Beagle Research Group

Mr. Darwin, meet Mr. Smith

Last week I got into the idea of evolution as it relates to the technology market and used Microsoft and salesforce.com to illustrate the need to keep multiple plans percolating so that a company can take advantage of a move in the market. 

Evolution is an important filter through which I view the world; some people see baseball metaphors but I wonder about Darwinian implications.  When I started my company, Beagle Research Group, people naturally thought I had named it for my dog.  In fact, I have a dog, but it's not a beagle.

When I was naming my company I was thinking about the HMS Beagle, the ship that carried Charles Darwin around the world on a five year voyage during which he collected the data and specimens he would need to formulate the theory of evolution.  A lot of people confuse the idea of evolution with some of the more controversial implications involving people and monkeys, and less than half say they "believe" in it, but I won't go there.

The easiest way to understand evolution is in its most universal context, change through time.  It's a simple algorithm involving a few basic components -- start with something, make modifications, test them in the real world and those that fit the given need the best will persist while the less successful won't.  Then repeat it all over again.

A company with multiple products in development follows this approach.  It is really nothing more than having multiple variations in a population and letting selective pressures determine which ones become important.

We see this progression all the time from venture capitalists with a portfolio of companies to TV shows.  The ones that do the best get more resources and a chance to play another day while the others get canceled.  It might seem harsh, but who is going to be willing to fund something that doesn't work?

There is actually a new way of thinking about economics, called complexity economics, which views economics through the Darwinian lens and comes up with some better explanations for the way the world works than the classical economics handed down to us from people like Adam Smith. 

Just as I won't get into monkeys here, it is not my intent to go deep into complexity economics either, there isn't enough space.  If you'd like to know more though, I can recommend "The Origin of Wealth:  Evolution, Complexity, and the Radical Remaking of Economics," by Eric Beinhocker.  The book is published by Harvard Business School Press and the jacket says Beinhocker is an adviser to McKinsey & Company, so dob't let the "radical" in the subtitle throw you: this is not "The Communist Manifesto."

Beinhocker provides the theoretical underpinnings for Clay Christenson's observations in "The Innovator's Dilemma," which I think does a good job of explaining the ebb and flow of individual innovations.  If I had to boil it down, the reason for loss of market share it would be failure to innovate and I wonder if we're seeing some of that failure today in enterprise software.  I don't know how else to explain the tepid response many vendors have so far given to the Software-as-a-Service movement.

More importantly for CRM though, is the fact that our industry is subject to the same forces pulling and pushing other industries around even while it does some pulling and pushing of its own.  The recent and continuing focus on the customer experience is a classic example of evolution working for both CRM and its customers. 

At the broad market level, many companies have discovered that the Wild West atmosphere of the early high tech era is gone.  In place of boundless opportunities in countless new markets, companies have increasingly found that they need to sell something else to the same customers who bought in the hay day or face dire economic consequences. 

So what is evolutionary theory telling CRM?  It's time to change.  CRM's customers need help discerning the forces acting on them in their markets.  These forces are principally, though not exclusively, end customers who want things -- new things and improvements to old things.  But what to do first?

To meet these needs companies may have to develop new or expanded business processes which will be supported by new and different applications.  If Christianson was right, and I think he was, then you won't find many existing software suppliers building and integrating these applications.  Many of these new applications will come from new companies devoted to these new ideas. 

Also, because these emerging companies want to work with the latest platform technology it means a large number of them are developing for the on-demand market.  Next week I will visit salesforce.com's new incubator.  The idea of the incubator is pretty simple: bring together a bunch of innovators and give them the tools and business help they need to develop new solutions, make modifications and test them in the real world.  Then repeat it all over again.

One of the interesting things in my mind is that an incubator strategy might at least partially supplant conventional venture capitals.  Even the wizards of business evolution are not immune from a little natural selection.  Imagine that.

