How to Become a Chief Innovation Officer

I had a real treat this week: I was invited to give a presentation to 25 CIOs at Infor's European CIO Advisory Council meeting, in Maranello, Italy. If you are not familiar with Maranello, it's famous as the town of the headquarters of Ferrari, which is an Infor customer. More on Ferrari at the end of this post.

Infor's Integration Strategy

The event was kicked off by Infor's CEO, Charles Phillips, who came into the top job last December, from his previous position as Oracle's co-President. It was a good opportunity for me to see how Charles deals up close with Infor customers, some of whom were meeting him here for the first time. Charles demonstrated a detailed knowledge of Infor's product portfolio and an ability to outline complex product strategy in business terms.

To that point, Charles gave the best explanation I've heard to date on Infor's integration strategy. Infor's Intelligent and Open Network (ION) is a lightweight middleware product that provides integration between various Infor products, between those products and third-party applications, and between those products and customer/partner developed systems. It is "lightweight" in that it is not optimized for specific transactions or point-to-point integration. Rather each application publishes a complete XML document for each transaction (e.g. a sales order), to which other ION-aware applications can subscribe asynchronously. ION stores all XML documents in a business vault, for reporting purposes and, I assume, to satisfy any regulatory compliance needs for audit trails.

According to Charles, ION is not appropriate for every application (e.g. an equities trading platform requiring subsecond response time would not be a fit), but it meets the need in a simple way for enterprise business applications, such as ERP, CRM and supply chain management. Infor is now in the process of ION-enabling each of its products for approximately 93 business transactions.

The best part is that ION ships as just three CDs, which, according to Infor, can be installed in about 10 minutes.

Infor's Challenge

So are all Infor customers ready to move forward with ION? Not quite. From group discussions and hallway conversations, it is clear that Infor's challenge is to get customers to current releases of their Infor products, where they can take advantages of Infor's new capabilities.

To be fair, this problem is not unique to Infor but common to all enterprise software vendors with large and long-standing installed bases. Many customers purchased their ERP systems years ago, and for good and not-so-good reasons they may have made hundreds or thousands of code modifications. Although they may have seemed justified at the time, these modifications now make it nearly impossible for customers to upgrade. In successful case studies mentioned by Infor executives, the only thing that seems to work is to take a clean-sheet-of-paper approach: put the latest software version in front of users in a conference room pilot and ask, "What's missing?" If you start with the assumption that each previous modification is still needed, the whole project collapses under its own weight.

How to Become a Chief Innovation Officer

This background turned out to be a good set-up for my presentation. I shared that the job of the CIO is becoming more difficult. CIO budget increases in most companies are severely limited, while at the same time CIOs are being asked to do more: support business change (which is increasing) as well as new technology innovations, such as mobile applications, business intelligence, new customer-facing systems, and social business.

The risk for CIOs under these pressures is that they may become, essentially, irrelevant. According to our research at Computer Economics, 75% of CIO budgets go toward ongoing support, leaving only 25% for innovation. With limited time and money, the CIO is forced to defer many business requests for new initiatives, and when users can't get what they need from the CIO, they begin to develop their own systems and IT capabilities. Eventually, the business stops asking the CIO for new stuff, and the CIO slowly becomes just a "Chief Infrastructure Officer," maintaining existing systems.

In such an environment, how can the CIO grow into a "Chief Innovation Officer?" I outlined the key steps.

1. Optimize the Infrastructure. The first step is to lower on-going support costs to free up money for innovation. Understand your current cost structure and where there are opportunities to upgrade and consolidate the infrastructure and applications portfolio. Adopt key IT management best practices for incident management, problem management, and change management, which further lower costs and improve service levels. Cloud computing can also play a role here as a way of quickly rolling out new systems that build upon the organization's core transactional processing systems.
2. Become a Chief Integration Officer and Chief Intelligence Officer. Once the infrastructure has been optimized, the CIO now has the credibility and ability to expand his or her role to become a Chief Integration Officer (focused on end-to-end business processes and customer/supplier integration) as well as a Chief Intelligence Officer (focused on turning internal and external data into useful information and deploying it to the organization through a variety of channels).
3. Become a Chief Innovation Officer. The CIO is now not only reacting to and supporting the business strategy but also leading the business into new IT-enabled products and services.

I finished with a warning. Becoming a Chief Innovation Officer is not a one-time promotion. Today's innovation becomes tomorrow's infrastructure. Just as personal computers and email were once seen as innovations in IT, today they are just part of the infrastructure. Any CIO today who is focused on PC maintenance or email administration risks becoming irrelevant. So also, tomorrow, mobile applications, tablet computing, and business intelligence will become commonplace as elements of tomorrow's infrastructure. The CIO's challenge is to continually learn and grow.

