Tech Investments & Partnerships Help MPHRO Leaders Solidify Position | Market Insights™
September 5, 2014
Leaders are investing in technologies and striking partnerships
Leaders are investing in technologies and striking partnerships
Shakespeare said a rose by any other name would smell as sweet. However, what the eternal bard did not say but easily could have is that it would not have sold as well. The rose that’s catching fire now in the marketplace is as-a-service offerings. But service providers are confusing the market.
As-a-service offerings take a business function (CRM, HR recruitment, etc.) and provide it on a consumption basis (pay for it as used) and bundle the entire end-to-end process including hosting the application, the network and often some business function.
It’s interesting to see these function ideas brought to the market, and it’s the most powerful and disruptive force in services today. Providers range from startups such as ZenCash, which delivers receivables as a service, to more established companies such as Salesforce for CRM as a service. Many of the Indian providers’ as-a-service offerings come in the model of platforms or as managed services.
No matter what the providers call their offerings, all the marketing terms are names for very similar business constructs. The providers seek to differentiate themselves by naming the offering using different terminology in an effort to claim that they’re different. But the market largely ignores these efforts. Why?
Because, a rose by any other name may be just as sweet, but people looking for roses don’t stop to look at flowers called something else. Buyers adopt offerings that they recognize as something they want. The sweet thing the market now recognizes it wants is the power of consumption and end-to-end functionality — which it recognizes as buying an “as a-service” offering.
Providers can deliver an as-a-service offering off a common platform or build it unique. But the market is signaling that “as-a-service” has become the recognized term for what the market wants — simplicity and easy-to-adopt functionality instead of past experiences with big, complex projects that require long lead time and are complicated and risky to implement.
Calling as-a-service offerings by different terms just confuses the market and slows down growth.
Photo credit: Yannis
If you read the technology news in the press and social media sites, it’s apparent that we’re in the midst of a big sea of change in which the as-a-Service and public cloud models are transforming the services industry. HP and IBM’s travails and Oracle’s slowdown are laid at the feet of the SaaS providers. But when you pile all the current cloud activity together, it amounts to a hill of beans, not a mountain. Why aren’t we seeing evidence that disruption from these models is happening on a significant scale?
The buzz
In the famous words of an American hamburger TV commercial several years ago: “Where’s the beef?” Everyone is talking about big agendas to rework workload portfolios and making big efforts to to do that. Yes, Accenture has invested well over $1 billion around cloud and several Indian providers have invested $100+ million a year in mobility and cloud work. And the HCL-CSC alliance is predicated on the fact that there will be a huge cloud sandwich for which they want to position themselves.
If you give providers half a moment, they’ll wax with great eloquence and excitement about the prospects for the cloud model as a high-growth area in services. But if cloud disruption is coming to the services industry, it must be walking; it sure isn’t running.
Where are the billion-dollar practices that do cloud? Why don’t we see service providers launching entire new practices or start-ups reworking applications so they work in the cloud? Who is doing all the work?
The reality
The answer to the above questions is that disruption to service providers is happening occasionally but not en mass.
It reminds me of a conversation I overheard around the impending revolution about self-driving cars. Supposedly a Google executive was saying that it’s not likely that new self-driving car will come on the market and people will buy them when they arrive. Instead, he believes the more likely scenario is that we’ll find ourselves using cars that park themselves and then over time become incrementally more capable and eventually driving themselves. But we won’t have gone through that aha moment where we went out to buy a self-driving car.
I think the same thing is happening with cloud disruption. There just doesn’t seem to be a lot of evidence that companies are driving huge transformations to the cloud right now. Maybe it’s a timing issue in which CIOs and large enterprises will become comfortable enough with the technology that they’ll move en mass to rework their ecosystems to embrace this model. But maybe they won’t embrace it like this and, instead, the industry will wake up one day and find that we’ve incrementally adopted SaaS, public cloud and private cloud.
Perhaps the tide bringing cloud disruption is coming in slowly rather than in as a tsunami. What do you think?
