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Business & Technology
© 2011 by Active Book Press 2nd Edition All rights reserved. Printed in the United States of America
ACKNOWLEDGEMENTS...........................................................................V INTRODUCTION.......................................................................................VII SEVEN BUSINESS MODELS.......................................................................1 MODEL ONE: TRADITIONAL ..........................................................................3 MODEL TWO: OPEN SOURCE ........................................................................5 MODEL THREE: OUTSOURCING.....................................................................7 MODEL FOUR: HYBRID. ................................................................................9 MODEL FIVE: HYBRID+ ..............................................................................14 MODEL SIX: SOFTWARE AS A SERVICE .......................................................15 MODEL SEVEN: INTERNET ..........................................................................17 COST OF SOFTWARE ....................................................................................18 SUMMARY ...................................................................................................22 APPLICATION CLOUD SERVICES ........................................................24 COLLABORATION ........................................................................................25 WEBEX STORY ..............................................................................................26 FINANCIAL APPLICATIONS ..........................................................................28 CONCUR STORY ............................................................................................28 NETSUITE STORY ..........................................................................................30 HUMAN RESOURCE APPLICATIONS .............................................................31 KENEXA STORY.............................................................................................32 TALEO STORY ...............................................................................................33 SUCCESSFACTORS STORY ..............................................................................35 CRM FOR MARKETING ...............................................................................36 VOCUS STORY ..............................................................................................37 OMNITURE STORY ........................................................................................38 CONSTANT CONTACT STORY .........................................................................40 CRM FOR SALES .........................................................................................42 SALESFORCE.COM STORY .............................................................................42 CRM FOR SERVICE .....................................................................................44 RIGHTNOW TECHNOLOGIES STORY ...............................................................46 VERTICAL APPLICATIONS ...........................................................................48 DEALERTRACK STORY ..................................................................................51 BLACKBAUD STORY ......................................................................................52
........................113 CUSTOMIZATION ......................................................................................................................................83 COMPUTER CARBON FOOTPRINT .......................................................105 SALESFORCE...................................................124 CLOUD SERVICES ........................................................................98 MICROSOFT AZURE STORY .......................................96 HORIZONTAL PLATFORM SERVICES ..........................57 NETWORK CLOUD SERVICES ................................................................................................................................................................122 OPERATIONS MANAGEMENT ....................................................................................................73 HIGH GROWTH APPLICATIONS ..................................................................................................68 COMPUTE & STORAGE CLOUD SERVICES.......................120 SUMMARY .............128 EBAY STORY .........................................................................................................................................................................................................................................................................................................................................65 ECONOMICS .................................................62 POWER CARBON FOOTPRINT ...........................................89 APPLICATION SPECTRUM ...............................................................................77 PERIODIC BURSTY ..................................................................................................................................................................................... CLOUD DEVELOPMENT ..................................................................................................102 GOOGLE APPENGINE STORY ................105 FACEBOOK STORY ..........61 POWER UTILIZATION EFFICIENCY .90 MULTI-TENANCY ...........................56 DATA CENTER CLOUD SERVICES ......................124 CHANGE MANAGEMENT ..............93 SOFTWARE DEVELOPMENT LIFECYCLE......................79 SPECIALIZED CLOUD SERVICES (AKA PRIVATE CLOUD)........................................................................................................................................................................................................103 VERTICAL PLATFORM SERVICES ...........................................................78 STORAGE CLOUD SERVICES .....................133 ii ..COM STORY ...............................76 ON OFF APPLICATIONS ...............................................................OPENTABLE STORY ........................................................................................67 SUMMARY ..........................................................................................................................87 SOFTWARE DEVELOPMENT CLOUD SERVICES ....54 SUMMARY ..............................................111 TESTING ..............................................................................58 POWER QUALITY.70 BUSINESS MODELS ..........................................................................................53 CLOUD SERVICE STACK ...........................................................................................................................................................................................................83 SUMMARY .......................130 AVAILABILITY MANAGEMENT ........................................................................................................................................................................................................................................................80 TODAY’S CLOUDS ARE SMALL.........109 NETSUITE STORY .....................................116 TRADITIONAL VS.......................75 APERIODIC BURSTY ........................
.191 SUMMARY ........................................................................164 CONTRACTS ......................................................................................................159 SALES ...................................................................................163 SELLING NEW APPLICATION CLOUD SERVICES .......................................................................................................................................................................................................................................191 VENTURE CAPITAL .......................185 CHURN: COST OF KEEPING A CUSTOMER ............................................136 SECURITY MANAGEMENT ...............153 SOCIAL MEDIA MARKETING ......................182 MONTHLY RECURRING REVENUE (MRR)...........................199 SCRAPE ..........................................................................201 BUY NEW ......................................188 FINANCIAL ANALYSTS ...............187 FINANCIAL SYSTEMS ..............................141 SEARCH-BASED APPLICATIONS ..........................................156 EDUCATE & SELECT ........................................................................................................................................................................................................194 ECONOMICS .......................................................................................................................................................................................................................................................................................................PERFORMANCE MANAGEMENT .................181 REVENUE RECOGNITION ...177 FINANCE ...................154 GET NOTORIOUS .....................................................................................................................................................................169 SERVICE LEVEL AGREEMENTS ............................................................................................................137 CARE REHAB STORY ..195 RIGHT PEOPLE.....................................................................................................................................................................................197 CULTURE .................................................................................................. RIGHT STAGE .........................................................................................................................173 INSTALLED BASE SALES .....................................................................................149 EMAIL MARKETING ........158 SUMMARY ..............................................................................................................................................................................................................................170 SALES COMPENSATION .......................................................................................................................139 MEXICO STORY .....................140 CUSTOMER SERVICE ...........................185 COST OF SALES: WHEN TO HIRE FOR MORE SALES .........................................................................................................................................................151 E-LOAN STORY ............................................184 CASH ........147 ECONOMICS OF SALES & MARKETING .........................152 SEARCH MARKETING .195 RIGHT PEOPLE ...................148 TRADITIONAL SALES & MARKETING ..........................................................................................................146 MARKETING ........................................203 iii .................................193 HUMAN RESOURCES...................................................................................................................................................175 INDIRECT CHANNELS ..........................................................161 TRANSFORMING TRADITIONAL SOFTWARE SALES..............................................................................................142 SUMMARY ...........................................................
.........................212 INDEX........................REMODEL ....210 BEGINNING OF SOFTWARE......................................206 WORLD OF WORK ......................................................................................................................................................................216 iv ...........................................................................................................................................208 SUMMARY ........................................................
Zach Nelson. v . We just completed the 5th year of the class. with the help of Claire Stager. I launched the first seminar class on software as a service. With nearly 50 unique guest lecturers we have spanned the range of companies that are either delivering their applications as a cloud service or providing the platform to do so. so I’d like to thank many of them for their contributions. At the application level nearly all of the companies who’ve developed business application cloud services have lectured including: Evan Goldberg. So in 2005 when I left my role as the President of Oracle On Demand. Some of these lectures have been captured explicitly and implicitly in this textbook. It was born of my desire to help both technology students understand more about the world of business as well as to have business students understand more about technology.Acknowledgements For almost fifteen years I had the pleasure of teaching introductory computer architecture to over a thousand students at Stanford University.
Mark O’Neil.Marc Benioff. Brian Behlendorf. Vic Gundotra. I’d also like to acknowledge Janet Stevenson. Marc Chardon. Subrah Iyar. for inviting me to deliver 10 lectures at Tsinghua University in the winter of 2009. vi . and Erich Clementi. Danielle. Joe Kennedy. Finally special thanks to Professor Qianchuan Zhao. and Michael Gregoire. Maynard Webb. Alexandra and Caroline. whose hard work and perseverance provided me the means to realize many of my dreams. I am also grateful for my parents. It was the preparation for those lectures that created the first generation of this textbook. Greg Gianforte. Rudy Karsan. And finally thanks to my wife. Udi Manber. At the platform and infrastructure level the lecturers included: Charles Phillips. Sue. Mary Ann and David. Reid Hoffman. Steve Singh. Dave Girourard and Philip Rosedale. for her artwork. without whom the past twenty one years would not have been anywhere near as meaningful or as exciting. The class also focused on leaders on the consumer side as well including: Tony Hsieh. and our three children. Pradeep Sindhu. Tom Leighton. Jeff Jordan. Jonathan Schwartz. Samir Aora. Werner Vogels.
managed services. software as a service (SaaS). platform as a service (PaaS). or are they similar names for different ideas? This textbook is written as a primer for anyone trying to make sense of what many believe is the 3rd major wave of computing. or experts in operations to read the operations chapter. Instead. In that light we introduce a five-layer cloud services stack to educate you on many of the new cloud services you can buy and not build. While it contains some aspects of technology the book is first and foremost written from a business perspective. and purchase software. we open with seven business models for software and use these models in the discussions throughout the remaining chapters. Software+Service. this textbook is not written for the experts in marketing to read the marketing section. deliver. Are they just different names for the same thing.Introduction Cloud computing. Finally. software on demand. Hence. and client-server computing. or for those considering moving existing applications to the cloud. after mainframe. our mission is to deliver a holistic and balanced view useful for the technology student to understand the business vii . The book is written for any business contemplating developing new application cloud services for internal or external usage. infrastructure as a service have all been used to describe new ways to build.
challenges and the business student to understand the technology challenges. In March of that year. but what I couldn’t get out of my head was “what are they saying to customers?” I realized that the way we educate salespeople is to bring them in to the corporate campfire. of course. the good news was that we have two new sales people. I hammered out the story I had been telling around the campfire with the intent that. and send them back out into the wilderness. perhaps during a long plane ride or over a few evenings. abused and often lost. tell them lots of great stories. but rather could be written down. the Managing Director of Oracle Germany asked to meet with me as the President of the Oracle On Demand business. So. That book was called The End of Software. During the meeting he told me he had assigned two salespeople to selling Oracle On Demand. Any student of history knows there was a massive change when Gutenberg invented the printing press. Part of the book was devoted to viii . Suddenly. I thought to myself that. knowledge could stop being just campfire stories that were repeated. over a long weekend. an Oracle salesperson or a potential customer could come to understand why moving to “software as a service” was a logical and inevitable step. printed and passed out to many people. hoping they will be able to repeat the stories. The origins of the book can be traced to early 2002.
ix . Most people were debating why ASPs (Application Service Providers) failed and whether SaaS (Software as a Service) would be successful. and NetSuite. Netsuite (2007). Taleo (2005). who all deliver business application cloud services. the world is completely different. RightNow Technologies (2004). Successfactors (2007).8B. RightNow Technologies. These fifteen include Concur (1999). and Opentable (2009).case studies of three small private companies: Salesforce. Webex (2002). Omniture (2006). Omniture acquired Websidestory and most recently Omniture itself was acquired by Adobe in October 2009 for $1. Websidestory (2004) Kenexa (2005). Webex was acquired by Cisco in March 2007 for $3. To get an idea of how different. Blackbaud purchased Kintera in 2008.com. consider since 1999 fifteen companies. have become public companies. Salesforce. Vocus (2005). Some of these companies have been acquisition targets. So for those of you who wonder if companies will purchase business application software as a cloud service I think you have your answer. Kintera (2003). As 2009 comes to a close the remaining eleven companies have a combined market cap of over $15B. Years later.2B. Salesforce. None of these companies was public at that time.com had generated only $5M in revenue.com (2004). Constant Contact (2007). DealerTrack (2005).
Seven Vices or Seven Virtues. The cloud service stack is meant to further differentiate each layer of cloud services. Anyone contemplating building new applications or transforming their existing applications to cloud services can today take advantage of 1000s of cloud service provided by companies large and small. Timothy. In this chapter.Chapter 1. Chapter 2 begins at the application layer with application cloud services. to SaaS. “Data Center” begins 1Chou. we outline the seven business models that encompass the entire software industry. “Seven Business Models” was originally published by the SIIA1 (Software and Information Industry Association) and based on a talk Scott Russell invited me to give at Diamondhead Ventures in 2005. from traditional software to open source. June/July 2005. you know which model you’re trying to succeed in. x . We’ll discuss all of the application areas that have benefited from being delivered as a cloud service – both horizontal and vertical. as a software business. to the consumer Internet. This layer of the stack is of interest to the business users. The intent is not to argue that one model is better than another. to outsourcing. each with a different audience. Chapter 3. but rather to make sure. Upgrade Magazine. We introduce the idea of a five-layer cloud service stack and dedicate Chapters 2 through Chapter 5 to covering each of the major layers.
instead of focusing only on the developer.at the bottom of the stack. The next layer of the stack: compute and storage cloud services is discussed in Chapter 4. platform. The co-location or data center layer focuses on delivering high quality. While not a semiconductor fabrication line. Visual Studio.000 per square foot to build. Horizontal services are designed to provide many of the development environments we’ve seen in the traditional world (e. or compute & storage cloud service business. these new data centers require a minimum outlay of $100M. while more restrictive allow the developer to leverage the data models xi . security and reliability locations to house computers and storage. these new platform services include much of the operational environments that were traditionally separate. the investment is not chicken feed. At $1.g. “Software Development Cloud Services” we discuss horizontal and vertical platform cloud services. Ruby on Rails). While having compute and storage available on demand is important it’s likely the cloud computing war will be won by winning the developer. This layer is of interest to the operations team at any application. Pioneered by Jeff Bezos and Amazon the ability to purchase compute by the hour and storage by the month is creating an environment for a whole new range of applications. Vertical platform services. However. All of the current generation of application cloud services have consumed network and colocation cloud services.. In Chapter 5.
In each of these areas there are numerous software companies providing these aspects of operations management as a cloud service. performance.com. we’ll talk about how it’s different and why it addresses some of the fundamental challenges we’ve encountered in traditional software development. Chapters 7 and 8 are written for the non-sales and marketing professional. After building the next great cloud service you’ll be faced with the traditional challenge of how to market and sell the service. availability and customer service management. Developing software in the newer models is not exactly the same as the traditional methods. As the price points for these cloud services decrease. quickly and inexpensively. In Chapter 7 we cover some of the traditional marketing approaches as well as discuss some of the more innovative solutions. Whether you’re trying to leverage your existing sales teams or build a new sales team. Netsuite and Facebook. and operations of the software.supported by applications like salesforce. We’ll focus on change. “Operations Management Cloud Services” introduces perhaps the most challenging area for traditional software people. security. the challenges are even greater to find new ways to educate the buyers of your services. Chapter 6. you’ll need to figure out how to make sales & marketing a more efficient and xii . the management.
In the end though. “This is one thing that's really changing in the marketplace. stage-appropriate leadership and the right specialist in the right organizational structure are as key as picking the right development methodology or sales compensation structure. “Human Resources. Having a solid culture. but we all should remember that every software business is a people business. Salesforce. Everybody is a xiii . Finally. including sales executives from WebEx. We’ll hear from many experts in this area.” may be at the end of the book. We believe the campfire stories and lessons apply to all businesses. Chapter 10. whether you’re a business student trying to make sense of these new technologies and business models or a technology student trying to understand what it means to launch a new business. any technology company requires two things to be successful: money and people.com. As long time venture capitalist Ann Winblad said. I hope this book will serve to inform you. All of the public application cloud service companies spend far more on sales and marketing than any other functional area. Google.powerful organization. and Customer Lifetime Value) that are important to running a subscription business. Churn Rate. The chapter entitled “Finance” is meant for the non-finance professional and highlights some of the key financial metrics (MRR. and Oracle.
” xiv .software company. not just the companies in the software industry.
the Seven Deadly Vices. one of only two Popes to be given the title. These were: Pride. Hope.1 SEVEN BUSINESS MODELS In the 6th century. he also included a balancing set of values. Gluttony. Justice. the Seven Virtues: Faith. Envy. 1 . or as they are sometimes called. Lust. Greed and Sloth. Many would agree that managing a software company requires a little of both. Not only did Pope Gregory define the seven sins to avoid. Fortitude. Anger. Charity. Pope Gregory the Great. defined the Seven Deadly Sins. Prudence and Temperance. “the Great”.
the sales guys will never be able to sell it.1 Seven Business Models 2 . it’s important to understand the seven potential business models before deciding if they are a Vice or a Virtue. “We can’t move to a SaaS model. Figure 1. “It’ll be great to not have to wonder if this quarter we’ll close that big deal at midnight on December 31. The models are oriented around application software and we’ll start from the traditional world of business software.” while others will talk endlessly about the virtues of the model and how.SEVEN VICES. The seven business models are complete and include every company that makes money from their software. There are successful companies in each of the models.” As you’ll see some companies operate in only one model. SEVEN VIRTUES Today. You will hear some say. others have products that operate in multiple models. as the software industry undergoes a major transformation to a cloud computing model.
say 20 percent. for the update/upgrade rights as well as maintenance. The business that bought the software then buys hardware. and one of the earliest industry analysts to follow the change to software delivered as a service. Oracle’s maintenance business is over $12B annually. of $4. in our example. sometimes referred to as the software support fee. including Oracle and SAP. In fact in late 2009. the customer is charged some percentage. at International Data Corporation (IDC). This cost multiplier is not limited to complex business software. Subsequently. and hires or redeploys people to manage the software. Many would point out that even traditional software companies have large subscription businesses. The Gartner Group has estimated that the end user can spend up to four times the cost of their software license per year to manage these applications. or around $800 per user per year. Why does it cost so much? Amy Konary. mastered by many companies. The software is licensed in perpetuity with a one-time price.CLOUD Model One: Traditional This is the traditional software business model. It’s here that the spending really goes up.000 per user. In our case study. this translates to about $65 per user per month. cites five major areas that cost 3 .
performance. so called premium support. Some software companies also provide additional support services. Software support or maintenance is mostly limited to break-fix. the customer will end up spending $1. “CIOs and their departments really focus on five key aspects of the management and maintenance of their computer and software systems: availability. security. which often conflict with their partners or internal consulting groups who also provide value added services to help the customer service the software.000 per user. leaving little money on the table for new programs and projects. In our example. A Model One business is good since.300 per user per month just to manage that software. CIOs’ budgets are dominated by spending on managing software. can be funded. while the purchase price of the software may be $4. sales and marketing expense. and all of the profit realized from software support.SEVEN VICES. which typically can run thirty to forty percent of revenue. problems. At a well-run Model One business. It is. of course. in the software company’s interest 4 . access to a Web site of usage information and upgrades. First. SEVEN VIRTUES companies millions of dollars annually. with the large up-front purchase of the software. you’ll see license revenue breaking even. and change management.” The implications of this are substantial.
in many ways. and the users who report bugs and suggest new features. creating the Open Source Initiative (OSI) to promote the new term. this is mutually beneficial.” Model Two: Open Source The free software movement began in the late 80s. a group of programmers came up with open source as a replacement for free software. IBM made an acquisition of Gluecode Software. a privately held company specializing in integration 5 . In May 2005. By 1998. WebEx founder Subrah Iyar. that’s why the consumer chooses to buy versus build." an in-flux of for-profit dollars has changed the landscape of free software remarkably. lecturing at Stanford in 2006.CLOUD to move customers forward on new releases so as to not incur expense in supporting multiple releases of the software. said “I would much rather have built a software business on the traditional model—it’s a much better business model for the software company. In the early stages of any software company. and many of these companies have become quite adept at working with the community that participates in the projects. Under the name "open source. Most major free software projects now have corporate backing of one form or another. as the customer needs and wants future functionality and.
at least $500M has been invested in a variety of open source software companies. the founder of SugarCRM has shown a Google map with the heartbeat from hundreds of computers in Europe running SugarCRM software—and SugarCRM has no sales force in Europe. Over the past many years. While having people download. Red Hat. JasperSoft estimates there have been nearly two million downloads and over 20 thousand corporate deployments in 200+ countries of their Jasper Reports. All of this has not been lost on the investment community. has been 6 . the world's best-known Linux distributor. announced the acquisition of JBoss for a reported $420M. Why? The open source model (much like Google) has reduced the entry cost to “try it” to zero. open source software companies have struggled with the business model. and potentially use your software is far better than having them download a brochure. In early 2008 Sun Microsystems surprised everyone with their $1B acquisition of MySQL. A year later. MySQL estimates there have been 100 million installations and over 60 thousand downloads per day. install. Support and maintenance. which has been the lifeblood of Model One software companies. John Roberts. The purchase price was estimated at $100M.SEVEN VICES. SEVEN VIRTUES software based in El Segundo. in June 2006. CA.
but now the Model Three business will take on the management of that software for less than the $1. Unfortunately. it may not be for long.CLOUD difficult to monetize. other than Red Hat with their Red Hat Network. Some open source companies are experimenting with providing both appliances and an on-demand solution as a way of providing a higher degree of service than traditional software support. and gold support has also been difficult to sell. support fees are still paid. EDS (purchased by HP) and IBM Global Services have each built large. But with lots of money and smart people. silver. revenue has been elusive. since there has been little value-add other than changing the hours you will answer the phone and how quickly you’ll respond to a request. multi-billion dollar businesses outsourcing the management of the software and systems. Traditional bronze. Model Three: Outsourcing. Some are providing additional functionality in a paid-for subscription service not available in their free version. Recognizing that the cost to manage software systems is much larger than the purchase price of the software. companies have emerged who are eager to take on the challenge. In Model Three software is still licensed from the software company on a perpetual basis.300 per user per month the customer would be 7 .
there are two key challenges. SEVEN VIRTUES spending. with the inherent risk of human error. Second. These companies continue to grow and take on higher value functions. using offshore resources in India to lower the overall cost. the dependence of system availability on people. a new group of companies. which. Tiny Infosys with over $3B in revenue has traded at more than eight times revenue. IBM Global Services generates over 50 percent of IBM’s revenue. such as Infosys. As much of the cost of the software management is buried in the cost of people. Outsourcers can manage the software either at the client’s site or at their own locations. a multiple most software companies would be glad to have. ADP is probably the granddaddy of this business model. in 2007. China or Eastern Europe. including entire business processes. massive differences in labor rates are not sustainable. First.SEVEN VICES. bringing them to 8 . was $50B. EDS at the time it was acquired was over $20B in revenue. IBM has recognized that they could grow their Global Services business by a factor of two. over time. is also not sustainable. Model Three can grow big companies and high value companies. have emerged. While Model Three is good. Of course today every Model Three business is leveraging a global pool of talent whether in India.
represents a bridge from Model One to Model Six: This business model attempts to leverage what an existing software company already has: products. that means the software is still licensed for $4. The big difference in Model Four is to give the purchaser the choice of having the software company service their own software. This is the model Oracle pursued 9 . distribution channel.000 per user with a support fee of 20 percent or $65 per user per month.CLOUD over $100B in revenue. the Hybrid model. Jim Spohrer founded an initiative inside IBM called Service Science. Russia. Spohrer has said. Model Four.” Computer science has benefited from Moore’s Law (where the capabilities of computer chips double about every 18 months). and China—so unless there are highly skilled resources in Antarctica waiting to be discovered. “One grand research challenge for us is how to scale up services and how to invest to get year-overyear improvements. For most traditional software companies. and an installed base. Fortunately. or unfortunately. Could a Moore’s Law of service science be possible? Model Four: Hybrid. they would erode their margins. In Model Four the traditional licensing model is retained. While the opportunity is there. In our example. IBM will need to invest in technology. they are already in the low cost countries—Brazil. India.
We’ll come back to answer the question as to why was it so inexpensive. no questions asked. SEVEN VIRTUES beginning in 1999 and resulted in the fastest growing business inside of Oracle in 2004. and rather than have a complex Service Level Agreement (SLA). Oracle guaranteed if for any reason the customer were unhappy with the service. What’s new is the customer is given an option to have the availability. manufacturing. With Oracle On Demand. and changes managed for an additional fee.300. and CRM and supply chain. there would be a 20 percent rebate in that month. or having Oracle service their own software for $150 a month.300 per user per month. the choice was between servicing the software themselves for around $1. the purchase of the software and support remain the same. there was a “Nordstrom’s guarantee”. having a Model Three business provide the service for less than $1. but first let’s make sure you’re clear on the model. security. In Model Four. From the consumer’s perspective.SEVEN VICES. Customers ranged from middle market to Fortune 500 companies and spanned the range of applications from financials to HR. the customer had a one year contract that could be cancelled with 30-days notice. 10 . It’s important to note this decision-enabled revenue to be recognized on a monthly basis. performance.
recruiting) customers of Oracle applications implemented much heavier weight processes (e. process or discrete manufacturing). there was also a great degree of standardization. which isolated changes that were made for one customer.CLOUD Unlike some lighter weight business processes (e. customers were also given the flexibility to choose where the computers would be located—either at an Oracle owned data center or at a location of their choice.. @C (for at customer) means a site the customer owns. which could be separately priced and give a customer the choice of how much they valued their customizations. An innovation was provided called CEMLIs. there needed to be flexibility to customize and integrate the applications. There will be more on this later as well. email. This started 11 . There will be more on this in a later section. As a result. While there was a great deal of flexibility versus what you will find in either Model Six or Model Seven.g. sales force tracking. Model Four also allowed customers to choose when changes would be made to the application and when upgrades to major releases would occur. Figure 1. Additionally.g..1 illustrates this flexibility by using the symbols of @H (for at home) meaning a data center owned by the business providing the service.
SEVEN VICES. product level margins could be achieved because of a high degree of standardization. Standardization allows for specialization. A simple example is upgrades. and increasing parts of the upgrade process were automated. Oracle On Demand upgrades were done hundreds of times in a year by specialized teams. For example. ultimately computers could be put to work automating the key business processes in the business of servicing software. SEVEN VIRTUES from the hardware and moved up to the disaster recovery process. By the way. disks were network attached versus SAN attached. With repetition based on specialization. while you could choose when upgrades happened. 12 . the key to quality and skill in any area. yes. and. Which gets us back to—how was it possible to offer the service at significantly lower prices than a traditional outsourcer? Could this business be operated at “product level” margins? The quick answer is. Model Six and Seven businesses follow this principle in spades. Specialization allows for repetition. whether managing computers or doing heart surgery. they always followed the same process. all applications were run on a Linux multi-tier grid. Automation ultimately results in both lower cost and higher quality service.
the ability to offer a complete solution from one vendor was often a significant competitive advantage against traditional software companies who had to go to partners for the solution. In addition. There were many situations where there were no traditional software sales persons assigned to customer accounts that had bought a lot of software. The second downside is the model can only take you so far from a cost 13 . The model is not cannibalistic. since the sales teams were compensated not only on the sale of the license but also the first year of the service. by having a model that split the software license from the service. from a sales perspective. since the traditional license model is preserved. In fact.CLOUD The advantage of Model Four is that the software does not have to be re-engineered. because they had bought all the software they could eat—an interesting paradox. the average selling price nearly doubled for on-demand applications. the entire installed base of customers who had already bought the software was open for business. you can use your existing sales channel. And. Alternate channels of software distribution do not welcome Model Four. They have made a living selling “boxes and bodies” and see the vendors’ entry into this space as competitive. any model is not without its downsides. Of course. Finally.
