Another thing was starting to happen around the same time.  As Oracle and SAP consolidated its hold in the broader Business Applications space, innovation, primarily delivered via software-as-a-service, was starting to become mainstream in HCM.  Demand for talent management applications (I say applications because at that point few vendors had suites) delivered via SaaS was starting to grow rapidly on the edges of core HRMS implementations now dominated by Oracle and SAP (at least for the large enterprise market).  Though Oracle and SAP saw customer interest rise in talent management solutions, they struggled to keep up.  They delivered new functionality, but it was difficult for their installed base to absorb because they needed to upgrade to take advantage of it.  Most customers were conditioned to upgrade infrequently because, in many cases, the projects were large and expensive.  This created a window of opportunity for SaaS vendors like SuccessFactors to grow and prosper.  So, in one sense, this acquisition has the feel of if you cannot beat them, join them.  On the other hand, it is much more.

It is a cliche to say that the pace of change is accelerating.  However, I think it is fair to say that the forces driving change in technology are at the strongest I have seen in my career.  If you think about Cloud Computing, Social, Mobile, and Analytics (including “Big Data”),they are all conspiring to drive a generational shift in computing.  Viewed from this perspective, this acquisition takes on a different light.  SAP is arming itself not only to defend its hard-earned turf, but also to stake its claim to what comes next.  Acquiring SuccessFactors does not solves all of SAP’s cloud challenges nor does it provide it all the arms it will need to win.  However, it is a first step.

So, everything feels different this time too.  We are at the beginning of another era.  The battle is just being joined. Some of the players, like Oracle and SAP, are the same.  New combatants like Salesforce.com, NetSuite, and Workday have emerged to take up the challenge for enterprise application suite supremacy.  However, others will continue to innovate around the edges, especially in HCM.  Some of those will have high growth and the cycle of consolidation will repeat.  Again.  It is the nature of enterprise application software markets.

Once upon a time there was a vendor who was a dominant player in business applications.  It had a large installed base.  It had deep functionality.  It helped automate business functions and processes and through that provided significant value to customers.  Then, all of the sudden the market changed and the vendor eventually faded into obscurity.

With all of the chatter on blogs and twitter about the leadership change at SAP, I can forgive you if you thought I was describing SAP (or its future).  I was actually describing Dun and Bradstreet Software (DBS).  If you have been around the business applications world for a long time (I guess I qualify at this point), you will remember this vendor formed through the merger of McCormack and Dodge and MSA in the early 1990s.

What made the wheels fall off for DBS was the emergence of client/server computing.  It had two suites of Mainframe-based Financial and HR solutions (ERP was really just emerging around 1990) and were a large, dominant vendor in the U.S.  There were new players on the scene.  SAP was a European vendor that had had some success selling the ERP notion to global companies with a Mainframe-based product called R/2.  By 1992, it had developed a client/server solution called R/3.  Originally, R/3 had been meant to be a complementary product to R/2 (part of a two-tier ERP strategy), but customers, especially in the U.S., started to embrace it instead of R/2.  In addition, there was a U.S.-based vendor called PeopleSoft that developed a client/server HCM solution that by the mid 90s had started to gain significant traction at the high end of the U.S. market.

Why the history lesson?  History often repeats itself.  Upstart vendors upset the current market order.  It is not a new phenomenon (“The Innovator’s Dilemma” chronicles this well) – new technology and architectures emerge and new vendors emerge to solve the customer challenges with the previous generation of solutions.  SAP solved the quality (single database), velocity (real-time integration), and access to information problem better than previous modular solutions had done (and over a greater scope of functionality).  PeopleSoft solved the user experience and information access issues customers had with mainframe/mini-computer-based solutions.

DBS was not blind to what was going on.  It built its own client server solution – called SmartStream.  However, it took them a long time to respond (and there were other issues with the response).  They had what I call installed base inertia.  When you have a large installed base, it is hard to keep them happy because they value incremental change from their current vendor more than radical change.  It is easier for a newer, specialist vendor to drive the early adoption and help a market to “cross the chasm” in Geoffrey Moore parlance into mainstream growth.  However, when a leading vendor in a previous generation of solutions waits for this to happen, they have to time the market exquisitely with their own competitive offerings.  If done well, a leading vendor can lead the next wave of growth.  If timed poorly (or with the wrong solution), they can be left behind.

That brings us to present day.  In my opinion, the business applications market is coming to another crossroads.  There is new computing paradigm and delivery model that is gaining prominence – Cloud Computing and SaaS.  However, there are some who believe customers have invested so much in their current solutions that they would not consider replacing them.  In addition, the vendors have invested 20 years or more in building out the level of functionality required to support large, global enterprises and that experience cannot easily be replicated.  Both are true. 

However, I have been talking to many customers that already use SaaS add-on solutions and they are questioning why they should continue to pay high maintenance fees, to incur large upgrade costs, and to maintain large support staffs with their current ERP solution (total cost of ownership if you will).  They are questioning the ongoing value (if they are not taking on much of the new functionality and upgrading only every 4 to 6 years) and considering alternatives, specifically SaaS.  Today, it is not the right answer for all clients I speak with, but the market momentum, at least in HCM, is certainly in that direction.

So, where does that leave today’s market leaders?  Are they a victim of their own success?  Will installed base inertia cause them to miss the market window?  The jury is still out.  The good news for SAP and Oracle is that they have next generation solutions in the pipeline, Business ByDesign and Fusion Applications, respectively.  If delivered as promised, few vendors will have the breadth and depth of next generation solutions that they can bring to the table. 

