BizCamp Event – September 19th Dublin

For those of you near Dublin on the 19th of September, the BizCamp conference is taking place at the Guinness Storehouse. This free to attend event is a great place to meet with an expected 400 entrepreneurs to share ideas, experience and knowledge in a broad range of business areas. I will be giving a presentation on how Software-as-a-Service (SaaS)  is changing the structure of the software (and broader IT) industry and the various implications this has for businesses (a process known as servitization).

Hope to see you there.

Steve

SaaS and the Servitization of the Software Industry Part 2

In the first part of this post, I explored some of the historical trends that have led the software and IT  industry in general to be structured as it is today. The key point is that for most enterprises a gap exists between themselves as users and purchasers of software and the actual software vendors. The gap is filled by third parties such as value added resellers (VARs), system integrators and outsourcers as well as other elements of the distribution channel such as retailers and distributors and all the technology infrastructure that supports them. So the big question then, is how is this large group of intermediaries affected by such a fundamental change in the customer/vendor relationship that SaaS potentially brings?

To try to answer that question it’s necessary to break it down into a number of different elements. It’s also necessary to set some sort of context as terms such as enterprise customer and software vendor are quite broad definitions. The following sections try to provide this context and work through each key area of impact for SaaS.

The Scenario

Software vendors come in all shapes and sizes, as do their applications and customers, and the impact and uptake of SaaS will be different depending upon the demographics involved, so for the purposes of this exercise I will assume the following:

The customer is a mid size enterprise with multiple office locations and 5000 staff. They have outsourced most of their IT functions and assets to a 3rd party outsourcer but retain a team of IT strategy, governance and architecture staff.

The application suite they are thinking of migrating to a new SaaS vendor is currently implemented using an on-premise system that runs on on multiple geographically distributed servers with a client-server architecture and various customisations made over the years.

The Players

There are a number of participants in this, fairly typical, enterprise ecosystem both in terms of job functions and organisations. They are broken down as follows:

Enterprise Customer

These are the people using and paying for the software application and its supporting infrastructure. In previous years this would have included a sizeable IT department that installed, configured and supported the application environment but most of these functions have been outsourced to a third party now and the remaining IT staff are a small team who set the corporate IT strategy and framework.

The Software Vendor

There are actually a number of software vendors installed within the enterprise. These are traditional on-premise, perpetual license vendors whose software is a mix of server, client and client-server applications.

The Infrastructure Vendor

Like most enterprises, the customer has purchased and deployed a range of computing and infrastructure systems over the years and this has led to the building of data-centres in major locations consisting of racks of servers, storage, networking gear and remote access equipment – all to power and provide access to the enterprises software applications and associated data.

The VAR / System Integrator

This organisation has resold the applications and servers of the existing infrastructure for some time. They are a channel partner of the primary software vendors and offer a broad range of services to the enterprise customer including design, installation, configuration, optimisation and customisation of the existing applications. In recent years their scope and level of activity has been squeezed somewhat by the outsourcing organisation who now operates almost all of the enterprise IT infrastructure under a 5 year deal and is taking on many of the activities previously performed by the VAR.

The Outsourcer

The outsourcer is a large managed services business who specialises in providing a complete turnkey IT solution to enterprises whereby they take over the support and operation of the enterprise IT environment including the transition of enterprise IT support staff and potentially assets such as data-centre equipment (servers, network equipment etc).

The Transition to SaaS

So somewhere along the line, the enterprise customer decides to move to some/most/all (delete as required) of their application needs to a SaaS provider. In general industry terms this is going to be a slow but steady transition. All analyst estimates and current data show SaaS deployments out performing the market (in terms of percentage growth) by a very significant margin – albeit from a much lower base – so over time the transition will become more prevalent. Of course the pace of change and impact will vary enormously between particular customers and particular application segments but again for the purpose of this discussion lets assume it  happens nonetheless and focus on its impact.

