The inexorable dominance of cloud computing

Cloud computing is not just one more way to deploy information systems. It represents a total shift in how IT resources are delivered and ultimately will replace most of not all internally-maintained IT infrastructure.

At least that's the view of Nicholas Carr, who gave a talk at a one-day conference on cloud computing organized last week in London by Google. If you've read Carr's work in the past, his presentation will be familiar. One main point: the on-premise deployment of systems such as Oracle and SAP today are analogous to the on-premise factory power-plants of the 19th century--ultimately replaced by public electric utilities. So, it will be with utility computing.

Carr also gets a little bit into IT budget ratios, which we track closely at Computer Economics. His analysis is spot on and is a strong argument for why cloud computing ultimately will prevail over on-premise systems.

Near the end of the presentation, Carr presented five models for adoption of cloud computing:

1. Internal clouds: large organizations take advantage of cloud computing technologies by moving their own large IT infrastructures to a cloud computing model.
   
   
2. Cloud as supplement: organizations retain their on-premise systems but use cloud computing to deploy new IT capabilities.
   
   
3. Cloud as replacement: organizations forgoing their own IT infrastructure altogether and going with cloud computing for everything. So far this is appealing, naturally, to smaller businesses.
   
   
4. Cloud as democratizer: cloud computing allowing individuals to have their "own data centers," leading to an explosion in innovation.
   
   
5. Cloud as revolution: cloud computing reducing the cost and increasing the accessibility of data processing, leading to new ways of embedding IT in new products and services.
   

You can view Carr's 30 minute talk here:



What about the major on-premise software providers, such as SAP and Oracle? Can they make the transition to cloud computing? Although both SAP and Oracle have cloud computing initiatives, such as SAP's Business ByDesign and Oracle's On-Demand CRM, I'm not hopeful. They have too much invested in, and receive too much of their margin, from their legacy products.

Consistent with this view, at the end of his presentation, Carr looks at cloud computing as a disruptive technology, a la Clayton Christensen. I was glad to hear that, as I've long felt that cloud computing strongly qualifies as a disruptive technology that does not give hope to the current market leaders in enterprise software. But that's the subject for another post.

From time to time I bring up issues that buyers should be aware of in evaluating SaaS providers--for example, business continuity concerns. But in the long run, I'm convinced these issues will be worked through. The transition will take some time, but the economics are too strong for cloud computing not to prevail. Therefore, even today, buyers should consider every IT decision in light of the options available in the cloud.

Update, Nov 1. Be sure to read the first comment on this post, from former SAP executive Nenshad Bardoliwalla, who essentially confirms my point.

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Out of recession: US economic review and forecast

Maria Simos at E-forecasting has put together an excellent slide show on her firm's forecast for US economic activity, in light of history since the mid-1800s. This is a must-see for anyone interested in where we're headed in the near future.

Bottom line: we're already out of recession.

Some key points:

• US GDP is estimated at 3.6% growth in Q3, marking end of recession
• Six month growth rate in September is at 0.5% growth--first time positive since August 2008
• US leading indicator has gone up six-fold, growth rate above the long-term trend
• US GDP growth will peak in the 3% range, then stabilize at 2% through 2012
• Manufacturing sector growth has already hit bottom and has started to rebound
• Inflation will worsen due to increases in the money supply

There is much more on consumer spending, export and imports, and global trends.

You can view the whole slide show below. (Skip quickly through the first 20 slides to get to the good stuff starting on slide 21.)

Us Economy Historical Review And Forecast General

View more presentations from e-forecasting.com.

Oracle's roadmap for Fusion Apps

In the last part of the last keynote at Oracle Open World yesterday, Larry Ellison finally gave some specifics concerning Oracle's Fusion Applications, its next-generation of business software.

Technology foundation and user interface
These are the areas where Fusion really shines. The product is completely architected from the ground up on Oracle Fusion middleware, with a service-oriented architecture, allowing it to interoperate with existing Oracle applications as well as competitor applications and even custom systems, as long as they adhere to open standards. Fusion apps also incorporate role-based design, embedded analytics, and unified communications features, such as presence-awareness and chat.

