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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
..............................120 SUMMARY .............................................................................................................................................................................96 HORIZONTAL PLATFORM SERVICES .........57 NETWORK CLOUD SERVICES ...........................61 POWER UTILIZATION EFFICIENCY .....................................................................................................................................................58 POWER QUALITY...................98 MICROSOFT AZURE STORY .............................................................................................................................................................................................................................................................................................................62 POWER CARBON FOOTPRINT ...........................................................................54 SUMMARY .................................116 TRADITIONAL VS..................................................................................................................................................................................................53 CLOUD SERVICE STACK ..................................133 ii .77 PERIODIC BURSTY ....................87 SOFTWARE DEVELOPMENT CLOUD SERVICES ...... CLOUD DEVELOPMENT .......................................124 CLOUD SERVICES ................................67 SUMMARY ......................................................................................................105 SALESFORCE.......................................................80 TODAY’S CLOUDS ARE SMALL.........................................70 BUSINESS MODELS ..............................................................................75 APERIODIC BURSTY ........111 TESTING ..............................................................................130 AVAILABILITY MANAGEMENT ............OPENTABLE STORY ...................................................................................................105 FACEBOOK STORY .........93 SOFTWARE DEVELOPMENT LIFECYCLE............90 MULTI-TENANCY ........................................................................................................................................................................................................................................................83 SUMMARY .....113 CUSTOMIZATION .................................76 ON OFF APPLICATIONS .103 VERTICAL PLATFORM SERVICES ..........................................................................................................................122 OPERATIONS MANAGEMENT .................................................................................................................................................................................................................................................79 SPECIALIZED CLOUD SERVICES (AKA PRIVATE CLOUD).................................................................................................................128 EBAY STORY .....................................78 STORAGE CLOUD SERVICES ................................102 GOOGLE APPENGINE STORY ................................................................................................................................109 NETSUITE STORY .......................................................................................................................................................................65 ECONOMICS ...........COM STORY .........89 APPLICATION SPECTRUM ..................73 HIGH GROWTH APPLICATIONS ..............................................................................................................................83 COMPUTER CARBON FOOTPRINT ..................................56 DATA CENTER CLOUD SERVICES ..........................................68 COMPUTE & STORAGE CLOUD SERVICES.....................................................124 CHANGE MANAGEMENT ..
......177 FINANCE ..................................136 SECURITY MANAGEMENT ............................................169 SERVICE LEVEL AGREEMENTS ..........................................................................164 CONTRACTS ................181 REVENUE RECOGNITION ................................................................... RIGHT STAGE ....................203 iii .....................................197 CULTURE .......................................................163 SELLING NEW APPLICATION CLOUD SERVICES ..........................161 TRANSFORMING TRADITIONAL SOFTWARE SALES.........146 MARKETING .................184 CASH .....................................................................................................................................................................................................................................................................................................................................153 SOCIAL MEDIA MARKETING ..................................................................................................................................................195 RIGHT PEOPLE .............................................................................188 FINANCIAL ANALYSTS .....193 HUMAN RESOURCES.................................................................................191 VENTURE CAPITAL ................................152 SEARCH MARKETING ........................................................................................................................................................................................................................137 CARE REHAB STORY ........................................................................................................................................................................................................................................147 ECONOMICS OF SALES & MARKETING .........................................................................................194 ECONOMICS ............................149 EMAIL MARKETING .................140 CUSTOMER SERVICE ...................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................139 MEXICO STORY ..........................185 CHURN: COST OF KEEPING A CUSTOMER .......................195 RIGHT PEOPLE.................................158 SUMMARY .................................................142 SUMMARY ........................................159 SALES ...............191 SUMMARY .............................................................................................................173 INSTALLED BASE SALES .175 INDIRECT CHANNELS .....................................................199 SCRAPE ......................................182 MONTHLY RECURRING REVENUE (MRR)..........................201 BUY NEW ..............................................................................................................................................................................PERFORMANCE MANAGEMENT .........141 SEARCH-BASED APPLICATIONS .......................................................154 GET NOTORIOUS .............156 EDUCATE & SELECT ......................................................................170 SALES COMPENSATION .................148 TRADITIONAL SALES & MARKETING ................................................187 FINANCIAL SYSTEMS ......................................................................................................................................................................................185 COST OF SALES: WHEN TO HIRE FOR MORE SALES ............................................151 E-LOAN STORY ........................................................................................................................................
....................................................212 INDEX.................................................................................................................................REMODEL ...............................210 BEGINNING OF SOFTWARE..206 WORLD OF WORK .........................................................................................................208 SUMMARY .......216 iv ..............................................................................................................................
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. with the help of Claire Stager.Acknowledgements For almost fifteen years I had the pleasure of teaching introductory computer architecture to over a thousand students at Stanford University. Some of these lectures have been captured explicitly and implicitly in this textbook. So in 2005 when I left my role as the President of Oracle On Demand. v . 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. I launched the first seminar class on software as a service. At the application level nearly all of the companies who’ve developed business application cloud services have lectured including: Evan Goldberg. Zach Nelson. so I’d like to thank many of them for their contributions. We just completed the 5th year of the class.
Alexandra and Caroline. It was the preparation for those lectures that created the first generation of this textbook. Marc Chardon. and Michael Gregoire. Mary Ann and David. Greg Gianforte. Mark O’Neil. Reid Hoffman. without whom the past twenty one years would not have been anywhere near as meaningful or as exciting. Pradeep Sindhu. Dave Girourard and Philip Rosedale. I’d also like to acknowledge Janet Stevenson.Marc Benioff. Jonathan Schwartz. I am also grateful for my parents. Vic Gundotra. The class also focused on leaders on the consumer side as well including: Tony Hsieh. Jeff Jordan. Tom Leighton. Danielle. And finally thanks to my wife. Udi Manber. whose hard work and perseverance provided me the means to realize many of my dreams. and Erich Clementi. and our three children. for her artwork. Samir Aora. Finally special thanks to Professor Qianchuan Zhao. At the platform and infrastructure level the lecturers included: Charles Phillips. Brian Behlendorf. Rudy Karsan. Werner Vogels. Maynard Webb. for inviting me to deliver 10 lectures at Tsinghua University in the winter of 2009. Subrah Iyar. Joe Kennedy. Steve Singh. vi . Sue.
our mission is to deliver a holistic and balanced view useful for the technology student to understand the business vii . after mainframe. Finally. 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. 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. Software+Service. and purchase software. The book is written for any business contemplating developing new application cloud services for internal or external usage. deliver. software as a service (SaaS). Instead. and client-server computing. or experts in operations to read the operations chapter. or for those considering moving existing applications to the cloud. software on demand. platform as a service (PaaS). this textbook is not written for the experts in marketing to read the marketing section. While it contains some aspects of technology the book is first and foremost written from a business perspective. managed services. Hence. infrastructure as a service have all been used to describe new ways to build. Are they just different names for the same thing. we open with seven business models for software and use these models in the discussions throughout the remaining chapters.Introduction Cloud computing.
tell them lots of great stories. printed and passed out to many people.challenges and the business student to understand the technology challenges. knowledge could stop being just campfire stories that were repeated. and send them back out into the wilderness. over a long weekend. Part of the book was devoted to viii . 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. So. the Managing Director of Oracle Germany asked to meet with me as the President of the Oracle On Demand business. Any student of history knows there was a massive change when Gutenberg invented the printing press. I hammered out the story I had been telling around the campfire with the intent that. of course. abused and often lost. I thought to myself that. That book was called The End of Software. the good news was that we have two new sales people. In March of that year. an Oracle salesperson or a potential customer could come to understand why moving to “software as a service” was a logical and inevitable step. but rather could be written down. The origins of the book can be traced to early 2002. hoping they will be able to repeat the stories. During the meeting he told me he had assigned two salespeople to selling Oracle On Demand. perhaps during a long plane ride or over a few evenings. Suddenly.
Kintera (2003). None of these companies was public at that time. Blackbaud purchased Kintera in 2008. Omniture (2006). the world is completely different. Omniture acquired Websidestory and most recently Omniture itself was acquired by Adobe in October 2009 for $1. Constant Contact (2007). and NetSuite. Webex was acquired by Cisco in March 2007 for $3. have become public companies. who all deliver business application cloud services. RightNow Technologies. Years later. Websidestory (2004) Kenexa (2005). RightNow Technologies (2004). These fifteen include Concur (1999). So for those of you who wonder if companies will purchase business application software as a cloud service I think you have your answer.com had generated only $5M in revenue. ix . consider since 1999 fifteen companies.com (2004). Netsuite (2007). Salesforce.com. Salesforce. To get an idea of how different. Webex (2002). Vocus (2005). and Opentable (2009). Some of these companies have been acquisition targets. Most people were debating why ASPs (Application Service Providers) failed and whether SaaS (Software as a Service) would be successful. As 2009 comes to a close the remaining eleven companies have a combined market cap of over $15B.2B.case studies of three small private companies: Salesforce.8B. Successfactors (2007). Taleo (2005). DealerTrack (2005).
The intent is not to argue that one model is better than another. June/July 2005. but rather to make sure. Chapter 2 begins at the application layer with application cloud services. The cloud service stack is meant to further differentiate each layer of cloud services. as a software business. from traditional software to open source. to the consumer Internet. Timothy. Seven Vices or Seven Virtues. 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. x . In this chapter. we outline the seven business models that encompass the entire software industry. We’ll discuss all of the application areas that have benefited from being delivered as a cloud service – both horizontal and vertical. 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. to SaaS. each with a different audience. This layer of the stack is of interest to the business users. you know which model you’re trying to succeed in. to outsourcing. “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. Chapter 3. Upgrade Magazine.Chapter 1. “Data Center” begins 1Chou.
g. Ruby on Rails). Visual Studio. the investment is not chicken feed. At $1. 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. instead of focusing only on the developer. While not a semiconductor fabrication line. This layer is of interest to the operations team at any application. The next layer of the stack: compute and storage cloud services is discussed in Chapter 4.. Vertical platform services. these new platform services include much of the operational environments that were traditionally separate. The co-location or data center layer focuses on delivering high quality.at the bottom of the stack. “Software Development Cloud Services” we discuss horizontal and vertical platform cloud services. platform. 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. However. security and reliability locations to house computers and storage. While having compute and storage available on demand is important it’s likely the cloud computing war will be won by winning the developer. these new data centers require a minimum outlay of $100M. while more restrictive allow the developer to leverage the data models xi . All of the current generation of application cloud services have consumed network and colocation cloud services. In Chapter 5.000 per square foot to build.
you’ll need to figure out how to make sales & marketing a more efficient and xii . Whether you’re trying to leverage your existing sales teams or build a new sales team. “Operations Management Cloud Services” introduces perhaps the most challenging area for traditional software people.supported by applications like salesforce. Netsuite and Facebook. performance. the challenges are even greater to find new ways to educate the buyers of your services. security. In Chapter 7 we cover some of the traditional marketing approaches as well as discuss some of the more innovative solutions. After building the next great cloud service you’ll be faced with the traditional challenge of how to market and sell the service.com. Chapter 6. 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. and operations of the software. In each of these areas there are numerous software companies providing these aspects of operations management as a cloud service. We’ll focus on change. As the price points for these cloud services decrease. the management. Developing software in the newer models is not exactly the same as the traditional methods. availability and customer service management. quickly and inexpensively.
The chapter entitled “Finance” is meant for the non-finance professional and highlights some of the key financial metrics (MRR. including sales executives from WebEx. Finally. As long time venture capitalist Ann Winblad said. Churn Rate.” may be at the end of the book. We believe the campfire stories and lessons apply to all businesses. Everybody is a xiii . “This is one thing that's really changing in the marketplace. Google. and Customer Lifetime Value) that are important to running a subscription business.com. “Human Resources. any technology company requires two things to be successful: money and people. but we all should remember that every software business is a people business. All of the public application cloud service companies spend far more on sales and marketing than any other functional area.powerful organization. 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. and Oracle. I hope this book will serve to inform you. Salesforce. Chapter 10. In the end though. We’ll hear from many experts in this area. Having a solid culture. 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.
not just the companies in the software industry.” xiv .software company.
Envy. “the Great”. Gluttony. These were: Pride.1 SEVEN BUSINESS MODELS In the 6th century. Hope. Many would agree that managing a software company requires a little of both. Pope Gregory the Great. Justice. Fortitude. 1 . the Seven Virtues: Faith. Anger. Lust. Not only did Pope Gregory define the seven sins to avoid. or as they are sometimes called. one of only two Popes to be given the title. defined the Seven Deadly Sins. he also included a balancing set of values. the Seven Deadly Vices. Charity. Prudence and Temperance. Greed and Sloth.
There are successful companies in each of the models. Figure 1.” As you’ll see some companies operate in only one model. SEVEN VIRTUES Today.SEVEN VICES. it’s important to understand the seven potential business models before deciding if they are a Vice or a Virtue. 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. You will hear some say. as the software industry undergoes a major transformation to a cloud computing model.1 Seven Business Models 2 . “We can’t move to a SaaS model. “It’ll be great to not have to wonder if this quarter we’ll close that big deal at midnight on December 31. The seven business models are complete and include every company that makes money from their software. the sales guys will never be able to sell it. others have products that operate in multiple models.
or around $800 per user per year. In fact in late 2009. and hires or redeploys people to manage the software. of $4. Many would point out that even traditional software companies have large subscription businesses. It’s here that the spending really goes up. for the update/upgrade rights as well as maintenance. the customer is charged some percentage. This cost multiplier is not limited to complex business software. The software is licensed in perpetuity with a one-time price.000 per user. say 20 percent. In our case study. The business that bought the software then buys hardware. Why does it cost so much? Amy Konary. including Oracle and SAP. in our example. at International Data Corporation (IDC). and one of the earliest industry analysts to follow the change to software delivered as a service.CLOUD Model One: Traditional This is the traditional software business model. sometimes referred to as the software support fee. Oracle’s maintenance business is over $12B annually. this translates to about $65 per user per month. Subsequently. 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. mastered by many companies. cites five major areas that cost 3 .
so called premium support. Software support or maintenance is mostly limited to break-fix. sales and marketing expense. of course. A Model One business is good since.000 per user. It is. and change management. and all of the profit realized from software support.” The implications of this are substantial. can be funded. in the software company’s interest 4 . Some software companies also provide additional support services. leaving little money on the table for new programs and projects. CIOs’ budgets are dominated by spending on managing software. security. the customer will end up spending $1. SEVEN VIRTUES companies millions of dollars annually. problems. In our example.SEVEN VICES. which typically can run thirty to forty percent of revenue. while the purchase price of the software may be $4. you’ll see license revenue breaking even. which often conflict with their partners or internal consulting groups who also provide value added services to help the customer service the software. performance. access to a Web site of usage information and upgrades. First. with the large up-front purchase of the software. At a well-run Model One business. “CIOs and their departments really focus on five key aspects of the management and maintenance of their computer and software systems: availability.300 per user per month just to manage that software.
WebEx founder Subrah Iyar. 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.” Model Two: Open Source The free software movement began in the late 80s. in many ways. lecturing at Stanford in 2006. IBM made an acquisition of Gluecode Software. that’s why the consumer chooses to buy versus build. a group of programmers came up with open source as a replacement for free software. creating the Open Source Initiative (OSI) to promote the new term. a privately held company specializing in integration 5 . as the customer needs and wants future functionality and. Most major free software projects now have corporate backing of one form or another. By 1998. this is mutually beneficial. and many of these companies have become quite adept at working with the community that participates in the projects. In May 2005." an in-flux of for-profit dollars has changed the landscape of free software remarkably. and the users who report bugs and suggest new features. Under the name "open source. In the early stages of any software company.CLOUD to move customers forward on new releases so as to not incur expense in supporting multiple releases of the software.
All of this has not been lost on the investment community. JasperSoft estimates there have been nearly two million downloads and over 20 thousand corporate deployments in 200+ countries of their Jasper Reports.SEVEN VICES. The purchase price was estimated at $100M. CA. SEVEN VIRTUES software based in El Segundo. John Roberts. Over the past many years. Red Hat. which has been the lifeblood of Model One software companies. open source software companies have struggled with the business model. In early 2008 Sun Microsystems surprised everyone with their $1B acquisition of MySQL. at least $500M has been invested in a variety of open source software companies. in June 2006. MySQL estimates there have been 100 million installations and over 60 thousand downloads per day. install. While having people download. Why? The open source model (much like Google) has reduced the entry cost to “try it” to zero. announced the acquisition of JBoss for a reported $420M. 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. A year later. and potentially use your software is far better than having them download a brochure. Support and maintenance. has been 6 . the world's best-known Linux distributor.
Unfortunately.CLOUD difficult to monetize. support fees are still paid. Traditional bronze. it may not be for long. and gold support has also been difficult to sell. 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.300 per user per month the customer would be 7 . other than Red Hat with their Red Hat Network. EDS (purchased by HP) and IBM Global Services have each built large. revenue has been elusive. 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. Some are providing additional functionality in a paid-for subscription service not available in their free version. In Model Three software is still licensed from the software company on a perpetual basis. but now the Model Three business will take on the management of that software for less than the $1. Model Three: Outsourcing. multi-billion dollar businesses outsourcing the management of the software and systems. Recognizing that the cost to manage software systems is much larger than the purchase price of the software. silver. companies have emerged who are eager to take on the challenge. But with lots of money and smart people.
the dependence of system availability on people. First. ADP is probably the granddaddy of this business model. Second. Tiny Infosys with over $3B in revenue has traded at more than eight times revenue. including entire business processes.SEVEN VICES. Outsourcers can manage the software either at the client’s site or at their own locations. there are two key challenges. IBM has recognized that they could grow their Global Services business by a factor of two. As much of the cost of the software management is buried in the cost of people. with the inherent risk of human error. These companies continue to grow and take on higher value functions. is also not sustainable. which. EDS at the time it was acquired was over $20B in revenue. have emerged. Model Three can grow big companies and high value companies. was $50B. Of course today every Model Three business is leveraging a global pool of talent whether in India. a new group of companies. bringing them to 8 . in 2007. such as Infosys. massive differences in labor rates are not sustainable. IBM Global Services generates over 50 percent of IBM’s revenue. China or Eastern Europe. SEVEN VIRTUES spending. While Model Three is good. a multiple most software companies would be glad to have. using offshore resources in India to lower the overall cost. over time.
Model Four.CLOUD over $100B in revenue. and an installed base. Russia. The big difference in Model Four is to give the purchaser the choice of having the software company service their own software. the Hybrid model. represents a bridge from Model One to Model Six: This business model attempts to leverage what an existing software company already has: products. Could a Moore’s Law of service science be possible? Model Four: Hybrid. In Model Four the traditional licensing model is retained. that means the software is still licensed for $4. In our example. or unfortunately. Fortunately. “One grand research challenge for us is how to scale up services and how to invest to get year-overyear improvements. distribution channel. IBM will need to invest in technology. Spohrer has said. This is the model Oracle pursued 9 . and China—so unless there are highly skilled resources in Antarctica waiting to be discovered.000 per user with a support fee of 20 percent or $65 per user per month. While the opportunity is there. For most traditional software companies. they are already in the low cost countries—Brazil. they would erode their margins. India.” Computer science has benefited from Moore’s Law (where the capabilities of computer chips double about every 18 months). Jim Spohrer founded an initiative inside IBM called Service Science.
