In defense of incremental innovation

As regular readers know, I am a fan of Clayton Christensen, author of The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Christensen is the one who first coined the phrase disruptive innovation, which has become almost a cliche these days for anything "new" in the world of technology.

But when we say a certain innovation, or a certain technology, is disruptive, what does that mean? Disruptive of what? Disruptive to whom? Without a clear explanation, the term is ambiguous.

This became quite clear in a presentation that I gave to a client. At one point, we used the word "disruptive," and several individuals in the room grimaced. One of them spoke up and said something to the effect of, we are a conservative organization--we're not sure we are ready to be disrupted. Ironically, this is a high-tech company, at the forefront of its industry in terms of innovation. Yet, when it came to its own information systems, the word disruption was not viewed as a good thing.

Should our client have been concerned? I don't think so. Go back and read Christensen's book. In it, he is quite clear that the disruption caused by a new technology is not disruptive to technology buyers--it is disruptive to technology sellers, especially the sellers of older technologies that are replaced by the new technologies. In fact, buyers find the new technology anything but disruptive. They find it simpler, easier, and cheaper to use. It is the sellers of the old technology, which is more sophisticated, more feature-rich, and more expensive that are disrupted by the newer, cheaper, simpler technology.

The vendor's responsibility

This thought came back to me last week when I read a post by my friend and associate Vinnie Mirchandani, who attended, as did I, SAP's user conference in Orlando, Florida. In Sapphire Now: Innovation at the Edges, he writes:

But if there is plenty of innovation at the edges, the core [SAP's core products, such as ECC and the rest of its Business Suite] still seems fairly static. The lightbulb still has not gone on that if on-demand functionality can be delivered for sub-$100 a user a month, there is little justification for on-premise price points to be 10, 15, 20x that. That if Apple and Google and amazon can build mobile ecosystems of hundreds of thousands of applications and games with a cottage industry of entrepreneurs, SAP cannot continue to magically expect its current SI and outsourcing partners to match that speed or those price points. If small teams can build fairly ambitious HANA applications part-time in a matter of days, SAP’s and its partner’s project time scales need to be similarly compressed. if on-demand benchmarks are showing frequent upgrades and importantly instant propagation throughout the customer base, SAP cannot afford to have old-school and grudging multi-year customer base migrations at the core.

That is SAP’s next big challenge. It has picked up a whole bunch of hammers and sickles as it innovates at the edges. It now needs to use them to bombard the core.

Now, I have no argument with the thought that SAP needs to transform its core products with the same technologies that it is using to develop its new "edge" products, such as its line-of-business applications. In fact, SAP co-founder Hasso Plattner and board member Vishal Sikka emphasized this same point in small group discussions I participated in.

Where I do have a different point of view, however, is with any thought that SAP's existing customers would be well-served by a disruptive transition of SAP's core products. Call it the curse of the installed base or whatever you want. But the fact is that thousands of organizations use SAP's core products to run mission-critical systems that support their businesses. SAP cannot, and should not, disrupt or otherwise undermine the investment that those customers have made. Whatever SAP does in the way of innovation, it should do so in a way that preserves and extends those customer investments.

It's not that SAP doesn't know how to rewrite its core products. It's already developed a full ERP replacement built on a true multi-tenant, in-memory SaaS platform: its Business ByDesign product for small and mid-size businesses. And it is using the same platform to deploy its "edge" products, which Vinnie refers to. Ultimately, it intends to migrate functionality from the core to these new technologies.

Lest anyone think I'm an apologist for SAP, please search this blog for posts I have written about SAP since 2002, the majority of which are critical of SAP. But on this point, I respect what SAP is trying to do.

The customer view

Customers of SAP, Oracle, and other legacy vendors are in a difficult position. Many, such as the client I referred to earlier, see value in new technologies, such as mobile applications, cloud computing, and in-memory analytics. But the value does not justify a complete replacement of their core systems, which may be stable and meeting their basic requirements. Why replace those systems? How can the customer extend the value of those legacy or core systems, while at the same time acquiring and implementing new technologies?

Rather than focus on acquisition and implementation of a new technology just because it is new, I would prefer to focus on business value. If an old technology has value, why replace it? If a new technology is not cost-justified, or not justified for strategic reasons, why implement it? If an existing technology is already implemented, what is the business case for change?

That is the need that SAP (and Oracle, and other vendors with large installed bases of customers) is trying to address. It's not easy. In fact, one might say that if SAP can meet this need, SAP would be quite innovative. It would be like allowing a driver to swap out the engine while the automobile is moving down the highway at 75 miles-per-hour. I'm having a hard time thinking of an example where a legacy enterprise software vendor has made such a transition.