Salesforce ContentExchange

Salesforce.com introduced its latest acquisition to the world yesterday.  At a luncheon served up at the Four Seasons Hotel in San Francisco, CEO Marc Benioff said that document management is a core element of the company’s platform strategy.  That strategy has been rolling out in bits and pieces since the company announced its apex platform last year.  But it should not come as any surprise to savvy market observers that things like document management would comprise part of the company’s approach to the market.

For many people, trying to figure out what Salesforce.com is about can be like the blind men touching an elephant trying to figure out what it is.  Salesforce.com has a CRM business which is currently bringing in most of its revenue, a platform business which is just getting started but which shows real promise, and a bulk services business which essentially sells undifferentiated seats which partner applications have tuned to specific uses.  There might be other business plans but those are the ones that are most apparent to me.  If you think about it from a Darwinian perspective, though, Salesforce.com’s actions make perfect sense because it is acting in a highly adaptable fashion. 

As you know, evolution selects the best designs from all those available and lets them replicate.  The trouble is that one never knows what the future holds and so, no one can say for certain which designs will be selected for, that’s where variation comes in to play.  In life, variation means expressing life in many different forms or species with many alternatives within each type.  The business equivalent of a species is a business plan and Salesforce.com is investing in several business plans simultaneously.

Salesforce.com is not inventing anything here.  As far as I can tell, the all time champion in generating and pursuing multiple business plans simultaneously might be Microsoft.  Back in the 1990’s, when Microsoft was generating revenues just north of $300 million—a little smaller than Salesforce.com is today—Microsoft invested in eight different business plans. 

Microsoft wanted to be the leader in graphical operating systems but Windows 1.0 and 2.0 were disappointments.  The company also had to contend with the fact that IBM was introducing a new computer, the PS/2, which it wanted a new multitasking operating system for, which became OS/2.  There was also serious competition from Unix and its champions as well as competition for desktop applications on the PC and the Mac.  There were other challenges too but these are the most germane to the story.

In retrospect we might like to think that Microsoft simply made a big bet and won with Windows and Office, but at the time it was not a sure thing.  Rather than making a big bet, Microsoft made many relatively small bets.  It worked with IBM on OS/2, co-opting a potential competitor, and took what it learned to Windows.  It also continued its strategy of building office applications and continued building them for the Mac as well and at one point it was the largest software developer working on that platform.  Microsoft also continued investing in Windows and hit paydirt with version 3.0 which rescued its MS-DOS business and Windows was a major reason for the continued success of Office.

Today, Microsoft still has a lot of irons in the fire from software to home entertainment to games and much more and it continues to feed each one looking for the next big hit.  In a way it is no different than a venture capitalist nurturing a portfolio of companies or for that matter Salesforce.com feeding several related businesses.

Like Microsoft with Windows, I think Salesforce.com knows that the success of the platform is partly dependent on the success of the individual applications that run on it and for that reason it is working hard to ensure that the platform, Apex, offers as many ways to build applications as possible.  It is also working hard to breathe life into the idea that all applications developed on the platform do not necessarily have to relate to CRM per se.

This week Salesforce.com announced that it bought Koral to anchor a new offering, Salesforce ContentExchange.  In the scheme of things, this was an important addition to the company’s platform technology because it gives Salesforce.com, its users, and its partners, the ability to capture, index, manipulate and use unstructured data, including documents, and because it gives developers wider latitude in the kind of applications they build.

There is a large swath of application types that require more than relational data in key verticals including finance, healthcare, technology, and media to name a few, where document management, not just data management, are baseline requirements.  So with one key acquisition, Salesforce.com has significantly increased the number and kind of applications that can be built with its platform technology and in so doing, it has increased the potential developer and partner community as well.

Will this strategy be successful?  Hard to say, but it certainly increases the variability of potential offerings and in so doing increases the chance that something in the portfolio will make it big.  As a business proposition it doesn’t get much better than that.

SAP, Agassi, and the future

SAP’s abrupt announcement that golden boy Shai Agassi was leaving the company last week hit like a proverbial ton of bricks.  The initial announcement said all the right things about Agassi wanting to pursue other options and board chairman Hasso Plattner made the usual remarks about still being friends and the mutuality of the decision, but you have to suspect that there’s a back story.