The Drivers

Well you can look at any SaaS vendors list of benefits to see the claimed advantages of a SaaS model but here are some of the obvious ones for our example enterprise:

CapEx Savings

When an enterprise moves from an on-premise (lets assume server based) application deployment to a cloud based SaaS offering there is a significant transfer of infrastructure responsibilities. All of the server side hardware, software and related infrastructure is no longer required in-house (again this assumes a complete SaaS hosting scenario rather than some sort of hybrid model). This will result in CapEx savings in the following areas (but I will address the issue of current versus future savings later):

Servers

The server compute hardware is no longer required in the enterprise data centre for the SaaS migrated application. In addition to the hardware costs there are also things like OS licenses, virtualization licenses and so on.

Storage

Whether inside the servers or in external dedicated storage infrastructure, this hardware is no longer required when the application it serves moves to the SaaS cloud (there will of course be storage needs in the enterprise for some time to come though).

Networking

The networking gear that lives within and between the enterprise data-centres such as Ethernet switches, routers, internal firewalls, load balancers, remote access equipment etc. These are all in place to provide connectivity services to servers that are no longer required when the applications move to the SaaS cloud.

Data-Centre Facilities

This covers all of the facilities infrastructure to host the servers and networking gear such as racks, UPSs, air-con, cable systems and so on.

Lastly, but certainly not least, is the licensing costs of the on-premise software itself.

In summary, there is a lot of capital  costs that are directly impacted by a large scale SaaS migration. I will touch on the flip side of this issue later on.

OpEx Savings

There are again very significant operational expenditure savings to be made within the enterprise as a result of a large SaaS migration. These fall broadly into two camps – the server/data-centre operating/support costs (directly related to the CapEx saving listed above) and desktop support costs. The data-centre cost saving are more obvious and quantifiable but when you factor in the implications of a web delivered client for the SaaS application that is now the responsibility of the SaaS vender, there are potentially significant savings in desktop application support, deployment and maintenance.

The savings in OpEx then are primarily about people costs – the roles and responsibilities normally paid for directly by the enterprise for on-premise activities are now supplied by (and paid for indirectly to) the SaaS vendor.

There are also annual maintenance costs for on-premise software and infrastructure to be factored in and finally there are the utility costs of powering the various enterprise data centres.

The Constraints

While the benefits above may make the transition process seem like a no-brainer, there are of course a number of constraining factors to consider. Here are some of the commonly cited ones:

Existing Infrastructure Investment

While there are clearly major CapEx and OpEx savings to be made by shifting responsibilities to the SaaS vendor these are significantly diluted by the fact that the enterprise has already paid for and implemented its current infrastructure (even leased equipment will have term constraints). This blurs the ROI figures unless you take a longer term view. If the enterprise decides to migrate a large piece of its application infrastructure to a SaaS vendor its going to be left with a lot of redundant hardware and data-centre facilities, much of which is already amortised.

Of course by taking the longer term view the enterprise can see the savings realised both in terms of reducing future on-premise expenditure for growth and also legacy support. The difficulty is during the transition period when only some of the applications are moved to SaaS and so the data-centre needs may not be reduced as quickly or significantly as first thought – it probably means more empty space in the data-centre rather than smaller or no data-centres until a certain tipping point is reached in terms of SaaS migration.

The Costs Of Change

Another major constraint is the perceived and real costs of moving from one application platform to another. Inevitably, it is going to cost the enterprise time and money to assess, design, plan and implement any such transition. As in all such situations, the benefit of the new model must really appear obvious and significant to entice the customer to proceed.

In particular, when an outsourcing relationship is already in place there will be cost and contractual issues to be addressed if the SaaS migration will reduce the need for equipment and people that the outsourcer may have acquired directly from the enterprise.

The Vested Interests

The enterprise is not making decisions about the migration to SaaS in a vacuum. The various partners involved in the enterprise ecosystem listed earlier, particularly the VARs and Outsourcers, have an important role to play in the decision making process. Because a major SaaS migration will alter the CapEx and OpEx models of the enterprise, it will also have a major impact on those 3rd parties which form the CapEx and OpEx costs. This is in addition to the existing software vendors who will fight hard to maintain their business.

