Bad idea: suing your software vendor

Thomas Wailgum, blogging for CIO magazine, thinks that it's not wise for customers to take legal action against software vendors. He looked at the lawsuit against SAP for $100 million, filed by Waste Management, and decided to interview IT executives of other organizations to get their perspective on the litigation option. He found a strong bias against the idea of suing vendors:

In recent conversations with IT executives I asked them if they had ever sued a software vendor and whether, in retrospect, it was a good thing to do.

Most had known about or participated, in some capacity, in the litigation process against some well-known and some not-so-well-known vendors. And what nearly all of them had decided was that suing your software vendor just wasn't a smart thing to do.

Sure they had all been disappointed by software packages and could tell tales of broken vendor promises, but when it came to critical enterprisewide software implementations, the bigger picture mattered most.

The reasons cited against taking legal action were three:

1. Enormous cost of litigation.


2. Odds against winning the case.


3. Distraction from the business that the litigation would bring, as executives would need to participate in discovery, etc.

Wailgum admits that sometimes the threat of legal action is useful to "get vendors to return a call or fix the bugs infinitely faster than retaining an army of lawyers." But still he insists that "initiating a major lawsuit against a software vendor should be the very last option."

Generally, I would agree. I have seen one or two cases over thirty years where there may have been a clear misrepresentation and the threat of legal action was justified. Generally, though, vendors recognize their culpability in such cases and they get settled long before they reach court.

But I've seen more cases where the customer simply didn't do its homework and bought into the vendor's sales pitch without due diligence. Rather than admit that they didn't really understand what they were getting into, customers feel the need to blame the vendor. Legal action is a way of saving face. The problem is more acute among small companies, where the whole decision might be made by the owner. In larger companies, there is often enough shared leadership to prevent a purely emotional response. And better legal advice as well.

So, if lawsuits against vendors are generally counter-productive, what's the alternative? As indicated above, doing one's homework up front is the key. Software decisions, especially in small and mid-size businesses, are still too often being made based on too little information. Key requirements are not defined. Critical business processes are not mapped. Software demonstrations are based on the vendor's scenarios instead of the customer's. References are not checked, or they are limited to those that the vendor provides. And customers underestimate the resources that they will need to devote to the project to make the implementation successful.

There are many other keys to successfully implementing major systems. But I agree that legal action is not one of them.

Workday: evidence of SaaS adoption by large firms

Workday, the on-demand HR system provider, has signed up two new mega-clients: Flextronics and Chiquita (hat tip: Vinnie Mirchandani), providing evidence that software-as-a-service (SaaS) is not just an option for small companies.

Workday is a new human capital management (HCM) system provider, founded by David Duffield after he sold is previous software company, PeopleSoft, to Oracle.

According to Information Week, the Flextronics deal is huge, and Workday won in a bake-off with all the major traditional enterprise system vendors, including SAP and Oracle:

Flextronics, which designs and manufacturers parts for automotive, cell phone, and computer companies and grossed $28 billion in sales last year, selected Workday HCM to replace some 80 HR systems being used by the company in 30 countries, said Flextronics CIO David Smoley. The decision, he said, involved a "direct comparison with all the alternative, on-premise [software] vendors," which likely includes SAP and Oracle.

The deal with Chiquita is also large, covering 26,000 employees.

As a green field development effort, Duffield's company is creating a pure SaaS offering without the encumbrance of a legacy on-premise product. Though such offerings have had some success in smaller organizations, have had a mixed track in larger companies. Salesforce.com is the best known example, in the CRM arena, and relatively successful as a choice for large organizations. On the other hand, Netsuite, which attempts to provide the entire range of ERP functionality, has had some rough sledding even among smaller implementations.

Workday is the latest high profile attempt at establishing an enterprise-class solution on an on-demand platform, this one specifically for human capital management (HCM), with functionality also rolling out for financials, purchasing, and payroll. The projects at Flextronics and Chiquita have just begun, and success is not guaranteed. But if successful, they will offer an existence proof that SaaS adoption is moving up-market to large organizations.

It will be a good sign and a welcome trend.

