The Biggest Challenge in the Shift to Cloud

An article in yesterday’s Financial Times discussed how Bill McDermott, who will take over as sole CEO of SAP this week, plans to usher in a new era at the company:

SAP is in the early stages of a disruptive shift from selling traditional boxed on-premise software to allowing customers to rent it via the internet.

That marks a big change for a more than 40-year-old software company as it demands faster development cycles, more investment in remote data centres and new web-based sales and support operations (which will increasingly replace on-site staff).

This follows the news last week that Baljit Dail is replacing Hamish Brewer as CEO of JDA Software “to lead the company through the next phase of its strategic growth plan.”

Yes, the enterprise software industry is undergoing a lot of disruptive change, led by the growing demand for cloud solutions, which is putting pressure on software vendors not only to innovate their solutions faster, but also their business models and go-to-market strategies.

But the shift to cloud solutions requires more than a change in pricing and deployment models; it requires a shift in company culture too, which is arguably the biggest challenge traditional enterprise software vendors face in the months and years ahead.

Several years ago, I remember speaking with Art Mesher, former CEO of Descartes (a Talking Logistics sponsor), after he had led the company from the brink of bankruptcy back to growth and profitability. Art attributed the turnaround to Descartes’ shift from a “culture of selling” to a “culture of serving,” which is not a trivial transition for an industry long fixated on measuring its health and success by new license revenue (sales of products) instead of customer-centric metrics, such as realization of ROI and payback objectives.

“One secret to maintaining a thriving business is recognizing when it needs a fundamental change,” say the authors of a great 2008 Harvard Business Review article, Reinventing Your Business Model. One of my favorite examples from the article is Hilti, a Liechtenstein-based manufacturer of high-end power tools for the construction industry, which shifted its business model from selling tools to leasing a comprehensive fleet of tools to increase contractors’ on-site productivity. Here’s an excerpt from the article:

A contractor makes money by finishing projects; if the required tools aren’t available and functioning properly, the job doesn’t get done. Contractors don’t make money by owning tools; they make it by using them as efficiently as possible. Hilti could help contractors get the job done by selling tool use instead of the tools themselves — managing its customers’ tool inventory by providing the best tool at the right time and quickly furnishing tool repairs, replacements, and upgrades, all for a monthly fee.

Similarly, manufacturers and retailers don’t make money by owning software applications; they make it by using software applications as efficiently as possible to get their job done. Put differently, manufacturers and retailers don’t really want to buy supply chain software; they want to buy outcomes — cost reductions, productivity improvements, revenue growth, increased market share, improved working capital, and so on. As Harvard marketing professor Theodore Levitt famously said, “People don’t want to buy a quarter-inch drill; they want a quarter-inch hole!”

This is why the business models of third-party logistics providers (3PLs), software vendors, and consultants are converging today in the supply chain market. Software alone is not enough, and neither is simply changing the way you price and deploy software applications. You also have to transform your company culture — which is the most critical and difficult job CEOs at enterprise software companies face today.

I’ll leave you with this video interview of Harvard Business School professor Clayton M. Christensen, one of the authors of the article referenced earlier, where he discusses some of the key takeaways from their research.