The Next (and Hugely Important) Frontier
Many, many years ago, on a very snowy day in New York City, I sat in on a Merrill Lynch investor conference. Marc Benioff of salesforce.com was one of the technology CEO speakers that day. As Marc spoke, it dawned on me that salesforce.com was not going to be a giant application software vendor. Instead, salesforce.com was angling to become a platform player first and foremost.
In that moment, I realized a fundamental change was occurring in the application software marketplace. But, I wondered if other vendors would also see this and act in a manner similar to salesforce.com? The uptake of platform technology has been slow among application software vendors until recent years. There is currently an arms race underway inside software companies today with each trying to build its own cloud platform stack. Unfortunately, too many firms may be too late in the development of their platform technology and worse, may have missed the boat altogether in developing a vibrant platform ecosystem.
Within the ERP space, platform-as-a-service (PaaS) technology is something that salesforce.com and NetSuite have developed, promoted and used to attract developers. The force.com architecture of salesforce.com may currently be one of the largest business PaaS ecosystems today.
Over the last many months I have quizzed a number of ERP, HR and other vendors regarding their platform-as-a-service offerings. In summary, what I have learned is that:
- there are a number of application software products that utilize Microsoft technology as its basis for its original (SOA and then cloud) platform
- some vendors believe that continued enhancement of these SOA platforms may require rewriting much of the their solutions
- vendor after vendor are rolling their own PaaS environment utilizing combinations of open source and commercial software technologies from both large and small providers
- vendors and vendor management see the development of a PaaS as a technical challenge that will deliver benefits for their customers. They are not fully aware of nor understand the ramifications that a PaaS ecosystem will bring to their firm and their customer base
A few days ago, I sat down with Phil Simon. Phil has a new book out called, “The Age of the Platform“. This book focuses on four major technology platforms: Apple, Amazon, Google and Facebook. In the hour and a half Phil and I spent at lunch, I was astounded at how deeply each of us understood the platform space but also recognized how each of us has come to different understandings around platforms based on our coverage areas. I care mostly about how platforms will be developed within the application software space while Phil’s closes the gap with many more examples in the consumer technology space.
That lunch was a particularly important one as the lessons that have developed in the platforms of Phil’s big four (Amazon, Google, Facebook and Apple) will doubtlessly come back to apply to PaaS developers in the ERP and other application spaces. And possibly, the most important lesson that warrants focus today is this: there will not be an infinite number of successful platform ecosystems and many of the platform development efforts of ERP vendors today will not deliver big benefits.
State of ERP PaaS and PaaS ecosystems
SOA (service oriented architecture) has been a significant focus area of ERP and other application software vendors for the last decade or so. These architectures compartmentalized many common “services” such as user interface presentation, database access services, mobile device interaction, etc. By isolating specific services, large portions of code would remain unaffected by changes in one of the component service areas. SOA made application software easier to adjust to the evermore changing world full of cell phones, social networks, etc.
But, SOA was not necessarily designed for concepts such as multitenancy — the critical capability found in the best software-as-a-service (SaaS) applications. Indeed, SOA was conceived in a time before distinctions such as single or multi-tenancy were commonplace. SOA was good but it did not possess the completeness, tools or ecosystem capabilities found in some of the PaaS environments of today.
The Force.com platform, for example, now contains development tools, cloud database technologies, code development tools and more. The VMForce offering possesses much more. It is an architecture that enables the citizen developer world where anyone with a live Internet connection and a computing device can build sophisticated Web applications on their own. That platform allows one, two or three person development teams (and larger) anywhere in the world the ability to build complex, powerful business applications. These programmers do not need to acquire expensive licenses for databases and other systems management tools. These programmers do not need to purchase computing hardware such as servers, routers and other devices. No, these developers need only an Internet connection to become commercial software firms.
It is the ease of use with which individuals can use platforms like force.com and iOS from Apple that both transforms the software industry and also the nature of the companies propelling these platform ecosystems. The size of the Apple iOS ecosystem is staggering when one sees the number of applications developed and the number of developers within the community. But more important is the fact that Apple has begun to build a separate marketplace for business applications created through this platform. Understand this, neither Apple, NetSuite, Salesforce.com nor are other vendors interested in just building a platform. No, they want to build an ecosystem and they want to do it badly.
So what’s the big deal?