More on that later. but midstream in the second year this begins to change.000 per user license fee. adding the $65 per user per month for support and the $150 to manage the software results in an “all in” price of $325 per user per month.SEVEN VICES. The 14 . SEVEN VIRTUES perspective. then you would no longer stay in Model Four. it is easy to see you are not far from moving the business model as well. not price. of providing this service is in the neighborhood of $50 per user per month. this model is resulting in much larger revenue stream than was true in the traditional model. By the third year. the revenue recognized in the first year is less than in Model One. Model Five: Hybrid+ Many people see the SaaS model as a change in the way software is purchased—in particular. this would equate to $110 per user per month. Of course. the elimination of the upfront license fee.com. which is probably closer to $500 per user per month. The cost. which compares favorably with doing it yourself or having an outsourcer provide the service. In our example. This of course is the story of Siebel and Salesforce. But if someone could provide 80 percent of the function of your product at $5 per user per month. if one were to assume a 36-month time to pay off the $4. While Model Four allows for the delivery model to change.
repetition. a provider of sales performance management solutions. not a technology choice. Rather than split the license from the service as we have seen in Model Four. they are providing one price for the entire service. As a business model. but there is a floor. of the new business software companies started in the late 90s have adopted this model. even MMORPG (Massively Multi-player Online Role Playing Games) like World of Warcraft have adopted Model Six. Most. 15 . the cost to manage the software can be driven down through standardization. representing nearly 40% of total revenue. has adopted this business model. and automation. If you get to start from scratch and engineer an application for delivery as a service (and only a service) the cost structures drop by another order of magnitude. if not all. Since Leslie Stretch became CEO in December 2006 the company’s subscription revenue as a percentage of total revenue has nearly doubled. Callidus Software.CLOUD choice of moving from Model Four to Model Five is strictly a business choice. Model Six: Software as a Service As we discussed briefly in Model Four.
as in Model Four and Five. and being able to plow that cash back into sales and marketing. such as the Microsoft channel. Unfortunately.com. companies in Model Six have to find a way to finance the early acquisition of customers. If you analyze Salesforce. While it is clearly a better model for the consumer of the software. the cost and. UpShot and others. one can debate whether it’s a better model for the software company. rather than being able to close million-dollar deals for software licenses in Model One. simplicity of purpose allowed them to compete very effectively. 16 .SEVEN VICES. Siebel had to face the direct challenge of Salesforce.com. are at best ambivalent to the Model Six players. Furthermore. Model Six is not without its challenges. the existing channels. SEVEN VIRTUES Software engineered for Model Six will have dramatically lower cost structures than software as a service offered by traditional software companies. With no easy distribution channel. and Concur you will find it took somewhere between $50M and $100M to establish the distribution channels required to achieve their meteoric growth. as we’ll see. This has typically been done in the private and public markets. WebEx. While these new companies’ offerings had far less functionality.
com have all been very focused on a single function. Whether it is eBay charging by transaction. it’s the advertisers that are paying for it.CLOUD many companies in Model Six reach $10M in revenue and have no ability to grow larger. First. You don’t buy books. or Zappos by embedding it in the sales transaction. eBay. Google by the ad. We all use Google for free. Model Seven: Internet Model Seven encompasses all of the companies in the consumer Internet.com. auction cars or find your perfect mate on Google. these companies have chosen unique and often indirect ways to monetize their intellectual property. The second big difference is that each of these solutions is highly specialized. Model Seven is distinctive in a few ways. You only need to look at eBay’s or Google’s financials to realize that there is a healthy spend on sales and marketing. Facebook. Amazon. the software. Asymmetric business models mean that the user of the software is not directly paying for the usage of the software. and Amazon. it 17 . Google. Why? Again. each of the companies in Model Seven has adopted business models that are asymmetric. Google. Of course that does not mean Model Seven companies have no cost of sales and marketing. Yahoo and eBay are all software companies.
the cost of software is much. That model resulted in the classical software company “going horizontal”—meaning they began to offer more and more parts of the solution. Some will say the cost of software is the cost of the CD or the manual. The simplicity of the Google interface begged for millions. SEVEN VIRTUES comes to cost. Unfortunately. so no new company could get in the door. Australia. if not billions. all the time promising full integration. so what is the cost of software? I'm not talking about the price of the software. I had to hire a sales/support engineer and a salesperson. in fact.SEVEN VICES. and I wanted to expand to Melbourne. of people to adopt—clearly not possible if the application tried to do everything. but. and difficult to integrate—no one needs to spend much time comparing a traditional enterprise application to consumer Internet applications to see the difference. these applications tend to be complex. In the traditional world. but the cost. much more. this all shows up in the speed of adoption. difficult to install. 18 . if I built some interesting software in Sydney. This has led to massive suites of applications. Of course. My cost of distribution meant that I needed to extract the greatest degree of value out of each of my customers. Cost of Software If you went to work for Dell you'd be well educated on the cost-or economics-of hardware.
' Let's put it in the next release. This really ruined my Windows 95 configuration. “Hey.” we would say. and we can solve this. boss. “Okay. A few months or years later. I got a new feature I want everybody to see.” so a million CDs would go out in the Sunday paper.CLOUD I'm going to use eBay to help explain how the cost of traditional software differs from that of delivering software from the cloud. I got the plan. some bright product manager would show up and say. Let's put it in the Sunday paper. and my ShockWave DLL doesn't run anymore. right? We would insert the CD in the next Sunday paper. wait a minute.” “No problem.” No problem. What would have happened on Monday morning? My guess is the 1-800 number would be ringing with calls: “Hey. how do we get it to anybody?” Some smart VP of Sales and Marketing would have said. It's called 'Buy It Now. Let's assume ten years ago we wanted to start a company building auctioning software. boss. “We're software guys. set up a help desk. got a really great idea.” Then we'd hire a support team. Monday morning would 19 . “No problem. They'd have just gotten out their C++ compilers and ultimately created an auction product. We would have hired a bunch of smart programmers. But the first question the CEO would have asked would be. and so on.
that microprocessor stuff is cool.” No problem. no way you would have been a multi-billion dollar business. and Data General dominated the scene and companies like Intel were dismissed as not delivering real computers. Burroughs. all of us in the traditional software business know how to do this. It has completely transformed the hardware business. The cost for delivering the software. If you think about what has transformed the entire hardware industry. While you could have built a small auctioning software business. hardware companies like Digital Equipment Corporation. and managing it would have been so prohibitive eBay would have had to charge hundreds of dollars for every auction. We'll hire a bunch more support guys. SEVEN VIRTUES arrive and the first phone call would start with “My Linux server just fell over after I installed your software. “Well. What would have been the cost of that scenario? It would have been enormous. The problem is economic.SEVEN VICES. We've been doing this since the beginning of software. Now. but it's 20 . distributing it. There is no way eBay could possibly have existed under this software cost model. it has been a relentless pursuit of taking cost down by an order of magnitude every decade. In the beginning of the 80s. we'll move them to India. Problem solved.
you're going to have to standardize the hell out of everything. you're going to do really well if the cost (not price) is $50 per user per month. so even if SAP or Oracle charges $150. Now remember. and analyze their cost (the cost of delivering the software).com. Bottom line: anyone in the software business needs to become a student of the economics of software.70 per user per month. it's costing them closer to $1000 per user per month.” We all know the end of that story. of course. Now. By the way. If you go down 101 to Mountain View and estimate what it costs Google to deliver their service. 21 . chances are. That's impressive. so you'd do really well to get it out there at $50. it's significantly lower than having each and every customer of the software solve the problems uniquely. you'll come away with a number closer to $0. Remember. guess what that number is? -About $7 per user per month. So what do the real numbers look like? If you take enterprise software-say from SAP or Oracle-and you deliver it as an ondemand service. forget about it. if you become a student of Salesforce. this is for a fixed set of functions. if the customer is running this software in house.CLOUD never going to amount to much. But that's not the end of our story. and if you want to control when you upgrade.
this shift is much more than technology. we will be at the end of software. You can choose to use Model One and Model Four. which is what Oracle did. which is what Salesforce. one thing is clear—the traditional software model is ending. With increased competition and the dynamics of the open source movement. You can choose to move completely to Model Six. SEVEN VIRTUES Summary While it may not be clear to you which model to choose. You can choose to start out a new business in Model Six. In the next chapter we’ll drill down a little more into some of the 22 . with increased pressure on top line growth without fundamentally altering the cost structure of software companies.SEVEN VICES. You can choose to acquire Model Six companies. You will have many choices. the days of million-dollar software licenses are clearly over. and have some of your product line in Model One. And. which is what Concur did. which is what Blackbaud did. since unlike the change to client-server.com did. some in Model Four and some in Model Six. Whatever you choose to do you’ll need to think about how the choices affect the entire company.
CLOUD application areas and companies that have been successful in delivering their applications as a cloud service.
APPLICATION CLOUD SERVICES
It’s far easier to talk about business models and the new cloud computing services from the point of view of an application any of us would use in a business setting. In this chapter we’re going to introduce you to a variety of both horizontal (everyone can use) and vertical (specialized to a particular industry) applications. We’re going to focus only on application areas, which have companies who have succeeded in bringing their companies into the public market. I was having lunch in early 2007 with an old friend Tom Kucharvy. He said, “You know, Tim, you’ve been talking a lot 24
CLOUD about this software as a service, software on demand thing. Now when is this going to really happen?” His question got me to thinking, so I did a little homework. I went back to 1999 and looked up nine (at the time) of the business application software companies, who all deliver their software as a service, and who all have gone public since 1999. Since then some of them have been acquired (Webex, Kintera, Websidestory, Omniture), but the remaining eleven have a combined market capitalization of over $15B, so it’s safe to say, “It’s happened!” So let’s start our discussion of what areas have seen success. Collaboration Of all of the application areas, perhaps the simplest (from a business point of view) is collaboration. The way you use email vs. your friend at another company is not significantly different. As a result some of the more successful application cloud service companies have started out in collaboration. Collaborative software or groupware includes features such as email, calendaring, conferencing, instant messaging, wikis and simple project management. The granddaddy of all collaborative software, Microsoft, of course delivers email (Hotmail) but more recently introduced Exchange Online and SharePoint Online. Microsoft Office chief Chris Capossela predicts2 that 50% of
Fast Company, October 28, 2008.
APPLICATION CLOUD Exchange mailboxes will be online within five years. They might be able to achieve this, as there are reports of large companies, including Coca-Cola and Nokia, using their collaboration cloud offerings. This, of course, is a major battleground area. Google has brought its considerable resources to bear by introducing Google Apps, which includes mail, calendaring, and the ability to collaborate around spreadsheets, presentations and text documents. IBM, not to be left behind has introduced Lotus Live and continues to innovate in this area. But perhaps the company that did the most to prove that collaborative application cloud services could be a high growth standalone business is Webex. Webex Story Min Zhu and Subrah Iyar founded WebEx in late 1996 as a re-start of another company called FutureLabs. FutureLabs focused on providing software-client and client-server solutions for data conferencing. In 1995, FutureLabs was acquired by Quarterdeck. It was then that Subrah, who was responsible for Quarterdeck’s acquisition of FutureLabs, met FutureLabs founder Min. Within a year of the acquisition, Microsoft introduced NetMeeting and ended Quarterdeck’s interest in the
During 1997 and 1998.CLOUD space. Iyar and Min saw the potential of continuing as a service provider.5 million in revenue with about 400 customers. perhaps the first business software any company purchases is a financial application. Intuit QuickBooks. so they launched WebEx. Webex continues to deliver one of the largest application cloud services in use today. 27 . it took Subrah and Min until 1999 to actually launch the service. With over two million registered users and over 85. By their 10th anniversary. is history. WebEx went public in January 2002.000 meetings per day around the globe. Oracle Financials or SAP every company large or small needs a financial application. by 2000. WebEx generated about $2. they spent a lot of time working with customers such as Charles Schwab and StrataCom. which. and the rest. While collaboration is the modern day telephone. In 1999. Microsoft Dynamics. ironically. was also purchased by Cisco. Whether an Excel spreadsheet. Fortunately. they were generating nearly $500M. Although they started WebEx in 1996. as they say. revenues were $25 million.
This area has not been easy to penetrate for application cloud service companies. accounts receivable and payroll. Netsuite.APPLICATION CLOUD Financial Applications Financial applications record and process accounting transactions within functional modules such as accounts payable. procure-to-pay. The most complex and expensive business accounting software is frequently part of an extensive suite of software often known as enterprise resource planning (ERP) software. perhaps for two reasons. That being said two companies have been quite successful in this area. Concur made an initial public offering in 1999 and has grown a large business specializing in travel and expense management. financial analytics. that application generally has few users. almost every company has a financial application and second. governance. financial control and reporting. has mirrored the “suite-approach” pioneered by Oracle and SAP and instead focused on the middle market. who made a public offering in 2007. few 28 . Financial applications can help provide cash & treasury management. and travel & expense management. Concur Story While Oracle was one of the leaders in moving from a traditional model to software delivered as a service. First.
By the end of the transformation. Concur began life as a traditional software company. and the number of employees went from 700 to 300. Global Operating Manager at Agilent.. Their customers include Vivek Ahuja. a $5B+ medical technology company. nearly the entire senior management team was replaced. but in June 2000. chairman and CEO Steve Singh made a bold decision to reinvent the whole company and make the transition to delivering their expense management software as a service. Concur had over 4. Of course if you were smart enough to purchase the stock at the low point your returns would be over 40x today. This was a major challenge. By the end of 2006. particularly since they were a public company. Senior Business Systems Analyst at Cummins.CLOUD examples compare with Concur. Courtney McCoy. While some question whether such a transition from a Model One provider to a leading Model Six service provider would be 29 . Inc. A/P & Payroll Supervisor at Stryker Medical. with seven of the world's ten largest companies using their services to help them manage the corporate travel and expense process. a leader in diesel engine technology and Gloria Brown. a global measurement equipment company.000 clients. Concur has steadily held to its mission. The stock sank to below $1 a share. Since those lean years early in this decade.
The company changed its name in September 2003 from NetLedger to NetSuite and made a successful IPO in December of 2007. Today. a Tokyo- 30 . Everette Phillips. Nomis Solutions.C. CFO of Asahi Kasei Spandex America. few can debate the success of the bold decisions that Steve Singh and Concur made. Bill Ford. Evan Goldberg is Chairman of the Board and Zach Nelson is the company's CEO. Evan Goldberg.. The company launched its first online financial application targeting small businesses in 1999. and Chris Blum founded the company under the name NetLedger in October 1998. located in Charleston. is a subsidiary of Tokyo-based Asahi Kasei Fibers Corp. With this foundation. Netsuite Story NetSuite is a leading provider of integrated online software that allows SMBs to manage their entire business in a single application.. Asahi Kasei. Dave Lipscomb. support and marketing. President and CEO of China Manufacturing Network and David Stover.APPLICATION CLOUD possible in the public markets today. with financing from Larry Ellison. Netsuite’s customers include Todd Spartz. S. the company broadened the application to manage both back-office and front-office sales. CFO. a price optimization solution for the financial services industry.
Human Resource Applications Along with financial applications. is perhaps the best-known company specializing in HR software. 31 . Peoplesoft. It was founded in 1987 and ultimately acquired by Oracle for $10B in 2004.CLOUD based manufacturer of polyelastane filament fibers used mainly in textiles. Human resource applications are built to assess. Beginning with tracking of resumes of prospective employees to keeping record of employees’ compensation & benefits. acquire. You might find it hard to believe but they replaced their SAP R/3 with Netsuite in 2008. performance appraisals. It turns out this has also been a good area for application cloud service companies including three companies that have made initial public offerings in the past five years – Kenexa in June 2005. and align a businesses workforce. Taleo in October of 2005 and Successfactors in 2007. human resource (HR) applications were an early example of widely adopted business applications. develop. HR software tracks the lifecycle of many companies most valuable asset: their people.
but as a recruiting firm. On a certain Friday. Kenexa took the long way home. His message to the students was. the customer would have waited to the last day to pay. maxed out his credit cards. Karsan talked about a day in 1991 when he had mortgaged his house. and was ready on Monday morning with his rent payment.com and WebEx started out knowing what they wanted to be. cashed the check at the issuing bank.000 contract to a large insurance company. Kenexa has bought and sold over twenty businesses. Over the past 20+ years. having been founded by Rudy Karsan in 1987.APPLICATION CLOUD Kenexa Story While Salesforce. and was three months late in the office rental payments. Kenexa has grown its business to over $160M in revenue in 2009. Kenexa is a provider of software: proprietary content. services and process outsourcing that enable organizations to more effectively recruit and retain employees. drove from Philadelphia to New York City. Karsan took the check. but for some reason the checked arrived early. you might be as hard working and as smart 32 . on that Friday. Kenexa is the oldest of the group. the landlord had told him the sheriff would be coming on Monday to evict them. Through these acquisitions. But Kenexa’s path has not been without its challenges. The good news was that the company had sold a $40. Kenexa began operations in 1987 not as a software company. Today. Typically. At a lecture at Stanford University.
Some 33 . Taleo joined fellow application cloud service companies DealerTrack. Taleo had over 12 hundred customers. Taleo’s software is used by Fortune 500 companies as well as smaller companies to match all sources of talent—be they professional and hourly candidates. but. who had a background in supply chain management. campus recruits. or multinational. whether it is centralized. or existing employees—to all positions. and had tracked over 66 million candidates. By late 2007. contingent workers. success is based on a lot of luck. Taleo Story Taleo traces its beginnings to 1996.CLOUD as the next group. when founder Martin Ouellet created Viasite. Ouellet founded Recruitsoft in 1998 and joined forces with Louis Tetu. one could deliver a talent supply chain management solution that provided the same bottom-line and process improvement benefits to large enterprises that supply chain management had brought to manufacturing. which would become the most successful job board in Canada. Following on that success. Tetu understood by leveraging the power and connectivity of the Internet. in the end. Kenexa and Vocus in going public in 2005. This was his lucky story. agency referrals. one million users. decentralized.
Christoph Thoma. there must be a schema change. Meaning that. Mike’s lecture at Stanford in 2007 was entitled: “Does Business Evolution Drive Technical Innovation or Does Technical Innovation Drive Business Evolution?” He ended the talk by saying. With a schema change comes an upgrade. and Bruce Hatz.APPLICATION CLOUD of Taleo’s customers include Randy Goldberg. if a traditional software company wants to deliver any significant function. given the often-high degree of customization most customers apply. which manages over 100. VP of Recruiting at Hyatt Hotels & Resorts. Global Staffing Director at Applied Materials. the cost for the upgrade becomes prohibitive. as he was an Executive Vice President at PeopleSoft before joining Taleo. a global healthcare company employing over 75. today. CEO Michael Gregoire is uniquely qualified to see the similarities and differences between traditional and application cloud service companies. “Yes!” 34 .000 people worldwide. and.000 rooms in over 40 countries. an $8B+ provider of semiconductor fabrication equipment. Head of HR at Roche. Hence. He sees the challenges of the traditional software business as being interlocked with the technology. the business can’t move forward since the technology can’t move forward.
You are going to be running Portugal in two years!” Lars said: “What? What are you talking about?” The VP came back and said. In short order he was headhunted by Unilever.CLOUD Successfactors Story Sometimes you can tell a company is different when you walk in the door. founder and CEO. A few years back I went to the SuccessFactors headquarters to meet with Lars Dalgaard. that’s not the only one. All Lars could think was “Is this is how they manage careers?” 35 . “See. “Well. On graduation Lars went to work for Novartis. a large pharmaceutical company based in Switzerland. and then pulled out all a set of org charts and said. no separate offices. I also have you …” and he started going through more and more org charts. but that is a lower job. skimmed through it. opened a closet and pulled out a huge three ring binder. Many companies are born on the personal experiences and frustrations of their founder. The office had no cubicles. Successfactors is no different. When he went to the VP of HR to inform him of his decision the VP got a key out of his pocket. and furniture that had been specially designed to reinforce that each individual was part of a team. here you are. I also have you in Germany.
APPLICATION CLOUD Out of that epiphany he founded Successfactors in 2001. Their customers are as small as Jay Greenstein. Allianz Group was founded in 1890. from outside the organization) to give one view of the customer. to closing the sale. CRM’s goal is to bring together information from all data sources within an organization (and where appropriate. and marketing to make quick. informed decisions. In 2007 they made a successful initial public offering. and in 2008 placed number 133 on Deloitte’s 2008 Technology Fast 500.000 employees worldwide. customer support. 36 . CRM for Marketing Customer Relationship Management (CRM) is a companywide business strategy designed to reduce costs and increase profitability by managing a customer lifecycle from initial marketing. owner of the Sport and Spine Rehab centers based in Virginia and as large as Brenda Leadley. a VP of global human resources for Allianz Group. The goal is to allow customer-facing employees in sales. servicing the customer and ultimately delivering more products and service to the same customer. Their solution is deployed to over four million end users in over 30 languages. and is one of the leading global services providers in insurance. banking and asset management with more than 180.
Omniture and Constant Contact. This group includes products from Vocus. 37 . Maryland. including in-depth journalist profiles. Vocus provides a proprietary information database of over 800. sends out press releases. Today they have over 2000 active customers representing organizations of all sizes across a wide variety of industries. contact schedules. Web-based software for public relations. media outlets. and publicity opportunities.000 journalists. based in Lanham. sales and finally service. Their platform monitors news. The company. went public in December 2005 and provides on-demand. email marketing. As a part of their solution. and helps communicate with the media and the public. Vocus Story Vocus was co-founded by Rick Rudman and Bob Lentz in 1992. Their database contains information about the media. analysts. CRM for marketing includes solutions to track PR effectiveness.CLOUD This area has been very fruitful for application cloud service providers. podcast interviews. In the next three sections we’ll divide up CRM into CRM for marketing. web analytics and soon new innovations in social media marketing. If the software can increase the number of qualified leads for sales then it’s CRM for marketing.
They focused their first business on Web design. as international spokesperson and Director of Media Relations. to closing the loop with digitized feedback and management analytics. Omniture Story Josh James and John Pestana met as undergraduates at a computer science class at Brigham Young University. address the communications life cycle. For a business that is over $2B in revenue that’s no small step. 38 . and gathering Web visitor data primarily for small businesses. one of the largest nonprofit organization in North America. all media relationships were tracked and managed in a notebook (no. from identifying key contacts. The Vocus database is integrated with a suite of on-demand modules that. joined Goodwill Industries International. The Vocus application is used by a wide variety of organizations. and other relevant information compiled by its dedicated media research team.APPLICATION CLOUD pitching preferences. to distributing information. Christine Nyirjesy Bragale. When she joined. By replacing the notebook with Vocus they are able to not only access records of interactions with journalist but also be able to measure the results of news coverage. together. After a successful career in television news at ABC. developer’s tools. not a computer—a real notebook).
some large enterprise customers saw the value of their software and it didn’t take them long to shift their focus to providing Web analytics solutions for those larger customers. Based on this data. like security. Reflecting the new business focus. Luckily. resulting in a 70 percent increase in conversion rates. Omniture is used in a wide variety of applications. the company was renamed Omniture in 1998. we had to fight through numerous issues. and dynamic Web pages.CLOUD While it was a good business the cancellation rate for these small businesses was so high they had to constantly run to stay in place. redundancy.” Josh recalls the early days when they were offering software as a service. In another application. Omniture is derived from the words “omniscient” and “future. Using Omniture’s SiteCatalyst software. static Web pages. Novell uses Omniture SiteCatalyst on their corporate intranet to track the use of applications. Novell can 39 . before people even knew what to call it. and availability. We decided the best thing to do was to go after the larger companies and then use them as references. Overstock. they refined their checkout process from seven down to three Web pages.com was losing customers in the checkout process.” Today. “In the early days.
it’s rocketing past you—and there is no way to catch up!" In 2009.APPLICATION CLOUD better expose pages. The company had just seven employees and a handful of clients when Gail Goodman took the reins in 1999. Josh loves the subscription business model. by the time you hear it. Goodman raised more than $20M in her first year and launched the company’s first product: a permission-based email tool. Gail’s advice to would be entrepreneurs: "Get a lot of advice. or adjust resources so that they don’t have to spend money on pages or applications that are not being accessed. "just like a freight train. Omniture acquired Visual Sciences. but don't feel like you're a slave to every piece of advice you get. it seems as if the business is growing slowly at first. only the revenue. Since your competitors cannot see the bookings. acquired WebSideStory and now finds itself as one of the gorillas in Web analytics. I had never raised venture capital. was incorporated as Roving Software in 1995. Constant Contact Story Constant Contact. Adobe was so impressed they made Omniture an offer they couldn’t refuse. But. remove them. so I 40 . which had themselves. I networked like crazy. Inc. which he likens to a freight train.
the company has over 150.000 worldwide clients that depend on its Web-based email marketing service to communicate with their customers.000 customers and having a really fun party. beginning with an unlikely category . Not only does their newsletter reach 3. “My most rewarding business moment … was reaching 100. Since they started sending out their new monthly newsletter. Reflecting on her years as CEO Goodman said. dedicated congregation the church inspires through innovative and creative communications. writing the shutdown plan. their communications pastor made it his mission to update the way they communicated their message to the congregation. Bethany Church of the Nazarene has an active. It was just a very dark week or two." Constant Contact’s customers span the range.000 opt-in subscribers weekly but it also reaches people 41 ." By 2004." And "my scariest business moment .. the company changed their name to Constant Contact and in October 2007 completed its initial public offering. Some of the advice I got was on target. Today.. happened in summer 2001 with less than one payroll in the bank. Some of it wasn't.CLOUD talked to lot of people who had done that. Bill Miller.churches. the church has experienced a tremendous increase in the number of people signing up.