The Impact

Okay, so assuming that the enterprise navigates the various issues previously outlined and embarks on a major shift towards a SaaS model what are the likely impacts for the major participant groups? Using the same groupings listed earlier on, here are some thoughts:

The Enterprise

The impact on the enterprise will vary depending upon the nature of their existing application environment and the level of outsourcing they have already contracted in. If there is a largely in-house IT team then clearly there must be an impact on this group. The focus of the in-house IT organisation must shift from building and delivering IT services to defining them and measuring their performance and business impact. Many enterprises will already be some way down this road through outsourcing but SaaS will have an even greater impact.

There are some particular issues that must be addressed differently when the applications and data are being delivered from a SaaS vendor. These involve policies and procedures for data security, compliance, privacy, availability, redundancy and so on. The enterprise must ensure that the SaaS vendor meets and delivers on all of these items and implements the necessary contracts and SLAs to enforce them.

The enterprise must also calculate the long term costs of the move to SaaS and this must be done holistically by comparing the subscription costs of the SaaS vendor over a long time period against the savings in On-premise CapEx and OpEx.

If carefully considered and managed however, the enterprise has a lot of upside from this transition. There is almost an inevitability about this trend too. If you look at how the electrification process began in enterprises during the early part of the 20th century it has similar parallels – enterprises first saw electricity as a differentiator and built power generation plants next to their buildings for private use. The private power plant was seen as a strategic asset by the enterprise and the early power industry was structured around supplying, installing and operating on-premise power generation. It took some time for enterprises to accept the notion of some external 3rd party providing power on-demand from the grid. You could view the evolution of global manufacturing outsourcing in a similar way.

The Software Vendor

By this I mean the incumbent on-premise vendor. Clearly a major industry shift towards SaaS will dramatically change the structure and fortunes of the software industry and its vendors – over time. The implications for existing on-premise software companies and the appropriate strategic response is a tough call. But in many ways its a tough call in relation to timing only. How long should an ISV wait before implementing a SaaS strategy and then how quickly should it migrate to it fully. These are typical questions that any business operating in an industry undergoing radical innovation and change must decide.

But whatever the timing, the competitive pressures are certain. Again in typical fashion, new entrants are moving in with completely different business models than the existing software companies. Now many of the existing companies are also beginning to move, so that creates pressure from within the existing industry boundaries and beyond.

There is also something specific to consider in terms of timing and strategic options for ISVs. The SaaS vendors are not just offering the same sort of software that happens to be delivered over the web – they are in some cases creating entirely new (and often proprietary) ecosystems. Salesforce.com’s Force platform is a good example of this, by creating a rich platform and getting to a certain critical mass of customers they can now become more than just a vendor but a decision point for the enterprise customer. As the enterprise does more work on the Force platform, it becomes attractive for them to take more applications that are integrated with their datasets stored on Force than in another platform (particularly another on-premise platform).

So the more time that passes, the more external influencers that the ISV needs to accommodate (I guess this swings both ways though and at least the late movers have many more platform options available).

So the end result for the on-premise software vendor? Well in most cases they will need to embrace the SaaS model in the longer term so its now a question of when and how.

The Infrastructure Vendor

As SaaS becomes more dominant then the infrastructure vendors will find the purchase volumes shift increasingly from the enterprise to the service provider space (where the SaaS vendors will be hosted). As the server and storage needs on-premise decrease (or at least don’t grow as fast in the short to medium term) then all the related connectivity and facilities are impacted too. Instead, the enterprise application needs will focus on edge connectivity (and protection etc) with more bandwidth required and possibly direct (virtually) private connections to the larger SaaS providers.

The VAR / System Integrator

This group faces significant change. As SaaS brings the enterprise customer much closer to the SaaS vendor architecturally and commercially, many of the services provided by the traditional VAR / SI become less or un-necessary. The entire on-premise design, architecture, implementation, upgrading and related activities no longer apply in a pure SaaS environment. So is this the end of the road for this group? No, but it is a major fork in the road and they need to re-think their strategy and service offerings.

