“We blew it in the 1990s. By running applications on the client, client/server was meant to put information at your fingertips. But all we did was to create distributed complexity and fragmented data. CEOs have come to hate IT because they can’t get what they want from it.”
That was Larry Ellison talking to the Economist in 1999. He knew the move to the cloud was coming. And while he has personally profited on its arrival through investments in Salesforce and Netsuite, his primary focus – Oracle, not racing boats – has all but missed out on the biggest shift in enterprise technology since the move from the mainframe. No longer willing to be left behind, however, the Redwood Shores giant and other industry incumbents are attacking the market with a vengeance. In the last six months, we’ve seen one of the largest onslaughts of enterprise M&A ever.
So the big enterprise software vendors are beginning to gobble up the small enterprise software-as-a-service vendors – nothing to get out of bed for, right? The natural evolution of any market is consolidation, and it’s certainly familiar territory for today’s existing leaders. Cisco, EMC, Oracle, IBM and others have all maneuvered into their current positions of strength with strings of successful acquisitions. Historical validations of this strategy are abundant: a significant portion of Cisco’s profitable businesses and entries into growth markets have come through its acquisitions of leading networking and hardware companies; Oracle has consolidated markets in order to continue to control customer accounts and evolve into to a one-stop enterprise software (and now hardware) shop; IBM’s software portfolio has arrived through a series of acquisitions, allowing it to continue to avoid fading into irrelevance by buying technologies like Lotus, FileNet, or Tivoli. Acquisitions have kept these companies afloat far longer than the natural life of their own product developments.
But something different is happening this time around. The purchases of RightNow, SuccessFactors, Taleo, and DemandTec have little to do with the need to consolidate markets, or even to feed immediate or medium-term revenue needs (most of these companies’ revenues are literally rounding errors on their acquirers’ sales). Rather, they’re being bought because of the existential threat to the industry leaders’ entire way of being – packaged software delivered to the customer through a system of relationships and alliances so complex that it resembles Hollywood more than it does the world of hypertext. These 9-and-10-figure acquisitions are intended to give the acquirer a shot of adrenaline, rapidly infusing their organizations with the ability to bring new cloud services to market, typically only after stumbled attempts to get it right internally.
What makes running a cloud business so different?
‘Cloud’ is the closest thing to a disruptive innovation in the enterprise software world. It’s the digital camera to Kodak. Email to the fax machine. For decades, enterprise technology vendors have been structured to build, market, sell, and service products in a way that only supports a legacy way of buying and consuming technologies, namely one that’s anchored to geographic presence, time-zones, release cycles, and limited options by customers.
Clayton Christensen, famed for codifying the ‘innovator’s dilemma,’ would explain the differences between legacy vendors and their cloud-born challengers through their respective unique sets of Resources, Process, and Values (RPV). We often naively and conveniently consider a company’s resources as its primary asset, overlooking the fact that the years of building specific processes and values – which have helped the organization thrive in one specific market or business model – do little to make it succeed under a different set of rules. These unique traits often become liabilities, as we’ve seen when traditional software or hardware vendors attempt to embrace the cloud.
The cloud is 24-7. It’s on-demand, it’s everywhere, and as a vendor, you’re always on the line. It’s no accident that it’s called software-as-a-service. And moving Oracle’s 108,000 employees toward an entirely different way of doing business takes more than just running a few all-hands meetings and circulating memos. It’s a tectonic shift in company culture, business operations, profit margins, and technical skills.
Rather than mimic their predecessors, cloud companies have in many ways been created in the 24-7 image of consumer internet companies. Take engineering: in the cloud world, you ship out new code instantly and often versus packaging builds over years. Microsoft still builds on three year product timelines. Or, to see how supporting customer differs, a small experiment may suffice: try calling SAP off-hours and you’ll be greeted with a friendly voice: “Thank you for calling SAP. Our office is currently closed. Our normal business hours of operation are Monday through Friday, 8AM to 8PM Eastern time.” In the cloud, you’re always directly responsible for your customers’ success, at any hour.
In the non-cloud world, when you have a problem with your technology, your first call is to the system integrator, consultant or IT administrator. An ecosystem of service providers (one that rivals most countries’ GDPs) has been built up around managing, maintaining, and implementing enterprise technology. These too are being disrupted and transformed in a cloud world, causing even more strategic incongruity with the incumbent vendors. In a world where I can get to any app I need for my business, and pay marginally and only for as much service as I use, the marketplaces that prop up old business models are dramatically weakened.
And with IT spending near flat-lining, the largest growth markets are going to come from cloud delivered solutions, representing a possible $177 billion market by 2015. With a fast growing pie, all vendors are looking to grab the largest pieces they can get, before it’s too late.
But will it work?
While large vendors have delayed the market through confusion or aggressively pushed for internal innovation, companies like Salesforce, Successfactors and a wave of cloud startups have seen rapid adoption across businesses of all sizes, including the legacy vendors’ once-faithful customer base. Rather than watch new entrants continue to drain their lifeblood, large enterprise companies are making acquisitions in the most pain-minimizing and strategy-optimizing way.
These acquisitions are not cases of the incumbent strategically disrupting itself by buying the imminent disruptor, but rather, relatively safe ways to dip one toe into the cloud while keeping a firm grip on the core business. SuccessFactors is adjacent to SAP’s core ERP and HRM systems. RightNow and Taleo overlap little with Oracle’s main revenue stream, but certainly target the same customers. With SuccessFactors, you get a killer leader in Lars, who is the best bet for bringing the giant into the future; and Oracle gets the fourth and fifth largest public SaaS providers in the market. There are no burning boats, in part because it’s simply not necessary or even possible at this stage.
These mergers won’t, and can’t, look anything like the ones we’ve traditionally seen in the enterprise space. Sarah Lacy points out that the old way of consolidation and competition is no longer relevant, even with a shiny new portfolio of cloud applications. I’m inclined to agree, as the world has dramatically changed in just the past few years around how enterprise technology is built, bought, and sold.
The only way to survive in the world of end-user decisions, mobility and the growing millennial work-force is to innovate and deliver value at web-speed and scale. This is more than a shift in delivery model. It’s a fundamental change to the values and processes that these enterprise software companies have traditionally operated under. The Workdays, Jives, Yammers, Tidemarks, Asanas, GoodDatas, Domos, and SnapLogics of the world embody this new way of running and are reaping the benefits substantially. To succeed, the defining characteristics of today’s cloud services will need to be absorbed and transform the acquiring companies faster than the market progresses around them.
Larry Ellison’s cloud prophecy is looking awfully accurate; the only question is if, after all these years of pursuing a different model, he can buy his way back into it.