A client asked me whether I had anything in the files that laid out “the value proposition of cloud computing.” I don’t, and I don’t know of another good treatment. (Please, commenters, refer me.) But I thought I’d provide an answer here. It’s provisional, but I’m hoping that the comments will help improve it.

Before I begin, a few notes. First, as I noted in “Silver and Tinsel” the term “cloud computing” is heavily contested.If you are confused by all the silly claims, Ray Wang does a good job disentangling the terms. In what follows, I am ONLY talking about rue multi-tenant cloud applications, not hosted or single-tenant applications.

Second, in what follows, I’m only talking applications (SaaS). The value proposition for infrastructure (IaaS) or platforms (PaaS) is somewhat different. Third and last, I am assuming that multi-tenant application vendors are exploiting the advantages I’ll describe. In making this assumption, I’m clearly oversimplifying; many vendors simply don’t exploit the technological oopportunities as effectively as they could.

That said, here are the advantages of cloud computing:

I. Cloud computing is much cheaper.

The cost per unit of application functionality delivered by a SaaS company to the user is, in principle, much less than the cost of the same functionality delivered from your own premises, because the SaaS company shares the cost of expensive resources among all its customers and because the costs of distribution and remote support drop to zero.

What resources are shared? Database. Application server(s). Disk memory. RAM. Backup. Load management. Bandwidth. Provisioning. Patching/Patch testing. Security. Utilities. Personnel. All of these provide major economies of scale. What costs disappear? The cost of testing on multiple machines/OS’s/DBs. The cost of preparing and sending out disks or downloads. The cost of getting access to and understanding the configuration of a remote site.

Now, within the world of cloud applications, the problem of sharing all these resources efficiently is not an easy one to solve. There are several different “standard” approaches, each involving tradeoffs. Nevertheless, it’s safe to say that the more resources shared, the cheaper the cloud computing application. So if you want to figure out whether the cloud computing application you’re thinking about buying is any good, ask them for details about how they share those resources.

Now, very few of us really have a good intuitive feel for how much saving is involved. Your knee-jerk reaction might be that your data center costs roughly the same amount as a SaaS company’s data center. And if you know that your own data center is a little expensive, maybe you think that some partial solution, like hosting the application somewhere else, is roughly as good.

So, when Oracle tells you that their cloud application is hosted in their datacenter, so that you share data center management costs with other customers, that sounds good to most of us. And if Lawson tells you that they’re running on Amazon, so you’re sharing data center and app server and disk costs with other Amazon customers, that sounds good, too.. And if some smaller vendor tells you that you’re running on a virtual machine in a rented data center like Rackspace, that sounds good. It turns out, though, that none of these common, single-tenant “cloud” solutions really get anywhere near close to achieving the cost savings that are available. The only way you can get those cost savings is if the application itself is “multi-tenant,” which means that the application has been written in a way that allows it to manage the resource sharing.

How much of a difference does multi-tenant make? It’s astonishing, but the answer appears to be that multi-tenant is ten times cheaper than a single-tenant solution in a shared data center. (See “Silver and Tinsel” for more on this.)

And what does that say about taking delivery of a solution. Obviously, it depends. But the experience so far says you should think of it this way. Choice 1. Multi-tenant solution taking advantage of shared data center resources, shared computing resources, lower distribution costs, and lower management costs. Choice 2. You take on all the costs of the data center, computing, distribution (to you), and management, sharing those costs among all the applications at your company. You know that companies that do hosted or single-tenant cost 10 times more than multi-tenant. Do you really think that Choice 2 is comparable in cost to Choice 1?

II. Cloud Applications Are Easy to Consume

Cloud applications are generally much easier to set up, try out, get access to, buy, and use than on-premise applications are, for a very simple reason. Cloud applications are designed to be delivered with as little intermediation as possible to the end user. On-premise applications are designed to be intermediated by IT. They are built and sold under the assumption that IT will approve the purchase, take delivery, find all the computing resources, install the software, set up the users, arrange for training, fix problems (if any), ask for improvements, etc., etc.

To some extent, this is an artifact of the first value. The SaaS company is taking over the job of delivery to the user from your IT department, and they’re getting a lot of leverage because they’re delivering it to lots of users, not just the users at your company. Not unnaturally, they can do automatically what your IT department has to do manually. With that automation come a lot of savings in cost for them and a lot of improvement in the user experience for you.

III. Cloud Applications Are Up-To-Date

According to the many really knowledgeable people who have tried the real edge that the cloud application vendors have lies in the speed and effectiveness of their development.

