Since my last blog post the ERP heavyweights spent $6.8 billion purchasing providers of cloud services.
You could say Oracle and SAP’s investments indicate this ‘cloud thing’ is real. I slightly disagree. I think the heavyweights’ purchases are intelligent hedges—neither is going to give up their lucrative on-premise software business, nor should they. Despite the hype on-premise ERP software is not going away. It’s only going to get better.
But I believe a parallel universe of pure-play cloud companies will emerge to challenge our ERP leaders. I cannot say who these cloud competitors will be. They’ll rival SAP and Oracle in size. And they’ll get there very quickly.
There are at least three reasons why Oracle and SAP will soon face worthy pure-play cloud competitors.
Cost Curves
Cloud is a scale business—the larger your operation, the lower your cost for acquiring and supporting customers. It’s called a “cost curve,” and for asset-intensive industries like cloud the cost curve will be steep. The firms who take the early lead growing their customer bases will leave slower growing competitors in the dust.
Standardization
Cloud’s real advantage is not cost. Sure cost matters, but the cloud companies who really rip the roof will be those who deliver true process standardization.
Let’s be blunt, ERP promised standardization but a host of factors meant most companies implemented multiple “flavors” of ERP across their operations. It all made sense—what started with real regulatory differences often led to the accommodation of business “needs” which led to a very hybrid ERP landscape.
Cloud eliminates this dynamic—there's one way to do thing across a company, globally, and that’s it. And standardization substantially reduces cost and complexity, which explains why cloud is taking off in functions that do not offer competitive advantage but can offer cost advantages: think HR, Procurement, Sales, Marketing, and Service.
Improvement Cycles
The most decided advantage cloud companies have over their on-premise ERP competitors is grounded in the way cloud companies offer new functionality.
ERP companies traditionally package functionality improvements in version releases. Version releases are doled out across months and years.
Cloud company update their functionality on the fly—what’s requested by customers can become widely available in months, even weeks. As an IT leader at Kimberly-Clark noted (talking about the HR cloud company Workday, but the point is universal),
“Workday listens to what customers want, and the product gets updated based on that input. What you need is actually delivered, which is quite amazing.”
Cloud companies should also benefit from terrific network effects. The notion behind network effects is the value of a network is a result of the number of people in the network. Large networks are “richer”—more diverse, deeper, and ultimately more valuable to their members. So as cloud companies ramp their customer counts network effects will take hold. The company with the largest, richest customer bases (networks) will have distinct advantage over all other competitors, offering better, deeper, and more valuable improvements to its customers.
The Beginning of a New Game
The combination of rapidly declining costs and consistently improving functionality will separate a few large cloud competitors from the pack, leading to a handful—think two or three—capable challengers to the current ERP leaders.
And the ERP leaders will be challenged by their own internal tensions. Embrace the cloud? Protect the on-premise franchise? Find some magical balance between cloud and on-premise?
I have no idea where SAP and Oracle will go.
But it will be interesting.
