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Cloud Computing Savings - Real or Imaginary?

The venerable management consulting firm, McKinsey & Company, released a thought-provoking analysis yesterday on cloud computing economics. The piece has generated a fair bit of attention because it’s been taken to mean that migration to cloud platforms is actually more expensive than what large companies currently spend on their own datacenters.

As usual, the problem is not in the analysis or the research but in the question that is being asked. The question that the McKinsey analysis answers is about the comparative economics between running your datacenter on your own hardware vs. running it on Amazon’s hardware (offered as a service). We aren’t going to question their analysis or numbers (we’ll leave that to experts like Vinnie Mirchandani), but we also don’t think this really answers the question about what cloud platforms can do for a business.

Cloud platforms exist at three levels
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At the lowest level, infrastructure-as-a-service is purely computational power for rent, which is what services like EC2 offer. It abstracts the physical infrastructure but you still need to do the work of mounting a database and an app server on the infrastructure, building and maintaining your app, etc. Therefore, the only savings are those that come from the delta between how efficient your datacenters are vs. those that Amazon runs. As you talk about large, well-managed datacenters that are operating at scale, it’s plausible that savings are not significant.

It’s at the next level, Platform as a Service, and beyond, that we start to see significant savings. Once you move up the stack to PaaS, there are significant savings because you no longer need to run a datacenter (physical or virtual as in the Amazon case) or maintain infrastructure software (database and app servers). Within our 150+ customers, we see savings of over 30% on operating costs and 2-3x improvements in time-to-market when building on cloud platforms. For example, for a publishing client, we built a custom application that automated the entire publishing process in less than 6 months. Their estimate for doing this using on-premise platforms was over 3 years. In terms of ongoing cost/productivity improvements, they have estimated a 50-75% reduction in the time and effort it takes to add new products. Additionally, since the application is built on the Force.com platform, upgrades are seamless and the platform gets better over time, all for no additional cost.

At the highest level of the stack, the benefits get multiplied further, since you get all the benefits of PaaS, plus you get freed from 22% maintenance and costly (to implement) upgrades every 3-5 years. The savings have been well documented: 25-40% in terms of implementation costs (by freeing yourself from the clutches of the dreaded Globals SIs) and operating cost savings, e.g.,50%+ savings running your mail on Google vs. Exchange.

Cloud platforms provide savings at each layer of the stack, and McKinsey’s analysis focuses on just the lowest levels of the stack, thus missing most of the savings potential.
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We have seen the benefits of cloud platforms first-hand at over 150 customers, including companies like Avago, Genentech, Japan Post, Qualcomm, Starbucks and Dolby. Once customers experience the benefits of cloud platforms - quantifiable savings, rapid time to value and innovation that drives the business, they seldom want to go back. This is why 90%+ of customers plan to increase their spending on cloud platforms. In these economic times, there is no greater vote of confidence for cloud platforms than that!

Balakrishna Narasimhan - Appirio

“Salesforce.com is good BECAUSE it’s SaaS”

Lawson CEO: “Traditional software is like cocaine — you’re hooked”

Salesforce

In a mind-numbing interview with ZDnet, Harry Debes, CEO of ERP vendor Lawson Software, demonstrates why the traditional enterprise software market is overdue for disruption. Debes’ remarks show how little care and understanding legacy on-premise vendors have for their customers, and how poorly suited they are to help businesses address today’s challenges. Is this really how traditional software executives view their customers?

Ordinarily, we’d ignore the musings of an executive whose company has destroyed massive shareholder value over the last 7 years - Lawson shares have lost nearly half their value since its IPO. But Debes’ lack of awareness of the trends surrounding his market and the reality of what customers experience rivals that of telegraph executives trying to understand the implications of phones. Actually, Debes’ cluelessness more brings to mind the infamous image of those cigarette CEOs telling the U.S. Congress that their products don’t harm customers.

So here they are - Exhibits A, B, C, D, E, and F for why we founded Appirio, straight from the mouth of Lawson CEO Harry Debes:

“It isn’t about locking people in. People lock themselves in. Traditional software is like cocaine — you’re hooked. It’s too difficult and expensive to switch providers once you’ve invested in one. If it were easier to jump ship, a lot of people would’ve hit the eject button on SAP a long time ago.” In a moment of candor, the best comparison to on-premise software the Lawson CEO can think of is cocaine. Enough said. We’d laugh, until we’d remember what a painful drain this is on the productivity of real customers. The notion of lock-in was a central theme of why Appirio’s first blog entry back in 2006 argued that every company must have an on-demand strategy.

