Thursday, July 14, 2011

Microsoft as the Good Guys

I spent a good part of this week at Microsoft's Worldwide Partner Conference (WPC) in Los Angeles, and I came away with this thought: in enterprise IT, Microsoft is turning into one of the "good guys."

When Microsoft ruled the world

First, let's turn back the clock. Around the turn of the last century, Microsoft had a lock on personal computing, especially with its Windows desktop OS and its Office productivity suite. Apple was in a far distant second place. Netscape had a head start with a Web browser but was soon crushed by Microsoft's Internet Explorer. Linux made inroads at the server level but never gained traction on the desktop. Microsoft on the desktop was like IBM in the data center in the 1980s. It was commonly said, whatever market Microsoft chooses to go after, it will soon dominate. The US Department of Justice and European Union pursued Microsoft on antitrust grounds, like the US did with IBM years before. But these actions seemed to do little to slow Microsoft's momentum.

But, what a difference a decade makes. The desktop is rapidly losing ground as the center of personal computing. Smartphones and tablet computer usage are exploding, and Microsoft has a tiny market share on both. Apple still has a small market share for desktops, especially in the enterprise, but it is now the choice for all the "cool kids." Microsoft still has a majority and growing share of the workload in corporate data centers (over half, even in large organizations, per our research at Computer Economics), but it is late to the game in cloud computing, which threatens the very reason-to-be for corporate data centers, long-term. Its search engine, Bing, has some interesting technology, but faces an uphill battle against Google, which dominates the search ad business. Therefore, in many markets, Microsoft is the underdog.

So, it was entirely fitting that the WPC Tuesday keynote this week began with a version of Coldplay's song," whose first line is, "I used to rule the world:

I used to rule the world
Seas would rise when I gave the word
Now in the morning I sleep alone
Sweep the streets I used to own

I used to roll the dice
Feel the fear in my enemies' eyes
Listen as the crowd would sing
"Now the old king is dead, long live the king!"
One minute I held the key
Next the walls were closed on me
And I discovered that my castle stands
Upon pillars of salt, and pillars of sand

There were signs of humility in the keynotes, such as Steve Ballmer remarking that the market share of Windows Phone had gone "from very small to very small." Even in touting success, such as with the roll-out of Windows 7 and Office 2010, there was none of the bluster we too-often see from certain enterprise vendors. Ballmer even had a hard time getting the partner audience to give a good hiss at the mention of a competitor.

So, as I'm listening to keynotes and conducting one-on-one interviews with Microsoft executives and partners, I'm getting the feeling that Microsoft is losing its place as everyone's favorite punching bag. In fact, it has a real opportunity to be the good guys in the enterprise IT marketplace.

I see this in three ways.

1. Offering safe platforms

Microsoft takes a lot of criticism for its proprietary technologies--especially from open source advocates (of which, I am one). I still believe that open source technologies, such as Linux, AJAX, and others, are a great foundation for building enterprise software. But, increasingly, independent software vendors (ISVs) are seeing Microsoft as another safe alternative.

It is not generally known, for example, that SAP--the granddaddy of enterprise software--is using Microsoft Visual Studios as the platform for scripting custom logic in its new Business ByDesign (ByD) cloud-based ERP system. SAP formerly did nearly all development in its proprietary ABAP language as well as in Java. But now, SAP apparently feels that Microsoft's C# is a better choice, at least for ByD. When I asked SAP about this a few months ago, an SAP executive told me, it's because most of the target market for ByD--small business--is already using Microsoft technologies.

This week, at the WPC, I ran into an executive of a Tier II ERP vendor, which competes with Microsoft Dynamics. I was surprised to see him at a Microsoft event. Why was he here, I asked. "Because, we're a Microsoft partner," he replied. "We use .NET, Lync, Sharepoint, and Microsoft's business intelligence capabilities as part of our product strategy. We're also using Azure to build cloud-based mobility apps."

Later in my one-on-one interviews with Microsoft executives, I asked about this. How can you compete with these enterprise software vendors in your Dynamics business, yet turn around and support them with your technology? The answer, in so many words, is that in the big picture, Microsoft will be more successful by being a safe platform provider for other vendors, than it will be by hoarding its technologies only for use by its own applications business.

So, at a time when other enterprise software vendors are questioning their commitment to Java, in light of Oracle's acquisition of Sun, Microsoft is starting to look like one of the good guys.

2. Focusing on cloud-value

Despite Steve Ballmer's talk about being "all in with the cloud," Microsoft's actual progress has been slow. From this perspective, Microsoft is seen as a laggard, falling behind cloud infrastructure providers such as Amazon, as well as SaaS providers, such as and NetSuite. This has been my view for some time, and I still feel this way.

But from interviews with Dynamics executives, it's clear that there is some deep thinking going on about the cloud. Specifically, what is the value of cloud computing to customers? Is it only in cost-savings through outsourcing the infrastructure to a low-cost platform? Is it with all workloads equally, or with certain workloads? Are there parts of the enterprise suite that customers will more likely want to retain in-house, or with a trusted third party hosting provider, while moving other parts to a shared multi-tenant environment? What scenarios favor multi-tenant as the preferred architecture, due to the relationship between the tenants?

With many enterprise IT vendors today, where you stand on the cloud depends on where you sit. If you are a NetSuite or, the only valid strategy is to have everything delivered as a pure multi-tenant SaaS offering. If you are a Larry Ellison, SaaS is a myth, or if you are a Harry Debes, the SaaS industry will collapse in two years.

