Timothy Chou not only knows a few things about the software as a service (SaaS) movement, but leverages his knowledge to forecast changes in information technology adoption, utilization and payback for today's CIOs and technology leaders. Chou was president of Oracle’s On Demand business (originally called Business Online) from its formation in 1999 until 2005. He currently teaches a software-as-a-service class at Stanford University and is a recent co-founder of Openwater Networks.
Q: Discuss your second book relative to the first. What’s changed for CIOs?
A: The first book was written to convince people that this movement to software as a service and on-demand software was going to happen. Now we’re there and a lot has changed. When The End of Software was published, Salesforce.com, RightNow Technologies and Netsuite were all privately held companies. The new book starts by talking about nine public software companies. These nine (Concur, DealerTrack, Kenexa, Omniture, RightNow, Salesforce.com, Taleo, Vocus and Webex) have a combined market cap of over $15 billion. Seven was written to help current and future software companies understand the fundamental business models, and it asks them to choose which one they will operate in. It’s critical for CIOs to understand their new options and the software industry. The book outlines seven models - from current traditional licensing to Internet software businesses like Amazon and Google. For CIOs, it’s equally urgent to understand the financial and service implications of each model. Most CIOs realize that their budgets are dominated by spending on managing and maintaining traditional hardware and software, leaving little money for new programs and projects. While the steady revenue stream is good for the software company, it’s not necessarily in the best interests of the buyer.
On the other hand, while buyers will pay less, or nothing, in the case of open-source software, with the new models, they might not be assured of support, updates and the viability of the vendor going forward. They have to understand what’s driving the market and also what’s best for their business and customers.
Q: What should CIOs do about this transformation?
A: Three things: Embrace, verify and extend the models. CIOs should first understand each of these business models as they become available. Some CIOs have already made the decision to only buy software delivered as a service; only if there is no on-demand service available will they choose the traditional method. This may be more practical for some companies than others, but we all know there are more valuable uses of IT’s time than running backups of CRM data and ensuring that the upgrade goes smoothly. That’s better left to the company that produces the software.
Verify means to figure out whether a software company is just marketing around the message of software services or really doing it. Here’s what I mean by extend - you probably have some software that’s unique to your business. As we all move to become information businesses, these systems could be made available to others in your industry. Perhaps the best example of this is the Sabre airline reservation system. Once it was an internal system to American Airlines, however, today, Sabre, which was acquired in 2006 for $5 billion, is one of only a handful of airline reservation systems on the planet. A less well-known example is AltiusPAR, a spinout of Posadas, the largest hotel chain in Latin America. Posadas built a modern hotel reservation system, deployed it internally, and now is calling on the largest hotel chains in the world with the same kind of story Sabre told many years ago.
Some people think that if the United Airlines loyalty system could be spun out, it would be worth more than the airline. And the world’s best logistics system might be buried in FedEx or UPS. What if those systems could be extended so everyone could use them?
Q: What’s the role of software in a service economy?
A: Eighty percent of the U.S. economy is in services. Whether you’re in financial services, health care, professional services, software or high technology, you’re in the service business. Service is information, the more personal, the better. Amazon.com proves this every day. Amazon uses personal information to deliver a more targeted and useful experience than traditional bookstores could ever provide.
Q: Does that mean that IT and CIOs are merely providing a service to the business, like HR or accounting, or is there a more strategic role they can play?
A: The CIO sits at the crux of the new business model. My experience has been that few executives outside of the CEO have as complete a picture of the business. Ask any CIO who has completed an ERP software implementation, and he or she will tell you more about how the business really runs than any-one on the executive staff. As the hub of the business, the CIO has two strategic roles. First, inside every business today is an Internet’s worth of information. The surface Web [the part of the Web indexed by search engines such as Google and Yahoo], is estimated to be 100 terabytes. Anyone reading this article is likely in a company with many more times that much information. So, given that every business is both a service business and an information business, the way in which you choose to connect people and information is what every business is about.
The second strategic role for the CIO centers on people. A service business relies on information in computers, but it’s also about the knowledge and specializations of the people in the business. Gone are the days when any manager could manage just by walking around. The strategic challenge today is how to provide the tools and the infrastructure to manage in a world where my R&D team is one place, my support team is another place and my headquarters is yet another.
Q: What new challenges do CIOs face as they move to on-demand service models?
A: Why should a company manage transactional HR or CRM software systems? CIOs know that is not the most efficient use of limited resources. The biggest cost for most businesses is human labor, and going through a major ERP software upgrade is a vastly inefficient waste of money. You are doing it for the first time, but the on-demand software company delivering its software on demand has done it a hundred times. Which company do you think will do it quicker, better and at a lower cost? Many people think you have to pay more for reliability, but the opposite is true. If you want to buy the most reliable car, don’t pick the $1 million handcrafted sports car; find a Toyota that’s been produced a million times. As author Geoffrey Moore says, know what’s core and what’s context to your business. A lot of software is all contextual: You don’t need it to differentiate your business. You don’t have to be your own power company to run a network. Once you realize this, you can turn attention and resources to your real business - the information and people that differentiate you. At that point, you can ask what new systems you need to build to bring together people and information. What do you do uniquely, and how do you monetize that? That is your business and its value—not transactional systems.
Q: What does the future hold for the current leaders in the server and software businesses?
A: Large software and hardware businesses have been consolidating around the service of existing hardware and software—whether that’s Oracle and its consolidation of the support revenue streams of Peoplesoft, Siebel and BEA, or HP with the recent acquisition of EDS.
The challenge all these players face is three-fold. First, internally they will be challenged to reduce service delivery costs. The second challenge is how to reduce the cost of service for the CIO. With no standardization to speak of, every computer, application and network looks different, which means there can be no specialization. Ultimately, this sets a floor on costs for both the buyer and the seller. Third, as we have seen in each successive change in technology from mainframe to client/server to the Internet, new unknown players emerge to disrupt the scene. When Google presented its vision, how many investors in Silicon Valley said, “Who needs another search engine?” The one thing we can be certain about is this: The next Google is out there.