Traditional ERP vendors such as SAP and Oracle overlook the Disruptive Innovation question when they discuss their move to a SaaS model

Posted on May 26, 2010

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In my May 18th Procurement Insights post titled “SaaS Sprawl, One-Stop Shopping and Free 8-Tracks To Boot: A Sad Day in the World of SAP” I indicated that SAP’s John Wookey might have been overly optimistic when he put so much stock in customers coming to SAP and saying that it “would sure be nice if you could provide these things on-demand so we wouldn’t have to go to all of these other vendors?”

The “other vendors” to whom Wookey was referring, are the original SaaS-based organizations whose solutions are viewed as being technologically more advanced than the Enterprise Resource Planning or ERP applications for which SAP, Oracle and up until last year Ariba, are known. The fact that SaaS solutions (which to the uninitiated is the acronym for Software-as-a-Service), requires very little up front capital outlay versus the significant licensing and on-going maintenance fees associated with traditional ERP applications, I could not help but wonder about what customers Wookey was talking. Especially since 85% of all ERP-centric implementations fail to deliver the expected results.

Even by his own admission there is what he called a “rub” regarding this claim of perceived demand in that “Customers that already have gone with SaaS in addition to an on-premise suite may not swap out for on-demand orchestration.” Herein of course is where the concept of “disruptive innovation” comes into play in terms of driving the paradigm shift to which Rosslyn Analytics Founder and CEO Charles Clark referred in a recent interview on the PI Window on Business Show.

When SAP talks about orchestration, they are referring to a consolidation of the functionality of different applications under a single SAP umbrella. Conceptually reminiscent of the Safe Passage and Project Fusion connectivity – what was it Oracle CEO Larry Ellison said about his company’s Service Oriented Architecture “SOA” providing “near real-time” connectivity, orchestration is an attempt to integrate client driven functional requirements within the framework of the existing SAP architecture and business model. This is similar to, and this is taking a step back in the old time machine, the days of CP/M and a loosely connected product suite called Perfect.

In the days before Windows and yes even DOS, the Perfect Family included a word processor, data base and spreadsheet module. The only thing these three applications actually shared of course was the Perfect name as each was designed by a different author or programmer. This meant that “orchestration” was about as simple and as straight forward as open heart surgery without the doctors and the hospitals.

In terms of innovation, the programs including the attempt to package them into a orchestrated suite was evolutionary and perhaps even somewhat transformational, but not necessarily disruptive. Specifically, and referencing the work of Clayton Christensen, the “software suite” concept did not become disruptive until Microsoft introduced and then “perfected” what we now know today as Office.

As part of this necessary history lesson, the term disruptive technology was first coined in 1995 in the article Disruptive Technologies: Catching the Wave by Clayton Christensen and Joseph Bower. As it was described at the time, disruptive technologies refers to innovations that improve a product or service in ways that the market does not expect, typically by lowering price or designing for a different set of consumers. Are you starting to see the SaaS picture become a little bit clearer and why companies like Ariba followed by Oracle and then SAP are attempting to introduce a SaaS model.

In the case of SAP, or for that matter any traditional ERP vendor, it is very unlikely that their attempt to move to a SaaS model within the confines of their present platform will prove to be successful, let alone disruptive even with the vast resources and deep technological know how they currently possess. This is because the issue is not one of technology alone, but as Christensen wrote in his 2003 book The Innovator’s Solution, the disruptive element that transforms a product or service and ultimately the industry itself, is simply enabled by the technology.

Specifically, the innovative disruption associated with the introduction of the SaaS model is tied to the cost of implementing and managing the application, which requires a minimal up front investment of capital with a low cost, on-going pay as you play fee schedule. In short, if the product works you pay. If it doesn’t you don’t because you won’t use it. Conversely, the business model for traditional ERP vendors like SAP and Oracle are based upon their receiving a sizable up-front licensing or per seat fee, plus significant and on-going fees associated with somewhat onerous maintenance and upgrade agreements. Here of course is the inherent flaw with this latter pricing model . . . the more you invest in the application, the less likely you are to walk away and take a hit that can run as high as several hundred million dollars. Perhaps these are the stalwart clients to which Wookey had referred?

Based on their technology and corresponding business model, the smaller more mobile SaaS vendors can offer incredibly advanced functionality at a fraction of the cost of their mammoth predecessors, who are encumbered by the need to support their large and perhaps bloated infrastructures while delivering an inferior solution.

Before I am inundated with e-mails regarding my inferior solution comment, I will once again defer to my May 18th article and in particular the similarity between Oracle’s announcement regarding their entry into the SaaS world, which Ariba CMO Tim Minahan referred to as a “bipolar attempt at cloud computing,” and the current verbiage from SAP.

It is worth noting that Minahan then went on to say that if he “were an Oracle or SAP customer,” he’d be confused, and that he thinks that “that’s their intention.” In fact the Ariba CMO went so far as to say that “Oracle’s on-demand sourcing is not really on-demand at all.” Interesting words coming from the former CSO and Senior Vice President, Global Supply Research at Aberdeen Group. (Once again, check out the Minahan interview.)

Notwithstanding the reference to the ersatz nature of an ERP-based SaaS orchestration, another barrier to entry as my friends from the VC world call it, is that an organization making the transition from a licensing to on-demand SaaS business model is not likely to find the road an easy one.

In my interview with Ariba’s CFO Ahmed Rubaie, he talked about the need for a company to make a wholesale change at its grassroots level when he said, “The biggest challenge in transitioning to an on-demand model is not really financial per say, nor is it about the technology investment. It’s really about changing the DNA of the company.” (Note: here is the link to the Rubaie interview on the PI Window on Business Show which aired on May 7th, 2009.)

An important part of the DNA change would be to emulate the original SaaS company model that would require a severe cut to the SAP workforce. That alone may make a true transformation to a SaaS model a non-starter, especially given the on-going need to support the current technology in what is still a significant client base.