CIO advisory: Does enterprise software have a soul?
Enterprise software is a $400 billion industry that affects virtually every mid- and large-sized company in the world, not to mention governments and other organizations. Despite that impact, enterprise software is still a challenge to evaluate, buy, implement, support, and get rid of.
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For Chief Information Officers and IT, success with enterprise software demands an understanding of the vendors and developers who create this complex software.
In fairness, the ugly name "enterprise software" should be called by the even-uglier term, "business process software," or worse, "process automation software." These horrible names indicate the primary function of this software: automating business processes such as finance, customer relationships, HR, or supply chain. Making processes efficient is crucially important for every company, which explains why enterprise software is so pervasive.
Even though it's pervasive, enterprise software remains expensive and far too complicated.
To shed light on this arcane yet important topic, I invited two colleagues from the Enterprise Irregulars as guests on episode 286 of the CXOTalk conversations with the world's top innovators. Dave Kellogg is a serial enterprise software CEO, and David Dobrin is a long-time industry analyst and advisor. Individually, these guys are amazing and together they offer massive brainpower to rival the most powerful AI supercomputer!
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The conversation hits on areas such as:
- Why is enterprise software so complicated?
- Does cloud improve the situation?
- How to measure ROI?
- Why are support and maintenance fees so important to software companies?
- Are software suites better than best-of-breed?
These two experts offer a wealth of practical advice for every CIO and enterprise software buyer. At the same time, enterprise software companies should study the conversation because there is much to learn and absorb.
Watch the entire conversation embedded above and be sure to read the complete transcript and edited summary comments below.
What is enterprise software?
David Kellogg: It's software sold to businesses to run businesses, and that differentiates it from consumer software, which is built for people as individuals, not for people working in corporations. When I break down the enterprise software market, I always think of four primary buckets. I think of data and data storage, so database related technology as kind of the foundation. I think of middleware as the next layer that kind of ties everything together, again broadly defined. On top of that, I think of applications, whether it be CRM, ERP, or EPM. On top of that, I would say analytics, a layer of tools that helps you gather insight from all the stuff below. That's how I think about enterprise software.
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David Dobrin: Corporations are very large entities. They have large numbers of departments, and everybody wants software that serves them. If you're in HR, you want HR software. If you're in sales, you want sales software, and so on. The simplest way of dividing up the alphabet soup is to ignore the alphabet soup and think about which parts of the company are served and say, "Okay, this is software for these guys." That's the simple way of thinking about it.
One of the things that people don't seem to realize about enterprise software is that a medium size corporation will be running 700, 800 pieces of software, maybe more. I've seen as much as 3,000 or 4,000, so far more pieces of software than there are even people in IT, which is pretty frightening.
How do you think about the ROI of enterprise software?
David Kellogg: Most of the software out there can prove a good ROI because it helps automate. Put it this way: If you can't demonstrate an ROI today, I think it's pretty hard to sell enterprise software. I don't think that was true 20 years ago. [Laughter] I think people bought more on faith, return on information and information for competitive advantage. But, I don't know. I feel like the leap of faith days are beyond us. I don't know if Dave agrees or disagrees.
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David Dobrin: I'm somewhat more doubtful, I must say. Michael has been very influential for me in this. He has quoted numbers like 50 percent of enterprise software sales fail. If we're talking about expectation and not about actual return if everything works the way it's supposed to, really, your cost is twice what you're calculating your ROI on. A lot of ROI numbers go away if you include expectation.
David Kellogg: The cloud has changed a lot of what you said because there was the pre-cloud era where you would sell these giant deals, and the vendor didn't really care if the software got used. We had shelfware.
How can you prove ROI with enterprise software?
David Dobrin: I think it's extraordinarily difficult.
David Kellogg: Rather than try and get an ROI number or an IRR number to say how much capital went in and how much cash came back, to try and get concrete business objectives. It used to take us 20 days to close the books. We'd like to close the books in ten. It used to take us six months to run the budgeting process. We'd like to run it in three. We used to be able to update the budget, in my world, once a year. Now we want to update it 12 times a year.
If a company has objectives and says, "These are the things we want to do," and the software helps them achieve those objectives, that's the way I'd look at it. Technically speaking, to get a real ROI number, I've been a part of studies that do that but, boy, is it hard. Oh, yeah.
David Dobrin: Dave, I agree. But then, it's not fair for you to say, "Well, the ROI has improved." You have objectives. The software will enable the objectives. It's a step change in something important that you're doing in the company. That's a reason to buy software. But, don't try to value it. It's going to be hard. And, recognize that the failure rate is high on any strategic objective, not necessarily because of the software, and that the overall cost is high.
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Many of the things that software companies claim to be proof that they're okay about all this are renewal rates. Well, think about your own renewal rates on things. How many charges do you have today on your credit card that are renewals of things you don't really want or need, but you don't have the momentum to do it or too much chance to change? When was the last time you changed your bank account despite the horrible service you're getting from your bank? The fact that you renew is merely an indication of minimum acceptable performance. It's not an indication that you've achieved the strategic goals that you set out for yourself.