A cloud application vendor can develop more efficiently than a vendor that delivers on-premise, because they’re only developing for one installation. They can develop faster, because they don’t have to build up a massive “release.” They can deliver much, much, much faster. They can fix problems much more easily, because they’re basically fixing once and they can do analysis on the same system that they’re delivering. They can respond to customer requests more easily, partly because of the aforementioned, but also because they can actually look at how customers are using the application.

Cloud application vendors often tell customers, “No more upgrades,” and wonder that this statement fails to thrill. (It is thrilling, but only to the poor gents in IT who have lost too much of their lives in 72-hour stints over some Labor Day or Christmas.) They should be saying, “Look, we’re keeping up.” New devices? We’re on it. New interface techniques? Done. New requirements? Months, not years.

In my view, even the most modern of modern on-premise applications is roughly 5 years behind what a modern consumer experiences every day, and most applications used today are 10-15 years behind. With a cloud application, you have a chance of staying within reach of the latest innovations. With an on-premise application, you simply don’t.

IV. Cloud Applications Can’t Be Customized

Wait a minute? Wasn’t that supposed to be a disadvantage of cloud applications. Sorry, it’s an advantage. A big one.

The problem with customization is simple. It costs too much. Unfortunately, the way modern corporations and IT organizations are structured, most of the costs are hidden. IT organizations are service organizations, and they’re rewarded for providing service, so they simply defer the astronomical costs of managing, maintaining, and upgrading around the customizations because they look bad. They’re in the position of a butler at a billionaire’s house who is asked for fresh raspberries in February and, rather than disappoint, simply charters a jet from Chile and accepts the complaints when the billionaire finds they’re not fresh enough.

So when a SaaS company says, “No,” to its customers, they’re providing the same kind of benefit that I am when I tell my daughter, “No sugar.” They’re helping the customers to do something that they shouldn’t do anyway.

This doesn’t mean and shouldn’t mean that the SaaS company doesn’t allow any changes whatsoever to the way the product is used or doesn’t allow customers to do things with the data that they hadn’t envisioned. But typically, anything that the customer should want can be provided either by changing configuration settings or by moving the work (far more cheaply) to some external system.

If you find a SaaS system where you MUST have a customization (or an integration, the same logic applies) or it will be literally impossible for you to use the system, don’t buy it. Period. The fit is wrong for you, and it will never be right. This, too, is a huge value, both for the SaaS company and the customer. They have fewer customers who should never have bought in the first place, customers that are excessively expensive to support and often likely to sue.

Choice and Control

What is the cost of all this value that’s suddenly being delivered? To SaaS naysayers, the cost is choice and control. “We let the customer choose between on-premise and on-demand.” “We let the customer run on his own machine, which he controls.” “We let the customer run the application the way he wants.” (I use the word “he” advisedly.) Those silly SaaS companies force you to do things their way.

Well, if you ever, ever hear the CEO of an on-demand company say, “What we offer is choice,” run, do not walk, in the other direction. Because what he is not telling you is the cost of that choice. Modern enterprise applications are highly tuned, finely designed, very complex machines–think Ferrari, if you want–and for such machines, the kind of choice offered to customers is pretty much akin to offering Ferrari customers a choice of rear axles or of steering systems. Giving you that choice costs you a lot, costs them a lot, and is completely pointless.

The same thing applies to when an IT person says, “We need to have the control” or “We really can’t afford the security problems.” Unless you ask what the cost of that control is or the cost of that [non-]security, and get very accurate answers, you have no idea what a bill of goods you’re being sold.

About three years ago, I was a judge in a software contest, and all the entrants were SaaS vendors. They had figured out already what my client was asking me last week: the value proposition of a SaaS (multi-tenant) is so overwhelming that there’s simply no point in building an application for on-premise delivery.

Once again, we have a flurry of posts/announcements about the apparently mysterious Solution Manager. Panaya starts things off with a survey of Sol Man customers, who apparently don’t get much (?) out of it and don’t understand it. My much-opinionated colleague, Dennis Howlett, publishes a post [I am mentioned, thank you, Dennis] accurately going back over the history and suggesting that SAP needs to do better. Tom Wailgum publishes a post asking why SAP’s account of Sol Man benefits and Panaya’s account are so different.

It’s all a little confusing, partly because Panaya’s survey isn’t well-structured and partly because SAP itself does as much as it can to throw oil into the waters. (This used to be a quite different metaphor.)