The Need for Speed

Our two days together were not all work and no play. As part of the event festivities, Infor arranged a tour of the Ferrari Museum and a Ferrari test drive around Maranello for all the attendees. I put together a little video of my Ferrari driving experience, which you can view here.

Disclosure: Infor paid for my participation in this event.

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Risks and Opportunities with SAP's Platform Economics

Unless you hang around with SAP developers or independent SAP analysts, you may not be aware that there is a conflict brewing over how SAP wants to charge for its new technology platforms. Specifically, the Sybase Unwired Platform (SUP), which SAP acquired for developing mobile applications, and the SAP Netweaver Gateway, which SAP built to allow third-party applications and devices to connect seamlessly with SAP back-end processes.

The conflict is this: SAP wants to make money, on some basis, for SUP and the Netweaver Gateway, while any fees charged for these platforms discourage third-party development and increase the cost for customers.

Dennis Howlett has been hammering on this subject for many months, encouraging SAP (pleading might be a more appropriate word) to offer these platforms at low-cost or no-charge. He calls it the "Apple model," in recognition of how the free-nature of Apple's development platform has enabled thousands of developers to write third-party applications for Apple's iPhone and iPad. At SAP's annual user conference in Orlando this year, I heard him bring up this point directly with SAP co-CEO Bill McDermott. Bill appeared interested, but non-committal. After the conference, Dennis wrote about SAP's mobile platform, on a downbeat note:

The main problem comes in the licensing model. I find it staggeringly backward thinking that SAP almost invariably finds it necessary to monetize everything that has running code attached to it. That world has been left behind. If SAP could mobilise itself to think differently to the way it is accustomed it could (almost) easily bulk up without having to find another mega acquisition that inevitably amplifies disruption.

Now, just this week, Dennis called my attention to a post written by a third-party SAP developer Graham Robinson on SAP's own SDN site, which strongly confirms SAP's problem:

So let's say I come up with my own killer app. It is an all-singing all-dancing mobile application that will provide huge business benefit to lots of SAP customers. In fact it is so good I can sell the idea to my favourite customers (those that trust me) with a business case that they will jump at. So I have the idea, I have the funding and foundation customer commitment - I am ready to go. So time to decide what technology I should use to build my application with. Let me focus on NetWeaver Gateway but I think similar arguments apply to the [Sybase] Unwired Platform.

....I see NetWeaver Gateway as a programmer productivity tool. It provides a method for exposing SAP functionality using those standards mentioned - but we ABAP developers have been able to do that for years....I am not saying I am not interested in a toolset and/or framework from SAP that does this sort of thing as well, I am. But really the value proposition is that NetWeaver Gateway will save me development time on the backend in publishing the services I want to consume in my application.

BTW - I do not believe NetWeaver Gateway saves me any time developing the front end application despite all the great "app in a minute" demos we have seen. Whether I use NetWeaver Gateway to expose services or I handcraft my own as long as I conform to industry accepted standards the front end development tool should be able to introspect and the runtime consume these services identically.

So back to my killer app. Why should I take the funds my customer has committed to my app and pass some of them onto SAP? Even assuming I could get a straight answer from SAP on what the price would be - why should I do it unless the benefits outweigh the costs? How can a recurring pricing model on a piece of technology be weighed up against the value of saving me development time on a project I already have approval for? And why should I just let dollars go to SAP for my idea? And by the way my customers' employees (the target audience for my killer app) are already licensed to use SAP anyway. Why should they pay again? ....

Returning briefly to the [Sybase] Unwired Platform - how do I justify the cost (albeit unqualified) of this platform against the benefits of my single, albeit killer, app? I can't. And even if I could why would I confuse my customer with extra technology and extra licensing when I don't need to? I wouldn't
....

The real problem is that SAP are struggling to find a way to monetise the millions, probably billions, of users they envisage connecting to their customers' SAP systems via the internet. These will be their customers' customers, their customers' suppliers, their customers' prospects, Joe Average searching for the cheapest widget. Basically it could be everyone in the world with a smart phone.

This is a new-ish problem, but I am sure SAP looked for old business models to learn from. I suspect the business model they took on board is that of the utility companies. IDEA! Let's put a meter on the edge of the SAP landscape and charge for use just like the electricity, gas and water meters on the edge of everyones property. (In case I wasn't obvious enough - SAP NetWeaver Gateway is the meter) Kar-ching! Brilliant! [Emphasis mine.]

Read the whole thing, as Graham goes into more depth in his full post.

Some Monetization May Be Appropriate

After reading Graham's post, I reconnected with Dennis Howlett on this subject. Interestingly, Dennis does see an opportunity for SAP to monetize these two platforms for a select group of customers--its largest customers, who will use these platforms for their own revenue generation. Dennis writes:

SAP believes its largest customers will pay for SUP because they will use it to develop apps for their own purposes from which SAP would likely see little or no economic benefit. These companies - as Gartner has indicated - could easily turn into applications suppliers in their own right, building their own IP on the side of what SAP can offer for the benefit of their ecosystems. The nearest equivalent would be the proprietary EDI mechanisms the likes of Toyota and Dell created which went right through their supply chains.

