Panorama Capital CIO Offsite : IT Trends and Implications for CIOs

I am in SF at Panorama Capital’s CIO offsite meeting, which is a great get together between investors, startups, and actual CIO’s with large enterprise companies. For those of you that don’t know Panorama, it is a pure venture capital group spun out of JPMorganChase, so as you would expect their CIO Council features some well known major brands; in attendance today are CIOs from HomeDepot, 800Flowers, SnapOn Tools, JDSU, Manpower, E*Trade, House of Blues, Audiovox, and Juniper Networks, among others.

The first session of the day is a presentation by McKinsey about the trends in enterprise applications. With only 1 hour this topic obviously isn’t going to get covered in detail so what they did was break it up into 4 major buckets:
– IT budget
– New technologies
– Evolution of infrastructure and architecture
– IT organization

All of these are good topics, although I think I would have attacked this a little differently by focusing on what user are expecting as an experience, how go to market and route to market strategies for vendors are evolving, and how dramatic technology evolution over the last decade have hardened architectures and how customers and vendors alike are benefiting as a result.

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I Like Companies That Say “We Suck”

This is something along the lines of people who like it when people say “I’m sorry”. As for me, I really don’t care what companies say, I care about what they do… just like with people, it’s not that you are sorry about something but rather what are you going to do in the future to affect a different outcome. If Yahoo! 360 has crappy feeds, well just acknowledging that still results in their users having crappy feeds. A more meaningful “conversation” to have would be around the product plan for a new feed mechanism that improves them.

Just saying you are sorry or “we suck” doesn’t get you off the hook in my book.

PS- it wasn’t Yahoo! saying “we suck” in that blog post, it was some guy in a product group… there is a difference.

Micro Persuasion: I Like Companies That Say “We Suck”:

I like companies and products that have the guts to say “we suck” or something close to it.

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Redeye VC: 53,651

Every so often you read a post that completely nails something from whatever angle you want to look at it, this is one of those posts.

By coincidence I had a meeting yesterday for an advisory board I participate on with some VCs and other “Valley people”. The meeting was to discuss an upcoming conference for enterprise software and I found myself pretty (uncharacteristically) quiet throughout the meeting because having been back on the operations side of SAP for the better part of 6 months I am forced to admit that the Valley is so radically removed from mainstream enterprise software that it really does leave me speechless.

This is not an easy admission for me to make because I pride myself as being a technology optimist, always able to see the reason why something will succeed as oppose to fail. But I can’t escape the fact that if I walk into the XYZ Enterprise Inc. anywhere in the country (world) and start talking about behind the firewall, well the discussion is going to go something like this: 30 minutes on what is tagging, 30 minutes on what is, 5 minutes on spelling out the url (repeatedly), 10 more minutes on what is tagging and 30 minutes on why anyone would want to do it.

Enterprise software is boring, but there is money in boring. Last time I checked there was a $400 million a year business in selling software and services for the AS/400, a platform that first debuted 17 years ago. My point is not that the AS/400 is something startups should be focusing on, but rather that enterprises live with and continue to support the things that they have invested in, not just the things we believe they should invest in. Maintenance is the primary function of enterprise IT, not innovation and this is antithetical to Valley people like you and me, and especially investors.

Having said all that, the future is not about companies that have been around for years but rather the things that haven’t yet been invented but are built on the things that have been done. Web 2.0 in the enterprise, compliance, open source, collaboration, lightweight process orchestration, security, sensor networks, and many more themes are very meaningful but they won’t be successful just because we collectively will them to be.

My favorite example of this is SugarCRM (a company I very much admire so put your flamethrowers back in the holster). Invariably whenever someone starts talking about open source business applications they bring up Sugar and use it as an validation of open source as an enterprise application disruptor… the only problem with that being that Sugar is a startup that is not profitable and hasn’t been catapulted into the mainstream CRM business arena. Out of the 35,000 customers that SAP has, I am aware of just one SAP customer who has approached us about Sugar integrating with our ERP suite. in other words, whatdayasay we wait for the investors to cash out before we declare victory for SugarCRM.

I don’t mind living in the echo chamber, and I certainly wouldn’t suggest that we get off the hype train or suddenly strive to become boring like so many other industries, but I would caution to not drink the proverbial kool-aid to the degree that we have in the bubblet that we seem to be in for the last year. Per Josh’s suggestion, the 25k users may not tell us anything, and in the enterprise arena it’s not about who’s using your stuff but rather who’s paying to use your stuff.