“Getting signed up as a SaaS customer is fast, but getting out is just as fast.” Switching costs are lower for SaaS applications. This key feature has fueled the massive customer interest in SaaS. But the biggest application switching costs have more to do with business change than what you’re paying the vendor. Companies adapt their business processes based on what their software can do. The idea that SaaS vendors will see their customers switch month-to-month, chasing lower prices, is ridiculous. Vendors keep customers by demonstrating value. This may be a foreign concept to Debes, but the cornerstone of stable relationships in any field, business or personal, is mutual benefit to both parties - not addiction.

The reality is that Salesforce.com has much higher than average customer retention: 94% of its customers say they’d refer the company to a colleague, 74% of its customers say they have already done so. These figures are twice what most on-premise software vendors are seeing. SaaS solutions tend to be good because they have to be, to keep customers. On premise software can afford to treat customers as addicts - at least for the short-term, until the customers kick the habit for good.

“The success of Salesforce.com, in my opinion, has to do with their product being good, not because it’s SaaS.”

Salesforce.com is good BECAUSE it’s SaaS. You can’t separate the two! Consider the plight of a beleaguered Lawson product manager, trying to figure out how to improve the product. Invite a few customers into a lab and watch them work? Spend a day at a customer’s office asking questions? Maybe they can peruse error reports “phoned home” by software to headquarters. The product manager then struggles to translate this anecodotal feedback into requirements, and plan the next release - which likely isn’t for a year or two, since massive upgrade costs mean customers can’t handle more frequent updates.

This process is a key bottleneck to the rate of innovation for on-premise software. It’s nearly impossible to know if certain changes will make the product better or worse. The result - bloatware, as product managers add features based on what’s going to look good on a feature sheet, without really knowing what customers will actually use.

Now look at the happy life of a SaaS product manager. After launching a new feature, they get immediate, direct feedback on real-life usage patterns. They see what works and what doesn’t. They can even launch two versions of a feature to see which works better. Their development teams can fix problems instantly, without having to issue patches or service packs. In reality, early users of Salesforce.com would have had a hard time calling it a “good” CRM package when it was first released. But today, it is great. The rapid rate of improvement is a direct result of the SaaS model.

“SaaS is just a financing option for the customer… This is something I’ve lived through three times: first it was called ’service bureaux’, then ‘application service providers’, now ‘SaaS’. But it’s pretty much the same thing.” Sorry, Mr. Debes, but you’re wrong. SaaS is far more than a “financing option,” and it’s fundamentally different from the models that preceded it.

* Economies of scale: The TCO benefits of SaaS go beyond the initial pricing model. There are real cost profile differences between a customer versus a vendor owning IT infrastructure. The benefits scale as SaaS grows. Google offers an online productivity suite for free, because the incremental cost to Google is near zero. Microsoft couldn’t change this equation even if it gave Exchange and Sharepoint away for free, because a customer would still have to invest in the infrastructure required to run these on-premise applications.
* Multi-tenancy: The ASP “hosting” model was based on single tenancy - a separate copy of the server for each customer. By contrast, putting all customers onto the same code base gives the vendor economies of scale and allows them to deliver rapid innovation because they build on a single platform. Traditional software vendors wrestle with the nightmare of managing, enhancing, and testing multiple versions of their software, then porting everything to various hardware and OS stacks. Multi-tenancy virtually eliminates the single biggest cost to the customer in all of enterprise software - the dreaded upgrade. Salesforce.com and Google have released dozens of major releases without ever forcing their customer to re-implement, re-test or re-set their business processes.

“When the sunk costs have been fully depreciated, customers effectively run the software for free.” Yeah, right. This is a shocking lie - unless Debes and on-premise software companies want to stop collecting maintenance payments from customers. Tell on-premise customers who have had their maintenance fees raised without warning, or had a running product suddenly characterized as “end of life” because their vendor was hungry for an upgrade, that they’re running software for “free.” The even greater cost is the lack of business flexibility these rigid systems empart on their customers.

“People will realise the hype about SaaS companies has been overblown within the next two years….then, the rest of the SaaS industry will collapse. The hype is based on one company in the software industry having modest success… People are stupid.”

So customers like Flextronics (200,000 SaaS users), Japan Post (45,000 SaaS users), and Wachovia (55,000 SaaS users) are stupid?

McKinsey reports that three-quarters of software buyers say they are “favorably disposed to adopting SaaS platforms” for software development and deployment, and that they will dedicate 19% of their total software budget to applications delivered as services this year. Are they stupid?

How about Silicon Valley venture capitalists? When’s the last time you’ve seen them fund an on-premise software company? Are they all stupid?

