no free lunch. One of the reasons that the company had decided to implement SaaS was the assumption that it would be possible to migrate from one SaaS application to another.  However, while it might be possible to migrate basic data from a SaaS application, it is almost impossible to migrate the process information. Shouldn’t there be a different approach to integration in clouds than for on premise?

The bottom line is that Software as a Service has many benefits in terms of more rapid deployment, initial savings in hardware and support services, and ease of access for a highly distributed workforce.  However, there are complications that are important to take into account.  Many SaaS vendors, like their counterparts in the on-premise world, are looking for long-term agreements and lock-in with customers.  These vendors expect and even encourage customers to customize their implication based on their specific business processes.  There is nothing wrong with this – to make applications like CRM and HR productive they need to reflect a company’s own methods of doing business. However, companies need to understand what they are getting into. It is easy to get caught in the hype of the magic land of SaaS.  As more and more SaaS companies are funded by venture capitalists, it is clear that they will not all survive. What happens to your customized processes and data if the company goes out of business?

It is becoming increasingly clear to me that we need a different approach to integration in the cloud than for on premise. It needs to leverage looser coupling, configurations rather than programmatic integration. We have the opportunity to rethink integration altogether – even for on premise applications.

There is no simple answer to the quandary.  Companies looking to deploy a SaaS application need to do their homework before barreling in.  Understand the risks and rewards. Can you separate out the business process from the basic SaaS application? Do you really want to lock yourself into a vendor you don’t know well? It may not be so easy to free your company, your processes, or your data.

Why we about to move from cloud computing to industrial computing?

I spent the other week at a new conference called Cloud Connect. Being able to spend four days emerged in an industry discussion about cloud computing really allows you to step back and think about where we are with this emerging industry. While it would be possible to write endlessly about all the meeting and conversations I had, you probably wouldn’t have enough time to read all that. So, I’ll spare you and give you the top four things I learned at Cloud Connect. I recommend that you also take a look at Brenda Michelson’s blogs from the event for a lot more detail. I would also refer you to Joe McKendrick’s blog from the event.

1. Customers are still figuring out what Cloud Computing is all about.  For those of us who spend way too many hours on the topic of cloud computing, it is easy to make the assumption that everyone knows what it is all about.  The reality is that most customers do not understand what cloud computing is.  Marcia Kaufman and I conducted a full day workshop called Introduction to Cloud. The more than 60 people who dedicated a full day to a discussion of all aspects of the cloud made it clear to us that they are still figuring out the difference between infrastructure as a service and platform as a service. They are still trying to understand the issues around security and what cloud computing will mean to their jobs.

2. There is a parallel universe out there among people who have been living and breathing cloud computing for the last few years. In their view the questions are very different. The big issues discussed among the well-connected were focused on a few key issues: is there such a thing as a private cloud?; Is Software as a Service really cloud computing? Will we ever have a true segmentation of the cloud computing market?

3. From the vantage point of the market, it is becoming clear that we are about to enter one of those transitional times in this important evolution of computing. Cloud Connect reminded me a lot of the early days of the commercial Unix market. When I attended my first Unix conference in the mid-1980s it was a different experience than going to a conference like Comdex. It was small. I could go and have a conversation with every vendor exhibiting. I had great meetings with true innovators. There was a spirit of change and innovation in the halls. I had the same feeling about the Cloud Connect conference. There were a small number of exhibitors. The key innovators driving the future of the market were there to discuss and debate the future. There was electricity in the air.

4. I also anticipate a change in the direction of cloud computing now that it is about to pass that tipping point. I am a student of history so I look for patterns. When Unix reached the stage where the giants woke up and started seeing huge opportunity, they jumped in with a vengeance. The great but small Unix technology companies were either acquired, got big or went out of business. I think that we are on the cusp of the same situation with cloud computing. IBM, HP, Microsoft, and a vast array of others have seen the future and it is the cloud. This will mean that emerging companies with great technology will have to be both really luck and really smart.