Update, 4:43 p.m.: Workday's wins are getting a lot of attention from other bloggers as well. Phil Wainewright notes that SAP must be really hurting with the loss of Flextronics to Workday. He also mentions that Salesforce.com is going live internally on Workday's HCM service, "extending its ambition to switch completely to on-demand products for its own internal use."

Dennis Howlett has lots of good insight, coming from his close association with Workday. He explains why Workday has found itself going after large customers, which wasn't its original intent. He also points out the nascent threat that Workday poses to SAP and Oracle:

The customers Workday is winning - it has 40 - are those that want to get off Oracle/SAP. Until now, there hasn’t been a choice that offers enough of an overall compelling package to make the switch....Workday is in the right place at the right time, which is more luck than judgment.

Of course, SAP in particular is not standing idly: its developing its own SaaS ERP offering for the SMB market, its Business ByDesign. But Workday's wins show that it will be facing new competition when it gets there.

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Custom systems: alternative to ERP

Vinnie Mirchandani brings up an interesting point: outside of the manufacturing industry, the major ERP vendors have a much more difficult time breaking into core operational functions.

Upon returning last week from SAP's Sapphire conference, he writes:

I asked two SAP executives - Jim Hagemann Snabe and Bob Stutz - at Sapphire about such verticals [such as banking, utilities, insurance, and health care]. Jim acknowledged that legacy, typically custom-developed vertical applications, have been tough to displace particularly in the US. In a few deals where I have seen SAP vertical proposals, I can tell you the "displacement" is tough because SAP's [total cost of ownership] (particularly those of its SI partners) has not been compelling. You could custom develop that functionality again for cheaper. Just maintaining the legacy apps is even cheaper.

True ERP is found almost uniquely in manufacturing firms
Vinnie hints at a point that is not widely recognized. In big companies, ERP--real ERP that forms the core transactional processing platform for cross-functional business processes of an organization--is still largely a manufacturing industry phenomena. Outside of the manufacturing sector what you generally have is custom-developed systems, or commercial software for specific business functions, interfaced (at best) with the "horizontal" (cross-industry) modules (e.g. accounting, HR) of the major vendors.

So, when a major vendor speaks of having a strong presence in healthcare, banking, or insurance, what they mean is that they sell a lot of their accounting, HR, business intelligence, or CRM modules into that industry. What they are not doing is replacing all the industry-specific systems for those customers.

Now, to be fair, Oracle is an exception in certain industries. In 2005, Oracle acquired I-flex, a vendor of core banking systems. Earlier that year, Oracle acquired Retek, a leading provider of retail systems. But still, it would be really, really interesting to find out how many of Oracle's customers are running all Oracle software, now three years later. I'm sure there are some, but I doubt there are many.

The reason is that the manufacturing industry has had over 30 years to figure out how cross-functional business functions should look in an integrated system. Starting with the so-called MRP revolution of the 1970s and continuing with MRP II systems of the 1980s, and ultimately ERP in the 1990s, there is now pretty much widespread agreement on the logical architecture of an integrated system for a manufacturing enterprise.

Business case often weak for replacing legacy systems
Today it is rare to find a manufacturing company writing its own material planning or shop floor control systems. Perhaps in some very specialized niches, but it's rare. Not so in banking, or insurance, or retail. Those industries are loaded with examples of companies that continue to run the core of their businesses with custom-developed software. The business case for replacing those systems--especially with those of a vendor that wants to charge 22% of the net license fee, annually, for maintenance (i.e. Oracle and now SAP). Maybe for HR, or financials, where I can justify the cost in terms of not being responsible for regulatory changes. But for my core systems? No way.

Again, for smaller companies, I think packaged software makes a better business case for non-manufacturing sectors. Many have far less investment in legacy systems and have far fewer resources to develop or maintain custom systems. But for large multi-national organizations in, say, banking, insurance, energy, transportation, or utilities, it's hard for me to imagine them standardizing all of their core operational systems on a single vendor such as SAP or Oracle.

I would love to be offered some evidence to the contrary. If you know of any, let me know.

An alternative to ERP
Where does this leave organizations that do not see the value in replacing core custom systems? The answer is to make an investment in refreshing such systems. For a fraction of the cost of ripping out and replacing legacy software, an organization can make a concerted effort to invest in modernization, training, documenting, and even redeveloping these critical operational systems.

