Archive for July 2013

SAP Customers Migrate to the Cloud

Software industry revenue is migrating to cloud subscriptions like geese migrating south in the winter. Whatever doubt there was should have been dispelled by SAP’s latest earnings announcement.

According to the SAP announcement, “Second quarter non-IFRS cloud subscription and support revenue increased 166% (171% at constant currencies). SAP’s non-IFRS cloud subscription and support revenue in the second quarter outperformed many cloud competitors on a sequential quarterly growth basis.” That’s triple digit cloud subscription growth and better growth than  seen elsewhere. Of course, “growth” is a funny thing. If you start from a very small amount then growth of this sort is not all that remarkable.

What is more interesting is how much revenue SAP realized from from cloud subscriptions and services. SAP pegged cloud revenue at €183M (non-IFRS), up from €69M the year before. That makes cloud revenue a bigger portion of the overall revenue picture than it was a year ago.

This should not surprise anyone but it did. Financial analysts, who operate on rules different from the rest of the business world, were not happy. They seemed to key in on the 7% drop in on-premises software revenue that SAP experienced. Of course, the acted similarly when Oracle made it’s quarterly earnings announcement a few weeks ago. There was a bit of talk about missing “expectations”. Even SAP said “the rapid transition to the cloud have resulted in lower software revenue expectations”. That’s like a dinosaur saying that the giant meteor collision had resulted in lower than expected herbivore birth rates. When big shifts happen it’s nearly impossible to really know what to expect. It’s hard to imagine SAP thought that the shift to the cloud would be neutral to the on-premises software business.

In terms of revenue, the new cloud revenue more than made up for the lost on-premises revenue. That’s very important. It says that SAP customers, and enterprise IT purchasers in general, are not abandoning their long term information technology providers and are, instead, shifting to their favorite vendor’s cloud services. This bodes well for a company such as SAP. They are not losing customers, only migrating them from one form of software delivery to another.

It’s not clear what the effects of customers moving to cloud subscriptions will have  on gross margins in the long-term. Cloud services are more convenient, accessible, and flexible but not necessarily less costly from a license point of view. From a total cost perspective, one that does not include running a data center with all the requisite equipment and personnel, it might well be less expensive for the buyer. Much of that cost has shifted to the vendor who must now operate data centers and hire personnel to run them – or pay a partner to do so. That can’t be cost neutral to software vendors.

That aside, the shift to cloud software is happening no matter what it does to software vendor margins. It’s better that SAP customers make the move to the SAP cloud than another vendor’s cloud software. Focusing on lost on-premises revenue misses the big picture – SAP is retaining and growing it’s customer base through an industry transition that they cannot stop from happening.

SAP has shown that they are smart by embracing the cloud software movement and making the transition easy on their customers. They have migrated with their customers rather than try an act like a prevailing headwind.

Use Social Tools to Bolster Culture Not The Other Way Around

Social collaboration, has, for many companies, struggled to show real value. At a talk I gave at the CITE conference in June, I took a straw poll of how the attendees felt about their social collaboration solutions. Needless to say, it wasn’t positive. This attitude has created something of a conundrum for vendors who have invested a lot of money in developing these solutions. They have to explain why there is a pervasive feeling that these tools don’t deliver real business value.

One explanation has been, in essence, that companies aren’t doing social right. This particular meme says that companies first need to change their culture so that they can collaborate better and then tools will make sense.  That’s like saying that your raincoat leaked because you stood in the rain. Why would anyone buy software that requires them to change their corporate culture first? If you were trying to change your culture then, my all means do that. I’ll assume there is a good reason for doing so. Otherwise, it’s a situation of “if it ain’t broke, don’t fix it.”

Speaking with Kakul Srivastava of Tomfoolery recently, I heard a better, more logical, take on corporate culture and social collaboration tools. Tomfoolery, despite a frivolous sounding name, is in the serious and competitive business of creating business applications. Their philosophy is to bring the best aspects of the consumer mobile app user experience to the business application. Tomfoolery’s first application, called Anchor, is in the equally competitive segment of enterprise social networks.

Their take on the enterprise social network is that it is best used to bolster the corporate culture through the sharing of business and personal information, especially rich media. This makes more sense to me. By sharing information about each other, we learn to see each other as people and can interact better at work. Yes, it’s important to keep the two domains separate – there are times I only want to look at business content – but that’s pretty easy with Anchor. By making it easy (there’s that word again) and fun to share pictures of your kids and amusing stories, you help to build or bolster an open company culture, one more conducive to creative collaboration.

While there is a lot to like about Anchor, it’s the attitude and message that most resonates with me. Yes, enterprise social networks are very useful for dealing with the less structured and dynamic activities of knowledge workers across functional silos. That’s something most other enterprise applications don’t handle well. In that respect enterprise social networks are a business productivity tool. But the right kind of social tools can also be used to help maintain interpersonal relationships and build the culture that makes a company competitive.

Put another way: Use the tools to adapt the culture, not ask the culture to adapt to the tools. This seems to me a more logical way to look at the value of social tools. If your getting wet in your raincoat, it’s not the rain, it’s the leaky coat.