PART THREE - Market Implications
The wave after wave of functionality moving to cloud deployed solutions is neither limited nor diminishing. What started with cloud based apps like CRM and HR software now includes office automation, marketing automation and financial accounting software, too. Supply chain and industry-specific/vertical solutions will soon have their day as well.
Different technologies have different adoption rates that can range from wildly ecstatic to non-existent. Consumer technologies frequently go from ice-cold to white-hot and back to ice-cold in the shortest time possible. Business technologies, in contrast, take longer to move through the acceptance cycle.
It’s done – cloud won!
Cloud software adoption within businesses can now be safely and assuredly seen as a fait accompli. More vertical solutions will likely follow the same well-worn path and should complete the transition.
Some vendors are already there. Plex has been in the cloud manufacturing space for quite some time. Rootstock, NetSuite and Kenandyare coming in this area, too. My colleague Tom Ryan adds that supply chain execution solutions like Deposco, LogFire, and SnapFulfil for cloud based WMS and Lean Logistics for cloud based TMS are also emerging. Numerous traditional vendors have begun the process of moving their on-premises solutions to the cloud world but many of these need new user interfaces, multi-tenancy, PaaS and more to be fully competitive. Nonetheless, cloud is where the development money, marketing focus, etc. is going and will continue to go.
Some potential stumbling blocks remain and could further delay future adoptions. The fallout re: privacy invasion activities by various governments on Internet communications and systems could have a dampening effect on cloud solutions uptake. What this may trigger though is:
- A review of one’s systems to ascertain which kinds of data are highly sensitive and strategic. Those systems would be kept in-house with others in cloud.
- Greater focus on encryption, security monitoring, etc. of data kept in cloud-based systems
- Sharper focus on where cloud-based data is stored. Limiting certain data to reside in specific countries can lessen the opportunity for some governments to gain access to data.
While the recent publicity re: government access and monitoring of internet powered information is viewed very negatively by many, it also is shining a bright light on how businesses need to think about and manage their cloud-deployed data, solutions and risks. This wake-up call, while painful in the short-term, should bring more clarity to businesses in how their cloud solutions should function and which cloud provisioners they should trust.
Three weeks ago, I saw a reseller get on-stage to tell his colleagues about this wonderful new deployment strategy he’d come to learn about this last year. It was called: the cloud. I felt sorry for this fellow. He was the technology equivalent of Rip Van Winkle. Here’s hoping he discovers the iPhone by next year. I tell you this because some service firms appear to be caught in a time warp. They’re still hoping that the systems integration, ERP implementation or outsourcing markets will forever remain in a 1998 timeframe. They won’t and aren’t. Wishing won’t help – these firms need to advance their business models, cull declining service offerings and re-train/re-deploy some of their best and brightest to newer cloud driven solution realities. Adherence to old business methods, solutions and organizing paradigms will kill or economically cripple non-adaptive firms.
Cloud solutions will impact service firms in pronounced, possibly painful ways.
Multi-tenant cloud software has a compelling value proposition to software users: the vendor (not the customer) updates the one (and only) copy of the software. This is huge. Customers told us in 2010 that their 8-10 year TCO (total cost of ownership) breakdown of on-premises software shows approximately 40-60% of total software costs go to this one area: patching, upgrading and maintaining the software. On-premises software is simply a cost-intensive product compared to a multi-tenant cloud application. On-premises solutions are an expensive luxury that fewer and fewer firms will want.
Integrators, resellers and consultants used to make a lot of money from the on-premises world but those days may be facing a material decline. Let’s look at several of their offerings today:
Application Maintenance Outsourcing – This service transferred the application software patching, maintenance and upgrading activity from the customer to an external third party. While the outsourcer could achieve some measure of scale in doing this work for multiple customers, they were still dealing with uniquely configured client-specific solutions. This is, at best, single-tenant work and becomes mostly obsolete as customers adopt multi-tenant software products. The vendors will provide the bulk of the update work as part of the subscription. An integrator can keep the part of maintenance where they integrate the cloud solution to other cloud and on-premises applications. Bottom line: this is a troubled business model.
ERP Implementation Services – On-premises solutions used to require a lot of prep work to acquire, setup, tune, test and configure production and test environments for new ERP software. Integrators can still offer valuable change management and integration services, but, many cloud solutions can be provisioned in mere minutes (not months). The real help clients will need are in areas around configuration decisions (e.g., Do we need to select FIFO or LIFO for our inventory accounting method?), integrations with other systems and report design. This market has changed and is now less about busloads of young technicians and more about focused subject matter experts. An emerging market may arise though in porting data from on-premise solutions to cloud solutions, and, eventually, from one cloud solution to another.