The 37 year-old Agassi has been sort of a wunderkind or rising star at SAP since it bought his company TopTier Software in 2001.  Agassi has been the motive force behind NetWeaver and SAP’s on-demand strategy.  As recently as January, SAP announced that it was investing in a new business model driven by on-demand that would deliver products and services in a software-as-a-service model to the mid-market. 

Many people, myself included, figured this was the beginning of SAP’s long awaited response to the on-demand initiatives of the last decade in which SAP seemed to stake a head start companies like Siebel, NetSuite, RightNow, and, of course, salesforce.com.

I thought the idea was brilliant—a mature company in a market that is being disrupted sees the writing on the wall and takes decisive action to change its game.  Behind the new business model announcement I could see a strategy of proving the model and then moving it upstream to SAP’s largest customers.  SAP, I thought, would become one of a few information utilities on the planet.  Now, who knows?  It takes vision and leadership to pull something like that off.  SAP doesn’t lack leadership but I wonder about its vision.

A few years ago I recommended that Siebel (then still independent) buy itself back from its shareholders.  At the time, the company was stagnating; it was the software company that had reached the $1 billion plateau faster than any in history and although it recorded revenues as high as $2 billion at one point, it was moving sideways. 

My recommendation was based on the fact that Siebel had about $2 billion in the bank and a lot of institutional shareholders who were getting impatient with the company’s drift.  The founders were still involved and were pretty wealthy to begin with and attracting the necessary capital for a management buyout was certainly possible. 

Why not go private, I thought?  The company’s problems we in part based on price and the total cost of ownership of its traditional product offering at a time when delivery models were in flux.  So why not go under cover for a couple of years, rework the products into an on-demand suite and re-emerge with a whole new business model? In short, the company wasn’t growing and the shareholders didn’t want to wait around; they had options and if Siebel couldn’t grow, it could be sold off which is what happened.

Unfortunately, once you have built a company of that size and taken it public it’s hard to contemplate doing it all over again, more or less and it is very doubtful that Siebel’s shareholders would have stood by the company as it tried to reinvent itself.  Today Oracle owns Siebel and it appears that at least some of the changes needed to make it a competitive on-demand solution are being made.

So, the natural question I have is does a similar fate await SAP if they don’t get to on-demand?  They are so big I am not sure who would buy them and that size, and the size of the customer base could delay any day of reckoning much longer than we saw in the Siebel scenario.  In my mind, the more likely procession of events would look more like Detroit than San Jose.

For decades Detroit had massive market share and a definite preference for doing things its own way regardless of market demands.  When competition came from overseas it drove the big car makers up market where they built bigger and bigger cars for a shrinking market.  Today, GM’s market share is half of what it was before foreign cars gained a toehold in the US market.

Despite management incompetence in Detroit, no one could buy GM and even when Chrysler was teetering in the 1970’s it was deemed to big to fail.  So instead of failure you got stagnation and rot.  Market share for US car companies is still dissipating and Detroit still clings to its increasingly antiquated notions about the car business while reality hardly ever breaks through.

Sometime this year analysts say Toyota will overtake GM as the largest producer of cars and trucks.  The same kind of thing could happen in software too.  Smaller, more nimble companies armed with new technologies and platforms as well as an army of partners could drive SAP, and Oracle for that matter, up market into irrelevancy unless it decides to fight the battle on SaaS turf. 

SAP still has a chance if it continues to execute on an on-demand strategy but it is now in need of a continuing vision.  Agassi’s departure tells me that the Old Guard at SAP never really whole-heartedly bought into the vision that Agassi promoted.  He was a necessary change agent but also an outsider and when the kitchen got too hot he was expendable. 

Agassi might be gone but that hasn’t fundamentally changed anything about SAP’s future.  The run up to an irrevocable decision to change SAP’s business model is the corporate equivalent of a biological clock.  It’s been ticking for a while and last week the sound got a lot louder.