Category Archives: Strategy

Software vendor: Have you even had the problem of discontinuing a software solution?

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There has been an outcry the last few days due to the decision of Google to drop its Google Reader application. Jim Aley concludes in his article that life will continue even without Google Reader, but it is painful to a lot of people that have relied on the service. Google has announced that Google Reader will not be available after July 1, 2013. Reading this annoucement, I reflected a bit on what I have seen during my career in respect to discontinued software solutions and issues around that decision.

What Google did is something that we all have probably run into in some shape or form. I used to run software product development teams earlier in my career and have had to “kill” products due to different reasons; some of them being based on economics and some of them purely on the change in competition and changes in strategy. I have also been consulting software companies that have killed products along the way because they company has had to change direction of their strategy.

When I see companies grown their operations, I have also seen a tendency to increase the complexity of the solution portfolio which typically leads to complexity in the entire operations. Suddenly your operation has become more complex from support and delivery perspective, your channel partners do not understand what you are trying to accomplish and your sales is scratching its head to figure out how to position the solution as there are so many moving parts.

Looking back at my career, I can say that I am guilty of this as well so I have experienced it first hand and have had to do difficult decisions along the way. Just the fact that the software vendor has to inform the customer that something that they use on a daily basis does not get enhanced anymore can be very difficult to message to a customer. How do you inform this kind of decision to an end user customer without getting a blooded nose?

When I select software solutions, I typically also consider the strength of the software vendor whether I will be investing my resources and future into it. There has been a few times during my career when I have “seen the signs” of weakening of a software vendor and then made a decision to transform my operations to something else. I am sure this will be the case also in the future. This is extremely true specifically in the cloud space as the investment to start a cloud business is almost zero (if not considering the labor) from infrastructure perspective so anybody can now come with an idea but for the business to be sustainable, it is another story altogether.

What do we learn from the Google Reader case? In my opinion, we can easily say that even large companies with loads of money will make decisions that can hurt the client base even if it is a non-paid solution. Secondly, I think we need to learn to understand that nothing exists for ever and if you select a solution for your operation, you better analyze the vendor first to see if they are for real or just a hobbyist organization.

ISV wakeup call: Cloud and mobility will surge in 2012 according to IDC

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I run a seminar in Finland at Microsoft Finland office 23rd of November for Microsoft ISVs about the transition to the cloud and what it means for software vendors overall. One of the key things in my messaging for ISVs is that they have to look at the cloud together with mobility going forward. This morning I run into an article in Information Management web-site where IDC predicts that mobility and cloud will surge in 2012.

It is easy to agree to this based on what we have seen in our work and research specifically in the US continent. IDC predictions are based on 1000 IDC analysts and according to this study, cloud spending will top $36 billion next year which is four-times the overall IT industry rate of growth.

Another interesting statement from IDC chief analyst Frank Gens is that there will be a “generational shift in the tech platform adoption and innovation” which could according to him lead to a worldwide IT spending of $5 trillion by 2020 and all of this based on mobile tech and the cloud.

Based on hundreds of discussions with independent software vendors (ISVs) around the world we have seen a clear shift in the urgency of many ISVs to ensure that they are on the right bandwagon concerning the cloud. My colleague, Juha Harkonen has been analyzing the trends for quite a while and the observations that he has made are very interesting. You might want to check some of his observations from his excellent blog.

 

 

 

SaaS companies are better valued when compared with traditional software companies according to latest research

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Now it is in the open. According to a recent article from Gigaom.com and research from Martin Wolf M&A Advisors, SaaS companies are getting much higher valuation when compared with legacy software vendors. The chart from Wolf M&A Advisors tells it all:

I knew we would get to this sooner or later as the move is definitely towards the cloud and ISVs that are resisting this move, will eventually run into issues if they do not re-architect their legacy solution as clients will require a true SaaS solution and not a solution that is “running in the cloud” but without really taking advantage of things such as scalability etc.

The Gigacom.com article concludes that it is not a surprise that enterprise vendors acquire smaller SaaS players such as the acquisition of RightNow Technologies by Oracle (1.5 billion). I work with ISVs around the world and I have seen many different types of organizations, some of them being start-ups and some making the transition from legacy business to SaaS business. One very popular way for traditional ISVs to make inroads to SaaS game is to build some type of an extension to the legacy solution to get experience what it is to build for the cloud and this also gives a more evolutionary way of creating something that can be sold to existing customers as add-on service.

I think each and every software executive should contemplate on the message from Gigaom and Martin Wolf especially if the company is in the game of getting sold in the future. The times of high license revenue with maintenance and support is gone and will be sooner or later replaced by monthly/quarterly recurring revenue where the software vendor has to create a solution that is not only used but loved by its users. Gone are the times where a software was sold that was both unfriendly to use but as the software vendor got its money, there was no incentive (other than getting the annual maintenance and support fee paid after first year) to ensure that the software was something that the buyer really liked. In the old-fashioned model, the company paid a large lump sum for the software and this was almost always a lock-in from the software vendor as the end user organization is always fully invested in the solution and is almost forced to pay the maintenance fee in the end. I do remember vividly when I was CEO for a business intelligence company when I was always worried whether our largest clients would pay the support/maintenance fee in the beginning of each year.