300. What’s new is the customer is given an option to have the availability. but first let’s make sure you’re clear on the model. having a Model Three business provide the service for less than $1. and CRM and supply chain. the customer had a one year contract that could be cancelled with 30-days notice. there would be a 20 percent rebate in that month.SEVEN VICES. the choice was between servicing the software themselves for around $1. no questions asked. there was a “Nordstrom’s guarantee”. manufacturing. security. It’s important to note this decision-enabled revenue to be recognized on a monthly basis. and changes managed for an additional fee. In Model Four. 10 . performance. With Oracle On Demand. SEVEN VIRTUES beginning in 1999 and resulted in the fastest growing business inside of Oracle in 2004. Oracle guaranteed if for any reason the customer were unhappy with the service. From the consumer’s perspective. and rather than have a complex Service Level Agreement (SLA). the purchase of the software and support remain the same. or having Oracle service their own software for $150 a month. We’ll come back to answer the question as to why was it so inexpensive. Customers ranged from middle market to Fortune 500 companies and spanned the range of applications from financials to HR.300 per user per month.
there was also a great degree of standardization.1 illustrates this flexibility by using the symbols of @H (for at home) meaning a data center owned by the business providing the service..g. sales force tracking.CLOUD Unlike some lighter weight business processes (e. There will be more on this later as well. recruiting) customers of Oracle applications implemented much heavier weight processes (e. There will be more on this in a later section. While there was a great deal of flexibility versus what you will find in either Model Six or Model Seven. This started 11 . there needed to be flexibility to customize and integrate the applications. which could be separately priced and give a customer the choice of how much they valued their customizations. As a result. which isolated changes that were made for one customer. Figure 1. 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.g. email.. Additionally. An innovation was provided called CEMLIs. Model Four also allowed customers to choose when changes would be made to the application and when upgrades to major releases would occur. process or discrete manufacturing).
12 . while you could choose when upgrades happened.SEVEN VICES. Automation ultimately results in both lower cost and higher quality service. 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. Standardization allows for specialization. ultimately computers could be put to work automating the key business processes in the business of servicing software. For example. and increasing parts of the upgrade process were automated. yes. product level margins could be achieved because of a high degree of standardization. Oracle On Demand upgrades were done hundreds of times in a year by specialized teams. With repetition based on specialization. they always followed the same process. SEVEN VIRTUES from the hardware and moved up to the disaster recovery process. By the way. all applications were run on a Linux multi-tier grid. Specialization allows for repetition. A simple example is upgrades. whether managing computers or doing heart surgery. Model Six and Seven businesses follow this principle in spades. the key to quality and skill in any area. disks were network attached versus SAN attached. and.
you can use your existing sales channel. In fact. the average selling price nearly doubled for on-demand applications. any model is not without its downsides.CLOUD The advantage of Model Four is that the software does not have to be re-engineered. The model is not cannibalistic. the entire installed base of customers who had already bought the software was open for business. since the sales teams were compensated not only on the sale of the license but also the first year of the service. because they had bought all the software they could eat—an interesting paradox. by having a model that split the software license from the service. There were many situations where there were no traditional software sales persons assigned to customer accounts that had bought a lot of software. They have made a living selling “boxes and bodies” and see the vendors’ entry into this space as competitive. And. Alternate channels of software distribution do not welcome Model Four. The second downside is the model can only take you so far from a cost 13 . In addition. from a sales perspective. Of course. 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. since the traditional license model is preserved. Finally.
the elimination of the upfront license fee. While Model Four allows for the delivery model to change. Model Five: Hybrid+ Many people see the SaaS model as a change in the way software is purchased—in particular.SEVEN VICES. 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. if one were to assume a 36-month time to pay off the $4. This of course is the story of Siebel and Salesforce. The cost. Of course. which compares favorably with doing it yourself or having an outsourcer provide the service. The 14 .com. By the third year. but midstream in the second year this begins to change. In our example. But if someone could provide 80 percent of the function of your product at $5 per user per month. it is easy to see you are not far from moving the business model as well. not price. the revenue recognized in the first year is less than in Model One. this model is resulting in much larger revenue stream than was true in the traditional model. SEVEN VIRTUES perspective. this would equate to $110 per user per month. More on that later. of providing this service is in the neighborhood of $50 per user per month.000 per user license fee. then you would no longer stay in Model Four. which is probably closer to $500 per user per month.
CLOUD choice of moving from Model Four to Model Five is strictly a business choice. of the new business software companies started in the late 90s have adopted this model. the cost to manage the software can be driven down through standardization. Callidus Software. Most. has adopted this business model. 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. Rather than split the license from the service as we have seen in Model Four. even MMORPG (Massively Multi-player Online Role Playing Games) like World of Warcraft have adopted Model Six. As a business model. 15 . Since Leslie Stretch became CEO in December 2006 the company’s subscription revenue as a percentage of total revenue has nearly doubled. repetition. and automation. if not all. but there is a floor. they are providing one price for the entire service. Model Six: Software as a Service As we discussed briefly in Model Four. a provider of sales performance management solutions. not a technology choice. representing nearly 40% of total revenue.
Unfortunately. such as the Microsoft channel. simplicity of purpose allowed them to compete very effectively. one can debate whether it’s a better model for the software company. WebEx. SEVEN VIRTUES Software engineered for Model Six will have dramatically lower cost structures than software as a service offered by traditional software companies. and Concur you will find it took somewhere between $50M and $100M to establish the distribution channels required to achieve their meteoric growth. UpShot and others. companies in Model Six have to find a way to finance the early acquisition of customers. and being able to plow that cash back into sales and marketing. the existing channels.SEVEN VICES. as we’ll see. While these new companies’ offerings had far less functionality. While it is clearly a better model for the consumer of the software. 16 .com. Furthermore. rather than being able to close million-dollar deals for software licenses in Model One. With no easy distribution channel. the cost and. are at best ambivalent to the Model Six players. Siebel had to face the direct challenge of Salesforce. as in Model Four and Five. Model Six is not without its challenges. This has typically been done in the private and public markets.com. If you analyze Salesforce.
eBay. Google. You don’t buy books. Of course that does not mean Model Seven companies have no cost of sales and marketing. Google by the ad.CLOUD many companies in Model Six reach $10M in revenue and have no ability to grow larger. First. Yahoo and eBay are all software companies. Amazon. Model Seven: Internet Model Seven encompasses all of the companies in the consumer Internet. auction cars or find your perfect mate on Google. Model Seven is distinctive in a few ways. or Zappos by embedding it in the sales transaction. You only need to look at eBay’s or Google’s financials to realize that there is a healthy spend on sales and marketing. it 17 . each of the companies in Model Seven has adopted business models that are asymmetric. We all use Google for free. and Amazon. The second big difference is that each of these solutions is highly specialized. Google.com have all been very focused on a single function.com. Facebook. Whether it is eBay charging by transaction. the software. Asymmetric business models mean that the user of the software is not directly paying for the usage of the software. it’s the advertisers that are paying for it. Why? Again. these companies have chosen unique and often indirect ways to monetize their intellectual property.
if not billions. so no new company could get in the door. SEVEN VIRTUES comes to cost. and I wanted to expand to Melbourne. Of course. but the cost. all the time promising full integration. this all shows up in the speed of adoption. Cost of Software If you went to work for Dell you'd be well educated on the cost-or economics-of hardware. the cost of software is much.SEVEN VICES. in fact. I had to hire a sales/support engineer and a salesperson. Australia. The simplicity of the Google interface begged for millions. 18 . In the traditional world. if I built some interesting software in Sydney. Unfortunately. these applications tend to be complex. and difficult to integrate—no one needs to spend much time comparing a traditional enterprise application to consumer Internet applications to see the difference. much more. This has led to massive suites of applications. difficult to install. Some will say the cost of software is the cost of the CD or the manual. but. That model resulted in the classical software company “going horizontal”—meaning they began to offer more and more parts of the solution. so what is the cost of software? I'm not talking about the price of the software. My cost of distribution meant that I needed to extract the greatest degree of value out of each of my customers. of people to adopt—clearly not possible if the application tried to do everything.
This really ruined my Windows 95 configuration. Let's put it in the Sunday paper. A few months or years later. But the first question the CEO would have asked would be. “We're software guys. “Hey. I got a new feature I want everybody to see. and so on. What would have happened on Monday morning? My guess is the 1-800 number would be ringing with calls: “Hey. Let's assume ten years ago we wanted to start a company building auctioning software. Monday morning would 19 . set up a help desk. “Okay. It's called 'Buy It Now. boss. right? We would insert the CD in the next Sunday paper. got a really great idea.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.” No problem. They'd have just gotten out their C++ compilers and ultimately created an auction product.' Let's put it in the next release.” we would say.” “No problem.” so a million CDs would go out in the Sunday paper. “No problem. and my ShockWave DLL doesn't run anymore. some bright product manager would show up and say. We would have hired a bunch of smart programmers. I got the plan. and we can solve this. how do we get it to anybody?” Some smart VP of Sales and Marketing would have said. wait a minute.” Then we'd hire a support team. boss.
it has been a relentless pursuit of taking cost down by an order of magnitude every decade. SEVEN VIRTUES arrive and the first phone call would start with “My Linux server just fell over after I installed your software. The problem is economic. The cost for delivering the software. and Data General dominated the scene and companies like Intel were dismissed as not delivering real computers.” No problem. We'll hire a bunch more support guys. all of us in the traditional software business know how to do this. What would have been the cost of that scenario? It would have been enormous. Problem solved. If you think about what has transformed the entire hardware industry. Burroughs. we'll move them to India. no way you would have been a multi-billion dollar business. that microprocessor stuff is cool. but it's 20 . Now. distributing it. and managing it would have been so prohibitive eBay would have had to charge hundreds of dollars for every auction. hardware companies like Digital Equipment Corporation. We've been doing this since the beginning of software.SEVEN VICES. There is no way eBay could possibly have existed under this software cost model. “Well. It has completely transformed the hardware business. While you could have built a small auctioning software business. In the beginning of the 80s.
21 . of course. and analyze their cost (the cost of delivering the software). if the customer is running this software in house. guess what that number is? -About $7 per user per month. That's impressive. But that's not the end of our story. this is for a fixed set of functions. Bottom line: anyone in the software business needs to become a student of the economics of software. 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. it's significantly lower than having each and every customer of the software solve the problems uniquely. so even if SAP or Oracle charges $150. By the way. it's costing them closer to $1000 per user per month. and if you want to control when you upgrade.” We all know the end of that story. If you go down 101 to Mountain View and estimate what it costs Google to deliver their service. chances are. if you become a student of Salesforce. Now remember. you're going to do really well if the cost (not price) is $50 per user per month. Now. Remember. you're going to have to standardize the hell out of everything. so you'd do really well to get it out there at $50.com.CLOUD never going to amount to much. you'll come away with a number closer to $0. forget about it.70 per user per month.
Whatever you choose to do you’ll need to think about how the choices affect the entire company. With increased competition and the dynamics of the open source movement. In the next chapter we’ll drill down a little more into some of the 22 . one thing is clear—the traditional software model is ending. which is what Blackbaud did. with increased pressure on top line growth without fundamentally altering the cost structure of software companies. SEVEN VIRTUES Summary While it may not be clear to you which model to choose. since unlike the change to client-server. the days of million-dollar software licenses are clearly over. we will be at the end of software.com did. You can choose to use Model One and Model Four.SEVEN VICES. and have some of your product line in Model One. You can choose to move completely to Model Six. You can choose to start out a new business in Model Six. You can choose to acquire Model Six companies. And. which is what Salesforce. You will have many choices. this shift is much more than technology. which is what Concur did. which is what Oracle did. some in Model Four and some in Model Six.
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
and the rest. Iyar and Min saw the potential of continuing as a service provider. While collaboration is the modern day telephone. it took Subrah and Min until 1999 to actually launch the service. is history. Although they started WebEx in 1996. Intuit QuickBooks. so they launched WebEx. perhaps the first business software any company purchases is a financial application. Fortunately. by 2000. they were generating nearly $500M. revenues were $25 million. Webex continues to deliver one of the largest application cloud services in use today.CLOUD space. During 1997 and 1998. By their 10th anniversary.5 million in revenue with about 400 customers. With over two million registered users and over 85. as they say. Whether an Excel spreadsheet. Microsoft Dynamics.000 meetings per day around the globe. WebEx went public in January 2002. Oracle Financials or SAP every company large or small needs a financial application. ironically. 27 . In 1999. they spent a lot of time working with customers such as Charles Schwab and StrataCom. WebEx generated about $2. was also purchased by Cisco. which.
APPLICATION CLOUD Financial Applications Financial applications record and process accounting transactions within functional modules such as accounts payable. has mirrored the “suite-approach” pioneered by Oracle and SAP and instead focused on the middle market. governance. financial analytics. almost every company has a financial application and second. procure-to-pay. accounts receivable and payroll. that application generally has few users. few 28 . First. Concur Story While Oracle was one of the leaders in moving from a traditional model to software delivered as a service. This area has not been easy to penetrate for application cloud service companies. and travel & expense management. 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. Netsuite. Financial applications can help provide cash & treasury management. perhaps for two reasons. who made a public offering in 2007. financial control and reporting. 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.
and the number of employees went from 700 to 300.. While some question whether such a transition from a Model One provider to a leading Model Six service provider would be 29 . with seven of the world's ten largest companies using their services to help them manage the corporate travel and expense process. Of course if you were smart enough to purchase the stock at the low point your returns would be over 40x today. Their customers include Vivek Ahuja. A/P & Payroll Supervisor at Stryker Medical. 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. Since those lean years early in this decade. Concur has steadily held to its mission. The stock sank to below $1 a share. Senior Business Systems Analyst at Cummins. a global measurement equipment company. particularly since they were a public company. Courtney McCoy. Concur began life as a traditional software company. Concur had over 4. Global Operating Manager at Agilent. This was a major challenge. nearly the entire senior management team was replaced. By the end of the transformation. Inc.CLOUD examples compare with Concur.000 clients. By the end of 2006. but in June 2000. a leader in diesel engine technology and Gloria Brown. a $5B+ medical technology company.
and Chris Blum founded the company under the name NetLedger in October 1998. CFO of Asahi Kasei Spandex America. few can debate the success of the bold decisions that Steve Singh and Concur made. President and CEO of China Manufacturing Network and David Stover. Bill Ford. Today. Asahi Kasei. Evan Goldberg is Chairman of the Board and Zach Nelson is the company's CEO. S. CFO. a price optimization solution for the financial services industry. The company launched its first online financial application targeting small businesses in 1999. The company changed its name in September 2003 from NetLedger to NetSuite and made a successful IPO in December of 2007. Netsuite Story NetSuite is a leading provider of integrated online software that allows SMBs to manage their entire business in a single application. is a subsidiary of Tokyo-based Asahi Kasei Fibers Corp.C. With this foundation. located in Charleston. Dave Lipscomb.APPLICATION CLOUD possible in the public markets today. Nomis Solutions. a Tokyo- 30 . Evan Goldberg.. Netsuite’s customers include Todd Spartz. Everette Phillips. support and marketing. the company broadened the application to manage both back-office and front-office sales.. with financing from Larry Ellison.
performance appraisals. develop. Beginning with tracking of resumes of prospective employees to keeping record of employees’ compensation & benefits. Human resource applications are built to assess. It was founded in 1987 and ultimately acquired by Oracle for $10B in 2004. and align a businesses workforce. is perhaps the best-known company specializing in HR software.CLOUD based manufacturer of polyelastane filament fibers used mainly in textiles. 31 . Peoplesoft. 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. acquire. Human Resource Applications Along with financial applications. human resource (HR) applications were an early example of widely adopted business applications. You might find it hard to believe but they replaced their SAP R/3 with Netsuite in 2008. HR software tracks the lifecycle of many companies most valuable asset: their people. Taleo in October of 2005 and Successfactors in 2007.
Today. His message to the students was. Over the past 20+ years. on that Friday. maxed out his credit cards. Typically. Karsan talked about a day in 1991 when he had mortgaged his house. but as a recruiting firm.com and WebEx started out knowing what they wanted to be. Kenexa began operations in 1987 not as a software company. the customer would have waited to the last day to pay. and was ready on Monday morning with his rent payment. Kenexa is a provider of software: proprietary content. Kenexa has grown its business to over $160M in revenue in 2009. and was three months late in the office rental payments. Kenexa has bought and sold over twenty businesses.000 contract to a large insurance company. Kenexa is the oldest of the group. Karsan took the check. At a lecture at Stanford University. having been founded by Rudy Karsan in 1987. Through these acquisitions. you might be as hard working and as smart 32 . On a certain Friday. But Kenexa’s path has not been without its challenges. services and process outsourcing that enable organizations to more effectively recruit and retain employees.APPLICATION CLOUD Kenexa Story While Salesforce. drove from Philadelphia to New York City. but for some reason the checked arrived early. cashed the check at the issuing bank. The good news was that the company had sold a $40. the landlord had told him the sheriff would be coming on Monday to evict them. Kenexa took the long way home.
Taleo Story Taleo traces its beginnings to 1996. Some 33 . contingent workers. Taleo had over 12 hundred customers. Taleo joined fellow application cloud service companies DealerTrack. in the end. success is based on a lot of luck. or multinational. By late 2007. one million users. agency referrals. Kenexa and Vocus in going public in 2005. which would become the most successful job board in Canada. whether it is centralized. when founder Martin Ouellet created Viasite.CLOUD as the next group. Tetu understood by leveraging the power and connectivity of the Internet. and had tracked over 66 million candidates. Following on that success. who had a background in supply chain management. This was his lucky story. campus recruits. or existing employees—to all positions. 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. decentralized. but. 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. Ouellet founded Recruitsoft in 1998 and joined forces with Louis Tetu.
as he was an Executive Vice President at PeopleSoft before joining Taleo. the business can’t move forward since the technology can’t move forward. given the often-high degree of customization most customers apply. CEO Michael Gregoire is uniquely qualified to see the similarities and differences between traditional and application cloud service companies.000 people worldwide. VP of Recruiting at Hyatt Hotels & Resorts. Hence. Meaning that. an $8B+ provider of semiconductor fabrication equipment.APPLICATION CLOUD of Taleo’s customers include Randy Goldberg. Global Staffing Director at Applied Materials. and Bruce Hatz. which manages over 100. With a schema change comes an upgrade. there must be a schema change. today. the cost for the upgrade becomes prohibitive. Head of HR at Roche. a global healthcare company employing over 75. He sees the challenges of the traditional software business as being interlocked with the technology. Christoph Thoma.000 rooms in over 40 countries. “Yes!” 34 . and. if a traditional software company wants to deliver any significant function. 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.
When he went to the VP of HR to inform him of his decision the VP got a key out of his pocket. The office had no cubicles. skimmed through it. and furniture that had been specially designed to reinforce that each individual was part of a team. founder and CEO. no separate offices. All Lars could think was “Is this is how they manage careers?” 35 . Many companies are born on the personal experiences and frustrations of their founder. here you are. “See. I also have you …” and he started going through more and more org charts. that’s not the only one. “Well. and then pulled out all a set of org charts and said. On graduation Lars went to work for Novartis. In short order he was headhunted by Unilever. Successfactors is no different. but that is a lower job. I also have you in Germany.CLOUD Successfactors Story Sometimes you can tell a company is different when you walk in the door. a large pharmaceutical company based in Switzerland. A few years back I went to the SuccessFactors headquarters to meet with Lars Dalgaard. opened a closet and pulled out a huge three ring binder. You are going to be running Portugal in two years!” Lars said: “What? What are you talking about?” The VP came back and said.
and is one of the leading global services providers in insurance. a VP of global human resources for Allianz Group. informed decisions. Allianz Group was founded in 1890. from outside the organization) to give one view of the customer. 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. Their solution is deployed to over four million end users in over 30 languages. The goal is to allow customer-facing employees in sales. banking and asset management with more than 180. and marketing to make quick. 36 . to closing the sale. and in 2008 placed number 133 on Deloitte’s 2008 Technology Fast 500. customer support. In 2007 they made a successful initial public offering. CRM’s goal is to bring together information from all data sources within an organization (and where appropriate. owner of the Sport and Spine Rehab centers based in Virginia and as large as Brenda Leadley.000 employees worldwide.APPLICATION CLOUD Out of that epiphany he founded Successfactors in 2001. Their customers are as small as Jay Greenstein. servicing the customer and ultimately delivering more products and service to the same customer.
sales and finally service. Today they have over 2000 active customers representing organizations of all sizes across a wide variety of industries. In the next three sections we’ll divide up CRM into CRM for marketing. and publicity opportunities. As a part of their solution. The company. Vocus Story Vocus was co-founded by Rick Rudman and Bob Lentz in 1992. podcast interviews. email marketing.CLOUD This area has been very fruitful for application cloud service providers. Vocus provides a proprietary information database of over 800. Web-based software for public relations. Their database contains information about the media. This group includes products from Vocus. Maryland. sends out press releases. web analytics and soon new innovations in social media marketing. media outlets. went public in December 2005 and provides on-demand. contact schedules.000 journalists. Their platform monitors news. CRM for marketing includes solutions to track PR effectiveness. based in Lanham. Omniture and Constant Contact. 37 . analysts. and helps communicate with the media and the public. including in-depth journalist profiles. If the software can increase the number of qualified leads for sales then it’s CRM for marketing.
address the communications life cycle. to distributing information. to closing the loop with digitized feedback and management analytics. one of the largest nonprofit organization in North America. developer’s tools. and gathering Web visitor data primarily for small businesses. from identifying key contacts. Christine Nyirjesy Bragale. all media relationships were tracked and managed in a notebook (no. as international spokesperson and Director of Media Relations. and other relevant information compiled by its dedicated media research team. 38 . For a business that is over $2B in revenue that’s no small step. After a successful career in television news at ABC. 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. Omniture Story Josh James and John Pestana met as undergraduates at a computer science class at Brigham Young University. The Vocus application is used by a wide variety of organizations. joined Goodwill Industries International. not a computer—a real notebook).APPLICATION CLOUD pitching preferences. together. When she joined. The Vocus database is integrated with a suite of on-demand modules that. They focused their first business on Web design.
