#FearTheCloud

October 24, 2011 Appirio

Narinder Singh

Fear drives change like few forces in the world. Yet it is also often the source of paralysis that prevents action. How a person, country or company responds to fear can define whether they are remembered as heroes or just forgotten.

Most early conversations about the cloud revolved around perceived inhibitors – was it secure, safe, reliable? Then began the era of cloudwashing – every vendor putting the word cloud in front of their offering to capitalize on the cloud conversation’s momentum vs. the reality of their own offering. Now that reality is beginning to set in and people are seeing that cloud computing is ushering in a fundamentally new era of business and technology, the fear is around who will prosper, be left behind or cease to exist.

Here’s a look at three constituents who should be biting their fingernails, and some thoughts on if or how they might overcome those fears.

1. Core Application Providers 

Today, Workday announced a new round of funding for $85 million on a rumored valuation of nearly $2 Billion. At the same time, Oracle just announced they were acquiring cloud service provider RightNow for ~ $1.5 Billion.

As salesforce.com rose to dominate its category, skeptics said cloud apps were only for small to medium businesses. When large enterprises started to adopt SaaS, the skeptics fell back to “well, it’s ok for enterprise because it’s an edge app.” With Workday’s success in the realm of HR and Financials, that last floodgate is breaking and creating expectations that cloud will be the dominant paradigm for future business applications at companies of all sizes.

Now for the fear, Workday has at least a five year head start over legacy vendors on how to successfully create a cloud application for HR and Financials that can successfully support enterprises with thousands to even hundreds of thousands of employees. Whether they admit it publicly or not, SAP, Oracle and other traditional software providers are scrambling to figure out how to make up that difference.

Recently at the Gartner IT Symposium, I met a CIO to whom Oracle quoted an upgrade to their latest release which would take 2+ years and cost $20-35 million – after which it would be about time to consider an upgrade to Fusion. In the past his only choice would be to say yes, or defer for a couple more years. Now, he immediately went to Workday to analyze how their solution would compare. This story is repeating itself in every market Workday competes and will only multiply as they expand to additional verticals and geographies.

A normal reaction for legacy vendors might be to buy your way into the space. It’s what Oracle is attempting to do in CRM with RightNow (a move prophetically predicted by Workday Co-CEO Aneel Busri a few weeks ago). In core HR and Financials this will be much harder for anyone to pull off because there are far fewer enterprise-focused players. In addition, Workday itself has clearly communicated that it is not interested in overtures from legacy players. Its founders (Dave Duffield and Aneel Bhusri) came from Peoplesoft and created Workday after and partly because of Oracle’s hostile takeover of that company.

2. The CIO and the IT Department 

Very often discussions around technology disruption focus on the impact to other industries and how the world must change rapidly to incorporate new advances. A piece today in ZDNet entitled “Cloud Computing’s Real Creative Destruction may be the IT Workforce” describes the potential for cloud computing to significantly reduce the number of people needed in the IT workforce itself – something that scares the pants off many.

History shows that the status quo never persists, and those who do not make the leap should fear being disrupted. Recently, we have even seen a few high profile CIO departures because the pace at which they were driving change was insufficient. CEOs could see results from other companies showing what is possible in a cloud-centric world. The amount of operational support needed per unit of IT capacity will only move down, and multiplying this effect is not enough for IT in the future. Innovation must also flourish.

Many in enterprise IT organizations see cloud as a lifeline to the next decade of their careers. After all, IT as a function is better situated to change and can adapt better than any other part of the economy. Nearly everyone who began a career in technology inherently understands that change is part of the equation.

Effective CIOs and IT leaders will help their teams see the inevitability of change and provide them with the right kind of skills to be successful in their current organizations, or help them transition to other companies that specialize in delivering their expertise as a service (e.g. data center operators move to cloud providers). In a cloud world there are also communities like CloudSpokes which let developers participate in challenges to build their own skills, giving them a way to take control over the direction of their own careers. Communities like these also provide businesses with new ways to access cutting edge development (where they pay for output vs. input).

The flexibility and direct relevance of the cloud to the end customer, the social and mobile trends, and the ever increasing pace of business practices have the potential to make IT both strategic to and well understood by the business. But first IT must embrace, rather than inhibit, change.

3. The Ecosystem That Surrounds It All

In the last generation of enterprise applications, the Global Systems Integrators (GSI) were a critical enabler of the success of companies like SAP, Oracle and Peoplesoft (regardless of the pain they sometimes caused). In the cloud world, companies like Salesforce and Workday established independent credibility first and the systems integrators later attempted to hitch a ride.

Similarly VARs and pure resellers have a substantive role in distribution when software and hardware is bundled almost as a physical good. In the world of cloud delivery they must reinvent themselves.

Last week Dennis Howlett talked about the level of disruption possible in the coming years. In it he quotes a provocative piece from Larry Dignan (which in turn quotes the Gartner keynote):

“The strategies of IBM, HP, Oracle, SAP, Microsoft, Cisco—old standbys for enterprise tech buyers—should be viewed as “long-term risky,” said Sondergaard. Going forward, these vendors should be judged on how they embrace mobile, social and cloud. Apple and Google will be disruptive enterprise vendors. You’ll buy from all of them.” 

If these pillars of the technology industry are considered “long term risky” isn’t it fair to expect that those whose entire business models are built around them are also at risk ? Deloitte and Accenture have well over 100,000 Oracle and SAP developers and tens of thousands of customers relationships based upon them.

To make it through this transition, ecosystem partners have to return to the focus of their business – their customers. Indeed, they will have to put the customer’s needs and priorities ahead of their own business structure in order to understand and adapt to the level of change required. Expecting the ecosystems that supported the last generation of technology to continue to operate under the old rules is naive and dangerous for enterprises.

Structural limitations and difficulties of legacy vendors wanting to change were laid out in our own Services 2.0 piece nearly five years ago, tied to the core Innovator’s Dilemma in a piece by Phil Wainewright 2.5 years ago which still holds true today. As one industry veteran described to me “even if it’s the rational action, cutting off your arm in hopes that you will survive seems foolish while you’re living the good life and too late once you’re taking your last breath.” After all, old habits die hard – for years after the invention of the car, horse and buggy accessory makers tried to sell you a whip for your car.

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