September 30, 2008

By Paula Klein, Techweb

Timothy Chou has a lot of ideas about enterprise software. The former president of Oracle's On Demand business -- from it's formation in 1999 to 2005 -- he now sits on several corporate boards, teaches at Stanford University, and frequently speaks to business leaders and writes about software trends.

Chou's provocative first book "The End of Software" (Sams, 2004) was widely read as a primer to the on-demand model of software delivery and its benefits. The just-released sequel, called Seven (printed on demand at www.lulu.com/activebookpress), expands on the premise and provides a roadmap for success in the ever- changing software business.

Chou believes that CIOs are in a great position to lead the next-generation businesses that can result from embracing new software service models. He spoke recently to contributor Paula Klein about the book and his view of current software trends.

Q: How are CIOs reacting to your new book? Do they 'get' the connection between their business and the software industry as a whole?

A. More than anyone, CIOs get that the cost to manage software -- and by that I mean the cost to manage performance, security and upgrades -- dominates what their people do, and therefore dominates their budgets. It's no secret that over 75 percent of the IT budget is spent managing existing software applications. As a simple rule of thumb, just take the purchase price of your application software and multiply it by four, that's what you're spending to manage that software per year – it's what I call the Rule of Four.

The book, Seven, describes ways you can reduce that cost with a spectrum of choices or models. In each case, you will trade off standardization and reliability for cost. One option, for example, is to outsource the management of the software to traditional outsourcers; in the book we call this Model Three. This will give you less flexibility than you have today in your traditional model, but the cost will drop. Your second option (we call this Model Four and Model Five) is to ask the software vendor if it provides software as a service. In general, their pricing will be significantly lower. Finally, if you're either ready to purchase a new application, or you think it's time for a change, there is a broad set of new companies that have built their software as a service from the ground up; e.g, Webex, Microsoft Live Meeting, Taleo, Salesforce, Kintera, Netsuite, RightNow. These providers will be even less expensive.

Q. Are you saying that CIOs should outsource or use software as a service for just about everything?

A. More than anyone, CIOs get that the cost to manage software -- and by that I mean the cost to manage performance, security and upgrades -- dominates what their people do, and therefore dominates their budgets. It's no secret that over 75 percent of the IT budget is spent managing existing software applications. As a simple rule of thumb, just take the purchase price of your application software and multiply it by four, that's what you're spending to manage that software per year – it's what I call the Rule of Four.

Context activities may be critical, but they cannot in themselves distinguish the business from the others in the market. Most business people don't realize that context activities might be mission-critical, but that's not the same as core. For example, electricity that powers the office building is mission-critical, but it's not core to the revenue-generation of the business. Accounts payable, general ledger, CRM, HR and E-mail applications might be mission-critical, but it's hard to consider them core processes. Identify your context activities and have them delivered as an on-demand service; then use the savings to fund what is core. And by the way, every core process will be fueled by software.

Q: How do new software service models resemble services of the past and how do they differ?

A: The book Seven identifies seven key software business models that are currently at work in the industry. These models span everything from traditional software (Model One) to the Internet business models (Model Seven). The point of the book is not to prove that one model is better than the other. In fact, there are multi-billion dollar companies in all seven models. The point is for every software business to understand which model or models it wants to operate in, and then focus on the successful execution within that model.

Q: Do large, global enterprises need to centralize and consolidate their data centers before they move to software services?

A: No. While data center consolidation can be very useful in reducing the overall cost of IT, the cost of IT is not real estate, it is human labor. Identifying what is core and what is context; taking the context activities and standardizing them (e.g. purchasing), outsourcing management of the context to the people who build your software so you can focus on your core activities -- that's what you should be working on.

Q: Where are most businesses in the adoption of service models and where do you see things heading in the next year?

A: Recessionary times put the focus on cost control so I would expect there to be a greater and greater focus on IT budgets. My only counsel to CIOs is not to paint all of your software with the same brush. Consider the idea that every company is a software company today. Ask what your company can offer as a service. It's probably more apparent at Amazon, Google and eBay, but look inside any of your competitors and you'll realize that in the U.S. economy -- which is 80% services – information, and therefore software, is the key differentiator.

Every large-scale business is all about service — whether it's health care or financial services. Wal-mart's strength is in the value chain, not the products it sells. Competitive advantage is in customer experience and the personalization of that experience. How do I differentiate my business? Is it in logistics, reservations, databases?

Q: What is the CIOs role in the service scenario?

A: CIOs should be putting these ideas on the table and leading the way to reducing the spend on context activities and increasing the investment in using information and software to drive core business processes. The CIO's role is to say: 'let's go build the right software and manage that; that's our strength.' The shift will take place when the business understands that software drives it. Identifying the core business processes requires more than the CIO; it's a high-level, executive staff discussion. But the CIO can, and should, initiate the conversation.

Seven Business Software Models

1. Traditional: Software is licensed with a one-time price. Maintenance and support carry separate charges.
2. Open source: The software is free, and support usually comes from the open-source community or a developer company.
3. Outsourcing: Offers third-party management of software for a monthly fee.
4. Hybrid: Provides traditional licensing, with service from the vendor rather than from in-house staff or value-added resellers.
5. Hybrid-plus: Software and service are provided on demand, as needed.
6. SaaS: Both software and service are offered only as online services, such as those from Salesforce.com.
7. Internet software businesses: The software is the uniqueness of the company, such as eBay and Google.