the enterprise software landscape beckons
These days, enterprise software seems to be the doddering fool of the software world that some like to mock and others like to lament. After turning around billions of dollars in return on invested capital for much of the 80s and 90s, enterprise software today has come to be associated with the institutional trauma that conventional cubicle farms inflict on employees. To be sure, consumer-oriented software and Internet startups have led the charge on innovation in recent years for a number of reasons, not the least of which are generational changes and the Darwinian nature of the market. No matter how much enterprise software may have fallen in favor relative to the hot consumer Web startups of today though, I think it is and will be one of the hottest sectors for innovation and investment for a number of reasons:
- Enterprises still have the money. All the recent attention paid to consumer Web services has reduced the gaping void that used to separate the erstwhile ‘enterprise-grade’ (read serious) and ‘consumer-grade’ (read crappy) services. What hasn’t changed is the access enterprises have to the resources needed to buy these services. The average consumer has become used to cheap or free services that don’t give consumer Web service providers much wiggle room for channels or cross-promotion. The lack of viable business models not based on advertising isn’t helping either. Enterprises, on the other hand, will pay for a reliable, well-managed product or service that is valuable to the business, and in deal sizes that will sustain an ecosystem around the service provider.
- Traditional enterprise software doesn’t serve Atomized Enterprises. We have seen in some of my earlier posts that Atomized Enterprises are beginning to emerge as a result of several economic, organizational and technological changes. Enterprises in this class must stringently maintain three kinds of discipline for their very survival, and will need a whole new class of software to help them do so. Analytics for RoI tracking, internal chargeback and immersive collaboration are but three kinds of software that aren’t served well enough for atomized enterprises by the traditional enterprise software sector. Atomized Enterprises will realize that attempting to build these on their own isn’t viable or even advisable and will be hungry for vendors that serve this sector.
- Old enterprise software ≠ enterprise software now. Even if we take Atomized Enterprises out of the picture, the enterprise software market that produced impressive returns on invested capital was built on a set of assumptions that have been disrupted massively by the emergence of open source and software-as-a-service. In particular, open source has commoditized a lot of the lower end functionality that enabled vendors to command high margins on their sales. Not only is innovation pushed further up the value chain, the periodic payment model of software-as-a-service holds vendors accountable for delaying their innovation agenda with a too-long product cycle. Several VCs already realize that this enterprise software market is different than the one 20 years ago, but it bears repeating.
- Innovation happens worldwide. In past business cycles, investments in enterprise software were done almost entirely in the American technological context. Now, a large contingent of international entrepreneurs from Eastern Europe, Asia and Latin America is better connected to a global pool of capital. Historically, these regions have evolved radically different modes of doing business in the face of severe economic constraints, and these modes are rather underserved with the current enterprise software market. In addition, for areas like mobile technology, India and many Asian countries, uninhibited by an installed base of legacy technology, have leapfrogged corresponding technology in the US. This combination of constrained modes of business and advanced technology open up several opportunities for innovation in enterprise-oriented products and services.
Investment interest from a lot of Silicon Valley VC stalwarts may be moving away from software and Internet services to cleantech, biotechnology, medical devices and other capital intensive investment areas. Software and Internet services, however, continue to be a significant investment area for midsize to smaller funds. In so far as software continues to be a viable investment theme, enterprise software is somewhat underappreciated as an investment area. Fundamental structural change in the consumer and market profile for enterprise software is something any good VC should recognize as a good investment opportunity.
the stuff that dreams are made of
Now that we have some idea about what an Atomized Enterprise is, what does such an enterprise actually look like relative to traditional enterprises? Are there existing value-producing models of loosely structured capital, ideas and collaboration that creators of Atomized Enterprises can draw inspiration from? The entertainment industry comes to mind in this context.
Year after year, movie and TV show producers raise money from backers assemble functional teams of skilled professionals to produce content for mass consumption. As studios shepherd a movie through movie theaters, DVD and ancillary merchandising, they assemble sizeable teams with diverse skills, which work together intensively to generate value at each stage, as measured by box office sales and proceeds from merchandising tie-ups. Movie franchises are great at creating value but not especially good, however, at sustaining it. By the very nature of the business, once the consuming audience has moved on, there is little incentive for the creators of a movie to continue delivering value.