So let me try to clear things up. Here’s what is known to any analyst or user who does his homework. The Solution Manager is a big product, which tries to do lots of different things. Some it does OK or pretty well, which means SAP is right. Some it does poorly. Like most software products. Here is a rough, off-the-top-of-my-head list of things the Sol Man does.

1. The Sol Man downloads patches that come from SAP. It does this pretty well, and it had better, because it is supposedly the only way to get patches from SAP.

2. The Sol Man gives you a fairly straightforward way of installing those patches and some templates/test cases that are supposed to help you test them. This, too, works fairly well.

3. The Sol Man does some basic SAP system cleanup and monitoring. It finds code that’s not being used, frees up disk space, identifies code you are using that’s been superseded (possibly), etc., etc. This works; some people use it, some don’t.

4. The Sol Man does some SAP performance monitoring. (Jim Spath, an SAP mentor, is the expert on this aspect of the product.) Spath has not spent a lot of time praising the product and from what I’ve seen of the product, there’s a good reason for this. [Adddendum: Jim has also recently posted on the Sol Man’s abilities to help with cleanup.]

[Note on this last point. Performance monitoring is a very complex area, because SAP performance and other system performance are deeply interlinked. There are actually many products out there that do some kind of performance monitoring, usually not just confined to SAP, and many SAP customers already use these products. So no matter how good or bad the product, SAP's entry into this area is going to be problematic in a way that patch installation is not going to be.]

5. The Sol Man provides some tools that should allow SAP to deliver better support because the SAP organization can use these tools to get a better understanding of what your whole system does. To get any benefit at all from this, however, you need to spend some time documenting your system for SAP. If a lot of customers didn’t do this or didn’t know about it, I wouldn’t be surprised. For more on the benefits that might accrue from this, talk to my favorite Australian SAP Mentor, Tony de Thomassis.

6. The Sol Man can help you improve your business processes, with help from SAP, as long as you first document your business processes. This help could take various forms. The Sol Man could help eliminate redundant customizations, find process bottlenecks that SAP upgrades can fix, do root cause analysis of performance issues, etc., etc. Could this benefit you? If you ask Tony, the answer is “Yes,” but bear in mind that this a lot of work.

Now how do I know all this, especially what works and what doesn’t? Well, I didn’t do anything special. To find out what the Sol Man does, I went to a session at Sapphire 2009 (SapphireThen?) and then went to a really interesting session at the Influencer Summit. To find out about the benefit, I mostly relied on studies that SAP and SUGEN did last year, whose results were described at the summit. I’ve published this in a couple of blog posts, and both Jim and Tony have done much more than I to get the word out.

I don’t fault Panaya or Dennis or Tom for not having done this research. Why should they? But I do think that SAP could have done one thing very easily that would have helped everyone involved. Publish that study they told us about at the Influencer Summit. In it, the benefits are laid out fairly clearly and accurately. And then Dennis and Tom and Panaya and I could start arguing about how much those benefits amount to and what could/should be done to improve them.

I have been watching the earnest attempts with which Ray Wang is trying to “define” the flavors of cloud computing and Phil Wainewright is trying to describe its “unspoken benefits” and James Governor’s simplifications of cloud concepts, and all those efforts make me want to use words that you shouldn’t use on the Internet.

Why? Well, they’re a bit too high-minded and value-free.

Let me explain the problem with the use of an example. Imagine you were a high-minded dictionary writer who was trying to stand above the fray, so you defined “good,” as a ‘set of behaviors and attributes approved of by some,” and “bad” as “a set of behaviors and attributes not approved of by people who approve of the good.” There may be some sad, sorry truth to these definitions. But far from being even-handed or fair-minded, they’re simply serving the interests of the bad guys, who get to turn bad and good into a popularity contest.

Similarly, if you define hosted or SaaS or whatever as if all of these were legitimate choices which you, the high-minded definer are not going to evaluate, you serve….well, all the guys who want to foist a bad choice on you while pretending that it has all the virtues of a good choice.

You can see this most clearly if you look at the history. Ever since people (Marc, you know who you are) started using the term SaaS, applications that are shared and leased have been what the academics call “a site for contested definition.” As soon as the term SaaS was bruited about by some people, other people would say, “Oh, well that’s just a silly new term for ‘hosted,’ and ‘hosted’ is a great thing and it’s what we’ve always done. If you’d like to lease our software, go ahead.” (Larry, you know who you are.) The same things have happened to “on-demand” and “cloud” and all the other terms that the eminent and high-minded analysts are trying to explain.