The Promised Land of SaaS and cloud models in the services world is clearly visible, but it’s frustratingly difficult for service providers to get there. The new models are the land for service providers’ growth and profits, but providers are finding it painful and frustrating as they try to move to the new models.
Software companies are shifting from the traditional on-premises licensing/deployment model to SaaS and cloud subscription models, and it’s not a trivial matter to make the switch. They have to change operational practices and investments and stop doing some activities to be able to do the new models’ activities. The transformation pulls them in two different directions.
Outsourcing service providers have the same problem as the software vendors. As SaaS takes hold, it changes customers’ expectations, and they want to buy services on a consumption or subscription basis instead of buying a set of components. They want to pay only for what they use rather than a take-or-pay model where they have to buy commitments.
In attempting to accommodate these increasingly vocal clients, providers are forced to move in two opposite directions at the same time. First they have to accommodate their original client demands with their existing service contracts structured in a business model where the provider charges customers on the basis of service components (e.g., buying 30 applications people, 15 servers, 50 licenses). But new demands require that these components are bundled, delivered and priced on a functionality on demand, or consumption basis. Their SaaS or Saas-like expectations require different approaches and even different customer support.
These two different business models are driven by different customer adoption patterns and also often driven by a different set of stakeholders making the decision. The new business stakeholder buyer is less concerned about cost per unit and more concerned about meeting the business needs. And they are increasingly influential in driving new opportunities.
Hence the dilemma for incumbent providers. The traditional business model won’t support a SaaS model, and the SaaS model won’t support a traditional model. The result? The provider is like a carriage drawn by two horses pulling in different directions. It’s not good for the carriage and quite frustrating for both horses.
Providers, thinking the dilemma is just a pricing issue, try to make their existing teams and business operate in both worlds and price services on a consumption basis the way new customers want to buy it. But they quickly find that’s not the case. To succeed, they need to backwards-engineer their entire delivery platform so it can work that way.
The alternative is to have two “carriages.” But then they have double the costs. There’s the frustration in getting to the Promised Land: they’re faced with having one carriage and two horses pulling it in opposite directions or having two carriages and twice the cost. The trip to the Promised Land of growth in the cloud world isn’t as simple as it appears.
I once read that our society’s major accomplishments over the last 50 years were that we had harnessed lightning and used it to get sand to think. This massive leap forward was about using information and computers to automate processes, and it really took center stage in the service marketplace. But 15 years ago labor arbitrage emerged and arguably supplanted automation as the dominant source of value creation in the services field. With the maturing of the arbitrage market, we are seeing automation reemerge at the center of service offerings, and I feel we are in the early stages of a tectonic shift where automation once again dominates the landscape.
We see this disruptive shift to automation happening in many areas. For instance, what moves the market now in end-user customer service isn’t outstanding service from India or the Philippines. It’s the emergence of “service now,” an automation SaaS play, which creates increased levels of automation for customer service.
And there is the expectation of just-in-time cloud or consumption-based CRM. I blogged before about IBM reacting to this trend by selling its transactional BPO and CRM practice when the space commoditized. Dell and CSC are other market leaders reacting to the move toward automated services.
The analytics movement is part of the shift to automation. Another hot growth area is digital commerce. Both of these areas have become largely a tools play rather than a labor arbitrage play.
The as-a-service platforms are also a manifestation of the shift to automated services. Hot new offerings are coming out as BPaaS platform-based services and disrupting the BPO space. In a previous blog I mentioned how payments companies are outperforming BPO companies because of the automated platforms that allow the payments providers to be highly profitable.
These are all harbingers of things to come as automation re-disrupts the global services world.
Although enterprises are aware of, and increasingly adopting, new delivery models such as SaaS and cloud, they continue to be challenged by effectively leveraging these models to derive meaningful business value, and are looking to service providers to help them achieve these goals, driving up inclusion of consulting in AO contracts.