That's a model I would expect to emerge because the value that can be driven is clear, clean and in the control of the channel master. Therefore, there is a case for SAP charging that fits their model and satisfies the needs of those very large customers. But it will be limited to SAP's top 400-500 customers and does not bring with it a sustainable model. At best it is a series of one-off deals that in total would likely be worth no more than $2 billion in license revenue and $450 million in annual maintenance, based upon past performance, Sybase pricing, discounts, bundling and the like.

However, such models cannot hope to cover all eventualities or for that matter the whole of the market. We can envisage thousands of situational, ad hoc, even one-off applications where the need for fast tracking is paramount or where value comes from volume usage. This is already happening in the Salesforce.com universe where cloud brokers like Appirio are working on a 4-6 week develop/release cadence for proof-of-concept to initial deployments. Having ready access (which has to include easy, clean, cheap licensing) is the only model framework that will encourage those types of developer shop to flesh out the 80% SAP claims it wants to see from its ecosystem. In other words, it is no longer about the fear of leaving money on the table. It is about investing now for benefit that accrues to everyone.

He concludes, "If SAP does that, then it will fulfill its promise of being a good citizen in the enterprise apps landscape."

SAP at a Tipping Point

I'm not sure SAP realizes how precarious its position is, and it works two ways.

1. SAP charging for the SUP and Netweaver Gateway creates "friction" for both developers and customers. As Graham points out, he has no real economic incentive to develop for these platforms, which will eat into the budget his customers have allocated for his development projects.
   
   
2. The desktop analogy: when you license SAP, do you pay an additional license fee to use your desktop computer as a user interface? Of course not. SAP customers are already paying maintenance fees for enhancements to their SAP products. Why should those customers have to pay SAP an additional license fee to use a mobile device instead of a desktop computer? Even if those mobile applications add functionality to the SAP applications the customer has licensed--isn't that what the customer is supposed to get by paying maintenance fees?
   

SAP charging for the SUP and Netweaver Gateway further opens the door to competitors, such as Workday, who are bundling mobile applications at no charge. I fear that SAP is just giving customers another reason to consider alternatives to SAP.

My own work with SAP customers tells me that, in many accounts, SAP is not at the center of the action as it thinks it is, especially when it comes to line-of-business users, which SAP hungers after. Many of these customers are actively looking for new functionality, and they generally take a look at SAP's offerings. But it doesn't take much to nudge them into the welcoming arms of another provider, whether it be for CRM, customer service, or --yes--mobility applications. SAP argues that the integrated nature of its Business Suite and ability to support end-to-end processes gives it a strong advantage with its installed base. My work with SAP customers tells me otherwise. Yes, there are benefits to integration. But that alone is not enough to keep customers in the SAP fold when there are strong economic incentives, or perceived functionality advantages, from competing solutions. Throw up an economic disincentive to adoption of SAP's SUP or Netweaver Gateway, and customers may be quick to look elsewhere. Many won't migrate away from SAP, but they'll wall it off and implement new stuff around it from competing suppliers.

The Entitlement Mentality

What concerns me about SAP's attempt to monetize these two platforms is, once again, the mentality of entitlement. We saw it previously with the battle over SAP's attempt to increase its maintenance fees across the board to 22%. SAP consistently gives the impression that, because of its market dominance in the past, that it is somehow entitled, not only to continuing revenue from its customers, but an increasing share. It does not give the impression that it is concerned about losing ground to upstarts in the cloud, such as Workday or NetSuite, or its traditional competitors, such as Oracle, Microsoft, Infor, IFS, or dozens of others with niche industry functionality.

SAP apparently views its SUP platform and Netweaver Gateway as a way to gain new revenue. I view them primarily as a way of keeping the revenue it's already receiving.

SAP's Opportunity

If SAP can free itself from its entitlement mentality, it has an enormous opportunity with its installed base, which is the largest in the world, including many or most of the world's largest companies.

Such companies have a huge legacy investment in SAP, both in terms of historical data and business processes built around SAP software. Many of these customers would love to stick with SAP for mobile applications, which by most accounts will become the primary way that business users connect with business applications. If the SUP is low or no cost for the majority of customers, it will encourage thousands of developers, such as Graham, to embrace it, and tens of thousands of customers to make it part of their applications infrastructure. The same economics apply to the Netweaver Gateway. If SAP really wants to lock-in its customers, it should offer these platforms to the majority of its customers at low or no charge. This will liberate business value to SAP's installed base, ensuring SAP's relevance for years to come.

Whether SAP truly recognizes this risk and opportunity remains to be seen.

Updates: Others have been pounding away on these points for some time. Here are some other good perspectives on this subject.