Application Modernization - Previously, a lot of companies used third parties to standardize and make current their diverse, often far-flung application portfolio. When a company lacked the people, project skills or political will power to enforce the need to have just one application per function, they called in these firms. Often the firm doing the modernizing sold a continuing operations outsourcing contract with this deal. That way, they got to run the upgraded software stack for the client. In the cloud world, service firms can modernize and standardize applications for clients but more and more of the operations of the software will go to the software vendor not the outsourcer. This solution still has value today but will definitely be impacted by more cloud adoption.
Infrastructure (traditional) Outsourcing – With more systems moving to the cloud, fewer applications (and their attendant hardware and systems software) will remain to be outsourced. In the past, companies would ask an outsourcer to ‘lift and shift’ their IT software and technology to an outsourcer’s operation. Cloud solutions definitely affect this space in an adverse manner. What remains to seen however is the impact that all-new solutions, like analytics, big-data, etc. will have on this space. Given what software vendors, like SAP with its HANA software and own cloud farm, can do in the cloud for customers, traditional outsourcing looks tough. There may also be a private cloud play here as well for some of the larger businesses.
Business Process Outsourcing and Outsourced Shared Services Operations – In this world, businesses entrust to a third party the operation of one or more key processes. This includes transferring people, software and/or other assets to a third party. The theory is that the third party has identified a number of best practices to improve the process, has scale and focused personnel, and, optimized technology to deliver first quartile process performance for the customer. Businesses often need to revisit how they do work and whether they’re as efficient and effective as they could be. However, the need to have your own solutions (managed by a third party) could be in for a change. Businesses will want business process re-engineers to benchmark processes and design better ones. However, they’ll make their changes in cloud software where the technology rests on a vendor’s cloud. Yes, the BPO provider will still have people handling aspects of the process but the technology component of their solution will likely shrink.
Cloud solutions will impact business processes. For example, Tom Ryan adds that: "Third party logistics (3PLs) companies are perfect candidates for blending outsourced services with SaaS based software. Today they already offer WMS, TMS, and other supply chain execution solutions as IT services to go along with the physical services and physical assets (e.g. distribution centers) they offer their customers. Shifting from their predominately on-premises IT model to a SaaS based solution set would allow them to cut their costs while continuing to provide other necessary services. Their customers are already looking to them to take care of their supply chain execution software needs."
Software Developers and Independents
The new market will create opportunities for entrepreneurial software developers in creating analytics, vertical or industry-specific bolt-on programs to cloud applications. These extensions will become a revenue stream for smart developers (and resellers). SalesForce.com has its Force.com PaaS (platform-as-a-service) along with a big marketplace to hawk these value-added extensions to salesforce.com, FinancialForce.com and other products running in this ecosystem. Likewise, NetSuite has its NS-BOS PaaS. SAP has the HANA analytics tools, too. Opportunities are there but developers (and resellers) need to shift their focus from basic ERP software tasks to more value-added intellectual property creation.
Developers and resellers should look for vendors with open architectures and PaaS environments. Closed environments don’t offer as many opportunities to create and market new intellectual property solutions. If you want to be where the money is, then bet on the following:
- Align with vendors with PaaS and/or other open platforms
- Seek vendors with growing product lines/suites as these are going to be preferred by more and more customers over standalone or best of breed solutions. Buyers like getting as much pre-supplied integration and common look and feel as possible from one source (BTW - I heard this independently from two sources this week alone). Look for ‘convenience’ plays and develop your solutions and skills to these growing spaces.
- Find ecosystems that are growing. Don’t focus on already mature or declining spaces. All you’ll get for your trouble in mature markets is a billing rate war, lots of competition and little joy. Seek spaces with lots of upside growth, limited competition and the room to stake out your own, growing space.
Structural changes in markets deserve serious thought and consideration. These changes occur somewhat infrequently but can be quite thunderous in their disruption to the status quo.
The interviews and the tone of these executives tell us all that the move to cloud applications is permanent and will continue. This is bigger than just any one segment, like CRM. It cuts across all kinds of application solutions and will not stop. After financial accounting, you can expect supply chain, manufacturing and other sectors will cross the cloud chasm, too.
Structural changes mean all kinds of firms will be affected. Your firm, software firms, hardware firms and service firms must transition (or perish). If your firm hasn’t done a thorough long-range strategic IT plan, you need to get cracking on it now. And, if your execs need someone to scare them into action, give me a call. The stories I could tell….
For More Information
If you’d like to read more, the 2010 report I mentioned in Part One was licensed by Workday some time ago but should still be available here.
I also just finished a new a e-book on the top executive interviews for this work. FinancialForce.com has made that available on their site here.
If you made it this far, then you have my thanks for your patience and attention. Comments?