So, what most companies, especially large companies need is incremental innovation: implementation of new technologies for new applications, while at the same time preserving and extending the life of their existing systems, while over the long term incorporating these new technologies into those core systems. The alternative--ripping and replacing those core systems--is painful, expensive, and, yes, too disruptive for most organizations.

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SAP innovating with cloud, mobile and in-memory computing

Based on my attendance at SAP's SAPPHIRE NOW conference this week, SAP appears to be making major advances in three strategic themes of innovation. But to succeed, it needs to do two things equally well: reach new customers with leading-edge technology while at the same allowing its legacy customers to adopt these technologies in an incremental way.

I arrived in Orlando Sunday evening just in time for dinner with SAP’s co-CEO Jim Snabe and a small group of bloggers. It was a chance to get to know Jim up close and exchange views on SAP and the enterprise software market. The conversation was very frank, and most of it was off-the-record. Jim described his own roots at SAP as well as his vision for the future, which currently revolves around three broad themes of innovation: cloud, mobile, and in-memory computing. Not surprisingly, these turned out to be major themes throughout the keynotes and briefing sessions I’ve attended.

Cloud computing

As Jim pre-announced with us Sunday evening, SAP just sold customer No. 500 for Business ByDesign (ByD), its pure SaaS solution for small and midsize businesses. This puts SAP ahead of its goal to reach 1,000 customers by the end of 2011, a point of pride. On Monday, I met in a small group briefing with Rainer Zinow, who is in a leadership position with both ByD and SAP's new line-of-business applications for customers of SAP’s Business Suite. The ByD platform, though originally developed for the small business offering, now serves as the platform for all of SAP’s on-demand applications, such as its Sales On-Demand.

On Monday, I also took time to walk out to the show floor for a test drive of the ByD application. I was impressed by the extent of functionality offered by the product, though I did find screens to be crowded and a bit difficult to navigate at first. Some of this might be resolved at implementation, as screens can be customized to reduce the amount of information displayed.

On Tuesday, I interviewed an early ByD adopter, who confirmed that they did find it helpful to configure screens to remove unnecessary information. This configuration can be easily accomplished by end-users. Nevertheless, it points out that once you get into implementation and change management, there’s not much difference between an on-demand and on-premise solution.

Mobile computing

SAP took a big step into mobile computing with its 2010 acquisition of Sybase. Much of the focus since the acquisition has been on development of the Sybase Unwired Platform (SUP), which provides the infrastructure for mobile applications (for example, device management). Now, with the platform now in place, the focus is turning to mobile apps themselves. SAP is showing dozens of mobile apps on the show floor. I got a look at some of them on the floor and also in a blogger briefing with SAP’s Ian Kimbell. Kimbell reports that initially it took SAP’s team a week or two to develop the initial apps, but after coming down the learning curve, the team now only required a couple of days to developa new application. This sort of productivity will hopefully lead to an explosion of innovative mobility applications, not just to replace desktop apps but to enable new business processes.

Some of the new apps are quite simple, such as expense reporting or management approvals, while others carry deeper functionality, such as those for patient data reporting or field service management. Some are developed directly by SAP, while others are being developed by partners. Most are or will be available through the newly announced SAP apps store.

See the video I shot, below, of some demonstrations of these mobile apps.

In-memory computing

Most enterprise software vendors consider cloud computing and mobility applications as the top two innovations currently disrupting the enterprise software marketplace. But SAP consistently lists a third innovation: in-memory computing. The strategic place of in-memory computing was made clear in my meeting with SAP co-founder and current Supervisory Board chairman Hasso Plattner. In memory computing is simply an computing architecture where an entire database resides in main memory and all reads/writes are performed directly in memory, instead of in disk storage. (In SAP’s implementation, disk storage is still used as staging area for source data, for failover integrity, and to archive inactive data.) In-memory computing is enabled by the rapidly the improving price-performance of computer processors and memory, allowing main memory to reach into many terabytes, limited only by the number of nodes in the cluster. SAP’s flagship use of in-memory computing is in its HANA in-memory appliance, although the technology is also being deployed in other applications, including SAP’s Business ByDesign, described earlier. SAP referenced a number of early HANA adopters during the keynotes, most of which focus on business analytics with very large data sets. Early adopters include:

