This is a guest blog post by Sebastian Grady, President, Rimini Street
I love enterprise technology! For 30 years, it has been a disruptive enabler that has helped companies improve their customer experiences and in turn improve their revenues and profits. I have travelled around the world meeting senior IT professionals and never stop getting excited about hearing how technology has enabled them to become more efficient, innovative and competitive.
Today, though, I am struck by the growing scepticism among CIOs and business leaders regarding the tangible value IT providers (software vendors, hardware vendors, and systems integrators) bring to their business. There seems to be a widening chasm between what customers really need from their enterprise applications and what vendors are prepared to offer.
I feel that the IT industry could be in danger of emulating the banking sector and its massive fall from grace during the 2008 crash.
CIOs are increasingly questioning whether vendors are putting profits ahead of delivering value to customers. The constant drumbeat of “change for the sake of change” is falling on deaf ears. CIOs are not approving massive runaway projects such as “boil the ocean” ERP implementations of the past. Everything today is “scrum” and “agile software development.” CIOs are saying “prove it to me before I invest massive amounts of money”.
It is time for the enterprise IT industry to accept it needs to win back the trust of CIOs. We need a wake-up call before it is too late and the industry suffers long-term reputational damage.
We should not be surprised that we have arrived at this point – it has been the same with every major IT industry cycle. ERP went through a period of invention, and was then propagated by a number of vendors and adopted by pretty much every Fortune 500 and Global 2000 company. In the early 1990s ERP leaders like SAP and Oracle delivered applications that provided great value and innovation in a short timeframe. Customers willingly paid software maintenance fees, because they were reinvested to deliver significant improvements in terms of features and functionality. Bottom-line, the money spent on maintenance delivered strong value in return.
Today, it is widely known these same industry leaders whose software applications are now 30–40 years old, can reap more than 90% margins from maintenance in return for poor support and “incremental at best” product enhancements.
Today, ERP software is mature, feature-rich and stable. The problem is that the market is now controlled by a small cartel of vendors, whose priorities do not match those of its customers. This is best illustrated by the declining investment in new functionality for existing applications, undermining the value of the traditional maintenance model for CIOs. This is stifling innovation at a time when CIOs are under immense pressure to support the businesses in today’s highly competitive global markets.
Every quarter the established vendors must demonstrate profits to Wall Street and their shareholders. To achieve this they are increasingly using audits to extract more license revenue or they must persuade existing customers to invest in more software. Rather than offering customers significant innovations as part of their existing software, they push “new products” that must be bought separately and frequently lag in innovation and value compared to leaner Software-as-a-Service or cloud applications vendors. CIOs are now openly questioning why they have to pay extra for products that should be provided by their maintenance fees. And who would blame them?
Customers have found themselves trapped by a concept we call “mandatory evolution.” Whereas previously they would willingly upgrade to the next software release because it would deliver significant value, today they are being forced to upgrade just to sustain full support for their existing ERP solutions that work perfectly and meet their business needs as is. It wasn’t easy getting there, after all, this is some of the most complex software ever produced run by the largest companies in the world. That also means these applications were heavily customised to meet the needs of the business – but that custom code is not supported by the vendors.
Like a hamster on a wheel
The customers I have spoken to liken this to being on a hamster wheel, the pace dictated by their vendors, locked-in without a discernible return. As a result, they have continued to pile up new licenses for software they don’t even fully use. Thankfully, we are reaching an inflection point which will dramatically shift power back to customers. The combination of cloud computing, the maturing of open source software and alternative support models for existing software gives CIOs a level of choice that they have not had in the past 10 years.
The response from dominant vendors to this new landscape however, has been disappointing, and my conversations with CIOs suggest this is pushing relationships to breaking point. Rather than helping customers take advantage of greater choice, they have increased the pressure to move to their cloud solutions. Not because they are always right for every customer, but in order to excite Wall Street by demonstrating they are replacing revenues from declining on premise licenses. Moving existing “back office” on-premise enterprise applications to the cloud is a daunting and financially untenable proposition. There is no button to press. It is a massive reimplementation – where is the ROI?
It would be a shame if the industry, weighed down by its size and gorging on a constant stream of license and maintenance revenue, failed to heed the warnings that I am hearing. Its first priority must be to give customers choice in how software is delivered, maintained and upgraded. If customers do not see a fair return on their investments, of course they will move away. One simple action would be to accept customised code as part of core maintenance contracts, rather than citing contract clauses as an easy “get out clause.” Another would be a return to the days when customers had a dedicated local – not remote – support engineer.
The industry’s second priority is to respond to the business needs of customers and enable them to free up resources for innovation. According to Gartner, 89% of IT budgets are spent on keeping the lights on and only 11% on innovations that help businesses. This is not good enough, as it puts CIOs in an impossible position at a time when budgets are tight.
The industry needs to work with customers to sweat assets, drive down costs and most importantly be ready to respond to rapidly changing global market dynamics. I call this innovation agility. The principle is that a “fit-for-purpose” IT infrastructure is not necessarily one made up of the latest and greatest kit. It is a mix of mature, stable legacy systems combined with applications targeted to drive businesses forward. This “hybrid IT environment” should enable CIOs to liberate resources—people, money and time, so that they can meet the needs of business and invest in innovations to grow revenue, cut costs, and take market share from competitors.
If the industry can get this right it will return to demonstrating the core value they offer customers and fend off the growing criticism of their current approach.