 

A tale of “me too” kind of innovation: RIM to launch music service for BlackBerry

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It is sad to read about Research in Motion (RIM) attempt to become hip again. I have been a client for RIM for the past few years for one reason: AT&T provides me with an unlimited data plan (worldwide) and that is hard to beat. I have not been able to switch to any other phones as I really need my phone when globetrotting and I am reluctant to spend hundreds of dollars each month for roaming.

As a Blackberry user, I would have appreciated RIM to focus on getting a real phone on the market that is competitive and I can still keep my unlimited data plan but I guess nothing lasts forever and I need to move on and change to a new operating system and vendor and deal with the roaming. I can’t be left behind in innovation and usability and when you look at the current smart phone market, it is growing and advancing with huge steps every month. My current phone (BlackBerry Torch) has a lackluster touch screen that does not react to my fingers the way one would expect. I have also had to rebuild the phone at least 10 times from scratch due to applications that have broken the phone. One would think that cannot be possible, but it is and I have seen it many times. I even had to buy a software tool to “self-manage” the rebuilding as AT&T refuses to rebuild the phone and forces you to buy the phone again if the warranty is over. Not something I enjoy doing. Once returning from Europe I put my phone on and it went dead and by discussing with AT&T service they said to buy it again.

The latest attempt from RIM was to publish BBM Music store that enables BlackBerry users to stream 50 songs using BlackBerry Messenger. Why on earth would I want to do that and wasn’t this something that Nokia already failed in and decided to kill? If I were RIM, I would focus purely on getting new phones on the market and focusing on the youth as they are the ones that either make the platform or break it. Another group are the developers that now are at crossroads as they have to decide what to do to a dying operating system as RIM is moving to the new QNX operating system that they acquired by RIM.

My personal opinion is that RIM needs to focus on having applications that support music services such as Spotify, Rhapsody etc. and forget about things that are outside their own core competence areas. This tale is also something that the software/IT industry keeps seeing all over again: once you are the top dog, you will eventually come down due to many reasons. We have seen this happen with IBM, Nokia and many other players. We need to remember to reinvent ourselves on regular basis and keep working in a humble way. Becoming arrogant and believing in something that is not true anymore can be lethal in the long run. When somebody becomes market leader, it always causes people/employees to think that this stays status quo even in the future. This never happens.

Where does this leave me as a smart phone user? In my mind there are only three players left in the smart phone field: Windows Phone 7 from Microsoft, Android from Google and iPhone from Apple. With these three choices the follow-up decision is to select the hardware manufacturer and that is where the race is going on with Nokia, HTC, Samsung, Dell etc. on the WP7 field and obviously the same thing with Google Android devices but with iPhone with only one manufacturer being Apple.

Cloud ISV: What technology will you be using when supporting different mobile and tablet devices?

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I explained in my previous blog post that the cloud era is here to stay and with this new era, there are also quite a few technologies that the ISV has to select to build a solution. One key thing is to select the cloud platform but an increasingly important technology that the ISV has to evaluate is what development environment to use to support hundreds of different mobility devices, both smart phones as well as tablets.

When I look back not more than five years, the requirements for applications were much different that today when it comes to consuming information. Today, the end user expects to be able to use a smart phone and tablet to view/update information using a solution that typically is built on cloud technology. Flash used to be the main technology to build applications for the Internet browser, but with the decision that Steve Jobs and Apple did on Flash of not supporting Flash on Apple iPad, the success of Flash is doubtful in the future. Consumers do not care about technology, they care about having the ability to consume information and this is something that the technology industry forgets every now and then. If somebody has any doubts about this, just look at what is happening on the US markets and what has happened for example for RIM and BlackBerry market share on smartphones. It is brutal.

Back in 2010, there were quite a few articles of whether HTML5 will kill Flash. There are millions of Flash web sites whereby I do not think Flash will go away anytime soon, but the real question is whether the ISV should believe that Flash is going to survive going forward. My personal opinion is that I would not invest time and money to Flash anymore as we all know it is not going to support all of the relevant mobility interfaces and I do not think that for example RIMs approach by marketing its BlackBerry PlayBook to support Flash makes a difference in the large scheme of things. The question that each ISV needs to evaluate is what technology it expects to support from a long-term application development perspective.

We already know by now, that Flash will not survive in the long run and has already become a major limitation for many ISVs. When you really think about it, users have already won the battle by ignoring the Flash and showing this by buying iPads even if they know it won’t support Flash. Can you afford building sites and ignore the millions information consumers? I do not think so. Many entrepreneurs (me included) have made the decision not to allow any Flash technology  to be used on the web-site as most smart phones and tablets do not support Flash and Flash not optimized either from SEO and SEM perspective. Check your web site analytics/statistics and you will find out that smart phones and tablets are becoming more relevant in information consumption.

I believe that the next wave of innovation will be coming from software vendors that are able to combine the cloud and mobility in a way that helps end user organizations to become more effective and productive in whatever the application area happens to be. I read an interesting article “Building An Enterprise Software Company That Doesn’t Suck” where the author described how large enterprise software packages are losing the appeal from both end user organizations as well as users. People are sick and tired of complicated and hard-to-use software solutions that do not bring any value add to a user’s daily life. Organizations have forced users to use software to fulfill some type of compliance rule but I my bet is that with the new generation of users, this will change whether organizations want it or not. The new generation entering the marketplace is fluent mobility users, they use social networks as we used to use the regular phone and they would not care less about the corporate compliance stuff and based on research, they won’t even apply to organizations that are old-fashioned way of viewing the world.