The bottom line is that Cloud Connect represented a seminal moment in cloud computing. There is plenty of fear among customers who are trying to figure out what it will mean to their own data centers. What will the organizational structure of the future look like? They don’t know and they are afraid. The innovative companies are looking at the coming armies of large vendors and are wondering how to keep their differentiation so that they can become the next Google rather than the next company whose name we can’t remember. There was much debate about two important issues: cloud standards and private clouds. Are these issues related? Of course. Standards always become an issue when there is a power grab in a market. If a Google, Microsoft, Amazon, IBM, or an Oracle is able to set the terms for cloud computing, market control can shift over night. Will standard interfaces be able to save the customer? And how about private clouds? Are they real? My observation and contention is that yes, private clouds are real. If you deploy the same automation, provisioning software, and workload management inside a company rather than inside a public cloud it is still a cloud. Ironically, the debate over the private cloud is also about power and position in the market, not about ideology. If a company like Google, Amazon, or name whichever company is your favorite flavor… is able to debunk the private cloud — guess who gets all the money? If you are a large company where IT and the data center is core to how you conduct business — you can and should have a private cloud that you control and manage.

So, after taking a step back I believe that we are witnessing the next generation of computing — the industrialization of computing. It might not be as much fun as the wild west that we are in the midst of right now but it is coming and should be here before we realize that it has happened.

What are the Unanticipated consequences of the cloud – part II

As I was pointing out yesterday, there are many unintended consequences from any emerging technology platform — the cloud will be no exception. So, here are my next three picks for unintended consequences from the evolution of cloud computing:

4. The cloud will disrupt traditional computing sales models. I think that Larry Ellison is right to rant about Cloud Computing. He is clearly aware that if cloud computing becomes the preferred way for customers to purchase software the traditional model of paying maintenance on applications will change dramatically.  Clearly,  vendors can simply roll in the maintenance stream into the per user per month pricing. However, as I pointed out in Part I, prices will inevitably go down as competition for customers expands. There there will come a time when the vast sums of money collected to maintain software versions will seem a bit old fashioned. In fact, that will be one of the most important unintended consequences and will have a very disruptive effect on the economic models of computing. It has the potential to change the power dynamics of the entire hardware and software industries.The winners will be the customers and smart vendors who figure out how to make money without direct maintenance revenue. Like every other unintended consequence there will be new models emerging that will emerge that will make some really cleaver vendors very successful. But don’t ask me what they are. It is just too early to know.

5. The market for managing cloud services will boom. While service management vendors do pretty well today managing data center based systems, the cloud environment will make these vendors king of the hill.  Think about it like this. You are a company that is moving to the cloud. You have seven different software as a service offerings from seven different vendors. You also have a small private cloud that you use to provision critical customer data. You also use a public cloud for some large scale testing. In addition, any new software development is done with a public cloud and then moved into the private cloud when it is completed. Existing workloads like ERP systems and legacy systems of record remain in the data center. All of these components put together are the enterprise computing environment. So, what is the service level of this composite environment? How do you ensure that you are compliant across these environment? Can you ensure security and performance standards? A new generation of products and maybe a new generation of vendors will rake in a lot of cash solving this one.

6. What will processes look like in the cloud. Like data, processes will have to be decoupled from the applications that they are an integral part of the applications of record. Now I don’t expect that we will rip processes out of every system of record. In fact, static systems such as ERP, HR, etc. will have tightly integrated processes. However, the dynamic processes that need to change as the business changes will have to be designed without these constraints. They will become trusted processes — sort of like business services that are codified but can be reconfigured when the business model changes.  This will probably happen anyway with the emergence of Service Oriented Architectures. However, with the flexibility of cloud environment, this trend will accelerate. The need to have independent process and process models may have the potential of creating a brand new market.

I am happy to add more unintended consequences to my top six. Send me your comments and we can start a part III reflecting your ideas.

Ten things I learned while writing Cloud Computing for Dummies

I haven’t written a blog post in quite a while. Yes, I feel bad about that but I think I have a good excuse. I have been hard at work (along with my colleagues Marcia Kaufman, Robin Bloor, and Fern Halper) on Cloud Computing for Dummies. I will admit that we underestimated the effort. We thought that since we had already written Service Oriented Architectures for Dummies — twice; and Service Management for Dummies that Cloud Computing would be relatively easy. It wasn’t. Over the past six months we have learned a lot about the cloud and where it is headed. I thought that rather than try to rewrite the entire book right here I would give you a sense of some of the important things that I have learned. I will hold myself to 10 so that I don’t go overboard!

1. The cloud is both old and new at the same time. It is build on the knowledge and experience of timesharing, Internet services, Application Service Providers, hosting, and managed services. So, it is an evolution, not a revolution.