However, what we do not know is whether or not they have the wherewithal to move a new business model required with these new solutions.  In addition, we do not know if they are willing to cannibalize their own installed bases – moving from higher margin (maintenance) customers to somewhat lower margin (SaaS) customers.  The reality is if that is what the market wants, it is better to cannibalize your own installed base than to have a competitor take that installed base away.

The challenge in a nutshell is: do you cling to the past or do you lead the market into the future?  DBS clung to its past too long and delivered too late (and with a solution that did not meet all of the market challenges).  Will Oracle and SAP cling too closely to the past and become the next legacy vendors (at least in business applications) or will they be able to adapt to the changing market and lead into the future?  It is one of the myriad of questions facing the new SAP leadership team  (see Thomas Otter’s take here).  What do you think? 

• SAP talked about how they would allow Business Suite customers to work "side by side" with Business ByDesign.  Essentially, this would allow Business Suite customers to leverage services that are developed as part of the BBD effort
• SAP has a focus on expanding the usage of its applications beyond task users (I would call them professional users) to business users (employees and managers)
• SAP made a point of "process integrity" as a key benefit of its approach to service-oriented architecture.  If you use services from SAP, they have made a point of making sure that there is process integrity built in (e.g., if I have a service called "Cancel Order", it makes sure that it updates all the modules impacted by the order cancellation)
• SAP showed the business process modeling environment within Business ByDesign which was pretty interesting.  It did a nice job of integrating application configuration with process models (the configurations are shown with the process model and when the configuration changed, the process model changes based on the choice)
• One of the keys to SAP’s strategy of adding functionality more quickly (and allowing customers to take it on more quickly) is Enhancement Packages.  SAP is keeping the core ERP (version 6.0) application stable while using Enhancement Packages (EP) to add new functionality.  These EPs operate on a Switch Framework that allows a customer to choose whether or not it wants to turn on that new functionality.  SAP is releasing EPs twice per year (it has already released two).
• SAP provided some stats from surveys of their customer base.  It indicated that 65% of R/3 4.7 customers that are doing an upgrade to ERP 6 are doing a technical upgrade, 25% are adding functionality (via EPs), and 5% are planning to use it as a full Business Process Platform (using ERP 6 and NetWeaver as the basis for delivering business processes enterprise-wide).  It also indicated that 15% of the installed base is on ERP 6.

• Understand the business need — In Rio Tinto’s case, the business imperative for talent management was a talent shortage for critical talent (e.g., mining engineers) to support growth
• Focus on defining the process first, then look at the technology — Rio Tinto did a really good job defining talent management processes that work for them.  They have implemented integrated technology (SAP) for some of the processes, but have not implemented automation for all (though they will continue to automate more over the next couple of years).  Rio Tinto is a good customer for other customers to speak with about SAP’s talent management capabilities, especially e-recruitment.
• Analysis is where the value is — It is one thing to define a good process.  That is good.  It is also good to automate that process.  That is even better.  However, the best case is when you can use that data to make better decisions about talent.  One example that Rio Tinto gave was that by having a more comprehensive view of talent (and access to that data), they were able to understand their bench strength and redeploy people as needed.  In addition, when they had gaps that they could not fill internally, they had data about sourcing that allowed them to more quickly respond to new needs.

Are you doing all three in your talent management initiatives?

That theme is SAP as a platform for Business Network Transformation.  What is Business Network Transformation?  Well, it is the ability for a company to work with business partners (e.g., customers, suppliers, etc. — the network) in a more agile fashion to gain and sustain competitive advantage.  It is an admirable goal.  However, it is a hard one to achieve.  Any transformation requires the right strategy, people, process, technology, and work environment.  SAP provides the technology and support for business processes, but it does not provide the rest.  Arguably, SAP can point to its ecosystem efforts and say that partners can provide the necessary services to fill in the gaps.  However, it is not a simple endeavor as the efforts in Business Process Engineering in the 90s has shown (and this was within the four walls of the enterprise).  I will be interested to see the customer examples that SAP puts forth to demonstrate how they enabled this.  Good customer examples were lacking at the Industry Analyst Summit last December.

We have not seen too many HCM vendors jump on the Ecosystem bandwagon yet, but if some of the early vendors have success, it may spur more movement to align with a specific ecosystem providers.  Keep track of which vendors have become ecosystem partners as you make decisions about new HR technology.  In addition, dig under the covers to find out if the vendor has just a marketing relationship with the ecosystem provider or if they have really created deep product integration (including standardizing on the ecosystem vendor technology platform/architecture).  Not all partners make the same level of commitment to a particular ecosystem.

Anyone remember R/3?  This was the same exact positioning SAP had for R/3 when it was first released circa 1992.  At that time, R/2 was the enterprise solution that most customers used.  R/2 ran on the mainframe.  R/3 was a client/server solution that ran on Unix.  It took several years for SAP to add functionality and improve the scalability of R/3 so it could be a replacement for R/2.  When R/3 was introduced, SAP, to some extent, was in the right place at the right time with the right product.  I do not think they thought in 1992 that R/3 would be a successor product to R/2.

SAP is older and wiser now.  Though it will not say so publicly, I do not think it would be too disappointed if "SOA by Design" became the successor product to mySAP Business Suite.  SAP has an ambitious goal of having 100,000 customers by the end of the decade.  "SOA by Design" will need to play a major role for SAP to achieve this goal.

• Talent Management Applications (including inquiries on Recruitment, Performance Management, and Talent Management Applications Suites)
• Workforce Management Applications (Time and Attendance, and Expense Management)
• HRMS
• Specific Vendors (SAP, Oracle, Kronos)

Talent Management application inquiries were the leader this week with the rest split evenly among the other themes.

In terms of the breakout of inquiries, we had the following:

• End User Inquiries– 71%
• Vendor Inquiries– 5%
• Vendor Briefings — 19%
• Investor — 5%

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