Technology selections for an ISV business is always tricky and I have had to do this many time during my career and I have also had a few misses such as selecting an application development tool from Synon (acquired by CA) called Obsydian that never really took off in the marketplace and my developers were never really able to use it effectively. The same applies to the selection today in respect to mobility development. Can you afford making a mistake, spend money in development and then suddenly realize that something else should have been used. I do not think so.

I recently read an interesting article “Seven Reasons HTML5 is Killing Flash” with some interesting points of why HTML 5 could potentially kill flash. According to the article, there are more than 109 million mobile users with HTML-5 ready browsers, but by 2016 the estimate according to ABI Research is that there will be more than 2.1 billion mobile users with compatible browsers. According to ABI Research, there will be 25 key features that will make HTML 5 competitive and the seven that was picked in the article are as follows:

1)      Video Play: HTML5 includes a tag for videos that allows it to play with the start, stop, pause etc.

2)      Video Record: This will become even more important going forward as mobile phones have video recording and HTML5 will support this

3)      Audio Play/Record: Today, the user needs, Flash, QuickTime or Java to play or record audio, but with HTML5 it is just another tag.

4)      Apps: HTML5 allows Web pages to access the same routines that make browsers work and enables them to become like any application. I think this is one of the key things when you think about mobile application development using HTML5

5)      Rich 2D Graphics: All types of sophisticated two-dimensional graphics will be built into HTML5

6)      IM: Instant messaging will be built into HTML5 by virtue of Web sockets

7)      Real-time Streams: Web sockets will also allow any Web-page designer to easily add real-time data streams to the application.

HTML5 could become the best friend for the ISVs going forward as it will provide the broadest support from a device/browser perspective and when smart phones will get HTML5 compliant Internet browsers. HTML provides a better way to support multiple devices as is explained in the article “Enterprise App Stores Harness HTML5” by Colin Johnson.

What makes a good salesperson according to research and what are most important characteristics?

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I run into an interesting blog entry by Steve W. Martin where he lists seven personality traits of top salespeople. Martin has also published a book about sales psychology with a good empirical study of thousands of sales professionals so we can assume that he knows something about this topic.

As an entrepreneur I have concluded that one of the most important decisions and selections that one can make are the salespeople for your organization. Engineer led organizations have the temptation to focus on engineering talent while sales-driven organizations understand that with a good product, the growth will come with an effective sales team. Let view some of the characteristics that Martin has identified. 1. Modesty – a salesperson that can adjust his/her skills with target has a higher chance to be successful. This means that the sales person needs to be both modes and humble and not let the customer/prospect to feel inferior. Just think about this. Would you like to feel stupid when buying something? I wouldn’t. 2. Conscientiousness – eighty-five percent of top sales people had high levels of conscientiousness, whereby they had some sense of duty and being responsible. The ole saying “close the deal and leave the customer in the dust” does not work well if you want to be a good salesperson and achieve results. In this case I want you to think what this means. You put your career on the line when buying something and you expect the acquisition/purchase to work so you do not put yourself in a position where you have to explain yourself.

3. Achievement Orientation – Eighty-four percent of the top performers score high in the achievement orientation. They want to achieve goals and measure their performance. These people also take political orientation into consideration when selling by understanding the dynamics in the purchasing process. These people understand that performance is rewarded.

4. Curiosity –a top performer is curious and hungry for information and knowledge. Eighty-two percent of top performers scored high in curiosity levels. This also leads to these salespeople to be very close to the sales process and ask the right questions, even the difficult ones. In technology field, salespeople need to be continuously educated to be able to help the prospects to do the right selection. Salespeople should be seen as trusted advisors and this will create a long-term relationship with the customer with ample opportunities to upsell and cross sell other solutions. 5. Lack of Gregariousness – this was a surprising finding in the study where top performers averaged 30 percent lower in gregariousness. This means that top performers do not become too close to the client or become too friendly. In the software business we have always known that if a salesperson starts living the life of the prospect and defending the claims of the prospect, the deal will not be what it should be.

6. Lack of Discouragement – Less than 10 percent of top salespeople were experiencing sadness and high levels of discouragement. According to the studies, a high percentage of the top performers had some type of active participation in high school sports and are competitive. 7. Lack of Self-Consciousness – this is a measure of how easily a salesperson is embarrassed and with top sales performers this is very low. According to Martin, the byproduct of high level of self-consciousness is bashfulness and inhibition.

If you look at the list of characteristics that Martin has identified when analyzing top performers in sales and reflect this to your organization’s best salespeople: do you agree with Martin’s findings?

If you are in the process of building a cloud business, you might also want to make sure that you hire people that fit into the high pace sales cycle that are part of a SaaS sales business.  Joel York explains well different SaaS sales models in his excellent blog Chaotic Flow.