Luckily. Omniture is used in a wide variety of applications.com was losing customers in the checkout process. resulting in a 70 percent increase in conversion rates. “In the early days. Overstock. Novell can 39 . and availability. Using Omniture’s SiteCatalyst software. static Web pages. We decided the best thing to do was to go after the larger companies and then use them as references. before people even knew what to call it. Reflecting the new business focus. Omniture is derived from the words “omniscient” and “future. we had to fight through numerous issues. the company was renamed Omniture in 1998. In another application. 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. they refined their checkout process from seven down to three Web pages.” Josh recalls the early days when they were offering software as a service.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. Novell uses Omniture SiteCatalyst on their corporate intranet to track the use of applications. Based on this data.” Today. redundancy. like security. and dynamic Web pages.
Gail’s advice to would be entrepreneurs: "Get a lot of advice. it’s rocketing past you—and there is no way to catch up!" In 2009. The company had just seven employees and a handful of clients when Gail Goodman took the reins in 1999. Adobe was so impressed they made Omniture an offer they couldn’t refuse. was incorporated as Roving Software in 1995. I had never raised venture capital. by the time you hear it. "just like a freight train. which he likens to a freight train. Inc. Omniture acquired Visual Sciences. only the revenue. Constant Contact Story Constant Contact. Josh loves the subscription business model. Since your competitors cannot see the bookings. it seems as if the business is growing slowly at first. But. remove them. which had themselves. but don't feel like you're a slave to every piece of advice you get.APPLICATION CLOUD better expose pages. Goodman raised more than $20M in her first year and launched the company’s first product: a permission-based email tool. acquired WebSideStory and now finds itself as one of the gorillas in Web analytics. or adjust resources so that they don’t have to spend money on pages or applications that are not being accessed. I networked like crazy. so I 40 .
" Constant Contact’s customers span the range.. their communications pastor made it his mission to update the way they communicated their message to the congregation. Some of it wasn't. dedicated congregation the church inspires through innovative and creative communications.CLOUD talked to lot of people who had done that.. the company changed their name to Constant Contact and in October 2007 completed its initial public offering. writing the shutdown plan. “My most rewarding business moment … was reaching 100. Bill Miller. Bethany Church of the Nazarene has an active. beginning with an unlikely category .churches. happened in summer 2001 with less than one payroll in the bank. Not only does their newsletter reach 3. Reflecting on her years as CEO Goodman said. It was just a very dark week or two." By 2004. the church has experienced a tremendous increase in the number of people signing up. Some of the advice I got was on target. the company has over 150.000 opt-in subscribers weekly but it also reaches people 41 .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. Today. Since they started sending out their new monthly newsletter." And "my scariest business moment .
com Story The largest and most visible player in the application cloud service market has been Salesforce.” said Bill. As a result much of the initial focus of traditional CRM companies.com in 1999 to pursue a simple idea: deliver enterprise applications on the Web. Whether it’s having visibility to a lead by status. like Siebel and the leading application cloud service company.com. has been building software to increase sales productivity. The company began. the lead conversion%. not in a garage. and with a team of three software developers. but in a 42 .com.” CRM for Sales In most companies the largest single expense is sales.APPLICATION CLOUD in multiple countries. Salesforce. “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. medium and large enterprises. With that vision. CRM for Sales seeks to standardize the sales process and make it repetitive. Marc founded Salesforce. “It is an incredible feeling to know that people in another country want to be a part of our extended family. salesforce. converted leads by month or who is the tops sales rep this class of software has been adopted by small.com. Marc Benioff founded Salesforce.
Behind the Cloud: The Untold Story of How Salesforce. Jossey-Bass (October 19. Salesforce. From those early days. At a now-famous keynote speech.CLOUD rented San Francisco apartment. It received no venture capital investment.com Went from Idea to Billion-Dollar Company-and Revolutionized an Industry.com throughout the book. they were the highest valued of all of the application cloud service companies. 3 Benioff. was generating over $150M in revenue. 43 . M. “Our growth validates the belief in ‘The end of software. next door to his home. but was funded instead by Marc and Larry Ellison.com check out Marc’s new book3. There will be a few stories about salesforce.’ as well as raises new questions for existing software companies. For the insider’s view of the creation of salesforce.. by 2005.” says Marc. Marc gave his company a mission—to bring about the end of traditional software. Everywhere he went he wore a pin that had the word software crossed out. 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. In 2009.com’s growth has been meteoric and has symbolized the movement to software on demand. The company made an Initial Public Offering in 2004 and. 2009).
1 Growth of the U.S.S. the U. GDP (gross domestic product).1 shows the dramatic shift from manufacturing and agriculture to services over the last 50 years. We all know that high quality service is relevant information. chat. At the highest level. economy is a service economy. email or phone. Financial services. service is all about information. education.APPLICATION CLOUD CRM for Service Once you have a customer keeping a customer is increasingly defined by the quality of the service delivered. Figure 2. Services Economy Today’s services economy accounts for 80 percent of the U. Figure 2. delivered. personal to you. IT services. Whether thru web. healthcare.S. and software are all industries that don’t 44 . as you need it.
lawyers. Instead. One of the earliest companies to focus on customer service application was RightNow Technologies. 45 . Figure 2. contrary to conventional wisdom. Furthermore. Figure 2. and customer service professionals and all of these jobs are fundamentally different than working on the assembly line in the early 20th century. This includes executives. hedge fund managers. doctors.2 shows the results of the 1996 census. and administration and management functions. 70 percent of the service employment involves highly skilled people. scientists. this shift has not been an increase in the number of kids flipping hamburgers.CLOUD manufacture or grow a single thing.2 United States Census (1996) Services economy jobs include software designers.
Montana. and Microsoft all originally started without VC funding. but he reminds the reader that Dell. 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. they doubled their revenues and employees every 90 days for two years before 4 Gianforte. Gianforte knows he is pushing a contrarian view. If you have the money you will spend it—whether you have figured out your business model and market or not. Gianforte didn’t start RightNow with venture capital. "Bootstrapping Your Business: Start and Grow a Successful Company with Almost No Money. In RightNow’s case.” BookSurge Publishing.APPLICATION CLOUD RightNow Technologies Story Founded by Greg Gianforte in 1997. HP. Let your customers fund your business through product orders. Based in Bozeman. RightNow went public in August 2004. You sell your precious equity very dearly before you have a proven business model. and makes a passionate case for starting businesses the old fashioned way. This is the worst time to raise money from a valuation perspective. G. RightNow focused on helping customer service organizations improve service delivery using technology. Often more time than it would take to just go sell something to a customer. Money removes spending discipline. 2007 46 .
It fundamentally changes both the relationship between the software vendor and the customer. and the economics of purchasing and owning software. “Customers want solutions that are up and running in days or weeks. and manages customer service interactions from initial contact through resolution. and they are looking for ways to reduce overall ownership costs. companies can more effectively deliver support and service for their customers. Boyd Beasly. assigns. a $3B+ leader in electronic gaming and Chuck Udzinski. tracks. “Delivering applications as a cloud service is more than just another way to implement software. a $6B+ manufacturer of power tools. Consumer Services Manager at Black & Decker. a 50 year old natural nutrition company. Web self-service. and. 47 . Senior Director of Customer Support at EA. even then. RightNow provides a suite of customer service and support solutions that captures. Some of RightNow’s customers include Ken Harris. the employees retained more than 75 percent ownership after the company raised $32M. not months or years. and collaboration modules. Using their case management. CIO at Shaklee. email management.” says Gianforte.CLOUD they took any outside money.
1 edition (July 11. Norton & Co. but we black people had little cargo of our own?” The answer is that. Jared. “Guns. and today we are just in the early stages of this next evolutionary stage for software. The lucky ones had the right circumstances to do both. and still others 5 Diamond. W.W..APPLICATION CLOUD Utilizing cloud delivery models. due to conditions in a few isolated places in the ancient world. 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. 2005) 48 . Germs.”5 may make you see the world a little differently. and Steel: The Fates of Human Societies”. The cloud is altering the way enterprise applications are being consumed. Germs and Steel: The Fates of Human Societies. Having the ability to store food meant that the society could develop specialization. others could grow food. organizations are able to get these advantages over on-premise applications. “Guns.” Vertical Applications Reading Jared Diamond’s bestseller. Being a food producer meant that the population could grow. Some people could make weapons. Specialization meant technology could develop. some peoples began to produce food either through herding large mammals or growing crops.
Consider the fact that CitiGroup today employs more programmers than SAP or Oracle. what they needed to do. No one had to teach anyone how to use the system. A slightly tongue in cheek example of specialized software is Flock IT. that if we provide purchasing. This is no surprise to us in the modern world of work. auction a Pez dispenser and search. and sales force automation solutions. to the teams building the software. But if you walk into any ongoing business. So how specialized can software get? We’re conditioned to think that business software is about ERP and CRM. you’ll discover that the ERP/CRM footprint is less than ten percent of their overall software. 49 . it became immediately obvious what it did and. and why does specialization matter? Probably the best example of the power of specialization is Google. HR. but what does specialization mean in software. we’re sure history would be quite different.CLOUD could erect buildings. we’ve built all the software a business needs. If Google had started out to build software that enabled you to buy a book. financial.
do we have to think this way? On a global basis. he just couldn’t afford to do this. he would have had to hire a support engineer and a salesperson. Had he wanted to expand to Sydney. But post-Internet. In the not so distant past.3 Specializations Flock IT is a company specialized in poultry management software.APPLICATION CLOUD Figure 2. are there not enough people managing poultry to use this software? And once you see this possibility. Unless he had enough capital and a high enough price on the software. 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. doesn’t the future 50 . Search Yahoo! or Google and you’ll find thousands and thousands on Flock ITlike companies.
the old system was both slow and manually driven. to the tune of $100M. and poultry management software? There are many examples of specialized applications including those provided by Blackbaud for nonprofit organizations. with each lending institution using a different form—cumbersome for both the consumer and the dealer. DealerTrack Story DealerTrack was founded in January 2001 with the initial financing of $20M coming from three forward thinking financial institutions: J.P. it was this much-needed competition. AmeriCredit Corp. 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 . If anything created focus at DealerTrack.CLOUD look like lots and lots of specialized software: search. In their first year.. auctioning. Ford and General Motors decided to finance a new company. Dealertrack for automotive dealerships and Opentable for reservation taking restaurants. Chrysler. but by late 2002.. cattle management. RouteOne. a dark cloud came onto the horizon. Morgan Chase & Co. pig management. They saw whenever a consumer applied for an auto loan. and Wells Fargo & Company.000 dealers in the United States.
DealerTrack went public in 2005. Not only does he get tremendous economic/cost leverage. Chairman and CEO of DealerTrack. First. but the application cloud service model also gives the company the ability to release new products quickly and nimbly. a real “information superhighway.S. he will say there is no other way to run a software business. which gives him tremendous pricing leverage.APPLICATION CLOUD products for the dealers. Blackbaud is the market leader in software for non-profit organizations. In addition a few years ago they began offering their traditional products in Model Four. DealerTrack has established an electronic channel.000 dealers in the U. they have a large support and maintenance revenue stream as a by-product of selling in traditional Model One. More interesting. Below is a chart of the growth of that business. which they are doing at the rate of three per year. talks about delivering software as a service. Blackbaud Story Founded by a soccer-playing Englishman.” that allows them to continue to distribute new software products. Their story contains elements of all of the seven business models. When Mark O’Neil. 52 . and today the company is connected to almost all of the 22.
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. thru acquisitions in 2006 of eTapestry and 2008 of Kintera. The solution is an integrated software and 53 . On the consumer side. Upon completing the reservation you receive OpenTable rewards points. cuisine. Blackbaud has two Model Six companies engineered for multi-tenant low cost delivery. OpenTable Story As one of the newest public companies. date. which can be redeemed for discounts at member restaurants.CLOUD Figure 2. and price range. Opentable is a great example of the blurring of the boundaries between consumer and enterprise software.4 Blackbaud’s Four Product Lines Finally.
datacenter. 54 . Cloud Service Stack Many of these application software companies were architected in the late 1990s. Sales are done using the traditional door-to-door approach and once the buyer says yes. In many ways the business looks like a combination of a Model One and a Model Seven business. you don’t pay for the service. Given the relative unreliability of the network connections this is all implemented on a standalone PC. Todays cloud services not only include the business applications we’ve just discussed but also network. 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.APPLICATION CLOUD hardware solution that computerizes restaurant host-stand operations. integrates with the POS system and allows for reconfiguring the tables for larger and smaller seating arrangements. On the other hand the consumer side of the business is a classic Model Seven business. customer preferences. But if you were going to start today there is a much larger array of services that you might consider using. a consulting arrangement occurs to implement the reservation system. As a diner. The system keeps track of VIPs.
software development and operations management cloud services. storage. Compute & storage services use data center cloud services to house. 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. power and secure the physical hardware. 55 . which give you access to computer and storage resources. Amazon Web Services pioneered compute & storage cloud services. ß Figure 2.CLOUD compute.
So whether you’re taking an existing application and delivering it as a cloud service. 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. These early pioneers had to build much of the infrastructure and software to deliver and sell these applications. This organization will serve to frame the next several chapters. What’s exciting today is the creation of 1000s of new cloud services which new providers of applications can now take advantage of. 56 . The next several chapters will focus on the different layers of this new cloud stack. developing one for in-house use. 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.APPLICATION CLOUD Finally all of these services are connected thru network cloud services.
which are the basic network connection services. If you choose to build your own compute and storage cloud service. 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 begin where the name “cloud” began. we’ll 57 .3 DATA CENTER CLOUD SERVICES The compute. connected to the network. Staying with the physical infrastructure. storage and network hardware that power all cloud services ultimately must reside in a facility. We’ll move on to discussing one of the key attributes in the reliability and cost of any cloud service: power.
However. Anyone operating an application cloud service will one day need to operate globally.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. this is not the case so it will be important that the application deployments are location independent. At $1.000 per square foot it’s some of the most expensive commercial real estate you’ll ever see. reliable and fast then operating out of two data centers on the planet could work. It is here that the world of appliances and application cloud services intersect. reliably and efficiently. but the reason we all call this cloud computing is because we always drew the network (and the Internet) as a cloud. entire books can be written on network cloud service so for our purposes we’re going to focus on one valuable idea. we weren’t sure how it worked but somehow bits were transmitted from one point to another. By that we meant. 58 . Clearly. If networks were indeed uniformly cheap. and will require at least one disaster recovery site. Network Cloud Services Many have forgotten.
you’ll need to figure out where your users are concentrated.1 Front of the Box. then you’ll locate people in the Americas. Companies like Akamai 59 . performance and reliability of your “Front of the Box” Network. and the cost. If you want the people managing the software to be working the first shift. versus keeping a team in the US on three shifts.CLOUD At some point in the day or night. Figure 3. If you want to provide for a disaster recovery site. Europe and Asia time zones. as shown in Figure 3. the people managing the application will be remote from the physical location of the computer. you’ll need at least two sites. Beyond that.1. Once you’ve done that. Back of the Box Your next question will be where to locate the computers. you will need to establish a “Back of the Box” Network to connect the computers to the operations staff.
some downsides to not being able to keep all of the hardware in a few locations. Furthermore. as soon as you realize that standardizing the infrastructure of software and hardware to run in Shanghai. In particular. this should be no problem if you have architected a location-independent application. it becomes only a financing question as to who owns the actual data center. But. As a result. of course. as opposed to the operational technology. there is a fine line between application appliances. if you’re application needs to run in Chile. in the end. the cost of bandwidth might be such that you’ll need to locate the computers in Chile. 60 . faster connections. Again. San Francisco and Paris is critical to global deployment. and a multi-location deployment of any application cloud service. it will be more expensive. There are. Furthermore. as it will be much more difficult to take advantage of spare capacity afforded by other users consuming the same compute and storage resources. it really doesn’t matter where the building that houses the computers is located. It becomes more a matter of who pays for what.DATA CENTER CLOUD SERVICES have built a large business helping companies provide more reliable.
After two minutes. even though they had tested the generators every quarter. (TR-1006274. Madison WI. Unfortunately there was a clog in the fuel line. In fact at least 4 times per year the power will be out for a minute or more. a large data center had to rely on their diesel generators. but during testing 6The Cost of Power Disturbances to Industrial and Digital Economy Companies. and no matter how reliable your electric grid. 61 . The Electric Power Research Institute (EPRI) estimates the cost at over $119B per year. June 29. A few years ago. there have been several efforts to assess the national cost of power interruptions and power quality. the systems failed. there is always the possibility you will lose power. quality data centers will be equipped with UPS and diesel generators. 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. It turned out their quarterly test duration was for 30 seconds.CLOUD Power Quality Computers and networks cannot operate without power. You should. Available through EPRI). During the past decade.6 EPRI. As a result. of course periodically run a test to see if the generators are working—and make sure you run the test long enough.
” Technical Committee White Paper. 8 Data Center Energy Efficiency and Productivity By Kenneth G. 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. EYP Mission Critical Facilities 62 .58. and no more. Power Utilization Efficiency While having high quality power is important. In another published work9 a team from the Lawrence Berkeley National Labs benchmarked 22 data centers. 2007. the Uptime Institute gathered data from many of the 85 members of the Institute’s Site Uptime Network®.DATA CENTER CLOUD SERVICES there was enough fuel in the line to run the test for 30 seconds. “The Green Grid Data Center Power Efficiency Metrics: PUE and DCiE. To give you a sense of the range of possibilities. as we will see the effective usage of power has both economic and carbon impacts. Rumsey Engineers Bruce Myatt. and Bill Tschudi. Brill . Evan Mills. In their sample size the average PUE was 2. PUE was established by The Green Grid. Presented at The Uptime Institute Symposium 2007 9 Best Practices for Data Centers: Lessons Learned from Benchmarking 22 Data Centers Steve Greenberg. Their analysis showed data centers could be over 40 times as energy 7 The Green Grid. 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. Lawrence Berkeley National Laboratory Peter Rumsey.
They created a metric defined as the Computer Power Consumption Index. The 22 data centers ranged from a PUE of 1.0.3 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. 63 .2: Computer Power Consumption Index for 22 Data Centers (Inverse of PUE) Again.2 shows the Computer Power Consumption Index for all 22 data centers in their study. Figure 3. Figure 3. which as it turns out is the inverse of the PUE. Figure 3. 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.5 to 3.CLOUD intensive as conventional office buildings.