Such an approach has its own drawbacks, of course, in terms of an organization's ability sustain a professional software development team. But in terms of overall cost and risk of disruption, refreshing a legacy system can be an attractive alternative.

Update, May 13: Sigurd Rinde writes in the comments section that ERP has not taken hold in certain non-manufacturing sectors because business in those sectors is largely non-transactional:

...the core for health, government, education and consulting is mainly Barely Repeatable Processes where each event/task can lead to many user chosen changes to the workflow path (a physician with an Xray in hand..)

I disagree. Core processes in healthcare, for example, are highly transactional: appointments, patient visits, diagnoses, treatments, patient charges, prescriptions, insurance claims, reimbursements--these are all transactions. The fact that EDI is such a big part of healthcare confirms the transactional nature of the business.

Rather, I think the problem goes back to the history of application development in each industry. I may be not as familiar with the evolution of business systems in non-manufacturing sectors, but I don't believe there has been the same concerted effort in such sectors to establish a standard view of core business processes as there has been in manufacturing. APICS played a big role in this effort, and I don't know of a corollary in other industries. Again, my knowledge may be limited, so I welcome correction on this point.

More discussion between Sig and me in the comments section.

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SAP encounters rough patch with Business Objects

There are indications that SAP is not having an easy time with its new ownership of Business Objects. According to a note late last month on DM Review, Business Objects emailed its customers to apologize for "issues related to poor service including delayed deliveries of the company’s technology."

The email originally sent to customers and forwarded to DM Review was signed by Pascal Clement, VP of Enterprise Information Management at SAP/Business Objects. It stated in part, “As we look back at the past several weeks, it is painfully obvious that our internal system issues have brought challenges and unwanted distractions to your ongoing operation of Business Objects software solutions. To be specific, many customers have not been able to receive our technologies in a timely manner. You have our most sincere apology for these issues and also our total dedication toward immediate resolution.”

Responding to DM Review's report, Franz Aman, VP of Business Intelligence Platform Marketing at SAP/Business Objects, then issued a statement:

“Recently a small number of SAP/Business Objects data quality customers have had difficulty receiving technology support in a timely manner. We acknowledge the situation and sincerely apologize for this temporary inconvenience. Issues with migration are currently being resolved and we have put additional resources and staff to address the issues immediately. Customer support managers have all been apprised of these measures and we did not hesitate to contact our customers directly as well.”

It's hard to tell whether these problems are related to the SAP acquisition of Business Objects last year, or whether they would have happened anyway. Nevertheless, they take some of the wind out of SAP's sails, which was recently boasting that Business Objects was taking deals away from Oracle for business intelligence solutions.

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Enterprise software sales holding up, despite soft economy

We know that IT spending is not immune to an economic downturn. Our current research at Computer Economics shows a definite softening of IT executive expectations for spending growth in 2008. "Anemic growth" is how we described the IT spending outlook back in December. Preliminary results from our IT spending survey currently underway seems to be confirming that forecast.

Nevertheless, anecdotal reports seem to indicate that enterprise software sales--or at least buyer activity--seem to be continuing at a fairly strong pace. I know of several new deals in the early stages of evaluation here in Southern California, and vendor personnel in this area are reporting quite a bit of activity and interest. It certainly doesn't sound or feel like the early part of this decade, when things came to a screeching halt.

On the other hand, several vendors are reporting quarterly numbers beneath expectations. Oracle, SAP, Epicor, and others missed or came in at the low end of their forecasts. Even Infor, which is privately held, has reportedly told its investors that new license deals are slowing or being deferred to future periods. None of this is surprising in light of economic uncertainty. What is notable, however, is that the misses are not big, and certainly not what we'd expect in a major downturn.

Confirming this view, Josh Greenbaum reports from SAP's Sapphire conference in Orlando that enterprise software sales are better than they appear.

If you look at SAP’s last quarter, and believe the formal and informal guidance they’re making about the current quarter, and catch the buzz on the conference show floor, then the possibility that SAP, and much of the enterprise software market it represents, are relatively recession-proof starts gaining real credence.