The best summary I've seen so far about Fusion apps comes from Forrester's Paul Hamerman.

What Fusion will include
Those counting on Fusion to be a comprehensive successor for Oracle's existing products, however, will be disappointed. According to Ellison, when Fusion first reaches general availability, it will not provide the breadth of functionality currently available in Oracle's existing portfolio. This has been self-evident, but now Oracle has made it official.

Specifically, Fusion will only address the following horizontal functions:

• Customer Relationship Management
• Project Portfolio Management
• Governance, Risk, And Compliance
• Human Capital Management
• Financial Management
• Procurement
• Supply Chain Management

Ellison specifically mentioned manufacturing (both process and discrete) and public sector as two sectors that would not be addressed by Fusion Apps, at least initially. But it would also appear that any Oracle customers or prospects looking for industry-specific functionality (e.g. retail, life sciences, etc.) would not find Fusion to be a complete solution.

The roadmap: "Fusion + Other Stuff from Oracle"
Here's the big disappointment. In nearly the last sentence of his keynote, Ellison indicated that Fusion apps would be available "next year." That would be 2010. So literally, Oracle could release Fusion apps next December--14 or 15 months from now--and still meet Ellison's timetable. Until then, for most customers, Fusion is just a roadmap.

As Hamerman puts it,

Although Oracle asserts that the apps are “code complete,” the product is in what Oracle calls “in-house beta.” Customers have been brought in to test applications installed on Oracle premises as part of this program. There are no live customers currently, but early adopters are signing on as we speak.

On the other hand, you could spin the Fusion timetable in positive light. The fact that software sales are depressed right now as a result of the recession means it is a good time for Oracle to be making this transition. In addition, I would rather see Oracle take the time to get it right with Fusion than rush it into general availability only to suffer a loss of credibility when new customers encounter problems.

But even when Fusion does reach general availability, most Oracle customers will need to consider Fusion apps along with industry-specific modules from existing Oracle products. Unless an organization only needs the horizontal functionality in the bullet points listed earlier, we're talking about Oracle selling Fusion apps in combination with other Oracle products. A manufacturing industry prospect would need to buy Fusion apps plus manufacturing modules from Oracle's E-Business Suite or J.D. Edwards, for example. A retail industry prospect would need to buy Fusion apps, plus Oracle's Retek products. "Fusion + Other Stuff from Oracle" will be the roadmap, at least until Oracle can roll all that industry-specific functionality into Fusion.

Compounding the problem, Oracle's existing products are a moving target. From other information gleaned during Open World presentations, it's clear to me that Oracle's development organization is not standing still with its current portfolio. For example, I saw some very deep CRM functionality recently introduced for municipal government in Oracle's E-Business Suite. I don't know when Oracle would be able to incorporate such functionality into Fusion.

From the quick screen shots and demo scenarios presented during Ellison's keynote, it appears Fusion apps will be a great product. But the limited functional coverage of the initial release for Fusion means, as I noted, that most Oracle customers and prospects will need to sign up for Fusion in combination with other, existing, Oracle products. For existing customers, the more straightforward path would be to simply stay with Oracle's existing products, for which Oracle has promised to continue support under its Apps Unlimited program. And new sales prospects may find "Fusion + Other Stuff from Oracle" a muddled sales pitch.

Update: Merv Adrian blogs that he was less impressed with the Fusion news than with the news on Oracle's database and BI offerings.

Update: Jim Holincheck has a good post with lots of details about the functionality included in the Fusion's Human Capital Management (HCM) module.

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Salesforce.com: more than an itty-bitty application

I'm spending a couple of days at the Oracle Open World conference this week and decided to find out a little bit more about Salesforce.com and its relationship with Oracle. Why? A couple of weeks ago, Oracle's CEO Larry Ellison made some not-so-kind comments about the term "cloud computing" in general, and Salesforce.com in particular.

Ellison said,

"Let's look at [Salesforce.com's] technology," he said. "They buy computers. They rent a room. Uh, they put the computers in the room. They buy electricity and plug it in. They then buy an Oracle database to run on those computers and then they buy Oracle middleware to build their applications. Oh, excuse me, and then they build this little itty-bitty application for salesforce automation. ... Most of the technology at Salesforce.com is ours."