This contest is exactly why there is the confusion in the market, a confusion that Ray rightly decries. The terms are confused and confusing because people are trying to appropriate them.

They’ve tried to appropriate them for a perfectly obvious, simple reason. They’d like to get the credit and money associated with doing something difficult, but very good, without all the trouble and bother of doing that difficult and good thing. But as a definer (or as an entrant in the marketplace), you will never, repeat never figure out what they’re trying to do if you don’t look squarely at why the difficult design choice really is difficult and what the payoff for that design choice really is.

If you try to define “good,” that is, without deploying some notion of worth, you’ll end up with no practical difference between the two and a whole lot of bad people trying to use your definition to show that they’re really good.

Maybe in one of those hoity-toity academic environments like the one across the street from me, it’s OK to publish even-handed appraisals and fine, nuanced distinctions that clearly lay out all the issues for those five other people who are interested in publishing themselves on the subject. But in the real world, where some people who haven’t done their homework are trying to appropriate the hard work of people who have done their homework, it’s not OK.

That said, let me tell you the real scoop on “cloud,” “multi-tenant,” etc., etc., etc. True SaaS, true multi-tenant, true cloud applications are shiny like silver. Hosted, on-demand, and private cloud are shiny like tinsel. For any purposes that aren’t temporary and don’t have pretense built in, silver is better. Multi-tenant applications have more functionality. They’re more adaptable. They are easier to operate for the vendor. They are cheaper. They are easier to manage. They are more competitive and more likely to last. Unless you’re throwing a party and are planning to take down the decorations the next day while suffering from a hangover, they are better.

Why is true multi-tenant better? It’s very simple. They’re more efficient. More of any dollar spent on a multi-tenant application goes into value delivered to the customer. A programming dollar spent on a multi-tenant application is immediately delivered out to all the users of the product, and, it’s put there to make the product more useful. To get the same effect in an on-premise application, it takes a lot more money. The same dollar for the programming (actually a little more), another dollar (say) for the testing, packaging, and delivery, another dollar (say) to test it at the other end, and another dollar (say) to get users to make it effective. Let me be generous and include the cost of delay in the delivery of value in those last two dollars. I think the cost is really more. But of course, there are no reliable published figures. Analysts, where are you?

Aghast? Don’t believe me? Well, let me use an example where there are published figures. A couple of years ago, a senior executive at a major application company gave some lectures at local universities where he claimed that single-tenant (hosted or on-demand) applications cost 10 times more to run than multi-tenant. Let’s say he’s right. The benchmark in this area is the (highish) per-user cost of a major SaaS provider, which is about $3.50/month (not published, but widely known). His company, at the time, offered a single-tenant application that it leased out for a hundred and change each month. Let’s assume that the major SaaS provider was a direct competitor and was charging the same. Are these companies really offering the market good alternatives, both of which need to be respected. Remember, one is putting $31.50/month/user (roughly 1/4 of your subscription) into paying for extra servers, extra electricity, extra licenses for virtual machines, extra complexity in their provisioning systems, extra management of load balancing, etc., etc., etc., all of which (from your point of view) add exactly zero value?

Imagine you’re buying one of these two choices. One vendor has made a bad, inefficient, and expensive design choice in the way it delivers the software. The other vendor has made a good, efficient, and inexpensive design choice. Which should you buy? Wouldn’t you feel really annoyed at any analyst who said, evenhandedly, that there’s much both good and bad to be said about both choices?

“But…but…but…” I hear you saying, “I just read Ray, and Ray says that you can customize single-instance products, whereas you can’t customize multi-tenant apps, and you can have more confidence that your installation is secure if it’s not sharing resources with some other application.”

Ray is perfectly right in his facts and perfectly wrong in his emphasis. What he isn’t saying is that in this context, customization and security are impossibly expensive, ridiculous luxuries, the moral equivalent of the rear-view mirrors in the Rolls-Royce that used hand-blown glass. Imagine the following conversation with your CFO. to see what I mean. “To get customization and security, we have to pay ten times as much for the software to be delivered by a company whose gross margins are 1/10 of industry best practice? Excuse me? We’re paying for a limousine when everybody else is paying for a bicycle messenger? Hello. Do we really need customization? Is the security really all that much better?” To which, the only rational answers are “No” and “No.”

