Why SAP and Oracle’s So-Called “Hybrid” Approach to SaaS Won’t Work

Lately some of the major on-premise software companies – notably SAP and Oracle – have been making statements to convince the market that they are more actively embracing software-as-a-service, or SaaS. SAP executives, who once dismissed on-demand software as a fad, and then tried to introduce ambiguity by using terms such as isolated tenancy, now say that SaaS has its place in the enterprise software landscape. Alongside its $22 billion investment in acquiring on-premise software companies, Oracle has placed a moderate bet on SaaS - just as they have with open-source and seemingly every other emerging trend.

If only words could make it so. SAP and Oracle rely on billions of dollars in on-premise software maintenance revenue to drive their businesses. They acknowledge they are not shifting their software strategies to SaaS, but instead merely adding it as an option. Their new marketing says customers want choice; the hybrid model is best for everyone; and an integrated suite will always provide an advantage.

Let’s examine each of these myths.

Myth: Customers Want Choice….and the Hybrid Model Gives It To Them
Politicians have a great trick for making a debatable proposition sound like a slam-dunk. They will take a bill with controversial provisions and name it the “Freedom Act” or “Prosperity and Happiness Bill,” using words no one could take issue with.

Legacy on-premise vendors promote “choice” in a similar vein. After all, who could argue with “choice” as a virtue? Well, while customers certainly want options, that notion has little to do with a particular vendor suggesting they provide a magic solution that fits all scenarios. For example, the market allows customers to choose between using a local power generator (on-premise) and buying electricity as a utility (on-demand). There are circumstances that favor each scenario, and the market provides customers a distinct choice.

What customers do not want is a vendor stating that the less cost-effective solution of on-premise resources can be extended to provide on-demand capabilities without any drawbacks. Moreover, by claiming that “choice” comes from using the vendor’s solution, they actually highlight the lack of flexibility in their own offering. Once installed, on-premise software systems make it difficult to move information to an alternative solution without very high switching costs. With SaaS solutions, the customer makes a repeated choice to use the solution every month. The only “choice” on-premise vendors offer with hybrid solutions is a once in a lifetime (or career) decision.

Myth: The Integrated Suite Is Always the Better Solution
Another argument often used by Oracle and SAP is that an integrated suite provides superior value for the customer. In the past, for business application software this has been partially true. Their tightly integrated proprietary applications forced customer lock-in and made it difficult to use complementary and superior independent solutions. By insisting that a single suite benefits the customer, the vendors once again highlight the inflexibility of their own architectures. If SAP and Oracle sold PCs, they would suggest that a single vendor should provide the computer, display, power adapter, keyboard, and all peripherals– never acknowledging that this approach makes it impossible to effectively use the innovative solutions of others.

The web represents the culmination of loosely coupled components working together to create cohesive solutions across people and domains. Few websites would attempt to rebuild a mapping solution; they would create a mashup with Google or Yahoo. In the SaaS future, multi-tenant solutions will create well defined interfaces that offer consistency for adjacent solutions. Even today, Salesforce.com still supports backwards compatibility for all nine releases of their web services interface. With this new level of service oriented architectures(SOAs), solutions can be interdependent. Applications can depend on interface and information consistency; just as household appliances rely on the consistency of every electric socket so that they just “work.”

Conclusions
The innovator’s dilemma makes it hard for vendors such as Oracle and SAP to accept change and relinquish control. By their dramatic acquisitions and reinvigorated focus on ecosystem development, both acknowledge that a vendor cannot create a single unified suite. But a better focus for them would be on making decisions and taking positions that allow customers flexibility in tying together business scenarios. This flexibility will only come from the stability of interfaces and rapid innovation that is the web and pure SaaS solutions. By not making a choice, the lack of decisiveness of legacy on-premise vendors will result in higher financial costs and less innovation for their own development and their customers’.

Credit Suisse, Seeking Alpha and Saugatuck Reports Show SaaS in the Enterprise Gaining Steam

Several important research reports in the past two weeks demonstrate the continuing momentum of Software as a Service (SaaS). These recent announcements reflect a broader market awareness of the disruption SaaS is causing for on-premise software in the enterprise.