CRM for Sales seeks to standardize the sales process and make it repetitive. As a result much of the initial focus of traditional CRM companies. the lead conversion%. Whether it’s having visibility to a lead by status. has been building software to increase sales productivity. salesforce. Marc Benioff founded Salesforce.com Story The largest and most visible player in the application cloud service market has been Salesforce. With that vision. and with a team of three software developers.” said Bill. “It is an incredible feeling to know that people in another country want to be a part of our extended family. Salesforce.com in 1999 to pursue a simple idea: deliver enterprise applications on the Web. but in a 42 . not in a garage.APPLICATION CLOUD in multiple countries.com. like Siebel and the leading application cloud service company. The company began.” CRM for Sales In most companies the largest single expense is sales.com. converted leads by month or who is the tops sales rep this class of software has been adopted by small.com. medium and large enterprises. “Knowing that the news of our congregation and the work we’re doing has a far greater reach through our newsletter than it ever could have otherwise is encouraging and has a positive effect on everyone involved with Bethany. Marc founded Salesforce.
by 2005. Salesforce. Marc gave his company a mission—to bring about the end of traditional software.com Went from Idea to Billion-Dollar Company-and Revolutionized an Industry. 2009). they were the highest valued of all of the application cloud service companies. 3 Benioff.’ as well as raises new questions for existing software companies. There will be a few stories about salesforce. Everywhere he went he wore a pin that had the word software crossed out. Behind the Cloud: The Untold Story of How Salesforce. 43 . At a now-famous keynote speech. M.com’s growth has been meteoric and has symbolized the movement to software on demand.” says Marc. In 2009. was generating over $150M in revenue. For the insider’s view of the creation of salesforce. Marc constantly changed from a business suit to a Hawaiian shirt and debated himself on the merits of the old and new ways to deliver software. It received no venture capital investment. next door to his home. Jossey-Bass (October 19. From those early days. The company made an Initial Public Offering in 2004 and.com throughout the book. “Our growth validates the belief in ‘The end of software.. but was funded instead by Marc and Larry Ellison.CLOUD rented San Francisco apartment.com check out Marc’s new book3.
We all know that high quality service is relevant information. and software are all industries that don’t 44 .S. education. Financial services. Figure 2. economy is a service economy. Whether thru web. email or phone. delivered. as you need it. Services Economy Today’s services economy accounts for 80 percent of the U. GDP (gross domestic product). service is all about information.S.S. personal to you. chat. the U.1 Growth of the U. Figure 2.APPLICATION CLOUD CRM for Service Once you have a customer keeping a customer is increasingly defined by the quality of the service delivered. At the highest level. healthcare. IT services.1 shows the dramatic shift from manufacturing and agriculture to services over the last 50 years.
70 percent of the service employment involves highly skilled people. and administration and management functions. doctors. This includes executives. contrary to conventional wisdom. Instead. this shift has not been an increase in the number of kids flipping hamburgers.CLOUD manufacture or grow a single thing. Figure 2. hedge fund managers.2 shows the results of the 1996 census. and customer service professionals and all of these jobs are fundamentally different than working on the assembly line in the early 20th century. One of the earliest companies to focus on customer service application was RightNow Technologies.2 United States Census (1996) Services economy jobs include software designers. 45 . Figure 2. Furthermore. scientists. lawyers.
HP. If you have the money you will spend it—whether you have figured out your business model and market or not. and makes a passionate case for starting businesses the old fashioned way. "Bootstrapping Your Business: Start and Grow a Successful Company with Almost No Money. This is the worst time to raise money from a valuation perspective.APPLICATION CLOUD RightNow Technologies Story Founded by Greg Gianforte in 1997. Montana. G. RightNow focused on helping customer service organizations improve service delivery using technology. and Microsoft all originally started without VC funding. Based in Bozeman. You sell your precious equity very dearly before you have a proven business model. RightNow went public in August 2004. Let your customers fund your business through product orders.” BookSurge Publishing. In RightNow’s case. but he reminds the reader that Dell. Money removes spending discipline. Gianforte knows he is pushing a contrarian view. 2007 46 . He published a book4 in which he builds a strong case against relying on venture capital (VC) funding: Raising money takes time away from understanding your market and potential customers. Gianforte didn’t start RightNow with venture capital. Often more time than it would take to just go sell something to a customer. they doubled their revenues and employees every 90 days for two years before 4 Gianforte.
CLOUD they took any outside money. even then.” says Gianforte. It fundamentally changes both the relationship between the software vendor and the customer. a $6B+ manufacturer of power tools. and. Web self-service. a 50 year old natural nutrition company. assigns. and manages customer service interactions from initial contact through resolution. Consumer Services Manager at Black & Decker. not months or years. and collaboration modules. a $3B+ leader in electronic gaming and Chuck Udzinski. the employees retained more than 75 percent ownership after the company raised $32M. “Customers want solutions that are up and running in days or weeks. companies can more effectively deliver support and service for their customers. and the economics of purchasing and owning software. email management. Boyd Beasly. tracks. CIO at Shaklee. RightNow provides a suite of customer service and support solutions that captures. Senior Director of Customer Support at EA. Some of RightNow’s customers include Ken Harris. and they are looking for ways to reduce overall ownership costs. Using their case management. “Delivering applications as a cloud service is more than just another way to implement software. 47 .
and today we are just in the early stages of this next evolutionary stage for software. some peoples began to produce food either through herding large mammals or growing crops. W. and Steel: The Fates of Human Societies”. Specialization meant technology could develop. others could grow food. Norton & Co.W. due to conditions in a few isolated places in the ancient world. The cloud is altering the way enterprise applications are being consumed. and still others 5 Diamond..APPLICATION CLOUD Utilizing cloud delivery models. Some people could make weapons. Diamond’s book centers around answering a question he was asked by his New Guinea friend Yali: “Why is it that you white people developed so much cargo [goods] and brought it to New Guinea. “Guns. Germs and Steel: The Fates of Human Societies.”5 may make you see the world a little differently. organizations are able to get these advantages over on-premise applications. Jared. Having the ability to store food meant that the society could develop specialization. 1 edition (July 11. but we black people had little cargo of our own?” The answer is that. 2005) 48 . Germs.” Vertical Applications Reading Jared Diamond’s bestseller. “Guns. Being a food producer meant that the population could grow. The lucky ones had the right circumstances to do both.
49 . financial.CLOUD could erect buildings. But if you walk into any ongoing business. Consider the fact that CitiGroup today employs more programmers than SAP or Oracle. that if we provide purchasing. A slightly tongue in cheek example of specialized software is Flock IT. So how specialized can software get? We’re conditioned to think that business software is about ERP and CRM. to the teams building the software. and sales force automation solutions. we’ve built all the software a business needs. we’re sure history would be quite different. This is no surprise to us in the modern world of work. No one had to teach anyone how to use the system. what they needed to do. you’ll discover that the ERP/CRM footprint is less than ten percent of their overall software. HR. auction a Pez dispenser and search. it became immediately obvious what it did and. If Google had started out to build software that enabled you to buy a book. and why does specialization matter? Probably the best example of the power of specialization is Google. but what does specialization mean in software.
But post-Internet.3 Specializations Flock IT is a company specialized in poultry management software. Search Yahoo! or Google and you’ll find thousands and thousands on Flock ITlike companies. Had he wanted to expand to Sydney. he would have had to hire a support engineer and a salesperson. he just couldn’t afford to do this. Australia. the cost of supporting and selling this software (pre-Internet) would have been so high that the founder could only support customers in his hometown of Brisbane.APPLICATION CLOUD Figure 2. do we have to think this way? On a global basis. In the not so distant past. Unless he had enough capital and a high enough price on the software. are there not enough people managing poultry to use this software? And once you see this possibility. doesn’t the future 50 .
CLOUD look like lots and lots of specialized software: search. the old system was both slow and manually driven. a dark cloud came onto the horizon.. auctioning.000 dealers in the United States. They saw whenever a consumer applied for an auto loan. Morgan Chase & Co. but by late 2002. it was this much-needed competition. Dealertrack for automotive dealerships and Opentable for reservation taking restaurants.. AmeriCredit Corp. and Wells Fargo & Company. Ford and General Motors decided to finance a new company. RouteOne. and poultry management software? There are many examples of specialized applications including those provided by Blackbaud for nonprofit organizations. DealerTrack Story DealerTrack was founded in January 2001 with the initial financing of $20M coming from three forward thinking financial institutions: J. If anything created focus at DealerTrack. In their first year. pig management. cattle management. Chrysler. with each lending institution using a different form—cumbersome for both the consumer and the dealer. DealerTrack brought on line over 20 percent of the 22. The company began to add more dealers (60 percent signed up in year three) as well as more 51 . to the tune of $100M.P.
which gives him tremendous pricing leverage. but the application cloud service model also gives the company the ability to release new products quickly and nimbly.” that allows them to continue to distribute new software products. In addition a few years ago they began offering their traditional products in Model Four. First. and today the company is connected to almost all of the 22. When Mark O’Neil. Below is a chart of the growth of that business. 52 . a real “information superhighway. More interesting.000 dealers in the U. they have a large support and maintenance revenue stream as a by-product of selling in traditional Model One. he will say there is no other way to run a software business.S. which they are doing at the rate of three per year. Chairman and CEO of DealerTrack. Not only does he get tremendous economic/cost leverage. Blackbaud Story Founded by a soccer-playing Englishman.APPLICATION CLOUD products for the dealers. DealerTrack has established an electronic channel. talks about delivering software as a service. Their story contains elements of all of the seven business models. DealerTrack went public in 2005. Blackbaud is the market leader in software for non-profit organizations.
Upon completing the reservation you receive OpenTable rewards points. On the consumer side. thru acquisitions in 2006 of eTapestry and 2008 of Kintera. Opentable is a great example of the blurring of the boundaries between consumer and enterprise software. and price range. which can be redeemed for discounts at member restaurants. cuisine. OpenTable Story As one of the newest public companies. date. OpenTable allows you to find and make reservations at restaurants based on time. On the enterprise side Opentable provides restaurant owners with a reservation management system designed to replace existing paper reservation systems.4 Blackbaud’s Four Product Lines Finally.CLOUD Figure 2. Blackbaud has two Model Six companies engineered for multi-tenant low cost delivery. The solution is an integrated software and 53 .
Todays cloud services not only include the business applications we’ve just discussed but also network. But if you were going to start today there is a much larger array of services that you might consider using. Instead Opentable charges the restaurant a monthly fee to be part of the Opentable network as well as a transaction fee that varies depending on whether the reservation originated from Opentable’s site or the restaurant’s site. As a diner. you don’t pay for the service.APPLICATION CLOUD hardware solution that computerizes restaurant host-stand operations. Given the relative unreliability of the network connections this is all implemented on a standalone PC. In many ways the business looks like a combination of a Model One and a Model Seven business. customer preferences. The system keeps track of VIPs. a consulting arrangement occurs to implement the reservation system. Sales are done using the traditional door-to-door approach and once the buyer says yes. 54 . On the other hand the consumer side of the business is a classic Model Seven business. datacenter. Cloud Service Stack Many of these application software companies were architected in the late 1990s. integrates with the POS system and allows for reconfiguring the tables for larger and smaller seating arrangements.
55 . ß Figure 2. Operations staff to manage either traditional applications or application cloud services uses operations management cloud services.5 Cloud Service Stack Software development cloud services are either service used by software developers to build new applications. software development and operations management cloud services.CLOUD compute. power and secure the physical hardware. Amazon Web Services pioneered compute & storage cloud services. which give you access to computer and storage resources. storage. Compute & storage services use data center cloud services to house.
Summary The early pioneers of SaaS/Application cloud services have demonstrated there is the ability to sell and deliver applications in the new business models. or trying to be the next public company the good news is these new cloud services can speed the delivery and lower the cost of getting new applications into the market. So whether you’re taking an existing application and delivering it as a cloud service. The next several chapters will focus on the different layers of this new cloud stack. What’s exciting today is the creation of 1000s of new cloud services which new providers of applications can now take advantage of. This organization will serve to frame the next several chapters. 56 . developing one for in-house use. These early pioneers had to build much of the infrastructure and software to deliver and sell these applications.APPLICATION CLOUD Finally all of these services are connected thru network cloud services.
Staying with the physical infrastructure.3 DATA CENTER CLOUD SERVICES The compute. we’ll 57 . storage and network hardware that power all cloud services ultimately must reside in a facility. We'll begin where the name “cloud” began. or if you consume application or platform cloud services this chapter is written to highlight the major areas you’ll need to understand. We’ll move on to discussing one of the key attributes in the reliability and cost of any cloud service: power. which are the basic network connection services. If you choose to build your own compute and storage cloud service. connected to the network.
but the reason we all call this cloud computing is because we always drew the network (and the Internet) as a cloud.DATA CENTER CLOUD SERVICES highlight some of the key attributes in building highly available and secure facilities and conclude with the fundamental economics of building data centers. If networks were indeed uniformly cheap. At $1.000 per square foot it’s some of the most expensive commercial real estate you’ll ever see. It is here that the world of appliances and application cloud services intersect. reliable and fast then operating out of two data centers on the planet could work. entire books can be written on network cloud service so for our purposes we’re going to focus on one valuable idea. this is not the case so it will be important that the application deployments are location independent. Network Cloud Services Many have forgotten. However. and will require at least one disaster recovery site. By that we meant. reliably and efficiently. 58 . Clearly. we weren’t sure how it worked but somehow bits were transmitted from one point to another. Anyone operating an application cloud service will one day need to operate globally.
Europe and Asia time zones. then you’ll locate people in the Americas. as shown in Figure 3.1 Front of the Box. performance and reliability of your “Front of the Box” Network. Back of the Box Your next question will be where to locate the computers. Beyond that. you will need to establish a “Back of the Box” Network to connect the computers to the operations staff. versus keeping a team in the US on three shifts. Figure 3. you’ll need to figure out where your users are concentrated.CLOUD At some point in the day or night. Once you’ve done that. If you want the people managing the software to be working the first shift. Companies like Akamai 59 .1. If you want to provide for a disaster recovery site. and the cost. the people managing the application will be remote from the physical location of the computer. you’ll need at least two sites.
As a result. San Francisco and Paris is critical to global deployment. and a multi-location deployment of any application cloud service. this should be no problem if you have architected a location-independent application. Furthermore. it becomes only a financing question as to who owns the actual data center. as it will be much more difficult to take advantage of spare capacity afforded by other users consuming the same compute and storage resources. some downsides to not being able to keep all of the hardware in a few locations. Furthermore. the cost of bandwidth might be such that you’ll need to locate the computers in Chile. In particular. there is a fine line between application appliances. 60 . There are. as opposed to the operational technology. it will be more expensive. in the end. if you’re application needs to run in Chile. it really doesn’t matter where the building that houses the computers is located. faster connections. of course. as soon as you realize that standardizing the infrastructure of software and hardware to run in Shanghai. Again. But.DATA CENTER CLOUD SERVICES have built a large business helping companies provide more reliable. It becomes more a matter of who pays for what.
a large data center had to rely on their diesel generators. You should. Madison WI. A few years ago. In fact at least 4 times per year the power will be out for a minute or more. but during testing 6The Cost of Power Disturbances to Industrial and Digital Economy Companies. (TR-1006274. June 29. During the past decade. there is always the possibility you will lose power. of course periodically run a test to see if the generators are working—and make sure you run the test long enough.CLOUD Power Quality Computers and networks cannot operate without power. As a result. the systems failed. After two minutes. Unfortunately there was a clog in the fuel line. Available through EPRI). and no matter how reliable your electric grid. and the National Power Lab data also shows that a typical facility will on average have a voltage fluctuation lasting between one cycle to over thirty minutes 38 times per year. 2001. even though they had tested the generators every quarter. The Electric Power Research Institute (EPRI) estimates the cost at over $119B per year. 61 . there have been several efforts to assess the national cost of power interruptions and power quality. quality data centers will be equipped with UPS and diesel generators.6 EPRI. It turned out their quarterly test duration was for 30 seconds.
58. 2007. To give you a sense of the range of possibilities. and Bill Tschudi.DATA CENTER CLOUD SERVICES there was enough fuel in the line to run the test for 30 seconds. Their analysis showed data centers could be over 40 times as energy 7 The Green Grid. Rumsey Engineers Bruce Myatt. Brill . PUE was established by The Green Grid. Power Utilization Efficiency While having high quality power is important. Presented at The Uptime Institute Symposium 2007 9 Best Practices for Data Centers: Lessons Learned from Benchmarking 22 Data Centers Steve Greenberg.” Technical Committee White Paper. Lawrence Berkeley National Laboratory Peter Rumsey. In another published work9 a team from the Lawrence Berkeley National Labs benchmarked 22 data centers. as we will see the effective usage of power has both economic and carbon impacts. and no more. an association of IT professionals seeking to dramatically raise the energy efficiency of data centers through a series of short-term and long-term proposals. “The Green Grid Data Center Power Efficiency Metrics: PUE and DCiE. Evan Mills. In their sample size the average PUE was 2. EYP Mission Critical Facilities 62 . the Uptime Institute gathered data from many of the 85 members of the Institute’s Site Uptime Network®. 8 Data Center Energy Efficiency and Productivity By Kenneth G. The Power Usage Effectiveness7 (PUE) metric is defined as the ratio of the total power consumed by a data center to the power consumed by the IT equipment that populates the facility.
3 summarizes the PUE from all Google-designed data centers with an IT load of at least 5MW and time-in-operation of at least 6 months. because large Model 7 companies consume large numbers of servers per employee it makes sense that companies like Google are pushing the state of the art. 63 .CLOUD intensive as conventional office buildings.2: Computer Power Consumption Index for 22 Data Centers (Inverse of PUE) Again.5 to 3. Figure 3. They created a metric defined as the Computer Power Consumption Index. Figure 3. The 22 data centers ranged from a PUE of 1. Figure 3. which as it turns out is the inverse of the PUE.0.2 shows the Computer Power Consumption Index for all 22 data centers in their study.
Data Centers E and F are two of the newest and have among the lowest values. Also. 64 . In addition. PUE values are impacted by seasonal weather patterns. which influences the PUE performance. and the facilities themselves are located in different climates. Data Center A is the oldest facility of the group and has one of the highest average PUE values. and over time their designs have become more efficient. the data centers shown were built at various times since 2005. and thus the PUE during cooler quarters tends to be lower than in warmer ones.DATA CENTER CLOUD SERVICES Figure 3. For example.3: Google Data Center PUE Why is there variation among the data? Power and cooling architectures differ between facilities.
2B for the U. Stanford University. and the World. Estimating Total Power Consumption by Servers in the U. that number grows to 1. and the world. For this answer we turn to the Emissions & Generation Resource Integrated Database11 (eGRID).6 percent of total U. The total electricity bill for operating those servers and associated infrastructure in 2005 was about $2.7B and $7. and 14 such plants for the entire world.2 percent. Jonathan G. February 15. Some power has a much higher carbon footprint than other. In total power demand. Koomey completed a study on the global power consumption of servers. Dr.S. an amount comparable to color televisions’ power consumption.CLOUD Power Carbon Footprint With the increasing cost of power and the need to reduce carbon emissions. 2007. the other major area of focus is the reduction of overall power and cooling requirements.S. respectively. The total power used by servers represented about 0. When cooling and auxiliary infrastructure are included.10 Not all power is created equal.S. Jonathan. 11 http://cfpub. electricity consumption in 2005.gov/egridweb/ 65 .S. this is equivalent to about five 1000-MW power plants for the U.epa. 10Koomey. eGRID is a comprehensive source of data on the environmental characteristics of almost all electric power generated in the United States.
Surprisingly there are coal-fired plants that are cleaner than some oil-fired plans.00876.4: Sub-region power grids Interestingly the sub-regions have a nearly 4:1 difference in the amount of carbon generated per Watt (40-170 pounds/Wattyear). Figure 3. otherwise eGRID divides the country into a number of sub-regions. Units are in lb/MWh and are converted to lb/Watt-year by multiplying by 0.DATA CENTER CLOUD SERVICES The annual total output emission rate is the measure of the carbon emissions as it relates to the generation output. 66 . If you go thru the database you will find specific power plants that range from 0 to 876-lbs/watt year. If you know which specific power plant your data center is connected to then that CPF can be used.
CLOUD Economics Building data centers is expensive. At ~$1. In 2007 Microsoft decided to build a 470.000 sq foot data center at a cost of $100M.com broke ground on an 116. Sixty percent of the cost is mechanical and power systems. Figure 3.6 is an analysis done by IBM. And just so you don’t think this is purely a US phenomenon.000 sq foot data center at an estimated cost of $550M. Figure 3. In Figure 3.5 you’ll see an IBM estimate of the cost breakdown for the various components. GDS-China is in the process of building five new data centers in China. 67 . with a plan for fifteen more.000 per square foot these are expensive capital investments. which shows what many who have been students of this area already know. In 2008 Amazon.5 Datacenter Capital Costs This brings us to the on-going operational costs of a data center.
DATA CENTER CLOUD SERVICES That is. $300 Cumulative Cost of Operations ($m) $250 $200 $150 $100 $50 0 Energy Cost Staffing Bldg. C. from 3 cents per KWh in Idaho to 18 cents in Hawaii. Power and Cooling Costs More than IT equipment it supports”. “In the Data Center. Moreover the cost of power can fluctuate by a factor of at least 6x. that power or energy costs dominate the operational costs of a data center. Summary Network and datacenter cloud services represent significant capital investments to build out. & Mgmt. 2008 Figure 3. Electronics Cooling Magazine. R E Tax 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year Source: IBM engineering estimates. Increasingly the location of the data centers will be dictated not only by the proximity to 12 Belady. Maint. 68 .6 Datacenter Operational Costs Christian Beladay’s analysis12 shows that as of 2008 energy costs alone have exceeded server costs. So in the end it may turn out that future data centers will just be value add to anyone generating power.
69 . or the month. i. Utilizing these datacenter services. the next layer of the stack is to provide compute and storage cloud services. but also by the availability of low-cost.e.. We’ll discuss this more on the next chapter. providing computers and storage technology purchased by the hour. These data centers will in many ways be the bridges and roads of the next generation of all industries.CLOUD networks. low-carbon high quality power.
if not over. but also compute and storage. Business Week November 2006 70 . Jeff. 13 Jeff Bezos’ Risky Bet. Why would he want to do this? Amazon doesn’t release the public numbers on how big their business is but it is widely believed they’re close to. founder and CEO of Amazon was announcing to the world that not only was he going to sell books and CD’s.4 COMPUTE & STORAGE CLOUD SERVICES The cover story in Business Week in November 2006 was entitled Jeff Bezos’ Risky Bet13. To which most people thought he was crazy.
a Joyent.CLOUD a billion dollars in a little bit over four years of operation. their success has brought many players. While many may have been skeptical at first. Figure 4. So whether that is small players that you may never have heard of. or big players like Microsoft with Windows Azure or IBM everybody is headed into this space because fundamentally everybody needs to buy compute and storage. and through a layer of software.1Virtualization In order to cost effectively implement compute & storage cloud services we need virtualization technology. GoGrid or Layered Technology. large and small into the marketplace. Virtualization is the ability to take a single physical computer. when IBM created the VM operating system. give you the illusion that 71 . Now in reality (small joke) virtualization as the technology has been available since 1972.
2 Compute & Storage Cloud Service Business Model Amazon’s innovation was not virtualization.SOFTWARE DEVELOPMENT CLOUD SERVICES actually you have multiple computers there. Of course in order to execute on this business model they had to achieve not only a high degree of standardization and automation. their innovation was the business model. VMware has built an entire business around this and has been enormously successful. 72 . While virtualization is a necessary technology. and you were only required to buy it for an hour. Figure 4. but also a simple user interface. it is not sufficient. For the first time you could purchase the usage of a computer for 12 cents for an hour.
which today you can get a computer priced per hour. which is priced on demand at 12 cents per hour.3 on YouTube and see how quickly and simply a server is provisioned. Business Models Amazon not only created the on demand business model. In the last generation provisioning a server could have taken longer than growing and harvesting the coffee beans. 73 . they also created the reserved and spot pricing models.CLOUD Figure 4. the compute service. Compute Cloud Service in Less time than it takes to get a Latte Take a look at Figure 4. is discounted to 4 cents with an upfront payment of $227.3. For example. Reserved pricing allows you to reduce your hourly rate in exchange for an upfront fee.
We’ll look at each one in turn.4 Spot Pricing So you’re probably wondering .SOFTWARE DEVELOPMENT CLOUD SERVICES Spot pricing is their latest business model.4 you’re seeing an example of what happened over a period of days in terms of those spot-pricing model. periodic bursty. These are high growth.Why do I need a computer for 12 cents an hour? There are four different classes of workloads .four different types of applications that are uniquely suited to this business model. 74 . aperiodic bursty. In Figure 4. Figure 4. how it fluctuated. and on-off applications. Every hour on the hour you can bid for a compute service and if your bid is the high bid during that hour then you get the computer for that hour.
and instead of paying $2. If you think about how many transactions had to be processed in order to generate that kind of revenue. Traditionally the CIO for Gilt Groupe would have been in the CEOs office saying. For those of you who either purchase high end women's fashion. As a member you can buy a Prada handbag. but was not in this case. They started several years ago by spot auctioning brand name items. Some believe it’s the largest company solely 75 . you could now pay $1. I need another rack. “I need another server. I need more power. Gilt Groupe. Clearly this is possible. you start to realize they would have had to buy more and more and more computers in order to satisfy that processing need at the rate they were growing. I need another data center. As an example consider the company. The Gilt Groupe runs entirely on a compute and storage cloud service. the business grew to over $150 million. They are a private company.” Clearly it could have been done. or know people who purchase high-end women's fashion.500. but it is widely believed in a little over two years.CLOUD High Growth Applications The first category is high growth applications. you probably already know who is the Gilt Groupe.000.