ISV transitioning to the Cloud, Cloud Financials and Operational Metrics

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I divided in my previous blog post how a cloud transition will impact an ISV. The first blog entry was about the change in business model and this blog entry is about the impact in financial model. However, it is important to recognize that the financial side has lots of different drivers and I will only portray a few of these in this entry, and deal with some others such as sales related metrics later.

Independent software vendors (ISVs) have the concern of profitability when running a cloud business. Mature software vendors with ongoing annual maintenance and support revenue are wondering how to make a transition to avoid future cash flow issues. The most typical question that I get from ISV management team members is: “how do we transition to the cloud without jeopardizing our current business?” Unfortunately there is not one and simple answer to this and what nobody wants to hear as an answer is: “it depends”. There are many different variables to consider and some of them are ISV specific and cannot be generalized. It is like comparing two different cars that have a different purpose: one that is used for racing and the other for transportation of heavy equipment. How does one compare these two and what is the comparison metrics?

I can still remember my early career when we did a bunch of comparisons between publicly traded companies in my business school using metrics that was regarded as “industry norm”. We had to learn in our accounting class each ratio that could be calculated concerning income statement and balance sheet. When we added cash flow statement to the equation, we were sometimes completely lost… me included. Once I understood the connection between income statement and balance sheet, life become so much easier. I would argue that ISV management has to do the same thing to really get to understand where a cloud business is taking them. I am sure that the ISV CFO and controller are on the right page, but I am not that convinced that the management team members all understand the impact of the change. That is just my observation from both research and talking to a bunch of entrepreneurs.

It is obvious that accounting metrics has not changed but was has changed is how we measure our operational activities that eventually leads into the financial accounting metrics that we track and our auditors are interested of.  If we change our model from classic perpetual software licensing model to subscription-based model and keep our operational metrics in the prior, I will guarantee that the company will run into a wall pretty soon and one of the things that would be recognizable is that there is no cash in the coffers.  Do we really know how to recognize revenue in a way that tax authorities are OK with it? Do we know how to recognize service revenue with a software sale from revenue recognition perspective? You do not want to find this out later on when an audit is taking place or when you are during due diligence when selling your company.

The ISV management has many questions to answer. Is your current business and software solution built in such way that it is easy for the current client to move to pure SaaS environment? What is the current complexity of your solution and does it require lots of human interaction to get delivered? Does your solution have lots of integration points to other operational applications? Does your current software solution support a migration to a pure SaaS environment? If it does not, what is the alternative? I am sure you are getting my point here. Running a solution from the cloud is not just to “port” the solution, but it is to have it run natively and I do recognize that this is not easy for many legacy ISVs.

What about the financials? The number one term that you need to familiarize yourself with is CMRR (Contracted or Committed Monthly Recurring Revenue), Churn and Cash. Other key metrics are Customer Acquisition Costs (CAC), Customer LifeTime Value (CLTV) and there is a bunch of others that are related to different operational functions such as sales, marketing etc.

Fortunately there are lots of good resources in the Internet that I have found very helpful in doing my own research. Many of these examples come with lots of use cases and practical advice so my recommendation to any ISV is not to try to figure these out on their own, but to really learn from what is already known.

Some of these resources such as David Skolp that maintains a blog for entrepreneurs with a specific focus on SaaS business as well as Joel York that brings lots of financial mathematics to the game. He also addresses something that I have not seen anybody else do which is the concept of Net Present Value (NPV) in the calculations.

What many ISVs forget is to keep their Customer Acquisition Costs (CAC) down as much as possible as many ISVs are still used to the old model where the prospect/lead needs lots of human interaction before the deal is closed. This is no longer possible in scenarios where the price is on a level that the ISV can never achieve break-even with providing too much support in the deal closing. If you look at the Customer LifeTime Value (LTV) and Customer Acquisition Cost (CAC) figure below, the trend needs to be according to the following picture.

LTV and CACIf the ISV did not control the CAC, it would very soon run into a situation where LTV and CAC are getting closer to each other and the ISV would be bleeding money.

Following picture from Joel York gives an even more interesting view how Customer Acquisition Costs (CAC) combined with Churn will impact an ISV and how each customer adds to the accumulated CMRR until it covers the accumulated CAC cost. In the picture the sixth client creates a situation where company becomes profitable. The picture also shows how churn will impact the overall MRR with time.

Churn and CMRRThe picture gives us an idea how CAC and Churn plays a central role in SaaS financials, but there are many other financial measures that an ISV should think of and also measure. Skok provides an interesting breakdown in how key SaaS goals can be divided into different components: Profitability, Cash, Growth, Other (like Market Share) and each one of these components can be divided into smaller components.

If we further divide the profitability into components, this is how it can be seen:

Profitablity in ComponentsWhen you view the picture in more detail, you can see how Customer Acquisition Costs (CAC) and LifeTime Value (LTV) drives the customer profitability, Monthly Recurring Revenue (MRR) and Services Revenue drives the overall revenue and when you add expenses and COGS to the formula, you will have the regular accounting related profitability. Measuring your employees can be done from many perspectives and I will address sales measurement separately in a later blog entry.

