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Cloud Is OK, But Consumerization Is The Real Disruptive Play In Enterprise Software August 13, 2012

Posted by bernardlunn in Enterprise Sales, Enterprise Web 2.0, SAAS.
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Today’s hype is all about the Cloud, which is a triumph of marketing. Marc Benioff, Founder/CEO of Salesforce.com, is the trailblazing pioneer who executed brilliantly on a marketing blitz with the No Software tag line and image. It was brilliant, but something grated on me. Salesforce.com was still all about software, just software delivered in a different way. “Software is eating the world” as Marc Andreesen puts it. This is the golden age of software. The tag line should be More Software.

What Benioff really meant was:

“you don’t need to install our software on your hardware”.

That does not exactly trip off the tongue. It sounds like branding conceived by an engineer – totally precise and accurate….and quite useless.

Or he could have said:

– No CAPEX.

That is the Pay As You Use Licensing model. Again, this is precise, but useless as marketing. Working out the trade off between monthly payments vs perpetual licensing is Finance 101. Plenty of traditional enterprise software companies offer a monthly payment option and this can help to get a deal “below the radar” of a corporate CAPEX authorisation process; but that is hardly a game-changing revolutionary approach. Many companies, savvy to this move by vendors, require authorization for the full length of the contract (e.g. they multiply the monthly fee by 24 if it is a 2 year term).

Or Benioff could have said:

– No Hardware

Or:

– No Data Center

That would have been more accurate. No Hardware is the simple core of the cloud computing value proposition. Salesforce has been adamant that they will never license their software for use within a customer’s data center. That gives them lifetime value and great revenue visibility. They can maintain that position with customers as they get their initial traction with end users who have zero interest in the hassle of installing software on hardware in data centers. By the time the Salesforce sales guys get to the CIO level, they are already entrenched at the end user level, so they have enough negotiating clout to hold this line. As Salesforce.com has the scale and technology to buy hardware at least as efficiently as their biggest clients this works. This is tougher for startups without any buying clout.

So now we have:

– No CAPEX

+

– No Hardware

Now, lets add Consumerization. Now we can say:

– No Committment

+

– No Documentation

This is more radical. Many enterprise software vendors fail at this step.

No Commitment means users pay monthly and quit any time they want without penalty. When I was editing the SAAS Insights Report, there was one quarter when Salesforce.com was panned by Wall Street analysts because the company had moved from a policy of insisting on at least 12 months commitment, to asking for no commitment. This meant that analyst’s models that forecast future revenues based on contractual committments saw a weaker forecast. If they had bothered to ask their colleagues analysing consumer centric subscription businesses, they would have looked at churn models and cost of customer acquisition and concluded that Salesforce was making the right move. This showed me that conventional Wall Street analysis is often deeply flawed; but that is another story.

No commitment naturally leads into Freemium. The conventional enterprise response to the need to try before you buy is the free trial. This is quite different from freemium, which is free forever with limited functionality. This is a game that large companies can play more easily. For example, I am confident that Google will survive and won’t feel under financial pressure to adversely change the terms of their free Gmail service. A free service still requires me to invest my time; if the vendor goes smash or changes the rules, I lose that investment.

The key to No Commitment is Low Churn. If you get high churn, if users pay for a couple of months and then terminate, your customer acquisition cost will be too high.

Low Churn means that users actually find it useful. Which leads onto to next one:

– No Documentation.

Would you use Gmail if you needed a Manual to get started? Consumerization means really, really user friendly software. You know what to do the moment you see the screen and you can get real value immediately. If you want to become a power user, you can do so gradually. If you want to use related modules, they are loosely coupled but integration is automatic.

Consumerization is the real revolution in enterprise software. Cloud Computing and Pay As You Use Licensing are usefull iterations of the current model. Consumerization is the seismic shift that will:

  1. Dramatically lower the cost of customer acquisition and on-boarding for vendors (and therefore enable lower prices for customers).
  2. Bring the customers and partners directly into the systems and processes on a peer level with internal employees.

The last point is critical. Enterprises have already cut a lot of costs. They won’t stop, cutting costs is like weeding the garden, a job you always have to do. But senior management priority has shifted decisivelty towards revenue generation. Enterprises today are very cash rich and profit margins are at an all time high, but management teams are all struggling to grow the top line.

Online networking is changing how business is done in fundamental ways. The consumerization of software is not only about letting Facebook addicted Gen Y and Z feel more at home at work. Nor is it just about incremental productivity improvements from easier to use software. Consumerized software is about enabling front line employees to connect in real time and in context with customers and partners. Business is evolving from managing hierarchies to managing ecosystems. That requires a radically different type of enterprise software. The revolution in enterprise software that commenced with cloud and SaaS is just getting started. It is this aspect of consumerized enterprise software to add the final one:

– No Walls (between employees and customers).

Today’s enterprise software is a 5 point mantra:

No CAPEX
No Hardware
No Commitment
No Documentation
No Walls

Vendors can choose which of these 5 mantras to focus on. There are trade-offs and some vendors will do well be focussing only on one or two of these mantras.