He concludes by crediting the shift in vendor attention to how to deliver real business value to customers:

The bottom line is that years of pushing the value of enterprise software in terms of its contribution to productivity and cost-savings is paying off once again. And years of honing a marketing message that focuses on delivering business value to line of business managers — the men and women who are stealing the prerogative of software spending from the CIO — is paying off in real spending on enterprise software. Especially in recessionary times, this spend to save message works well, even if it takes a little more time to make the sale and a few more layers of management to give the approval. SAP is not alone in this trend, but their example is a particularly strong one. It may be that 2008 will be a year of relative abundance for enterprise software vendors, even as belts are tightening at the very customers who are making this abundance possible.

Josh might be overstating the case a bit. I think credit also goes to IT executives that have been operating under quite a bit of spending restraint over the past five years, in spite of economic good times. With fewer excesses in good times there is less pressure for drastic cuts in bad times.

The uneven nature of the current downturn is also a factor. Financial services, consumer goods, and home building sectors are the industries that are hardest hit and where IT spending is under greatest pressure. U.S. companies that have significant export business are actually benefiting from the weaker dollar. Those firms may be actually increasing their investment in IT to support their international markets.

Whatever the reason, signs that enterprise software sales are holding up is good news, for vendors and customers alike.

Rimini Street to provide third-party support for SAP

As if it didn't have enough on its plate providing third-party support contracts for Oracle customers, Rimini Street is getting ready to do the same thing for the SAP installed base.

So says a press release from Rimini Street this morning from SAP's Sapphire conference in Orlando. (The release is not yet posted on the firm's website.) Rimini Street claims much interest from SAP's installed base in having an alternative to SAP's support contracts.

Vendors' money grab
One major driver in the interest from SAP clients is SAP's increase in maintenance fees. Formerly an annual charge of 17% of the client's software license cost, software maintenance pricing now risen to 22%, which just happens to match Oracle's pricing.

From SAP's perspective, I suppose it felt it was leaving money on the table. From the client's perspective, however, it's hard to understand why it is necessary, in essence, to completely repay for their system every four years.

The ability of Oracle and SAP to get away with charging 22% for software maintenance shows how much pricing power is in the hands of the major vendors. They may do whatever it takes in terms of initial license fees to win the deal, knowing that once they are the incumbent, the 22% is a recurring revenue stream. More and more, for these two players, ERP is all about maintenance revenues. I don't know of any customers that feel this level of pricing is justified.

The business case for third-party support
Rimini Street, which claims its revenue quadrupled in 2007, is taking advantage of this gap between the vendors' price and value delivered. Ironically, SAP itself tried to exploit the same situation by buying TomorrowNow, which offers third-party support for Oracle products. (In another twist, TomorrowNow was co-founded by Seth Ravin, the founder of Rimini Street). But Oracle was able to, essentially, shut down TomorrowNow's business by suing SAP and TomorrowNow last year for "massive theft" of Oracle's intellectual property. That case is still in the discovery phase.

How long can Rimini Street avoid being in the cross-hairs of Oracle (and now SAP)? I have no doubt that the firm has plenty of legal advice and all the necessary policies, procedures, and practices in place to defend itself in the event of a lawsuit similar to that brought by Oracle against TomorrowNow. At the same time, you can't stop someone from suing you.

I regret that Oracle's legal action against TomorrowNow is probably scaring away other potential new entrants into the third-party maintenance business for SAP and Oracle. That's too bad. A thriving third-party support industry would go a long way toward keeping the vendor's money grab in check.

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Rimini Street says no thanks to SAP and TomorrowNow
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ERP support staffing ratios

Over at Computer Economics, we've finished the analysis of our survey results on ERP support staffing ratios. Thanks to Spectator readers who helped with the survey.

From the report abstract:

ERP systems can be major investments requiring a substantial effort in implementation. Yet many organizations do not realize that the total cost of ownership of an ERP system is composed largely of ongoing support. In this report, we analyze ERP support staffing levels by size of the installation, the scope of functionality implemented, class of software vendor (Oracle and SAP vs. all others), the extent of system modification, the number of ERP versions and instances in production, and the age of the system. In addition, we analyze the allocation of ERP support staff to specific job functions. Based on these statistics, we conclude with recommendations for optimizing ERP staffing levels to better manage costs and improve user satisfaction.

