Much has been discussed about SAP’s pending $3.4B acquisition of SuccessFactors, and now Oracle’s $1.9 billion deal to buy Taleo. Rightly, SAP and Oracle have been praised for trying to bolster their cloud offerings with these moves. But, in a few years, I wonder if it will really matter. Because, while SAP and Oracle are obviously trying to get with the times by offering their services via the cloud, it may be too late. Why? Because, in short, ERP – enterprise resource planning software – is on its deathbed.
That’s right. ERP’s days are numbered. And it is because of a fundamental shift that is taking place regarding how people consume products and services driven by the massive growth of the cloud itself.
I’m referring to the shift we are experiencing away from a 20th century product-based, “buy once” economy to a 21st century services-based “Subscription Economy” centred around recurring customer relationships.
Think about it: there is a very good chance you are one of the exploding number of consumers who now access their music via a subscription such as Pandora or Spotify. Perhaps you are one of the many people who have stopped renting DVDs in favor of streaming your movies over Netflix. Or, you could be one of the growing number of consumers who have eschewed owning a car to accessing one via a subscription with Zipcar. Or, maybe you are one of the growing list of companies who are voting “no” to buying hardware and software and instead are using apps and computing power served up from the cloud. As an economy and a culture, we are rapidly moving away from owning tangible goods and, instead, gravitating towards becoming members of services that provide us with experiences – such as listening to a song, using a car, watching a movie or collaborating with our colleagues.
Of course, this cultural transformation has profound implications for business models. Why? Success is no longer gauged by counting how many units of your product you have sold. Rather, success is measuring how many customers are using your service on a recurring basis and how successful you are monetizing those recurring relationships.
Today, the Subscription Economy is fuelling massive changes across communications, media, technology, consumer services and other billion dollar industries that are embracing subscription revenue models. In addition to the names above, innovative companies that adopted the subscription business models to fundamentally transform their industries include Salesforce.com, Box, Tata, VNU Media and Zendesk.
But, it is not just the upstarts that are leveraging the subscription model. A greater indicator of this shift is that traditional product companies such as Dell are racing to re-invent themselves around services. Dell recognized that selling low-margin hardware was simply much less lucrative than offering services. Consequently, Dell has acquired service companies and refocused its efforts around, “pricing our products based on value rather than based on cost,” according to Michael Dell. And it is working. In a recent Q3 earnings call, Michael Dell stated, “This is a new Dell…in Q3, our enterprise solutions and service business grew 8% to a record high $4.7 billion.”
And Dell is just one of the many titans of industry that have shifted to a service-based model. According to a recent Gartner Group report, “by 2015, 35% of Global 2000 companies with non-media digital products will generate incremental revenue of 5% to 10% through subscription-based services and revenue models.”
Why does all of this signal the death of ERP? It’s because the rigid ERP systems from SAP, Oracle and others were designed specifically for the 20th century manufacturing era rather than the 21st century services-based world. Because ERP was built to track products that can be put on a pallet, versus offering services that are consumed over time, subscription businesses using this legacy technology struggle over and over again with the fundamental questions:
- Who are my customers? Try asking SAP or Oracle how many active customers you have at any one time. The concept simply doesn’t exist. Orders, Accounts, and Products? Sure. Ask your ERP how much up-sell business you’ve done, or how many customers have renewed in the past year – and you’ll get a blank stare. ERP is simply not built around customer-centric transactions. In a Subscription Economy, unless you can monetize customer relationships over time, you’re dead in the water.
- How can I price this service the way I want to? Subscription services run the gamut from simple monthly recurring charges, to usage based charges, to one-time charges, to “all of the above.” Unfortunately, ERP systems force companies to resort to hokey workarounds to get their pricing right, like creating different products for every month of the year. “February Service SKU” anyone? And simple cost-plus pricing doesn’t apply to services. Instead, businesses want to do rapid A-B price testing when trying to gauge appetite for a new service or offering. Meanwhile, a single price change in an ERP system can take weeks.
- Where’s the “Renew” button? Subscriptions are all about an ever-changing lifecycle as customers sign-up, upgrade, add-on, and ultimately renew their service. At their core, ERP systems only give you a “Buy” button for tracking transactions. They’re missing the critical tools you need to process this lifecycle over time.
- Why can’t I sell to everyone? Subscription Economy companies like Salesforce.com and Box have found success by selling their services to everyone from individual users up through very large enterprises. They need tools for managing things like high volume recurring payments in the B2C world, as well as tools for managing high-complexity invoices and contracts in the B2B world. And those tools need to manage customers that may come through different channels such as web self-service, mobile devices, direct or channel sales or even Facebook. Legacy enterprise technology makes you chose one or the other, when what you really need is the ability to sell B2Any.
- What’s going on with my financials? Subscription businesses live or die by their ability to measure the ways that bookings, billings, cash flow, and revenue are inter-related. Unfortunately, this data lives in different software silos. Bookings fall into CRM, billings and cashflow live in your GL or ERP system, and revenue is too often calculated in a series of complex spreadsheets. Good luck stringing all of that together.
It’s for all of these reasons that ERP’s days are numbered. The Subscription Economy demands new ways of both measuring and monetizing customer relationships. Companies must break out of the shackles of ERP if they are to succeed in this new world. Or, risk being buried alongside it.
Original post by Tien Tzuo