Stripping away the hyperbole, let's break down Ellison's analysis. He thinks that the value of Salesforce.com is in its IT infrastructure, most of which is provided by Oracle. The CRM application is just a small part of the total solution and therefore a small part of the value that Salesforce.com's customers receive.

What's wrong with this picture
Let's stipulate that in terms of lines of code, the application layer is a small part of the overall technology running at Salesforce.com. I don't know what the percentage is, but let's assume it's 5%. Does that mean that the application only contributes 5% of the value that customers derive from Salesforce.com? I don't think so. Strip away the application, and Salesforce.com customers get nothing. Furthermore, it would imply that all a software vendor needs to do is build its application on Oracle technology and it will deliver value. That argument, of course, is ludicrous.

Of course, Oracle technology can be used to build on-premise solutions as well as software-as-a-service (SaaS) solutions, such as Salesforce.com. Is there anything special about SaaS in terms of delivering customer value?

Cloud computing delivers innovation
Yesterday, to answer these questions, and also to have a little fun, I took my Flip video camera and set out with my fellow Enterprise Advocate, Vinnie Mirchandani, to see how cloud computing was represented at Oracle Open World.

There are a lot of vendors on the exhibit floor offering cloud computing and SaaS solutions. But finding one willing to go on camera to talk about this subject wasn't easy. So, I was happy when Kendall Collins, Chief Marketing Officer at Salesforce.com, agreed to an interview. I'll let Kendall speak for Salesforce.com in this four-minute clip:



What is striking to me in this short clip is the single example of how cloud computing delivers value in a way that's just not possible with an on-premise system. The salesforce-to-salesforce functionality that Kendall describes above is only possible when multiple organizations are resident on a multi-tenant system. To achieve this sort of functionality with an on-premise system would either require extensive EDI links, or custom systems using Web APIs. In any event, it would most likely take an organization years to develop such a system using on-premise deployment.

This doesn't mean that cloud computing is the best solution to every problem. Many SaaS providers do not yet have the out-of-the-box functionality to match an Oracle E-Business Suite, for example. But that may be changing. As SaaS becomes a more accepted means of software delivery, these solutions will become more mature, displacing on-premise systems in more organizations.

And this might prove to be the real threat to Oracle, which might explain Ellison's hyperbole on this subject. It's possible that years from now, Oracle will be mainly known as an infrastructure provider to the Salesforce.coms of the world, who deliver the real value.

Update, Oct. 14. Bruce Richardson reports on the presentation by Marc Beniof, CEO of Salesforce.com at Oracle Open World.

Live from Oracle Open World 2009

I'm attending a couple of days at Oracle's user conference in San Francisco this week. Tonight, Larry Ellison and Scott McNealy took the stage as a united team representing Oracle and Oracle's latest acquisition, Sun Microsystems.

Larry Ellison, true to form, spoke mostly about Oracle's competition, specifically IBM, claiming Oracle's database running on Sun processors are faster than IBM's DB2. He reassured Sun's customers that Oracle would invest even more in Sun's products than Sun has. And, he also said the right things about continuing to invest in MySQL, Sun's open source database management system.

So, for Oracle and Sun fans: plenty of red meat. For the rest of us, we'll need to wait to see how the Oracle/Sun combination plays out in reality. And, those of us on the enterprise software side of the house would really like to hear about Oracle's progress on its Fusion applications roadmap.

In the meantime, take a look at what its like at the Moscone Center in San Francisco, with thousands of Oracle Open World attendees streaming into the Ellison-McNealy keynote.




Update: On Monday, several analysts present at Oracle Open World recorded videos of their first impressions of the conference:

Here's Vinnie Michandani:



And Ray Wang's take:



Finally, here are my thoughts:

NetSuite a viable alternative for SAP customers?

NetSuite has been getting some attention recently in the press and among my blogger friends for its PR campaign to offer itself as an alternative to SAP. The opportunity? A good number of SAP customers--approximately 70%--are on older versions, such as R/3 4.6 and 4.7 that are nearing end-of-support. These customers must either upgrade to a more recent version, forgo maintenance and support, or migrate to some other system.