A TV show that runs over multiple seasons may be a better model for atomized enterprises to aspire to, because of how the team running it can sustain its value over an extended time period. But even TV show production teams have only limited applicability to how a traditional enterprise functions. By and large, the setting, premise and characters of a TV show don’t change over its extended lifetime whereas an enterprise may reinvent itself over and over. Except for the occasional lead-in, TV shows generally don’t enter into partnerships with other TV shows in a bid to diversify their viewer base. In other words, TV shows sustain value but they don’t innovate.
Enterprises must create value, sustain value and innovate to adapt to changing economic and market conditions. Atomized enterprises can learn a lesson or two from the entertainment industry on how to create and sustain value, but as for innovation, we’re in a brave new world. I posit that another viable working model for an Atomized Enterprise to take inspiration from would be that of teams that develop open source software. The ultimate value delivered by a successful, widely used open source project is the creation and sustenance of active user communities–a strategic Herculean task that goes well beyond simply the code that implements the functionality of a project.
So where does all this leave us with respect to what an Atomized Enterprise looks like? An Atomized Enterprise can learn from the models of value creation, sustenance and innovation mentioned above that it must practice three kinds of discipline to stay atomized: deliverable discipline, communication discipline and retail discipline. Continued practice of these three kinds of discipline will support a loosely coupled entity for value creation where each step of the value chain is specialized and virtualized.
These last few posts have laid out a theory of Atomized Enterprises, but there are others who speak to the theory of Atomized Enterprises much better than I can. We will, however, touch upon the many profitable opportunities that the rise of Atomized Enterprises creates in future posts.
a legal framework for atomized enterprises
Atomized Enterprises have been a realistic possibility for less than a decade now, as reliable, high-quality connectivity spreads globally and connects pools of capital, labor and ideas. It is hardly a surprise then that governance and law, conservative by nature, are still geared towards serving traditional enterprises best. To be sure, these are heady times, when barriers are being broken and power structures are being subtly rebalanced; prophets who proclaim that everything is new in this brave new edge economy are not hard to find. The unbendable laws of physics for enterprises however mandate that any entity that creates and sustains value (atomized or traditional) must have a legal framework to support it.
This is why I was happy to see a news item about Vermont passing tax laws that pave the road for the existence of virtual corporations. Limited liability companies incorporated in most US states are required to have a registered agent, a physical headquarters and in-person board meetings. In an age when it’s possible for corporations to have widely dispersed stakeholders, some of these laws are a little anachronistic. Vermont LLCs dispense with in-person requirements for board meetings, and permit ‘any means of communication, including an electronic telecommunications and video- or audio- conferencing conference telephone call’ for directors to communicate.
The idea of seeking the most efficient labor pools is not new to US enterprises. In practice, however, work would be outsourced to body shops in emerging markets while shareholders, still largely in the US, got rich off the resulting savings. These gains were attributable to little more than smart labor arbitraging, and were not sustainable over the long term because they were often divorced from ground realities and incentives around the world. These new provisions in Vermont’s corporate structure effectively enable directors to be located around the world, along with the full context of where the enterprise conducts its operations.
Let’s not get carried away though. I am not sure I agree with say board meetings over Twitter, or the applicability of these provisions to corporations that exist only in Second Life. No system is immune to scamsters, however, and despite the possibility that these provisions could be gamed, it is a big step forward to quicken the creation of more Atomized Enterprises powered by collaboration among a loosely linked clique of actors.
atomized enterprises: the best is ahead of us
The Atomized Enterprise is not just a theoretical construct. I saw a news item on Friday about Twitter bringing in external software development folks to rework its infrastructure and fix its chronic problems with service availability. This is huge! It ties in well with our earlier definition of the Atomized Enterprise: a pool of talent is being brought in to deliver value efficiently and in a loosely-coupled manner to Twitter’s stakeholders. In this case, the hired guns are being brought in from the local San Francisco area, but there are already companies seeking even more capital-efficient labor pools. Such work currently happens for high-end projects conceived internally at large enterprises, but the learning experiences gained therein will help open the floodgates for more atomization. High quality work, ironclad contracts and adequate intellectual property protection are and will be essential to more fully realizing the Atomized Enterprise.
What’s even more exciting is this quote from the post
Pivotal Labs qualifies its client list with this phrase: “There are more startups that are in stealth mode, and larger clients that are a little shy about us mentioning their names.”
More enterprises are being conceived as Atomized Enterprises from the get go. Traditional enterprises may view offshore product development and other loosely-coupled ways of marshalling resources to create value as little more than cheaper ways of getting a project done. But natively Atomic Enterprises will find ways of allocating resources efficiently because it is central to their very survival.