3: Google Data Center PUE Why is there variation among the data? Power and cooling architectures differ between facilities. the data centers shown were built at various times since 2005. Also.DATA CENTER CLOUD SERVICES Figure 3. and the facilities themselves are located in different climates. Data Centers E and F are two of the newest and have among the lowest values. and thus the PUE during cooler quarters tends to be lower than in warmer ones. and over time their designs have become more efficient. PUE values are impacted by seasonal weather patterns. Data Center A is the oldest facility of the group and has one of the highest average PUE values. For example. 64 . In addition. which influences the PUE performance.
the other major area of focus is the reduction of overall power and cooling requirements.6 percent of total U. an amount comparable to color televisions’ power consumption.S. 10Koomey. respectively.2B for the U. electricity consumption in 2005. The total electricity bill for operating those servers and associated infrastructure in 2005 was about $2. and the world.7B and $7.10 Not all power is created equal. For this answer we turn to the Emissions & Generation Resource Integrated Database11 (eGRID). The total power used by servers represented about 0. In total power demand. Estimating Total Power Consumption by Servers in the U.epa. Jonathan G. Dr. 2007.2 percent.CLOUD Power Carbon Footprint With the increasing cost of power and the need to reduce carbon emissions. 11 http://cfpub. Some power has a much higher carbon footprint than other. this is equivalent to about five 1000-MW power plants for the U. and 14 such plants for the entire world. Jonathan. and the World. Koomey completed a study on the global power consumption of servers. When cooling and auxiliary infrastructure are included. Stanford University. that number grows to 1. February 15.S.S.S. eGRID is a comprehensive source of data on the environmental characteristics of almost all electric power generated in the United States.gov/egridweb/ 65 .
00876. 66 .DATA CENTER CLOUD SERVICES The annual total output emission rate is the measure of the carbon emissions as it relates to the generation output. 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. Units are in lb/MWh and are converted to lb/Watt-year by multiplying by 0. Figure 3.4: 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). Surprisingly there are coal-fired plants that are cleaner than some oil-fired plans. otherwise eGRID divides the country into a number of sub-regions.
CLOUD Economics Building data centers is expensive. which shows what many who have been students of this area already know. And just so you don’t think this is purely a US phenomenon. GDS-China is in the process of building five new data centers in China. Figure 3. Figure 3. In 2008 Amazon. In Figure 3. At ~$1.com broke ground on an 116.5 you’ll see an IBM estimate of the cost breakdown for the various components.000 per square foot these are expensive capital investments. 67 .6 is an analysis done by IBM. with a plan for fifteen more.5 Datacenter Capital Costs This brings us to the on-going operational costs of a data center. In 2007 Microsoft decided to build a 470.000 sq foot data center at an estimated cost of $550M.000 sq foot data center at a cost of $100M. Sixty percent of the cost is mechanical and power systems.
that power or energy costs dominate the operational costs of a data center. C. Maint.DATA CENTER CLOUD SERVICES That is. from 3 cents per KWh in Idaho to 18 cents in Hawaii. Summary Network and datacenter cloud services represent significant capital investments to build out. 2008 Figure 3. “In the Data Center.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. Increasingly the location of the data centers will be dictated not only by the proximity to 12 Belady. & Mgmt. Electronics Cooling Magazine. 68 . Moreover the cost of power can fluctuate by a factor of at least 6x. 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. Power and Cooling Costs More than IT equipment it supports”. $300 Cumulative Cost of Operations ($m) $250 $200 $150 $100 $50 0 Energy Cost Staffing Bldg.
69 . low-carbon high quality power. We’ll discuss this more on the next chapter.CLOUD networks. the next layer of the stack is to provide compute and storage cloud services. or the month. i.. These data centers will in many ways be the bridges and roads of the next generation of all industries. but also by the availability of low-cost. Utilizing these datacenter services.e. providing computers and storage technology purchased by the hour.
4 COMPUTE & STORAGE CLOUD SERVICES The cover story in Business Week in November 2006 was entitled Jeff Bezos’ Risky Bet13. if not over. but also compute and storage. To which most people thought he was crazy. 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. Jeff. founder and CEO of Amazon was announcing to the world that not only was he going to sell books and CD’s. Business Week November 2006 70 .
Virtualization is the ability to take a single physical computer. large and small into the marketplace. their success has brought many players. a Joyent.CLOUD a billion dollars in a little bit over four years of operation. Now in reality (small joke) virtualization as the technology has been available since 1972. when IBM created the VM operating system.1Virtualization In order to cost effectively implement compute & storage cloud services we need virtualization technology. and through a layer of software. While many may have been skeptical at first. give you the illusion that 71 . 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. Figure 4. So whether that is small players that you may never have heard of. GoGrid or Layered Technology.
VMware has built an entire business around this and has been enormously successful. and you were only required to buy it for an hour. Of course in order to execute on this business model they had to achieve not only a high degree of standardization and automation. While virtualization is a necessary technology. For the first time you could purchase the usage of a computer for 12 cents for an hour. it is not sufficient. but also a simple user interface. Figure 4. 72 .SOFTWARE DEVELOPMENT CLOUD SERVICES actually you have multiple computers there.2 Compute & Storage Cloud Service Business Model Amazon’s innovation was not virtualization. their innovation was the business model.
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. they also created the reserved and spot pricing models.3. For example. which is priced on demand at 12 cents per hour. which today you can get a computer priced per hour. the compute service. Business Models Amazon not only created the on demand business model. 73 . In the last generation provisioning a server could have taken longer than growing and harvesting the coffee beans.CLOUD Figure 4.3 on YouTube and see how quickly and simply a server is provisioned. Reserved pricing allows you to reduce your hourly rate in exchange for an upfront fee.
In Figure 4.four different types of applications that are uniquely suited to this business model.4 Spot Pricing So you’re probably wondering . 74 .4 you’re seeing an example of what happened over a period of days in terms of those spot-pricing model. 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. We’ll look at each one in turn.Why do I need a computer for 12 cents an hour? There are four different classes of workloads . how it fluctuated. aperiodic bursty.SOFTWARE DEVELOPMENT CLOUD SERVICES Spot pricing is their latest business model. These are high growth. and on-off applications. Figure 4. periodic bursty.
Clearly this is possible. the business grew to over $150 million.000. but was not in this case. you could now pay $1. but it is widely believed in a little over two years. They are a private company. 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. As a member you can buy a Prada handbag. I need another data center. Traditionally the CIO for Gilt Groupe would have been in the CEOs office saying. “I need another server. They started several years ago by spot auctioning brand name items. The Gilt Groupe runs entirely on a compute and storage cloud service.CLOUD High Growth Applications The first category is high growth applications. I need more power. As an example consider the company.” Clearly it could have been done. Some believe it’s the largest company solely 75 . or know people who purchase high-end women's fashion. I need another rack. For those of you who either purchase high end women's fashion. Gilt Groupe. you probably already know who is the Gilt Groupe.500. If you think about how many transactions had to be processed in order to generate that kind of revenue. and instead of paying $2.
the Intuit website failed under high load resulting in 350. In the case of Dockers register and you'd get a free pair of pants. is building on compute and storage cloud service. and the end of January. Hallmark sends more e-cards on Valentine’s Day than any other day. more storage. You may have never thought about it. several years ago. What many of don't know is on April 15th. Aperiodic Bursty The next major category of application is characterized by aperiodic bursty workloads. What many 76 . This is why nearly every startup company in Silicon Valley. February 14 is Valentine's Day. and more data center space. A few years ago Denny’s and Dockers ran multimillion-dollar ad campaigns to drive people to their websites. you don't want to be out there trying to buy another computer.000 people who could not file their taxes. Because in the event of high growth. but it is the number one day for e-cards on the planet. The story here revolves around three dates: April 15th. who thinks they are going to be the next Groupon or the next Gilt Groupe.SOFTWARE DEVELOPMENT CLOUD SERVICES running on a compute and storage cloud service. You don't send a Valentine's Day card on February 13th and you certainly don't send one February 15th. In the case of Denny’s if you registered you’d get a free breakfast at Denny’s. The end of January is Super Bowl Sunday. February 14th.
Pathworks 77 . Now you can cost effectively ramp up a simulated load for an hour or a day using 1. 70% of the time tumors can be diagnosed by visual inspection under a microscope. 30% of the time the state of the art is to run chemical analysis. meaning applications that runs.000s of computers and only pay for the time you use them. hence. we’re going to talk about a service provided by Pathwork Diagnostics. the Dockers website actually collapsed from too much load. runs and then doesn't run.CLOUD people don't know is that within minutes of the Dockers ad running. Of course you could have bought computers located in New York and San Francisco and Miami to test these sites. 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. But purchasing hundreds of computers just to test for one day has historically been cost prohibitive. while technically feasible no one does it. On Off Applications The third category we’ll call on-off applications. They are in the business of providing tumor diagnosis. This is a perfect application for compute & storage cloud services. For this case. and then doesn't run. So these are all examples of the need for performance testing at scale.
Again.000 servers executing risk analysis algorithms. eight hours a night. For six weeks. This case study comes from a financial service firm. 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. and currency markets. 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. twice a year . bond markets.SOFTWARE DEVELOPMENT CLOUD SERVICES takes a different approach. During the trading day. They take the data from hundreds of these samples. 78 .which is their product life cycle . they run 300 servers pulling data from the stock exchanges. Then at night they ramp up to 3. Could they have bought a thousand computers and put them in a data center? Yes of course they could. In the morning the results are provided to their traders. They run five days a week.they utilize a thousand servers and to run giant machine learning algorithms. 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. hundreds of these test.
throughput. Stay tuned there are lots of new solutions. latency. How much are you supporting high performance transactional applications versus just storing photos et cetera. most of what we’re seeing storage services that is in essence connected to the compute services. Furthermore assume three weeks later I went into her office and said: “You know boss. write.CLOUD Let’s assume I'm the guy who talked my boss into buying 3. Storage really has a little bit of a different character. 79 . This is because you need object stores to store the machine instances for the compute service. Furthermore. To consumer and deliver those storage cloud services you’re going to have to consider the type of access. plus the ratio of read vs. We’ve started out with very simple object level stores.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. But obviously there is an opportunity for storage cloud services to exist independently. the experiment really didn't really work out. and how random or how sequential is the access.
or go to the EMC or the NetApp guys how many different kinds of storage do you have. location. 80 . Let’s start with performance characteristics. security or business model. But if I was to go talk to the Dell. There are many reasons why you might need compute & storage services. IBM sales rep about how many different kinds of servers. These cloud services might be specialized by four different characteristics: performance. Sun. Many times private cloud is just used to mean a virtualization project. but in no case is anyone discussing buying or selling an hour of computing. HP. In today’s offerings there are perhaps ten different types of computers and storage. 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. 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. So unless in the traditional world we built these different kinds of compute & storage for no reason. its way more than ten. which are not available today.SOFTWARE DEVELOPMENT CLOUD SERVICES Specialized Cloud Services (aka Private Cloud) Much of the discussion about cloud computing has centered on public and private clouds.
You can choose where your computer storage is going to be and the cost can vary based on that. penetration testing? Do you need to be HIPPA compliant. There will also be compute and storage cloud services specialized by security characteristics. whether that’s Vietnam. post Patriot Act world it’s clear each of the G20 countries will have compute & storage cloud services – a Canadian. et cetera? So there's a 81 . You are seeing this with Amazon today. compute & storage cloud services will be specialized by location. But even if the geopolitical issues could be resolved network bandwidth is not ubiquitous nor universally inexpensive. You need to identify these and ask the right questions. Instead there may be security characteristics you need to accomplish your requirements. Spain or Israel. a French compute & storage cloud service. PCI compliant. In a post Wikileaks. How are you implementing identity management? What's your audit trail retention policy? How are you doing security testing. so it will make sense to locate compute & storage near the source of the demand. Remember even the public cloud companies are not trying to deliver an insecure service. a Chinese.CLOUD Second. So both for geopolitical and technical reasons there will be compute & storage cloud services specialized by location.
So just a simple example of a compute and storage service specialized by location. From small companies like Eucalyptus and Cloud. Consider a compute & storage cloud service delivered by Bell Canada. Today many companies are producing software to enable the creation of these specialized compute & storage cloud services. Priced at a premium to Amazon they are today being used to provide testing services for First Media who provides dating services. Just to give you a small example. Compute and storage cloud services will be specialized by security characteristics.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. but this is far from the end of the story. We've talked about three different ones pioneered by Amazon.SOFTWARE DEVELOPMENT CLOUD SERVICES whole range of different security characteristics that may be particularly important to you. 82 . We’re going to see compute and storage cloud services specialized by different business models. Specifically they are testing of a new system to handle calls coming in through the Internet. Finally there is the question of different business models.
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. Visa is believed to process around 100M credit card authorization transactions and Google about 200M searches per day. IBM projects that by 2011. Indeed when you now see the iPhone and Android as merely the “eyes and ears” of the cloud to quote Vic Gundotra of Google.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. then the potential number of transactions will only grow.000M transactions per day. The NYSE stock trading system processes about 10M trading transactions per day. Computer Carbon Footprint As compute & storage infrastructure grows and as our concern for global warming increases it will turn out that for 83 . 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. 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.CLOUD Today’s Clouds are Small Google’s cloud contains over 500. In fact.
SOFTWARE DEVELOPMENT CLOUD SERVICES modern technology-powered companies the carbon footprint of the company’s computers is the new smokestack of the 21st Century. Yewande Awe (Editor) 14 84 .04 and in India at 0. 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. 15 Environmental Priorities and Poverty Reduction: A Country Environmental Analysis for Colombia (Directions in Development) (Paperback) by Kulsum Ahmed (Author). Kulsum Ahmed. 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. In this section we discuss a simple way to calculate the Computer Carbon Footprint™ (CCF) of any company. 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. Ernesto Sanchez-triana. Simon Commander (London Business School) Rupert Harrison (IFS School of Finance 1st June 2006. Interestingly.02.
33 computers per employee.32-3. 17 Assessing Trends in the Electrical Efficiency of Computation over Time.4: Servers Per Employee Technology Birth Year (TBY) TBY is designed to compute the approximate power consumption of all of the servers.32 to 3. We base our analysis on a recent paper17 authored by Jonathan G. The New York Times.000 people in 2006 it would put their SPE (Servers per Employee) at 45. John and Hansell. 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. 2006.CLOUD Columbia the range was reported to go from 0. Of course probably nothing compares to the modern largescale Internet companies.04 0.000.33 45 India Brazil Columbia Google Figure 4. Saul. In 2006 the number of servers Google deployed was estimated to be 450. June 14. of Lawrence 16 Markoff.02 0.16 With Google employing approximately 10. increasing or decreasing the power consumption. Year 2007 2007 2007 2006 Servers Per Employee 0. Submitted to IEEE Annals of the History of Computing: August 5. 2009 Released on the web: August 17. 2009 85 . Koomey. Hiding in Plain Sight: Google Seeks an Expansion of Power.
Under the above assumption that computations per server doubling every 1. doubling every 1.5 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.25 2003 2004 2005 2006 2007 2008 2009 Figure 4.SOFTWARE DEVELOPMENT CLOUD SERVICES Berkeley National Labs. in 2009.5: 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 2006.75 0.6.5 0. Stephen Berard from Microsoft. Marla Sanchez with Stanford University and. The paper explores the relationship between the performance of computers and the electricity needed to deliver that performance. a pace of change in computational efficiency comparable to that from 1946 to the present. More precise calculations would include the data in Figure 4. The paper documents that computations per kWh grew about as fast as performance for desktop computers starting in 1981. Henry Wong from Intel Corporation. Technology Birth Year 4 3 2 1 (Baseline) 0.5 years. 86 . This will also make our estimates conservative.
6: Weighted average power (Watts) of top 6 servers.000 computers for 30 minutes. Of course it begs the question of what would you do with 10.000 computers for 30 minutes.CLOUD Class Volume Mid-range High-end 2000 183 423 4874 2003 214 522 5815 2005 218 638 12682 Figure 4. http://enterprise. everybody paid attention.000 also buys you 10. As you might guess I was greeted with a big yawn. But when I said $3.000 worth of compute and storage time. Nobody has been given 10. California or Ireland for about 3 ½ years.amd. February 2007. China. but that’s precisely the point. J..000 computers for 30 minutes for $3. So just like client-server computing began with low cost personal computers and low cost Unix servers.. G.com/Downloads/svrpwrusecompletefinal. 2007. Amazon was generous enough to donate $3. I told the class about the donation and started by telling them $3. by sales18 Summary A couple of years ago I had the opportunity launch the first class on cloud computing at Tsinghua University in Beijing.000 buys you a server in Virginia.000 until now. Estimating Total Power Consumption by Servers in the US and the World.pdf 87 . which a group of 18 Koomey.
scalable enough. cloud computing. but instead about an explosion of new applications driven by a wider group of people. so it will be with. “Oracle isn’t scalable or secure enough for enterprise computing”. Will history repeat itself? 88 . In fact these technologies were not superior to the established mainframe and minicomputer technologies. “No one will run their business on Windows”. reliable enough. In those days many people said: “Unix isn’t reliable enough”. but there were economically differentiated. The move to client server was not about porting mainframe or AS/400 applications. We hear the same thing today – cloud computing is not secure enough.SOFTWARE DEVELOPMENT CLOUD SERVICES programmers found new uses for.
so it may be in the fight to win the cloud. who is not an expert a working knowledge of the issues. We’ll cover the fundamental parts of the software 89 . This chapter is not written for the computer science major. tools and economics of software development.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. but instead is meant to give everyone else.
We’ll see how new technologies are bridging the worlds of developing new applications. how it is delivered will vary according to the software and its usage. One dimension in variation is what we’ll call the application weight. Figure 5. While all software can be delivered as a service from the cloud. which heretofore have been highly separate disciplines. it’s worthwhile noting all applications are not created equal.1 Application Weight 90 . Application Spectrum Before we launch into discussing some of the key success factors. and managing them.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.
manufacturing or financial applications deployed in the traditional model have resulted in upgrades occurring once every couple of years. These processes are much more customized. The way Coca-Cola manufactures soda shares little in common with the process Chevron uses for refining petroleum. The lighter weight business processes allow for a greater frequency of change. first. No one has figured out how to make these as customizable as changing your Yahoo home page. At the other end of the spectrum is eBay makes changes 52 times a year. An example of a heavyweight business process might be discrete or process manufacturing. Web conferencing and Internet search. As a result. on the frequency of change. 91 . This is also true of eBay-style auctioning. At one end of the spectrum. Email is a very lightweight business process. The implications of application weight are many. often at great expense.CLOUD By weight we mean the complexity of the business process. meaning the way each of us uses email is pretty much the same. although both are manufacturing processes. it’s been the case that lightweight business processes have been earlier to move to Model Six or Seven. areas that Oracle and SAP have specialized in.
2 Usage Spectrum Corporate applications. and. This usage spectrum is shown in Figure 5. furthermore. those users use the application infrequently. The closer you get to the consumer Internet. figure out where in these maps you’re going to fit.2.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. it will have many implications for your product and delivery options. As you think through your product offering. like SAP Financial Applications. usually have very few users. 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. Figure 5. 92 .
if you have a lightweight business process. The multi-tenancy approach allows you to serve the largest number of tenants per database server. you only architected for singletenancy. 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. 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. In this approach. to be deployed as a service in the cloud and gives the customer some.CLOUD Multi-tenancy One area that is hotly debated is that of a single-tenancy versus multi-tenancy model. one should consider a multi-tenancy model. However. this approach may require additional development effort 93 . and you intend to write the application from scratch. architected for traditional deployment. because multiple tenants share the same database tables. of the flexibility they have come to expect in an on-premise deployment. Adopting Model Four or Five allows software. If you’re coming from the world of traditional enterprise software. but not all. Of course.
don’t get embroiled in the religious war here—there are numerous tradeoffs to be made. depending on whether you’re starting with an existing application or building from scratch. as well as a change management technique. Furthermore each of these applications can be on a different revision level. Most of the multi-tenancy service providers run multiple sites. how is that different than single tenancy? Bottom line. and it has exponential advantages when you serve millions of users in a highly fluid environment. Perhaps more important. whether you have a lightweight or heavyweight 94 .SOFTWARE DEVELOPMENT CLOUD SERVICES in the area of security to ensure that one tenant cannot access another’s data. This is often done to do A-B testing of new releases. Of course. But just when you thought it was a black-and-white decision. if General Motors wanted one of those sites to run only GM auctions. this is only possible in areas where you have lightweight business processes. vastly simplifies the development and management of the software. the multi-tenancy approach forces there to be one code line and. eBay has maintained one code line since they were founded. let’s make it more confusing. therefore. In the limit.
