Despite all the noise made about winning new business, enterprise software vendors have traditionally earned the bulk of their software revenues by persuading the installed base to upgrade to the latest version. In the past, this has largely been seen as a captive market, but today's market is challenging that view.
Vendors are beginning to realize that if their customers remain too long on out-of-date software versions, they become more amenable to considering cloud-based alternatives from competing vendors. Getting the installed base to upgrade is becoming a survival imperative, as customers left on older versions compare what they have to what's available from the cloud and find it wanting.
The ageing SharePoint installed base is a case in point. Jeff Teper, corporate vice president of Microsoft Office, explained in a meeting last week that many customers cite features from competitors' cloud-based file sharing and collaboration platforms without realizing the same functionality is available from Microsoft:
"People say that they can't do this or that and I ask them have you seen our latest release? Often they're running SharePoint 2007. It was a completely different product then."
Microsoft's answer to the inertia of its installed base is to embark on a campaign to encourage customers to upgrade to the cloud that one industry participant last week described as unprecedented:
"Possibly the fastest cannibalization of one's own on-prem product I've ever seen. Incredible to watch."
At last week's SharePoint conference, Teper warned delegates not to hold back:
"The cloud is the key because it lets us deliver more value to you. That velocity is accelerating ...
"We cannot state this more clearly. Go to the cloud because that's the only way you're going to get this productivity gain."
Although Microsoft will continue to support its on-premise Sharepoint servers, it's clear the vendor has taken a strategic decision in its collaboration product line to focus on cloud platforms for the future. The vendor appears to have made the fairly radical calculation that it will win more customers by moving as many as possible to the cloud than it would lose if large numbers continued with on-premise offerings.
Other vendors with more conservative customer bases (and indeed other divisions of Microsoft) have to follow a more delicate balancing act. They face the same dynamic of older systems becoming incapable of keeping up with the demands of an increasingly connected, mobile and real-time business environment. They face the same challenge of bringing those customers up-to-date before they are tempted away by cloud-based alternatives. But they are having to follow more of a hybrid strategy.
ERP vendor Infor is an example of a vendor facing that challenge — the risk is that if the new product is too much of a step-change from what the customers are currently running, the effort of upgrading becomes even more of a hurdle. As CEO Charles Phillips explained to me last year, the vendor has to do what it can to make the upgrade irresistible:
"We can't force anyone to move but we have to make it really attractive for people to move ...
"It's not that they don't want the new technology, it's the challenges of upgrading."
Cloud forms an important part of Infor's answer to that quandary, providing an option for customers to upgrade to a new version operated by Infor on the Amazon cloud platform. As Phillips explained to dignomica's Stuart Lauchlan this week:
"With 10x, we ran so fast that we ran ahead of the customer. It was an issue to some customers that they weren’t used to so many releases coming out.
"That's why we came up with Upgrade X. We do it ourselves ...
"Within a week [of announcing Upgrade X] we had 100 customers for it."
Pace of innovation
At SAP, as VP of cloud strategy Sven Denecken told me yesterday, cloud features both as a managed hosting option for customers of its core Business Suite product as well as a complete platform offering for more innovative application development for customers. Here too, it's all about shifting customers onto its flagship HANA platform, which the vendor sees as the key to staying competitive with agile rivals.
All of these vendor strategies seem to be symptomatic of a growing realization among conventional enterprise software vendors that most of their on-premise installed base can no longer keep up with the pace of technology innovation their businesses need.
Vendors need those customers to upgrade to a more modern product architecture that can move at a sufficient pace of functional refresh. But for most customers the leap is becoming too far to jump and therefore the vendors must also offer the latest platform as a cloud solution.
Effectively the vendor has to own and operate the underlying technology because the vast majority of customers no longer have the technical and financial resources to keep pace. And the longer they remain on outdated on-premise versions that fall further behind the state-of-the-art, the more attractive the notion of switching to a pureplay cloud alternative becomes.
For the cloud-native players there's a satisfying irony to this new landscape. For years the upgrade cycles have worked against them.
I can recall frequent past complaints that analyst product reports such as the Gartner Magic Quadrant or Forrester Wave were compiled based on unfair feature comparisons. The problem for the cloud-native vendors was that their current products were being compared to newly announced versions of on-premise software that were still many months away from production installs on customer sites. Add in the production time for the report itself, and prospects would end up comparing an on-premise vendor's newest product to a cloud vendor's release from a year or more ago.
Today, the boot is on the other foot and the on-premise vendors' customers are comparing the three-year-old product they've currently got to the fresh cloud-native offering that could be up and running in just a few months. If the incumbent vendor can't offer a competitive cloud offering then suddenly the prospect is comparing what they can have within months from the cloud-native vendor against a feature set that may be attractive but will require an implementation project stretching out over a year or more.
No wonder the on-premise vendors are suddenly preaching a 'go cloud' message. It's a matter of grim survival in a market that's being turned on its head.
Disclosure: SAP is a diginomica premier partner.
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