Over the last several weeks, I’ve been on several phone pitches from west-coast companies that are looking to be the “flickr of XXXX” or “like but YYYY” or “the Digg killer”. It got me thinking – how many people outside of the valley have ever heard of these companies? I asked a bunch of local (Philly-area) acquaintances and the answer came back loud and clear: none – nada – zip. People here have barely heard of Myspace and Craigslist – let alone any of the “hot” Web 2.0 companies.

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Benkler: The Wealth of Networks

If you know me or have heard me speak you probably realize that I am a huge fan of Yochai Benkler (and Eric von Hippel as the two seem to fit together rather well). 

Benkler's new book, The Wealth of Networks, is out as a wiki and a downloadable PDF. Of course, if you can afford it you should support Prof. Benkler by buying a copy on Amazon or wherever.

Want to understand what drives Open Source? Read Benkler:

In the networked information economy, the physical capital required for production is broadly distributed throughout society. Personal computers and network connections are ubiquitous. This does not mean that they cannot be used for markets, or that individuals cease to seek market opportunities. It does mean, however, that whenever someone, somewhere, amongthe billion connected human beings, and ultimately among all those whowill be connected, wants to make something that requires human creativity, a computer, and a network connection, he or she can do so—alone, or incooperation with others. He or she already has the capital capacity necessary to do so; if not alone, then at least in cooperation with other individualsacting for complementary reasons. The result is that a good deal more thathuman beings value can now be done by individuals, who interact with each other socially, as human beings and as social beings, rather than as marketactors through the price system.

Persistent Search: Search’s Next Big Battleground

Back in 2004 I wrote a post about a service that allowed you to track Ebay auctions via RSS. The notion of watching keywords or triggers with a mechanism like RSS is so logical that it stuns me to see how little of this has been adopted by companies in my segment of the technology business.   

I noticed that Niall Kennedy is going to Microsoft to build feed syndication into Live. When I consider what Microsoft is doing with their small business applications and the potential for leveraging, well it makes me think that maybe they do get it better than most and can make this happen

Burnham's Beat: Persistent Search: Search’s Next Big Battleground Simply put, Persistent Search allows users to enter a search query just once and then receive constant, near real-time, automatic updates whenever new content that meets their search criteria is published on the web.

First IT|Redux Breakfast : The World is Flat

Ismael Ghalimi is hosting a breakfast meeting on April 18 at the Hotel Sofitel. I’m going, the topic is interesting, Ismael has a lot of experience in the area, and quite honestly, very few people are publicly talking about how to actually implement “populist catch phrase business strategy” for this important area. People like to say the world is flat, but beyond the title of the book there isn’t much else said.

The theme for this meeting is The World is Flat, based on Thomas L. Friedman’s excellent book. We will discuss how Friedman’s ten flatteners can be put to use by software vendors today, using Intalio and a couple other start-ups as reference cases. This event is sponsored by Lohika — our offshore development partner — and will feature their CTO, Mark Phillips, who will share his experience working with small and large software companies that successfully offshored part of their software engineering process to Western Ukraine.

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IDC’s 10 SaaS predictions

You might consider saving the $3,500 it costs to buy the report, BTL is running the list here. But with predictions like this let’s just say I think they owe the people who actually paid for this report at least 5 freebies.

SaaS Will Help Drive a Software Industry Transition to Subscription Licensing

Gee, ya think?

I find it hard to believe that anyone actually pays to buy these “top 10” reports that the analysts put out. Sure they are mildly interesting, but can anyone say they are terribly revealing? Plus, nobody ever goes back and actually scores the analysts on how well they do on predictions over time, at least nothing I have seen has ranked them. If you know of site that ranks analysts, please let me know.

No, I think what happens with these reports is that IDC et. al. sends them out to their clients who then end up emailing them to everyone, who then turns around and uses the predictions in their powerpoint presentations as validation for what their company is doing. Pretty soon, the phrase “IDC predicts blah blah blah” becomes widespread and IDC has accomplished a primary goal, getting their name in print…

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Dark Side of Network Effects :: March :: 2006

Niel Robertson came by my office today and we had a great 1 1/2 hour conversation about everything from SAP/Oracle business to online advertising arbitrage. The advertising topic is what spurred this post upon reading Will Hsu's post about the Dark Side of Network Effects. I had a good laugh with Niel when I told him about the recent Under the Radar event and how every company that got onstage seemed to have the same answer to the "what's your business model" question: "we are advertising driven".

