The PaaS ecosystem creates a virtuous cycle for its creator and its participants. PaaS ecosystems represent the epitome in virtuous cycle environments. When one ERP vendor decides to create another version of its product utilizing the platform tools found in another company's ecosystem, they create an opportunity to cross sell into the install base of every other software firm was built products for that ecosystem, too.
When Coda created FinancialForce.com under the Force.com platform, it quickly found a ready made market available to it. Thousands of salesforce.com customers were now potential subscribers to the FinancialForce financial accounting software products. Likewise, third parties that have built applications on the NS-BOS architecture of NetSuite have found that platform and its ecosystem to be a built-in channel for their products.
SAP's Business ByDesign, a multitenant ERP solution for the midmarket, does not possess a full PaaS yet but does offer a SDK (solution development kit) that permits third parties to build a number of complementary capabilities and extensions to the product line. SAP has tried to bring some measure of supporting ecosystem capabilities to its channel partner network. This is a product line that is moving towards the support of an ecosystem and at least has made a number of moves in that direction.
The virtuous cycle occurs when momentum builds around the ecosystem. The more developers the ecosystem can attract, then:
- the more products will be created,
- which entices more customers to the ecosystem,
- which triggers more customers to buy from the software developer and other developers in the ecosystem,
- which fuels more development,
- which attracts still more customers,
In contrast, a platform that does not create momentum does not create an ecosystem. It is clear in conversations with technology leaders in some ERP firms, that their PaaS efforts will remain largely an internal tool set or one that will be highly restricted to all but a few outside entities. These limited, closed ecosystems may not prove to be sustainable or will suffer from low market uptake.
The ecosystem is about power. Power is not the same as control. Market power and mind share are what the PaaS ecosystem builders are seeking. Yes, they will build customer pleasing application software. But, they are more interested in building the destination for the largest possible universe of customers to come to.
In the minds of these forward-looking, ecosystem building ERP vendors, they are creating some solid, yeoman products but will leave many of the millions of potential enhancement requests in the hands of volunteers, third-party integrators, independent software developers, etc. that participate in the ecosystem. It's absolutely brilliant this approach as it transfers significant amounts of R&D costs that the application software vendor would have incurred to members of the ecosystem. And, while others are doing the development work, the software vendor is selling even greater amounts of their basic core product at ridiculously solid margins.
The smart ERP play today may be to focus one's R&D efforts on building out platform capabilities instead of only focusing on application functionality. The purpose of this is to create a technology platform that will enable record MARKET power for the ERP vendor.
Market power is what causes an application software vendor to be considered automatically in any software evaluation decision. In the past, any large enterprise would have automatically considered SAP, Oracle and possibly other vendors in an ERP selection. These are companies that are well-known in their space and are considered by prospective buyers whether the prospect has been actively marketed to by these vendors. Lesser-known vendors have a more difficult process of getting the attention of and staying in contention for this business because of the lack of market awareness and market power of the brand these vendors possess.
What is happening now is that market power is shifting to the vendors with the largest ecosystems not to the vendors with the largest installed bases. The distinction is critical and will represent a fundamental shift in buying habits of ERP software purchasers. To ignore the shift in where market power is moving is to do so at one's peril.
The power vs. control issue will be a big discussion item in the executive suites of ERP firms. Some vendors will have a tough time transitioning from bring control mavens to facilitators of great ecosystems. These firms believe that:
- only they can do product development to the ERP product
- only they can create new functional applications
- only they can implement the software
- only they should determine who will be a partner
- only they can own the customer relationship
- only they .... (well, you get the point)
Controlling most aspects of an ERP firm may give one a sense of security. But, in the world of PaaS and PaaS ecosystems, it will be a false sense of security. Letting go will need to become a core competency of the modern ERP firm. Students of the human psyche (and change management) know this will be a tough road for some firms. Next: The Growing Importance of the PaaS Ecosystem