2012: the year of cannibalisation in enterprise land?

While not quite a prediction, I think 2012 will be something of a watershed year for the mega vendors. It's all about the business model.

Despite a shaky global economy and widespread political unrest, double digit growth was back on the agenda for many vendors during 2011. Will 2012 be the same? I'm hesitant. The landscape is more complex than ever before.

SaaS/cloud players are not going away. If anything they are going from strength to strength. New players are emerging out of the shadows, most notable in 2011 was Workday but others like Tidemark also show promise. We will likely identify more 'sleepers' in 2012.

The 'usual suspects' among the SI brigade (IBM, Accenture, Deloitte and others) are all looking forward to a continuing bonanza as they upgrade customers and help with an anticipated flurry of M&A activity in 2012. Some believe that work will stretch out to at least 2013. The one notable exception is Cap Gemini's repositioning for social business. Their position is interesting since it implies their road ahead for traditional deployments is running out of tarmac. My immediate and snarky response was that it was because CG cannot compete with the IBM's and Accentures of this world so has to find something new to do. It may well be more deep rooted than that.

SAP is gearing up to make HANA its customers' database of choice over Oracle while Oracle in turn wants everyone using its Exa-whatever boxes and databases. That hasn't worked so well in 2011 and the company is throttling back its expectations. Then there is the tantalising prospect of what Oracle Fusion may (or may not) deliver in the coming year. Let's not forget Infor as it packages ION integration. Even Microsoft looks interesting again as it eyes 2012 as the year its business cloud applications become ready for prime time. And all of that barely scratches the surface.

At first glance 2012 would seem fairly predictable, given the leisurely manner in which development cycles operate inside enterprise shops, the rates at which companies adopt and deploy application technologies and the extent to which enterprise vendors can feast upon maintenance revenues.

It's not that simple.

The weight of maintenance revenue provides the mega vendors with their best chance of transformation and fresh growth. At 90-95% margin, maintenance revenues are so attractive the vendors cannot help themselves from eyeing that particular prize. It is what they do with those billions that matters. Why?

Among the mega vendors, SAP has said 'no more upgrades' to its Business Suite. Oracle's legacy applications portfolio is now in decline as Fusion becomes its go to market offering. Taken together that means 2012 will likely be the last year of significant growth for on premise business models before the SaaS/cloud players really start encroaching on their territory. Oracle might try to argue differently and has yet to show cloud based pricing for Fusion. Regardless, I don't think it has a choice but to go that direction because the market is speaking loud and clear. Even Salesforce.com will quietly admit it has only been nibbling around the edges but that could easily change.

If the incumbents are not prepared then by 2015, top line growth for today's flagship solutions will have all but evaporated.

The mega vendors will push back with talk about mobile (who's not?) Big Data (who's not?) in-memory (more noise to come) and, in some cases, social business (beware that one.) But none of the marketing chatter can hide the fact that business models have to evolve. There is increasing evidence that line of business managers are much more likely to look towards the newer vendors for more than CRM. I believe that in the next few years we will see a massive shift to core processes going into the cloud. Why when core financials and HR are relatively stable?

Simple: the operational cost of keeping these solutions running in-house or on current BPO contracts is unsustainable when business leaders want/need business model innovation. It may be a relatively slow forced march but the alternative economics alone will be enough to maintain cloud momentum.

If you believe that then 2012 becomes the year when cannibalising the enterprise vendor business model is no longer something to fear but an economic imperative. Even then, life will not be that simple for the incumbents.

From what I have seen so far, I do not believe the incumbents have much clue about pricing in these environments. I recall a discussion late last fall with one exec who was talking about $50-75/month/user for a 500 person mobile deployment. When I asked what happens when it is a 5,000 person deployment I was met with a blank stare. I'd argue that is (almost) true of Salesforce.com which has yet to articulate an enterprise licensing argument that convinces.

There is still too much talk about per seat, per module licensing and not enough about solution selling in volume that talks to business value delivered. It's a huge topic that is little understood. Too much of the talk I've heard is really code for a like for like dollar revenue exchange rather than a fundamental rethinking of the model. In short, the vendors are simply not thinking big enough.

Those conversations are not made any easier when comparing with bottoms up, consumer based pricing of the AppStore variety. It is natural but a tad distracting. But then I don't believe those consumer pricing models can work for enterprise vendors either. It amounts to comparing apples and oranges a lot of the time.

In conclusion, I see 2012 as one that will be highly predictable on the one hand but wholly unpredictable on the other. Investors will draw comfort in the short term but will need to watch for how the mega vendors articulate the future. Customers will not be short of choice but they will be faced with some difficult decisions around developing strategies for the long term, especially as regards core solutions. If they're not negotiating now for certainty over the next three to five years, they need to get busy with their slide rules, calculators and spreadsheets.

Endnote: I have deliberately left many of the adjacent arguments on this topic alone in this post. Topics such as add-ons to existing, entrenched business processes, strategic platform choices, change management and the ultimate role of IT all figure into the mix.


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