If you run the numbers on the wide range of companies that intend to be advertising revenue based you quickly come to the conclusion that the numbers just don't seem to work unless they have extremely well targeted demographics and high value click throughs. in other words, getting paid $30 for an insurance signup clickthrough (CPA/CPC) only works if it costs you less than $30 to deliver that one clickthrough. For most businesses they won't get to those numbers, as per Will's post, and they won't get to the kinds of volumes that are required to sustain a low value CPM driven model.

With Microsoft building the "Internets largest advertising network" I would suspect that online advertising will continue to be a buyers market.

this is a cautionary tale for all the web 2.0 plays out there. . . if you attract the wrong kind of community initially, you are building the wrong kind of network effects that could quickly deterioate

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I continue to be fascinated by the Dashboard feature in my new Mac, there is an amazing array of widgets available that extend the functionality of existing services in very useful ways. I have also seen a trend of vendors offering widgets or encouraging their community to develop widgets, as evidenced by this contest that 37Signals ran offering a year of premium service to anyone who developed the best Dashboard widget.

Widgets, of all kinds, are one of the realized benefits of SOA (whatever incarnation you want to refer to) because rather than requiring users to go to you app you are bringing your app to them, and more importantly you are enabling an external community to actually take responsibility for developing useful widgets (and their close cousin, mashups).

I can't wait for enterprise software vendors to get on this bus, however it's not evident that we're even at the bus stop as of yet. Salesforce comes close with their appexchange, but I'm not sure that is full web 2.0 as yet. I have seen some Firefox extensions for SAP, although I would bet that it is a complete mystery to most developers at SAP, and if not, then why didn't someone at SAP write these?

Will Oracle go subscriptions or not?

Last month I speculated that Oracle was preparing to abandon the traditional software license model for a subscription based scheme. I based that speculation on a couple of observations, the first being that Ellison has been devoting a lot of his public speaking to reinforcing a notion that Oracle already generates a significant subscription revenue stream. Second, the simple fact is that Oracle gets their ass kicked 70% of the time they encounter SAP in a competitive sales situation, and the acquisition spree they have been on hasn't changed that dynamic, in fact, over the last couple of quarters our win rate has actually increased. Lastly, Ellison is a smart man and he sees the trends pretty clearly with regard to SaaS and open source, both predominately based on a subscription model.

The idea that Oracle has subscription revenue today is somewhat of a shell game because what Ellison is doing is suggesting that maintenance revenue is subscription revenue. Technically it is, but it's a stretch to suggest it is of the same ideology. Every public company software executive that has maintenance revenue is faced with the same dilemma: maintenance rev is valued at 2-2.5x while anything called "subscription" revenue is valued at 3-5x by Wall St., so it's entirely logical that Ellison would try to reposition his maintenance stream as subscription revenue in the best interests of his shareholders (which is primarily himself). Heh, if your stock has been stuck sideways for 6 months despite all the attention you have generated you would be looking at any option that could improve your valuation without requiring you to actually execute your business better.

On top of the pragmatic valuation concerns I am quite sure Ellison is looking at the success of companies offering their products as services and concluding that removing barriers for customers to get on your products quicker is a good thing. This is where the open source components start to enter the picture because they have zero barriers to acquisition and have built up a significant user and developer community as a result. Acquiring the LAMP stack (minus MySQL) provides Ellison with a significant pipe to drive his Fusion middleware products through, and ideally draft success in applications as the ultimate goal. It is difficult to execute on a hybrid services/license model to the scale that Oracle would require, therefore it's even more logical to assume that Oracle is paving the way for this eventuality by moving to subscriptions on a defined path rather than a disruptive reaction to events that they would have set in motion with the acquisitions they are apparently making now. There is a lot more to their open source moves, IMO, than simply an economic model to be sure.

Yesterday there were a couple of analyst notes, one from First Albany and the other from Goldman, suggesting that Oracle was in fact preparing to abandon the license model, even if just under the guise of "subscription accounting". Just like you can't be a little bit pregnant, it's evident that you can't call it subsciption accounting without it actually being a subscription license option. Furthermore, any subscription revenue plan is dependent on growing deployments, and even though subscription licensing can even out the quarterly volatility that software companies fight, attention still goes to unit shipments as an indicator. As Sherlund points out, their valuation models are based on cash flow.

Today Oracle "clarified" the issue by saying they weren't going to move to a subscription licensing scheme, although it's really hard to swallow the notion that they just gave up on it after a few analysts came out critical of the move. My suspicion is that nothing changed in the plan other than the timing and way they communicate it.

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