Aperiodic Bursty The next major category of application is characterized by aperiodic bursty workloads. and the end of January. February 14 is Valentine's Day. several years ago. What many of don't know is on April 15th. What many 76 . February 14th. This is why nearly every startup company in Silicon Valley. Because in the event of high growth. but it is the number one day for e-cards on the planet.000 people who could not file their taxes. and more data center space. In the case of Dockers register and you'd get a free pair of pants. The end of January is Super Bowl Sunday. more storage. Hallmark sends more e-cards on Valentine’s Day than any other day. is building on compute and storage cloud service. the Intuit website failed under high load resulting in 350. You may have never thought about it. You don't send a Valentine's Day card on February 13th and you certainly don't send one February 15th. A few years ago Denny’s and Dockers ran multimillion-dollar ad campaigns to drive people to their websites.SOFTWARE DEVELOPMENT CLOUD SERVICES running on a compute and storage cloud service. who thinks they are going to be the next Groupon or the next Gilt Groupe. you don't want to be out there trying to buy another computer. In the case of Denny’s if you registered you’d get a free breakfast at Denny’s. The story here revolves around three dates: April 15th.
meaning applications that runs. This is a perfect application for compute & storage cloud services. 30% of the time the state of the art is to run chemical analysis. They are in the business of providing tumor diagnosis. the Dockers website actually collapsed from too much load. For this case.CLOUD people don't know is that within minutes of the Dockers ad running. hence. But purchasing hundreds of computers just to test for one day has historically been cost prohibitive. On Off Applications The third category we’ll call on-off applications. Pathworks 77 . The oncologist is given protein levels that are high or low and based on his or her experiences they determine what kind of tumor it is. we’re going to talk about a service provided by Pathwork Diagnostics. and then doesn't run. 70% of the time tumors can be diagnosed by visual inspection under a microscope. runs and then doesn't run. Of course you could have bought computers located in New York and San Francisco and Miami to test these sites. So these are all examples of the need for performance testing at scale. while technically feasible no one does it. Now you can cost effectively ramp up a simulated load for an hour or a day using 1.000s of computers and only pay for the time you use them.
twice a year .which is their product life cycle . eight hours a night. they run 300 servers pulling data from the stock exchanges. This case study comes from a financial service firm.they utilize a thousand servers and to run giant machine learning algorithms. and using complex machine-learning algorithms to probabilistically determine across a larger sample size what is the probability it is one kind of tumor or another. Again.000 servers executing risk analysis algorithms. They run five days a week. They take the data from hundreds of these samples. hundreds of these test. but let's ask the question: What were they going to do with them the other 40 weeks out of the year? Periodic Bursty The final class we'll talk about is periodic busty applications. Could they have bought a thousand computers and put them in a data center? Yes of course they could. During the trading day. economically now instead of owning 3000 computers their ongoing cost is 1/5 (40 out of 200 hours) but there may be an even more important advantage. For six weeks. and currency markets. Then at night they ramp up to 3. 78 .SOFTWARE DEVELOPMENT CLOUD SERVICES takes a different approach. In the morning the results are provided to their traders. bond markets.
000 servers and put them in a data center.” Do you think I'm going to have a job tomorrow? Storage Cloud Services Let’s spend just a minute and talk about storage cloud services. the experiment really didn't really work out. 79 . Storage really has a little bit of a different character. We’ve started out with very simple object level stores. plus the ratio of read vs. How much are you supporting high performance transactional applications versus just storing photos et cetera. latency. write. throughput. Stay tuned there are lots of new solutions. This is because you need object stores to store the machine instances for the compute service.CLOUD Let’s assume I'm the guy who talked my boss into buying 3. To consumer and deliver those storage cloud services you’re going to have to consider the type of access. most of what we’re seeing storage services that is in essence connected to the compute services. But obviously there is an opportunity for storage cloud services to exist independently. and how random or how sequential is the access. Furthermore. Furthermore assume three weeks later I went into her office and said: “You know boss.
SOFTWARE DEVELOPMENT CLOUD SERVICES Specialized Cloud Services (aka Private Cloud) Much of the discussion about cloud computing has centered on public and private clouds. There are many reasons why you might need compute & storage services. These cloud services might be specialized by four different characteristics: performance. Let’s start with performance characteristics. Rather than get into a word game I’d like you to realize that the few compute & storage cloud services available today are not the end of the road. security or business model. its way more than ten. But if I was to go talk to the Dell. Sun. In today’s offerings there are perhaps ten different types of computers and storage. IBM sales rep about how many different kinds of servers. Many times private cloud is just used to mean a virtualization project. HP. 80 . which are not available today. or go to the EMC or the NetApp guys how many different kinds of storage do you have. So unless in the traditional world we built these different kinds of compute & storage for no reason. In other case private cloud is code for “these cloud services are not secure enough”. there will be compute & storage cloud services with different performance characteristics. but in no case is anyone discussing buying or selling an hour of computing. location.
How are you implementing identity management? What's your audit trail retention policy? How are you doing security testing. In a post Wikileaks. Instead there may be security characteristics you need to accomplish your requirements. You are seeing this with Amazon today. so it will make sense to locate compute & storage near the source of the demand. There will also be compute and storage cloud services specialized by security characteristics. a French compute & storage cloud service. compute & storage cloud services will be specialized by location. a Chinese. et cetera? So there's a 81 . You can choose where your computer storage is going to be and the cost can vary based on that. So both for geopolitical and technical reasons there will be compute & storage cloud services specialized by location.CLOUD Second. post Patriot Act world it’s clear each of the G20 countries will have compute & storage cloud services – a Canadian. whether that’s Vietnam. PCI compliant. Remember even the public cloud companies are not trying to deliver an insecure service. But even if the geopolitical issues could be resolved network bandwidth is not ubiquitous nor universally inexpensive. Spain or Israel. You need to identify these and ask the right questions. penetration testing? Do you need to be HIPPA compliant.
com to the Openstack initiative from Rackspace to large companies like CA Technologies and VMWare are all providing components that will enable you to build your own cloud. We've talked about three different ones pioneered by Amazon. So just a simple example of a compute and storage service specialized by location.SOFTWARE DEVELOPMENT CLOUD SERVICES whole range of different security characteristics that may be particularly important to you. but this is far from the end of the story. From small companies like Eucalyptus and Cloud. Specifically they are testing of a new system to handle calls coming in through the Internet. Priced at a premium to Amazon they are today being used to provide testing services for First Media who provides dating services. Finally there is the question of different business models. Today many companies are producing software to enable the creation of these specialized compute & storage cloud services. Just to give you a small example. Compute and storage cloud services will be specialized by security characteristics. Consider a compute & storage cloud service delivered by Bell Canada. We’re going to see compute and storage cloud services specialized by different business models. 82 .
the world will be ten times more instrumented then it was in 2006 and the number of Internet connected devices will grow from 500M to 1 Trillion. Consider real time translation. Now let’s imagine that every mobile phone in the world executed on transaction per day that would be over 4. turn-by-turn navigation or determining the supply chain that brought you the lettuce in your local market and you’ll quickly realize today’s clouds are small.000 servers and many see that as large – but is it really? Just to put this into perspective consider a few other massive computing systems.000M transactions per day. In fact. Visa is believed to process around 100M credit card authorization transactions and Google about 200M searches per day. The NYSE stock trading system processes about 10M trading transactions per day. then the potential number of transactions will only grow. IBM projects that by 2011.CLOUD Today’s Clouds are Small Google’s cloud contains over 500. Computer Carbon Footprint As compute & storage infrastructure grows and as our concern for global warming increases it will turn out that for 83 . Indeed when you now see the iPhone and Android as merely the “eyes and ears” of the cloud to quote Vic Gundotra of Google.
The CCF is computed as follows: CCF #Employees SPE TBY PUEavg CPFavg Where SPE = Servers Per Employee TBY = Technology Birth Year factor X 400 watts PUEavg = Average Power Utilization Efficiency of the data centers CPFavg = Average Carbon Power Footprint of the sub-region grids (lbs/watt-year) Servers Per Employee (SPE) The number of Servers per Employee may be a simple measure of how much a company is powered by technology.SOFTWARE DEVELOPMENT CLOUD SERVICES modern technology-powered companies the carbon footprint of the company’s computers is the new smokestack of the 21st Century. In a book15 published by the World Bank in 2007 the on the economy of the country of ICT adoption in developing countries: Firm-level evidence from Brazil and India. Interestingly. In this section we discuss a simple way to calculate the Computer Carbon Footprint™ (CCF) of any company.04 and in India at 0. Ernesto Sanchez-triana. Yewande Awe (Editor) 14 84 .02. 15 Environmental Priorities and Poverty Reduction: A Country Environmental Analysis for Colombia (Directions in Development) (Paperback) by Kulsum Ahmed (Author). Simon Commander (London Business School) Rupert Harrison (IFS School of Finance 1st June 2006. in a presentation14 by Simon Commander of the London Business School and Rupert Harrison of the IFS School of Finance they measured the number servers per employee in Brazil at 0. Kulsum Ahmed.
We base our analysis on a recent paper17 authored by Jonathan G. Koomey.32 to 3.33 45 India Brazil Columbia Google Figure 4. Of course probably nothing compares to the modern largescale Internet companies.02 0.33 computers per employee.04 0. Hiding in Plain Sight: Google Seeks an Expansion of Power. John and Hansell.32-3. Year 2007 2007 2007 2006 Servers Per Employee 0. The New York Times. increasing or decreasing the power consumption. In 2006 the number of servers Google deployed was estimated to be 450. 2006.4: Servers Per Employee Technology Birth Year (TBY) TBY is designed to compute the approximate power consumption of all of the servers.000 people in 2006 it would put their SPE (Servers per Employee) at 45.16 With Google employing approximately 10.CLOUD Columbia the range was reported to go from 0. 2009 85 . This is done by establishing a base line of power consumption at 2006 at 400 watts and then if the servers are on average older or younger. June 14. Saul.000. Submitted to IEEE Annals of the History of Computing: August 5. of Lawrence 16 Markoff. 2009 Released on the web: August 17. 17 Assessing Trends in the Electrical Efficiency of Computation over Time.
a pace of change in computational efficiency comparable to that from 1946 to the present. Marla Sanchez with Stanford University and.5 years. This will also make our estimates conservative. Stephen Berard from Microsoft. in 2009. More precise calculations would include the data in Figure 4. 86 . doubling every 1.75 0.5: Technology Birth Year factor While every server consumes a different amount of power we will use 400 watts as the average power consumption of a server in 2006.6.5 years then the same unit of performance would require 4x more power 3 years earlier in 2003 and ¼ the amount of power 3 years later. Under the above assumption that computations per server doubling every 1. The paper documents that computations per kWh grew about as fast as performance for desktop computers starting in 1981.25 2003 2004 2005 2006 2007 2008 2009 Figure 4. The paper explores the relationship between the performance of computers and the electricity needed to deliver that performance. Technology Birth Year 4 3 2 1 (Baseline) 0.5 0.SOFTWARE DEVELOPMENT CLOUD SERVICES Berkeley National Labs. Henry Wong from Intel Corporation.
2007.CLOUD Class Volume Mid-range High-end 2000 183 423 4874 2003 214 522 5815 2005 218 638 12682 Figure 4. Amazon was generous enough to donate $3. everybody paid attention.000 until now.amd. China. Nobody has been given 10.000 worth of compute and storage time. http://enterprise.000 computers for 30 minutes. I told the class about the donation and started by telling them $3.com/Downloads/svrpwrusecompletefinal.000 also buys you 10.pdf 87 . Estimating Total Power Consumption by Servers in the US and the World.000 computers for 30 minutes. but that’s precisely the point. California or Ireland for about 3 ½ years. February 2007.000 buys you a server in Virginia..6: Weighted average power (Watts) of top 6 servers. by sales18 Summary A couple of years ago I had the opportunity launch the first class on cloud computing at Tsinghua University in Beijing. As you might guess I was greeted with a big yawn. G.000 computers for 30 minutes for $3. But when I said $3. J. which a group of 18 Koomey.. So just like client-server computing began with low cost personal computers and low cost Unix servers. Of course it begs the question of what would you do with 10.
but instead about an explosion of new applications driven by a wider group of people. In those days many people said: “Unix isn’t reliable enough”. so it will be with. The move to client server was not about porting mainframe or AS/400 applications. reliable enough. We hear the same thing today – cloud computing is not secure enough. In fact these technologies were not superior to the established mainframe and minicomputer technologies. scalable enough. cloud computing. Will history repeat itself? 88 . “No one will run their business on Windows”. but there were economically differentiated.SOFTWARE DEVELOPMENT CLOUD SERVICES programmers found new uses for. “Oracle isn’t scalable or secure enough for enterprise computing”.
who is not an expert a working knowledge of the issues. but instead is meant to give everyone else. so it may be in the fight to win the cloud. This chapter is not written for the computer science major. tools and economics of software development. We’ll cover the fundamental parts of the software 89 .CLOUD 5 SOFTWARE DEVELOPMENT CLOUD SERVICES With the increased availability of compute and storage cloud services just as the battle for the desktop was won by winning the developer.
and managing them. how it is delivered will vary according to the software and its usage. Figure 5.SOFTWARE DEVELOPMENT CLOUD SERVICES development lifecycle and touch on some of the new horizontal and vertical platform cloud services which are providing software developers with a set of tools tuned for the world of cloud computing. We’ll see how new technologies are bridging the worlds of developing new applications. While all software can be delivered as a service from the cloud.1 Application Weight 90 . it’s worthwhile noting all applications are not created equal. One dimension in variation is what we’ll call the application weight. Application Spectrum Before we launch into discussing some of the key success factors. which heretofore have been highly separate disciplines.
although both are manufacturing processes. meaning the way each of us uses email is pretty much the same. An example of a heavyweight business process might be discrete or process manufacturing. manufacturing or financial applications deployed in the traditional model have resulted in upgrades occurring once every couple of years. No one has figured out how to make these as customizable as changing your Yahoo home page. The way Coca-Cola manufactures soda shares little in common with the process Chevron uses for refining petroleum. on the frequency of change. Email is a very lightweight business process. areas that Oracle and SAP have specialized in.CLOUD By weight we mean the complexity of the business process. The lighter weight business processes allow for a greater frequency of change. As a result. These processes are much more customized. At the other end of the spectrum is eBay makes changes 52 times a year. This is also true of eBay-style auctioning. Web conferencing and Internet search. often at great expense. 91 . The implications of application weight are many. At one end of the spectrum. first. it’s been the case that lightweight business processes have been earlier to move to Model Six or Seven.
like SAP Financial Applications. The closer you get to the consumer Internet. usually have very few users.2. figure out where in these maps you’re going to fit. and. the more dramatic the change in both the number of users and the frequency of use and therefore on the degree of specialization and focus for the application. As you think through your product offering. Figure 5. those users use the application infrequently. it will have many implications for your product and delivery options.SOFTWARE DEVELOPMENT CLOUD SERVICES Another evaluation you’ll need to make when positioning your offering is to map the number of users for your software against the frequency of use. furthermore. 92 . This usage spectrum is shown in Figure 5.2 Usage Spectrum Corporate applications.
In this approach. of the flexibility they have come to expect in an on-premise deployment. one should consider a multi-tenancy model. Of course. architected for traditional deployment. If you’re coming from the world of traditional enterprise software. because multiple tenants share the same database tables. The approach does not require rewriting or building new software and allows one to offer the service to the 100s or 1000s of businesses that have already bought the application. a given table can include records from multiple tenants stored in any order and a tenant ID column associates every record with the appropriate tenant. to be deployed as a service in the cloud and gives the customer some. you only architected for singletenancy. this approach may require additional development effort 93 . However. Adopting Model Four or Five allows software. if you have a lightweight business process. and you intend to write the application from scratch. The multi-tenancy approach allows you to serve the largest number of tenants per database server. but not all.CLOUD Multi-tenancy One area that is hotly debated is that of a single-tenancy versus multi-tenancy model.
vastly simplifies the development and management of the software. the multi-tenancy approach forces there to be one code line and. Furthermore each of these applications can be on a different revision level. how is that different than single tenancy? Bottom line. But just when you thought it was a black-and-white decision. let’s make it more confusing. This is often done to do A-B testing of new releases. don’t get embroiled in the religious war here—there are numerous tradeoffs to be made. if General Motors wanted one of those sites to run only GM auctions. Perhaps more important. and it has exponential advantages when you serve millions of users in a highly fluid environment. therefore. In the limit. this is only possible in areas where you have lightweight business processes. eBay has maintained one code line since they were founded. as well as a change management technique. depending on whether you’re starting with an existing application or building from scratch. Most of the multi-tenancy service providers run multiple sites. Of course.SOFTWARE DEVELOPMENT CLOUD SERVICES in the area of security to ensure that one tenant cannot access another’s data. whether you have a lightweight or heavyweight 94 .
000 for the car and the need for a McLaren mechanic. If something is standardized. ultimately. and finally the margins and pricing you’ll need to be successful in the market.3: dramatically reducing the cost and improving the quality of anything starts with standardization. lowest cost automobile. you can’t argue its low cost and high quality. Underlying this whole debate is a much more fundamental principal that’s illustrated in Figure 5. choose a Toyota. not a McLaren F1. So how does this apply to software? Figure 5. you can specialize. at $1. While the idea of a hand-built automobile with a production run of fewer than 100 cars certainly has exclusivity going for it.CLOUD business process. If you want the highest quality.000. Specialization leads to repetition and. computers are far better at repetition than people.3 Standardization 95 .
3.SOFTWARE DEVELOPMENT CLOUD SERVICES If we were to take a paintbrush and walk around to every computer that has deployed an SAP or Oracle enterprise application. and management processes should be an effort to move closer and closer to the left-hand side. databases. each running the same software. all of the states in between represent progressively greater degrees of standardization. we’d end up coloring each one differently. So if you look at Figure 5. originally published in June 1975. With greater degrees of standardization comes the ability to specialize. and ultimately automate the greatest cost you have—the human labor required to manage these systems. and middleware. Every choice you make in hardware architecture. Now. Over at the other end of the figure. think about eBay. each deployment would have a different change management process or disaster recovery process implemented by different groups of people. repeat. Software Development Lifecycle Few books on software engineering have been as influential as Fred Brooks' Mythical Man Month. Beyond that. every box on the right-hand side has a different color. as each installation would be on different server and disk architectures. software architecture. Much of the book was based on his experiences as 96 . Furthermore each would be deployed on a different software stack—different versions of operating systems. hardware and management processes. with three sites.
” Many in the software business can testify to their personal experiences that validate his comment. He furthermore estimated that any software project would use a 1/3rd of its scheduled time in requirements. you'd spend six months in requirements. Fred. Assuming a 24-month release cycle. and a 1/4th in system test time before it would be ready for release. and the last 12 months testing. 1/6th in coding. 97 . No inventions that will do for software productivity. the largest single software development project ever undertaken. reliability. IEEE Computer. at the time. April 1987. In the book. Brooks documented what came to be known as Brooks’ Law: “Adding Manpower to a late software project makes it later. and 19Brooks. He writes of flaws in the design and execution of the system and ultimately concludes that the project was late. the very nature of software makes it unlikely that there will be any. Brooks later published a landmark paper19 in which he wrote. and underperformed against expectations for the first several releases. again no real surprise to the old-timers. “Not only are there no silver bullets now in view.CLOUD the development manager of IBM's OS/360. three months writing code. No Silver Bullet: Essence and Accidents of Software Engineering. a 1/4th in unit test. well over budget. he recounts that the project could not be considered a success.
SOFTWARE DEVELOPMENT CLOUD SERVICES simplicity what electronics, transistors, and large-scale integration did for computer hardware. We cannot expect ever to see twofold gains every two years.” Throughout the past 30plus years, the industry has struggled to find a way to uncover Brooks’ elusive order-of-magnitude improvement in software productivity. Rapid prototyping, object-oriented programming, program verification, and Software Engineering’s Capability Maturity Model (CMM) all have been thought to be the “silver bullet,” but, unfortunately, each attempt has come up short. While building and deploying high quality software is certainly no easy task, as you will see in this chapter, the movement to delivery of software as a service is fundamentally changing the way software is designed, developed, and tested. Maybe this isn’t the silver bullet Dr. Brooks talks about, but you be the judge. Horizontal Platform Services Once you know the kind of application you want to build it remains to consider how you’ll build it – what your coding framework will be. As shown in Figure 5.4 you have three large choices: horizontal software, horizontal services, and vertical services.
Figure 5.4 Software Development Cloud Services
Horizontal software refers to a framework where you may use any of the software (open-source or traditional Model 1 software) on a compute and storage cloud service. In this model you can choose to use the database, middleware and languages of your choice. All of today’s application cloud service providers, who did not have horizontal or vertical platform services to choose from, use large amounts of horizontal software on compute and storage services they have had to manage. Which brings us to horizontal services. Horizontal platform services offer you less flexibility, but allow the cloud service provider to manage the platform software thereby reducing cost and complexity. Further restrictions in flexibility (e.g., definition of a particular database schema) result in more vertical platform 99
SOFTWARE DEVELOPMENT CLOUD SERVICES services in which you’ll further trade off flexibility, for greater productivity and lower cost assuming you’re application maps well to these vertical platform services. In order to understand the advantages of these platform services it’s useful to further understand the traditional application environment. Figure 5.5 shows the traditional silos between the group that writes the original application, the group, which has had to port and test it in multiple operating system and database environments and finally the operations management group which has to manage the application after it’s delivered.
Figure 5.5 Traditional Application Development & Deployment
What this new generation of platform services is attempting to do is to merge these worlds together since now the builder of
CLOUD the software is no different than the people who have to operate the software. As an example these platform services provide: Maintain a current level of the underlying software Automatically replace a failed server One-button click to replicate production application for testing and staging Automated change management – from code check in to production Add capacity when load thresholds trigger.
Engine Yard is a good example of providing horizontal platform services to the Ruby-on-Rails community. Google’s App Engine, while it has a number of programming model restrictions, does give you access to the highly scalability of Google’s compute and storage services. More importantly, versus a traditional LAMP stack deployment frees you from the operations management hassles like disk space management, security patch management and backup and recovery. Finally, Microsoft, who ruled the client-server programming model, has introduced Azure to provide an easy on ramp for the millions of Microsoft programmers around the world to build next generation application cloud services using many of their familiar tools. 101
which prompted a massive shift at Microsoft toward Internet-based technology.” Gates compares the push toward such services. dated Oct.” Windows Azure seeks to provide the Microsoft Visual Studio programmer with compute and storage services similar to those provided by Amazon as well as SQL and . “We have competitors who will seize on these approaches and challenge us—still. Then he wrote a now-famous memo. Ray Ozzie. “This coming 'services wave' will be very disruptive. to the changes he saw nearly a decade ago. First and foremost is Chief Software Architect. While Gates might have left day-to-day operational responsibilities. 2005. “The next sea change is upon us. in order to best formidable competitors.” Gates wrote.Net services with 102 . 30. In a recent interview Ozzie said. which range from online business software offerings to free Web-based email. founder and then Chairman of Microsoft urged company leaders to “act quickly and decisively” to move further into the field of offering software as services.SOFTWARE DEVELOPMENT CLOUD SERVICES Microsoft Azure Story In a widely publicized email to top executives. Bill Gates. “We’re going to look back at this era and wonder how we did without this other kind of computer in the cloud. there are key people to carry on his vision. the opportunity to lead is very clear. The Internet Tidal Wave.” Gates wrote.
or RAM or a number of CPUs. While with Google Apps they provide office applications in the cloud. specify how you want it to run in response to requests. As an example the SQL Azure service provides availability monitoring on five-minute intervals as well as updating lower level system software as required. App Engine’s goal is to provide a simpler alternative to the traditional LAMP stack.” Ultimately. By providing a more vertical (more constrained) offering the tradeoff will hopefully 103 . or anything like that. and then we run and serve it for you. we provide a way for you to package up your code. We don't run arbitrary compute jobs. App Engine is not a grid computing solution. Speaking at App Engine Campfire One in April 2008. App Engine is their first attempt to provide a platform for others to build cloud-based applications. Kevin Gibbs. We also don't give you a raw virtual machine. App Engine Tech Lead said. Instead. or machines. You don't reserve resources. “App Engine is different than a lot of other things out there.CLOUD integrated operations management. Google AppEngine Story In mid-2008 Google introduced App Engine. It's a fluid system that runs your code in response to load and demand.
The database is not SQL instead it is based on Bigtable. Toward that end an administration console is provided to give you access to the application. You can make use of numerous Python modules and libraries using any Web framework. but there also needs to be an operations environment. meaning it can support arbitrary new properties or columns. While there are some early applications being demonstrated. it is still early days. the system used for Google. not only does there need to be a programming environment. Bigtable is schema-less.SOFTWARE DEVELOPMENT CLOUD SERVICES be greater productivity at the expense of flexibility. distributed system that can span tens of thousands of hard disks on thousands of machines. Unlike SQL. If you want flexibility you can always go buy your own computers. which can be created as you code.com. Bigtable is a fault-tolerant. since they are typically a source of performance problems in a distributed system. As we know. 104 . One feature you won’t find is joins. making all of them appear to be a single storage table. It is designed to move data around and restructure the system automatically to account for hotspots and increased storage. App Engine starts by writing server side code in Python.