As we can see, there foundation for an ISV is still the same, to generate ROI for the investment and dividends for the shareholders. What has to change is how and ISV measures the operational activities when running a SaaS business. ISVs that have not made the move towards the Cloud might really have issues with their competitiveness going forward. My recommendation to mature ISVs is to start looking what can be done in the cloud world and get the development team focused on the changes that a pure Cloud solution will require to be truly multi-tenant so the ISV can achieve the scalability benefits of a PaaS platform such as Windows Azure. Stay tuned for more about metrics and changes in operational models for an ISV.

 

Will Independent Software Vendors (ISVs) without a cloud strategy have a slow but certain death?

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Independent software vendors (ISVs) and system integrators (SIs) will have a wakeup call very soon unless they spend some time contemplating how the cloud will change their strategy. What I am seeing around the world is that innovative ISVs and SIs are eating the lunch of traditional and more established vendors and I expect this trend to continue. This is not just a change from client/server era to cloud architectures; the change will have a tremendous impact on how we consume software and what end user organizations expect ISVs and SIs to deliver. My company is getting requests from very traditional end user organizations to move their solutions to the cloud and this is happening in an ever increasing pace. The most logical move is to move email and document collaboration to the cloud to be followed by accounting if you are in the SMB space.

My professional career started when the mini computers were the hot platform for software development. Mainframes were still very much the main platform for large organizations, but mini computers with HP 3000, Digital VAX/VMS and UNIX grew in market share. It did not take long until client/server architectures grew in popularity and this is the era where I led product development of more than 20 software products in the business intelligence/data warehousing and forecasting/planning domain. 

Jumping forward to the cloud era (ignoring some trends such as PC etc.), I have heard many people referring that it is the same thing as mainframe era. In some respect it is, but there are considerable differences as well. These differences have to do with how we innovate and how we build software to be consumed by the outside world. The mainframe era was more contained to services inside the corporation and any outside connection was controlled via physical machines or in some cases pre-determined integration mechanisms. Cloud era will not change this, but it will change the way organizations interact from within the organization to the outside world and how they consume services provided by software vendors.

The cloud era is completely different to any prior era when you view it from software development perspective. The software world (Internet at large) includes a massive amount of services providers that expose services that can be consumed by third-party software development organizations. A good example of this is Microsoft Azure platform and the new services Dallas (codename as of now) that allows developers and information workers to easily discover, purchase, and manage premium data subscriptions. In this case it will be more about data, but it could be anything, anything at all that software vendors are melding into their solution and building a composite application. Gone are the times were small ISVs were focusing on building infrastructure elements/components. I can still remember the times when software vendors were developing infrastructure to enable applications development. I have also been forced to spend money on building proprietary communication protocols based on SNA and TCP/IP as it gave our solutions a competitive edge. This is history and will never come back again.

Is consumer buying behavior also changing how corporations will buy software in the future?

I am tempted to claim that consumers are driving buying behavior in corporate world as well. Executives are now exposed to software solutions on the net and are forcing corporate IT to view the cloud world with applications that are consumed based on use. Executives download apps to their smart phones and get exposed by younger generation how apps are used from the net. The question that many executives might have is why some of the internal applications that are used in the corporation are so clumsy to use and any change to the system takes weeks/months to accomplish. You have probably read in business papers and magazines that sales of traditional enterprise solutions are not growing anymore the way they used to. It could be market saturation, but I also believe that there is a fundamental change in adding solutions that take care of the issue and not try to solve all of the problems in the world. This could be very smart for many smaller vendors that sell high quality packages to enterprises with a price point that is very low. It is about easy buying and I know that large enterprise deals are hard to get in today’s economic environment.

There are still enterprise solutions that will not work in the cloud due to many reasons. It could be due to regulatory issues but I am convinced that with time, regulators and lawmakers will have a wakeup call where any country’s competitiveness is founded on openness and not on closing the borders.  With the buying behavior changing, some less complex areas are already making huge progress like an interesting software vendor in the security play called Spectorsoft. The company sells and develops Internet monitoring software for home uses, business, education, and government. Most of the sales happen over the Internet and the software is assumed to be easy to install and to use. This will be the most typical scenario when it comes to software purchase.

Software buying can happen in 30 thousand feet

When you review your own shopping behavior, you will also understand how most solutions will be bought in the future. A few days ago on my flight from Seattle to Dallas on American Airlines, a gentleman sitting beside me was doing extensive search on products and made finally multiple different transactions by using his credit card. This has been made possible with innovation in wireless space where American Airlines provides wireless access for its passengers. It is fascinating to think about the new software era and compare it to the era when I started by software career. We can now sign up for CRM solutions without having to talk or consult the software vendor. We can deploy accounting packages in our company such as Intuit Quickbooks Online and we can manage our daily personal financial lives by using cloud solutions such as Mint.com. We can be sitting in 30.000 feet conducting business without really thinking about it. Another gentlemen that was on the same flight was chatting on Microsoft Office Communicator the entire flight with multiple people whereby he did not miss any working hours as we were flying towards east. He seemed to spend most of our 4 hour flight using the messenger.