The big deal is the ecosystem – that’s what’s really BIG. It’s not the applications a vendor has, it is the ecosystem around them. It is in the ecosystem where:
- hundreds of thousands of developers build extensions to the software vendor’s applications
- other software firms build complementary, robust applications that run on the same platform as the vendor’s applications
- users of the ecosystem can share their experiences, ratings and other feedback about the multitude of products available in the ecosystem
- channel partners flock to the ecosystem because they see a way to develop unique intellectual property and collect royalties on the usage of it thousands of times
- people, firms (large and small), partners and customers can monetize their intellectual property and product extensions
- providers of third-party data, analytical algorithms and other non-software types of intellectual property can find new users for their thoughtful works
The ecosystem is about money. A PaaS ecosystem extends the value opportunity by placing functionally rich, possibly low cost, vertically relevant extensions and new modules within the reach of all ecosystem users. Many of those extensions, modules, etc. come with price tags. The revenue from those solutions represents an income stream to their creators.
Let’s not forget that the ecosystem has significant benefits to the vendor creating this environment. Apple, Amazon, salesforce.com, etc. are not creating these ecosystems and their technical environments for altruistic and non-economic reasons. They are collecting toll charges for usage, transaction fees and other events. These ecosystems make money for the provider. In some cases, they make the providers a lot of money.
Why power is so key to this part of the ERP world
The PaaS ecosystem creates a virtuous cycle for its creator and its participants. PaaS ecosystems represent the epitome in virtuous cycle environments. When one ERP vendor decides to create another version of its product utilizing the platform tools found in another company’s ecosystem, they create an opportunity to cross sell into the install base of every other software firm was built products for that ecosystem, too.
When Coda created FinancialForce.com under the Force.com platform, it quickly found a ready made market available to it. Thousands of salesforce.com customers were now potential subscribers to the FinancialForce financial accounting software products. Likewise, third parties that have built applications on the NS-BOS architecture of NetSuite have found that platform and its ecosystem to be a built-in channel for their products.
SAP’s Business ByDesign, a multitenant ERP solution for the midmarket, does not possess a full PaaS yet but does offer a SDK (solution development kit) that permits third parties to build a number of complementary capabilities and extensions to the product line. SAP has tried to bring some measure of supporting ecosystem capabilities to its channel partner network. This is a product line that is moving towards the support of an ecosystem and at least has made a number of moves in that direction.
The virtuous cycle occurs when momentum builds around the ecosystem. The more developers the ecosystem can attract, then:
- the more products will be created,
- which entices more customers to the ecosystem,
- which triggers more customers to buy from the software developer and other developers in the ecosystem,
- which fuels more development,
- which attracts still more customers,
In contrast, a platform that does not create momentum does not create an ecosystem. It is clear in conversations with technology leaders in some ERP firms, that their PaaS efforts will remain largely an internal tool set or one that will be highly restricted to all but a few outside entities. These limited, closed ecosystems may not prove to be sustainable or will suffer from low market uptake.
The ecosystem is about power. Power is not the same as control. Market power and mind share are what the PaaS ecosystem builders are seeking. Yes, they will build customer pleasing application software. But, they are more interested in building the destination for the largest possible universe of customers to come to.
In the minds of these forward-looking, ecosystem building ERP vendors, they are creating some solid, yeoman products but will leave many of the millions of potential enhancement requests in the hands of volunteers, third-party integrators, independent software developers, etc. that participate in the ecosystem. It’s absolutely brilliant this approach as it transfers significant amounts of R&D costs that the application software vendor would have incurred to members of the ecosystem. And, while others are doing the development work, the software vendor is selling even greater amounts of their basic core product at ridiculously solid margins.
The smart ERP play today may be to focus one’s R&D efforts on building out platform capabilities instead of only focusing on application functionality. The purpose of this is to create a technology platform that will enable record MARKET power for the ERP vendor.
Market power is what causes an application software vendor to be considered automatically in any software evaluation decision. In the past, any large enterprise would have automatically considered SAP, Oracle and possibly other vendors in an ERP selection. These are companies that are well-known in their space and are considered by prospective buyers whether the prospect has been actively marketed to by these vendors. Lesser-known vendors have a more difficult process of getting the attention of and staying in contention for this business because of the lack of market awareness and market power of the brand these vendors possess.
What is happening now is that market power is shifting to the vendors with the largest ecosystems not to the vendors with the largest installed bases. The distinction is critical and will represent a fundamental shift in buying habits of ERP software purchasers. To ignore the shift in where market power is moving is to do so at one’s peril.