That's where NetSuite is offering itself with its Crossroads Initiative as an alternative to SAP.

The terms are attractive: Zach Nelson, NetSuite's CEO, has been touting the special promotional offer: basically, to provide a NetSuite license in year one for the price the customer is now paying in SAP maintenance fees, followed by a 50% discount on NetSuite's then-current list price in year two and beyond.

Functionality gaps
Sounds like a great deal. But is NetSuite really a viable alternative for most SAP customers? I think the answer is no, for at least two reasons:

• My primary concern is the issue of functionality. In a recent evaluation for a distribution company, my consulting firm Strativa found significant issues with NetSuite functionality. These gaps did not involve esoteric requirements, but basic needs involving inventory allocation, available-to-promise, returned material, controls over changes to sales orders, and other issues. Furthermore, this client is not a large company, but rather has well less than $100 million in annual revenue. It is unlikely that any company large enough to be running SAP would find NetSuite to have functional parity.

• Second, NetSuite is reported to be well behind the curve in terms of supporting requirements of multinational organizations, especially those with localization needs in international sites. Many SAP clients fit this description.

Some counter that NetSuite's sweet spot is really with services business, not product-based businesses. My response is, that may be so, but that caveat sure doesn't appear in any of NetSuite's marketing materials for its SAP Crossroads Initiative.

Where NetSuite fits
It would appear then that NetSuite would only be a viable alternative for organizations with very simple requirements, perhaps basic financials with some sales or CRM needs. Or, small services-based firms. Such companies really have no business being on SAP in the first place. NetSuite may be targeting SAP in its marketing efforts, but in reality it is most likely going to show success with small companies that are outgrowing Quickbooks, or existing customers of Sage, Best, Exact, and other Tier III system providers.

To be fair to NetSuite, I think they've done a great job in moving the ball forward for software-as-a-service in the enterprise systems space. NetSuite's multi-tenant architecture is a terrific platform for other developers, such as Rootstock, to build upon and extend NetSuite's core offering. If there is any hope for NetSuite to close the functionality gap with SAP, Oracle, and other mature providers, it is likely to come from such efforts in NetSuite's partner community to develop industry-specific functionality.

There's no shame in serving small businesses. That's the natural starting point. As Clayton Christensen describes, disruptive technologies (such as SaaS) always start with success in the low-end of the market, then move up-market as the technology matures.

And long-term, I agree with Nicholas Carr that SaaS solutions (or cloud-based systems, on-demand systems, utility-computing, or whatever you want to call them) are likely to replace on-premise systems for the majority of customers. The economics are simply too powerful.

But in the meantime, unless an SAP customer was too small to be on SAP in the first place, it's unlikely they will find NetSuite a viable alternative.

Update, Oct 1. To all NetSuite customers that have converted, or are in process of converting, from SAP: I would really like to hear from you, confidentially if needed. Email me at the address shown in the righthand column.

Update, Oct. 2. David Stover, CFO at AKSA commented on this post and responded to my invitation for further dialog. As it turns out, David's experience is a good example of where NetSuite does in fact provide an alternative to SAP. David's firm, a manufacturer of textile fibers, was previously a user of SAP, as dictated by the firm's corporate parent. When the firm was then spun off, David realized that SAP was simply too big and too costly, without the support of the previous corporate parent. In a quest to cut costs, David then embarked on a search for a simpler solution and wound up on NetSuite.

To illustrate the point, of AKSA's 200 employees, 100 of them previously were using SAP. Now, under NetSuite, only 20 employees need to use the system. The remainder, who are mostly production people, get their information from reports or Excel worksheets. In my words, David de-automated the operation, allowing it to run on a much simpler system.

In our discussion, however, David did confirm my basic point in this post regarding NetSuite functionality gaps, mentioning one perfect example. NetSuite doesn't do standard costing, something that is a requirement in many if not most manufacturing firms. It only does average costing. So David wrote some custom scripts in NetSuite to work around the problem, a solution that would probably not be acceptable for many manufacturing prospects.