2. There are lots of shades of gray with cloud segmentation. Yes, there are three buckets that we put clouds into: infrastructure as a service, platform as a service, and software as a service. Now, that’s nice and simple. However, it isn’t because all of these areas are starting to blurr into each other. And, it is even more complicated because there is also business process as a service. This is not a distinct market unto itself – rather it is an important component in the cloud in general.

3. Market leadership is in flux. Six months ago the market place for cloud was fairly easy to figure out. There were companies like Amazon and Google and an assortment of other pure play companies. That landscape is shifting as we speak. The big guns like IBM, HP, EMC, VMware, Microsoft, and others are running in. They would like to control the cloud. It is indeed a market where big players will have a strategic advantage.

4. The cloud is an economic and business model. Business management wants the data center to be easily scalable and predictable and affordable. As it becomes clear that IT is the business, the industrialization of the data center follows. The economics of the cloud are complicated because so many factors are important: the cost of power; the cost of space; the existing resources — hardware, software, and personnel (and the status of utilization). Determining the most economical approach is harder than it might appear.

5. The private cloud is real.  For a while there was a raging debate: is there such a thing as a private cloud? It has become clear to me that there is indeed a private cloud. A private cloud is the transformation of the data center into a modular, service oriented environment that makes the process of enabling users to safely procure infrastructure, platform and software services in a self-service manner.  This may not be a replacement for an entire data center – a private cloud might be a portion of the data center dedicated to certain business units or certain tasks.

6. The hybrid cloud is the future. The future of the cloud is a combination of private, traditional data centers, hosting, and public clouds. Of course, there will be companies that will only use public cloud services for everything but the majority of companies will have a combination of cloud services.

7. Managing the cloud is complicated. This is not just a problem for the vendors providing cloud services. Any company using cloud services needs to be able to monitor service levels across the services they use. This will only get more complicated over time.

8. Security is king in the cloud. Many of the customers we talked to are scared about the security implications of putting their valuable data into a public cloud. Is it safe? Will my data cross country boarders? How strong is the vendor? What if it goes out of business? This issue is causing many customers to either only consider a private cloud or to hold back. The vendors who succeed in the cloud will have to have a strong brand that customers will trust. Security will always be a concern but it will be addressed by smart vendors.

9. Interoperability between clouds is the next frontier. In these early days customers tend to buy one service at a time for a single purpose — Salesforce.com for CRM, some compute services from Amazon, etc. However, over time, customers will want to have more interoperability across these platforms. They will want to be able to move their data and their code from one enviornment to another. There is some forward movement in this area but it is early. There are few standards for the cloud and little agreement.

10. The cloud in a box. There is a lot of packaging going on out there and it comes in two forms. Companies are creating appliance based environments for managing virtual images. Other vendors (especially the big ones like HP and IBM) are packaging their cloud offerings with their hardware for companies that want Private clouds.

I have only scratched the surface of this emerging market. What makes it so interesting and so important is that it actually is the coalescing of computing. It incorporates everything from hardware, management software, service orientation, security, software development, information management,  the Internet, service managment, interoperability, and probably a dozen other components that I haven’t mentioned. It is truly the way we will achieve the industrialization of software.

Does IT see the writing on the cloud wall?

For the last six months or so I have been researching cloud computing. More recently, our team has started writing our next Dummies Book on Cloud Computing. Typically when we start a book we talk to everyone in the ecosystem — vendors big and small and lots of customers.  For example, when we started working on SOA for Dummies almost three years ago we found a lot of customers who could talk about their early experience. Not all of these companies had done things right. They had made lots of mistakes and started over. Many of them didn’t necessarily want their mistakes put into a book but they were willing to talk and share.  As I have mentioned in earlier writings, when we wrote the second edition of SOA for Dummies we had a huge number of customers that we could talk to. A lot of them have made tremendous progress in transforming not just their IT organization but the business as well.

We had a similar experience with Service Management for Dummies which comes out in June. Customers were eager to explain what they had learned about managing their increasingly complex computing and business infrastructures.  But something interesting in happening with the Cloud book. The experience feels very different and I think this is significant.

Our team has been talking to a lot of the vendors — big and small about their products and strategies around the cloud. Some of these vendors focused on some really important problems. Others are simply tacking the word cloud in front of their offerings hoping to get swept up in the excitment. But there is something missing. I think there are two things: there is a lack of clarity about what a cloud really is and what the component parts are. Is it simply Software as a Service? Is it an outsourced infrastructure? Is it storage capacity to supplement existing data centers? Is it a management platform that supports Software as a service? Does cloud require a massive ecosystem of partners? Is it a data center with APIs? Now, I am not going to answer these questions now (I’ll leave some of these to future writings).