• Credit Suisse’s March 11 “On Demand Market Forecast” projects “On Demand software to grow at a CAGR of 36% to roughly $21 billion in 2011 from over $4 billion in 2006.”
• The number of companies over $1 billion in revenue that said they were planning to deploy SaaS for mission critical applications more than quadrupled over the previous year, from 13% to 53%, according to Saugatuck’s March 7 “Research Alert Survey of over 250 Senior Business and IT Executives.”
• On their March earnings call, salesforce.com reported a 81% growth rate in accounts with greater than 1000 users, and 88% in accounts with over 500 users. The growth rate of salesforce.com in the enterprise was nearly double their overall growth rate.
• The March 11 edition of “Seeking Alpha” reported that “The message in SAP’s re-segmenting of its revenue streams on March 8 is that SAP is beginning its tortuously slow move to 21st-century Software as a Service (SaaS). But the announcement also shows that SAP has a long way to go to compete with the salesforce.coms of the world from a business model perspective.’
  

SaaS market momentum, coupled with the significant customer benefits it offers, will lead to a continued expansion in the number of new SaaS offerings and amount of repositioning from existing on-premise vendors.

CIOs should respond by developing a comprehensive plan to properly understand, manage and promote SaaS solutions. An important first step is to create a clear view of the current and future application portfolio in light of the capabilities SaaS solutions offer. Reviewing a company’s portfolio of IT-managed applications, along with the on-demand applications flying under IT’s radar, helps CIOs understand the complete IT and application landscape.

CIO’s must then incorporate an organization’s business priorities in order to arrive at the right portfolio of applications and corresponding priorities. Through portfolio analysis and planning, a CIO can channel the momentum and benefits of SaaS. CIOs will better serve the business by extending their own capabilities and avoiding the creation of SaaS silos across functional areas. CIOs that get ahead of SaaS, will be able to simultaneously empower the business, ensure information consistency, and institute proper governance and controls.

Building a Business on Virtual Infrastructure, Using Google and salesforce.com

Startups signal trends that end up impacting the technology of more established companies. Turned off by the high upfront cost and slow innovation of on-premise software, startups were among the first to embrace companies like salesforce.com.



Appirio as a Case Study

Our own infrastructure at Appirio reflects the trend – the serverless enterprise. Let’s look at our lineup of “software”:
• Salesforce.com out-of-the-box – sales automation, tech support cases, contact management
• Salesforce.com as a custom development platform - recruiting management, professional services automation, IT asset management
• Google Apps – email, calendar, advertising, blog, website analytics, Jotspot wiki
• Quickbooks Online – financials
• Meebo/Skype/LiveOffice –instant messaging and telephony
• KTBS Online, BlueCross BlueShield Portal – integrated payroll and benefits


Our hardware, network, and software cost is essentially zero. We pay nothing for our collaboration infrastructure, and reasonable costs for the services our transactional systems provide. Our costs ramp smoothly - we pay for additional capabilities as we use them. We never invest upfront, hoping for some future value. Benefits come in real time.

Our core infrastructure is built to scale. Nothing will need to be swapped out as we grow except perhaps financials (would love to see Quickbooks use SaaS to finally move up market). We do not deploy a single server, our IT costs are tiny, and we spend relatively more on cutting edge solutions that directly improve our business.

Implications for the Enterprise CIO

Appirio’s approach offers lessons to even a large enterprise. Even if you use a standard software selection matrix for each category, weighing pros versus cons and costs versus value for each choice, in almost every category, the SaaS solution is far superior. This is especially true when collaboration is a requirement. Consider two extremes - if you had to provide an email solution for 10 million people, would you trust Google or try to build it yourself on an Exchange instance? At the other end of the spectrum, can you imagine implementing and rolling out Siebel on-premise for a salesforce of one?

At either end of the spectrum, software-as-a-service is a clear winner. We believe the models make sense for almost any company. The real challenge is not in deciding if SaaS is the right approach, but in figuring out where should you start, and how to reduce the switching costs.

Keep on the lookout for how small, successful companies are scaling up their IT. The future of the serverless enterprise is already here - its just not evenly distributed (with apologies to William Gibson).