If you want the highest quality. at $1.000.000 for the car and the need for a McLaren mechanic. you can’t argue its low cost and high quality. So how does this apply to software? Figure 5. ultimately. lowest cost automobile. and finally the margins and pricing you’ll need to be successful in the market.CLOUD business process. choose a Toyota.3: dramatically reducing the cost and improving the quality of anything starts with standardization. If something is standardized.3 Standardization 95 . computers are far better at repetition than people. Specialization leads to repetition and. Underlying this whole debate is a much more fundamental principal that’s illustrated in Figure 5. not a McLaren F1. you can specialize. While the idea of a hand-built automobile with a production run of fewer than 100 cars certainly has exclusivity going for it.
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. think about eBay. Now. repeat.3. Software Development Lifecycle Few books on software engineering have been as influential as Fred Brooks' Mythical Man Month. and management processes should be an effort to move closer and closer to the left-hand side. Furthermore each would be deployed on a different software stack—different versions of operating systems. So if you look at Figure 5. and middleware. every box on the right-hand side has a different color. software architecture. Much of the book was based on his experiences as 96 . databases. each running the same software. each deployment would have a different change management process or disaster recovery process implemented by different groups of people. with three sites. Beyond that. originally published in June 1975. Every choice you make in hardware architecture. Over at the other end of the figure. With greater degrees of standardization comes the ability to specialize. hardware and management processes. and ultimately automate the greatest cost you have—the human labor required to manage these systems. as each installation would be on different server and disk architectures. we’d end up coloring each one differently. all of the states in between represent progressively greater degrees of standardization.
you'd spend six months in requirements. again no real surprise to the old-timers. No Silver Bullet: Essence and Accidents of Software Engineering. he recounts that the project could not be considered a success. April 1987.CLOUD the development manager of IBM's OS/360. He furthermore estimated that any software project would use a 1/3rd of its scheduled time in requirements. No inventions that will do for software productivity. 1/6th in coding. and the last 12 months testing. the very nature of software makes it unlikely that there will be any. Brooks documented what came to be known as Brooks’ Law: “Adding Manpower to a late software project makes it later. three months writing code. 97 . He writes of flaws in the design and execution of the system and ultimately concludes that the project was late. reliability. Assuming a 24-month release cycle. well over budget. In the book. “Not only are there no silver bullets now in view. at the time.” Many in the software business can testify to their personal experiences that validate his comment. Fred. and 19Brooks. the largest single software development project ever undertaken. and underperformed against expectations for the first several releases. Brooks later published a landmark paper19 in which he wrote. and a 1/4th in system test time before it would be ready for release. a 1/4th in unit test. IEEE Computer.
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
the opportunity to lead is very clear.” Gates compares the push toward such services.” 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 . Bill Gates. 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. there are key people to carry on his vision. which range from online business software offerings to free Web-based email. “This coming 'services wave' will be very disruptive. 2005.SOFTWARE DEVELOPMENT CLOUD SERVICES Microsoft Azure Story In a widely publicized email to top executives. First and foremost is Chief Software Architect. While Gates might have left day-to-day operational responsibilities. 30. in order to best formidable competitors. to the changes he saw nearly a decade ago. The Internet Tidal Wave. Ray Ozzie. “We have competitors who will seize on these approaches and challenge us—still. which prompted a massive shift at Microsoft toward Internet-based technology. Then he wrote a now-famous memo. “We’re going to look back at this era and wonder how we did without this other kind of computer in the cloud.” Gates wrote.” Gates wrote. “The next sea change is upon us. dated Oct.Net services with 102 . In a recent interview Ozzie said.
or machines.CLOUD integrated operations management. While with Google Apps they provide office applications in the cloud. It's a fluid system that runs your code in response to load and demand.” Ultimately. App Engine Tech Lead said. Kevin Gibbs. Google AppEngine Story In mid-2008 Google introduced App Engine. Instead. we provide a way for you to package up your code. As an example the SQL Azure service provides availability monitoring on five-minute intervals as well as updating lower level system software as required. We don't run arbitrary compute jobs. or RAM or a number of CPUs. We also don't give you a raw virtual machine. or anything like that. specify how you want it to run in response to requests. App Engine is not a grid computing solution. By providing a more vertical (more constrained) offering the tradeoff will hopefully 103 . Speaking at App Engine Campfire One in April 2008. App Engine’s goal is to provide a simpler alternative to the traditional LAMP stack. “App Engine is different than a lot of other things out there. App Engine is their first attempt to provide a platform for others to build cloud-based applications. and then we run and serve it for you. You don't reserve resources.
The database is not SQL instead it is based on Bigtable. the system used for Google. Bigtable is schema-less. meaning it can support arbitrary new properties or columns. 104 . App Engine starts by writing server side code in Python. As we know. While there are some early applications being demonstrated. it is still early days. Bigtable is a fault-tolerant. but there also needs to be an operations environment. One feature you won’t find is joins. making all of them appear to be a single storage table.com. It is designed to move data around and restructure the system automatically to account for hotspots and increased storage. which can be created as you code.SOFTWARE DEVELOPMENT CLOUD SERVICES be greater productivity at the expense of flexibility. You can make use of numerous Python modules and libraries using any Web framework. Toward that end an administration console is provided to give you access to the application. Unlike SQL. not only does there need to be a programming environment. since they are typically a source of performance problems in a distributed system. distributed system that can span tens of thousands of hard disks on thousands of machines. If you want flexibility you can always go buy your own computers.
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.com and Facebook’s platform. Good examples of vertical services include Netsuite’s NSBOS. Salesforce. but also a marketplace (AppExchange) to encourage new CRM applications. Vertical platform services assume you are building a specialized usage of the wider platform provided by the vertical platform cloud service. Netsuite seeks to allow application builders who want to specialize their ERP oriented platform for more specific markets.com Story In traditional business software.com has led the way in turning their platform into a service others can use.com’s force. 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. Salesforce. 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. Salesforce with force. 105 . Salesforce.com seeks to provide not only the technology.
writes that two events changed Salesforce. the objective was to enable customers and partners to customize the Salesforce.SOFTWARE DEVELOPMENT CLOUD SERVICES AppExchange was launched in late 2005. Visualforce is a framework to build custom user interfaces. enabling productive code reuse and standardization. which fire when any user performs certain data operations. similar to HTML. Apex provides Force. ironically almost at the same time that Oracle acquired Siebel. which can be called from other classes and triggers. The first was an attempt to use the platform to write a quote application. A year after the introduction of Apex.com’s approach. At the time. which required transactional integrity. The result.com platform with a procedural language so that users can go beyond declarative programming to write code where needed. The other key event was that developers began to build applications that were not the conventional formsbased apps. Phil Wainewright. Underlying the Force. Apex can also create classes.com application and extend it. according to Phil.com platform added Visualforce. The Visualforce framework includes a tag-based markup language. who blogs about SaaS for ZD Net. There was no firm plan to extend the core application platform beyond its formsdriven database model.com 106 . was the creation of the Apex programming language ultimately leading to a complete platform for building application cloud services. Force. You can use this language to create triggers.
primary keys and defining relationships in terms of these keys. He’s had a long history in risk management software beginning with Risk Laboratory. launched in 2008. While similar to SQL in some ways. it's an object query language that uses relationships. foreign keys. the real test is the types of applications that can be built and delivered using the salesforce. not joins. Instead of developers’ having to deal with keys. as well as optionally providing user interface representations in both the parent and child records. Riskonnect’s software. which he started in 1994. A relationship field stores the ID of the parent record in a relationship. Of course. The Force. “This is 107 . The Force. Bob Morrell founded Riskonnect in July 2007. the database deals in terms of relationship fields. Salesforce Object Query Language (SOQL) is a queryonly language. Two interesting case studies are Riskonnect and Stakeware.com cloud.com platform supports two query languages: Salesforce Object Search Language (SOSL) is a language for searching all across all persisted objects. helps people visualize and understand risk at very high levels. for a more intuitive navigation of data.CLOUD platform is a multi-tenant database.com database differs from relational databases in the way record relationships are implemented.
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.com application. another force.” 108 . and Shell Oil.SOFTWARE DEVELOPMENT CLOUD SERVICES essential because too many consultants only use complicated calculations. lecturer. how would other factories and the supply chains respond. The Mexican Government.” Morrell said. StakeWare enables corporations to gather. Zaidenweber has over 15 years of experience in sustainability as a researcher. But many people don’t need that. in 2004. An example would be if one factory goes down. Natan Zaidenweber founded StakeWare. identify key issues and related indicators that are relevant and material to include in the standard G3 sustainability report. 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. Riskonnect allows users to drag and drop information to compare risks visually. and manager working in projects for The World Bank. organize. and analyze stakeholder data.
with their true identity. and a text markup language—that allow applications to integrate tightly with the Facebook user experience. a little more than a month after announcing it had 150 million active Facebookers. Connect and find friends who also use the application. 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. it’ll be difficult to pretend you’re Angelina or Brad.CLOUD Facebook Story In February 2009. Of course not only are basic profile 109 . who runs the application platform team. Dave Morin. 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. 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. twittered the number was now 175 million. Share information and actions on the application with their Facebook friends. nor are incented to represent themselves. This is a particularly valuable service since in the cloud many people will not represent. a database query language. after all unless you have no friends.
Citysearch. For example. a successful application on Facebook can grow to millions of people in a short time. groups. When iLike launched 10. and more. With access to the social graph. events. if a person changes their profile picture. iLike announced they had passed three million and were growing at a rate of 300.SOFTWARE DEVELOPMENT CLOUD SERVICES information available but also the profile picture. their privacy settings will follow them. With such a large population of people on Facebook. 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.000 people. friends. VLane. 110 .000 people joined in the first 12 hours. an application can dynamically show which Facebook friends already have accounts on the application. this is automatically updated in the application. and Howcast. In less than a year. A case in point is the story of iLike. In addition. If you’re interested in seeing early examples of applications using the Facebook platform take a look at TechCrunch.000 per day. ensuring that users' information and privacy rules are always up to date. photos. Now if we all were so lucky. As an individual moves around the Web. or removes a friend connection. By the end of the first day they had 50.
As a more vertically focused cloud service.000. we can now economically reach the Fortune 5. called SuiteFlex. 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. give application developers data storage flexibility.CLOUD NetSuite Story In 2005.000". a public cloud development environment that includes a set of Application Program Interfaces (APIs). The NSBOS APIs. To use Zach Nelson’s words: “By using the cloud. and create completely new custom record types for objects unique to a 111 . a mechanism to distribute applications. and the NetSuite application itself. NetSuite opened its architecture to partners and outside developers to further its reach through its NetSuite Business Operating System (NSBOS). 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.
both small CPG manufacturers. moving to the model reduces the number of variations and creates greater standardization. Whether that’s a standardized delivery model in Model Four or Five. By adopting the vertical application cloud service they could quickly and inexpensively manage their entire trading relationships. from inventory to shipping and invoicing. Circle of Friends and Mad Croc. in just nine months.300 retailers. With NetSuite providing the underlying cloud services. they built a multi-plant MRP application. But without an EDI solution they were limited in which retailers they could work with. 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. SPS Commerce. So how does moving to an on-demand model change anything as regards testing and QA? First of all. or using one line of code 113 .CLOUD chose to build on NetSuite. Neither could afford traditional ERP and EDI applications and the IT resources necessary to keep them running. most of software development time and cost involves testing. thereby allowing a small supplier to quickly and inexpensively meet the complex EDI requirements. benefited. Testing As Fred Brooks noted.
Furthermore. 100 percent of your customers experience that bug immediately. Think about that. Now. one database. For instance. you’ll know. and one hardware platform. “For Concur. But there are also major new responsibilities and issues. you can use the actual customer systems to develop real-world tests. The tests are more representative and come at a much lower cost. rather than wonder whether an upgrade will work. reducing the degree of freedom reduces the number of overall tests that have to be developed and executed. since the application will have already been tested in the development labs. Concur co-founder Michael Hilton said. So. IBM and MySQL databases on HP. the model lets you begin to leverage tests of specific customer configurations and execute those tests very early in the development cycle. Rather than employ an army of test developers in your engineering organization. that 114 .SOFTWARE DEVELOPMENT CLOUD SERVICES when you move to Models Six or Seven. the QA team can limit their focus to one line of code (hopefully). instead of trying to create and manage tests for this application release (and the three previous releases) and insure that they work on Oracle. if you introduce a bug into production. IBM or Sun hardware. Collapsing the supply chain between the customer and the producers of the software has even further economic benefits.
That means that.CLOUD means over six thousand companies and over four million end users are affected by any defect. not a release every 24 months. our users are getting new innovations and benefits without having to do anything. customers don’t have to deal with it right away if they don’t want to. just as we will see in the next chapter on operations. the testing/QA function will need to re-engineer for the new reality of a release a week or a release a month.” Of course. every month. At Concur. Again.” 115 .” It has fundamental impacts on how you think about quality assurance. meaning that. 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. if the feature is big enough. “This fundamentally changes how you develop. It forces you to care a lot more about the user experience. as Hilton points out. we do meaningful functional updates to our service every single month. ease of use and change management. so users can easily digest them. Lots of things end up being optional. And you end up releasing more often. You end up releasing things in smaller chunks.
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. “We don’t support extensions. CEMLI stood for Configuration. Localization and Integration. and described 17 classes of reason why 116 .” Or others would say.” The conversation was confusing. Marian defined the CEMLI framework. we allow for configuration. we support configurations.” was the famous Henry Ford quote often used by people describing early offerings. As Oracle On Demand was blessed with a natural channel to medium and large-scale businesses. “You can have any color you want as long as it’s black. Modification. any conversation with corporate IT will inevitably lead to the discussion of how to customize the application. “We don’t allow for customization. today Senior VP of R&D at Risk Management Solutions. While this subject is almost nonexistent from a consumer perspective. it remained challenged on how to address this question. In 2000. Some engineers would try to be PC (politically correct) and say. Marian Szefler. Extension. architected an innovative approach while at Oracle that changed the argument from techno-babble to a business decision.
for the first time.6 CEMLI Framework The framework shown in Figure 5. Adding a new report was far less invasive than adding a 117 . not all CEMLIs were created equal. of course. grouped. and discussed by both the customer and Oracle—the framework eliminated the politically correct dialogue that preceded it. “CEMLIs” could be counted. one could have a precise conversation. by creating these classes.6 lists the 17 classes and is. unique to Oracle applications.CLOUD someone other than Oracle R&D might need to add software to an Oracle application. You should take away a few ideas from this. First. Second. Figure 5.
SOFTWARE DEVELOPMENT CLOUD SERVICES trigger. The cost for servicing the “one” is many more times than the cost of servicing the “many. In fact. former CIO of Unocal. meaning the likelihood that a mistake in this class would cause data corruption or a down system. where standard products. The classes were ranked by how “toxic” they were. So now the CIO could ask the business. By isolating CEMLIs and separately pricing the management of these. the CEMLI framework created an environment where the degree of customization became a business decision. There were cases at Oracle where the cost to manage the CEMLIs was larger than managing the entire Oracle application. The model created a framework for the business to justify why the particular CEMLI was worth the extra expense. used the cost to manage CEMLIs to move the number of CEMLIs down from 1500 to 300 over the period of 18 months.” 118 . “Do you want to spend X for the uniqueness. the customer could choose how much they wanted to spend. something you want to avoid at all costs. you were coming closer and closer to making fundamental modifications to the software. or can we use the standard product and save money?” This is no different than in the real world. as you got to higher degrees of “toxicity”. for what degree of uniqueness. for example. not a technical or religious one. Fred Magner. Finally. are far lower cost (and higher reliability) than custom crafted cars like a McLaren F1. like Toyota Corollas.
Both teams need to be working in the same organization. In our model. 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. when some of these very same prospects have returned to look at Taleo to replace those same customized solutions purchased earlier from other vendors.” Concur’s Michael Hilton sees the investment in architecting a solution as one reason traditional R&D and consulting are now connected. However. When you think about traditional enterprise software companies. years later. our approach has been validated. This approach provides customers the ability to avoid the customization version lock trap while still enabling customers to meet their unique business requirements. 119 . a lot of times the teams that write customizations (typically consultants in the field) are completely separate from the core R&D teams. “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. He said. Taleo CEO Michael Gregoire said. “It’s just part of our development model.CLOUD Anyone in enterprise software has faced these challenges. that doesn’t work. Concur created a model that allows them to easily move customizations into core code.
there is no “middleman” between the producer of the software and the consumer. what features aren’t. Chairman. At Concur. As you’re delivering the service. It took us a couple of years to really get it right. at the same time. you can tell what features are being used. it is much easier to talk to the customers. They can use data to determine what 120 .SOFTWARE DEVELOPMENT CLOUD SERVICES utilizing the same tools and processes. What’s more. let’s get back to R&D.com takes special advantage of designing an operational environment that allows them to experiment with new features and. we built out a fairly complex architecture to deal with customizations. He speaks from an excellent vantage point. In a lecture at Stanford University. so that everything scales. Cloud Development But. since the software can be instrumented. migrates. Amazon. and CTO.” Traditional vs. compare with the old system. having spent eight years with Oracle. Perhaps no one is better qualified to talk about the differences between the traditional development and development in Model Six than Evan Goldberg. while still operating in our multi-tenant environment. Our large clients can have their unique needs meet. as Founder. followed by ten years with NetSuite. First. but the benefits are extraordinary. Goldberg pointed out there are numerous product design benefits to Model Six. and works together seamlessly.
With an ability to focus on single version. versus the traditional model. something. as a designer. delivering software as a cloud service allows for testing through actual customer usage.CLOUD features to keep and what to retire. “Kill Bugs Dead!” There is instant gratification to solving complex problems. software engineers can put all of their energies into that release. Goldberg said. The 121 . as Goldberg put it. given that installation is occurring on the companies’ computers. And. As we’ve already pointed out. versus working on back porting to multiple releases on multiple platforms. The ability to monitor real-time performance and develop and inventory tests based on actual usage are significant advantages over the traditional model. The immediate feedback loop afforded by the model allows the software engineers to.” The last group Goldberg addressed in his Stanford lecture was the QA organization. the engineering staff doesn’t need to spend a lot of time on simplifying installation. Finally. “they were never good at. where it may be months before a particular patch can make it into a production system. you can build on top of previous innovations rather than worry about which customer has which features. because there can be universal adoption of innovations.
But in any of Models Four through Seven. the average has been over three releases per year. Goldberg ended his comments by putting up a slide that said: “Operations: Welcome to the New World. how you architect for customization. or how you’re going to have to re-think testing and software release. 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. it’s a new world. In the case of NetSuite. With such a rapid rate of change. for a VP of R&D in a traditional software company. 122 .” He noted that. worrying about the operations of your software was a distant issue. Whether it’s database architecture.SOFTWARE DEVELOPMENT CLOUD SERVICES challenge that QA shares with the other disciplines is that each release of software is happening much more quickly. There was always the support organization and the customers own operational people that stood between you and any issue. that idea is a distant memory. we can’t depend solely on human power so all aspects of engineering are going to have to automate.
the availability of your software. problems. perhaps most importantly. As Evan says. you’re going to need to understand how to manage the security.” 123 . performance. we’ll spend time on the key success factors in the management and operations of software. “As the VP of R&D. change and.CLOUD In our next chapter.
vice president for Oracle. Today. a student recites multiplication tables to learn to multiply. This is no different in the world of managing software applications. the key to excellence in anything is specialization and repetition. an application cloud service provider manages hundreds of systems and therefore has to repeat numerous processes multiple times. Swimmers swim thousands of laps to perfect a stroke. Don Haig. cites an example of where this repetition ultimately 124 . and a great surgeon performs hundreds of surgeries to master her craft. This is true for all human endeavors.6 OPERATIONS MANAGEMENT CLOUD SERVICES Repeat after me.