Let’s reflect for a moment on who is actually “stupid.” Over the past five years, Salesforce.com shareholders have tripled their money, while Lawson shareholders have watched their shares under-perform the market. After reading Mr. Debes’ interview, many may come to their senses and bring in a CEO who doesn’t see himself as a cocaine dealer. After Debes remarks, the most interesting open question is who will file the first lawsuit, his shareholders or his customers…
Ryan Nicols from Appirio

Must FAX to Change Credit Card

Riddle me this: Why does the self-proclaimed "Leader in Software-as-a-Service" require you to fill out a form and fax it in to change the credit card used for billing on your account? This is the email I got from their billing department when I asked where on their website I would go to change my credit card information:

From: Omar Hernandez [mailto:
 This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
 ]
Sent: Monday, January 29, 2007 12:04 PM
To: Mike Schinkel
Subject: RE: Need to change billing info

Mike,

If you would like to change the credit card on file,please fill out and sign the form I have attached and return back to me. Once I get this form, I willupdate your account immediately. You can send it tome either by fax at my number below, or by email asan attachment. Please let me know if you have any questions. 

Regards,
Omar Hernandez
salesforce.com

 This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
 
415-536-XXXX  Phone
415-901-8494  Fax

I thought the whole idea of "Software-as-a-Service" was that you did things online at their website! Sheesh!

Integration *is* the killer app for SaaS

J.Ja comments on "Benioff: Customers want integration, customization" by saying (emphasis mine):

How can any CEO seriously consider adding a single new feature when the core product is a broken pile of junk? Based on Salesforce.com’s track record, I am surprised that anyone would consider them as a choice, without some serious price concessions. Given that they are more focused on adding new gee-gaws like integration (hello? it’s a web-app, what will you integrate it with?) instead of reliability, I’m surprised that anyone would consider signing a contract with them at all.

Although I agree with J.Ja that reliability it essential, he/she absolutely does not get it when he asks "Hello? What will you integrate it with?"  I would instead ask "HELLO?!? What won’t you integrate it with?"  I currently am integrating and/or want to integrate SalesForce.com with Outlook, Word, Excel, my local SQL Server databases, other web apps I use, my website, and more.

As far as I am concerned Integration is the "killer app" for Software as a Service.  That is why is infuriates me so much that Marc Benioff and friends don’t allow Professional (and Team) Edition customers to use the API except in very limited indirect cases.

Why is “No Software” Bad Positioning?

In commenting on my post entitled "Is Hosted CRM Viable?" Enough BS asks:

"I do not understand how you see local software as the answer to hosted software reliability problems. Could you elaborate?"

Simply put, local software could cache data locally and then replicate back to SalesForce.com when available thereby allowing people to access and update their data when SalesForce.com is offline. Not everyone would take advantage of this, but those who did could get past these downtime issues, and such a solution would scale a heck of a lot better than SalesForce currently does (By analogy, imagine if the all DNS queries had to route through one of the ten (10) root servers?!?)

SalesForce.com does have the Offline Edition, but it is only handles about 25% of what is needed.  For example, synchronization needs to be handled seemlessly and close to real time.  What’s more, there needs to be an option for something like Offline Edition to be the only interface users need, not the interface they use when the regular one is not available.  In other words, the user shouldn’t even need to know when SalesForce is down; everything would just keep working.

And local software can provide a lot of other benefits besides reliability. My opinion in this area is admittedly broader in scope.  If SaleForce continues to shun local software in their positioning, their competitors who do not will eventually bypass them.

For example, assume you want to update the address for ten (10) Contacts at the same company. Currently it is a very labor intensive projects.  It would be a lot easier if you have a grid of data that behaves like Excel than having to edit each individual record in a web form.  Of course, SalesForce.com could add a web feature to make this use-case easier, but they will never be able to add enough features to keep up with the practically infinite data entry and data manipulation needs their users will have, and that local software can make easier.

Is Hosted CRM Viable?

Marc Songini of ComputerWorld emailed me to ask:

From a technology/market point of view–given the SaleForce.com crashes (and now that SAP is launching Hosted CRM) is Hosted CRM a viable source? Can we rely on it?

And I replied to him with this answer:

I think hosted crm will eventually get past these problems, but we’ve got a long way to go in terms of best practices for hosted alternatives.  SalesForce.com has just been too arrogant to acknowledge they are no where close to perfect yet.

Best practices may require maintaining all prior rollouts (except bug fixes) so that users can stay on the prior versions at least for a year or more, and upgrade (or downgrade) only when they are ready and the new release bugs have been shaken out.

The problem with what they do now is they rollout new versions and tell the users it affects "Sorry, too bad if you don’t like it. We like it and that’s what mattters." BaseCamp at www.BaseCampHq.com is especially bad at this, much worse than SalesForce.com even.

As for reliability which was the core of your question, I’m not sure the answer but they need to get to a lot more redundancy then they have now.  Ironically, a significant part of the answer might be to add software locally. But that would violate their "No Software" ideology which, IMO, is eventually going to back them into a corner from which they cannot extract themselves.