So, in my opinion, David's experience can be summed up as follows:

• There are companies out there running SAP that don't need to be
• Such companies can and should look for simpler solutions, and NetSuite is one of them
• NetSuite is not the functional equivalent of SAP, but to serve customers such as AKSA it doesn't need to be.
  

I'd still like to hear from other customers that have made the switch from SAP to NetSuite. If you have a story, contact me. My email is in the right-hand column.

Update, Oct 8. My fellow Enterprise Advocate, Dennis Howlett, has a lengthy post following up on my post here. Dennis goes into great detail regarding NetSuite's progress in addressing the localization issues, which I only mention generally above. Read Dennis's entire post, as he has done significant primary research on this matter and other matters involving NetSuite.

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SaaS contingency plans need more than software escrow

Although I'm a supporter of the software-as-a-service (SaaS) model of application delivery, there's one area that still make me nervous: contingency planning. What happens if my SaaS provider goes out of business? Or, one day decides he doesn't want me as a customer? How do I ensure continuity of my system? How do I get my data?

Furthermore, it doesn't take a business failure of my SaaS provider for there to be issues about my getting full access to my data. What if I want to switch providers? I wrote a post on this last year, entitled: SaaS: plan to get out before you get in. It's now 10 months later and I still have the same concerns.

Last month, Ben Kepes suggested that software escrow is part of the answer. Traditionally, software escrow is a service whereby a trusted third-party has access to the vendor's source code and the customer's software license agreement allows the customer to gain legal access to said source code in the event of business failure by the vendor. Ben writes:

Others have noted escrow services as being valuable in the event that a vendor goes under, providing,as they do, certainty over data ownership. However there is a bigger issues with the ability of escrow services to cover the IP of a third party application and therefore give ongoing certainty around the functionality of a third party integration. As Escrow Associate points out;

Some agents make the process even simpler by ensuring the integrity and currency of the source code with software escrow verification services. In a SaaS environment, these testing services can also recreate the hosting environment and provide access for end user testing. These services protect both providers and subscribers, because they know that the escrow account contains useable code.

He also points to Escrow Associates as a provider of software escrow services is now starting to offer escrow services specifically for SaaS providers.

Now, I will admit, I do not know much about the services provided by Escrow Associates or any other escrow agent specifically targeting the needs of SaaS customers. But here are some concerns that I would have if I were doing contingency planning for a critical SaaS application:

1. Does the escrow provider periodically test its ability to transfer both the software and all customer data to its backup hosting site? Access to the software is one thing: access to a completely operational system with my data is another thing.
2. What levels of service can I expect from the escrow provider in terms of access to my recovered system: 24 hours, 48 hours, a week, a month?
   
3. What actions do I need to take as a customer to ensure access to the escrowed version of the system. For example, do I need to make DNS changes?
   
4. What level of performance can I expect from the escrow provider? Is the escrow provider prepared to offer the same service levels as the SaaS vendor was giving?
   
5. Can I test my business continuity plan periodically with the escrow provider?
   

These are questions I came up with in just about five minutes. You can see the point. It's not just a matter of getting access to the escrowed software, or even to my data, but a matter of having continuity of access to a completely working system.

I'm waiting for the first example of a prominent or even not-so-prominent SaaS provider ceasing operations to see how this sort of thing gets handled in practice. It's probably already happened, but I'm not aware of it. A few cases, and I believe these business continuity needs will become more clear.

Read Ben's post and also be sure to read the many excellent comments, which also express similar concerns to those I mentioned above.

Update, Sep. 9: Be sure to read the comments on this post, which contain much additional discussion.

Update, Sep. 15: See additional discussion in the comments section on Vinnie's post, in response to this post, especially the comment from Laef Olson of RightNow Technologies, a SaaS provider, who points out the need for financial and operational transparency as a way of giving SaaS customers time to make a transition if required.

Update, Sep. 16. Jeff Gordon provides additional clarity to evaluating the continuity needs of various applications.

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Four technologies offering best investment profile in 2009

Over at Computer Economics, we've released our new study, Technology Trends and IT Management Best Practices 2009/2010. It's based on our annual survey, which also produces our IT spending and staffing benchmarks.