Does cloud make software deployments more successful?
David Kellogg: You can call me an idealist, but I think the cloud and the need to renew the customer means that the vendor cares. A smart vendor actually cares, "Is the software being used? Is it demonstrating value?" because once a year it's going to be up for a vote.
To me, the fact that people renew is indicative of the fact that they continue to get value for the software. I'd also add deployment failures. Again, ERP, the massive deployments of the '90s and early 2000s, those were extremely high-risk propositions. Cloud has turned what used to be a heart transplant into knee surgery in terms of the degree of difficulty.
David Dobrin: I don't know about whether cloud deployments are more successful. Certainly, most cloud software is smaller, which means they do last. Well, okay, and that certainly increases the expectation that they'll work, but it decreases the ROI.
David Kellogg: Hang on. Unless you buy the proposition that I do, which is that, in the on-prem era, you bought a lot of functionality you didn't need. To me, the basic cloud value prop is 80 percent of the functionality and 20 percent of the total cost. Bear in mind, I'm not only a seller of software; I'm a user of it. I bought Salesforce and Business Objects in the early 2000s as a cloud buyer because the IT department wasn't serving me because marketing was kind of third in line or fifth in line on the IT stack. I don't know. I think the cloud has made a lot of this stuff better.
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David Dobrin: I couldn't agree more, and I sure as heck hope it's made things a lot better. [Laughter] The question is, what's the ROI? I think it was unacceptably low in 1998. In fact, at my analyst firm, we did a study, which demonstrated conclusively that it was unacceptably low. Of course, we suppressed it since no one wanted to hear that. [Laughter]
But, the question is, is it acceptably high enough now? That's where I think the discussion is. The answer is probably that neither of us has the data very much, but 100 percent it's absolutely improved with the cloud.
Where is innovation happening right now with enterprise software?
David Dobrin: I'm disappointed at innovation right now. I think that a lot of people are pretty much sunsetting any innovative work on their original products, mostly because the technical debt is so great on them that it's not possible to pay them off. No one wants to start up a new ERP company. That would be too horrible for words. They're in a holding action. Also, some of the obvious things that happened over the last ten years, like inventing a new category, don't work anymore, so that doesn't work.
For me, the real interest is in data. You have all this data, and no one does anything with it. The people who seem to know what to do with it are data scientists, and they're horrible to talk to. Then everybody else just makes things up, so far as I can tell. It's like this small clan of people that know everything and can't communicate. Ditto with machine learning. I am spending a lot of time looking at both of those areas but trying to fend off the same kind of thoughtlessness and lack of perspicacity into what's real about them that I certainly ran into with ERP in 1996.
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David Kellogg: I think I'm a bit more sanguine here. First, I'm a big believer in the cloud, partly because I started as a buyer of cloud software, as I mentioned earlier. I know exactly what it feels like. I was told by my IT department, "You can have lead management in Italy in four years." I'm like, that's great.
Tell the next CMO that [laughter] because they're going to fire me because I'm not managing leads in Italy. I've got to find somebody to help me manage leads in Italy, and that's how we ended up buying Salesforce was actually for lead management. That was my first introduction of the cloud as a buyer. The cloud, I mean I think it's easy to forget how much time we used to spend buying servers, installing databases, worrying about rack space, and even just rolling out to individual computers. Enterprise software in the '90s, that was drudgery, right?
[Laughter] I don't forget the pain. We still even have customers today who will pay $25,000 for a study on how to do an upgrade from version 11.1.2.1 to 11.1.3.1, and that upgrade will cost $150,000. The business value of that is, like, zero.
I don't want to forget how much the cloud has done for us in terms of, in some ways, letting us worry about other things. We don't have to think about that anymore.
David Dobrin: I agree, David. Frankly, to me, the thought that you would ever buy anything that isn't cloud-based, there better be some damn good reason for it. The cloud offers obvious advantages. As far as I'm concerned, the world has just moved there and, therefore, when Michael is asking about innovation, I don't think of the cloud as an innovation anymore. It's just the standard.
David Kellogg: Yeah, it's all about the timeframe to me. I don't think it's a recent innovation, but I think enterprise software moves somewhat glacially. Last time I looked at the numbers, even salesforce automation was still 50 percenton-prem, maybe 40 percent on-prem. To think about that, Salesforce was founded 18 years ago, and the market is still half on-prem, half cloud, that's why I still think of cloud as kind of both the past and the future because a lot of people haven't gotten there yet.
Do enterprise software companies have a soul?
David Kellogg: Put it this way. I think they're born with a soul. I think, when they're startups, they have a soul because somebody started the company for a reason. Typically, they're looking at how people solve a problem and said, "I know a better way to solve it." The vast majority of enterprise software companies I know are started in that way.