The full report, ERP Support Staffing Ratios, is available for purchase. There is also a free executive summary if you follow the link.

Rimini Street says no thanks to SAP and TomorrowNow

Rimini Street has decided to pass on the opportunity buy TomorrowNow, SAP's third-party support business for Oracle. Rimini Street offers similar third-party maintenance services to Oracle customers running PeopleSoft, J.D. Edwards, and Siebel products. Such services reportedly can save customers as much as 50% compared to the vendor's maintenance fees.

Why did Rimini Street pass on the opportunity? Apparently, many TomorrowNow clients are already jumping ship to Rimini Street anyway, as the result of Oracle's lawsuit against SAP and TomorrowNow alleging theft of intellectual property.

"We see no need to pay for what we are already receiving, without any legal, structural or operational baggage related to TomorrowNow," said David Rowe, in an email message to me this morning. "For example, if you look at SAP's most recent Annual Report, the TomorrowNow subsidiary had an operating loss of about US $35 million in 2007. Our resources are better focused on the success of our existing and new clients."

The shift of TomorrowNow clients to Rimini Street contributed to the latter's reported 100% growth in first quarter bookings and revenue, according to Rowe.

A press release on Rimini Street's website has more on this subject.

Related posts
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xTuple: a hybrid open-source ERP development model

Open source ERP products have made good progress in the past few years in gaining customers. But their challenge has always been to leverage their "developer community" to fill out the functionality of their products.

Developer community is key
There's a little bit of a chicken-and-egg problem here. To encourage contributor code submissions, the owner's development organization needs to have adequate resources to foster relationships with the community as well as to evaluate and incorporate the contributions. But to afford those resources, the product needs a large enough installed base to support the contributors.

Large open source infrastructure software projects such as Linux and Apache don't have this problem. Those products are used to support all sorts of applications, giving them tremendous scale and major service providers take it upon themselves to hire and subsidize the efforts of the project's key leaders. The scale of these projects also leads to a large pool of contributors eager to see their improvements adopted into the core product.

Open source ERP products, on the other hand, are much more narrow in their market focus and therefore have a more limited pool of contributors available. Which is why we do not see an open source ERP project of the scale of Linux, Apache, or MySQL.

A hybrid model
I've been aware of this problem for some time. So, I took note of an announcement from xTuple (formerly OpenMFG) regarding 13 major enhancements contributed by customers over the past few years (which they dub "greatest hits").

A quick read through of the enhancements shows they are not small changes. They include an EDI engine, a complete project management subsystem, multi-currency functionality, an MPS module, and a shop floor subsystem that employs lean manufacturing and theory of constraints concepts. One contribution is from a consortium of five customers who put together a CRM module.

To understand how xTuple has gotten this level of cooperation from its customers, I called Ned Lilly, the firm's CEO.

According to Lilly, xTuple is an open source hybrid. It develops its product in three versions: a completely free and open source Postbooks edition, which it positions as suitable for small businesses; a Standard edition, which is its intermediate offering; and its OpenMFG edition, which is the premium offering.

The Postbooks version is freely available for download from xTuple, at no charge. The latter two versions are sold under a traditional license, through authorized partners, who pay an annual fee to xTuple. Source code is available to customers, and the partners are encouraged to develop enhancements for specific customer requirements. Under their agreement, the partners are then obligated to return those enhancements to xTuple, which evaluates them for applicability to the core product.

Customer contributions are included in all three editions, even the open source Postbooks version, but the really sophisticated stuff, of course, is saved for the higher end versions. According to Lilly, about one third of the source code across the three editions was contributed directly by customers, and another 60% or so was developed by xTuple under customer sponsorship. The CRM module mentioned earlier was a customer-sponsored development.

Open source purists might balk at this hybrid model--why isn't it all free, why do partners have to pay to be partners, etc.? Nevertheless, it's hard to argue with success. Although all ERP vendors claim that customers drive new features and enhancements, few can actually point to code that their customers have directly contributed. xTuple is making good progress in the key success factor of open source projects: getting users to actively contribute to development.