Salesforce.com Story In traditional business software.com’s force.com has led the way in turning their platform into a service others can use. Salesforce with force. but also a marketplace (AppExchange) to encourage new CRM applications.CLOUD Vertical Platform Services Further down the spectrum of decreasing programming model flexibility for increased productivity and decreasing cost to manage are the vertical platform services. Salesforce. Good examples of vertical services include Netsuite’s NSBOS. Vertical platform services assume you are building a specialized usage of the wider platform provided by the vertical platform cloud service.com seeks to provide not only the technology. This typically means you’re leveraging at least the data model and hopefully some of the higher level abstractions provided by that data model. Finally with so many users of Facebook. by opening up the platform (most notably Facebook Connect) can leverage a wider development community to extend their services far faster than they can with their captive R&D group.com and Facebook’s platform. Salesforce. 105 . Netsuite seeks to allow application builders who want to specialize their ERP oriented platform for more specific markets.
similar to HTML. A year after the introduction of Apex. ironically almost at the same time that Oracle acquired Siebel. You can use this language to create triggers. Apex provides Force.com 106 . was the creation of the Apex programming language ultimately leading to a complete platform for building application cloud services.com platform added Visualforce.com platform with a procedural language so that users can go beyond declarative programming to write code where needed. the objective was to enable customers and partners to customize the Salesforce. according to Phil. writes that two events changed Salesforce. Force. Apex can also create classes. who blogs about SaaS for ZD Net. Phil Wainewright. which required transactional integrity. The result. enabling productive code reuse and standardization.com’s approach. Underlying the Force.SOFTWARE DEVELOPMENT CLOUD SERVICES AppExchange was launched in late 2005.com application and extend it. The other key event was that developers began to build applications that were not the conventional formsbased apps. There was no firm plan to extend the core application platform beyond its formsdriven database model. The Visualforce framework includes a tag-based markup language. The first was an attempt to use the platform to write a quote application. which fire when any user performs certain data operations. which can be called from other classes and triggers. Visualforce is a framework to build custom user interfaces. At the time.
primary keys and defining relationships in terms of these keys. it's an object query language that uses relationships. “This is 107 . the database deals in terms of relationship fields. Salesforce Object Query Language (SOQL) is a queryonly language. Of course.com database differs from relational databases in the way record relationships are implemented. Bob Morrell founded Riskonnect in July 2007. Two interesting case studies are Riskonnect and Stakeware. for a more intuitive navigation of data. The Force. helps people visualize and understand risk at very high levels. which he started in 1994. While similar to SQL in some ways. The Force. not joins.com platform supports two query languages: Salesforce Object Search Language (SOSL) is a language for searching all across all persisted objects. as well as optionally providing user interface representations in both the parent and child records. Instead of developers’ having to deal with keys. foreign keys.CLOUD platform is a multi-tenant database. A relationship field stores the ID of the parent record in a relationship. launched in 2008. the real test is the types of applications that can be built and delivered using the salesforce.com cloud. Riskonnect’s software. He’s had a long history in risk management software beginning with Risk Laboratory.
and Shell Oil. how would other factories and the supply chains respond. The Mexican Government. The software also includes the ability to monitor and analyze emissions to help provide appropriate trade-offs when lowering the carbon footprint as well as the management of sustainability policies across supply-chain. Natan Zaidenweber founded StakeWare.com application. in 2004. organize. Riskonnect allows users to drag and drop information to compare risks visually. lecturer. Zaidenweber has over 15 years of experience in sustainability as a researcher. identify key issues and related indicators that are relevant and material to include in the standard G3 sustainability report. another force. An example would be if one factory goes down. StakeWare enables corporations to gather. Each of these examples is just further proof of what Marc Benioff said: "Software developers from a developing country can build just as great an application on our platform as somebody who lives in Palo Alto. and manager working in projects for The World Bank.” 108 . and analyze stakeholder data. But many people don’t need that.SOFTWARE DEVELOPMENT CLOUD SERVICES essential because too many consultants only use complicated calculations.” Morrell said.
Dave Morin. with their true identity. twittered the number was now 175 million. who runs the application platform team. it’ll be difficult to pretend you’re Angelina or Brad. Share information and actions on the application with their Facebook friends. Their most recent effort has been to bring the power of Facebook to other applications by providing the ability to: Connect any existing Facebook account and information with any application.CLOUD Facebook Story In February 2009. That kind of growth and scale can in part be attributed to Facebook opening up its platform and providing a full suite of APIs—including a network protocol. a database query language. a little more than a month after announcing it had 150 million active Facebookers. nor are incented to represent themselves. Connect and find friends who also use the application. and a text markup language—that allow applications to integrate tightly with the Facebook user experience. Of course not only are basic profile 109 . This is a particularly valuable service since in the cloud many people will not represent. How many times have you signed up for a site or a newsletter with fake identity? On the other hand it’s difficult to have a fake Facebook identity. after all unless you have no friends.
000 per day.SOFTWARE DEVELOPMENT CLOUD SERVICES information available but also the profile picture. iLike announced they had passed three million and were growing at a rate of 300. With access to the social graph. As an individual moves around the Web. In less than a year. if a person changes their profile picture. A case in point is the story of iLike.000 people. this is automatically updated in the application. or removes a friend connection. 110 . events. VLane. groups. their privacy settings will follow them. an application can dynamically show which Facebook friends already have accounts on the application. ensuring that users' information and privacy rules are always up to date. Citysearch. and Howcast.000 people joined in the first 12 hours. For example. a successful application on Facebook can grow to millions of people in a short time. If you’re interested in seeing early examples of applications using the Facebook platform take a look at TechCrunch. and more. photos. When iLike launched 10. friends. the individual can control who can see what pieces of their information—the same rules that they set on Facebook can be applied through your application. In addition. Now if we all were so lucky. With such a large population of people on Facebook. By the end of the first day they had 50.
a mechanism to distribute applications. The NSBOS APIs. we can now economically reach the Fortune 5. NetSuite opened its architecture to partners and outside developers to further its reach through its NetSuite Business Operating System (NSBOS).CLOUD NetSuite Story In 2005. and the NetSuite application itself.000". To use Zach Nelson’s words: “By using the cloud.000. Developers can create custom forms to give users access to specific fields. The resulting specialized application and data reside inside the NetSuite platform and share database and server resources within the core solution. NSBOS targets building out the core NetSuite offering with additional specialized functionality beyond the services delivered by the core application. This tight integration enables the platform and applications to remain in sync as the underlying NetSuite application is upgraded. As a more vertically focused cloud service. a public cloud development environment that includes a set of Application Program Interfaces (APIs). give application developers data storage flexibility. called SuiteFlex. and create completely new custom record types for objects unique to a 111 .
or using one line of code 113 . from inventory to shipping and invoicing. Whether that’s a standardized delivery model in Model Four or Five.CLOUD chose to build on NetSuite. a leader in electronic data interchange (EDI) supply chain developed a specialized application that allows smaller suppliers to tap into their network of over 1. By adopting the vertical application cloud service they could quickly and inexpensively manage their entire trading relationships. SPS Commerce.300 retailers. moving to the model reduces the number of variations and creates greater standardization. benefited. Circle of Friends and Mad Croc. both small CPG manufacturers. they built a multi-plant MRP application. Testing As Fred Brooks noted. With NetSuite providing the underlying cloud services. thereby allowing a small supplier to quickly and inexpensively meet the complex EDI requirements. Neither could afford traditional ERP and EDI applications and the IT resources necessary to keep them running. But without an EDI solution they were limited in which retailers they could work with. in just nine months. So how does moving to an on-demand model change anything as regards testing and QA? First of all. most of software development time and cost involves testing.
reducing the degree of freedom reduces the number of overall tests that have to be developed and executed. instead of trying to create and manage tests for this application release (and the three previous releases) and insure that they work on Oracle. Think about that. IBM or Sun hardware. you can use the actual customer systems to develop real-world tests. For instance. The tests are more representative and come at a much lower cost. that 114 . So. Rather than employ an army of test developers in your engineering organization. and one hardware platform.SOFTWARE DEVELOPMENT CLOUD SERVICES when you move to Models Six or Seven. Collapsing the supply chain between the customer and the producers of the software has even further economic benefits. if you introduce a bug into production. rather than wonder whether an upgrade will work. “For Concur. one database. the QA team can limit their focus to one line of code (hopefully). But there are also major new responsibilities and issues. Now. Concur co-founder Michael Hilton said. you’ll know. the model lets you begin to leverage tests of specific customer configurations and execute those tests very early in the development cycle. since the application will have already been tested in the development labs. Furthermore. IBM and MySQL databases on HP. 100 percent of your customers experience that bug immediately.
” Of course.” 115 . meaning that. And you end up releasing more often. Lots of things end up being optional. “This fundamentally changes how you develop. But there’s a flip side as well—you can fix the issue and 100 percent of your customers have that issue resolved—no more waiting for the slow trickle of customers to download and install the patch. the testing/QA function will need to re-engineer for the new reality of a release a week or a release a month. not a release every 24 months. customers don’t have to deal with it right away if they don’t want to. every month. our users are getting new innovations and benefits without having to do anything. That means that. Again.CLOUD means over six thousand companies and over four million end users are affected by any defect. we do meaningful functional updates to our service every single month. if the feature is big enough. At Concur.” It has fundamental impacts on how you think about quality assurance. ease of use and change management. You end up releasing things in smaller chunks. just as we will see in the next chapter on operations. so users can easily digest them. as Hilton points out. It forces you to care a lot more about the user experience.
In 2000. Some engineers would try to be PC (politically correct) and say. As Oracle On Demand was blessed with a natural channel to medium and large-scale businesses.” Or others would say. today Senior VP of R&D at Risk Management Solutions. we support configurations. architected an innovative approach while at Oracle that changed the argument from techno-babble to a business decision. “We don’t allow for customization. Localization and Integration. While this subject is almost nonexistent from a consumer perspective. Extension. and described 17 classes of reason why 116 . any conversation with corporate IT will inevitably lead to the discussion of how to customize the application. Modification.” The conversation was confusing. “You can have any color you want as long as it’s black. we allow for configuration.SOFTWARE DEVELOPMENT CLOUD SERVICES Customization One of the major objections to the SaaS/application cloud service model has been the belief that there is no ability to customize. it remained challenged on how to address this question.” was the famous Henry Ford quote often used by people describing early offerings. CEMLI stood for Configuration. Marian defined the CEMLI framework. “We don’t support extensions. Marian Szefler.
You should take away a few ideas from this.6 lists the 17 classes and is. and discussed by both the customer and Oracle—the framework eliminated the politically correct dialogue that preceded it. not all CEMLIs were created equal. “CEMLIs” could be counted. unique to Oracle applications.CLOUD someone other than Oracle R&D might need to add software to an Oracle application. of course. Figure 5.6 CEMLI Framework The framework shown in Figure 5. Adding a new report was far less invasive than adding a 117 . one could have a precise conversation. Second. First. for the first time. by creating these classes. grouped.
By isolating CEMLIs and separately pricing the management of these. former CIO of Unocal. There were cases at Oracle where the cost to manage the CEMLIs was larger than managing the entire Oracle application.SOFTWARE DEVELOPMENT CLOUD SERVICES trigger. The classes were ranked by how “toxic” they were. The cost for servicing the “one” is many more times than the cost of servicing the “many. Fred Magner. where standard products. are far lower cost (and higher reliability) than custom crafted cars like a McLaren F1. So now the CIO could ask the business. the CEMLI framework created an environment where the degree of customization became a business decision. something you want to avoid at all costs. for what degree of uniqueness. you were coming closer and closer to making fundamental modifications to the software. the customer could choose how much they wanted to spend. or can we use the standard product and save money?” This is no different than in the real world. used the cost to manage CEMLIs to move the number of CEMLIs down from 1500 to 300 over the period of 18 months. Finally. meaning the likelihood that a mistake in this class would cause data corruption or a down system. “Do you want to spend X for the uniqueness. not a technical or religious one.” 118 . as you got to higher degrees of “toxicity”. The model created a framework for the business to justify why the particular CEMLI was worth the extra expense. In fact. like Toyota Corollas. for example.
He said. “This approach did result in us having to pass on some very large opportunities in our formative years when prospects insisted on a customized approach. a lot of times the teams that write customizations (typically consultants in the field) are completely separate from the core R&D teams. our approach has been validated. When you think about traditional enterprise software companies. Taleo has addressed the customization challenge by creating a single line of code for all customers while baking in the ability for customers to do extreme configurations. Taleo CEO Michael Gregoire said. “It’s just part of our development model. Concur created a model that allows them to easily move customizations into core code. Both teams need to be working in the same organization. However. This approach provides customers the ability to avoid the customization version lock trap while still enabling customers to meet their unique business requirements.” Concur’s Michael Hilton sees the investment in architecting a solution as one reason traditional R&D and consulting are now connected. In our model.CLOUD Anyone in enterprise software has faced these challenges. that doesn’t work. years later. when some of these very same prospects have returned to look at Taleo to replace those same customized solutions purchased earlier from other vendors. 119 .
First. Amazon.” Traditional vs. so that everything scales. He speaks from an excellent vantage point. what features aren’t. having spent eight years with Oracle. as Founder. at the same time. They can use data to determine what 120 . and works together seamlessly. Cloud Development But.SOFTWARE DEVELOPMENT CLOUD SERVICES utilizing the same tools and processes. Chairman.com takes special advantage of designing an operational environment that allows them to experiment with new features and. What’s more. compare with the old system. while still operating in our multi-tenant environment. Our large clients can have their unique needs meet. Goldberg pointed out there are numerous product design benefits to Model Six. Perhaps no one is better qualified to talk about the differences between the traditional development and development in Model Six than Evan Goldberg. but the benefits are extraordinary. there is no “middleman” between the producer of the software and the consumer. it is much easier to talk to the customers. you can tell what features are being used. followed by ten years with NetSuite. and CTO. migrates. As you’re delivering the service. let’s get back to R&D. In a lecture at Stanford University. At Concur. we built out a fairly complex architecture to deal with customizations. It took us a couple of years to really get it right. since the software can be instrumented.
“Kill Bugs Dead!” There is instant gratification to solving complex problems. The 121 . where it may be months before a particular patch can make it into a production system. as a designer. the engineering staff doesn’t need to spend a lot of time on simplifying installation. software engineers can put all of their energies into that release. Goldberg said. delivering software as a cloud service allows for testing through actual customer usage. As we’ve already pointed out. With an ability to focus on single version. you can build on top of previous innovations rather than worry about which customer has which features. The ability to monitor real-time performance and develop and inventory tests based on actual usage are significant advantages over the traditional model. Finally. And. given that installation is occurring on the companies’ computers. versus the traditional model. “they were never good at. versus working on back porting to multiple releases on multiple platforms.” The last group Goldberg addressed in his Stanford lecture was the QA organization. because there can be universal adoption of innovations.CLOUD features to keep and what to retire. as Goldberg put it. something. The immediate feedback loop afforded by the model allows the software engineers to.
Whether it’s database architecture. Summary We’ve attempted to highlight some of the more important differences between traditional software development and the new world of developing software for cloud deployment.SOFTWARE DEVELOPMENT CLOUD SERVICES challenge that QA shares with the other disciplines is that each release of software is happening much more quickly. how you architect for customization. worrying about the operations of your software was a distant issue. But in any of Models Four through Seven. There was always the support organization and the customers own operational people that stood between you and any issue.” He noted that. it’s a new world. we can’t depend solely on human power so all aspects of engineering are going to have to automate. that idea is a distant memory. the average has been over three releases per year. In the case of NetSuite. Goldberg ended his comments by putting up a slide that said: “Operations: Welcome to the New World. for a VP of R&D in a traditional software company. With such a rapid rate of change. 122 . or how you’re going to have to re-think testing and software release.
“As the VP of R&D. perhaps most importantly.CLOUD In our next chapter. we’ll spend time on the key success factors in the management and operations of software.” 123 . change and. As Evan says. performance. you’re going to need to understand how to manage the security. problems. the availability of your software.
vice president for Oracle. an application cloud service provider manages hundreds of systems and therefore has to repeat numerous processes multiple times. a student recites multiplication tables to learn to multiply. Today.6 OPERATIONS MANAGEMENT CLOUD SERVICES Repeat after me. This is true for all human endeavors. the key to excellence in anything is specialization and repetition. This is no different in the world of managing software applications. Don Haig. cites an example of where this repetition ultimately 124 . and a great surgeon performs hundreds of surgeries to master her craft. Swimmers swim thousands of laps to perfect a stroke.
CIOs really don't like to do updates. upgrades have been repeated hundreds of times per year.” Upon hearing this example. an event that most organizations have to manage with some frequency and yet is an annoying distraction from their core business. In Oracle On Demand. When a customer is managing their own systems. But recent work adds more detail. TRICARE Military Health Services. but in most IT departments today. can often separate the talented from the average: How often do you do this? Research has established that busy hospitals generally deliver better care. they will do this upgrade once and only once. but understand they need to stay current on the latest release of a vendor's software. CIO.CLOUD helped his customers. the research shows. Navy Captain Brian Kelly. Consider the following research in the medical profession in light of the complexities of managing IT infrastructure. who was trained as a neurosurgeon. citing the 125 . A simple question posed to surgeons.” Yes. We have an expression in my business—‘You don't want to be the first guy to get your cabbage worked on’. the users of Oracle applications. “You don't need to explain this further. said. “Take software updates. complex surgeries are done for the first time by people who read the book the night before.
OPERATIONS MANAGEMENT CLOUD SERVICES specific risks patients face in the hands of low-volume surgeons. they don't know how to react. “Then. Dr. “It is now a very legitimate question to ask a surgeon: How much experience with a procedure do you have? What are your complication rates?” Tufts Medical Center's surgeon-in-chief. “The more often I do a procedure. ”It’s something every surgeon should keep track of and show patients if requested. who don't frequently and regularly perform certain procedures. the profession sees constant repetition as key to mastering complex surgeries. if I encounter something out of the ordinary. I'm quicker to recognize it and correct it.” said Mackey. But increasingly. a delicate procedure to clear a key artery of blockages. the more I fall into a standard routine. Since it may be the first time they've seen the issue.” Do we ask the same of our operations staff? How many times have the operations staff upgraded from Release 1 to Release 2? Some surgeons are convinced that measuring patient volume alone is too crude a measure for grading surgeons. William Mackey said.” Many studies of recovery from computer outages show the outage is often extended because the operator has seen something out of the ordinary. a vascular surgeon who performs frequent carotid endarterectomies. 126 .
So. after “Where do I get a beer?” was likely. Litwin. If we know the performance management process. network. authored a study where high volume meant 40 or more procedures annually. a University of California at Los Angeles urology professor. each with a different answer to the question. since scoring was left to whoever said they remembered 127 . the first question. then why not program computers to automate the process? To better understand what it means to automate key processes consider a simpler problem. rest assured. How many times a week have they performed a particular procedure? Is the procedure even written down? Can it be repeated? The good news is that if a process can be repeated 100s of times it can be automated. and database and application operations teams.CLOUD So what’s a high degree of repetition? Dr. Mark S. “Who’s going to keep score? Who knows how to score?” You can be certain the same conversation was occurring in all ten bowling lanes. Consider a corporation's system. while all ten lanes were bowling. And computers are far better and lower cost than people. and we’ve repeated it a hundred times. did a score of 200 on Lane 1 compare to a 180 on Lane 2? It was anyone’s guess. or the upgrade process. If you went bowling ten years ago.
availability. From an R&D point of view. Ten years later.OPERATIONS MANAGEMENT CLOUD SERVICES how. Consistency and standardization are being enforced through automation. but you can make sure that the scoring process is being implemented consistently. they get to receive the benefit of new R&D. You can be guaranteed that a score of 200 in Lane 2 and a score of 180 in Lane 3 are scored identically. and the computers score and tell you whether you get to bowl again. or VP of R&D will need to focus on. 128 . Change Management One of the advantages of Models Four through Seven is the increased simplicity of moving customers forward to the latest release. performance. Now. And from the customer’s point of view. and problem and change management the VP of Operations. It might not improve your bowling. this is good. In the remainder of this chapter. you enter your name. since your developers can focus on one code thread versus being forced to pay attention to multiple threads and platforms. we’ll go through some key processes in security. the story is quite different. versus putting it on the shelf and avoiding the upgrade at all cost. or play Wii Bowling. if you go into a high-tech bowling alley.
20ERP II: best practices for successfully implementing an ERP upgrade. W. Standardize the frequency of change 3. Communications of the ACM.P. Instrument the environment. Factors that range from weak project leadership to minimal employee product training have resulted in many ERP projects being delivered late and over budget.J. according to AMR Research. 21Peterson. Architect the software for change (roll-in & roll-back) 4. Gelman. and Cooke. ERP Trends. 2006. D. L. Number 3. with costs that were on average 25 percent over their original budgeted amount21.. The Conference Board Report. pages 105-109. Limit the locus of change 2.CLOUD We should also note that upgrades or changes to enterprise business software have always been an expensive and difficult proposition. The cost of a typical ERP implementation in a Fortune 500 company was estimated as between $40M and $240M. Consider these four fundamental principles when designing a change management process: 1. Volume 49. Two Northern Illinois professors documented20 the cost and challenges of upgrading Enterprise Resource Planning (ERP) applications. 129 .. Change management for applications. 2001. platform and system software sits at the nexus of the cost and reliability of delivering applications as a cloud service – there may be no more important process.
usability testing. instead componentize the application so you can deploy on lots of little boxes. user interface design. then Lynn Reedy is a master traffic engineer. Reedy has some good counsel for anyone building software that is delivered on demand. don’t engineer for one big box. architecture and release management. First. she says to insure a high availability application. product specification. Development and Architecture at eBay.OPERATIONS MANAGEMENT CLOUD SERVICES And for the key process From-Software–Change-InitiatedUntil-Completed measure the duration in minutes. As you are able to improve the predictability and improve the speed you’ll not only reduce cost. A pool is a set of computers dedicated to a particular function. but also increase the reliability. Furthermore. As the Senior VP of Product. eBay Story If information moves along an information superhighway. Reedy led the group that was responsible for all of the initiatives that pertained to the company’s work in software development. eBay architected a system that was based on the idea that 100 percent of the code base was sent to all of the pools of resources. make sure you’re not dependent on one large database but find a way to segment and componentize. 130 .
131 . pick up the changes every two or three weeks. eBay architected the system for change. there is a “sell your item” pool and a “My eBay” pool. The pooling architecture allowed change to be made gradually. when you make a change. when software development was done for a new feature. it could also be rolled back. Software needed to be both forward and backward compatible.000 regression tests. Even within a pool. with new software headed out on the next train. eBay architected the software so that code could not only be added. all database changes resulted in fields being added. then 25 percent of the pool and finally 100 percent of the pool. QA tested the feature for two weeks. thereby. With the eBay Train approach. you need to do this while maintaining availability of the service. As a result. This put the impetus on the new development to resolve problems or conflicts with features coming from other organizations. the new threads were forced to merge and. As a result. And remember. eBay’s change management process. referred to as the eBay train. a new feature would be added to one box. the feature was subject to a battery of over 100. For large projects. the feature was released to QA. Once it was scheduled for a train (along with other features).CLOUD For example.
Instead. eBay runs 132 . eBay personnel took weeks to understand why a component “threw an exception. As a result.” Exceptions could be in the code. At the top of the list was the central application logging (CAL) facility. Any exception within the system would show up as an error on the CAL graphical user interface (GUI). tornadoes. network. even in the event of earthquakes. if the systems and processes could handle the failover. Some people have deployed fail-over sites that run “dark” and wonder. or hurricanes is a day-one requirement. and with an average of 15 features per train. With over 200 features being worked on at any one time. As a result eBay maintains at least three data centers in the United States. Running a system that requires 7x24x365 availability. CAL is both software and an engineering practice to fully instrument the application. just depending on the quality of people and process for high productivity and reliability would not be enough.OPERATIONS MANAGEMENT CLOUD SERVICES eBay knew that. These components would be seen as a “red pool. resolution took minutes. or data layer. eBay’s second major investment was in automated rollout and rollback. eBay’s usage of automated rollout and rollback were critical.” With CAL. Before CAL. in the event of a failure. the company invested in numerous pieces of infrastructure software.
atis. right metrics. Recently the standard has been raised to both report on outages affecting 22 http://www. 1992.S. the FCC required telephone service providers to begin reporting outages of 30 minutes or more. Making this as obvious to the operations team as earnings per share was to the business unit led to a standard of excellence—few can argue with Reedy’s success. repeatable process that everyone can do over and over again—what works for surgeons should work for IT. not fail.org/nrsc/quarterlyrpt. and right metrics. And finally. On April 6.CLOUD every site hot and limits each site to no more than two-thirds of the overall traffic. which potentially affected 50. Right culture means a culture of people who find a way to “take the hill.” who think of ways to succeed. available system in the world to be the U. Metrics tell you where you are and where you want to be.asp 133 . We often refer to “Dial-tone” reliability to describe the highest level of availability. Availability Management Most people consider the most reliable. Reedy offers three things that every VP of Operations and R&D should focus on: right culture. right processes. telephone system. Right process means having a daily.000 customers22.
These are the summary statistics. The results may surprise you. nuclear power plants. 911. For the past 10 years the data has been collected.000 customers as well as to report on any outages affecting major airports. Figure 6.OPERATIONS MANAGEMENT CLOUD SERVICES 30. major military installations and key government facilities.1 Outage Profile These outages were caused by everything from Heisenbugs to human error to heavy rain. In Jim Gray’s landmark paper23 he 134 . regardless of the number of customers/lines affected.
pdf 24 Why do Internet services fail. which operator/human error being the majority. for example. and what can be done about it? Tandem Technical Report TR-85. (2) operator error was the largest contributor to time to repair in two of the three services. http://roc. EECS Computer Science Division.CLOUD analyzed a set of Tandem NonStop systems and determined that the reasons why systems stopped fell into four large categories.hpl.berkeley. operator salaries are now often the biggest expense in running complex Internet sites. The experience in the field leads to forming a handful of fundamental principles in availability management: Why do computers stop. Berkeley.7. and what can be done about it? David Oppenheimer. Archana Ganapathi.com/techreports/tandem/TR-85. University of California at Berkeley.pdf 23 135 .cs. Operators may face such difficulties because computer designers and programmers have frequently sacrificed ease of use in the quest for better performance. Patterson. it was observed that (1) operator error was the leading cause of failure in two of the three services studied.hp.7 www. and (3) configuration errors were the largest category of operator errors. because hardware and software have grown cheaper over time. CA. Ironically. can require a full-time staff of trained administrators to manage it. In a more recent study24 of more than 500 component failures and dozens of uservisible failures in three large-scale Internet services. and David A.edu/papers/usits03. Database software.
so operators can correct their mistakes. Furthermore as the recovery time is made predictable and reduced not only will you have happier customers. Performance and availability management are related. transaction flows. so design systems that recover quickly. 2. searches. Instrument to pinpoint the sources of faults 3.OPERATIONS MANAGEMENT CLOUD SERVICES 1. 4. Performance Management Your customers expect you to provide them with application access at an acceptable level of performance. but the cost of providing high reliability will go down. If you expect that result in 2 seconds and it takes 200 seconds does it really matter if the application is slow or down. Develop a high speed. Build systems that support an “undo” function. Performance management starts with the difficult task of workload characterization. predictable recovery process: problems are going to happen. Standardize the key management processes and take operations people out of the loop In the end the key availability management process is FromThe-Time-The-Failure-Is-Detected-Until-The-Time-The Application-Is-Live is perhaps the most important process. etc. which characterize that application. Once identified these 136 . Every application has some key queries.
we’re going to highlight a couple of 137 . While a discussion about securing online applications could take the remainder of the book. Perhaps the most famous one you see every day is in the upper right hand corner of every Google Query. A good example of a company providing a performance management cloud service is Keynote. perhaps more important. Now detecting a slow application is an exercise in profiling the performance of the application and then seeing when the application is performing outside of those norms. For many. Security Management Before enterprises can reap the benefits of on-demand software.CLOUD workload characteristics can be monitored. providers will have to convince IT managers and CIOs that the services they offer are reliable and. Of course once there is evidence of a slow application then we’re back to using the change management processes we discussed earlier in the chapter. secure. the push to put information in the cloud raises the specter of information breaches. They provide a service to monitor the performance of your web application from points around the globe.