For the first time this year, we not only analyzed each technology in isolation but also in comparison with each other, looking at adoption vs. current investment levels as well as risk versus reward (cost versus payback). In doing this we found four technologies that stand out as having the strongest investment characteristics: server virtualization, storage virtualization, unified communications, and cloud computing.

You can read a summary of these findings on our website.

You can also download the first nine pages of the full report, free.

The full report also analyzes adoption trends for 10 selected IT management best practices.

Optimizing ERP support staffing in smaller companies

I had an interesting analyst request today. An IT manager for a midsize company recently purchased our Computer Economics ERP Support Staffing Ratios report and wonders how the ratios would apply to a smaller business.

He writes:

We purchased the study "ERP Support Staffing Ratios". It was very helpful. Question - We are implementing an new ERP system, and bringing it up a little at a time. We are trying to get a benchmark for the minimum ERP IT support staff that would be required; regardless of the size of the user base.

Alternatively stated, if a company implemented a comprehensive ERP system, but only had 50-100 users, there is probably a minimum core staff the would be required to support it.
If you could take a look at the information underlying the study and try to shed some light on this for us, it would be very helpful. For example, what seems to be the typical (median) staffing ratio for the smaller user population groups?

Smaller firms are at a disadvantage
I responded that the report itself gives the answer, as the number of users per support staff member in small companies (under 200 users) is less than half of the number for organizations with 200 to 500 users. (Actually when you go to over 500 users, the number almost doubles again). In other words, there are tremendous economies of scale in ERP support staffing. In small companies, you need twice the number of support staff per 100 users as you do in midsize companies. (Buy the full report if you want the actual stats.)

Now, having said that, I would say, based on my experience, that when you get into the smaller companies, it all depends on what system you are implementing. I have seen or heard of MS Axapta or QAD sites of 50-100 users that are effectively managed by one full time IT person. But you rarely see that with Oracle or SAP, for example. Our report shows that Tier I systems simply have a bigger footprint, requiring more ERP support staff.

Think outside the FTE box
At the same time, smaller organizations should be thinking about outsourcing much of their ERP support. They simply do not have the scale to have a full-time apps programmer, plus a fulltime DBA, and a full-time help desk person. And these roles are not really suitable for a single person. A better approach would be to go ahead and staff the help desk but contract out the DBA work and apps work (e.g. applying patches or upgrades). Many small companies are too reliant on one or two IT staff members, and when they leave or become disgruntled it can be a real problem. If you get the right contractors, this also provides for better coverage and may actually provide for longer continuity of support personnel than relying on full-time employees.

The full report on ERP Support Staffing Ratios is on our website. A free executive summary is also available.

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2009 IT spending and staffing benchmarks

Over at Computer Economics, we've released our new IT Spending and Staffing Benchmarks 2009/2010 study, in this, its 20th year of publication.

The current economic recession has had significant impact on typical IT budget and headcount ratios. Our new study, based on our 2009 survey provides updated metrics for planning and benchmarking IT spending and staffing levels.

Some of the key findings:

• Sectors showing the sharpest decline in median IT operational spending include discrete manufacturing, process manufacturing, and retail. Median IT budgets are down 5.5%, 2.5%, and 1%, respectively in those sectors.
  
  
• Certain sectors, however, are continuing to show positive growth in their 2009/2010 IT operational budgets. These sectors include banking and finance at 4.9%, healthcare providers at 4.7%, professional and technical service firms at 4.0%, and utilities and energy at 1.3%.
  
  
• 46% of all IT organizations plan to reduce headcount this year, compared to 27% that are increasing headcount. Another 27% of IT organizations report their staffing levels will remain the same as last year.
  
  
• However, some sectors are showing continuing growth in IT staffing. For example, nearly 63% of survey respondents in the healthcare provider sector reported they were increasing IT staff this year.

The annual study is based on an in-depth survey of more than 200 IT executives who provide detailed breakdowns of their budgets, staffing, and technology adoption plans for the 2009-2010 period. The survey sample includes a roughly equal number of small, medium, and large enterprises. The respondents are stratified according to 12 industry sectors to provide a representative sample of IT organizations across all industries.

A free executive summary is available on the Computer Economics website.