If we have to compromise a little with the open source model to make that happen, so what?

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Cloud computing: can Microsoft turn from servers to services?

As everyone knows, Microsoft rose to its dominant position as a software provider. Today, however, it faces threats of disruption from players such as Google, which delivers software functionality as a service, over the Internet.

The new approach is dubbed "cloud computing," because the software that provides the service does not reside on a specifically-identified computer but is deployed over the Internet (which is often depicted graphically as a cloud) from any number of networked computers. The user has no idea of where the host computer is or what operating system it is running. The application is just out there "in the cloud," as so to speak.

A threat to Microsoft
Market leaders spend a lot of time thinking about how they can lose their market position. As Andy Grove, founder of Intel said, "Only the paranoid survive." The trend toward cloud computing, or software as a service, certainly is a threat to a company that depends on organizations buying servers and installing software. So Microsoft's current strategy, at least the one it offers publicly, is "software plus services." That is, it continues to sell software, but it is also offering hosted versions of its popular Exchange messaging system and Sharepoint collaboration system.

Which brings us to Phil Wainewright's view of Microsoft's strategy: "bunkum." In a Feb. 1 post, he wrote:

The attempt to define software as somehow separate and parallel to services is what exposes Microsoft’s software-plus-services notion as bunkum. Software is the stuff that powers services. Before the Web existed, the easiest way to get those services was to install a software package. Now that the Web exists, the easiest way to get those services is to click a link and let someone else run the software. That’s what Google does. That’s what Yahoo! has always done. These companies aren't doing away with software; they’re huge consumers of it. When Salesforce.com talks about ‘No Software’ what it really means is ‘Lots more software, but we’ll take care of it for you.’ The software becomes part of the service provider’s infrastructure.

Now, in a new post, Wainewright says that Microsoft may already be realizing that software-plus-services will not be enough to counter the threat of cloud computing. He points to recent comments by Microsoft's chief strategy officer Ray Ozzie, which suggest that, "despite the public bluster, Microsoft’s top brass already secretly realize that they must put services, not software, at the center of their world view." Read Wainewright's whole post for Ozzie's comments that reflect his view of Microsoft's need to make a more complete turn to services.

Dynamics a laggard in cloud computing
Where does this leave Microsoft in terms of its enterprise applications, Dynamics? Microsoft is way behind the curve in deploying these products in the cloud. It is just now getting ready to release CRM Live, the software-as-a-service (SaaS) version of its Dynamics CRM product. As far as its other Dynamics products, such as Axapta (AX) and Great Plains (GP), the only SaaS deployments are hosted versions offered by some Microsoft business partners.

The slow progress in moving its Dynamics applications to the cloud is not a big deal right now, as most small and mid-size businesses are still thinking in terms of on-premise deployments of software. (CRM is the one area where the SaaS model has taken hold, where its ubiquitous access characteristics are an advantage in serving sales users that have no fixed work location.) But as cloud computing becomes a more accepted way of delivering enterprise system functionality, providers that do not have a credible solution are going to be at a disadvantage.

Both Oracle and SAP are making major investments in the new model. SAP in particular is developing its new SMB offering, BusinessByDesign, from scratch to run in the cloud. As for Microsoft, it's no doubt difficult to embrace a business model that undermines the way it got to be an industry leader. But if it does not do so, it's likely to lose its position, not just in enterprise applications but the whole nine yards.

Update, Mar. 18. In the comments section, Michael Sheehan notes that cloud computing and SaaS are really not the same thing. I agree, and I was a bit sloppy in using the terms somewhat interchangeably. In my mind, SaaS is any software functionality delivered as a service, whether it be a dedicated system hosted by the service provider, a multi-tenant system providing services to multiple customers, or a system deployed in the cloud. I suppose in some organizations, the cloud could be used to deploy a system that is used by the organization itself. So, although cloud computing is often used as a way of deploying SaaS, they are not synonyms.

On his own blog, Sheehan points to this post by Paul Wallis that goes into much more detail on the evolution and relationship of supercomputing to grid computing to utility computing to cloud computing.

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