Ownership and on-demand

Misconceptions about the on-demand applications model are alive and well and were given a thorough airing by SAP blogger Jeff Nolan in An Open Letter to Phil Wainewright, which he wrote in response to my posting the other day about SAP's strategy around licensing.

It's quite astonishing to see just how far apart we are in our perceptionsRisks in the perpetual license model are often overlooked of the on-demand and on-premises models. Jeff takes me to task for what he calls 'errors' and what I would call self-evident truths. Clearly my work in explaining the nature of the on-demand model is far from finished.

I'm going to home in on some points about ownership, because this seems to be the crux of the non-communication between myself and Jeff. I had argued that owning a perpetual software license is neither here nor there in relation to ownership of business processes. Jeff vehemently disagreed:

How are customers not in control of their business processes using on premise software that is perpetually licensed?

Perhaps Jeff can explain to me how customers are in control of their business processes when those processes are hard-wired into software that can't be changed without bringing in boatloads of consultants for months on end? The architecture of on-demand software is such that customization is declarative rather than programmatic, and therefore it's far easier to adapt processes to new business conditions — often it's possible for business users to make changes for themselves without having to call on anyone else at all.

I know that this is the sort of thing SAP is trying to build into its roadmap but it's far away at present. In the meantime, any idea that by simply buying a perpetual license to a software package you get ownership and control of the business processes that are locked away inside of that software is somewhat fanciful.

Jeff then goes on to talk about downtime, as if owning your own infrastructure when the system goes down puts you in more control of your business processes than you are when a hosted provider's infrastructure goes down. Sure, it gives you ownership of the problem, but the business processes are still down either way. On-demand providers suffer less downtime overall than the majority of enterprises, so if we simply measure this on total uptime, then customers of on-demand vendors have more, not less, control over their live business processes than customers of on-premises vendors. I'll concede that the latter have more control over their business processes when they're out of action, but I'm not sure that qualifies as a selling point.

Jeff takes me for task for dragging open-source licensing into the discussion, and perhaps I should have explained this a bit more. It was relevant in the context of talking about vendors moving to a services-based model rather than a license-based model. The majority of on-demand vendors rely on open-source software for their infrastructure, because this increases their margins while giving them more control over the performance and quality of service they can deliver. I can foresee a future when on-demand vendors flourish even though they own no intellectual property in their software at all. Instead their value-add will lie in how they use the underlying software to assemble a unique and reliable service to deliver to their customers.

At least Jeff finally concedes agreement with me on one point: "customers don't 'own' open source or on-demand ... any more than perpetually licensed proprietary products." Jeff goes on to outline the risks that customers need to be aware of in the on-demand model, which is fair enough. These are well documented. I was seeking to draw attention to the risks in the perpetual license model, which are often overlooked: inflexible, cookie-cutter business processes that can only be adapted to the needs of your business by complex software customization that's difficult to change or upgrade — especially if the vendor gets acquired or goes out of business.

Perhaps his response was colored by dislike of my assertion that SAP's pursuit of conventional license revenues is taking the company "down a blind alley" — especially not when I praised Oracle for moving towards more of a recurring revenue model. If it's any consolation, one of my later pieces touched on areas where I believe Oracle is falling behind while SAP has it right. The overall thrust of my argument is that both vendors will have a tough time as they shape up to face the challenges ahead.

Jeff makes the very valid point that SAP may well have no choice but to continue along its chosen course because that is what its customers and its shareholders demand, and when you have "over $11 billion a year in revenue and $68 billion of shareholder value riding on the business model" you don't make changes lightly. I sympathize.