The strength the VARs have today is their customer relationships and the insight this gives them into their customer business needs and processes. This is of significant value. For most VARs they can adopt a two pronged approach (fork pun intended). They will obviously continue supporting and working with their existing customer base as they are today but can also look at the emerging SaaS ecosystem and value chain to see where they can play a role there too. If they get this right then they will not find themselves pushed out of the value chain as the SaaS migration continues. The SaaS vendors meanwhile, need to better understand their new customer base and can leverage the VARs to achieve this. Obvious activities include:

Customer Aquisition

This is a costly business for the SaaS vendor as can be seen by the level of investment they make in sales and marketing.

Customer Migration

Depending upon the application on offer there will be a level of migration from the customers existing systems to the SaaS application. This will involve the movement/population of key data and some level of customisation of the SaaS application to better align with the customer business needs. SaaS applications often differentiate themselves by offering a high degree of UI customisation and the integration of a range of optional software modules – a trend that will only increase going forward.

Onsite Training

Another major cost and concern of the enterprise customer is to roll out the new SaaS application to their userbase and a degree of training is likely to be required for this purpose.

In each of the areas above the VAR can play an important role in this process and it’s aparent today that many are engaging in this way through partnership programmes such as that offered by Salesforce.com and others. So in summary, the VARs have an important role to play in a SaaS future but it is different to the role they play today.

The Outsourcers

This group have probably the most to lose from a large scale migration to SaaS. They have built large businesses around taking over and running the on-premise infrastructure and related support functions. When the applications are no longer running in the customer data-centre, or the outsourcers data-centre on their behalf, their role is greatly reduced. There will of course remain a major role in the management and support of the front line IT services such as desktop PCs, laptops and printers but their backend role could go.

In response to this, the outsourcers can of course take an active role in the backend infrastructure on behalf of the SaaS vendors – as indeed many will given their current standing in the industry. But they are up against some serious competition from the likes of Amazon, Microsoft, Google not to mention the SaaS platform vendors such as SaasGrid, OpSource, Force.com and the huge variety of internet hosting companies who play in this space.

So in conclusion, there are both challenges and opportunities ahead for the software industry and the IT industry in general as it servitizes through a large scale migration to SaaS and it will certainly be an interesting transition to be part of.

Steve

Servitization Momentum Is Increasing

We attended a very good event at Cranfield University last week (details in earlier blog post). The faculty, staff, guest speakers and audience members were great and the quality of discussion was excellent. Cranfield are taking a leading position in this field and it shows in the expertise of the team there and the Product Service Systems (PSS) programmes underway. Cambridge are also doing some important work in this area and a presentation from one of the guest speakers, Guangjie Ren, a PhD graduate from their Institute of Manufacturing was particularly insightful.

One important take away from the session is that the study and application of servitization is accelerating. Another is that its been a long time coming and is more complex than was originally anticipated. Governments are increasing funding in this area, research institutions are expanding their programmes and businesses are becoming much more aware and active.

The net effect of both increased inputs (funding and research) and increased outputs (organisational and marketplace change) is that more companies are doing more in the whole area of service innovation, at a faster pace, than ever before.

There are various potential reasons why this acceleration is occurring now. One is the general accumulation of research and experience since the term servitization was first coined in 1988 – time and scale may have reached a tipping point. Another more likely explanation for the timing  is that the economic background and the commoditizing impact of global competition has focused attention on ways to differentiate and innovate through services.

Servitizer profiled in the Sunday Business Post

We were delighted and flattered to be profiled in this weeks Sunday Business Post, the leading business newspaper in Ireland. Servitization (or service innovation) is an important trend that companies are beginning to embrace to differentiate themselves and create more value for their customers and we at Servitizer are proud to be in the vanguard of this development.