My company is run in the cloud and any solution that is not SaaS-based, will not be considered

I run my business in the cloud. We have not owned or managed a single server since I started TELLUS more than five years ago. All of our operations are managed from the cloud such as accounting, email, collaboration, project management etc. I do not consider any new solutions that are not SaaS-enabled and this is the situation with many other organizations as well. The market is moving into “targeted” point solutions where we buy and consume services from the cloud. Integration of these solutions to possible onsite applications needs to happen either in the cloud or in some on-premise integration software tool. Integration still remains a factor that prohibits large organizations to move its operations to the cloud, but there are already numerous different solutions that enable integration between on- premise and off-premise (cloud) solutions. With time and new cloud solutions in the enterprise space, integration issues will become easier and new standards and interfaces for integration will emerge.

Maybe not this year or the next, but I am convinced that solutions will be based on “good enough” concept where organization buy solutions they consume on the need, and not on the “elephant” model we have been used to. A typical ERP project with customizations will probably be forgotten in the future and workflows and processes will be built in a new way that does not take down the company from both cost and labor perspective.

Large organizations with ongoing cost cutting can stifle innovation

What makes the new cloud ecosystem interesting is the innovation that can happen around it. Any software company, anywhere in the world and of any size, can bring new innovation and become something in the new cloud era. Some large organizations have been focusing on cost cutting avoiding risks instead of taking bold moves to create new market entries or new products. One of these fatalities has been Nokia as it has been reported by the press like New York Times recently.

According to the press, Nokia has had many of the ideas and prototypes built that Apple is now riding with, but management has not had the courage to make them to become true. Then on the other side of the spectrum is Apple that is known for bold moves such as iPhone that Nokia positioned to consumer with marginal importance. It reminds me of Nokia’s miss on the Motorola flip-phone market with the results of huge downfall in the US markets.  With new leadership by Stephen Elop Nokia is trying to change its course. The change has already started by two senior executives leaving the company. The first announcement was when Nokia smartphone head Anssi Vanjoki decided to leave. The second noticeable departure was last week  by Mr. Ari Jaaksi, the leader of MeeGo platform. I am sure we will hear more news in the upcoming weeks of additional changes. The incumbent Apple has also been able to put many established smart phone vendors in disarray and the rise of Android phone software platform will give additional grief to all vendors, including Apple.

Software is everywhere and software will be embedded in our daily lives.

I expect the software market to bring new innovative solutions that combine the cloud with smart devices that communicate to the cloud. This will create new opportunities for ISVs around the world and the winners will be the ones that are innovative and create new solution areas and products. Software is part of our lives already today and will continue to be even more so in the future. Embedded software will continue to rise in importance which will also create new opportunities for rising ISVs around the world.

One of the leading software development tool vendors MetaCase has been able to penetrate the embedded software space with its innovative domain-specific modeling tool that enables more effective variation of software products from a platform. This type of software product line engineering will also be of great importance to enable rapid variation of embedded software solutions and still maintaining the quality of the end product.

A couple of weeks ago I had TXU Energy install two new thermostat controllers to my house that enables me to control heating and cooling in our two story house. We have two cooling units and each of them can now be controlled from the Internet and enables us to save hundreds, if not thousands of dollars each year. The temperature in Texas is brutal in the summer so any optimization of cooling has a big impact on our electricity bill. I can create multiple profiles based on our family patterns (when we are in and out) and the system feeds information to the cloud and the cloud provides me information how to optimize my electricity consumption. This is a terrific example of intelligent use of web services, where I have much better handle of my daily/weekly/monthly electricity use.

Another example of smart devices is Fitbit device that enables me to track and control my calories burnt, steps, distance and sleep quality automatically. Whenever I am close to my laptop with the Fitbit device, it automatically loads data of my daily movement to the cloud. I can compare other people in the same age and get additional information of my health based on real data, and not on some assumed numbers that I have estimated. This is made possible by intelligent and embedded software that is becoming even more relevant in the future.

Cars are full of software devices and embedded software. My son and wife has a Ford car and both of them have Microsoft Sync that enables automated synchronization of music playlists, phone books and hands free phone use when driving. The system also provides information about vehicle health, business search, traffic alerts, 911 assist and many other things. All this is managed by GPS, wireless and Internet technology. 

Software ecosystems with cloud will change ISVs whether they want it or not.

Some software domains have been slow to move to the cloud space, but this is also changing and I will be writing another blog entry of this topic very soon. One of these domains is business intelligence/data warehousing space. There as some challenges in the BI/DW arena concerning the cloud, but many of these perceived obstacles will hopefully go away sooner or later with new innovation and solutions.

Some ISVs in smaller countries/regions have been protected from competition, but the cloud will also change this slowly but surely. There will always be new software vendors (ISVs) that are soliciting business across borders and many organizations are willing to test out new solutions even if they do not know anybody from the software company. Yet again, watch your own behavior when consuming web services/solutions. Do you really care where the solution is from? The only thing you might want to make sure is that the SaaS/Cloud vendor has an option to take backups of the data to a local environment in case the vendor disappears from the marketplace.

ISVs can’t avoid developing for the cloud anymore. I am surprised how some enterprise vendors and SMB ISVs defend their turf by concluding that cloud is not an option in their software world. Not only are these conclusions wrong, they might be lethal for the company when considering the future.  According to research, cloud adoption is accelerating specifically in the US market and if old trends are intact, rest of the world will see similar kind of growth as well.