• Jarret Pazahanick: Is SAP Using the Right Mobility Strategy. Jarret, an SAP mentor, outlines several ways in which SAP could make more money by not charging for SUP.
  
  
• Dennis Howlett, John Appleby, and Vijay Vijayasankar discuss in this 13 minute video the need for SAP to roll out an Apple-style apps store model, including – in their view – the need to give away the platform. SAP’s progress on mobility is assessed, and they ask, “Is SAP Listening?”
  
  
• Jon Reed covers a lot of ground in his post on SAP at the Crossroads, but be sure to read section 4 toward the bottom on "How Can SAP Win the Hearts and Minds of Developers?" As a bonus, there is an excellent video interview of Graham Robinson who makes many of the same points as he did in his blog post quoted at the top of this post.
  

I'll add more links as I come across them.

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Breakthrough in Material Planning: Demand Driven MRP

For the first time in over 30 years, Material Requirements Planning (MRP), is undergoing a fundamental improvement. A major new development, dubbed Demand Driven MRP (DDMRP) is moving from theory to practice, and the results are impressive. If you care about manufacturing ERP, you would be wise to pay attention.

Carol Ptak recently called my attention to her work with Chad Smith at the Demand Driven Institute, which they founded in 2010 to promote the concepts of DDMRP. I've known Carol for many years, through her work as past President and CEO of APICS and her time at PeopleSoft, where she was an early proponent of making MRP more "demand driven." I wrote a brief blog post in 2003 covering this subject (see: PeopleSoft Strengthens Its Manufacturing Offerings by Acquiring Demand Flow).

So, I jumped at the opportunity to set up a briefing on DDMRP with Carol and Chad for me and my associates Bob Gilson and Nick Hann at Strativa.

Bringing MRP into the 21st Century

Before we look at some of the key concepts of DDMRP, let's review the history of material planning.

MRP, first developed in limited fashion in the 1950s and 60s, really took off in the 1970s, when computer systems enabled widespread adoption and APICS undertook the "MRP Crusade" to popularize it. It was a great advance over previous material planning techniques, such as statistical order point (popularized during the Second World War), which viewed each inventory item separately. The big conceptual breakthrough of MRP was to separate dependent demand (sub-assemblies and purchased items) from independent demand (e.g. finished goods and service parts). MRP, therefore, provided a holistic, or system-wide view of inventory.

MRP (material requirements planning) morphed in the late 1970s and 80s into MRP II (manufacturing resource planning) and ultimately ERP (enterprise resource planning). But the heart of today's ERP systems (at least in the manufacturing sector) is still the MRP processing logic that is essentially unchanged since the 1970s.

In practice, MRP relied heavily on demand forecasts to drive planning and used safety stock inventory to cover variability in lead-times and forecast errors. The results, though far better than the old order point systems, were often excess inventory and less-than-acceptable customer service levels.

Just-in-Time (JIT) inventory and lean manufacturing techniques were, in part, a reaction to the complexity of MRP and a desire to obtain better outcomes. Introduced in the 1980s, JIT was a simplification in material planning and it took inspiration from the quality management movement and Toyota Production System in Japan. JIT is essentially a "pull system"--relying upon simple demand signals, such as Kanbans, from customers to suppliers up and down the supply chain, often with little or no computerized support. Unlike MRP, which viewed inventory as an asset, JIT viewed inventory as a "waste" and sought to minimize it wherever possible by minimizing variation in supply and demand, and reducing setup times to enable smaller lot sizes. But its emphasis on inventory reduction, lack of a system-wide view of inventory, and incomplete planning equation created brittle supply chains, subject to disruptions.

Embracing and Extending MRP and JIT

Demand Driven MRP is not a completely new method: it builds upon and extends the concepts of MRP while borrowing the best features of lean manufacturing. Like lean manufacturing, it seeks to "align efforts and resources as close as possible to actual demand" (a so-called pull system) while at the same time, like MRP, provide "visibility to the total requirements and status picture across the enterprise."

The authors' background in the Theory of Constraints is evident. They are not looking to compromise between MRP and lean manufacturing. Rather they recognize and seek to satisfy the legitimate objectives of both. For example:

1. The greatest extension of DDMRP is the introduction of supply chain modeling prior to generating material plans, as shown in steps 1-3 in the Figure at the top of this post. Here, the organization determines the optimum places where inventory should be held. This is a step that MRP simply does not address. MRP and even Advanced Planning systems (APS) generally take inventory stocking points and safety stock levels as givens and plans within them. At the opposite end of the spectrum, JIT techniques are blind to the overall supply chain. Each node of a pure pull system is only sensitive to the demand at the next downstream operation. DDMRP, on the other hand, models where inventory should be held in order to minimize lead times and reduce variability where it matters the most.
2. In terms of inventory, DDMRP stakes out a middle ground between MRP and lean manufacturing. It does not view inventory as a waste, as lean manufacturing does with its goal of "zero inventory," and it does not seek to establish safety stock levels in a static way, as MRP generally does. Rather it seeks to hold the right amount of inventory at the right place in the supply chain "to promote flow but minimize working capital," and "to size and dynamically adjust those strategic stock positions" based on a set of rules dominated by six factors.
3. DDMRP deals with lead times in a more realistic fashion than traditional MRP, which in calculating manufacturing lead time assumes all components are in stock, or in calculating cumulative lead times assumes nothing is in stock. Neither are good assumptions in most environments today. DDMRP introduces a concept it calls Actively Synchronized Replenishment (ASR) Lead Time (ASRLT), which represents "the longest unprotected sequences in the bill of material" where "protection" is defined by strategic stocking points. These points decouple, compress, and ultimately define the calculated lead time of an item.
4. MRP is only a planning tool and JIT is only an execution tool, whereas DDMRP is both a planning tool (in the modeling and planning stages) and an execution tool, in the execution stage (see Figure at top of this post).
5. DDMRP greatly reduces the emphasis on accurate forecasts in driving supply plans. Demand is driven entirely or largely by actual customer demand (typically sales orders), which can then be satisfied from compressed lead time due to the strategically placed inventories at the subassembly or component level.

These are just a few of the key concepts of DDMRP. For a more complete view, see the additional resources listed at the end of this post.

If there is any doubt that DDMRP is a major breakthrough, consider this: the book everyone considers the "Bible" of MRP was written in 1974 by the late Joseph Orlicky, and the second edition was authored in 1994 by the late George Plossl. McGraw-Hill, publisher of Orlicky's Material Requirements Planning has just released the third edition, which is authored by Carol Ptak and Chad Smith, the brains behind DDMRP. This third edition now incorporates the concepts of DDMRP, building upon the work done by Orlicky and Plossl, two of the fathers of MRP.

Proof in the Pudding

Think DDMRP is just a nice theory? Not so. The benefits have already been demonstrated by at least two early adopters:

1. Oregon Freeze Dry, after adopting DDMRP, saw a 20% increase in sales 20% and 60% inventory reduction in one division, along with 60% reduction in make-to-order lead-time and 20% inventory reduction in another division.
2. LeTourneau Technologies (LTI) is an interesting case study in the natural resources sector. The firm implemented DDMRP in one of its two plants, while letting the other plant continue with traditional MRP. Both plants had similar resources, bills of material, and material planning personnel.
   
   During a boom and decline cycle of 2005 to 2008, the DDRMP plant grew revenues from $270M to over $620M, while growing inventory by only about $80M. In contrast, the traditional MRP plant experienced the similar growth in revenues, but inventories grew at the same pace. When the recession hit in 2008, the DDMRP plant , however, was well positioned with lean inventories while the traditional MRP plant was exposed to a huge amount of inventory liability.

Additional case studies should begin to appear as other organizations gain experience with these new methods.

What's Next?

I believe that enterprise software vendors, especially those focused on supply chain management, are going to move quickly to begin to incorporate DDMRP concepts into their systems. So far, there is only one software provider that has done so, Replenishment+® from Demand Driven Technologies, of which Chad Smith is a paid advisor. However, I see indications that some other vendors are moving in this direction. In other words, I do not believe availability of software is going to be an obstacle.

If there is any obstacle to wholesale adoption of DDMRP, it is going to be in the general level of resource planning skills in many manufacturing organizations. The concepts behind DDMRP are not simple. Many practitioners tasked with responsibility for MRP systems today do not have a deep understanding of MRP principles, even of traditional MRP circa 1974. How are they going to grasp the concepts behind DDMRP? I think this will be the key limitation hindering widespread adoption, unless manufacturing organizations are willing to re-invest in professional development in a sustained way. Conceptual education--not just software training--is going to be key.

A corollary observation is this: production and material planning is going to become an even more critical function for manufacturing and distribution firms. It always has been, of course, but it will become even more critical in industries where some players have the skills to adopt DDMRP and others don't. No longer just a back-office function, resource management should once again become an inviting career path for young people.

Additional Resources

There is much more to DDRMP than I can outline here, such as its ability to accommodate seasonality, ramp up/down in production, and end-of-life scenarios, all of which are troublesome for traditional MRP systems and especially lean-manufacturing systems. Therefore, it is best to point readers to the following resources.

• Demand Driven MRP. The flagship DDMRP website maintained by Carol and Chad, with a good introduction to DDRMP. Free white papers, videos, and podcasts are available on a number of DDMRP topics.
• Demand Driven Institute. The educational and consulting organization promoting the concepts of DDMRP. The textbook I mentioned earlier, Orlicky's Material Requirements Planning, Third Edition, is also available here, with a supplemental DVD.
• Orlicky's MRP. This is the official website of the new edition of Orlicky's Material Requirements Planning.