The real question in this era of contested definitions is not what the definitions are, but how we can tell when we’re getting the real goods. This is a very, very difficult question, not at all easily answerable through the use of a single label. “Multi-tenancy”–essentially sharing computing resources among users of applications in a way that valorizes efficiency and accessibility–is a difficult and complex engineering problem involving numerous, complex tradeoffs. There is good multi-tenancy and bad multi-tenancy, and bad multi-tenancy can be so bad that it is virtually indistinguishable from single-tenancy. (That’s why, Naomi, I sometimes only give two cheers to your own really laudable insistence on multi-tenancy from HR vendors; it isn’t just multi-tenancy, but how you do multi-tenancy.)

Over the years, we’ve seen many attempts to isolate the truly distinguishing feature of multi-tenancy: that it runs on a single database or a single machine, that everyone gets upgraded at the same time, etc., etc. It’s just as silly and fruitless to do this as to find the single, isolating characteristic of “chair.” (Four legs? No, there can be chairs with any number of legs or none. People sit on it? People sit on lots of things besides chairs.) The only real way you can tell is to look at the engineering.

Not surprisingly, many vendors, even ones claiming to be “true multi-tenant,” don’t pass muster. A month or so ago, my old colleague, Brian Sommer spent a good deal of time calling around to companies that claimed to be multi-tenant. “You would be astonished, ASTONISHED,” he told me in his inimitable way, “at how few there actually were.”

If we hadn’t wasted time wrangling about definitions and propounding definitions that simply missed the real point, maybe a healthy discussion of the engineering issues surrounding multi-tenancy would have grown up by now. The plain fact is that the way Salesforce.com does it is really different from the way NetSuite does it, each company making quite different tradeoffs and pushing quite different levers. But today, whenever you get one of these obligatory “due diligence” site visits from companies fearfully dipping their toe into the cloud waters, the only “engineering” questions anybody asks have to do with SAS-70 Type II.

This blog post is as more an open question than a pronouncement. So please feel free to comment on this or take the idea in a different direction.

I’ve been thinking about the next generation of Enterprise Applications, the value that they (might) bring, and about how people might justify replacing the enterprise applications they have with the new generation.

Generally speaking, you justify an investment in infrastructure using ROI. You invest this much, get this much return. For the first generation of enterprise applications (most everything designed between 1990 and 2003 or later), this made sense, because they were basically automation apps. They automated work done by people. The ROI showed up because you didn’t have to pay people to do it any more.

Now these new applications simply don’t do that, that is, they don’t automate appreciably better than the old applications do. And this means that ROI is a pretty crummy tool for evaluating whether an investment is worthwhile. Yes, there will be ROI if the enterprise application works the way it’s supposed to. But the return will be highly indirect. You won’t be able to fire people and pay for the application.

Brian Sommer has been talking about this problem for years–essentially, he points out that automating something that’s already automated doesn’t justify an investment on the same scale. But he has never really explored whether there are other forms of justification.

Nenshad argues in his book and his blog that good performance management enabled by modern tools will get you to a place you want to be, and he tells you a lot about how to do it. And while it is true that these new applications help you manage performance better and that’s one of the reasons you want them, he doesn’t offer a way of thinking about justifying the move to what he recommends. (Nenshad, if I missed this in your book, I’m sorry.)

So what does one use? Well, let me offer a concept and sketch it out in a paragraph or two, and you my small but apparently very loyal readership can then take me to task.

I’ll argue that what these new applications really do is improve “operational effectiveness.” What’s that? Well, to start out with, let’s just say that they let each employee put more effort into moving the company forward and less effort on overcoming friction, that is.

Well, that’s suitably hazy. So here are some things that you could measure that would, I think, be indicators that employee effort is more coherent and focused. You could, for instance, take a page from the black belts and measure operational errors or even just exceptions as part of operational effectiveness. Or, you could look at corporate processes that are nominally automated and see whether they are managed by exception. (Truly best, automatable practices should require almost no routine manual actions.)

People sometimes try to look at operational effectiveness by measuring what percentage of revenue is spent on things that feel like pure expense, like IT. So, a company that spends 3% of its revenues is less effective than one that spends 1% of its revenues. People also try to get at it by trying to look at which activities are “value-added” and trying to get people to do more of them. Both ideas are silly, of course, in themselves. (The 3% company may be spending on stuff that makes them effective, while the 1% isn’t.) But I think there might be indicators of operational effectiveness that are better. Wouldn’t operationally effective companies spend less time in meetings, send fewer junk e-mails, work fewer hours/employee (!), resolve more customer complaints and deflect fewer, etc., etc., etc.?