Another clear trend that I have noticed is that organizations do not care anymore to have hugely complex applications/solutions and prefer to buy user friendly solutions that can be quickly deployed. I am convinced that the famous multi-year ERP deployment era is gone and organizations require solutions that can be easily purchased and quickly deployed. What ISV organization have to recognize is that the perception of solutions is changing whether we want or not and the price points and the usability and deployment is change forever. It will still take a few years for most organizations to move towards consumption-based software world, but it will happen as we have seen in so many cases.

If you are an ISV, you do not want to miss this window of opportunity to be innovating something new and get your footprint in the market. Does your company have a strategy for the cloud yet? If you don’t, you should take action now before your competition will eat into your market share.

Have the cost-cutting gone too far and are companies failing to retain talented people in mergers & acquisitions?

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I read today about Java creator James Gosling and the reasons why he left Oracle. James Gosling is of course the person that created the Java language and platform and is very well known authority in the Java world. He announced his departure in his blog entry and in an interview with eWeek, he explains in more detail the reasons why he is leaving. I have to say, I felt some déjà vu (seen it, felt it) feelings when reading the article.

There are two forces on the market today: slow economy with cost cuttings and a fundamental change in business models. Large organizations have cut costs without reducing the workload and this is putting huge pressure on its employees. Salaries have been cut, bonuses have been sliced but people are asked to work more. It is OK as long as both parties have a good plan going forward and both parties agree that the actions are needed for the company to survive. The change in business model is forcing people to learn new things and some will never get adjusted to the change no matter how much they try. The outcome if this is either unemployment or change of company and maybe even career.

When reading the story of James Gosling, I think every imaginable move from the buying company (Oracle) went wrong. First of all, Oracle does not have the same status for employees as Gosling (Fellow), they failed to provide a salary level and bonus plan that would have made sense for Gosling. The final straw that made him leave was when he realized that he had no say in any decision-making of Java and its future. The new owner (Oracle) wanted to micromanage everything and for a person like Gosling, this must have been just unacceptable. Mr. Gosling was king on the hill in Sun and now with Oracle, he had to take directives from people that probably never had anything to do with the creation of Java programming environment/language.

Is Gosling the first one to have to experience this? No and one does not have to go far to see how people such as Monty (Michael) Widenius (one of the creators of MySQL) left Sun once MySQL was sold to Sun. Monty rumbles in his blog and has been very aggressive in trying to block the Sun deal and MySQL going to Oracle. He did not succeed and is now working on a branch of MySQL as he does not believe in what Oracle is doing. One can always argue of his motivations, but there is no doubt that he was one of the carrying forces in creation of MySQL.

Why am I interested in the story of Gosling? It is probably because I do not understand the logic behind some of these large organizations and their ability to retain people and keep them enthusiastic about the future of the merged company. I have seen too many of these stories throughout my career and having been part of 3 sell-outs, I have also experienced interesting things myself as part of the sold company. It seems that buying companies are very focused and bullish about the transaction and forget that there are people behind the products and service that need to keep their focus on upcoming things and not have to dwell on the past. Large companies with deep pockets can survive of key people leaving, but it is another story if most of the core competence leaves with the acquisition.

What I would like you to do is to list your own experiences in mergers and acquisitions (M&A) or other similar cases and dwell what happened and try to remember how many key people left after the merger. I am sure you have plenty of those in your memory and if you are part of management and in the process of buying companies, you might want to focus on this.

Java was not created by one person even if Gosling got lots of credit for it, but I am pretty sure that with him, Oracle lost a great innovator and at the same time the whole user community will lose. This is of course a tremendous opportunity for competition to turn Java developers to something else, but that was not the intention of this blog entry.

Another company in the past that reminds me a bit of changes in power is when the star architect Anders Hejlsberg (creator of Turbo Pascal compiler and Delphi Object Pascal environment)  left Borland to join archrival Microsoft. The circumstances were different with Mr. Hejlsberg when compared to Mr. Gosling, but the future of Borland as software tools company started to detoriate when Mr. Hejlsberg left the company. Mr. Hejlsberg was in charge of creation of J++ programming language and later C# programming language. This move with many other moves finally took down Borland as it were and the company was sold and products divided into new owners. This ended the dream of  Philippe Kahn to win the competition of Microsoft. Mr. Kahn was a charismatic leader and known for his bullish dreams of taking over the world in development tools.

I am sure that most of the moves that people make in their careers have nothing to do with money, the reasons are multifaceted and mostly due to personal reasons and desire to have a meaningful life with purpose. Large organizations (and small as well) need to keep in mind that people crave for happiness and purpose in their work and if you take that away from them, no money or fame will replace the ill feel that these people might have.

I was recently interviewed  (in Finnish) by the amazing Cristina Andersson (author of Winning Helix: The Art of Learning and Manifesting Your True Potential) about courage and how collective fear can paralyze a company to its knees. Management teams often fail to realize that fear causes people not to make decisions and decisions that should have been done will create a death spiral in the company as everybody is trying to keep his/her own position without losing face or taking a risk.

In large organizations, the cost cutting has led to a corporate culture where people will keep their heads down in the cubicle and answer questions only when necessary. How do you think this will impact the long-term outlook for the company? I think we have seen this many times in our own careers and the outcome is always bad or in most cases fatal.