We are working with a number organisations here in Ireland and internationaly to help develop their services capability and the increasing awareness of this area of business is more relavent in todays economic climate than ever before.

Services Innovation is likely to play a key part of the Enterprise Ireland Stabilization & Growth Strategy for Indigenous Irish Businesses

Enterprise Ireland is continuing it’s strong focus on helping indigenous Irish businesses survive and grow through the current economic climate through the launch of it’s significant Stabilization & Growth Fund. The Fund was formally launched at a number of locations across the country last week.

While this fund is aimed at helping business across many different sectors, it is clear that Services Innovation will form a key part of this strategy in terms of differentiating Irish companies in the marketplace and growing incremental revenues.

Servitization, whether it be for product-oriented companies looking to build accompanying services offerings, or existing services companies looking to improve operational efficiencies, will continue to become a major influence on business strategy for sustainability and growth into the future.

Servitizer was in attendance at this launch as part of it’s role in providing Services Consultancy and Business Mentoring to Enterprise Ireland clients.

Transformations to Servitized Organisational Forms Industry Day

Cranfield University, one of the worlds leading academic authorities on servitization and service science, is hosting an event called Transformations to Servitized Organisational Forms Industry Day on June 17th. There is increasing momentum behind the trend of servitization and service innovation and events such as these provide important insight and discussion between those involved in this transition.

Servitizer will be attending this event and look forward to learning from and contributing to other leaders in this field. We will post a blog entry afterwards summarising any interesting findings.

Steve

CEIA May Business Briefing

The Cork Electronics Industry Association is holding its May Business Briefing in the Maryborough Hotel in Douglas, Cork on the 19th of May at 18:30. These events are always well attended and highly regarded and this month’s guest speaker is  Servitizer’s John Flynn.

John will be presenting a topic called “The Role of Services in Evolving towards a Solution-based Strategy“, describing servitization, services innovation and services transformation.

For further information on the CEIA, visit their site at http://ceia.ie. If you are attending then John will look forward to meeting you there.

The Key to Servitization is Effective Collaboration

Companies who are considering Servitization or Services Transformation as part of a key growth strategy have a lot of different aspects to consider depending on how they wish to tackle this challenge but one area in particular is worth looking at in some detail – i.e. their internal communication or collaboration.

Services is about people and it is a well known fact that businesses which depend on people and people skills will perform much better when there is an effective system of communication in place. Introducing change in an organisation which already has effective internal collaboration is also a much easier task and the companies who have been most successful at introducing and growing services have excelled in this aspect.

From portfolio planning and development through to sales/marketing and delivery, services touches almost all parts of an organisation supported by the key administrative business functions such as HR & Finance. Having an effective system of communication and collaboration in place will facilitate an ongoing evolution in the development of the services business and ensure that all participating functions within the organisation are engaged and have more visibility of each others contribution & impact on the business.

Capturing customer “pain points” and feeding these into the portfolio roadmap, understanding the value proposition, pricing and quantifiable impact of a service are all examples of elements which cannot be handled in isolation within a specific function in an organisation, but which should be worked in collaboration, maximizing the pockets of subject-matter expertise available within the company, and providing cross-visibility at all stages which increases the overall services competency of the business.

Some businesses still rely on the traditional email for internal communication of this nature but the benefits of using more context-based tools such as dedicated business portals, Wikis, Blogs, Discussion Forums, online Chatrooms etc are proving worthwhile especially for services businesses where staff are often located remotely or spread across multiple different geographic locations.

Services is all about people and facilitating effective people-communication will help create a more effective services business.

John

Innovation + Services

Innovation is one of the most powerful and creative forces of human nature, it has literally changed the world (for good and ill). In the commercial environment, innovation has been widely applied to and analysed against products and processes. More recently, significant study has been given to the impact of innovation on services.  Services are both major drivers of innovation and products of it.

We are currently working on some programmes that develop the relationship between innovation and services and will share some interesting highlights in upcoming blog posts starting below:

Services as an Innovation Enabler

Innovations can be loosely grouped into two catagories – incremental innovations and disruptive innovations. The development of a radical new product, process or service is often the outcome of a disruptive innovation.