In Oracle On Demand. can often separate the talented from the average: How often do you do this? Research has established that busy hospitals generally deliver better care. an event that most organizations have to manage with some frequency and yet is an annoying distraction from their core business. citing the 125 . upgrades have been repeated hundreds of times per year. When a customer is managing their own systems. they will do this upgrade once and only once. “You don't need to explain this further.” Upon hearing this example. Consider the following research in the medical profession in light of the complexities of managing IT infrastructure. said. but in most IT departments today. but understand they need to stay current on the latest release of a vendor's software. the research shows. Navy Captain Brian Kelly. We have an expression in my business—‘You don't want to be the first guy to get your cabbage worked on’. A simple question posed to surgeons.CLOUD helped his customers. “Take software updates. TRICARE Military Health Services.” Yes. CIOs really don't like to do updates. CIO. But recent work adds more detail. who was trained as a neurosurgeon. the users of Oracle applications. complex surgeries are done for the first time by people who read the book the night before.
if I encounter something out of the ordinary. they don't know how to react. But increasingly. the more I fall into a standard routine.” 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. Dr. 126 .” Many studies of recovery from computer outages show the outage is often extended because the operator has seen something out of the ordinary. who don't frequently and regularly perform certain procedures. a vascular surgeon who performs frequent carotid endarterectomies. “Then.OPERATIONS MANAGEMENT CLOUD SERVICES specific risks patients face in the hands of low-volume surgeons. the profession sees constant repetition as key to mastering complex surgeries. I'm quicker to recognize it and correct it. “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. Since it may be the first time they've seen the issue.” said Mackey. a delicate procedure to clear a key artery of blockages. ”It’s something every surgeon should keep track of and show patients if requested. “The more often I do a procedure. William Mackey said.
or the upgrade process. after “Where do I get a beer?” was likely. 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. Consider a corporation's system. Mark S. Litwin. If you went bowling ten years ago. So. and we’ve repeated it a hundred times. If we know the performance management process. the first question. network. since scoring was left to whoever said they remembered 127 . authored a study where high volume meant 40 or more procedures annually. then why not program computers to automate the process? To better understand what it means to automate key processes consider a simpler problem. while all ten lanes were bowling. “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. and database and application operations teams. a University of California at Los Angeles urology professor. rest assured. And computers are far better and lower cost than people.CLOUD So what’s a high degree of repetition? Dr. each with a different answer to the question. did a score of 200 on Lane 1 compare to a 180 on Lane 2? It was anyone’s guess.
performance. we’ll go through some key processes in security. 128 . this is good.OPERATIONS MANAGEMENT CLOUD SERVICES how. you enter your name. Consistency and standardization are being enforced through automation. availability. they get to receive the benefit of new R&D. From an R&D point of view. Change Management One of the advantages of Models Four through Seven is the increased simplicity of moving customers forward to the latest release. In the remainder of this chapter. or VP of R&D will need to focus on. since your developers can focus on one code thread versus being forced to pay attention to multiple threads and platforms. And from the customer’s point of view. and problem and change management the VP of Operations. if you go into a high-tech bowling alley. Ten years later. and the computers score and tell you whether you get to bowl again. versus putting it on the shelf and avoiding the upgrade at all cost. or play Wii Bowling. the story is quite different. You can be guaranteed that a score of 200 in Lane 2 and a score of 180 in Lane 3 are scored identically. but you can make sure that the scoring process is being implemented consistently. It might not improve your bowling. Now.
J. Standardize the frequency of change 3. D. Limit the locus of change 2.P. The cost of a typical ERP implementation in a Fortune 500 company was estimated as between $40M and $240M. Architect the software for change (roll-in & roll-back) 4. 20ERP II: best practices for successfully implementing an ERP upgrade. Gelman.. 21Peterson.. 2006. 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. pages 105-109. ERP Trends. Change management for applications. 129 . Consider these four fundamental principles when designing a change management process: 1. Instrument the environment.CLOUD We should also note that upgrades or changes to enterprise business software have always been an expensive and difficult proposition. Volume 49. The Conference Board Report. L. W. Two Northern Illinois professors documented20 the cost and challenges of upgrading Enterprise Resource Planning (ERP) applications. 2001. Communications of the ACM. according to AMR Research. Factors that range from weak project leadership to minimal employee product training have resulted in many ERP projects being delivered late and over budget. and Cooke. with costs that were on average 25 percent over their original budgeted amount21. Number 3.
don’t engineer for one big box. instead componentize the application so you can deploy on lots of little boxes. usability testing. 130 . product specification. As the Senior VP of Product. user interface design. Reedy has some good counsel for anyone building software that is delivered on demand. 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. Reedy led the group that was responsible for all of the initiatives that pertained to the company’s work in software development.OPERATIONS MANAGEMENT CLOUD SERVICES And for the key process From-Software–Change-InitiatedUntil-Completed measure the duration in minutes. but also increase the reliability. architecture and release management. eBay Story If information moves along an information superhighway. Development and Architecture at eBay. A pool is a set of computers dedicated to a particular function. Furthermore. she says to insure a high availability application. make sure you’re not dependent on one large database but find a way to segment and componentize. then Lynn Reedy is a master traffic engineer. First. As you are able to improve the predictability and improve the speed you’ll not only reduce cost.
eBay’s change management process. As a result. QA tested the feature for two weeks. then 25 percent of the pool and finally 100 percent of the pool. Software needed to be both forward and backward compatible. when software development was done for a new feature. Once it was scheduled for a train (along with other features). the new threads were forced to merge and. 131 . all database changes resulted in fields being added. eBay architected the software so that code could not only be added. This put the impetus on the new development to resolve problems or conflicts with features coming from other organizations. With the eBay Train approach. it could also be rolled back.CLOUD For example. a new feature would be added to one box. with new software headed out on the next train. As a result. For large projects. referred to as the eBay train. pick up the changes every two or three weeks. Even within a pool. there is a “sell your item” pool and a “My eBay” pool. And remember. thereby. eBay architected the system for change. you need to do this while maintaining availability of the service. the feature was subject to a battery of over 100.000 regression tests. when you make a change. the feature was released to QA. The pooling architecture allowed change to be made gradually.
With over 200 features being worked on at any one time. Running a system that requires 7x24x365 availability. eBay personnel took weeks to understand why a component “threw an exception. At the top of the list was the central application logging (CAL) facility. As a result. Before CAL.OPERATIONS MANAGEMENT CLOUD SERVICES eBay knew that. Any exception within the system would show up as an error on the CAL graphical user interface (GUI). eBay runs 132 . eBay’s usage of automated rollout and rollback were critical. if the systems and processes could handle the failover. As a result eBay maintains at least three data centers in the United States. These components would be seen as a “red pool. CAL is both software and an engineering practice to fully instrument the application. network. or data layer. and with an average of 15 features per train. in the event of a failure.” With CAL. resolution took minutes.” Exceptions could be in the code. the company invested in numerous pieces of infrastructure software. or hurricanes is a day-one requirement. Instead. tornadoes. just depending on the quality of people and process for high productivity and reliability would not be enough. eBay’s second major investment was in automated rollout and rollback. even in the event of earthquakes. Some people have deployed fail-over sites that run “dark” and wonder.
org/nrsc/quarterlyrpt. 1992. repeatable process that everyone can do over and over again—what works for surgeons should work for IT. Availability Management Most people consider the most reliable. Right process means having a daily.S.” who think of ways to succeed. telephone system. right metrics.asp 133 .000 customers22. Right culture means a culture of people who find a way to “take the hill. On April 6. Recently the standard has been raised to both report on outages affecting 22 http://www. Metrics tell you where you are and where you want to be. We often refer to “Dial-tone” reliability to describe the highest level of availability. and right metrics. And finally. the FCC required telephone service providers to begin reporting outages of 30 minutes or more.CLOUD every site hot and limits each site to no more than two-thirds of the overall traffic. Reedy offers three things that every VP of Operations and R&D should focus on: right culture. available system in the world to be the U.atis. 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. which potentially affected 50. right processes. not fail.
major military installations and key government facilities. Figure 6.000 customers as well as to report on any outages affecting major airports.OPERATIONS MANAGEMENT CLOUD SERVICES 30. In Jim Gray’s landmark paper23 he 134 . 911. The results may surprise you. nuclear power plants. For the past 10 years the data has been collected. These are the summary statistics. regardless of the number of customers/lines affected.1 Outage Profile These outages were caused by everything from Heisenbugs to human error to heavy rain.
pdf 23 135 . Archana Ganapathi.7. CA. EECS Computer Science Division. Operators may face such difficulties because computer designers and programmers have frequently sacrificed ease of use in the quest for better performance. 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.cs. Berkeley. Patterson.com/techreports/tandem/TR-85. Database software.7 www. http://roc.hp. because hardware and software have grown cheaper over time. In a more recent study24 of more than 500 component failures and dozens of uservisible failures in three large-scale Internet services. it was observed that (1) operator error was the leading cause of failure in two of the three services studied.pdf 24 Why do Internet services fail.CLOUD analyzed a set of Tandem NonStop systems and determined that the reasons why systems stopped fell into four large categories.edu/papers/usits03. University of California at Berkeley. (2) operator error was the largest contributor to time to repair in two of the three services. and what can be done about it? Tandem Technical Report TR-85.hpl.berkeley. Ironically. for example. and what can be done about it? David Oppenheimer. can require a full-time staff of trained administrators to manage it. and (3) configuration errors were the largest category of operator errors. which operator/human error being the majority. and David A.
2. Every application has some key queries. so operators can correct their mistakes. If you expect that result in 2 seconds and it takes 200 seconds does it really matter if the application is slow or down. Performance and availability management are related. Furthermore as the recovery time is made predictable and reduced not only will you have happier customers. so design systems that recover quickly. Performance Management Your customers expect you to provide them with application access at an acceptable level of performance. 4. searches. transaction flows. Build systems that support an “undo” function. Once identified these 136 . but the cost of providing high reliability will go down. 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. which characterize that application.OPERATIONS MANAGEMENT CLOUD SERVICES 1. Instrument to pinpoint the sources of faults 3. predictable recovery process: problems are going to happen. etc. Performance management starts with the difficult task of workload characterization. Develop a high speed.
providers will have to convince IT managers and CIOs that the services they offer are reliable and. secure. we’re going to highlight a couple of 137 . Perhaps the most famous one you see every day is in the upper right hand corner of every Google Query. 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. While a discussion about securing online applications could take the remainder of the book. For many. Security Management Before enterprises can reap the benefits of on-demand software. perhaps more important. the push to put information in the cloud raises the specter of information breaches. A good example of a company providing a performance management cloud service is Keynote. 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.CLOUD workload characteristics can be monitored. They provide a service to monitor the performance of your web application from points around the globe.
Authentication. Audit. When physical data protection offered by the co-location facility is not possible (e. Whether thru simple password management. network) encryption becomes the service of choice.g. Audit considerations include the process to access audit logs. Encryption. At the core of all security management is auditing.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. all the way up to two-factor authentication with retinal eye scan all security mechanisms begin with knowing who you are – authentically.. Access Control & Identity Management. on a tape. retention durations and evidence of tamper proofing. The simpler the definition of the security policy and the clear evidence that it is implemented insure the highest degree of trust. Encryption also solves problems of protection 138 . removable disk.
The company.com’s software to monitor the activities of its salespeople and to track its entire inventory. PIN encryption). One of the most recognized commercial standards is the Statement on Auditing Standards No. a medical device manufacturer. In the security management area there are numerous compliance standards. data security. security was an important consideration when the company was evaluating Salesforce. has been using Salesforce. A SAS 70 audit is performed by an independent auditor and results in a SAS 70 report. as devices are 139 . and so on. without offering any judgment as to whether they are satisfactory. vice president at the 200-person company. but that you examine it thoroughly to determine whether the provider is able to comply with your own internal standards for privacy. One should be mindful that a SAS 70 report only documents the internal control practices of an organization.” said Ed Barrett. Care Rehab Story “For Care Rehab. Due diligence therefore requires that you not only request an SAS 70 report from a prospective provider. which makes traction and electrotherapy devices used by physical therapy clinics.g.CLOUD when data leaves one application domain and enters another (e..com. 70 (SAS 70).
That audit included Salesforce.” I. “Tell me about your security. through SAS 70 Level II audits. In that situation.OPERATIONS MANAGEMENT CLOUD SERVICES prescribed by doctors and dispensed to patients.com’s security practices before agreeing to use the software. “Their security is superior to what we provide for ourselves. Texas. He said. through encrypted VPNs. of course. But I ended my answer by sharing a conversation I’d had the previous week with the CIO of OCBC Bank.com’s security practices. went through all the security features from the data center. I had the opportunity to speak with the Secretary of Treasury of Mexico. presumably in Mexico City. In my introductory remarks. mid-way into my explaining the 140 .” said Barrett.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.com. [We] need to have the best salespeople. or a data center of his choice. A few years ago.” Mexico Story We’ll end this section with one personal story. I'm sure we aren’t the world’s best security people. I made a point to tell the Secretary we could implement the Oracle On Demand model either in an Oracle data center in Austin. I spoke for about ten minutes and then asked him if he had any questions. Care Rehab audited Salesforce. you have to have the best people in security and the best redundancies. “If you’re Salesforce.
He replied. four-fifths of all IT-related attacks arise within the organization. 26Survey Michael. since security professionals agree that most IT-related attacks arise within the organization. Reveals Scandal of Snooping IT Staff. May 30. Security Threats from Within. but what would it mean to them?” It’s a perfect story to end with. Cyber-Ark Software Inc. Bruck’s estimate is consistent with a survey26 of more than 200 IT professionals. Press release. their bosses’ salaries and their bosses’ bosses’ salaries. but asked him why was he so adamant. 2007.com. 141 . Entrepreneur.CLOUD breadth of on demand services the CIO said.” I. I know your folks can see the same information. 25Bruck. 2007. said yes. which found one-third of them admitting to abusing their administrative access privileges to examine sensitive data unrelated to their job functions. “I want you to take my HR and Payroll data. According to security professional Michael Bruck25. “I know my DBAs can see their salaries. About one-fourth reported knowledge of former employees who retained access to sensitive networks long after their termination. with one-third stating a belief that they could do likewise with little risk of detection. of course. June 28.
The analysis was quite the opposite. or somewhere on the order of 25-50 terabytes of information. most people would think one hundred million requests would be for software patches to fix defects. personal to you. 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.000 terabytes) 142 . Oracle’s Support group received one hundred million requests for service.OPERATIONS MANAGEMENT CLOUD SERVICES Customer Service While many think of customer service management as defect management. So if you’ve ever been on hold with a call center. How deep is it? Consider that 1. But this surface Web of less than 100 terabytes pales in comparison to the deep Web of information contained in every business.9 percent) could be answered by knowledge in a library. known information.030 petabytes (a petabyte is 1. nine-nine point nine percent (99. with any software that has a reasonable degree of maturity. Now. the challenge of customer service management is not around defects—it’s around delivering information. Yahoo and others have indexed) is thought to contain ten billion pages. Just to drive the point home in 2004. existing patches that were contained in a patch distribution system or in people’s heads—in short. Just one-tenth of one percent (0.1 percent) of the requests actually resulted in any new software fixes.
and manufacturing information are all locked up in relational databases. the challenge is finding the relevant information. This is small when compared to the SQL database business. The simple math says the deep Web is. So why the gap? Perhaps the answer lies in tracing the history of SQL. Oracle was the most successful at commercializing SQL and by 1987 was generating 143 . Sales. While seeing or indexing the information is one thing. Independent companies like Fast. have both focused on the challenges of enterprise search. and Autonomy. the second highest valued European software company after SAP. at a minimum. and file systems all around the world. 10. enterprise search in 2009 is today probably only a $500M business. Today they are deployed in over 9. which was acquired by Microsoft for over $1B.000 sites around the world.000 times the size of the surface Web. which today probably exceeds $10B annually. Google launched their Enterprise Appliance in 2002 and. document management systems. purchasing. HR. has produced a major new release. The opportunity to mine this deep Web has not been lost on numerous companies.CLOUD of hard disk capacity was shipped in the fourth quarter of 2006. While these efforts have all been successful. support. every year since.
Chief Algorithms Officer at Amazon. ripping all of the pages out.com. he’s basically right. If you think about it. said “Google has been good and bad for search. He said searching the Internet is like taking all the books out of the Library of Congress. 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. once described the Internet in a very interesting way.” according to Manber. who founded FAST. John Lervick. Siebel. we need to understand what it means to have search-based applications. and was lured away a few years ago to be VP of Engineering at Google. Good because they made search important. bad because they’ve made everyone think it’s a search bar. Peoplesoft. who has been Chief Scientist at Yahoo. He recently unveiled a project called Knol. and many more to make the technology useful to business. Knol pages are “meant to be the first thing someone who searches for this topic for the first time will want to read. SAP. Search can be so much more if you think of it as a technology platform. So if the pattern is to repeat itself. throwing them on the floor and using a search bar to try and read them. The term knol means a “unit of 144 . and trying to read a book through a search bar makes little sense.” So what might these search-based applications look like? Udi Manber.OPERATIONS MANAGEMENT CLOUD SERVICES $100M a year.
which only control which people have access to which information. The search-based application fundamentally does three things. a new company. was previously the EVP for Oracle’s $5B+ product support and services business. or a business unit. President and CEO of Openwater Networks. Second.CLOUD knowledge. as opposed to traditional SQL-based applications. In that capacity. the search-based application acknowledges people add value to the information. a team. While Knol is targeted at the consumer Internet. the application is read and write. Michael Rocha. Openwater Networks. Finally. has engineered a search-based application cloud service. and their environments. 145 .” and has been seen by many as Google’s attempt to compete with Wikipedia. First. While this has been a characteristic of all SQL-based apps few people think of search-based applications as having this capability. he saw how the customers of complex applications struggled with being able to understand their software. While 99. it was the cost and difficulty of delivering that information which inspired him to bring modern Internet technology to the problem. it standardizes the language (much as SQL-based applications have standardized processes) of a group.9 percent of all of their service requests were met with known information. their business processes.
managing operations is the most foreign to a traditional software company. security and performance. finance and organize yourself for success? 146 . whether in open source or in the cloud. This chapter has highlighted some of the areas in the management of change. availability. But having a system of repetitive.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. But with greater and greater access to search technology. automatable operations is the key to lowcost and high-quality customer experiences. problems. How will you market the application. sell the service. there is bound to be hundreds of search-based applications just as we have seen hundreds of SQL-based apps. Summary Of all of the major functional areas. 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.
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. or just the Palo Alto Weekly. You’d have to make sure your tagline was short and sweet since you had no idea who would read it. 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.
MARKETING might have made sense when the production and distribution of information was expensive. This approach resulted in both founders maintaining significant ownership of the company. You should note that Webex’s spend in sales and marketing is hovering around 35 percent. This was the by-product of both a significant investment in sales and marketing and the explosive growth of Web conferencing post September 11. You’ll notice the explosive growth from 2000 to 2001. the traditional approaches and some of the newer ways for you to educate the buyers. Consider the implication of this. In these early years. In this chapter we’ll focus on marketing your product. we clearly no longer need to think this way. which totaled $107M prior to their IPO in 2002. 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). We’ll discuss the fundamental economics. in 1996 and 1997.1. they operated at or near profitability. You can also see that. The funding line shows each round of funding they raised. the single largest line item. but with the advent of the Internet and rich media. given how we all view Web 148 . Economics of Sales & Marketing We’ll begin by considering the Webex case study by becoming students of their P&L shown in Figure 7.
2 Traditional Sales & Marketing Pipeline 149 . Traditional marketing and sales has broken the pipeline into a series of stages.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.CLOUD conferencing as simple to use and simple to explain and simple to buy. Figure 7.
150 .3 and talk to anybody selling business software.MARKETING Early stages of the pipeline focus on getting awareness. Consider Figure 7. No news here for any of you who’ve sold enterprise technology. 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). then leads. Leads are both nurtured and qualified ultimately transitioning from a centralized marketing organization to the field where the potential customer is engaged. Scheduling the phone calls. Ultimately. and web conferences is time consuming and further elongates the sales process. lunches. more expensive things is a team sport. the big difference between consumer and enterprise sales and marketing is that there is not one decision maker – enterprise sales and marketing of imprecise. Even with a highly qualified lead the sales person finds himself or herself in the roll of traffic cop (or switchboard operator).