Encryption also solves problems of protection 138 . At the core of all security management is auditing.g. retention durations and evidence of tamper proofing.. on a tape. network) encryption becomes the service of choice.OPERATIONS MANAGEMENT CLOUD SERVICES specific areas you’ll need to think about to insure the applications are secure. Authorization mechanisms ensure authentication individuals have access to authorized data per a security policy. When physical data protection offered by the co-location facility is not possible (e. Whether thru simple password management. Access Control & Identity Management. Audit considerations include the process to access audit logs. removable disk. The simpler the definition of the security policy and the clear evidence that it is implemented insure the highest degree of trust. Audit. Encryption. all the way up to two-factor authentication with retinal eye scan all security mechanisms begin with knowing who you are – authentically. Authentication.
vice president at the 200-person company. has been using Salesforce. 70 (SAS 70). Care Rehab Story “For Care Rehab.CLOUD when data leaves one application domain and enters another (e. Due diligence therefore requires that you not only request an SAS 70 report from a prospective provider.g.” said Ed Barrett. security was an important consideration when the company was evaluating Salesforce. In the security management area there are numerous compliance standards. without offering any judgment as to whether they are satisfactory. The company. and so on. A SAS 70 audit is performed by an independent auditor and results in a SAS 70 report.com’s software to monitor the activities of its salespeople and to track its entire inventory.com. One of the most recognized commercial standards is the Statement on Auditing Standards No. One should be mindful that a SAS 70 report only documents the internal control practices of an organization.. but that you examine it thoroughly to determine whether the provider is able to comply with your own internal standards for privacy. which makes traction and electrotherapy devices used by physical therapy clinics. a medical device manufacturer. PIN encryption). data security. as devices are 139 .
you have to have the best people in security and the best redundancies. I'm sure we aren’t the world’s best security people.” Mexico Story We’ll end this section with one personal story.” said Barrett.com. In that situation. “Tell me about your security. Texas. He said. “If you’re Salesforce. [We] need to have the best salespeople.com staff members showing Care Rehab how they secured the data that was stored on their servers and reading documents describing Salesforce. one of the largest banks in Singapore. I spoke for about ten minutes and then asked him if he had any questions.com’s security practices. went through all the security features from the data center. presumably in Mexico City.” I. through encrypted VPNs.com’s security practices before agreeing to use the software. But I ended my answer by sharing a conversation I’d had the previous week with the CIO of OCBC Bank. mid-way into my explaining the 140 . through SAS 70 Level II audits. That audit included Salesforce. A few years ago. I had the opportunity to speak with the Secretary of Treasury of Mexico. “Their security is superior to what we provide for ourselves.OPERATIONS MANAGEMENT CLOUD SERVICES prescribed by doctors and dispensed to patients. Care Rehab audited Salesforce. I made a point to tell the Secretary we could implement the Oracle On Demand model either in an Oracle data center in Austin. of course. In my introductory remarks. or a data center of his choice.
Security Threats from Within. since security professionals agree that most IT-related attacks arise within the organization.com.” I. 25Bruck. “I want you to take my HR and Payroll data. of course. 2007. 2007. Press release. “I know my DBAs can see their salaries. May 30. Bruck’s estimate is consistent with a survey26 of more than 200 IT professionals. June 28. Entrepreneur. About one-fourth reported knowledge of former employees who retained access to sensitive networks long after their termination. According to security professional Michael Bruck25. Cyber-Ark Software Inc. but what would it mean to them?” It’s a perfect story to end with. Reveals Scandal of Snooping IT Staff. four-fifths of all IT-related attacks arise within the organization. but asked him why was he so adamant. 26Survey Michael. He replied. their bosses’ salaries and their bosses’ bosses’ salaries. with one-third stating a belief that they could do likewise with little risk of detection. 141 . which found one-third of them admitting to abusing their administrative access privileges to examine sensitive data unrelated to their job functions.CLOUD breadth of on demand services the CIO said. said yes. I know your folks can see the same information.
OPERATIONS MANAGEMENT CLOUD SERVICES Customer Service While many think of customer service management as defect management.000 terabytes) 142 . or somewhere on the order of 25-50 terabytes of information. known information. nine-nine point nine percent (99. So if you’ve ever been on hold with a call center. with any software that has a reasonable degree of maturity. But this surface Web of less than 100 terabytes pales in comparison to the deep Web of information contained in every business. The analysis was quite the opposite. the challenge of customer service management is not around defects—it’s around delivering information.9 percent) could be answered by knowledge in a library. existing patches that were contained in a patch distribution system or in people’s heads—in short. Just to drive the point home in 2004. Yahoo and others have indexed) is thought to contain ten billion pages. Oracle’s Support group received one hundred million requests for service. most people would think one hundred million requests would be for software patches to fix defects. personal to you.1 percent) of the requests actually resulted in any new software fixes. in a post-Google era haven’t you wondered why was the information so difficult to find? Search-based Applications Today's surface Web (which Google. Just one-tenth of one percent (0.030 petabytes (a petabyte is 1. How deep is it? Consider that 1. Now.
Sales. the challenge is finding the relevant information.000 times the size of the surface Web. So why the gap? Perhaps the answer lies in tracing the history of SQL. While seeing or indexing the information is one thing. have both focused on the challenges of enterprise search.CLOUD of hard disk capacity was shipped in the fourth quarter of 2006. enterprise search in 2009 is today probably only a $500M business. The simple math says the deep Web is. Google launched their Enterprise Appliance in 2002 and. Independent companies like Fast. every year since. has produced a major new release. which today probably exceeds $10B annually. 10. and Autonomy. document management systems. Oracle was the most successful at commercializing SQL and by 1987 was generating 143 . at a minimum. and manufacturing information are all locked up in relational databases. This is small when compared to the SQL database business.000 sites around the world. The opportunity to mine this deep Web has not been lost on numerous companies. While these efforts have all been successful. HR. and file systems all around the world. the second highest valued European software company after SAP. purchasing. which was acquired by Microsoft for over $1B. Today they are deployed in over 9. support.
” according to Manber. Search can be so much more if you think of it as a technology platform. SAP. throwing them on the floor and using a search bar to try and read them. Peoplesoft. we need to understand what it means to have search-based applications. But relational database technology has no intrinsic business value (it’s just cool technology) and it wasn’t until the advent of enterprise SQL-based applications like Remedy. Siebel. and trying to read a book through a search bar makes little sense. John Lervick. said “Google has been good and bad for search.OPERATIONS MANAGEMENT CLOUD SERVICES $100M a year. So if the pattern is to repeat itself. Chief Algorithms Officer at Amazon. Good because they made search important.com. The term knol means a “unit of 144 . Knol pages are “meant to be the first thing someone who searches for this topic for the first time will want to read.” So what might these search-based applications look like? Udi Manber. who has been Chief Scientist at Yahoo. and was lured away a few years ago to be VP of Engineering at Google. who founded FAST. once described the Internet in a very interesting way. he’s basically right. and many more to make the technology useful to business. He said searching the Internet is like taking all the books out of the Library of Congress. ripping all of the pages out. He recently unveiled a project called Knol. If you think about it. bad because they’ve made everyone think it’s a search bar.
Finally.9 percent of all of their service requests were met with known information. 145 . President and CEO of Openwater Networks. was previously the EVP for Oracle’s $5B+ product support and services business. a team. While 99. Openwater Networks.CLOUD knowledge. which only control which people have access to which information.” and has been seen by many as Google’s attempt to compete with Wikipedia. the application is read and write. a new company. Michael Rocha. the search-based application acknowledges people add value to the information. has engineered a search-based application cloud service. Second. it standardizes the language (much as SQL-based applications have standardized processes) of a group. he saw how the customers of complex applications struggled with being able to understand their software. First. In that capacity. While Knol is targeted at the consumer Internet. The search-based application fundamentally does three things. as opposed to traditional SQL-based applications. or a business unit. it was the cost and difficulty of delivering that information which inspired him to bring modern Internet technology to the problem. and their environments. While this has been a characteristic of all SQL-based apps few people think of search-based applications as having this capability. their business processes.
But with greater and greater access to search technology. problems. finance and organize yourself for success? 146 . managing operations is the most foreign to a traditional software company.OPERATIONS MANAGEMENT CLOUD SERVICES It will take a new generation of these kinds of search-based applications to truly use the information buried in the Deep Web. Summary Of all of the major functional areas. security and performance. But having a system of repetitive. availability. sell the service. there is bound to be hundreds of search-based applications just as we have seen hundreds of SQL-based apps. whether in open source or in the cloud. automatable operations is the key to lowcost and high-quality customer experiences. How will you market the application. This chapter has highlighted some of the areas in the management of change. We’ve now walked thru each layer of the cloud stack and now will focus the remaining chapters on the important areas for anyone building next generation application cloud services.
or just the Palo Alto Weekly. As a result many people think marketing means coming up with a clever tagline and finding a way to make it into a Super Bowl ad.7 MARKETING So let’s assume you’ve built the world’s coolest application and it’s going to revolutionize poultry management. or just the next major release of your ERP application. This 147 . How is anyone going to know? Once upon a time you’d hire an “ad man” who would come up with an ad campaign and then find out if you could afford to run it in the Wall Street Journal. You’d have to make sure your tagline was short and sweet since you had no idea who would read it.
which totaled $107M prior to their IPO in 2002. given how we all view Web 148 . This approach resulted in both founders maintaining significant ownership of the company. we clearly no longer need to think this way. You can also see that.MARKETING might have made sense when the production and distribution of information was expensive. in 1996 and 1997. but with the advent of the Internet and rich media. In these early years. the single largest line item. We’ll discuss the fundamental economics. This was the by-product of both a significant investment in sales and marketing and the explosive growth of Web conferencing post September 11. the traditional approaches and some of the newer ways for you to educate the buyers.1. In this chapter we’ll focus on marketing your product. The funding line shows each round of funding they raised. You should note that Webex’s spend in sales and marketing is hovering around 35 percent. Min and Subrah financed their operations by having a group of low cost engineers implement software and plowing the profits back into funding WebEx (at the time called Active Touch). You’ll notice the explosive growth from 2000 to 2001. they operated at or near profitability. Consider the implication of this. Economics of Sales & Marketing We’ll begin by considering the Webex case study by becoming students of their P&L shown in Figure 7.
Traditional marketing and sales has broken the pipeline into a series of stages.2 Traditional Sales & Marketing Pipeline 149 . Figure 7.CLOUD conferencing as simple to use and simple to explain and simple to buy.1 WebEx P&L Traditional Sales & Marketing For those of you who have been doing high tech sales and marketing this section will be old hat. Figure 7.
MARKETING Early stages of the pipeline focus on getting awareness. more expensive things is a team sport.3 and talk to anybody selling business software. lunches. the big difference between consumer and enterprise sales and marketing is that there is not one decision maker – enterprise sales and marketing of imprecise. Leads are both nurtured and qualified ultimately transitioning from a centralized marketing organization to the field where the potential customer is engaged. Ultimately. Consider Figure 7. and web conferences is time consuming and further elongates the sales process. Scheduling the phone calls. Even with a highly qualified lead the sales person finds himself or herself in the roll of traffic cop (or switchboard operator). then leads. Different constituencies within the buying enterprise have questions that can only be answered by members of the selling enterprise (or customers that have already purchased – the reference customer). No news here for any of you who’ve sold enterprise technology. 150 .
3 Sales is a Team Sport Hopefully thru CRM applications this process can be made more efficient. as an alternative to direct mail. 151 . This is largely because the economics are so compelling. Responsys have specialized in this area. Everything from the number of characters in the subject line (keep to less than 50) to the time the email is sent out can determine the effectiveness.000 people costs $5 versus over $500 to send out direct mail. As a specialist they focus on the details. Email Marketing Email marketing. repetitive and specialized. We’ll focus on a few areas where marketing services have developed to improve sales productivity. Emailing to a list of 1. Lyris. Companies like Constant Contact.CLOUD Figure 7. has been an area of considerable growth.
As a result of this campaign. provided a quick link to the partially completed application. has helped many companies implement successful email marketing campaigns. Director. As a simple case study. The program involves integration with the E-LOAN Web site to identify prospects that started but failed to complete the mortgage application. Built into the program was the ability to perform A/B testing on the messages sent to the customers.MARKETING Figure 7. triggered 30 minutes after the application was abandoned. The second phase. reminded applicants to complete the process. Siara Nazir. It was executed in two phases. and encouraged applicants to use phone support. called the applicant’s attention to the company’s value proposition and also offered a quick link to the incomplete application. 32% more applications were completed by the 152 . implemented an email program designed to remind and encourage prospective borrowers to complete their mortgage applications. Director of Online/Offline marketing at E-LOAN. Customer Services at Responsys. sent one week later. The first phase.4 Call at the right time e-Loan Story Scott Hilson.
Katy Roth. saw a lot of traffic coming to their site because of their extensive network management content. For example. giving it higher weight in the results.CLOUD control group that abandoned but did get the automated follow up email. Search Marketing A company’s Web site has become the face of the company so improving the volume and quality of traffic to a Web site from search engines via search results is clearly important. a network management company. By paying attention to how Web pages are built and the content put in them. you can create natural search results that drive traffic to your site without purchasing advertising (and more importantly be significantly more effective). This way. The content is generally considered by search engines to be fresher and more authentic. has some fundamental advice for anyone trying to optimize natural search results. you become the expert on the technology and the problem your company is trying to solve. we all know we click on natural search results more often than the ads on the side. who after years of experience in marketing Model Six companies formed her own consultancy. Blogs are great for generating traffic. 153 . Solarwinds. While there is plenty of advice on how to spend money on ad words. Build a FAQ into your Web site to capitalize on potential customers searching for reference or problem solving information.
Just check out Wikipedia for some good examples. Have your community create content. Since Februrary 2009. They worked with their developers to tune their page generation engine to produce better metainformation that allowed their pages to come up to the top of natural search results.com is a good example of a company that reworked their forms to pull in more community generated content. a provider of monitoring and development products for Ruby on Rails. See the previous section on blogging. Work with a search engine savvy developer to make sure the meta content of your Web pages is optimized.500 “Tweets” every second. iTaggit. Today more than 15 million users create 1. Social Media Marketing Facebook’s early success with college aged people has caused some people to see social networks as just a tool to hook up or find old friends. But Facebook has become much more. 154 . Facebook leads Google.MARKETING FiveRuns. The number of users has grown from 60M users in 2008 to over 300M with the fastest growing demographic being people 35-55. There is nothing worse than seeing a page with terrific content with a generic browser title. developed content on their blog that provided answers and guidance to Rails developers.300% this year. Twitter has also enjoyed phenomenal growth growing 1. Yahoo and MySpace in total time spent online by Americans (6% of total time). But they didn’t stop there.
As an example consider the recent case where Facebook simultaneously broadcast a soccer match in Spain for the Spanish Facebook community. The application of these social networks to sales and marketing is still in its infancy. sales reps could get to know the person behind the name and title. Reach More People. Within 30 minutes of the game starting the video servers crashed. Think of doing the same thing with a telephone and you’ll begin to understand the potential of these social networks.com. there were suddenly 100s of thousands of viewers. Why? Because once one person commented and his social graph saw the comment (and started watching the game) and another friend commented and another. she developed Faceconnector which pulls Facebook profile and friend information into salesforce. Now instead of anonymous cold calling. and Sell More Stuff. Clara Shih attended the first Facebook developer conference in 2007. With her friend Todd Perry’s help. Claire Shih 155 . and even ask for warm introductions from mutual friends.CLOUD Perhaps the best way to think about Facebook and Twitter is as a next generation telephone – and a very powerful telephone. Clara’s counsel27 for those thinking about using social networking in your marketing efforts: 27 The Facebook Era: Tap Online Social Networks to Build Better Products.
Not only are your people sources of information. and consulting. field service. Get Notorious This brings us to getting notorious. 156 . Customers of your product (the valued reference customers) that you metered out onto a conference call with a carefully selected sales person and prospect today can have their testimonials videoed and made available on YouTube. But there are many more sources of information. and friends all paint a picture of who you are and help to establish your brand. Your profile information. Prior to hyper targeting. Use the social graph and knowledge about relationships across your audience to create a more personalized online community. sales. Think about using social networks to market yourself as an individual.MARKETING Use hyper targeting as an opportunity to test new audiences and see if your product can gain traction. and quality of the print that ultimately made it into a folder at an event at the Hyatt in San Francisco. but so too are your customers. quantity. You have internal experts on the product in customer support. product management. deciding the colors. it was often cost-prohibitive to do this in any systematic way. spent weeks writing up a data sheet. Once upon a time the product marketing person interviewed the developers of the product. photos. R&D.
in your third parties. Limit it to 30 seconds. Blogging is personal.Don't send a note from "your company. and what you can contribute. and phone number. Encourage them to write. "best ever’s. Anshu Sharma. Charlie Wood.Look at the first few pages. controversy. or do Webinars or videos and communicate their expertise and more importantly their point of view. should become notorious. expensive communication required that you needed to aggregate content in the Internet behind the veil of “the company” today we should be able to know what you think. photo essays.but not an overproduced one. and Ed Herrmann provide some advice on getting notorious. video. By bringing more contributors into your marketing cloud. Use video . that's impressive!” Check out Digg . Make me think: “Wow. or speak. and use those. title.CLOUD While the old world of low bandwidth. Be notorious . generally "this is so cool!"). think about whom in your company.” Reach out as an individual Name. As you develop your marketing programs. A few bloggers including Vinnie Mirchandani. we will be able to find the knowledge we need delivered the way we want it—in a language and context that is accessible to each of us. No talking heads-show the product. See what formats are popular. what you believe. (Top 10's. 157 . in your customers.
last Christmas. we have figured out how to sell expensive items ($1M) that are not very precise (SAP Manufacturing) and 158 .5. Figure 7. consider the fact that. As a technology industry. the traditional human network that has powered sales for the last twenty-five years. as we move closer to delivering these applications as a cloud service. as they become more specialized.5 Selling Spectrum As you begin to tackle this problem. and as the price point goes down.MARKETING Educate & Select Sales and marketing have been critical components of traditional software companies and new software companies. We’re not saying there weren’t a lot bought. just that they were not bought because of a sales person. Perhaps the greatest change is. Consider Figure 7. very few people were sold a plasma TV. we must re-invent the traditional account management model.
Selling may be replaced by education and selection. select the right answer for themselves. Purchasing became a transaction. in the end. Summary The Internet changes everything used to be a corporate tagline. in the way they want it. talk to experts and other users and. had made their selection. precise items. We have also figured out how to sell low price (<$100). you now have an ability to deliver personalized information to every member of the team that influences a purchasing decision—when they want it. they figured out the right size screen. Perhaps this is what can happen in the future market for software. The reason no sales person sold a TV is that most consumers of Plasma TVs did their research online. Our challenge is how we effectively sell imprecise items that cost $10. read what others thought about the TV and. 159 . We should take a lesson from the Plasma TV. by the time they were ready to purchase. You only have to look at Amazon or eBay to see how successful this model has been. With a low cost means of delivering notorious content.CLOUD have grown large profitable businesses. People will educate themselves on the good and bad of the solution. Perhaps it is no more obvious than in the art and science of marketing.000.
or social networks. the act of matching what a potential customer needs and what you have to offer remains the role of a quality marketing organization. In the end. no matter how simple we try to make the software. whether they find you through search. you still need marketing. email. 160 .MARKETING While communicating to people.
Finally.com was winning more and more business. as Salesforce.” Sometimes it’s stated even more clearly. who today is the CEO of LucidEra. was asked by Tom Siebel to lead the efforts for Siebel On Demand. Rudin was able to work out the product strategy and business model. he was ready to tackle the sales and distribution channel. There was a sense of urgency. Ken Rudin. Early in 2002.8 SALES While SaaS or cloud computing might be all the rage. “But this will cannibalize our existing sales. of course. and he scheduled a meeting with the head 161 . but Siebel finally convinced him. After about a year. Rudin. wasn’t sure if it was a good idea. it doesn’t take too long until someone says.
Does it mean the comp plan will change? Is this new on-demand group going to compete with my sales force? How important is lead generation? In this chapter. “Ken. The VP listened politely to Rudin’s presentation and. at the conclusion. your primary advantage is that you already have a sales channel. moving existing applications to delivery as a cloud service with an existing channel and product (Models Four and Model Five). the challenges will pertain to developing a new sales force in a world where the economics don’t bring you million-dollar deals that can fund the creation of a channel. you will need to figure out how to leverage your existing sales force. Transforming Traditional Software Sales Every Model One software company worries about cannibalization when they consider a move to delivery of their 162 . More than with any other group. but stay the f—k away from my accounts!” This chapter is dedicated to sales and distribution. For the traditional software company. In Models Four and Five. said. there are many challenges. that’s an outstanding plan. But.SALES of North American sales. In Model Six. the solutions to the challenges here will make or break any new business. we’ll address some of these issues and also let you hear from some successful sales and marketing executives.
who led sales for Oracle On Demand for seven years and today is Group Vice-President of JDA’s on demand business. Next. Ensure that the sales team is setting proper expectations with the customers and selling a solution that your company has the ability to deliver on today. the existing sales force continues to sell the software as it always has. “Don’t sell futures!” Finally. Unlike selling traditional software. up front or expense it over time? Joe King. nothing changes. It doesn't have to be this way.. it’s 163 . hardware.CLOUD software as a cloud service. organize the sales teams around current delivery capabilities. third-party software. Joe says. If you adopt Model Four. Whether that’s a perpetual or term license. Do you want to manage our software or do you want us to manage our software? Do you want to capitalize and pay for the software. train the sales reps to find customer challenges that can be solved by having you provide the complete solution without letting the customer dissect the solution into its components. has first-hand experience in how to sell when you’re in Model Four. His first piece of advice is to make sure you find a team of sales professionals that have a mix of experience in selling both traditional software products and services. In other words. etc. The only change is they have a new delivery option (one which they can be compensated for).
you need to be armed with the evidence that when a software company delivers the service in a repetitive standardized way. There still needs to be value in your software in solving a particular business problem. the traditional sales person who manages an account and makes a good living sitting in a few accounts is unaffordable in the new world. And when you get to the CIO or IT director. 164 . Selling New Application Cloud Services For those of you building a Model Six business selling software as a service is in many ways no different than selling traditional software in Model One. What is different is the economics of the sales process. In Model Six. who will inevitably say: “I can do this” (because they have). they will ultimately be better and cheaper at insuring security.SALES important to discuss the underlying infrastructure that supports the solution. managing an upgrade. As a result.000 (for the first year). so no longer can you fund the software sales by the $1M up-front license fee. but remember the customer is not buying servers and data centers separately from your complete solution. the average selling price is going to be significantly under $100. or identifying performance problems than you as a single isolated island having to figure it out for yourself.
and Postini. A Model One software company offered to do a free six-week discovery process and scheduled a demo for eight weeks later. Eloqua.com.CLOUD While that aspect is worse than our old world. SpringCM. Salesforce. Now with adequate Web marketing and standard demo deployment. CIO at Stratus Computers. Since the software is either “always deployed” or “ready to be used.” the idea of scheduling custom demos is a thing of the past. a $250M a year computer company. Halogen. Joe Graves. the good news is Model Six products are reasonably precise versus the large application footprint of traditional enterprise software. some group of customers can try your product and then proceed to use it in small work groups. Remember. there are some things that are better. The 165 .” or “quickly configured. Xactly. is a big user of application cloud services. Today he uses Salesforce. QuickArrow. Ceridian.com and WebEx both can attribute their high growth and early success to having products that could be used simply and economically by small groups. Joe relayed a story of how different traditional software companies are from new Model Six companies. Stratus went with a Model Six solution and deployed the whole system in seven weeks—worldwide. WebEx.
com has also had a few tricks up their sleeve. Webinars. High priority leads are responded to within 24 hours. So from a company perspective you need volume.000.SALES bad news is that the average selling price is considerably lower in Model Six than in Model Four.000 per year with 50 percent of their customers having an average yearly contract of less than $1. This includes free trials. Every lead from this marketing is categorized into three buckets. and email campaigns. meaning that their average yearly contract is under $20. you can see they have perfected a sales engine. daily demos (scheduled and executed from India). Salesforce. the next level within 72 hours. A sales person can no longer depend on landing a few big whales to make quota. With an eight-to-one conversion ratio and a fifteen-day sales cycle. with an average price per seat of around $70 per month. you need a sales machine. Salesforce.000 in marketing per sales rep per year. WebEx’s approach has been to spend nearly $100. WebEx’s high-end customers average around $25. And when you need volume. The point of both of these numbers is that an average deal size is nowhere near the average selling price of traditional software.000 per year.com averages about 20 seats per customer. Aaron Ross was Director of Corporate Sales with 166 .
Instead. Today. Ross went on to say: “Give up Control.com from 2001 to 2006. Likewise. Vendors can’t control the flow of information.” In the past. because it was very challenging for customers to get unbiased information about vendors. There just are not enough great sales reps to hire out there.” This was possible. instead of obsessing over the number of sales people in your team. The best strategy is to embrace this. Today. who would work their patches to generate leads and close more business. so helping your current team do more with less is as important as hiring. the sales organization wanted “control over the sale. a VP of Sales would drive growth by hiring more sales people. We asked him what advice he would have for establishing high velocity sales. is what drives growth. which sales people close. In Ross’ opinion. that doesn't work.” Historically. think about how much information and control over the 167 . He started by saying something that might seem counter-intuitive: “The size of your sales team does not drive growth. obsess even more over your sales productivity. prospects can find out as much as they want about you before they ever call you. hiring more sales people is not the main engine of growth. The Internet changes everything.CLOUD Salesforce. generating more leads. and instead.