The power vs. control issue will be a big discussion item in the executive suites of ERP firms. Some vendors will have a tough time transitioning from bring control mavens to facilitators of great ecosystems. These firms believe that:
- only they can do product development to the ERP product
- only they can create new functional applications
- only they can implement the software
- only they should determine who will be a partner
- only they can own the customer relationship
- only they …. (well, you get the point)
Controlling most aspects of an ERP firm may give one a sense of security. But, in the world of PaaS and PaaS ecosystems, it will be a false sense of security. Letting go will need to become a core competency of the modern ERP firm. Students of the human psyche (and change management) know this will be a tough road for some firms.
Why these ecosystems are SO important
Why is a PaaS ecosystem so important, especially to ERP and other application software firms?
Application software buyers continue to evolve, learn and refine their shopping skills and business needs. They are, often by virtue of the effort they put into these deals, quite savvy and up-to-date. They know the score and they reward the vendors with the most appropriate, most current products.
A few years back, customers were looking at on-premise apps. Then, they started to consider cloud application software. Whether it was called SaaS (software-as-a-service) or cloud, they looked at and started to buy cloud solutions for office automation (e.g., Google Apps, Zoho, Microsoft Office 365), HR (e.g., Workday, Taleo, Silkroad) and CRM (e.g., Salesforce). Some even found business specific solutions in the cloud (e.g., Plex Online and Rootstock for Manufacturing).The move to cloud was on its way.
But in the rapidly evolving cloud world, future waves of buyers started to find lots of cloud choices. So, these buyers do what all rational, logical buyers do – they got smarter and refined their solution choices. Today’s SaaS (software-as-a-service) cloud apps buyer knows they want a SaaS product. With so many out there (and more to come), they need a way to differentiate these. So, these buyers thin the herd a bit and look at only multi-tenant SaaS applications. And, sometimes, that means they need another differentiator. They look at vendors with a PaaS (platform-as-a-service).Today, the truly discerning buyers will also want to look at apps with a PaaS and a vibrant ecosystem to go along with it.
Competition in the application space will require vendors continue to innovate and improve their value proposition. Logical buyers will seek the products that offer the best value for them. It’s simple economics and market dynamics.
The PaaS ecosystem will become important to vendors and not just to software buyers. To vendors, the ecosystem will become a major differentiator for a few vendors that can build one out and get wide market adoption of their platform. For other vendors, their participation in someone else’s ecosystem means that they can take advantage of other firms’ selling and distribution efforts. These ecosystems are full of integrators, product enhancers, resellers, add-on product builders, other major software firms, vertical solutions and more. When someone in these other firms makes a sale, it increases the probability that they will also trigger sales for other members in the ecosystem, too.
But the ecosystem is really important as it can fuel non-linear growth. When a traditional software vendor wants to grow, growth often occurs at a linear rate. This is because the company cannot develop new products beyond what its cash flow can support. R&D takes money and limited R&D funds artificially constrain how quickly the company creates new products. Moreover, the company can only grow other functions, like Sales, based on its available cash. SaaS companies really feel the cash constraint as they don’t get those huge upfront license fees. Many firms are instead getting monthly usage payments. Their cash comes in lots of smaller dosages over time.
In an ecosystem world, a software vendor can use the scale of others in the ecosystem. Third parties will recommend and may even implement a vendor’s products. The vendor doesn’t even need to sell these products. They can scale without pain. Likewise, they can start selling products while others round out the apps for them. The best PaaS technical environments permit users and third parties to create and reuse product extensions and enhancements. The advantage to a software firm is that they don’t have to do all of their product’s R&D work. They can rely on the ecosystem participants to build out additional vertical and horizontal capabilities. In the PaaS ecosystem world, Sales can scale big-time without making massive and time-intensive investments in people, Sales, Marketing and R&D.
“Does every ERP application vendor need to have its own PaaS ecosystem?” – No. Besides the market won’t tolerate more than a few successful ones anyway. Instead, vendors may want to look at which ecosystem(s) they will play in. RootStock already co-exists in both the NetSuite and Force.com ecosystems.