There are several white papers and videos linked at these sites that go into more depth on DDMRP. Training classes are now being rolled out. In addition, the authors will be presenting more on this subject at the APICS International Conference in Pittsburgh, October 23-35. If you are planning to be at this conference you will be wise to register for this session, as it will probably be standing room only.

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Kenandy: A New Cloud ERP Provider Emerges from Stealth Mode

There's news for those of us interested in manufacturing ERP: a new cloud ERP provider is having its coming-out party this week at Dreamforce, the annual user conference of Salesforce.com. Kenandy, which is built entirely on Salesforce.com's platform, provides core manufacturing functionality, such as inventory, shop orders, purchase orders, and material planning. Founded in 2010, Kenandy already has one customer live and a handful of others sold and in implementation.

Early this week, several people forwarded me advance word on Kenandy from a Wall Street journal blog post. Normally, the launch of a new cloud provider would not warrant this kind of attention. But this launch has an interesting twist: the brains behind Kenandy is none other than Sandra Kurtzig. She is the original founder and CEO of ASK Group, the developer of the well-known ManMan ERP system--more or less the SAP of the 1980s. She retired something like 10 years ago, but was convinced to come out for an encore by Marc Benioff, CEO of Salesforce.com and her neighbor on a beach in Hawaii. Kenandy has venture funding from Kleiner Perkins Caufield & Byers, and its managing partner Ray Lane sits on Kenandy's board.

Kenandy's Angle

I scored an interview with Sandra and her CMO Rod Butters yesterday, prior to Sandra's appearance on stage with Marc Benioff this morning at Dreamforce. I had a lot of questions for Sandra, and she was forthcoming with answers.

1. Kenandy is positioning itself for small and midsize manufacturers ($15M - $300M), especially those that source, manufacture, and distribute products through contract manufacturers and channel partners. Sandra noted that ERP vendors with systems designed in the 1970s and 80s (such as ManMan) assumed their customers were vertically integrated. Her perspective is that this orientation has carried forward in the design assumptions of the leading on-premise ERP providers today, which have their roots in systems built during that time period. This is not a good assumption today, as even small and midsize manufacturers are contracting large parts of their operations offshore and have complex distribution relationships with channel partners. Such organizations need an extended ERP system, and Kenandy is being designed with these scenarios in mind.
   
2. Built on Salesforce.com's platform, Kenandy is a full multi-tenant SaaS offering. An organization can run multiple facilities within a single tenant, or it can set up multiple tenants, for its contract manufacturers or business partners, for example, and gain inventory and production visibility up and down its supply chain. (Disclaimer: I have not evaluated Kenandy on any functionality points to confirm these features).
   
3. Kenandy expects very short implementation times. Its first customer, Den-Mat, a maker of dental products, went live in two weeks, converting from a legacy IBM Series i (AS/400) system.
   
4. Kenandy is focusing on manufacturing functionality and depending on other cloud providers to fill out other parts of the enterprise suite. For example, there is integration (of course) with Salesforce.com for CRM, and with FinancialForce.com for financials. In addition, Sandra claims that integration with customer's legacy systems (e.g. Quickbooks) are always an option.
   
5. Development of Kenandy is being led directly by Sandra: in other words, she is not only the founder and CEO. Like many start-up software firms, she is also the brains behind the product and the chief product management executive. She is working with a small group of internal developers and is supplemented by development resources from Persistent Systems in India.

I also took a walk to the Expo floor and got a quick view of Kenandy's system. I also met the "Ken" of Kenandy. (The firm is named after Sandra's two sons, Ken and Andy).

A Market with Lots of Open Space

I am currently working on a research report on cloud-based ERP systems, so I was quite interested in seeing a new competitor emerge in this market. In my view the market is wide open. There are only a handful of pure multi-tenant SaaS ERP providers, and even few that can support the needs of manufacturers. These providers include NetSuite, SAP's Business ByDesign, Workday, Plex, and Rootstock.

Compare this to the dozens or scores of ERP providers that we could choose from in the 1980s and 1990s. Today the market for traditional on-premise ERP systems is dominated by two vendors: SAP and Oracle. Microsoft occupies a strong secondary place, especially in the SMB space. Many of the other players have been acquired by Infor and Oracle, though several good providers, such as IFS, Epicor, QAD, Syspro remain independent.

Nevertheless, the broad industry trend is moving to cloud computing, and manufacturers that want full-suite ERP in the cloud have few choices. Therefore, the market is wide open. As I mentioned to Sandra, it's like the Pilgrims landing at Plymouth Rock. There is a whole continent waiting for anyone so inclined to stake a claim. There's no need to argue about property lines with neighbors. Just go out, pick a few verticals, geographies, and organization sizes, and build out your offering. There is plenty of room to grow.