But, with Microsoft there's no such dogmatism. Rather, it is thinking hard about where customers find the most value in cloud computing and is working to prioritize its migration to the cloud to focus on those value propositions. I just wish they would get there faster.

3. Enabling entrepreneurs

The third way in which Microsoft is the good guy is in the opportunity it offers to entrepreneurs. We all know that Microsoft's sells a lot of products to small and mid-size businesses. But Microsoft is also small-business-friendly in its partner channel. Attending the WPC is a real eye-opener: thousands of partners, mostly small businesses, many entrepreneurial, enabled by Microsoft's channel program. During these economic times, when everyone is championing small business as the key to economic prosperity, Microsoft is enabling thousands of entrepreneurs and small businesses worldwide to grow and compete successfully. In fact, IDC recently estimated the total 2010 revenue of the Microsoft partner ecosystem at US $580 billion. Compare that to Microsoft's revenue of approximately $60B, and you can see that every dollar Microsoft makes results in about 8 or 9 dollars of revenue for its partners. That's a big opportunity for Microsoft's 640,000 partners worldwide.

My interviews with three Microsoft partners also gave me insight into how these small businesses are winning in these difficult times. I interviewed Jeff Geisler, owner of Socius, a traditional CPA-type partner, which is growing steadily through the recession by acquiring smaller firms. I also met with Steve Thompson and Jim Sheehan from PowerObjects, a Microsoft CRM partner with strong development capabilities. Finally, I had a sit-down with Paul Tilling and Bob Hadingham at LexisNexis. Paul and Bob's group is an independent software developer in the UK that has taken its software for law firm practice management and is migrating it to Dynamics AX as its underlying platform. These three businesses have different focuses, but each is betting its business on Microsoft's partner channel.

With some other enterprise IT vendors, being a partner is a risky bet, as you sometimes find yourself competing against the vendor's direct sales force. Or, the vendor has a shifting strategy on where it wants to allow its partners to do business. Microsoft, by running 95% of its revenue through the channel, has no such conflict.

A closing thought

The choice of venue--Los Angeles--was entirely suiting to this theme. The city has seen hard times over the past several years. The glow is off the Golden State. The land of opportunity has been slow to recover from the recession. Our state budget is deep in the red and the business climate is going from bad to worse. It's a microcosm of most of the nation.

Microsoft could have chosen San Francisco or Silicon Valley, where it would have been just one more tech conference. Instead, it chose Los Angeles, where it could make a difference. In fact, I'm told, this was the largest business conference ever in Los Angeles, and was estimated to bring $45 million for local businesses.

So, once again, Microsoft is the good guy.

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Thursday, July 07, 2011

The IT Spending Recovery and Implications for Enterprise Software

Computer Economics has just published its 22nd annual IT Spending and Staffing Benchmarks study. The latest data, based on our survey from the first half of 2011, shows that the US and Canada have emerged from the IT spending recession of the past two years. At the same time, the recovery is weak and organizations have not returned to the IT spending growth rates of the middle part of the previous decade.

That said, some industry sectors are showing IT spending growth rates well above the median 2.0% for the composite sample, as shown in the accompanying figure. The insurance sector leads the way, at 5.0% growth in IT operational spending, followed by wholesale distribution, discrete manufacturing, high tech, healthcare, and process manufacturing, which all beat the composite median.

To no surprise, the sector dragging the averages down is government. Median IT operational spending by governments is falling 3%, the second year in a row that IT organizations in the government sector have reduced spending. The retail and banking and finance sectors also continue to show below-average growth in median IT spending, at 1% and 1.1% respectively.

Other key findings include:
  • IT operational budgets as a percentage of revenue is 1.6% this year, down from 1.8% of revenue in 2010, as revenue gains outpace investment in IT.
  • In a continuation of a six-year trend, IT operational spending per user this year is declining to $6,667, down from $7,002 the prior year, on an inflation-adjusted basis. The long-term trend is indicative of improving IT operational efficiency but is being pushed further by the cost-cutting of the past three years.
  • After three years of zero growth, IT capital spending is up 1.8% at the median. Discrete manufacturing, energy and utilities, and high-tech sectors show the strongest growth in capital investment.
  • The modest increase in IT spending this year is not reflected in IT hiring plans: only 34% of organizations are increasing IT headcount, while 27% are reducing staff levels.
A free 40+ page executive summary of the IT Spending and Staffing Benchmarks study is available, along with a description of the full report.

Implications for Enterprise Software

The recovery in IT spending is certainly good news for enterprise software buyers and sellers. The stronger-than-average recovery in the manufacturing and distribution sectors is especially welcome, as these sectors were hammered hard early in the recession. In our soon-to-be-completed technology trends survey, we are already seeing signs of increasing interest in expanding ERP systems, replacing legacy systems, and new investments in CRM, supply chain management, business intelligence, and mobility applications.

At the same time, our data shows the recovery is weak. Although many organizations are now willing to spend, they still have one foot on the brake, ready to cut back or postpone new spending initiatives if the recovery slows. Fear of a double-dip recession is far from over.

This cautionary mood means that sellers should expect buyers to negotiate hard on price. Flexibility in payment terms, with milestone payments instead of cash up front will also be well received. With its subscription-based pricing and avoidance of large up-front costs, software-as-a-service (SaaS) will continue to be an attractive option for many buyers. Finally, many buyers will be looking to add new functionality to existing systems, rather than completely replace them. Vendors that are able to play well with others will benefit the most in this environment.

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