Archive for September, 2009

Mary Hayes Weier of InformationWeek poses some great questions about Oracle’s desired switch (according to a recent announcement) to subscription-based pricing, in her article Oracle Mulls Shift To Subscription-Based Pricing.  “How is Oracle going to do subscription-based pricing, and is that going to require Oracle to invest heavily in a multi-tenant architecture,” Mary asks.

Let’s tackle the first part of the question. It is, indeed, a huge shift, moving to a subscription based pricing model.  Oracle probably has a twofold objective – to protect the current customer base (probably a bit easier because these customers have already spent millions on software/consultants and are seemingly ‘locked’ in) as well as acquire new midmarket customers that haven’t yet had a taste of Oracle’s software.  Can Oracle potentially repackage what customers would have paid into annual license and ongoing maintenance fees into a monthly subscription fee spread over the life of the contract, and protect current revenues as well as get new customers?

I don’t think so. When it comes to midmarket, vendors more grounded in the SaaS world (or the multi-tenancy experts) will surely come with lower priced options and Oracle will have a tough time competing.  The answer would have to be lower revenue per customer. Which means that just to produce the same revenue numbers, Oracle will need to acquire more customers. More customers implies more salespeople, more infrastructure, more support, more (you fill in the blanks).  In summary, that means incurring higher costs but getting the same revenue.  Safra Catz will not like that.

Which brings me to the second part of Mary’s question – will Oracle need to invest heavily in a multi-tenant architecture to solve this? Absolutely. Multi-tenancy will be necessary to deliver cloud services and shift to subscription-based pricing, while protecting the bottom line at the same time. Yes, building and delivering that kind of architecture isn’t Oracle’s forte. But their industry and financial stature gives them so many interesting choices that it shouldn’t be that hard for them either. They could go and buy a company (and a platform) tomorrow. They could sell more database licenses to salesforce.com and then use Force.com as the platform to build and deliver multi-tenant versions of Oracle apps (Peter Coffee points out in his blog entry What the Cloud Entails how increasingly complex multi-tenant apps are being built in a faster timeframe on Force.com). Or they could hire the best cloud talent and build the multi-tenancy infrastructure themselves.

Did I miss any other options that Safra has? I’d love to hear your comments. Oh, and of course, here’s a  (free) whitepaper (from yours truly) that may have a useful point or two about the pitfalls and benefits of the subscription-based pricing world:

Whitepaper: The Dos and Don’ts of the transition to Cloud Computing

Jim Sinur from Gartner poses some very good questions about IT’s role in the Cloud world, in his blog entry The Secret is Out: The Business is Building Processes and Applications. The question is: Will IT continue to play an important role within their organization, when the business now has the option of getting their apps developed on platforms such as Force.com, without IT involvement?

Jim also poses more great questions, such as:

“As the business relies more heavily on these new infrastructures, will they be able to hold up to high scale? Will the business folks really want to take on the tasks to maintain these processes and applications? Who is going to build the integration components to glue these new processes apps together? Will the business folks build and IT be stuck with the results? How does one make sure there is not rampant duplication of processes and applications?”

Another good blog post Force.com – CiO’s dream or nightmare? by Ian Gotts (who heads Nimbus Partners) also outlines some important implications for a CIO, in the new cloud world order.

I do agree with Jim and Ian about the change that’s looming. CIOs need to do some serious thinking and figure out how they’d add value. It seems to me that there’s clearly an anchor role that needs to be played so that all of this comes together within an organization. Take the example of large banks such as Citi or JPMorgan Chase. Retail banking and investment banking are two disparate business functions within each bank and neither function really cares what the other is implementing technologically. But someone would have to figure out how to get these two functions (and others) within a bank to play together so the bank can benefit from a coherent cloud strategy. I also think that that someone would most logically be the CIO (although large Cloud Service Providers may compete for that role in future – outsourcers want that role but they’re unlikely candidates in my view).

Ian provides some very good pointers for the CIO. Another great post when it comes to pointers, is from Thomas Bittman (also, from Gartner) titled If You Build a Private Cloud, Will Anyone Come.  “We’ve got to get our IT people to stop thinking about products and technologies and even architectures first, and instead to focus on understanding their service requirements first,” says Thomas.  I completely agree. Thomas advocates making ROI decisions based on SLAs and costs for each service, before getting mired in architectures.

I think this is a big paradigm shift for a CIO.  But then, aren’t CIOs smart people? If I can figure this out, so can they.  What may be harder for a CIO, though, is to change their IT organization to become more service-focused and less obsessed with ownership. If a CIO can pull off that change, he/she will be in the drivers seat.  Otherwise they will open opportunities for others.

I just read the announcement from Wipro and Oracle about their Cloud platform for software companies in this article, Wipro Offers Cloud Computing Service, from Mary Hayes Weier of InformationWeek.  According to the announcement, Wipro and Oracle are providing a service which will let software companies offer their existing applications as SaaS in a multitenant model. They claim they can move your apps into the Cloud at 50% of the cost.

Wipro is, undoubtedly, a very smart company. So is Oracle. And it definitely makes sense for two smart companies to generate some headlines. However, that’s all I see in this news item – no more. We only wish moving a software company and their customers to a SaaS model was that simple. I would understand if they were talking about providing manpower to maintain an app at 50% of the cost (that is the core business of Wipro – providing cheaper resources in India for tasks that are commoditized). We, at Navatar Group, live and breathe this every day (we help software companies move to Force.com, salesforce.com’s Platform-as-a-Service).

So what is the big issue, you may ask? The most important issue is that SaaS is more than just a technical platform. It is a business model to help you provide a “service”. A software company will die sooner if they move their existing software to a SaaS platform in this fashion. They will cannibalize their existing revenue, tick off their salespeople, lose their customers to startups and will be writing checks forever to meet daily customer demands.

Cloud Computing is a paradigm shift. A software company mustn’t jump into the SaaS model just because it’s cool and everyone else is doing it or even because it’s 50% cheaper now. They will probably survive a bit longer if they stick to their core competency – selling a “product” as opposed to providing a “service”.

To learn more about the issues faced by large software vendors like Thomson Reuters and CODA that have done this successfully, download this free whitepaper:

The Dos and Don’ts of the transition to Cloud Computing

Alok Misra