What I wanted to talk about was what I see happening with customers.  I see customers being both confused and very wary. In fact, the other day I tried to set up a call with a senior executive from a large financial services company that I have spoken to about other emerging areas. This company always likes to be on the forefront of important technology trends. To my surprise, the executive was not willing to talk about clouds at all.  Other customers are putting their toes in the cloud (pun intended) by using some extra compute cycles from Amazon or by using Software as a Service offerings like SalesForce.com. Some customers are looking to implement a cloud-like capability within their own data center. Could it be there they are afraid that if they don’t offer something like Amazon’s EC2 cloud that they will be put out of business? Just as likely they are worried about the security of their intellectual property and their data.

I predict that the data center is about to go through a radical transformation that will forever change the landscape of corporate computing. Companies have recognized for a long time that data centers are very inefficient. They have tried clustering servers and virtualizing their servers with some level of success.  But the reality is that in time there will be a systematic approach to scalable computing based on the cloud.  It will not be a simple outsourced data center because of the transition to a new generation of software that is component based and service oriented. There is a new generation of service management technologies that makes the management of highly distributed environments much more seamless. The combination of service oriententation, service managment, and cloud will be the future of computing.

The bottom line is that while the vendor community sees dollar signs in this emerging cloud based world, the customers are afraid. The data center management team does not understand what this will mean for their future. If everything is tucked away in a cloud what is my job? Will we still have a data center? I suspect that it will not be that simple. At some point down the line we will actually move to utility computing where computing assets will all be based on a consistent set of standards so that customers will be able to mix and match the services they need in real time. We clearly are not there yet. Today there will be many data center activities that either cannot or will not be put into a cloud. Internal politics will keep this trend towards clouds moving slowly.

Why its hard to build great software companies

I went to Progress Software’s  industry/financial analyst meeting this week.  I have known Progress Software since the 1990s as it migrated from the 4GL database development market to client/server and then to SOA and Software as a Service.  Unlike some of its peers in the 4GL space, Progress has managed to change with the times and evolve.  What I like about Progress is that it had the ability to move to new generations of software.  In addition, Progress had the good fortune of moving early into the OEM business. It has a large base of packaged software vendors that use its OpenEdge application development and database as part of their solutions.  This solid business provides a good cash flow to support the business. In fact, OpenEdge represents almost about 60% of the company’s revenue. Since it is a mature product, it provides nice cash flow for the company.

Now, I didn’t intend to write an entire report on Progress and its financial performance, although it would be a fascinating exercise. What I wanted to talk about is the issue of what makes a great software company.  I think that Progress is a good software company.  They do a lot of  things right.  What do they do well? Well, here is my list:

1. They have a great OEM base that embeds its technology into packaged software and therefore provides a predictable revenue stream.

2. Progress has used its cash wisely to purchase complementary software companies that already had a good revenue stream in secure markets.

3. The company has a good and predictable process for integrating acquisitions into the company while keeping the revenue stream growing.

4. Progress knows how to sell its newly acquired products to the installed base.

All of this is good. In the end, Progress has established itself as a good software company with predictable revenue that has been growing at a steady pace over the years. Today has revenues of around $540 million with more than $100 million in cash.

But is Progress a great software company? It is interesting to think about what might have been. Progress at this year’s meeting stated that it was going to start providing solutions to its customers. Good idea, in fact this is the trend among many software companies (I have always like solutions more than tools).  And Progress has a handful of offerings for the financial industry based primarily on its Complex Event Processing engine (Apama).  But here is an interesting observation. Progress has many successful ISV/OEM partners that sell solutions in various markets.  During the meeting management mentioned that some of these partners have bought other partners that also leverage Progress’s software (Sonic ESB, appserver, OpenEdge, etc.).  Now, I was just thinking, what would have happened if Progress had started buying some vertical solutions software companies that had been built on their technology? Could they have become that elusive $1 billion software company?

So, what do I think makes a great software company rather than a good one?  Here are my top five recommendations:

1. Great companies start with a predictable business model and turn the model upside down. They look three years ahead and experiment with innovation. They have to have a combination of intuition, risk, and innovation. These companies are willing to take enough risk to win big but smart enough to know the difference between great opportunities and pipe dreams.

2. Great companies find new areas to position themselves for leadership. This is very tough to pull off. The area has to be important enough for the market to pay attention to but not too big that they look silly.  Great companies never try to take a big existing market with established leaders and try to claim primacy.