Other providers are already doing so. Plex was first out of the gate, with a full cloud-based ERP offering dating back to the middle of the last decade, and they continue to gain momentum. SAP's launch of Business ByDesign is also gaining traction, not only in subsidiaries of SAP's traditional large customer base, but in net new SMBs as well. Rootstock, not as well known, has a credible offering for manufacturers (especially project-based) on NetSuite's platform, and it has now migrated its manufacturing ERP offering to Salesforce.com's platform. Moreover, other on-premise vendors, such as Epicor and Infor, have enabled their products to operate in a multi-tenant cloud deployment model.

But there are large swaths of open space. Kenandy is a welcome new player.

Update, 10:02 a.m.: Sandy is on stage now at Dreamforce. She's wearing a button with the letters ERP crossed out. Marc asks, "Your previous firm ASK built on HP's platform, right?" She jokes, "Is HP still in business?" Ray Lane, an HP board member, is standing next to her. Sandy mentions Salesforce.com's investment in Kenandy. Ray, as mentioned in my post above, is also an investor, and now relates the story of Sandy showing up in Ray's office, asking for money. Ray, who like Sandy, is well over the median age at Dreamforce, admonishes the audience, "Don't think our generation is through yet!"

Update, 10:20 a.m.: Dennis Howlett looks at manufacturing cloud ERP developments.

Update, Sep. 6: Dennis Howlett interviews me live about my thoughts on Kenandy. Click on the image below to watch the interview.

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Twenty Years of ERP Lessons Learned

I gave a keynote presentation last week at the Manufacturing ERP Experience conference in Chicago. You can watch the full presentation by clicking on the image to the right.

Because the primary attendees were end-users and prospective buyers of ERP systems, I wanted to share something on current ERP trends and best practices for success.

But this presented a challenge: I've been speaking about ERP for over 20 years. How would a presentation on this subject be different today than one I would have given 20 years ago?

So, during the keynote, I thought of at least three ways in which ERP is different today, and one way in which it is still the same.

ERP as a Platform

Twenty years ago, ERP was viewed, in effect, as the final destination. For example, CRM was not yet popularized (Siebel was founded in 1993). In most companies, business intelligence was limited to report-writing or custom-built data warehouses. Mobility apps and collaboration systems were a long way off in the future. Even email was not well-established in business communications. So, ERP was where most of the action was, especially in the manufacturing sector, where it has its roots.

Although ERP was a hot topic in the early 1990s, today we understand that ERP really doesn't do all things equally well. Even the acronym "Enterprise Resource Planning" (an evolution of "Material Requirements Planning" and "Manufacturing Resource Planning" systems of the 70s and 80s) is a misnomer. ERP is not primarily a planning system, it's a transaction processing system. Its benefits are primarily in standardizing and automating business processes. To perform what-if planning, or to understand trends hidden in the data, or to gain a 360-view of customers, for example, you need to go beyond ERP.

Does that mean ERP is just one of many investments that an organization can choose to make in enterprise systems? Not at all. ERP plays a unique role in the applications portfolio, as the foundation for so many other things that organizations want to do.

Sure, you can go out and implement CRM as a standalone system, but CRM works better when it is integrated with ERP for end-to-end business processes. Some organizations have implemented supply chain management without ERP, but SCM is more powerful when it builds upon ERP as the system of record. Likewise, business intelligence systems, collaboration systems, and mobility apps add more value when they have ERP as their foundation.

Today, ERP is critical as the transaction processing hub of the organization and the system of record for major organizational entities, such customers, suppliers, people, orders, and accounting entries. In many respects, we can think of ERP as the new IT infrastructure, as a standard platform for building out the rest of an organization's enterprise applications portfolio.

Recognition of the Risks of ERP

The second way I think things have changed is in how organizations perceive the risks of ERP. Everyone has read about he horror stories of failed ERP implementations. Names like Hershey, Waste Management, and Nike are well-known examples. Many times the understanding strikes closer to home: most business leaders by now have either experienced for themselves, or heard from their peers, what can go wrong with an ERP implementation.

This wasn't the case 20 years ago. Executives often believed the hype of software vendors who claimed that implementation could be rapid or painless, or that business leaders could go about their jobs while the vendor, or a systems integration partner, did the hard work for them.

Very few executives believe this any more.

General Acceptance of Key Success Factors

Similarly, twenty years ago, executives were quicker to believe that new software could solve their problems, or that systems could be customized to match how the organization did business in the past. ERP projects were often viewed as "computer projects," not business projects.

Today, I find that business leaders have a better understanding of best practices for successful ERP implementation. They realize that ERP means changing now the organization does business. They usually recognize that top management needs to be committed and that it will require participation by all affected functions. They often realize that it is best to pick a system that fits the business, and as much as possible to avoid customizing software code.

But Outcomes Have Not Improved

So, if ERP plays a critical role, and executives understand the risks and best practices, then organizations must be more successful with ERP today then they were 20 years ago, right?