000 people costs $5 versus over $500 to send out direct mail. This is largely because the economics are so compelling. Emailing to a list of 1.3 Sales is a Team Sport Hopefully thru CRM applications this process can be made more efficient. As a specialist they focus on the details.CLOUD Figure 7. Email Marketing Email marketing. We’ll focus on a few areas where marketing services have developed to improve sales productivity. 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. repetitive and specialized. Lyris. has been an area of considerable growth. 151 . Companies like Constant Contact. as an alternative to direct mail.
reminded applicants to complete the process. triggered 30 minutes after the application was abandoned. 32% more applications were completed by the 152 . provided a quick link to the partially completed application.MARKETING Figure 7. has helped many companies implement successful email marketing campaigns. Built into the program was the ability to perform A/B testing on the messages sent to the customers. 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. Director. It was executed in two phases. Siara Nazir. The first phase. Director of Online/Offline marketing at E-LOAN.4 Call at the right time e-Loan Story Scott Hilson. As a simple case study. sent one week later. The second phase. As a result of this campaign. The program involves integration with the E-LOAN Web site to identify prospects that started but failed to complete the mortgage application. implemented an email program designed to remind and encourage prospective borrowers to complete their mortgage applications. Customer Services at Responsys.
has some fundamental advice for anyone trying to optimize natural search results. For example. Solarwinds. The content is generally considered by search engines to be fresher and more authentic. we all know we click on natural search results more often than the ads on the side. While there is plenty of advice on how to spend money on ad words. By paying attention to how Web pages are built and the content put in them. you become the expert on the technology and the problem your company is trying to solve. Build a FAQ into your Web site to capitalize on potential customers searching for reference or problem solving information. giving it higher weight in the results.CLOUD control group that abandoned but did get the automated follow up email. Katy Roth. 153 . 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. Blogs are great for generating traffic. who after years of experience in marketing Model Six companies formed her own consultancy. you can create natural search results that drive traffic to your site without purchasing advertising (and more importantly be significantly more effective). saw a lot of traffic coming to their site because of their extensive network management content. This way.
500 “Tweets” every second.300% this year. 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. Since Februrary 2009. 154 . developed content on their blog that provided answers and guidance to Rails developers. iTaggit. 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.MARKETING FiveRuns. But they didn’t stop there. Yahoo and MySpace in total time spent online by Americans (6% of total time). 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.com is a good example of a company that reworked their forms to pull in more community generated content. See the previous section on blogging. a provider of monitoring and development products for Ruby on Rails. Today more than 15 million users create 1. Just check out Wikipedia for some good examples. Twitter has also enjoyed phenomenal growth growing 1. Have your community create content. Facebook leads Google. Work with a search engine savvy developer to make sure the meta content of your Web pages is optimized.
Think of doing the same thing with a telephone and you’ll begin to understand the potential of these social networks. sales reps could get to know the person behind the name and title. Claire Shih 155 .CLOUD Perhaps the best way to think about Facebook and Twitter is as a next generation telephone – and a very powerful telephone. As an example consider the recent case where Facebook simultaneously broadcast a soccer match in Spain for the Spanish Facebook community. With her friend Todd Perry’s help. Clara Shih attended the first Facebook developer conference in 2007. and even ask for warm introductions from mutual friends. and Sell More Stuff. The application of these social networks to sales and marketing is still in its infancy.com. Within 30 minutes of the game starting the video servers crashed. she developed Faceconnector which pulls Facebook profile and friend information into salesforce. 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. Reach More People. there were suddenly 100s of thousands of viewers. Now instead of anonymous cold calling. Why? Because once one person commented and his social graph saw the comment (and started watching the game) and another friend commented and another.
and consulting. field service. Once upon a time the product marketing person interviewed the developers of the product. it was often cost-prohibitive to do this in any systematic way. 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. and friends all paint a picture of who you are and help to establish your brand.MARKETING Use hyper targeting as an opportunity to test new audiences and see if your product can gain traction. Your profile information. But there are many more sources of information. sales. Not only are your people sources of information. and quality of the print that ultimately made it into a folder at an event at the Hyatt in San Francisco. spent weeks writing up a data sheet. You have internal experts on the product in customer support. quantity. Get Notorious This brings us to getting notorious. 156 . deciding the colors. Think about using social networks to market yourself as an individual. but so too are your customers. R&D. Prior to hyper targeting. Use the social graph and knowledge about relationships across your audience to create a more personalized online community. product management. photos.
Blogging is personal. Limit it to 30 seconds.CLOUD While the old world of low bandwidth.but not an overproduced one. photo essays. or speak. in your customers. that's impressive!” Check out Digg . By bringing more contributors into your marketing cloud. video. and phone number. "best ever’s. controversy. No talking heads-show the product. (Top 10's. generally "this is so cool!"). 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.” Reach out as an individual Name. Make me think: “Wow. Encourage them to write.Don't send a note from "your company. As you develop your marketing programs. Be notorious . should become notorious. and Ed Herrmann provide some advice on getting notorious. think about whom in your company. 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.Look at the first few pages. 157 . Use video . Charlie Wood. in your third parties. or do Webinars or videos and communicate their expertise and more importantly their point of view. See what formats are popular. and what you can contribute. A few bloggers including Vinnie Mirchandani. what you believe. and use those. Anshu Sharma. title.
consider the fact that. Perhaps the greatest change is. as they become more specialized. we have figured out how to sell expensive items ($1M) that are not very precise (SAP Manufacturing) and 158 . just that they were not bought because of a sales person. As a technology industry. Figure 7.MARKETING Educate & Select Sales and marketing have been critical components of traditional software companies and new software companies. the traditional human network that has powered sales for the last twenty-five years. and as the price point goes down.5 Selling Spectrum As you begin to tackle this problem. as we move closer to delivering these applications as a cloud service. last Christmas. very few people were sold a plasma TV. we must re-invent the traditional account management model. We’re not saying there weren’t a lot bought.5. Consider Figure 7.
Perhaps it is no more obvious than in the art and science of marketing.000. 159 . Selling may be replaced by education and selection. People will educate themselves on the good and bad of the solution. read what others thought about the TV and. in the way they want it. Our challenge is how we effectively sell imprecise items that cost $10. We have also figured out how to sell low price (<$100). Summary The Internet changes everything used to be a corporate tagline. had made their selection. select the right answer for themselves. by the time they were ready to purchase. precise items. Perhaps this is what can happen in the future market for software. in the end. Purchasing became a transaction.CLOUD have grown large profitable businesses. they figured out the right size screen. The reason no sales person sold a TV is that most consumers of Plasma TVs did their research online. With a low cost means of delivering notorious content. talk to experts and other users and. We should take a lesson from the Plasma TV. you now have an ability to deliver personalized information to every member of the team that influences a purchasing decision—when they want it. You only have to look at Amazon or eBay to see how successful this model has been.
no matter how simple we try to make the software. or social networks.MARKETING While communicating to people. email. 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. 160 . whether they find you through search. you still need marketing.
After about a year. he was ready to tackle the sales and distribution channel. who today is the CEO of LucidEra. Finally. it doesn’t take too long until someone says. of course. There was a sense of urgency. Rudin.” Sometimes it’s stated even more clearly.com was winning more and more business. as Salesforce. and he scheduled a meeting with the head 161 . but Siebel finally convinced him. “But this will cannibalize our existing sales. Rudin was able to work out the product strategy and business model.8 SALES While SaaS or cloud computing might be all the rage. was asked by Tom Siebel to lead the efforts for Siebel On Demand. wasn’t sure if it was a good idea. Early in 2002. Ken Rudin.
In Model Six. The VP listened politely to Rudin’s presentation and. For the traditional software company. 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. we’ll address some of these issues and also let you hear from some successful sales and marketing executives. In Models Four and Five. the solutions to the challenges here will make or break any new business. that’s an outstanding plan. but stay the f—k away from my accounts!” This chapter is dedicated to sales and distribution. But.SALES of North American sales. “Ken. moving existing applications to delivery as a cloud service with an existing channel and product (Models Four and Model Five). you will need to figure out how to leverage your existing sales force. at the conclusion. your primary advantage is that you already have a sales channel. Transforming Traditional Software Sales Every Model One software company worries about cannibalization when they consider a move to delivery of their 162 . said. there are many challenges. 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. More than with any other group.
The only change is they have a new delivery option (one which they can be compensated for). has first-hand experience in how to sell when you’re in Model Four.. “Don’t sell futures!” Finally. etc. nothing changes. up front or expense it over time? Joe King. Unlike selling traditional software. Joe says. it’s 163 . the existing sales force continues to sell the software as it always has. who led sales for Oracle On Demand for seven years and today is Group Vice-President of JDA’s on demand business. Next. In other words. It doesn't have to be this way. 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. 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. third-party software. hardware. 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.CLOUD software as a cloud service. Whether that’s a perpetual or term license. organize the sales teams around current delivery capabilities. If you adopt Model Four. 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.
164 . they will ultimately be better and cheaper at insuring security.000 (for the first year). but remember the customer is not buying servers and data centers separately from your complete solution. And when you get to the CIO or IT director.SALES important to discuss the underlying infrastructure that supports the solution. so no longer can you fund the software sales by the $1M up-front license fee. 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. who will inevitably say: “I can do this” (because they have). In Model Six. What is different is the economics of the sales process. or identifying performance problems than you as a single isolated island having to figure it out for yourself. 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. managing an upgrade. As a result. the average selling price is going to be significantly under $100. the traditional sales person who manages an account and makes a good living sitting in a few accounts is unaffordable in the new world.
Now with adequate Web marketing and standard demo deployment.” or “quickly configured. WebEx. Eloqua. there are some things that are better. Salesforce. the good news is Model Six products are reasonably precise versus the large application footprint of traditional enterprise software. CIO at Stratus Computers. Halogen. Joe Graves.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. Ceridian. Xactly. Stratus went with a Model Six solution and deployed the whole system in seven weeks—worldwide.com. QuickArrow. Since the software is either “always deployed” or “ready to be used.CLOUD While that aspect is worse than our old world. A Model One software company offered to do a free six-week discovery process and scheduled a demo for eight weeks later. SpringCM. a $250M a year computer company. and Postini. Today he uses Salesforce. some group of customers can try your product and then proceed to use it in small work groups. Joe relayed a story of how different traditional software companies are from new Model Six companies. is a big user of application cloud services. Remember.” the idea of scheduling custom demos is a thing of the past. The 165 .
This includes free trials. And when you need volume. Webinars. With an eight-to-one conversion ratio and a fifteen-day sales cycle. High priority leads are responded to within 24 hours. Every lead from this marketing is categorized into three buckets.000 in marketing per sales rep per year. meaning that their average yearly contract is under $20. The point of both of these numbers is that an average deal size is nowhere near the average selling price of traditional software. WebEx’s high-end customers average around $25. you need a sales machine. Salesforce. you can see they have perfected a sales engine. A sales person can no longer depend on landing a few big whales to make quota.com has also had a few tricks up their sleeve. Salesforce. with an average price per seat of around $70 per month.000 per year. So from a company perspective you need volume. and email campaigns.000. WebEx’s approach has been to spend nearly $100.com averages about 20 seats per customer. daily demos (scheduled and executed from India). Aaron Ross was Director of Corporate Sales with 166 .SALES bad news is that the average selling price is considerably lower in Model Six than in Model Four. the next level within 72 hours.000 per year with 50 percent of their customers having an average yearly contract of less than $1.
a VP of Sales would drive growth by hiring more sales people. Ross went on to say: “Give up Control. and instead. prospects can find out as much as they want about you before they ever call you. There just are not enough great sales reps to hire out there.” In the past. Today. 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. who would work their patches to generate leads and close more business.” Historically. Today. In Ross’ opinion. that doesn't work. which sales people close. because it was very challenging for customers to get unbiased information about vendors. We asked him what advice he would have for establishing high velocity sales. think about how much information and control over the 167 . Instead.com from 2001 to 2006.CLOUD Salesforce. instead of obsessing over the number of sales people in your team. generating more leads.” This was possible. Likewise. hiring more sales people is not the main engine of growth. so helping your current team do more with less is as important as hiring. is what drives growth. The best strategy is to embrace this. The Internet changes everything. the sales organization wanted “control over the sale. Vendors can’t control the flow of information.
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. and not creating a dedicated team that does nothing but outbound prospecting. Finally. the higher the quality and the larger the sales pipeline will be.” Buyers have seen all the sales tricks and programs. 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. So instead of “Always be closing. and anything artificial irritates them.” focus on building a sales team that is constantly asking. they become too busy to prospect anyway.SALES sale you can put into the hands of the prospect. Here are two specific examples of common mistakes: not hiring enough junior sales people to qualify inbound leads. 168 . lead generation and lead qualification are as important as closing.making sales results easier. 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. Yet. “Are we a match?” You can't afford to waste much time (money) on prospects that aren’t a great fit. they’re terrible at it. they hate doing it. They tend to ignore the first half of the process: lead generation and lead qualification.
They published a paper providing advice to customers renegotiating outsourcing contracts.” With this degree of complexity. TPI is a leading global outsourcing advisory firm. If you were to look at the contracts for those deals. found when he plowed through its contract to outsource desktop support and network management to Electronic Data Systems: “It was three inches thick. Since the earliest forms of selling software as a service were large outsourcing deals (Model Three). there is a cottage industry in providing advice to companies negotiating contracts. 85 percent of those surveyed indicated the restructuring process 169 . When asked about the duration of renegotiation. the Middle East. Hank Leingang.CLOUD Contracts Contracts vary significantly from model to model.7B. In Q1 2007. and Africa (EMEA) signed 75 large outsourcing deals in the quarter—with a total deal value of almost €5. The outsourcing (Model Three) business is still a growing business around the world. you might discover the same thing that Bechtel’s CIO. Forrester reported companies based in Europe. many contract issues for Models Four through Six carry with them some of this legacy.
Furthermore. Binding SLAs to contracts can vary.com offer SLAs on contractual terms on a case-bycase basis. the 28Restructuring Outsourcing Agreements: An Indication of Failure. 170 . take a look at the Yahoo terms of service or the WebEx contracts. Typical Model Six terms allow customers to pay on a month-to-month basis. other vendors require a two-year commitment. Fifty-five percent finished renegotiations in less than six months. January 2007. contracts like these SLAs are heavily negotiated. such as Blackbaud On Demand. For examples.SALES required less than a year to complete. 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. so contracts can be terminated with 30-days notice. If you want to spend a couple of frustrating days. In Model Three.28 At the other end of the contract spectrum is the online click wrap agreements. the subject of SLAs (Service Level Agreements) will come up. Service Level Agreements In almost all of the contracts from Models Three through Six. some vendors choose to enforce a penalty against the total value of the contract if a customer wants to cancel the deal prematurely. In other cases. Companies like Salesforce. or a Tool to Increase Value? TPI Report. and 13 percent finished in less than three months.
Oracle pioneered a different approach. So the total financial incentive for Taleo to keep the system up and running all day and every day is enormous. the important point is that a user of an application wants the service to perform. After that. so you should first focus on what service level your operations and development group are engineering to deliver. As noted earlier.” Taleo provides penalties in their contract if they don’t meet certain uptime standards. security. you can decide to what extent these metrics are embedded in a contract. Although the financial penalty might seem minimal to the individual customer. “We're very strict on ourselves.CLOUD contracts stipulate 99.9 percent uptime and are a standard part of the contract.” said Blackbaud’s CEO Marc Chardon.” Service levels in availability. simply called the “Nordstrom’s guarantee. change. “We occasionally modify the terms slightly for customer’s specific needs. but it is a competitive agreement.9 percent uptime guarantee and a commitment on the specifics for data handling and server maintenance. In either case. they point out. chances are they are writing a lot of other checks. and performance management were 171 . if they are writing a check to that customer. problem. There is a 99. as this agreement governs what we do operationally.
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. per quarter. However.9 percent. less than a handful of rebates were paid out. 172 . Let’s highlight the major areas you should focus on. This begs the question of whether this refers to unplanned or planned outages. and do that for planned and unplanned outages. 99. no questions asked.SALES published and reported. which is a much more important metric. In four years of offering the Nordstrom’s guarantee. 99. The Nordstrom’s guarantee was an effort to separate the issue of penalties from a description of the service level metrics and objectives. they could request a rebate of 20 percent each month. Writing these down and measuring them is key to improving the overall quality of the service. and 99.99 percent… They all sound about the same. Will you move all customers at once.7 percent. You should consider defining availability by total number of outage minutes per month. per year. It will cause you to focus on how rapidly you recover. don’t they?). if the customer was not satisfied with the service for any reason.5 percent. Change Management – Define how often upgrades to new releases will occur. or will you stage them over a three-month period? Availability Management – Many contracts call out percentages of availability (99.
just look at the upper right-hand side of your Google search results when you search for “SaaS”. For a service level that is reported on every transaction. “If you create a level playing field in the sales compensation. Instead. and if the solutions 173 . CEO of Blackbaud. Sales Compensation Marc Chardon. points out the universal truth in effective sales compensation: You’re looking for sales people to respond to the metrics that you give them. Some will push you towards EDS or IBM Global Service agreements. 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. “We try as much as possible to make the sales rep indifferent to selling an on-demand or on-premise version. In the end.com’s contracts and terms. You would be wise to separate the definitions of your service levels from the legal and contractual side. be proactive about the service levels you will provide and publish them to your customers.” he said. Become a student of WebEx’s and Salesforce. but providing some reference implementation to benchmark on a release-to-release basis will help you provide performant apps. remember the customer wants the service to work.CLOUD Customer service management – When a customer has a question about your software (these could be defects or just usage).
and consistently with the plan type and organizational style. sales reps should be. Analyze and change on a predictable schedule. Many companies come up with plans with dozens of variables and multiple levels of intricate dependencies. Even if you are able to follow every piece of advice above. One good (transparent) report delivered to payees at the right frequency keeps the focus and motivation where it should be. good at evaluating the shortest time necessary to get their commission. They have some guidelines that are applicable across a number of our seven business models. Make sure you have the data—and that it’s clean. Keep your compensation plans straightforward. Report regularly. and usually are. The most effective plans credit the primary seller along with those directly connected to that seller in the chain of command. The smartest and most successful companies are constantly evaluating their sales performance data and are not afraid to make changes to compensation plans. 174 . errors and problems will happen.SALES are roughly as easy to sell. Create a transparent dispute resolution process. transparently. Credit directly for sales compensation.” 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. But over 10 years ago some smart guys figured out if you could separate instruction execution into 5 stages. 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.CLOUD Installed Base Sales Most of the focus on selling has been on getting the new customer. 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. Computer architects have struggled with how to make computers faster and faster. 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. Years ago every instruction took 5 clock cycles to execute. While turning up the clock speed is one answer. 5 parts. But how can this be applied to higher ASP. So with 175 . Below is a diagram showing the typical execution of an instruction. again a by-product of selling a product for large upfront money versus driving revenue on a monthly or yearly basis. Nowhere is this more obvious than in the case of Amazon.
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
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.SALES midrange or mainframe computer. Axel boiled it down to a simple premise: “There is interesting software for a large variety of customers and industries. And along those lines.” Will history repeat itself? 180 . What is missing are the new channel companies.
We’ll discuss monthly recurring revenue (MRR). but if you don’t have money (and people) it will be hard to turn it into a reality. churn.9 FINANCE You might have a killer application and a market that is rapidly growing. 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. 181 . the Magic Number and how much it takes to launch a new business. revenue recognition.