You get the idea, I think. So why is this a good measure for the new generation of applications? Because, bottom line, I think that’s what they’ll do. They’ll help organizations and people avoid wheel-spinning, error correction, and pointless processes or rules by getting to what matters, faster.

Of course, people have always accused me of being a ridiculous, blue-sky, naive optimist. But that’s how it seems to me.

What do you think?

A few days ago, I argued that a company that wants to replace its old, limping systems with a brand, spanking new Oracle or SAP application should probably wait for the next generation of apps.

The post got a lot of approving comments, which surprised me. I think there are pretty good arguments for just hauling off and buying. Consider what one of these hypothetical companies might say in defense of a decision to buy now rather than later.

1. We’ve got the money now and we should spend it.

2. The product we’ll get will be much more reliable.

3. The cost of services surrounding the product will be lower.

4. We don’t know when the new products will be out (with the possible exception of Workday 10).

5. We don’t know what will be in the new product.

Imagine what idiots we’d look like, the buyer might say, if we waited for five years for a product that was no better than what we could buy today and far more incomplete and buggy.

I see the force of this, which is why I thought it was a close call. Ultimately, I did decide it’s better to wait for markedly better products that are coming, despite the risks and delays. But I saw why people would disagree.

So are my commenters intemperate or am I dithering? One test for this is to look at the case of somebody who is not considering a replacement, but is considering a fairly big investment in the existing platform. Maybe they’re considering an upgrade, or maybe they’re considering some extension products, or maybe they want to push their existing installation out to other geographies.

This is a very realistic case. Several companies I know fairly well are considering one or more of these options. One is upgrading to Oracle 11i; another wants to upgrade to Infor LN. Still another wants to extend its QAD implementation to another geography. Still another wants to buy a CRM system from its existing vendor.

For each of these companies, the details matter a lot, but on reflection, I think the same argument applies. It will be hard to get the return on this big new investment in the old platform, because the useful life of what is to you a new product is not long enough to justify the expense.

This raises two questions. First, how does one calculate “useful life.” Most of the companies I’m thinking of believe that the useful life is defined only by how long they’re willing to use it, and for some companies, that’s pretty long. (There are, after all, big SAP clients who are still using R/2.) I think this is wrong, but I’m going to have to hold off explaining why till a later blog.

The second question is, “Assuming that the commenters and I are right, what kinds of investments should companies who have decided to wait actually make?” I have no determinate answers to this, but I think there are some guidelines.

Start with Gavin’s comment on the previous post. Gavin points out that some investments in the Oracle infrastructure and in new Fusion-based products will actually take you toward the next Oracle generation. He is quite right; Oracle designed things this way, and partly because of the problem that I’m describing, they quite deliberately created some ways of investing in products from Oracle without locking yourself into an older technology.

There are many, many caveats, of course. Among other things, if you have an Oracle system now, you might not want Oracle in the future. The three main products I mentioned in the earlier post (Workday, Business by Design, and Fusion Applications) are all highly differentiated, each with its own flaws and virtues. A rational person would do well to look at all of them before deciding to stick with the vendor they have now. (This applies to SAP customers, too.)

Even if you are bent on Oracle, you still may want to take some time thinking through your infrastructure stack before investing in pieces of it. Even the examples Gavin gives like OpenID, which are likely to be pretty good, may not be right in the long run, and if they aren’t, that will be a lot of trouble and expense gone to waste.

You should note that Gavin’s argument almost certainly will apply to SAP, as well. SAP is also workng on “hybrid” intermediate solutions, and I’ll bet you dollars to donuts that they’re trying to figure out every way they can to ease the migration to the new system by asking you to make steady, rational investments in products that extend your current capabilities.

But what about customers for whom an infrastructure or extension investment isn’t right? Here, I think there are some interesting arguments, akin to Gavin’s, for small, light cloud-based apps, point solutions designed to solve highly specific problems. I’m not just talking about a CRM app or a call-center app or a recruiting app; I’m talking about things that are very, very specific to your industry, but really powerful, things like Tradestone in the apparel industry.

Another possibility is to spend some time and effort cleaning up your existing installation. This will improve its current effectiveness, extend its useful life, and very possibly lower the cost of the new system significantly. (A lot of the cost of any implementation is cleaning up after the mess left by a system that everybody has given up on.)