My recommendation to all companies, regardless of the size, is to analyze the well-being of people and quit looking at the quarterly numbers. These numbers will come down no matter what if people do not feel committed to their work and the teams that they work in.

Law #1 of Bessemer’s Top 10 Cloud Computing Laws and the Business Model Canvas: Less is more!

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If you have been active in the SaaS world, you have most probably heard of Bessemer’s Top 10 Laws of Cloud Computing and SaaS. These top 10 laws are defined to help to navigate in the world of SaaS, specifically for the ISVs that want to transition to the SaaS world and the ones that have a dream of starting a SaaS-based company. Let’s drill into the top 10 rules of Bessemer. These “laws” are built on hundreds of conversations with cloud executives around the world and Bessemer Venture Partners is one of the best known investors in cloud companies. The latest, Winter 2010 release of the Top 10 Cloud Computing Laws are:

  1. Less is more! Leverage the cloud everywhere you practically can.
  2. Get instrument rated, and trust the 6C’s of Cloud Finance.
  3. Study the Sales Learning Curve and Only Invest behind Success.
  4. Forget everything you learned about software channels. The internet is your new channel and Technology enabled Service providers are among the few partners that actually care if you succeed.
  5. Build Employee Software. Employees are now powerful customers, not just their managers.
  6. By definition, your sales prospects are online – Savvy online marketing is a core competence of every successful cloud business.
  7. The most important part of Software-as-a-Service isn’t “Software”, its “Service”.
  8. Leverage and monetize the data asset.
  9. Mind the GAAP. Cloud accounting is all about matching revenue and costs to consumption… besides the professional services.
  10. Cloudonomics requires that you plan your fuel stops very carefully.

Each of these laws had lots of detail information and logic behind it and I would recommend you to read the whitepaper that describes all of this in greater detail.

What I would like to accomplish is to portray these 10 Laws in respect to the Business Model Canvas (from Dr. Alexander Osterwalder et al.)  that I described in a prior blog entry ISVs are re-learning Business Models from multiple different perspectives using Business Model Canvas. The business model canvas portrays the dimensions in an overall business model. This Business Model Canvas is an excellent tool/framework to analyze any business, including a SaaS or traditional enterprise software business. I will break this analysis into multiple blog entries and will start by analyzing the first law (Bessemer Cloud Computing Law 1 #1: Less is more!)

Law #1: Less is more!

This law suggests that the software company (SaaS vendor) leverages the cloud wherever it can, both internal systems as well as own product offerings. This enables the software vendor to “eat its own dog food” with the experiences that a real customer would have of the solution use. This law also suggests that the vendor focuses on its own core competence and leaves everything else outside to be managed by others. This relates to at least three business model canvas building blocks: Key Resources (KR), Key Activities (KA) and Key Partnerships (KP) but can also have an impact on Cost Structure (C$). Let’s analyze why I am referring to these canvas building blocks.

Key Resources (KR) in the Business Model Canvas is needed to create the solution that is defined in the Value Proposition (VP) and delivered to the Target Customer Segments (CS). These resources can be physical, intellectual, human or financial. Bessemer Law #1 emphasizes to focus on SaaS vendor’s own core competencies and leave the rest to other vendors to deal with.

Key resources (KR) should not be used to install software, but to focus on key delivery using a PaaS (Platform-as-a-Service) or IaaS (Infrastructure-as-a-Service) platform that others will maintain for the SaaS vendor. Software development of today should be to focus on building value over a software product platform where the value is built using the platform and where the developer can assume to have basic functionality built into it as infrastructure services and these services can be consumed using well-defined application programming interfaces (APIs) and standards.

The Bessemer #1 Law suggests building single instance, multi-tenant software solutions with a single version of code in production. Having been in the software business for 20+ years, this objective is truly something that I would highly recommend if possible. The whole idea behind my 2004 doctoral dissertation was to review how Analytical Application Software could be applied in a product platform setting and using software product line engineering with the idea to create an optimized core platform that developers could utilize in derivative software development.

Key Resources also define how well the SaaS company knows its domain, how well investors think that the SaaS company is going to be able to deliver the Value Proposition that has been defined for the company. The areas where the company does not have skills or are competitive should be left to Key Partners (KP) that can take care of providing the service. This could be outsourced product development of non-key software components and this is where a cloud provider such as Microsoft comes to play as well.  The SaaS vendor should evaluate its key competencies in a realistic way and focus on the areas where they know they can survive and leave the rest to Key Partners.

This type of building value-add is part of a SaaS vendor’s  Key Activities (KA)  and infrastructure development such as building scalable data centers is left for companies like Microsoft that is investing billions in huge data centers around the world and taking the pain off ISVs and software development organizations of having to worry about hardware, scalability and Service Level Agreements (SLA). An example of this is Microsoft Windows Azure  that represents an operating system in the cloud and provides a foundation for ISVs to build value-added solutions.  With this model, the SaaS vendor will save money in infrastructure costs and therefore it has a direct impact on Cost Structure (CS).

The Bessemer’s top 10 cloud computing laws can be viewed through the lenses of Business Model Canvas as was described in this blog entry.  I will continue on this series until all Bessemer’s top 10 cloud computing laws is covered using the Business Model Canvas.