• Colgate Palmolive, which uses HANA to generate detailed real-time sales reporting for customers. The firm is also working with SAP now on a HANA application for trade promotions management.
• Medidata, a SaaS-provider of clinical trials data management. The firm uses HANA to allow its customers (generally large drug and medical device developers) to analyze clinical trial data from around the world for trends in quality issues and to quickly take remedial action, potentially saving large amounts of money in each trial.
• Caterpillar, the manufacturer of large earth-moving equipment, which uses HANA to analyze large numbers of product configuration options and design-to-order features. This application of HANA allows the firm to determine what configurations are feasible from instantly analyzing millions of rows of data.
• Canoe Ventures, a joint-venture of several cable TV companies that uses HANA to customize delivery of ads to millions of individual viewers, allowing them to instantly request more information. This is an application that uses HANA for non-SAP data. Once the ad and viewership data is no longer needed, it returns to its sources. Nothing is held in a permanent data warehouse.

These are just four of the many case-studies presented by SAP board member Vishal Sikka and discussed further in my briefing with him after his keynote session.

As a data analysis tool, HANA competes with Oracle’s Exadata product line. In-memory computing itself is not unique to SAP. It is also employed by other enterprise system providers, such as Workday, as well as data analytics firms such as QlikTech.

Interestingly, SAP has at least two connections between in-memory computing and cloud computing. First, its cloud ERP offering, Business ByDesign, itself uses an in-memory computing architecture. Second, SAP plans to offer HANA as a service, running in SAP's own cloud, for customers that cannot afford or cannot justify an on-premise purchase of a HANA appliance.

What does it all mean?

SAP is one of the largest and oldest enterprise software providers. It has a large installed base. In pushing forward on these three fronts of innovation—cloud, mobility, and in-memory computing—it has two goals. First, to keep its installed base customers supplied with new technology, to keep them from looking elsewhere. Second, to provide new and interesting solutions to prospects that are not yet SAP customers. These two goals can be seen in each of the three themes.

• With its cloud offerings, SAP is aiming its line of business solutions, such as Sales OnDemand at its installed base, some of whom have been leaving the fold, choosing Salesforce.com for sales force automation rather than SAP’s own on-premise CRM solution (as evidenced in a recent deal I was involved in). At the same time, SAP is targeting its Business ByDesign service to new prospects--small and midsize companies--that are increasingly looking at cloud solutions, such as NetSuite. In addition, SAP thinks it has a winning strategy in selling ByD to small subsidiaries of its large customer base, which might otherwise look to Microsoft, Epicor, Infor, or QAD, for example, in a two-tier configuration.
• With its Sybase Unwired Platform, SAP is trying to make life easier for its installed base customers, who otherwise would have to develop their own mobility applications or integrate offerings from a variety of providers to run on a variety of devices. At the same time, SAP thinks it can sell its mobility applications to companies outside of and separate from its installed base, potentially serving as an entry point for other SAP products. My associate Dennis Howlett thinks SAP should be even more aggressive in this strategy, by providing the Sybase Unwired Platform at low or even no cost, to gain a foothold in new organizations.
• With its HANA in-memory data appliance, SAP is looking at providing supercharged data analytics capabilities to its own installed customer base, such as its Business Objects users. At the same time it has taken great pains to ensure that HANA plays equally well with non-SAP data, to position HANA as a general purposes data analytics solution, as shown in the Canoe Ventures case-study, outlined above.

Will SAP be successful in these three themes of innovation? It certainly has the resources to do so. Its large installed base throws off billions of dollars in maintenance fees that SAP can invest in new development. It also has a long and proud history of engineering excellence. And in its acquisitions of Sybase and Business Objects it gained the subject matter expertise and customer base to give it a foothold in mobility and analytics. If there is any area where I might have reservations, however, it might be in cloud computing. Cloud solutions are an entirely different animal than on-premise systems, in terms of how they are developed, sold, delivered, and maintained. The revenue model is different, and as a public company, SAP is very sensitive to short-term constraints on its profitability.

When it comes to investing in the resources SAP needs to make ByD or the line of business applications successful, will SAP willingly pull resources away from its high-margin on-premise business or its multi-million dollar HANA deals? Those who are fans of Clayton Christensen understand the "Innovator's Dilemma." It is not an easy step for market leaders such as SAP. The leaders in the Business ByDesign and the line of business applications areas are certainly smart, talented, determined, and visionary. But will SAP as a whole stand behind their efforts when there is easier money to be made elsewhere?

Whether SAP as an organization can maintain the level of commitment needed to make them successful remains to be seen. The early results, with 500 new ByD customers is encouraging, but there are many more months and years ahead.

Note: SAP covered my travel expenses for this event.