Keying off 2013 market activities and indications, following are five SaaS developments I anticipate we’ll witness in 2014:
1) Blurring of SaaS and on-premise: With the quintessential poster boy of cloud computing and SaaS, Salesforce.com, announcing a partnership with HP whereby customers can now choose to have their “dedicated infrastructure” within a Salesforce.com data center, the true SaaS premise is dead. However, rather than quibbling and mindless debate on further defining true SaaS, SaaS vendors will realize the potential of this market in which a “dedicated” SaaS solution is required. Though Salesforce.com has always shied away from creating a true on-premise version of its SaaS offering, other vendors do offer on-premise and SaaS version. This blurring of boundaries will further continue in 2014.
2) Battle of architectures: Oracle, a company that always denounced cloud computing, has suddenly found a love for it, and has acquired (and will continue to acquire) numerous SaaS vendors. (Note that this nothing different from its on-premise strategy, e.g., remember JD Edwards and PeopleSoft?). However, Oracle for long has criticized Salesforce.com’s approach of creating application-based multi-tenancy. With the introduction of Oracle 12c (c denoting cloud), Oracle’s marketing machinery is going to town explaining how its database-driven multi-tenancy is better than typical application-based architecture. In 2014, we should see more the lines in the sand being drawn.
3) Indirect sales: Most SaaS vendors are running in losses, and understand that their sales and marketing expenses (~30-40 percent of revenue) are exorbitant. They will realize the importance of indirect sales channels such as system integrators and partners to further drive adoption of their offerings. Given the strategic partnerships of Salesforce.com, Workday, and NetSuite with large system integrators such as Accenture, Wipro, Deloitte, and niche providers such as Bluewolf, 2014 should see increase in the depth of these partnerships.
4) Churn management: Despite soft lock-in, SaaS providers are witnessing high churn rates. To be fair, some of the churn is attributable to clients’ unwillingness to adopt SaaS models once the pilot run is over. In 2014, we’ll see SaaS providers investing more time and energy in maintaining their existing customer relationships.
5) Enhanced functionality: This is a multi-year, multi-decade evolution for the SaaS ecosystem. In the past decade, SaaS providers have included many types of functionality that were earlier considered to be unsuitable for this model. In 2014, vendors will continue to evolve their offerings, including introducing industry-specific vertical flavors whenever possible. However, given the opportunities in the horizontal SaaS space (CRM, salesforce automation, marketing, HCM, etc.), most SaaS vendors will gain the lion’s share of their growth in enhanced horizontal functionality.
We’ve been engaged in a lot of discussions recently around whether or not SaaS has to be multi-tenant. In trying to answer that query, we started with another question: What would a private SaaS look like?
Typically when we think of Saas, we think of the multi-tenant platforms such as Salesforce, NetSuite, Ariba, etc. They have several things in common:
These aspects make SaaS a very powerful vehicle. Customer benefits are consumption-based pricing, loosely coupled technologies, and simplicity of management. The customer focuses on how to use the service rather than how to manage the components of the service. The net result is lower cost, because the customer manages its consumption and focuses on how to use the technology instead of focusing on the technology itself.
But here’s what you need to realize —
The market seems to want to claim that these benefits only come from a multi-tenant environment. That simply isn’t true. You can achieve the same goals in a private SaaS environment. There can be public and private versions of the same model.
So what if a provider were to provide those benefits in a private world where companies could have their own environment? A customer could enjoy all the benefits I already describe plus avoid the negative aspects of a multi-tenant environment — inflexibility to change the environment and having to make do with only what is available in the SaaS. Would that private world still be SaaS? As the saying goes, if a creature quacks like a duck and walks like a duck, is it a duck?
My claim is that, yes, you can have a private SaaS environment. So … where would you find such a creature?
Recently we explored ERP in the cloud. SAP and Oracle, for example, provide these offer sets as a SaaS product but without the multi-tenant component. They bundle the hosting, the service, the IP, sell it to you on a consumption basis and provide robust APIs so the customer benefits from the software vendor’s innovation trajectory. Notably, this model also allows the customer to have meaningful customization.