Disruptive products are often built upon new, unproven or incomplete technologies and designs. Many such products stall or fail during the transition from a working prototype to a saleable comodity. This is where services can play a critical role as an innovation enabler. Services can bridge the gap between an innovative new product and a potential customers ability to use it effectively (or at all).

A great example of this exists in the early years of the photographic industry. The first generation of photography technologies and products were based upon copper and then glass plates that captured and stored still pictures. Altough these plates went through a number of incremental improvements (innovations) over a period of decades they remained expensive and cumbersome thus limiting the camera market to professionals and dedicated amateurs.

In the 1880s a disruptive new innovation began to gain some following, roll film. This promised to make cameras significantly easier to use, much more portable and less expensive to own and operate. The charge was led by one George Eastman, who saw that roll film could alter the entire market for photography products by expanding their use from the professionals to everybody.

But like many radical new innovations, refining the technology and bringing the product to market was difficult. Having made great progress on the roll film itself  and the camera that would utilize it, a gap still existed. The ordinary user could now take a photograph without specialist training but they could not be realistically expected to open and replace the roll film (let alone develop it).

One solution was to engineer the camera and film to make them user changable (something which would happen but would take time), the other solution was to servitize the camera. This is exactly what Eastman did. He launched his new camera, called the Kodak, with a complete service wrapper whereby the user purchased the camera with a 100 picture roll film already installed and once they had use all of these photos they returned the camera as a complete unit to the Eastman Company who would then return it to the customer with a new film installed and the set of developed photographs (for a healthy fee).

In this example the service was not only a profitable business model, it was the innovation enabler that made the product ready for market use. Total customer solutions have a long history then and todays product developers must consider service as a core part of the innovation cycle.

Steve

Servitizing A Services Business

In the classic scenario, servitization is a process of transforming a product business into a products+services one. But the process of servitization is centered on people and organization (both internally and externally) and a similar, but different, approach can be used to take an existing services business forward too. Servitization is also a continuum – both in terms of how companies implement it (its an iterative process) and also in how the concept and diciplne of servitization itself has evolved and will continue to evolve over time. The methodologies, techniques and processes used to servitize a business are refined based on experience and technological developments.

One of the most high profile servitization initiatives undertaken was that of IBM in the 1990s. Theirs was (and still is) a story familiar to many other product companies – shrinking margins on a product business facing increasing commoditisation and competition. They embarked on a wide ranging programme of servitization that completely transformed the company and its fortunes. Today, services account for 60% of IBMs revenues (and even more of its profit margin) and its Global Services organisation is a global leader in the field of IT services. So it is particularly interesting to note how in recent years it has had to re-structure itself again – this time in that same services business.

As the recent FT article recounts, by 2004 IBM was facing increasing commercial pressures due to commoditisation and competition of its services portfolio. This was largely driven by the growth of off-shore outsourcing from the BRIC countries (even though IBM had massively increased its footprint in these regions too). The solution for IBM was to review and rethink its services business – servitize its services business. Its a process we undertake with our customers too, many of whom are pure service companies. It involves a complete audit of the existing service portfolio, revenues, customers and markets. In IBMs case, this led to strategic exiting of lower value services where commoditisation and globalisation had the greatest impact and an increasing focus on services where their specific advantages in both knowledge and location gave them an edge (and higher margins). They also implemented a programme of service standardisation to reduce their costs of service delivery and greatly increased the use of technology tools throughout the entire process. Many of the servitization lessons IBM applied to its services business were learned earlier through the servitization of its hardware business.

It is often much easier to understand and implement servitization in a product company. Services companies can be somewhat blind to their own needs and opportunities in this area. In an increasingly competitive, globalised, service-centric world, it’s important that they don’t lose sight of them. IBM posted improved earnings results in the 4th quarter and have a more positive outlook for 2009 than many of their rivals.

Steve