There’s a very smart analyst in Europe, Helmuth Gümbel, who has spent a lot of time thinking about this problem. He has a blog, and he also has a conference, Sapience, which goes into these questions at length. If you’re thinking about extending your current ERP to other geographies, a reasonable alternative might be to find lower-cost ERP systems to serve those geographies.

The basic theme running through these latter approaches is that while you’re waiting, you can focus on saving some money and preparing your current installation, thereby making the later transition to a newer technology faster and more affordable.

Is it time to wait? If it isn’t now, then when?

Wait, that is, for the next gen of applications–Workday HR and Financials, SAP Business by Design, or Oracle Fusion Application Suite–rather than go with what’s out there now: PeopleSoft 9, Oracle EBS 11, or SAP Business Suite–all quite good products, but limited in many ways.

My gut says, “Wait.”

Of course, unless you happen to be my gastroenterologist, you shouldn’t care much about what my gut says. So here’s the reasoning behind it, which I think you can adapt to your own purposes.

PeopleSoft, EBS, and BS were all designed in the early ’90s and are now mature. (There will be no fundamental improvements made to any of them.) So they’re roughly 20 years old. Let’s assume that this takes them halfway through their useful life.

Now let’s do some algebra. Assume that the new products have a similar useful life and offer a 30% improvement in overall effectiveness.
Say the net benefit of buying a this-gen system is 1. In that case, the net benefit of a system that’s 30% better and lasts twice as long is 2.6. Now assume that the net cost of not replacing your old system -.1/yr, which makes it very, very expensive to keep your old system. Even if you have to wait four years for the next-gen system, you’re twice as well off (2.2 vs. 1) waiting. Even if the next-gen system costs significantly more than the old one (fairly likely, depending on the vendor), it’s still a big win.

If you e-mail me, I can give you a spreadsheet, and you can run the numbers yourself.

You don’t need the spreadsheet, though, to see that the argument is a function of four factors: the relative benefit of adopting next-gen apps (over the life of both apps), the cost of implementing them, the risk of implementing them, and the cost of waiting.

A friend who reviewing this argument offered the following analogy. Let’s say you live in an older house whose roof is leaking, pipes are rusty, electrical way out of date. Sure, it’s time to move. But what if there were a big tax break coming fairly soon which would allow you to buy a much better house. As long as the break was big enough, my friend says, the best bet for most people is to wait, because it’s a house, houses last a long time, and being in the better house makes a big difference for a long time.

Even if things are pretty bad in the old house, he goes on to say, your best bet is just to fix the immediate problems: repair the roof, add some new wiring, etc.

Clearly, the biggest and most important factor is how much better that house will be. For a conservative company, this may seem to be a big unknown. But really, it’s not. If you look at any of the new-gen apps, the improvements they’re offering are fairly clear. None of them are killer or transformational; they won’t let you fly when you had been walking. They’re just the sort of things that anybody would add now that they have 20 years of perspective on the old designs.

What are those things? Well, better and faster access to data, what the other pundits call “embedded analytics.” The ability to do some level of search, without having to print out reports and trek down hierarchical menus to get to a record. The ability to bring other people into a discussion of a record, by e-mailing it or asking them to approve it or whatever. All of these things can be done in the old system. But it takes longer, is often a pain in the you-know, and is often not done. Systems that will have all these things built in will be systems where each of your employees wastes somewhat less time each day wrestling with a system that was never designed to have the flexibility and accessibility that the web era has taught us to expect from any application we deal with.

None of these is earth-shattering; indeed, I usually call the next-gen apps Version 1.3 because they’re really not that big an advance over the 20-year-old ERP applications that are Version 1.0. (Is a 2.0 coming? I think so.)

But taken in aggregate, I think they’ll make a material difference in your operational efficiency. Enough of a difference to be worth waiting for.

Does this really apply to your situation? What about that risk? What are the chances that you will get the gains that would justify waiting? What about the fact that your company is ready to move now and for you, such a move comes at the right time in your career? All good questions. And in some cases, it may be right to jump. But for most people, the best thing to do is to take steps to reduce the risk and time to benefit.

If you were one of SAP’s biggest customers and you found out that SAP was giving big discounts to another big customer, pretty much because they asked for it, what would you do?

Assuming you have at least a room-temperature IQ, that is.

Wait a minute. Let’s be democratic. If you were one of Oracle’s biggest customers and you found out that SAP was discounting maintenance for the asking, what would you do? I mean, you’re an Oracle customer, you definitely have a room temperature IQ.

Still not sure what to do? Here’s a hint. The phone number at SAP headquarters is 49/6227/7-47474. At Oracle, it’s +1.650.506.7000.

