Enterprise software, long a complex domain only of interest to specialists, has become the darling of venture-capital investors and startups. This post presents context and concludes with advice for CIOs on navigating the changing enterprise software landscape.
To get a sense of growing interest in enterprise software, look at investment in the category. In the first quarter of 2012, for example, venture capitalists invested $2 billion in IT companies, marking a 14 percent increase in dollars over the same period in 2011. Meanwhile, investment in consumer Internet companies dropped 76 percent during the same period. (All numbers from Dow Jones VentureSource.)
As money pours into startups, top investors have announced the greatness of enterprise software. In a well-known piece in The Wall Street Journal, investor Marc Andreesen, argued for the importance of software in today's economy:
In short, software is eating the world.
My own theory is that we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.
More and more major businesses and industries are being run on software and delivered as online services--from movies to agriculture to national defense.
In the last five years, there's been this sort of acknowledgment of the consumerization of the enterprise, which is consumer product development, design methods applied to business software, of which SaaS and cloud and all these things are examples.
The founder of startup Box, Aaron Levie, explained why the enterprise is so attractive:
Today, nearly every internet-connected, employed individual is a potential user and buyer of enterprise tools. And by making these tools accessible to users with just a few clicks, enterprise software providers can reach markets at a scale and speed that were impossible in the client-server paradigm.
Another investor offers a more prosaic view of why enterprise software is interesting--cash:
Straight-up enterprise subscriptions with average sales price of over $400,000. Not something that would be put on a credit card. In fact, it smells like enterprise software to me, and that sort of growth and deal size is sexy as hell.
For all these reasons, a new generation of startups wants to sell into the enterprise.
The startups argue that lightweight, cloud-based tools, selected by end users rather than centralized IT departments, are the future of enterprise software.
This vision presents a future in which organizations buy software from a variety of vendors, each of which offers a specialized solution to a particular business problem. Because each solution is relatively small and focused, implementation times are short and pose less risk than traditional enterprise deployments.
In this scenario, enterprise buyers link these solutions together using pre-packaged, API-based, cloud-to-cloud integrations that are simpler to configure and cheaper to maintain than the customized integrations typical of on-premises software.
Indeed, lengthy and expensive implementations are a significant weak spot of traditional vendors and present serious problems for customers. Even my friend, Vinnie Mirchandani, a staunch enterprise guy if there ever was one, criticizes the established players for not listening to customers and doing a better job:
In the enterprise world, with dedicated account managers and teams, you would think the customer has much more access to vendor executives. The reality I suspect is there are many walls to break through and vendor executives are insulated from their customers.
In a talk before an audience in New York City, investor and (great) blogger, Fred Wilson, went even farther in his criticism of the incumbent vendors:
If I could short the entire big, fat, old, cynical, rip-off artist enterprise software business, I would. They're not innovating. There's nothing that those big companies do that's really any good. The caveat is it takes forever to rip out those systems.
Fred invests in startups that compete with the established vendors, so of course his comments are biased. However, despite the obvious hyperbole, he does speak some truth. When software vendors earn significant revenue from maintenance and support, rather than product sales, it's obvious that status quo, and not innovation, is the driving goal.
Although Fred is definitely correct that changing on-premises systems is hard, he does not mention that making business process changes with cloud-based software is almost as difficult. This is a critical point because process change issues, rather than technology, cause most enterprise software failures. In fairness, cloud projects tend to be smaller and more incremental, both of which lower project failure rates.
Hyperbole aside, there are practical reasons why enterprise and consumer software are different.
Enterprise processes are complicated
For example, consider how a large company pays its bills, undertakes procurement, or balances its books. Each of these processes requires many steps, inputs, verifications, policies, procedures, and integration points--creating a spider's web of complexity. This inherent organizational complexity tends to make enterprise software complicated, while the best consumer software typically solves a narrow problem. The very best enterprise vendors build software that addresses organizational and business process complexity with the simplicity of a focused consumer product.
Enterprise procurement follows its own logic
The CEO of enterprise startup GoodData, Roman Stanek, explained the challenge of selling at a departmental level in large companies:
Selling to the front office can be on an inbound basis, with relatively horizontal, lightweight, consumer-like pitches. The problem is, you'll find that some serious company--Salesforce, Google, and Microsoft--already owns most of the desktop. Enterprise IT is used to provide significant, detailed explanations of functionality on an outbound sales basis. That means real salespeople burning real shoe leather.
Things usually get even harder when IT and procurement become involved, which explains why many enterprise startups avoid central purchasing departments whenever possible.
Enterprise systems demand integration and durability
Once again, Roman Stanek explained this well. He accurately said that enterprise technology must:
Satisfy...requirements for...scalability, reliability, security, availability, and so on. Enterprise IT wants to know that the software can integrate with long-established systems of record. Be prepared to answer questions about single sign-on, uptime, firewalls, recovery-time objectives, service-level agreements, and failover.
Advice for CIOs
The challenge for CIOs is seeing through the enterprise/consumer hype to figure out what's real. Here are some tips on trying to balance the desire to innovate with corporate mandates against change:
Ignore the hype: Established vendors talk about "time to value" while startups proclaim they are the "new enterprise software." Both comments are little more than self-serving statements of intention--established players push fast ROI as a selling point, while the startups want to displace the incumbents
Buy the cloud: The future is cloud, so make your plans accordingly
Don't accept huge, wasteful IT projects: Force all vendors to deliver on that well-worn promise of time to value--demand small projects, delivered with incremental change over time
Be open to the startups: Hyperbole aside, there are great enterprise startups out there, so give them a shot
Buy big when you need big: When your situation demands a large vendor, then don't spend time on startups. Just be careful because the rarefied air of big IT is fraught with risk, money, and politics. Folks, I study IT failures, so I'm not kidding about this.
The so-called consumerization of IT is real and happening, but the transition contains a messy mix of innovation, hype, and colliding business models.
As CIO, it is your responsibility to simultaneously innovate, execute daily operations, and protect the organization against risk. Juggling these conflicting goals defines the difficult, sometimes impossible, job of being CIO.