I'll speak for myself in my current job. I'm a huge fan of planning. I think companies don't plan much about the future as much as they should. I don't think they plan very well.
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David Dobrin: If you don't deal with a company that has integrity, you shouldn't deal with them. I set a pretty high standard for integrity. I think that why you do it, at least when you say why you're doing it, it should have some relation to the truth. That's the first thing with buying enterprise software.
The second is why you do it with a large enterprise software company often has very little do with what's being done. People in marketing, people in sales, people even in executive management have very little idea of what's being built, why it's being built, or how it's being built. You have to factor that into account as well.
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David Kellogg: There are two types of startups. [First,] there are ones run by people kind of HP-style. They see a technical problem. They want to solve it.
[Second,] because you can make a lot of money doing this, profiteers and charlatans who are less driven by a vision and just trying to slap something together, raise a lot of venture capital, and sell it to someone else.
I don't mean to sound jaded, but at least when I look at a startup, I can tell you which bucket I think it falls into.
David Dobrin: Yeah, and I think more buyers should make that the first cut, honestly. They would make their lives a lot easier. Also, frankly, the integrity of a large company is much, much harder to establish and maintain, just as the culture is harder to establish and maintain. You have to factor that into it.
Why is customer satisfaction so hard for enterprise software companies to deliver?
David Kellogg: There are some reasons. First, corporations are not people; they're groups of people. You have a bunch of people around the table with different opinions. They all want different things from the software. Often they're not really in agreement, either on how processes should work if you're trying to automate the process or on what the goals of the project are.
One of the real complexifying factors in enterprise software is knowing how to work with and understand enterprises, and that's a big part of it. I think customer satisfaction is also hard because people change jobs. You may start a project with one CFO and, two years in, there's a new CFO, and he or she has a different set of objectives, so you're shooting at a moving target.
One of the funnier metrics I look at is the lifetime of the software versus the lifetime of the executive who buys it. [Laughter] What's the mean lifetime of a CIO? It's like three years. Some of these systems last ten. [MK note: some systems can last twenty years or longer.]
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I think the other thing that's hard about customer satisfaction is these are hard problems. They are sometimes quite mundane problems. ERP, to me, is a relatively mundane field, but it's very important, and it's very hard. I think those things contribute to making customer satisfaction difficult.
David Dobrin: High customer satisfaction, I think, is a very rare commodity for all the reasons that Dave said. Some companies become the standard; Salesforce is perhaps the most obvious example. There, it's a combination of a better technical idea, utterly brilliant marketing, [and] very, very good management of the company. I could go on and on, except that all my Salesforce friends would be embarrassed, only they can't be because they work for Salesforce.
I think that the biggest single reasonable reason for lack of customer satisfaction is underbuilt software. Dave is right. It's really hard to build software correctly, but it's also really easy to be lazy about it.
I always make jokes about the software guy who went home at 5:00 on Friday, and that's why the software works that way. If you've ever actually worked with a software company, you know that's pretty much the truth. Less of that and more feedback from the customer, more understanding of what's going on in the customer, all of those things could improve customer satisfaction a lot.
Share your thoughts on maintenance and support contracts?
David Dobrin: Right now, in any large [software] company, maintenance and support is supporting the company. Eighty percent of their revenue is coming from maintenance and support right now, maybe more.
That means that every dollar you spend, what they spend 50 percent SG&A, a dollar of your maintenance is going to their SG&A. Forty cents is going to SG&A. Thirty cents is going to this. Twenty cents is going to that. Almost none of the money that you're spending on maintenance. What are you getting for it? Insurance, sort of. I think the first thing is to be realistic about that.
David Kellogg: From the vendor perspective, it's all about switching costs. I credit Ray Lane at Oracle for being the first guy to go, "Hey, wait a minute. This 22 percent annuity is worth something."
Before that, it was viewed as kind of a scrapheap. People would throw the contracts in a heap, and you'd have customers not paying their support, getting support from the call center. I think they discovered that there was a lot of value in the annuity, and they try and drive that up.
David's point is taken to heart. My advice to buyers is, find out what the company's strategy is because he's right. The average software company spends maybe 20 percent, 25 percent of revenue on R&D -- maybe -- sometimes 15 percent, once in a while 40 percent. But, it's not a huge chunk of revenue. If you know where they're going, that's what they're going to be investing in.
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A lot of times, companies are not going to place where the customer is because there's a lot of bright, shiny objects where they're chasing some vision. They're going to be investing in something that you don't care about. It doesn't solve the problem entirely but at least trying to get a real strategy statement and understanding what their typical customer looks like because all vendors are pulled by their customers. If you look at those two things, it's going to help you figure out where the R&D money goes.
You don't buy enterprise software; you inject it into your bloodstream. [Laughter] I want to know what I'm buying, and I want to understand the company.
CXOTalk offers in-depth conversations with the world's top innovators. Be sure to watch our many episodes!
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