3. Great companies build great relationships. Management at these companies builds an ecosystem of influencers including great customers who will talk about the value, press, analysts, and partners who together help the company create a persona of innovation and greatness while the company is still building.

Great software companies are complicated to build.   The software business a complicated and brutal with  lots of failures at every turn.  It is therefore proper to admire what Progress Software has done in building a sustainable business model. It isn’t easy. Great software companies are even more difficult and scary to build.

The ten reasons why software companies lose in a losing economy?

I have been thinking about the software industry and what is going to happen to companies in this really lousy economy. There will clearly be companies that don’t weather the storm — either because their venture capital backers get nervous or because their customers do.  But, as in every downturn, there will be companies that figure out how to do the right thing and actually thrive. There will also be companies that simply have a business model for another time and will not make it.  So, I thought that I would put together a list of the characteristics of the software companies that will fail:

1. My technology is so revolutionary everyone will want it. I see too many companies that don’t actually know what problems their technology solves for customers. If it doesn’t solve pain — don’t bother.
2. The platform we offer to our customers is a complete architecture and we’re going to build an ecosystem. Software companies that think they can offer a complete platform to customers — even if they have only a few dollars in revenue.  This isn’t the time to try to do it all. Anyone, no one will believe you. Pick something you do well and stick to it!
3. We don’t plan to try to partner with the big players; it’s too hard. In tough economic times, customers want to know that there is someone big and powerful behind the scenes…just in case.
4. We’d love to partner with a large vendor if they are willing to put our product on their price list and sell for us. Keep dreaming. Big vendors will partner but only if there is something in it for them. If you can fill a hole in their product line you have a good chance but you have to be realistic.
5. We sell a great tool. Everyone needs tools but they are commodities. So, unless a software company has a deep channel, this plan won’t work.  I have seen too many really nice tools companies go out of business. It takes a lot of energy to make one sale to a customer. If the return on the sales effort is only $199.00, it will takes a long time to get to a million.  And in tough economic times, customers will put a software company throught the same due diligence process for a $200 item as they would for a $20,000. Everyone is afraid to make a decision.
6. Our technology sells itself. Just a few months ago companies were talking about how they wanted technology that would foster innovation. Now that desire hasn’t changed and probably won’t. However, customers want to know that they can get a fast return on investment.  Therefore, successful vendors are structuring their offerings in a modular way so that customers can quickly prove value.
7. We sell an entire turnkey environment. The days of big all encompassing implementations are over — at least for now.  Customers need to be able to implement just what they can afford or get budget for. If it is successful, they want to be able to add the next chunk…next year.
8. We are implementing precisely what our customers tell us they need. I know that it is important to listen to customers. However, there are important lessons to remember. Customers do not always say what they mean. They don’t always know what they want. They might be asking a software company to add functions that are specific to the way their company operates and may not be wise for the market overall. So, to avoid failure, listen but make sure that you are not walking into a trap. Look beyond fear and to what will make your buyer successful in their jobs.
9. We are thinking about Software as a Service (SaaS)…but… In scary times, it is easier to stay with what you know and not make waves. But customers will buy SaaS offerings because there is no capital expenditure needed. If you don’t know how to do this, partner with someone who does. It is going to become the normal way that many software offerings are provided now and even more so in the future.
10. We are limiting our outreach in the market. It is too expensive to advertise or market. We’re going to wait until things get better. While these are scary times it is not wise to hide.  While companies are hiding smart software companies are out there doing a lot of low cost but very effective marketing initiatives. It takes some hard work, but prospects will notice because everyone else is really quiet

There is no doubt that there is lots of uncertainty out there. There will be a lot of companies who don’t know how to position, price, and partner. There will be lots of companies that simply don’t know how to prove to prospects that they are worth betting on.  I suspect that the companies that survive will be the ones with great business models, interesting and accessible innovation and a lack of fear.