Most VPs of Sales focus too much on the second half of the sales process: sales deals in the pipeline and what can close. the more investment sales put into both the quantity and quality of leads.. they’re terrible at it.SALES sale you can put into the hands of the prospect. They tend to ignore the first half of the process: lead generation and lead qualification.” Buyers have seen all the sales tricks and programs. and anything artificial irritates them. “Are we a match?” You can't afford to waste much time (money) on prospects that aren’t a great fit. Here are two specific examples of common mistakes: not hiring enough junior sales people to qualify inbound leads.. Yet. lead generation and lead qualification are as important as closing. How much can you educate the decision makers and influencers? Ross’ next piece of advice again might sound counterintuitive to old-school sales people: “Stop the ‘Always be closing’ mindset. Finally.making sales results easier. and not creating a dedicated team that does nothing but outbound prospecting. One way to fail at generating leads is to expect your own quota-carrying sales reps to do it. and as soon as they get some pipeline. 168 . the higher the quality and the larger the sales pipeline will be. they hate doing it.” focus on building a sales team that is constantly asking. So instead of “Always be closing. they become too busy to prospect anyway.
found when he plowed through its contract to outsource desktop support and network management to Electronic Data Systems: “It was three inches thick. When asked about the duration of renegotiation. If you were to look at the contracts for those deals. In Q1 2007. Hank Leingang. many contract issues for Models Four through Six carry with them some of this legacy. the Middle East. Since the earliest forms of selling software as a service were large outsourcing deals (Model Three). Forrester reported companies based in Europe.7B. They published a paper providing advice to customers renegotiating outsourcing contracts. you might discover the same thing that Bechtel’s CIO. TPI is a leading global outsourcing advisory firm.CLOUD Contracts Contracts vary significantly from model to model. The outsourcing (Model Three) business is still a growing business around the world.” With this degree of complexity. 85 percent of those surveyed indicated the restructuring process 169 . and Africa (EMEA) signed 75 large outsourcing deals in the quarter—with a total deal value of almost €5. there is a cottage industry in providing advice to companies negotiating contracts.
the 28Restructuring Outsourcing Agreements: An Indication of Failure. Typical Model Six terms allow customers to pay on a month-to-month basis. other vendors require a two-year commitment. In other cases. Service Level Agreements In almost all of the contracts from Models Three through Six. Fifty-five percent finished renegotiations in less than six months. January 2007. take a look at the Yahoo terms of service or the WebEx contracts. contracts like these SLAs are heavily negotiated. Binding SLAs to contracts can vary. 170 .com offer SLAs on contractual terms on a case-bycase basis. If you want to spend a couple of frustrating days. For examples. In Model Three. and 13 percent finished in less than three months. you can lock five experts in a room and try to define what uptime means and what penalties you should pay if the uptime is not met. some vendors choose to enforce a penalty against the total value of the contract if a customer wants to cancel the deal prematurely.SALES required less than a year to complete.28 At the other end of the contract spectrum is the online click wrap agreements. Furthermore. the subject of SLAs (Service Level Agreements) will come up. Companies like Salesforce. such as Blackbaud On Demand. or a Tool to Increase Value? TPI Report. so contracts can be terminated with 30-days notice.
In either case. as this agreement governs what we do operationally. and performance management were 171 . simply called the “Nordstrom’s guarantee. so you should first focus on what service level your operations and development group are engineering to deliver.” Service levels in availability. Although the financial penalty might seem minimal to the individual customer. they point out.” said Blackbaud’s CEO Marc Chardon. if they are writing a check to that customer. you can decide to what extent these metrics are embedded in a contract. After that. There is a 99.9 percent uptime and are a standard part of the contract. problem. the important point is that a user of an application wants the service to perform. Oracle pioneered a different approach. chances are they are writing a lot of other checks.9 percent uptime guarantee and a commitment on the specifics for data handling and server maintenance. change. “We occasionally modify the terms slightly for customer’s specific needs.CLOUD contracts stipulate 99. As noted earlier.” Taleo provides penalties in their contract if they don’t meet certain uptime standards. “We're very strict on ourselves. security. but it is a competitive agreement. So the total financial incentive for Taleo to keep the system up and running all day and every day is enormous.
per year. Writing these down and measuring them is key to improving the overall quality of the service. The Nordstrom’s guarantee was an effort to separate the issue of penalties from a description of the service level metrics and objectives. You should consider defining availability by total number of outage minutes per month. Will you move all customers at once. if the customer was not satisfied with the service for any reason. Change Management – Define how often upgrades to new releases will occur. 99. Security Management – Have you completed a SAS 70 audit? How frequently are backups taken? Where are backups stored? How fast can data be restored? Under normal circumstances or in the case where there is complete site failure because a disaster has occurred. or will you stage them over a three-month period? Availability Management – Many contracts call out percentages of availability (99. less than a handful of rebates were paid out. per quarter. This begs the question of whether this refers to unplanned or planned outages. It will cause you to focus on how rapidly you recover. and do that for planned and unplanned outages.99 percent… They all sound about the same.9 percent.7 percent. In four years of offering the Nordstrom’s guarantee.SALES published and reported. However. 172 . they could request a rebate of 20 percent each month. 99. don’t they?). which is a much more important metric.5 percent. no questions asked. Let’s highlight the major areas you should focus on. and 99.
Become a student of WebEx’s and Salesforce. Instead. be proactive about the service levels you will provide and publish them to your customers. Sales Compensation Marc Chardon. “We try as much as possible to make the sales rep indifferent to selling an on-demand or on-premise version.CLOUD Customer service management – When a customer has a question about your software (these could be defects or just usage). points out the universal truth in effective sales compensation: You’re looking for sales people to respond to the metrics that you give them.” he said. You would be wise to separate the definitions of your service levels from the legal and contractual side. just look at the upper right-hand side of your Google search results when you search for “SaaS”. In the end. what level of service will you be providing? Performance Management – What response time should customers expect? How much disk space is included? How quickly should reports run? This will be a difficult area. For a service level that is reported on every transaction. and if the solutions 173 . remember the customer wants the service to work. but providing some reference implementation to benchmark on a release-to-release basis will help you provide performant apps. Some will push you towards EDS or IBM Global Service agreements.com’s contracts and terms. “If you create a level playing field in the sales compensation. CEO of Blackbaud.
The most effective plans credit the primary seller along with those directly connected to that seller in the chain of command. and usually are. sales reps should be. They have some guidelines that are applicable across a number of our seven business models. Credit directly for sales compensation. Keep your compensation plans straightforward. Many companies come up with plans with dozens of variables and multiple levels of intricate dependencies. The smartest and most successful companies are constantly evaluating their sales performance data and are not afraid to make changes to compensation plans. Create a transparent dispute resolution process. errors and problems will happen. 174 . Even if you are able to follow every piece of advice above.SALES are roughly as easy to sell. good at evaluating the shortest time necessary to get their commission. Analyze and change on a predictable schedule. Make sure you have the data—and that it’s clean. transparently. and consistently with the plan type and organizational style. Report regularly. One good (transparent) report delivered to payees at the right frequency keeps the focus and motivation where it should be.” When you look for expertise in sales compensation you’d have to consider the team at Callidus Software.
as a result seven instructions would take 35 ticks of the clock. Nowhere is this more obvious than in the case of Amazon. less precise products? Here we can take a lesson out of the notebook of computer architecture. another answer lies in being more efficient about how an instruction is executed. Computer architects have struggled with how to make computers faster and faster. While turning up the clock speed is one answer. So with 175 . 5 parts. But over 10 years ago some smart guys figured out if you could separate instruction execution into 5 stages. While traditional sales has been on trying to know something about a customer you don’t have – for the first time companies can now focus on learning more about the customer they do have and based on that information personalize the offering using that knowledge. Years ago every instruction took 5 clock cycles to execute. each taking the same amount of time (1 tick of the clock) then instead of 35 ticks to get 7 instructions executed you could do it in 11 ticks. again a by-product of selling a product for large upfront money versus driving revenue on a monthly or yearly basis. But how can this be applied to higher ASP.CLOUD Installed Base Sales Most of the focus on selling has been on getting the new customer. Below is a diagram showing the typical execution of an instruction.
SALES the same clock speed the computer was in the limit five times faster.
Figure 8.1 Pipelining
So what does this have to do with sales? Our marketing & sales pipeline is no different only the clock ticks are not so fast. The conventional way of managing the pipeline is no different than the traditional way of instruction execution – we finish one deal, one instruction, before we start the next. But indeed the same principles can be applied, and were applied to sell a standardized Model Four service to 10,000 companies who already owned Oracle applications. The trick is to engineer each stage of the pipeline to last a fixed period of time (e.g., 2 weeks) and then move customers from one stage of the pipeline to the next. Then each stage could be optimized and specialized and over time sales transactions could be much more parallel than they are today. Anyone selling to a large installed base so reconsider how – and not just treat it the same as potential 176
CLOUD customers – where you have no idea who they area, nor what experience they’ve had with the product. Indirect Channels The last major generation of computing was called clientserver computing. Its rise was not only driven by the availability of low cost hardware (Dell, Compaq, etc.) and low cost software (Microsoft, Corel, etc.) but also by the creation of a new channel of distribution. Names like Ingram Micro, Tech Data and CDW, today all multi-billion dollar companies, provided a low cost indirect channel that matched the price of the technology products. This client-server indirect channel has been built on delivering “boxes and bodies” to implement and deliver the application. Unfortunately, whether you’re in Model Four, Model Five or Model Six, you are now in competition with these traditional channel players. In early 2006, I had the opportunity to spend a day with one of Microsoft’s largest resellers for its Great Plains Software. While the reseller saw the value of a Model Six business, they were as addicted to the “perpetual license drug” as the vendor. Allow me to explain. Today when they sell a $200,000 license, they get 35 percent of the sales price, or $70,000. With $70,000, they can afford to pay the sales
SALES rep to drive the sales cycle and then perhaps make more money by doing the implementation of the software to the specific and unique requirements of the customer. Consider the same scenario in subscription view. Now the $200,000 might be spread over four years. That’s $50,000 per year. Thirty-five percent of that number is now only $17,500—and the implementations are far more standard. Indirect channels have been important to the software business, so it’s no wonder people are trying to figure out what a next-generation channel will look like. Erin TenWolde and Darren Bibby of IDC published a research paper 29 in late 2007. Key highlights from their study were: There are still nascent partnering business models in the SaaS ecosystem. Based on interviews with SaaS providers, there is still a lot to learn and most of the activity is occurring on a trial-and-error basis. Traditional channel partners, particularly value-added resellers (VARs), have some potentially big challenges ahead, especially in terms of securing top-line revenue in resale scenarios. This will have implications on the valuations of VAR businesses, which traditionally have been valued based on a multiple of revenue. With many traditional IT challenges removed with SaaS, IDC believes those new solutions providers will emerge that are more business process oriented rather than
TenWolde, Erin and Bibby, Darren. The Emerging SaaS Channel. IDC Report #208547, September 2007.
CLOUD technology focused. Those partners that can develop discrete expertise in niche areas will be well positioned to take advantage of the vast SaaS opportunity. Axel Schultze, who founded Computer 2000, the largest reseller of PCs in Europe, also founded a Model Six company called Blueroads. He’s uniquely positioned to discuss what a next-generation channel might look like. Schultze remembers 1981, when IBM announced the PC, Compaq was founded, and Microsoft introduced BASIC. He saw the first three to five years of the PC industry focused on replacing existing midrange computers like IBM /34 or DEC PDP 11 with personal computers. This was a tough strategy and a cumbersome fight against established computer manufacturers, established software, established consulting processes and, most importantly, established sales channels. Can we learn from the PC industry development in the 80’s? What happened back then that led to the explosion of the PC industry and the enormous rise of companies like Compaq, IBM, Microsoft, Lotus, Ashton-Tate, and Intel? An interesting, almost unnoticed change happened: young startups entered the market and didn’t sell into the established businesses, but into a new market segment—companies below $50M in revenue. They started selling in companies who never even wanted a large 179
And along those lines. Axel boiled it down to a simple premise: “There is interesting software for a large variety of customers and industries. a channel emerged that helped sell and install those PCs and PC software for $1000—a price a mid-size systems integrator wouldn’t be bothered with.” Will history repeat itself? 180 . What is missing are the new channel companies.SALES midrange or mainframe computer.
the Magic Number and how much it takes to launch a new business. churn. 181 . We’ll discuss monthly recurring revenue (MRR). This chapter focuses on the money – some of the key metrics that you’ll need to track in order to insure a long running profitable business.9 FINANCE You might have a killer application and a market that is rapidly growing. revenue recognition. but if you don’t have money (and people) it will be hard to turn it into a reality.
traditional (Model One) software companies have been concerned about experiencing a negative short-term impact on license revenue. VSOE is limited to the price charged by the vendor for each element when it is sold separately. As a result. In the traditional software business. they recognize the million dollars on the day they sell it and it goes into the revenue for that quarter. The same dollar amount is spent on applications. but logged in accounting books differently under Model Six. the largest part of revenues stems from vendors’ license fees associated with software. If a Model One company sells software for $1M. A Model One company recognizes revenue from license fees when the software is shipped to the customer. assumes that they choose to move to Model Five with their existing license business versus working in Model Four.FINANCE Revenue Recognition Many traditional software companies are concerned about moving to Models Four through Six because of something called ‘revenue recognition’. If they were to sell that same system as software as a service.000 per month for the next 10 years. of course. Traditional software revenue accounting requires that the vendor’s fee be allocated to the various elements based on something called vendor-specific objective evidence (VSOE). they may get $20. This. This requires the deferral of 182 .
such as implementations or customizations. If customer support is the only undelivered element in the arrangement. recognition of revenue must be deferred if undelivered elements are essential to the functionality of any delivered elements. this should be no different than how this is done in your traditional software business. once again. former head of finance and business operations for Oracle On Demand says. You’ll also find out that your services will be much more specific than the terms you already have for product support. the simplest way to think about providing software on demand is to treat the revenue the same as you have treated customer support. 183 . you’ll have to recognize revenue based on milestones and the level of work that has been completed. the entire fee can be recognized ratably over the term of the customer support contract. but. can be treated the same way you have managed professional services contracts. one-time charges.CLOUD revenue until VSOE can be established for all elements in the arrangement or until all elements have been delivered.” In fact. subject to renewal by your support renewals teams. Priscilla Morgan. In addition. however. This way. some of the same contractual terms and sales methodologies can be used. Contracts are yearly. “For those pursuing Model Four. In these cases.
The rule of 78 says the company will generate a total of $3. MRR is a powerful idea but as such has both upside and downside. On the upside assume your company gets $50k of new MRR during your first twelve months of revenue generation.+1]. points out that you’re going to need the right metrics to run any Model Six business. A measure used by many Model Six companies is MRR (Monthly Recurring Revenue). But what happens if the company does only $25k of MRR bookings.FINANCE Monthly Recurring Revenue (MRR) Tien Tzuo. should also be used by Model One companies to track their support revenues. if your fixed operating costs are $600k per month. 12+11+10+. Furthermore – next year if it sells no new business revenue the company will still grow to $7..9 million ($50k * 78) of revenue over that year. Worse yet. which by the way. Now the first year revenue is only $1. since in the last month the company was doing $600K in MRR. [Note: 78 is simply the total of the revenue months during the year. And the company just missed its revenue number by $2 million.2M in year 2. assuming no 184 . CEO of Zuora..95 million. but now 12 months away under the $25k MRR bookings scenario. then the business is close to covering fixed operating expenses under the $50k MRR bookings scenario.
this is not exactly the case in a lower ASP. Model Six business model. Traditional Model One businesses have been great since with typical software license being sold for an Average Selling Price of say $500. which historically have 185 .000 could bring you the cash you needed to hire more people or buy more computers. Figure 9. Which of course brings us to the subject of cash.1 Power of Payment Terms Cost of Sales: When to Hire for More Sales As we’ve repeated Model Six companies don’t have the advantage of Model One companies. Meaning you’ll need another $2M on cash/investment.CLOUD churn. Unfortunately. However. if you could get a customer to change their payment terms and pay for the service a year in advance or better yet three years in advance it would do a lot to help your cash needs. Cash As Subrah Iyer commented.
In 2005 Omniture’s negative free cash flow was in excess of $22M—more than its total annual revenue—and it had spiked higher at some points. But when is it the time to step on the gas? When is it the time to ramp your sales force? Josh and Omniture have been relying on a simple calculation. and processes almost a trillion transactions per quarter. license fee when a sale is completed. “It is a scary moment.000 customers.” said Josh. it takes courage to plow ahead regardless.000-server cloud for its 5.FINANCE derived a large up front. 186 . it costs us more money that quarter—it costs us more cash that quarter” explained Josh James. Even when management understands the game plan and has the full support of its financial backers. which force the cost to be expensed upfront. CEO of Omniture. “When we were really stepping on the gas in 2004 we were GAAP unprofitable. shown is Figure 9. the service requires significant infrastructure investment. The financial consequences look exceptionally dire when expressed according to GAAP accounting rules.2 that produces what they call a Magic Number. To get a sense of the cost of service. Moreover.” he said. “Every time we add an incremental customer. Omniture operates a 15.
CLOUD Figure 9. there’s probably something wrong with your business.75 or more. what percent of the business 187 .5. According to the analysis any time the Magic Number is .2 Magic Number Calculations Figure 9.3 shows the analysis for a group of companies.3 Magic Numbers for Model Six Companies Churn: Cost of Keeping a Customer Another critical metric for recurring businesses is churn. Figure 9. For example. or its opposite. renewal. invest in more sales people and if the Magic Number is less than . for any given period. But there are many ways to calculate churn.
Perhaps you started off with 10 licenses of an application. and you want to suspend delivery for 2 weeks while you are on vacation. Or perhaps you subscribe to delivery of the New York Times. such as a month. the customer may choose to change the service. a renewal metric may be more appropriate. collect payment. at any time. Perhaps you have purchased a cell phone plan. Subscriptions are a living. and now want to add another 2 licenses. and the transaction is completed. I write up an order form. and now you want to add text messaging. ship you the products. Not so in the recurring revenue world. For a given period. what percent of the business that is up for renewal actually renews? Financial Systems Many companies dramatically underestimate what it takes to run a Model Six business. breathing representation of the relationship between you and your clients. In a Model One software company-you express interest in purchasing my products. Each month. In addition. The first order is only the start of the relationship. I can measure how much of my service you are using and compute your bill.FINANCE at the start of the period is still there at the end of the period? The part that is lost is considered the churn. and every change to the subscription must be handled by all your 188 . For companies with longer-term contracts. send you an invoice.
had other ideas. and we thought that would be the price forever.but in return. At Salesforce.com. but they told us that $50 a person was too steep a price. Tien Tzuo. Any billing system. and different price points. though. The market. large companies like Autodesk told us they actually wanted to pay more -. “When we first started.CLOUD back end systems from quoting. For any Model Six company. whether you buy or build must give you pricing and packaging flexibility. to billing. they wanted more features. and through to collections. We priced our sales force automation (SFA) service at $50 per user per month. today CEO of Zuora. having the right billing and payment systems is important to growing and scaling the business. and stronger customer service. to order provisioning. learned early on the importance of having the right pricing & packaging strategy in order to grow a subscription business. We quickly realized that a one-size-fits-all pricing model would never work. we thought the right strategy was to keep our pricing simple. Different companies had different needs. That's when we embarked on our 189 . At the other end of the spectrum. Many tiny companies loved the idea of an on-demand service to manage their sales force.
FINANCE packaging strategy that ultimately led to a Professional Edition at $65 per person per month, an Enterprise Edition at $125 per person per month, and a Group Edition at $995 per year for 5 users.” If you look at other subscription companies like Netflix and Zipcar, you see the same evolution in their pricing models. Netflix started off in 2000 with a simple model -- $19.95/month. Fast-forward almost a decade, and Netflix now has over 9 plans hitting multiple price points. Their most popular plan is $16.99/month, labeled as the 3-DVD-at-a-time plan. But subscribers new to Netflix can dip their toe in the water with the $4.99/month 1-DVD-at-a-time plan, and heavy users can upgrade all the way to the 8-DVD-at-a-time plan for a whopping $47.99/month Similar, Zipcar started off with a $50/year membership fee for their popular car sharing service. Today, Zipcar also has renamed the original plan as the "Occasional Driving Plan", and introduced 4 new price plans called "Extra Value Plans" for its heavy users. The basic lesson to learn here is that different customers have different needs. Customers want choice as to how they consume your services -- and how they pay – and the financial systems for service businesses need to reflect this degree of flexibility. 190
Financial Analysts As a new company, you’re going to hope that, one day; the financial analyst community will be talking about you. So what are they going to be interested in? How do they evaluate investments for the public markets? Laura Lederman, a William Blair & Co. financial analyst who focuses on new software companies, sees three important evaluation criteria. The first thing she looks at is total available market. “It’s the most important factor. The larger the market, the better the investment is likely to be.” Number two on her list is the quality of management team. From her perspective, it’s “one of the reasons Salesforce.com, Vocus, and Concur have all done so much better than other players in the market.” And, finally, her third criterion is to evaluate the level of competition: the more competitive the market, typically the more difficult the investment. Venture Capital If you were a student of Salesforce.com and you’d know that it took $60M+ in capital to get the company to an IPO. This is also the same type of number in Webex’s case. Of course the money was well spent since particularly in the later stage
FINANCE investments there was a direct correlation between investment in sales and revenue. Again, like WebEx, CRM took about six years to reach $100M in revenue. Students of traditional software companies know most of them struggle to get to $50M, and on a much slower growth curve. It is no wonder that both WebEx and Salesforce.com have high valuations relative to sales and earnings.
Figure 9.4 Salesforce.com P&L
Some of you reading this are starting up new companies and contemplating being “like Mark”. Ann Winblad began her career as a systems programmer, and in 1976, she co-founded Open Systems, Inc., an accounting software company, with a $500 investment. In 1998, she co-founded Hummer Winblad as the first venture capital firm to invest exclusively in software. Their first investment in a Model Six company was Employease in 1998. In a recent lecture at Stanford, Winblad discussed her 192
CLOUD view of software as a service, and identified a number of advantages. Having forward predictability, being independent of capital or IT budgets, being able to address unserved markets, and always “serving” the customer are all characteristics Winblad sees as being better. Her key characteristics of a Model Six company are: Can be sold and delivered over the Web (via browser) Single instance, multi-tenant architecture Can be sold to small and medium size businesses (SMBs) as well as enterprises Requires little customization Requires low professional services Pricing model is subscription based (by time period, user or transactions)
Summary Finance and business operations for a software product being delivered as an on-demand service are very different than what we’re used to in the traditional software model. But if the sales, operations, and R&D can come together under a unified business model, the growth rates and valuations can be astonishing.
and insuring you have the right people in the right jobs. you’ll face the Innovator’s Dilemma.10 HUMAN RESOURCES Software is a people business. The challenge of growing a new business is difficult and getting the right team and the right model will be key. software as a service. finding the right people and organizing them 194 . establishing the right organizations. If you’re a new software company. we’ll discuss some of the people challenges: finding or teaching the right skills. If you’re an existing software company. In this chapter. Web services. Whether it’s cloud computing. or software on demand it makes no difference.
1 Hiring ramp at Webex And by the way. as you can see in the year 2001.). Right Stage For many of us. Moore describes the seven major stages of a successful venture: 195 . etc. all of this begins with people. Right People.CLOUD appropriately will be a constant challenge. As a result much of the HR application cloud services have focused around recruiting (Taleo.1 how the company’s growth was tied to it’s ability not only to raise money. best describes the lifecycle of a high tech company. not only to hire people. But. Geoffrey Moore’s landmark book. In this and in subsequent books. but also to hire people. Economics If we again use Webex as a case study of a successful company you can see in Figure 10.) and performance management (Successfactors. Figure 10. Crossing the Chasm. etc. but also to fire people. and lots of people. Kenexa.
when the general marketplace switches over to the new infrastructure paradigm Main Street – a period of after-market development. Of course. We often see that the CEO of a company at the early market stage is not the CEO of the company when it reaches Main Street. learn and change as they cross through each of these stages. Names like Jobs. Ellison. moves into decline. it’s important to realize that people need to go through these stages as well. when the base infrastructure has been deployed and the goal becomes to flesh out its potential Assimilation – the technology loses its discrete identity. 196 . there are the rare exceptions of the individuals with the gift of being able to adapt. driven by compelling customer needs and the willingness of vendors to craft niche-specific whole products Tornado – a period of mass-market adoption. when the earlymarket’s interest wanes but the mainstream market is still not comfortable with the immaturity of the solutions available Bowling Alley – a period of niche-based adoption in advance of the general marketplace.HUMAN RESOURCES Early Market – A time of great excitement when customers are technology enthusiasts and visionaries looking to be first to get on board with the new paradigm Chasm – A time of great despair. and Gates are the clear exceptions to the rule. and is supplanted by a new technology paradigm While successful companies need to go through these stages.
the reality is. it might look like some companies took a straight line from inception to Fortune 500. there does come the day that experimentation and cheerleading need to be balanced with operational excellence. 197 . The mistake companies often make is putting an operationally excellent leader in place before they’ve crossed the chasm. co-author of The Gorilla Game. most would have failed early in their lifecycle. “As a company is trying to cross the chasm. instead it should mean Chief Experiment Officer. Making the quarterly sales numbers.” While. Getting the right people at the right stage. in hindsight. delivering releases on time. learn from them. or forgetting to get their operational house in order as they’re headed down to Main Street. Without the ability to quickly run experiments. recently said. there were many left-turns. and sticking to a budget are all requirements for any successful business.CLOUD But for the rest of us. Of course. right-turns and U-turns along the way. what are the characteristics that are most important in each of the stages? Tom Kippola. that’s the ticket. and then press on. the title CEO does not mean Chief Executive Officer.
Clearly. these individuals are leading premium support services and are located 198 . Lynn Reedy recommends you have the VP of R&D work for the VP of Operations. By doing so. operations people who understand both software development and software delivery. Often times.” Furthermore. As Evan Goldberg pointed out. or vice versa. but having the right people at all of the skill positions is the key to success. development people that are different from what we’ve seen in the traditional software world. People who have had to optimize performance or availability of software implementations in the field will have been exposed to some of the key processes and challenges involved with delivering Web applications. this is something we never had to do in traditional software companies. where are you going to find these skilled people? One place to look is in the traditional software product support organizations. you’re going to need what he calls next generation DBAs. it forces conflicts between the race for new features and the ability to manage change in a reliable way. Delivering cloud services requires operational people. having a good coach and quarterback is essential. So. your engineering group needs to both have a “high tolerance for change” as well as be “accurate and careful programmers.HUMAN RESOURCES Right People As with any team.