Sadly, I don't think this is the case. According to our 2011 survey, 38% of ERP projects exceed their budgets for total cost of ownership. Furthermore, as I indicated in my keynote, the risks of ERP go beyond cost overruns: ERP is particularly subject to functionality risks (the project was within budget, but the system doesn't satisfy key requirements), adoption risks (the project was within budget, but the organization is not fully using it), and benefit risks (the project was within budget, but the expected benefits are not realized).

So, what is the answer? The answer is that business leaders need to be reminded again and again about these lessons learned, and they need to execute on these best practices. So, while I could have given (and did give) much of this presentation 20 years ago, the lessons are still relevant.

You can watch a video excerpt of my presentation at the top of this post. The complete presentation is also available on Youtube. And, if you'd like a copy of the slides, please email me. My contact information is in the right hand column.

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IT Budgets vs. Tech Industry Spending: What's the Difference?

According to our research at Computer Economics, we reported that 2010 IT budgets showed no growth at the median. At the same time, IDC reported the global IT market grew by 8%.

So which is it?

Over the years, I see a lot of confusion between these two metrics, so let's start with some basic definitions.

• IT Budgets: This is the view from within an IT organization, of all IT-related spending.
  
  
• Tech Industry Spending: This is the view of the technology industry and the investor community, of the total market for technology-related products and services.
  

As you can see, these are related but entirely different measures. Unfortunately, many industry observers refer to both of these metrics as "IT spending."

So, What's the Difference?

Even though much tech industry spending comes from corporate IT budgets, tech vendors have a lot of revenue that comes from outside IT budgets. Furthermore, corporate IT budgets contain quite a bit of spending that does not go to tech vendors. Here are the big three differences.

1. Consumer tech spending. Not all tech industry revenues come from corporate IT buyers. For example, Apple just surpassed Exxon as the world's largest corporation, by market cap. How much of Apple's revenues are derived from consumer tech spending vs. business IT spending? Surely, the majority. Microsoft has a much stronger business focus, but still a large percentage of Microsoft's revenues are consumer-related.
   
   
2. Corporate IT spending outside the IT budget. Not all corporate IT spending is in the corporate IT budget. The percentage varies by organization, but typically 20-50% of what could be considered "information technology" spending can take place under departmental budget authority. Some of this is "rogue spending," for example, when a sales group buys a few seats of Salesforce.com, without approval or oversight from the IT department. But a lot of it is by design. For example, in most manufacturing companies, spending on computerized machine tools is entirely within the manufacturing operations budget. Such machinery has an enormous amount of computing power and there is typically an entire group within manufacturing devoted to programming these machines. But the machines themselves and the staff members that program them are typically outside the IT budget.
   
   Similarly, as my friend Vinnie likes to point out, products in nearly every industry today are becoming "smart products," with embedded computing power--not just automobiles, but even washers, driers, and refrigerators have IT capabilities. Do you think the technology spending that goes into designing and building products is under the manufacturer's IT budget? My observation is, almost never. Such spending accrues to the benefit of Intel, Cisco, and other tech vendors, but it is outside the corporate IT budget.
   
   
3. IT budgetary lines that are not tech industry spending. Finally, not everything in the corporate IT budget goes to technology vendors. The biggest item, of course, is personnel costs. Typically 40-50% of the corporate IT budget goes toward salaries of internal support staff, such as programmers, data center personnel, network personnel, and managers. Microsoft, Intel, and Cisco never see that money. So, right off the top, half of the IT budget does not show up in tech vendor revenues.

In addition, there are other corporate IT budget line items, such as facilities, power and utilities, and supplies that are typically not technology-related. Therefore, these show up in IT budget trends, but not in tech vendor market statistics.

When to Use Each Metric

Each of these measures is useful, but for different purposes. If you are a corporate CIO, you are interested in how your organization's IT spending compares against other, peer, organizations. You would like to know how your IT spending and staffing levels and their mix compares against industry standards. Therefore, you are really focused on IT budget metrics. Though they may make interesting reading, reports of tech industry revenues are not your primary focus.

On the other hand, if you are a technology vendor or an investor in the technology sector, you are really interested in how tech industry spending is expanding or contracting. You would like to know about overall tech industry revenues, and you would really like to know specifically about spending forecasts in the market you compete in. You are not interested in the typical corporate IT budget, unless your products or services are highly focused on that market.

What about consultants? If you are a consultant to IT organizations, your interest should be on IT budgetary metrics. Conversely, if you are a consultant to IT product/service providers, you probably want to focus on tech industry spending metrics.

So, when you read reports about IT spending trends, understand the context. Is the report referring to the IT budgets within user organizations, or the revenues of technology vendors? Those are two different things.

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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 Salesforce.com 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 Salesforce.com, 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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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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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.