My Top Eleven Predictions for 2009 (I bet you thought there would be only ten)

What a difference a year makes. The past year was filled with a lot of interesting innovations and market shifts. For example, Software as a Service went from being something for small companies or departments within large ones to a mainstream option.  Real customers are beginning to solve real business problems with service oriented architecture.  The latest hype is around Cloud Computing – afterall, the software industry seems to need hype to survive. As we look forward into 2009, it is going to be a very different and difficult year but one that will be full of some surprising twists and turns.  Here are my top predictions for the coming year.
One. Software as a Service (SaaS) goes mainstream. It isn’t just for small companies anymore. While this has been happening slowly and steadily, it is rapidly becoming mainstream because with the dramatic cuts in capital budgets companies are going to fulfill their needs with SaaS.  While companies like SalesForce.com have been the successful pioneers, the big guys (like IBM, Oracle, Microsoft, and HP) are going to make a major push for dominance and strong partner ecosystems.
Two. Tough economic times favor the big and stable technology companies. Yes, these companies will trim expenses and cut back like everyone else. However, customers will be less willing to bet the farm on emerging startups with cool technology. The only way emerging companies will survive is to do what I call “follow the pain”. In other words, come up with compelling technology that solves really tough problems that others can’t do. They need to fill the white space that the big vendors have not filled yet. The best option for emerging companies is to use this time when people will be hiding under their beds to get aggressive and show value to customers and prospects. It is best to shout when everyone else is quiet. You will be heard!
Three.  The Service Oriented Architecture market enters the post hype phase. This is actually good news. We have had in-depth discussions with almost 30 companies for the second edition of SOA for Dummies (coming out December 19th). They are all finding business benefit from the transition. They are all view SOA as a journey – not a project.  So, there will be less noise in the market but more good work getting done.
Four. Service Management gets hot. This has long been an important area whether companies were looking at automating data centers or managing process tied to business metrics.  So, what is different? Companies are starting to seriously plan a service management strategy tied both to customer experience and satisfaction. They are tying this objective to their physical assets, their IT environment, and their business process across the company. There will be vendor consolidation and a lot of innovation in this area.
Five. The desktop takes a beating in a tough economy. When times get tough companies look for ways to cut back and I expect that the desktop will be an area where companies will delay replacement of existing PCs. They will make do with what they have or they will expand their virtualization implementation.
Six. The Cloud grows more serious. Cloud computing has actually been around since early time sharing days if we are to be honest with each other.  However, there is a difference is the emerging technologies like multi-tenancy that make this approach to shared resources different. Just as companies are moving to SaaS because of economic reasons, companies will move to Clouds with the same goal – decreasing capital expenditures.  Companies will start to have to gain an understanding of the impact of trusting a third party provider. Performance, scalability, predictability, and security are not guaranteed just because some company offers a cloud. Service management of the cloud will become a key success factors. And there will be plenty of problems to go around next year.
Seven. There will be tech companies that fail in 2009. Not all companies will make it through this financial crisis.  Even large companies with cash will be potentially on the failure list.  I predict that Sun Microsystems, for example, will fail to remain intact.  I expect that company will be broken apart.  It could be that the hardware assets could be sold to its partner Fujitsu while pieces of software could be sold off as well.  It is hard to see how a company without a well-crafted software strategy and execution model can remain financially viable. Similarly, companies without a focus on the consumer market will have a tough time in the coming year.
Eight. Open Source will soar in this tight market. Open Source companies are in a good position in this type of market—with a caveat.  There is a danger for customers to simply adopt an open source solution unless there is a strong commercial support structure behind it. Companies that offer commercial open source will emerge as strong players.
Nine.  Software goes vertical. I am not talking about packaged software. I anticipate that more and more companies will begin to package everything based on a solutions focus. Even middleware, data management, security, and process management will be packaged so that customers will spend less time building and more time configuring. This will have an impact in the next decade on the way systems integrators will make (or not make) money.
Ten. Appliances become a software platform of choice for customers. Hardware appliances have been around for a number of years and are growing in acceptance and capability.  This trend will accelerate in the coming year.  The most common solutions used with appliances include security, storage, and data warehousing. The appliance platform will expand dramatically this coming year.  More software solutions will be sold with prepackaged solutions to make the acceptance rate for complex enterprise software easier.

Eleven. Companies will spend money on anticipation management. Companies must be able to use their information resources to understand where things are going. Being able to anticipate trends and customer needs is critical.  Therefore, one of the bright spots this coming year will be the need to spend money getting a handle on data.  Companies will need to understand not just what happened last year but where they should invest for the future. They cannot do this without understanding their data.

The bottom line is that 2009 will be a complicated year for software.  There will be many companies without a compelling solution to customer pain will and should fail. The market favors safe companies. As in any down market, some companies will focus on avoiding any risk and waiting. The smart companies – both providers and users of software will take advantage of the rough market to plan for innovation and success when things improve – and they always do.