Corrupting consolidation

The last week or so I've had a number of conversations with colleagues attempting to figure out how and why the enterprise software mega-players continue to get away with premium pricing during the worst recession in living memory.

Why is it that Oracle can show its best operating performance ever and Wall Street analysts don't ask the basic question: 'Is this sustainable?' Instead they allow Larry Ellison, Charles Phillips and Safra Catz to bask in a surreal glory as they confidently proclaim they'll get to 50% margins. Equally, why is it that whenever I have a call with other industry analysts, the first question on many lips is: 'Where are the KPIs SAP promised SUGEN to support SAP's maintenance price hike?' I was led to understand this was supposed to be done by the end of March. So far, radio silence.

The other week I was asked what I'd like to see on the sustainability agenda of one of the mega vendors. 'Show customers how to significantly reduce the cost of running the data centers needed to keep your apps going,' I said. The person at the other end of the call thought I was nuts. I explained that it makes no sense to budget pressured CIOs for vendors to come in waving the 'green' flag. Help the CIO find money through optimizing your own apps costs first and then maybe we can talk. Say what - how about schlepping over to Amazon and seeing what they've got to offer? I could almost hear the penny dropping.

This is where we're at: mega vendors desperate to maintain earnings using a broken model that shovels more product onto the market, hoping that customers remain locked in while maintenance costs go through the roof. It's toxic and corrupting in no less a way than you might find on Wall Street. Think I'm over zealous or over reaching?

Look at the tier two press critique of what's happening in the financial service industry. Check how publications like The Atlantic or individuals like Harvard's Umair Haque are calling foul on attempts to unfreeze credit. Look at what they're really saying: the lock-in tax cost of keeping a few mega banks in business will bleed the next generation. See the parallels between those analyses and my own? Still unconvinced? Check Vinnie Mirchandani's analysis of sacred cows:

If we can question the ideal of home ownership, we can definitely question the wisdom of such rigid IT dogma as the sanctity of vendor consolidation, the myth that buying is always better than building, and lots of other ideas that worked very well 10 or 20 years ago but have little relevance in today's global economy.

In my 'old' day job, we were once faced with the sudden imposition of maintenance charges on product that had previously been 'pay as you go.' I asked why we should pay:  'To support ongoing development.'

'But I've already paid for that and in any event I pay for new things as I need them so why this additional burden?' There was no solid answer and I took the decision to cut all payments to the vendor concerned, calculating I could save the then 60% effective cost burden while I worked out a replacement. At the time, the vendor was one of a very small number that could tie me in knots if they chose. I took the risk and it worked out OK. Sure, there was a good amount of strong arming along the way but I dug my heels in and came out on the top side. It wasn't a case of luck but calculated risk and discipline. How easy it is to forget these things yet this is what buyers have to be prepared to say and do. Why don't they?

Despite Ray Wang's exhortations that the mega vendors and customers should forge real partnerships, (which implies give and take) it doesn't seem to be happening. Instead there is a hardening of attitudes on both sides with the vendors winning - for now. The common cost reduction number demanded by CEO's I hear is 20%. That goes from head count all the way through to investments, facilities management - you name it. This is a figure way outside the comfort zone of many buyers. They're not used to asking for it. Instead, they're content to shave four or five points, if they're lucky. That won't cut it in this economy yet vendors can easily take advantage of this knowledge.

Things are changing albeit at a glacial pace. One analyst told me he knows of 'twenty to thirty major customers' who are walking away from their lead mega-vendor. Vinnie is advising clients to dig in hard and, depending on how aggressive the customer wants to be, go as far as putting a moratorium on buying from certain vendors for 36 months.

Agresso tells me it is specifically targeting SAP accounts where there is the need to change course quickly. The company believes its approach to managing change is much more cost effective than re-engineering code. Last year they claim to have snagged 60 SAP customers. Not a huge number in the scale of things but impressive nonetheless. I hear they're having to rein in enthusiasm at the executive level because the cost/benefit message is resonating.

Open source is making an appearance. Matt Asay, GM at Alfresco was quoted last week as saying:

“Two and a half years ago, I got a call from a large financial services firm. They said, 'Well, we're kicking the tires on Alfresco, we took the demo and we went through the processes.' Then they told me, 'You know, we're a conservative organization, and open source is just too risky for us. We can't do it.' Well, a week ago Friday, I got a call back from the same guy, same company, and he said: 'You know, losing my job for buying big proprietary software is too risky. You guys are now in the drivers' seats; we need to buy open source.'"

I applaud what's happening in OSS but it is relatively small potatoes when weighed against the meg-vendor preference for multi-million dollar deals. Even so, setting benchmarks in the $50,000 range can't be a bad thing.

Denial is a common attribute of those who believe they are unassailable but as Wall Street discovered, no-one is too big to fail except through the complicity of those who let them continue. The applications vendor consolidation of the last five or so years was fine in the good times when the idea of having a single throat to choke seemed sensible. It led to what I believe is a corrupted industry that refuses to give customers relief. We're living through disruptive economic conditions yet that doesn't seem to impact the mega vendors' relentless pursuit of Wall Street approval. That cannot be right. It cannot continue.