We will think through some of the implications of Atomized Enterprises in upcoming posts, but meanwhile, this is one item that I didn’t want to miss out on.
iphone app revenues. whither enterprise?
Apple recent announcement of the 3G iPhone, along with several enterprise features, stands to bring in a windfall for Apple, according to investment bank Piper Jaffray. Best-case estimates put the market reaching $1bn in 2009, with per-user annual revenue estimates for Apple between $10-$15.
I am quite puzzled that the note, while stating that the ‘iPhone heavily overindexes other smartphones in advanced services’ makes no mention of revenue that could be derived from enterprise-oriented applications on the iPhone. The 3G-iPhone features several enterprise class features such as connectivity with Microsoft Exchange, network security and management features and even a remote data wipe feature. iPhone users are said to occupy the upper echelons of technological savvy and sophistication among mobile device users. Given the high standards of iPhone users, an explosion in applications specifically targeted for the enterprise is plausible. Example applications I can think of off the top of my head include advanced unified messaging, video conferencing and background security processes that phone home periodically.to guard against corporate data leakage.
Vendors of these applications will sell through the Apple App Store, from which Apple will take a 30% cut; large enterprises can distribute applications developed in-house on their own networks, from which Apple likely won’t see per-user revenue. My sense is that beyond simple applications such as time and expenses tracking, most large enterprises will probably not develop in-house applications for the iPhone and will prefer to buy them instead. Unlike casual games sold for a one-time fee, advanced data protection and collaboration applications should be able to command $15 per user per year on a subscription basis from enterprises. All this should handily jack up the above per user revenue estimates by at least a dollar or two, if not $5.
Outside of the above estimate, Apple could potentially rake in even more green if it aligned its incentives with those of its developers even better. Powerful application analytics, analogous to Sun’s Project Insight (or even of the kind provided by young startups like Pinch Media) could easily be tied to an advertising or commerce engine, from which Apple can take a variable cut.
Perhaps the talk of enterprise-oriented apps isn’t the most fashionable in this consumer technology lovefest, but I think the iPhone is only beginning to hit its stride.
not your father’s enterprise
I attended a technology industry event hosted by IBM this week. One of the keynote speakers, an IBM employee, made an offhand remark that stuck in my head. He said, "Today’s IBM is not your father’s IBM, and I expect for many of you, your company is not your father’s". Honestly though, how many companies that exist today were even around when my father was my age? IBM happens to be one of a vanishingly small list of technology companies that have been more or less in their present form (if not in their present business) for more than 60 years. Most of IBM’s contemporaries were founded in the 1970s. How many of these will have earned the right in 30 years to make a statement like that of the IBM executive made? How many such companies exist today that will share a continuous historical timeline with their present selves in 60 years? I contend that we’ll be lucky to find enough of them to fit the fingers of one hand.
The enterprise of the future will be an Atomized Enterprise. A traditional enterprise was essentially a pool of intellectual capital (business model), social capital (employees) and monetary capital (investments) intended to advance the interests of its shareholders. It made sense to establish a traditional enterprise as a separate entity because the means of production were accessible only to a few, communication across vast geographies was limited and employing a captive set of workers lowered transaction costs for the enterprise. Some of these assumptions still apply, especially to successful traditional enterprises with existing operations and resource allocation models. Conditions are ripening, however, for Atomized Enterprises to take root in what we know today as the long tail of enterprises. We will touch on the definition of an Atomized Enterprise in this post and think through some of its implications in future posts.
An Atomized Enterprise is one where pools of intellectual capital, social capital and monetary capital are combined in efficient, loosely coupled ways to create stakeholder value. Perhaps the biggest contributor to the rise of the Atomized Enterprise is the rise and spread of the Internet as an efficient means of communication. After having percolated through developed and emerging markets for just over a decade, the Internet has come to serve as a neutral intermediary among global pools of labor and capital; in so doing, it upends a number of the assumptions underlying the establishment of traditional enterprises. As we will see in future posts, Atomized Enterprises represent a classic, Innovator’s Dilemma-style disruption in the very concept of an enterprise. As with disruptions in other markets, there is immense potential for the creation of wealth for those players who get ahead of the disruption and devise resource allocation models that recognize the disruption.
What are the forces facilitating the rise of the Atomized Enterprise? What will future models of wealth creation for stakeholders (as opposed to shareholders) look like? What opportunities will these create for interested parties? These questions are the beginnings of the kind of conversations I would like to facilitate in this space.
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