“Is there risk with being part of another firm’s ecosystem?” – Yes. The PaaS ecosystem creator has a vested interest in growing the ecosystem. They won’t give any third party applications firm an exclusive as this limits the growth of the ecosystem. Some PaaS creators may even want to develop their own products to supplant those of its early ecosystem participants. For this reason, your apps firm must insist on seeing the product road map of the ecosystem creator before committing to this space.
Why PaaS, ERP and ecosystems need planks
Phil Simon (author of “The Age of the Platform“) sees the platform and its ecosystem as two conjoined entities. I get the logic behind his combination of these two, but I have chosen to keep the two concepts separated in the ERP space as it is clear to me that too few vendors see them as one combined goal.
To these vendors, a platform is a collection of technologies. An ecosystem is something they will worry about “someday“. Phil believes a platform is “an extremely viable and powerful ecosystem that quickly scales, morphs, and incorporates new features (called planks in this book), users, customers, vendors and partners.” He adds, “the most vibrant platforms embrace third-party collaboration. The companies behind these platforms seek to foster symbiotic and mutually beneficial relationships with users, customers, partners, vendors, developers, and the community at large.”
The planks that Phil discusses are needed to create large, vibrant platform ecosystems for the ERP space. I believe the planks that ERP vendors should include capabilities such as:
- Application marketplace/monetization engine/
- Payment processing/currency
- Channel partner built apps
- Customer extensions
- Development tools
- Social tools
- Mobile tools
- Analytic tools
- Big data services
- Place technology (maps, RFID, etc.)
- Collaboration tools
- Context sensitive content
- Industrialized compute power (or peak computing power)
- Third party data/content
When I meet with ERP vendor executives, I often hear them rattle off portions of the list above. However, what is so telling is how they intend to utilize these capabilities. For many of the technologies, like mobile applications, they see these technologies as being something that will be part of the core part of their product and not something that will be utilized by a third party. Likewise, mechanisms to create a way to publicize and monetize third-party products are way down the priority list for the vendor. In fact, the development efforts have a eerily familiar ring to them from vendor to vendor. The initial platform efforts are designed around extending the original SOA model with ecosystem enhancements well out into the future of the product map.
What is (or will be) a good ERP PaaS ecosystem?
Remember, in technology, the best solution isn’t always the market leading solution. The same may be true for PaaS ecosystems, too. There probably won’t be a single “industry standard” for PaaS ecosystems. However, I am willing to bet that the market leaders will undoubtedly introduce products that possess:
- Easy to use tools and applications
- Citizen programmer speed and simplicity
- Low capital requirements to use
- Low barriers to entry
- Fair (not necessarily cheap) economics
- Some policing of the membership and solutions offered
- High velocity growth
- Lots of user content, reviews, rankings, ratings, interaction
- A reason for users to treat this as a destination
Furthermore, the new market leaders will be ones that:
- move quickly in creating their ecosystems
- shift from thinking entirely in terms of applications and application functionality and develop a mindset and finesse around creating an ecosystem
- fuel the virtuous cycle around their ecosystems to create market power and market momentum
- learn from non-ERP ecosystem pioneers like Apple and Facebook
What should ERP apps vendors do now? It’s a lot. Every ERP executuve committee should be pondering the following now:
- Should we go with NetSuite’s, salesforce.com’s or another PaaS? or should we roll our own?
- Is it too late to roll our own PaaS?
- Are we prepared for the culture and other changes that PaaS and PaaS ecosystems will place on our software firm? Issues such as:
- Sales compensation issues (e.g., who gets the commission when a channel partner sells your product?)
- Channel conflict
- Non-linear growth
- Can we make channel ecosystem developement a core competency?
- Do we need a new business model?
- Do we understand the new economics in an ecosystem world?
- How much hyper-growth can our cash support?
- Can we get more revenue from royalties, tolls and commissions than from original app licenses/subscriptions
- Have we done enough planning to scale well?
- Are we prepared to transform not just evolve?
- Can we make Marketing (especially into all new areas and to channel ecosystem constituents) a new core competency?
- Do we know how to recruit an all new kind of channel partner? (How does an old school ERP vendor recruit a 2-3 person code developer groups in Malaysia to create apps for their ecosystem? How do they even find them?)
- Are we ready to really understand how customers will use the ecosystem? If you don’t really know much about how they use your apps today, how will you get this right?
- And, finally, are you ready to focus on customers to come – not just the existing ones?
The Platform age is upon the ERP space. How these vendors fare depends on how well they adapt. This should be interesting….