“Wait a minute, wait a minute, wait a minute,” I hear you saying. “SAP didn’t start handing out discounts, did they? They raised maintenance prices; they didn’t lower them?”

Perhaps. But let’s try to apply that IQ of yours.

As I’m sure you know, it’s been an bruited about in the media that Siemens was seriously considering the possibility of dropping its maintenance contract with SAP, starting January 1 of this year. Their plan was to have a third party provide maintenance, possibly either IBM or Rimini Street. (For a representative summary of the situation, as reported in the press, see this Market Watch report.)

So what happened? As all of you big SAP customers realize, Siemens had to make a decision September 30. Well, here’s what we know. About a week ago, SAP issued a press release, saying that Siemens had in fact re-upped its maintenance contract for three years.

Case closed, right? SAP doesn’t ordinarily announce maintenance renewals, but the underlying tone was, “Well, we’ve read the stuff in the press, too, so let’s deal with those scurrilous rumors, and issue a press release. After all, Siemens didn’t just come back. They bought more.” End of story?

Maybe. But you’ll notice that the press release doesn’t actually say anything about how much they paid for the maintenance. Indeed, there’s a funny little line about, “based on SAP’s maintenance standards for large customers,” which seems to demand some explanation.

So, let’s pursue it a little further. Is there any further information anywhere about what Siemens actually paid? About the same time as the press release, a post appeared on the Sapience blog. The post said that Siemens had been paying 30 million euros, pre-deal and was now paying 18 million euros, plus some other concessions. If you value the concessions at zero, this is a roughly 40% discount.

Sapience is written by Helmuth Gümbel, an industry analyst who has been following SAP for longer than I’ve been in the business. Helmuth is not an uninterested party here; he offers consulting on how to pay less in maintenance. But he’s also a well-respected figure, a person who doesn’t just say whatever he feels like saying, true or not.

[Full disclosure: Helmut is also a person I regard as my friend, someone whom I see socially on the rare occasions when he's in town.]

So what is one supposed to believe? On the one hand, you can say, “Why believe an isolated blogger, especially when he has an axe to grind?” Then, you assume that the press release is giving you basically the right idea about what happened. On the other hand, you can say, “Where there’s smoke, there’s fire,” and assume that Helmuth (and the Enterprise Advocates, a group that discussed the Siemens situation in its recent webcast, have to have roughly the right version of the truth.

Helmuth isn’t the only source of smoke, here. Kash Rangan, an investment analyst at Bank of America/Merrill, estimated, recently, that 20-25% of customers get discounts on their maintenance payments. (The relevant figures are reproduced in the dealarchitectt blog.

No full disclosure required here. I have only a nodding acquaintance with Kash.

Of course, all this can be pretty muddy. American accounting rules tend to make it difficult for companies to give direct discounts on maintenance; basically, if a maintenance agreement is part of the initial license contract and the stated price of maintenance isn’t supported by objective evidence, companies are supposed to recognize the license revenue ratably, not all at once. If you give discounts, then your ability to demonstrate that the stated price is supported by objective evidence, is called into question. So, contra Kash and Helmuth, you could argue that SAP can’t be giving out discounts, because it would screw up their reporting.

But of course there are ways of discounting maintenance without actually charging less than the stated price. There is, for instance, a long, long history in the software business of handing out free seats, instead of cash, when customers are unhappy. (Both Helmuth and a cynical reading of the press release suggest that something of the sort may be going on here.) If pressed, vendors have also been known to reduce the basis for the maintenance charge and also to fiddle around with start and stop dates. I’m not saying that’s going on here–I don’t know–but I’ve been told by reliable sources that it has been done, at least by some companies.

If that were the case here, then Helmuth’s way of characterizing it is really the only sensible way to figure out what’s going on. You look at your outflow before. Then you look at your outflow afterward. The difference gives you a gauge of what the discount is.

So did Siemens get a discount? The plain fact is that we don’t know for sure, even with all that IQ, and won’t know unless SAP and Siemens agree to tell us, and even then we won’t know, because the one thing we can be sure of is that SAP will present the case in a way most favorable to them.

So, if we don’t know for sure, and yet it seems possible that in fact SAP is giving discounts, what should you do? Well, I have a suggestion. It’s 49/6227/7-47474. See what they say.

But don’t hide it. Post what they say right here. If SAP really is holding the line on disounts, well and good. But if they’re giving them out, don’t you think it’s time for you to get in line?

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