Culture starts from the hiring 199 . who recently retired from Amazon and was their Senior Vice President of Operations and CIO. 24-year-old Tony Hsieh sold his company. You may also discover some of the greatest expertise to be individuals who have been in end-user operations where they have had to manage applications for a large internal population (e. the people who ran American Airlines SABRE). to Microsoft for $265M.CLOUD at or near a customer site. the common values shared by everyone in a group. Rick Dalzell. Internet advertiser LinkExchange. Culture In 1998. The challenge for these people is that their tendency will be to customize a solution for each customer installation. Many of these people have run large-scale operations. uniform way. the leading online shoe retailer he made culture a cornerstone of the company. he never focused on the company culture.g. was recruited out of Wal-Mart. What some people don’t know is he sold it because he stopped wanting to come into work.. You’ll have to find the people that can generalize the lessons learned in the field and apply them in a standard. So it should be no surprise that when he invested in and later became CEO of Zappos. While LinkExchange had been a successful company.
Embrace and drive change 3. is designed to ensure employees are there for the right reasons.com also publishes a "Culture Book" every year. Be humble 200 . It’s several hundred pages of employees from all across the company describing what the company culture means to them. and open-minded 5. Build open and honest relationships with communication 7. “Which superhero would you want to be?” and continues thru their four weeks of training where every employee (even VPs) answers phones in the call center and ships shoes out of their distribution facility in Kentucky. This "quit now" bonus. creative. Deliver WOW through service 2.HUMAN RESOURCES process. Create fun and a little weirdness 4. which started at $100. In 2008 less than 1% of the trainees accept what the company calls "the offer. they are offered $2. Do more with less 9. After the training. Be passionate and determined 10." Zappos. Be adventurous. The company itself maintains 10 core values: 1. Pursue growth and learning 6. Build a positive team and family spirit 8. where they ask.000 to leave the company—no questions asked.
Scrape For those that are attempting to transform existing Model One software companies there are many unique challenges. Concur is a unique case study—a company that made the transition from a traditional license model to software as a service: from Model One to Model Six as a publicly traded company. You can see the 201 . when the hotel had closed room service. "We want people who are passionate about what Zappos is about . We’ll call these Scrape." For Zappos.service. The Scrape strategy is best illustrated by Concur. "Our number one focus is our company culture.2 shows you the transformation in revenue terms. Figure 10. Buy New and Remodel. Buy New means to acquire companies with Model Six business models and Remodel refers to adopting a Model Four or Model Five business in parallel with your traditional Model One business.CLOUD Tony says.com." This passion has translated to hundreds of stories of how Zappos employees have delivered unexpected service. including finding out a place to get food. a great culture translates into great service. You have three fundamental organizational approaches. I don't care if they're passionate about shoes. Scrape refers to an “all-in” approach to moving from Model One to Model Six.
but the transition will not be easy. Figure 10. Of course. along with the growth of the subscription line. 202 . Concur went from 700 employees to 300 and replaced the majority of the executive team. you’d see the price crashing below $1 a share. CEO Steve Singh says Concur was able to do this because the 2001 Internet Bubble burst gave them an environment where no one wanted to own technology stocks.2 Concur P&L The Scrape strategy can work. with the global meltdown of 2008. so this is not a change that’s easy to make. maybe we are entering another window of opportunity. Not something for the faint of heart. During the shift. If you were to look at the stock price for Concur when CEO Steve Singh made the announcement that they would shift business models.HUMAN RESOURCES license revenue line marching to zero.
CLOUD Buy New Buying a Model Six company is another strategy a Model One company can adopt. Consider making their VP of Operations responsible for operations of the entire company. In this strategy you’ll be best served by purchasing companies with products in adjacent markets. Once acquired you’ll need to be cautious of the “white corpuscles”. a popular mystery set in Palo Alto. having just released his second novel Smasher. These days. Those of you considering the acquisition strategy might consider the story of UpShot as told by founder Keith Raffel. Give them the opportunity to teach and share their experiences. Raffel has become an author of a different kind. In the late 90s UpShot was in head-to-head competition with Salesforce. as anyone traveling through the San Francisco airport would have seen.com. or make the same step in sales or marketing. or in with products that sell to customers significantly smaller than your current customer base. which will organizationally seek to envelop the foreign group and in time destroy it. Your challenge will be to leverage the knowledge of the people in development and delivery of the applications as well as in the new techniques for marketing and sales. Perhaps the most famous example is Siebel’s acquisition of UpShot.30 203 .
The salespeople would then pipe up and claim that they already knew about any prospect the marketing team uncovered. Not only that. but UpShot was founded over one. So Raffel came up with a way to distribute leads and send them out to the field using email and an electronic bulletin board (remember them?). Raffel started by finding what he calls “a brilliant engineer.” Raffel tells a story from the early days and gives you a glimpse into the role of 30 Raffel. and proceeded to rent space above a Jaguar dealer in Redwood City. but when the CEO asked him how effective the marketing programs were. he would point to all the deals that could be traced to one campaign or another. So he built a team that included Kris Olson to lead marketing and Bob Schulman as head of engineering. 204 . Raffel was working at a start-up where there was no good way to send leads out to the field sales team. who was between gigs” to build a prototype. and founded UpShot in 1996. the light bulb went on. Keith.HUMAN RESOURCES In the early 1990s. He showed the prototype to ten companies. When Keith saw the first Netscape browser in 1994. and nine said they would buy it. “HP might have been founded in a garage. Their aim was to make traditional CRM tools more accessible and affordable by using the Web. Midnight Ink. Raffel took a leave of absence and started working on a prototype in 1995. As Olson said. 2008. Smasher.
” UpShot became the first CRM software delivered as a service in August 1999. unfortunately. “A key engineer came to me one day and said that the paint fumes from below were leaking into his office. But ultimately they needed more money to fuel the sales and marketing engine (remember what we talked about in the last chapter). Nevertheless. unfortunately. they sold Upshot to Siebel. It took a year to fix this problem. a big New York investment bank wanted to purchase a huge number of seats of the Siebel Model Six offering and asked for new features. Siebel salespeople received their commissions stretched out over time. From that point on. The decision to accommodate them. More momentum was lost. And finally. bought some Spackle. Xerox. is recognized over time and therefore. in 2003. as we know. and HP.CLOUD a start-up CEO. Revenue for the UpShot product. Siebel was ready to launch an internal Model Six product. made 205 . I went to the hardware store. momentum slowed. They signed up Fortune 500 companies like Johnson & Johnson. So. In addition.com was founded. Siebel went with what they had developed internally. and patched the walls. which was not as fully featured as UpShot. at the time of the acquisition. about the time Salesforce.
First. Finally. While we’ve discussed the advantages of doing this. at best to create new opportunities to package your service as part of a larger offering. 206 . a well constructed Model Four service will be lower cost. As Raffel says. these new services will not endear you to any of your channel partners. These teams will say a standardized Model Four or Model Five service offering is too restrictive and worse yet will often block access to the customer. who not only resell your software.HUMAN RESOURCES against the advice of the UpShot team. everything changed again when Siebel was purchased by Oracle in 2006.” Remodel Finally. and still more momentum was lost. took them even further off course. which will threaten them even more. let’s focus on the organizational challenges you’ll have. This brings us to sales. While things improved gradually. So it goes in Silicon Valley. “That chapter is being written by others. there will be conflict on the delivery side with any premium support offerings or professional services offerings your company is providing. but also provide a box and a body. Your challenge will be to find was at worse to neutralize them. By the way. Model One companies have the opportunity to create Model Four or Five businesses to run in parallel with their traditional business.
” The CIO agreed.CLOUD Your biggest advantage in the Remodel strategy is that you can leverage the existing sales force. So. or competitively out position other traditional software providers. and Alberto Chacin. “In that case. based on the rule of thumb that the cost to manage the software is four times the purchase price. as SAP was both stronger in Latin America and stronger in mining as a vertical market. The CIO answered $6M per year. How? In a meeting with the mining company CIO we said. over five years the cost of this application. EVP of Latin America. But Luis Meisler. you can buy the 207 . “In the end. whether from SAP or Oracle will cost you $31M: $1M to purchase the software and $30M to manage the software. So we said. devised a strategy that won the business. probably somewhere near a million dollars. VP for Oracle On Demand in Latin America. “What have you budgeted to manage the application?” We were guessing it was about $4M a year. An application sales person can either double the size of the deal (application license plus first year of the service). Oracle did not look to have any advantage. Probably one of the best stories from the Oracle On Demand experience was competing head to head with SAP for an enterprise application sale to the largest mining company in Latin America. an SAP or Oracle application purchase price will be nearly the same.
at any moment 208 . World of Warcraft. once your application sales force is compensated for selling On Demand.” The Oracle sales person assigned to the mining company not only won the business from SAP but also received a significantly higher compensation. In either case it will be $31M. Organizationally. you’ll have to create an ondemand sales overlay team and focus on delivering a lot of information about how this solution is simpler. However. Once you have that core group of reference customers. So you can see. is part of a growing number of MMORPGs (Massively Multi-player Online Role Playing Games). you’ll be ready to ‘cross the chasm’. given that the deal included the license as well as the first year of the services. there is a third alternative: let Oracle manage the software for $15M. With over seven million subscribers. you will quickly bring them into alignment with your goals.HUMAN RESOURCES software from SAP and manage it yourself or you can buy the software from Oracle and manage it yourself. World of Work So how much will our work lives change in the future? What will be the nature of work? Here there are lessons to be learned from the world of online gaming. cheaper. and better than doing it the old-fashioned way. an elaborate fantasy computer game.
209 . some young. how is it that World of Warcraft accomplishes something that we find so difficult in the world of work? One of the keys to the success of World of Warcraft is the idea that an individual's skills are known and non-overlapping. there are hundreds of thousands. people they don’t. the vast majority are working with other people—people they know. if not a million. versus a previous mark of 50 percent.CLOUD in time. And other characters can heal. Sounds like the modern World of Work. Some characters have the ability to kill. In the 787. What are they doing? While some are merely spectators. the 787 Dreamliner. Consider the latest Boeing aircraft. in Beijing. outside suppliers are responsible for about 70 percent of the aircraft parts. but cannot slay. some old. doesn’t it? So. The company has pushed outsourcing of component parts to new levels. Our business world needs to extend these fundamental ideas in software that brings information and people into a network. in London—all to achieve an objective. but not heal. people simultaneously playing the game. These suppliers span the globe as shown below.
If you want to read an entire book on the implications of games check out the new book31 by Byron Reeves and J. They learned that the proportion of CIOs considering adopting application cloud services in the coming year has grown from 38 percent the previous year to 61 percent in 2007. like the great David Packard taught a generation of HP managers to do. because it’s the best time for Asia. Abhijit Dubey of McKinsey & Co. 210 . Today we’re all doing conference calls at 4:00 in the afternoon. Europe.HUMAN RESOURCES Figure 10. Business managers can no longer ‘manage by walking around’. but our software isn’t. led a team that surveyed CIOs regarding the SaaS model. Dubey and Dilip Wagle. a 31 Byron Reeves and J.3 The World is Flat The world might be flat. Summary Early in 2007. and North America to talk. Leighton Read: Games at Work: How Games and Virtual Worlds Are Changing the Way People Work and Businesses Compete. Leighton Read.
211 .” We could not agree more. Although this challenge is formidable. software executives who continue to put it off risk being left behind. they’ll have to build the management processes and organizational structures to manage two distinct but potentially mutually cannibalizing businesses (traditional software and software as a service) with different business models and requiring remarkably different sets of capabilities. but perhaps the best quote is: “And finally. have published a report entitled “Delivering Software as a Service.CLOUD partner at McKinsey’s Seattle office.” There are many interesting comments in the report.
this is the third wave of computing. and you’ll repeat some of the campfire stories. Word. as some people believe. Powerpoint.11 BEGINNING OF SOFTWARE Congratulations on making it to the end of the book. following mainframes and client-server then we are indeed at the beginning of another generation of software as revolutionary as Excel. you’ve found it enlightening and entertaining. Hopefully. SAP Financial applications and Oracle databases were in the last generation. If. 212 .
you have many choices. Time passed. the CEO of a company that builds sales compensation software in the traditional model asked me if he should deliver his software as a service. most of my customers are starting to ask me—what is the best sales comp plan?” 213 . or do three of your colleagues leave and start a new venture using your specialized expertise? For those of you already in a Model Six business. I told him it has to become more about the information and less about the software. I told him all of the good reasons he should consider doing it.CLOUD This software can take advantage of 1000s of computers. near infinite storage and a network of mobile eyes and ears that number in the billions. perhaps the book has given you a better understanding of the challenges your fellow team members face. and he called me again and said he’d made the decision and now that he was well on his way. and you’re starting to think about how information and community will change your business in the future. he asked me what he should think about next. Of course. For those of you in the traditional software business model. A few years ago. Do you attempt to build a Model Four business? Do you acquire a Model Six business. He said. “Interesting.
information. eBay or Google as software companies. All of you who are running software as a cloud service are sitting on valuable business knowledge. Concur today processes over 10 percent of the expense reports in the U. Perhaps this is why few of us see Amazon. the top 10 places to stay in Tahiti. The information about what hotels. and what times of the year travel is happening is far more valuable than the transactional efficiency afforded by delivering expense management as a service. which airlines. but here the customers are asking for something even more valuable: knowledge. We already have pointed out that consumer Internet applications are all content rich. because what we see when we when we use their applications is the information: the Pez dispenser. by geography? What if an ondemand CRM software vendor were to analyze all of the configured workflows and identify patterns of sales processes with the shortest sales closing periods? Again.THE BEGINNING OF SOFTWARE Now most of us in the software business are used to being asked for more features and functions. what VP of Sales would not pay to know what sales processes are the most efficient in a particular industry or geography? Few people may 214 . What is the value of knowing where there is a deficit in skills. the best seller.S. Taleo’s systems have seen millions of resumes.
” We hope this book has given you some insights into how to think about the future of your business. 215 . Kansas. as a consumer. but hopefully you get the point. Why isn’t this the case for business software? We could go on and on with new companies and ideas. whether you’re part of a large software company or three people with a great idea in Olathe. Again. Software is far from a mature industry. you’re contributing to their overall knowledge of consumer interests with every click. But. but to assess the overall health of the economy. Of course. Publication and resale of identifiable private data obviously violates legal regulations and privacy laws. the United States’ government contracts with Visa and MasterCard to understand aggregated data of how much each of us. spends. what rules apply to aggregated information? When you log on to Amazon. as many will be nervous about their trade secrets being published as best practices.CLOUD realize this. the value of the information far outweighs the value of the credit card transaction processing. or what some call the “Golden Age of Software. such usage of customer data remains a controversial topic. We’re much closer to the Beginning of Software.
28–30. 65 footprint. 92 usage spectrum. 15–17 traditional (Model One). 97 Brown. 5–7 outsourcing (Model Three). 17. 47 Benioff. 115. Boyd. 116–20 CEMLI framework. 17–22 open source (Model Two). Chris. Vivek. 172 channels alternate.com. 3–5 CAL (central application logging). 30 Bootstrapping Your Business: Start and Grow a Successful Company with Almost No Money (Gianforte). 171–72 216 . 98 Computer 2000. 132 Callidus Software. 201. Michael. 11. 177–80 Chardon. 141 business models hybrid (Model Four). 46 Brooks. Modification. 169–70 negotiating guidelines. 214 Configuration. 29 Bruck. 91–92 weight. 98 Capossela. 139 Beasly. 91 SAP financial. 35–43 Blueroads. 9–14 hybrid+ (Model Five). Extension. 7–9 Software as a Service (Model Six). 117 central application logging (CAL). 119–20. 116–20 Constant Contact. Fred. 172 management at eBay. 173 churn. 16. 179 Concur. 40–42 consumer Internet applications. 130 backup power generators. Alberto. 96–98. Ed. 113 Brooks’ Law. Modification. 214 companies. 17 contracts. Gloria. 207 change management. 187 CMM (Capability Maturity Model). 130. 128–30. Localization. 25 carbon emissions. 61 Barrett. 15 Capability Maturity Model (CMM). Chris. 132 Chacin. 120 Apex. 29 Amazon. Extension. 179 Blum. and Integration). Marc. 108 CEMLI (Configuration.INDEX Acquisition strategy to transition from Model One. 203 ADP. 90–91 availability management. 14–15 Internet (Model Seven). 177–80 indirect. Localization and Integration (CEMLI). 8 Ahuja. Marc. 106 applications frequency of change. 169 contractual service levels.
7 electrical power backup. 17. The (TenWolde. and the World (Koomey). 206–7 ERP II: best practices for successfully implementing an ERP upgrade (ACM). 17–22. The (Gates). cost of. 7. Bruce. viii Entwined strategy to transition from Model One. 61–66. 17. 5 Global Services. 120–22. 50 Force. 119 grid computers. Evan. 36 Gregoire. 65 database architecture. 93–94 DealerTrack. Subrah.com. 191 Facebook. 102 Iyar. 142–43 Delivering Software as a Service (Dubey. 38–40. Lars. 30 free software movement. 8 Innovator’s Dilemma. 46–48 Gibbs. 104 Gorilla Game. Larry. 192 IBM. 109–11 Facebook Era. against relying on venture capital. financial. 178 End of Software. 65 outages. 177–80 Infosys. Michael. 34 Goodman. Greg. 103–4 App Engine. Gelman. 30. 6. Tony. Kippola). 61–66. corporate. 35–36 Danvill Group. 46 Garrehy. 203 Dubey. 47 Hatz. 129 Estimating Total Power Consumption by Servers in the U. 61 Ellison. 33–34. 12 Haarmans. 65 evaluation criteria. Dilip). Kevin. 61 Crossing the Chasm (Moore). 8 indirect channels. 194 internal security threats. 61–66 power consumption. 61–66 consumption. process. 165 Greenstein. 119–20 Hsieh. 199–201 Dalgaard. 141 Internet Tidal Wave. Randy. 130 software upgrades. 5 funding. data center power. 210 eBay. 94. 191 finding people. 152 Hilton. 103–4 Bigtable. The (Chou). 43 Emerging SaaS Channel. 51–54 deep Web. 40–42 Google. 155 facilities. 65 financial evaluation criteria. 102 Gianforte. Ken. 5 Goldberg. Bill. 199–201 Cost of Power Disturbances to Industrial and Digital Economy Companies.CLOUD corporate culture. 34 Hilson.S. 195 culture. The (Moore. 177–80 Dot Dead (Raffel). 129 ERP Trends (Peterson. 186 217 . Guido. Abhijit. Don. The (EPRI). The (Shih). Cooke). 124 Harris. Pat. 199 Hummer Winblad. Bill. Johnson. 112 data center facilities power. 130–33 availability management. 61–66 power consumption. Jay. 198 Goldberg. Scott. Joe. 112 Gates. 115. 30–31. 106 Ford. 61–66. Gail. 103 Gluecode Software. 211 distribution channels. 198–99 Flock IT. Josh. 5 J ames. Bibby). 197 Graves. Michael. 131 EDS. 112 Haig.
16 Miller. 7–9 Model Two. Dave. 102 218 . 152 Nelson. 111 Nelson. 3 Oracle On Demand configuration. 145 Oracle. 97 Nordstrom’s guarantee. 12 OSI. 153–54 Massively Multi-player Online Role Playing Games (MMORPG). 6 Karsan. 118 Manber. 207 Microsoft. 28. 41 MMORPG (Massively Multi-player Online Role Playing Games). Open Source. 38 O’Neil. 5–7 Monthly Recurring Revenue (MRR). 30 LucidEra. Russia. 117 applications. 111–13. 177 channels. 9–12.INDEX JasperSoft. Udi. 5 open source software. Mark. 186 Open Source Initiative (OSI). 197 Knife Switch. 36 Lederman. 17–22 Model Six. Fred. 8 Ozzie. Brenda. Ray. 195 Morgan. 201–2 Knol. 9–14 Model One. 186 Magner. Eastern Europe. 17 investment in. Zach. 144 Konary. Jonathan. 6 Mythical Man Month (Brooks). Software as a Service. 145–46 Openwater Networks. 65 Leadley. 169 Lentz. Priscilla. 204 Omniture. 122 No Silver Bullet: Essence and Accidents of Software Engineering (Brooks). reasons for adding software. China. 15. 33 outsourcing Brazil. Laura. 91. 116 Entwined strategy example. 10–11 upgrades. strategy to transition from Model One. Amy. 6. Rudy. 117 support. Luis. 3 Koomey. 142 traditional software business model. Joe. 163 Kippola. Traditional. 191 Leingang. 9 India. Zack. 147–49 search optimization. See Open Source Initiative Ouellet. 3–5 Model Seven. 208 McCoy. Courtney. Kris. Dave. Hybrid. 10. Tom. 30–31 Netsuite. 120. 30–33 Kenexa. Bob. 14–15 Model Four. 109 Morrell Bob. Martin. 52 Olson. 15–17 Model Three. 190 NetLedger. 183 Morin. 12 Lipscomb. 207 Service Level Agreements. Bill. Internet. 161 Magic Number. 96 Nazir Siara. 208 Model Five. 29 Meisler. Hank. 38–40. 184 Moore. John. 30–33 King. 5–7 Openwater. Hybrid+. 107 MySQL. 144 Linux. types of calls. 116 customization. 30–31. 30–31 Netflix. Geoffrey. 37 Lervick. 15. Outsourcing. Christine. 144 marketing cost of. 171–72 Nyirjesy Bragale.
16. 173 Software as a Service. 49 QA. 141 Service Level Agreements (SLA). 172–73 Oracle On Demand. 182–85 support. 167. 191 SAP. 70). 6 Reedy. 10–11 Service Science. Ken. 179 search optimization. 171–72 metrics. cost of. backup. 153–54 security Care Rehab example. 130. 183 RightNow Technologies. 170 revenue recognition. 141 Security Threats from Within (Bruck). 202 SLA. 9 Seven business models. Steve. price. 210 performance architecting for. 105–9. 25–28. 136–37 Perry. Everette. 122 support fee. 153 Rudin. precision vs. 174 cost of. See software:Quality Assurance Raffel. internal. 145 Ross. 116 Riskonnect. 177–80 Restructuring Outsourcing Agreements: An Indication of Failure. 136–37 performance management. 37 SaaS. David. 154–57 software cost of. 139 Schulman. John. 17 lead generation. 33 Red Hat. 168 productivity. Clara. Michael. 203 recruiting. 171. 167 size of teams. Katy. number of. 129. 139 databases. 6 Rocha. Keith. 92 traditional software business model. 177–80 Siebel. 38 Phillips. 93 internal threats. 46–48 Risk Management Solutions. 172 Mexico treasury secretary example. 3 SAS 70 (Statement on Auditing Standards No. 3 testing. 102–15. 65 power generators. 133. 102–15. 56 seven stages of success. x Shih. John. 195–96 Seven Vices or Seven Virtues (Chou). 91 applications. 28–30. 165–66 profit and loss. 173 compensation guidelines. Aaron. 207 Quality Assurance (QA). or a Tool to Increase Value? (TPI). 158 Salesforce. 167–68 Roth. Rick. 171–72 objectives. 10. 161 Rudman. 136–37 management.CLOUD Packard. Lynn. 16. financial. 121 219 . See Software as a Service sales compensation. 139. 140 standards. 141 management. 173 programmers. 170–73 contractual service levels. 16. 155 SI (system integrators). 155 Pestana. See Service Level Agreements social networking. Todd. 141–42. 14.com. 204 Schultze. 198 resellers. 205–6 Singh. 35–43. 107 Roberts. Axel. 167 spectrum. 61 power outages. 172–73 Nordstrom’s guarantee. 61 problem management. Bob. 139 threats. 30 power consumption. 198–99 Recruitsoft. 168 lead qualification.
4–5 surface Web. David. Knife Switch. Acquisition. Jim. 192 Model One. 142–43 Survey Reveals Scandal of Snooping IT Staff (Cyber-Ark Software). 93–94 Tetu. 169–70 contracts. 195–96 business models. Entwined. 177–80 VAR (value added resellers). 158 support. 206–7 from Model One. Louis. 29 challenges. 193 open source. 30 Stretch. 203 Entwined. 136–37 software companies. 193 configuring. 16. 3–5 sales and marketing. negotiating guidelines. multi. 177–80 220 . 177–80 Szefler. 48–51. 189 Udzinski. 35–36 SugarCRM. 142 Entwined strategy. 6 recruiting. 48–51 traditional.single vs. 116–20 customizing. 91 transitioning from Model One. Model Four. 195–96 Successfactors. 201–2 software programmers. Model One. 203 from Model One. 95 Spohrer. seven. 47 upgrading software costs and challenges. 3–5 sales and marketing. 184. 33 Thoma. Tien. 116–20 performance. 182–85 specialization. seven stages. 113 stages of success. 139 Stover. 158 support. 34 traditional software business model. 192 Model One. 108 standardization. 183 services. 10–11 services. 91–92 value added resellers (VAR). 91 transitioning from Model One Acquisition. 141 system integrators (SI). 3–5 traditional software companies. Leslie. seven. 119. 15 success. 206–7 Knife Switch. 70 (SAS 70). Chuck. 29 challenges of. Christoph. 6 upgrades. 49 specialization. 34 growth. 6 revenue recognition. 128–30 upgrading. 206–7 fee. 198–99 revenue recognition. number of. 3 monetizing. 195–96 StakeWare. costs and challenges. 169 financial evaluation criteria. 6 upgrades. process at eBay. 6.INDEX upgrading. 131 Software as a Service (SaaS) business model. 204–5 usage spectrum. 201–2 Tzuo. 15–17 companies' key characteristics. 128–30 process at eBay. 116 Taleo. 33–34. Error! Not a valid bookmark in entry on page 83 support call types. 95 Statement on Auditing Standards No. Marian. 9 SPS Commerce. 34 growth. 56 contracts. 131 UpShot. 214 tenancy. 191 key characteristics of SaaS companies. 6 Sun Microsystems.
33 Visual Sciences. 182 Wagle. 106 Vocus. xiii. 208 Yahoo. 40 Winblad. 16. 37–38 VSOE (vendor-specific objective evidence). Ann. Phil. 108 Zappos. 17 Zaidenweber. 182 Viasite. 165–66 WebSideStory. 199–201 Zipcar. 211 Wainewright. Natan.CLOUD vendor-specific objective evidence (VSOE). 15. 106 WebEx. Dilip. 191–93 World of Warcraft. 190 221 . 40 Visualforce.