Other than NetSuite, at the large enterprise level we’re not aware of any multi-tenant ERP SAP or Oracle offering. While it’s true that SAP is multi-tenant at the fringes, you can actually run its core ERP system by the component parts as a private SaaS. That way you get to enjoy the benefits of consuming the service on a consumption basis and loosely coupling your innovation trajectory to allow it to evolve on its own separate from other technology innovations.
If you look at the many offerings in the marketplace, there are actually as many or more offerings that give customers a private SaaS environment as there are multi-tenant public SaaS environments.
I think we need to free ourselves from believing that SaaS only can be public (multi-tenant). Otherwise, we deny ourselves the possibility of real benefit from software services that are yet to go multi-tenant and perhaps never will.
As a humorist, American author Mark Twain would undoubtedly have been amused by this variant of his famous quote. But the demise of enterprise CIOs’ traditional role is real, (unlike the misreports of Twain’s passing), and to understand this phenomenon, we need to understand the evolving market dynamics.
Three key trends are significantly altering the shape, structure, and operations of today’s CIO office:
Cloud services: Unlike infrastructure, IT governance, and IT security teams, which are generally shared throughout an enterprise, large numbers of applications developers are normally aligned to specific businesses. Due to the complex labyrinth of multiple teams and decision centers, applications developers face substantial difficulties in fulfilling their business-based project sponsors’/budget holders’ demand for quick time to market.
To overcome these challenges, applications developers are increasingly adopting cloud-based infrastructure/platform-as-a-service (PaaS). This allows them to bypass the other IT teams, (e.g., security and infrastructure). By leveraging cloud services, applications developers no longer solely rely on enterprise IT’s infrastructure and operations to develop and test their applications. They can develop, test, and even host their applications on a cloud-based platform. This is causing challenges for the CIO’s office in terms of reduced involvement with businesses, security issues, and audit risks.
Software-as-a-Service (SaaS): Although it is part of the cloud ecosystem and has been in the marketplace for more than a decade, SaaS is treated as a different segment. The challenges with deploying enterprise software in the traditional manner, (e.g., ownership of licenses, hardware, support, upgrades, etc.), coupled with the significant time to deploy and the high rate of failure, are driving business to push the CIO’s office toward a “cloud first policy.” For simpler applications that do not require organizational support, (e.g., infrastructure, data, integration), businesses are more than willing to leverage the SaaS model. And to avoid getting embroiled into the complex labyrinth of organizational IT, businesses are also hiring contractors to perform specific IT-related tasks. Additionally, as businesses’ appetite to wait for months, even years, without knowing the possible outcomes of an enterprise software deployment is depleting fast, they are increasingly viewing SaaS as the solution.
Digitization and business-IT budgets: Although cloud services and SaaS are disrupting enterprise IT, the biggest challenge facing CIOs is the shift of technology budgets to the business. This typically includes initiatives such as big data analytics, multi-channel customer engagement, social media, CRM, and enterprise mobility. While the CIO’s office plays a role in these initiatives, it is fast losing decision-making powers. CEOs and CFOs are now inclined to spend technology dollars on business initiatives that generate growth, e.g., digitization. Therefore, in a boardroom battle for technology budgets, CIOs are increasingly losing against the businesses (e.g., chief marketing officers and chief digitization officers). The growing perception that digitization is for growth and IT is for efficient operations also works against the CIO’s office.
Despite the fact that a CIO’s office will always exist, there will be an increasing debate around its utility in its existing form. While the misalignment of business and IT has been an age-old debate, the cloud age has finally provided businesses with the ammunition required to change the game. Cloud services, next generation technologies, techno-savvy business users, and the pivotal role of technology in an organization’s growth are creating pressure on enterprise CIOs. They need to act fast to prove that Mark Twain was indeed right and stem reports of their death.
If you are a CIO or an IT manager interested in sharing your story, please reach out to me at [email protected], or directly add a comment below.
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