A Model One company recognizes revenue from license fees when the software is shipped to the customer. This requires the deferral of 182 . of course. they recognize the million dollars on the day they sell it and it goes into the revenue for that quarter. VSOE is limited to the price charged by the vendor for each element when it is sold separately. but logged in accounting books differently under Model Six. 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). the largest part of revenues stems from vendors’ license fees associated with software. assumes that they choose to move to Model Five with their existing license business versus working in Model Four. If they were to sell that same system as software as a service. If a Model One company sells software for $1M. The same dollar amount is spent on applications. traditional (Model One) software companies have been concerned about experiencing a negative short-term impact on license revenue. This.000 per month for the next 10 years. In the traditional software business.FINANCE Revenue Recognition Many traditional software companies are concerned about moving to Models Four through Six because of something called ‘revenue recognition’. As a result. they may get $20.
however. but. recognition of revenue must be deferred if undelivered elements are essential to the functionality of any delivered elements. the entire fee can be recognized ratably over the term of the customer support contract.CLOUD revenue until VSOE can be established for all elements in the arrangement or until all elements have been delivered. Priscilla Morgan. former head of finance and business operations for Oracle On Demand says. Contracts are yearly.” In fact. such as implementations or customizations. subject to renewal by your support renewals teams. can be treated the same way you have managed professional services contracts. “For those pursuing Model Four. You’ll also find out that your services will be much more specific than the terms you already have for product support. once again. In addition. you’ll have to recognize revenue based on milestones and the level of work that has been completed. one-time charges. This way. the simplest way to think about providing software on demand is to treat the revenue the same as you have treated customer support. If customer support is the only undelivered element in the arrangement. some of the same contractual terms and sales methodologies can be used. In these cases. this should be no different than how this is done in your traditional software business. 183 .
if your fixed operating costs are $600k per month.2M in year 2. 12+11+10+. But what happens if the company does only $25k of MRR bookings. which by the way. but now 12 months away under the $25k MRR bookings scenario.FINANCE Monthly Recurring Revenue (MRR) Tien Tzuo. should also be used by Model One companies to track their support revenues. MRR is a powerful idea but as such has both upside and downside. points out that you’re going to need the right metrics to run any Model Six business. Now the first year revenue is only $1. [Note: 78 is simply the total of the revenue months during the year.95 million.+1]. assuming no 184 . The rule of 78 says the company will generate a total of $3. A measure used by many Model Six companies is MRR (Monthly Recurring Revenue)... CEO of Zuora. On the upside assume your company gets $50k of new MRR during your first twelve months of revenue generation. then the business is close to covering fixed operating expenses under the $50k MRR bookings scenario.9 million ($50k * 78) of revenue over that year. Furthermore – next year if it sells no new business revenue the company will still grow to $7. Worse yet. since in the last month the company was doing $600K in MRR. And the company just missed its revenue number by $2 million.
CLOUD churn. However. Unfortunately. which historically have 185 .000 could bring you the cash you needed to hire more people or buy more computers. Cash As Subrah Iyer commented. Traditional Model One businesses have been great since with typical software license being sold for an Average Selling Price of say $500. Which of course brings us to the subject of cash. Model Six business model.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. Figure 9. this is not exactly the case in a lower ASP. 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. Meaning you’ll need another $2M on cash/investment.
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. which force the cost to be expensed upfront. “Every time we add an incremental customer. “When we were really stepping on the gas in 2004 we were GAAP unprofitable.2 that produces what they call a Magic Number. Omniture operates a 15.000-server cloud for its 5. Even when management understands the game plan and has the full support of its financial backers. it costs us more money that quarter—it costs us more cash that quarter” explained Josh James.000 customers. The financial consequences look exceptionally dire when expressed according to GAAP accounting rules. Moreover.FINANCE derived a large up front.” he said. 186 . shown is Figure 9.” said Josh. 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. To get a sense of the cost of service. it takes courage to plow ahead regardless. the service requires significant infrastructure investment. CEO of Omniture. license fee when a sale is completed. and processes almost a trillion transactions per quarter. “It is a scary moment.
For example. Figure 9. or its opposite.75 or more.CLOUD Figure 9.2 Magic Number Calculations Figure 9. there’s probably something wrong with your business. what percent of the business 187 . invest in more sales people and if the Magic Number is less than . renewal. for any given period. But there are many ways to calculate churn.5.3 Magic Numbers for Model Six Companies Churn: Cost of Keeping a Customer Another critical metric for recurring businesses is churn.3 shows the analysis for a group of companies. According to the analysis any time the Magic Number is .
In addition. and every change to the subscription must be handled by all your 188 . 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. the customer may choose to change the service. I write up an order form. Subscriptions are a living. collect payment. Perhaps you have purchased a cell phone plan. Perhaps you started off with 10 licenses of an application. and the transaction is completed. a renewal metric may be more appropriate. and now you want to add text messaging. Or perhaps you subscribe to delivery of the New York Times. I can measure how much of my service you are using and compute your bill. at any time. The first order is only the start of the relationship. such as a month. For a given period. ship you the products. and now want to add another 2 licenses. Each month. and you want to suspend delivery for 2 weeks while you are on vacation. Not so in the recurring revenue world. For companies with longer-term contracts. In a Model One software company-you express interest in purchasing my products. breathing representation of the relationship between you and your clients.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. send you an invoice.
but they told us that $50 a person was too steep a price. to billing. For any Model Six company. though. they wanted more features. to order provisioning. That's when we embarked on our 189 . having the right billing and payment systems is important to growing and scaling the business.com.but in return. today CEO of Zuora. At Salesforce. Tien Tzuo. The market. and stronger customer service. Any billing system. We priced our sales force automation (SFA) service at $50 per user per month. Many tiny companies loved the idea of an on-demand service to manage their sales force. We quickly realized that a one-size-fits-all pricing model would never work. At the other end of the spectrum. and different price points. whether you buy or build must give you pricing and packaging flexibility. we thought the right strategy was to keep our pricing simple. had other ideas. large companies like Autodesk told us they actually wanted to pay more -.CLOUD back end systems from quoting. “When we first started. and we thought that would be the price forever. Different companies had different needs. learned early on the importance of having the right pricing & packaging strategy in order to grow a subscription business. and through to collections.
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.
finding the right people and organizing them 194 . If you’re an existing software company. you’ll face the Innovator’s Dilemma. and insuring you have the right people in the right jobs. Web services. The challenge of growing a new business is difficult and getting the right team and the right model will be key. In this chapter. Whether it’s cloud computing. we’ll discuss some of the people challenges: finding or teaching the right skills.10 HUMAN RESOURCES Software is a people business. or software on demand it makes no difference. establishing the right organizations. software as a service. If you’re a new software company.
and lots of people. In this and in subsequent books. as you can see in the year 2001. etc. Right Stage For many of us. Figure 10. 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. Moore describes the seven major stages of a successful venture: 195 . but also to fire people.) and performance management (Successfactors. Geoffrey Moore’s landmark book. all of this begins with people.CLOUD appropriately will be a constant challenge. 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. best describes the lifecycle of a high tech company. Kenexa. Right People. But. etc.1 Hiring ramp at Webex And by the way. not only to hire people. Crossing the Chasm.).
learn and change as they cross through each of these stages. 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. Ellison. driven by compelling customer needs and the willingness of vendors to craft niche-specific whole products Tornado – a period of mass-market adoption. moves into decline. when the general marketplace switches over to the new infrastructure paradigm Main Street – a period of after-market development. 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.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. Of course. Names like Jobs. 196 . there are the rare exceptions of the individuals with the gift of being able to adapt. 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. 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.
Making the quarterly sales numbers. Getting the right people at the right stage.CLOUD But for the rest of us. the title CEO does not mean Chief Executive Officer. recently said.” While. Of course. and then press on. right-turns and U-turns along the way. most would have failed early in their lifecycle. Without the ability to quickly run experiments. and sticking to a budget are all requirements for any successful business. “As a company is trying to cross the chasm. learn from them. there does come the day that experimentation and cheerleading need to be balanced with operational excellence. 197 . it might look like some companies took a straight line from inception to Fortune 500. there were many left-turns. that’s the ticket. instead it should mean Chief Experiment Officer. what are the characteristics that are most important in each of the stages? Tom Kippola. co-author of The Gorilla Game. the reality is. or forgetting to get their operational house in order as they’re headed down to Main Street. The mistake companies often make is putting an operationally excellent leader in place before they’ve crossed the chasm. delivering releases on time. in hindsight.
but having the right people at all of the skill positions is the key to success. this is something we never had to do in traditional software companies. it forces conflicts between the race for new features and the ability to manage change in a reliable way.” Furthermore. operations people who understand both software development and software delivery. these individuals are leading premium support services and are located 198 . 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. By doing so. So. As Evan Goldberg pointed out. you’re going to need what he calls next generation DBAs. Clearly. having a good coach and quarterback is essential. Delivering cloud services requires operational people. or vice versa. development people that are different from what we’ve seen in the traditional software world. Often times. 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. where are you going to find these skilled people? One place to look is in the traditional software product support organizations. Lynn Reedy recommends you have the VP of R&D work for the VP of Operations.
The challenge for these people is that their tendency will be to customize a solution for each customer installation.CLOUD at or near a customer site. the people who ran American Airlines SABRE). Rick Dalzell. he never focused on the company culture. to Microsoft for $265M.g. Culture In 1998. Internet advertiser LinkExchange. While LinkExchange had been a successful company. the common values shared by everyone in a group. was recruited out of Wal-Mart. Many of these people have run large-scale operations. 24-year-old Tony Hsieh sold his company. 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. who recently retired from Amazon and was their Senior Vice President of Operations and CIO. the leading online shoe retailer he made culture a cornerstone of the 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.. uniform way. Culture starts from the hiring 199 . So it should be no surprise that when he invested in and later became CEO of Zappos.
This "quit now" bonus. Build a positive team and family spirit 8. It’s several hundred pages of employees from all across the company describing what the company culture means to them. which started at $100. and open-minded 5. Do more with less 9. Embrace and drive change 3. In 2008 less than 1% of the trainees accept what the company calls "the offer.com also publishes a "Culture Book" every year. Be humble 200 .HUMAN RESOURCES process." Zappos. Create fun and a little weirdness 4.000 to leave the company—no questions asked. After the training. Be passionate and determined 10. where they ask. Deliver WOW through service 2. Be adventurous. they are offered $2. is designed to ensure employees are there for the right reasons. creative. Pursue growth and learning 6. “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. Build open and honest relationships with communication 7. The company itself maintains 10 core values: 1.
com. "We want people who are passionate about what Zappos is about . I don't care if they're passionate about shoes. a great culture translates into great service. Buy New and Remodel. Figure 10. 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. 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." This passion has translated to hundreds of stories of how Zappos employees have delivered unexpected service. You can see the 201 .service. Scrape refers to an “all-in” approach to moving from Model One to Model Six. You have three fundamental organizational approaches." For Zappos.CLOUD Tony says. We’ll call these Scrape. including finding out a place to get food.2 shows you the transformation in revenue terms. "Our number one focus is our company culture. Scrape For those that are attempting to transform existing Model One software companies there are many unique challenges. when the hotel had closed room service. The Scrape strategy is best illustrated by Concur.
If you were to look at the stock price for Concur when CEO Steve Singh made the announcement that they would shift business models. with the global meltdown of 2008. Not something for the faint of heart. maybe we are entering another window of opportunity. 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. so this is not a change that’s easy to make. 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.HUMAN RESOURCES license revenue line marching to zero. Figure 10.2 Concur P&L The Scrape strategy can work. but the transition will not be easy. along with the growth of the subscription line. 202 . Of course. During the shift.
Give them the opportunity to teach and share their experiences. having just released his second novel Smasher. or make the same step in sales or marketing. Raffel has become an author of a different kind. Once acquired you’ll need to be cautious of the “white corpuscles”. which will organizationally seek to envelop the foreign group and in time destroy it. or in with products that sell to customers significantly smaller than your current customer base. These days. a popular mystery set in Palo Alto.com. In this strategy you’ll be best served by purchasing companies with products in adjacent markets. Those of you considering the acquisition strategy might consider the story of UpShot as told by founder Keith Raffel. 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. Consider making their VP of Operations responsible for operations of the entire company. Perhaps the most famous example is Siebel’s acquisition of UpShot.30 203 . as anyone traveling through the San Francisco airport would have seen.CLOUD Buy New Buying a Model Six company is another strategy a Model One company can adopt. In the late 90s UpShot was in head-to-head competition with Salesforce.
Raffel took a leave of absence and started working on a prototype in 1995.” Raffel tells a story from the early days and gives you a glimpse into the role of 30 Raffel. Smasher. and founded UpShot in 1996. Midnight Ink. Raffel was working at a start-up where there was no good way to send leads out to the field sales team. As Olson said. who was between gigs” to build a prototype. So he built a team that included Kris Olson to lead marketing and Bob Schulman as head of engineering.HUMAN RESOURCES In the early 1990s. Not only that. Raffel started by finding what he calls “a brilliant engineer. 2008. He showed the prototype to ten companies. “HP might have been founded in a garage. and proceeded to rent space above a Jaguar dealer in Redwood City. he would point to all the deals that could be traced to one campaign or another. 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?). but when the CEO asked him how effective the marketing programs were. Keith. but UpShot was founded over one. the light bulb went on. The salespeople would then pipe up and claim that they already knew about any prospect the marketing team uncovered. 204 . Their aim was to make traditional CRM tools more accessible and affordable by using the Web. and nine said they would buy it. When Keith saw the first Netscape browser in 1994.
CLOUD a start-up CEO. The decision to accommodate them. bought some Spackle. and patched the walls. Xerox. “A key engineer came to me one day and said that the paint fumes from below were leaking into his office. It took a year to fix this problem. they sold Upshot to Siebel. More momentum was lost. They signed up Fortune 500 companies like Johnson & Johnson. momentum slowed. Siebel went with what they had developed internally. From that point on. unfortunately. in 2003. In addition. So. at the time of the acquisition. I went to the hardware store. as we know. unfortunately. Siebel was ready to launch an internal Model Six product. But ultimately they needed more money to fuel the sales and marketing engine (remember what we talked about in the last chapter). is recognized over time and therefore. And finally. which was not as fully featured as UpShot. made 205 .com was founded. Siebel salespeople received their commissions stretched out over time.” UpShot became the first CRM software delivered as a service in August 1999. Revenue for the UpShot product. Nevertheless. and HP. about the time Salesforce. 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.
Finally. who not only resell your software.” Remodel Finally. While things improved gradually. As Raffel says. at best to create new opportunities to package your service as part of a larger offering. let’s focus on the organizational challenges you’ll have. these new services will not endear you to any of your channel partners.HUMAN RESOURCES against the advice of the UpShot team. This brings us to sales. which will threaten them even more. 206 . While we’ve discussed the advantages of doing this. everything changed again when Siebel was purchased by Oracle in 2006. there will be conflict on the delivery side with any premium support offerings or professional services offerings your company is providing. First. By the way. “That chapter is being written by others. but also provide a box and a body. and still more momentum was lost. So it goes in Silicon Valley. 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. a well constructed Model Four service will be lower cost. took them even further off course. Your challenge will be to find was at worse to neutralize them. Model One companies have the opportunity to create Model Four or Five businesses to run in parallel with their traditional business.
devised a strategy that won the business. The CIO answered $6M per year. or competitively out position other traditional software providers.” The CIO agreed. over five years the cost of this application. VP for Oracle On Demand in Latin America. But Luis Meisler. EVP of Latin America. “In that case. How? In a meeting with the mining company CIO we said. based on the rule of thumb that the cost to manage the software is four times the purchase price. 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 application sales person can either double the size of the deal (application license plus first year of the service). So we said. as SAP was both stronger in Latin America and stronger in mining as a vertical market. probably somewhere near a million dollars.CLOUD Your biggest advantage in the Remodel strategy is that you can leverage the existing sales force. whether from SAP or Oracle will cost you $31M: $1M to purchase the software and $30M to manage the software. you can buy the 207 . “In the end. So. “What have you budgeted to manage the application?” We were guessing it was about $4M a year. and Alberto Chacin. Oracle did not look to have any advantage. an SAP or Oracle application purchase price will be nearly the same.
However. In either case it will be $31M. 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. is part of a growing number of MMORPGs (Massively Multi-player Online Role Playing Games). World of Warcraft. Once you have that core group of reference customers. With over seven million subscribers. you’ll have to create an ondemand sales overlay team and focus on delivering a lot of information about how this solution is simpler. and better than doing it the old-fashioned way. at any moment 208 . cheaper.” The Oracle sales person assigned to the mining company not only won the business from SAP but also received a significantly higher compensation. Organizationally. given that the deal included the license as well as the first year of the services.HUMAN RESOURCES software from SAP and manage it yourself or you can buy the software from Oracle and manage it yourself. there is a third alternative: let Oracle manage the software for $15M. So you can see. an elaborate fantasy computer game. you will quickly bring them into alignment with your goals. once your application sales force is compensated for selling On Demand. you’ll be ready to ‘cross the chasm’.
some young. Some characters have the ability to kill. 209 . in Beijing. there are hundreds of thousands. And other characters can heal. outside suppliers are responsible for about 70 percent of the aircraft parts. versus a previous mark of 50 percent. some old. doesn’t it? So. What are they doing? While some are merely spectators. but cannot slay. These suppliers span the globe as shown below. but not heal. if not a million. in London—all to achieve an objective. 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. Sounds like the modern World of Work. In the 787. Our business world needs to extend these fundamental ideas in software that brings information and people into a network.CLOUD in time. the vast majority are working with other people—people they know. the 787 Dreamliner. The company has pushed outsourcing of component parts to new levels. people simultaneously playing the game. people they don’t. Consider the latest Boeing aircraft.
Business managers can no longer ‘manage by walking around’. If you want to read an entire book on the implications of games check out the new book31 by Byron Reeves and J.HUMAN RESOURCES Figure 10. Leighton Read. because it’s the best time for Asia. 210 . but our software isn’t. Europe. Today we’re all doing conference calls at 4:00 in the afternoon.3 The World is Flat The world might be flat. Abhijit Dubey of McKinsey & Co. 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. Leighton Read: Games at Work: How Games and Virtual Worlds Are Changing the Way People Work and Businesses Compete. and North America to talk. like the great David Packard taught a generation of HP managers to do. led a team that surveyed CIOs regarding the SaaS model. a 31 Byron Reeves and J. Summary Early in 2007. Dubey and Dilip Wagle.
” We could not agree more.CLOUD partner at McKinsey’s Seattle office. software executives who continue to put it off risk being left behind. but perhaps the best quote is: “And finally. 211 . 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. Although this challenge is formidable. have published a report entitled “Delivering Software as a Service.” There are many interesting comments in the report.
this is the third wave of computing. Word. as some people believe. you’ve found it enlightening and entertaining. 212 . SAP Financial applications and Oracle databases were in the last generation. Hopefully. If. following mainframes and client-server then we are indeed at the beginning of another generation of software as revolutionary as Excel. and you’ll repeat some of the campfire stories.11 BEGINNING OF SOFTWARE Congratulations on making it to the end of the book. Powerpoint.
perhaps the book has given you a better understanding of the challenges your fellow team members face. 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. He said. Time passed. most of my customers are starting to ask me—what is the best sales comp plan?” 213 . you have many choices. he asked me what he should think about next. and he called me again and said he’d made the decision and now that he was well on his way. Do you attempt to build a Model Four business? Do you acquire a Model Six business. I told him all of the good reasons he should consider doing it. 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.CLOUD This software can take advantage of 1000s of computers. I told him it has to become more about the information and less about the software. and you’re starting to think about how information and community will change your business in the future. A few years ago. Of course. For those of you in the traditional software business model. near infinite storage and a network of mobile eyes and ears that number in the billions. “Interesting.
information. Perhaps this is why few of us see Amazon. Concur today processes over 10 percent of the expense reports in the U. All of you who are running software as a cloud service are sitting on valuable business knowledge. eBay or Google as software companies. 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 . Taleo’s systems have seen millions of resumes. 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.THE BEGINNING OF SOFTWARE Now most of us in the software business are used to being asked for more features and functions. the top 10 places to stay in Tahiti. What is the value of knowing where there is a deficit in skills. but here the customers are asking for something even more valuable: knowledge. 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. We already have pointed out that consumer Internet applications are all content rich. The information about what hotels. because what we see when we when we use their applications is the information: the Pez dispenser.S. the best seller.
” We hope this book has given you some insights into how to think about the future of your business. the value of the information far outweighs the value of the credit card transaction processing. you’re contributing to their overall knowledge of consumer interests with every click. Software is far from a mature industry. as a consumer.CLOUD realize this. what rules apply to aggregated information? When you log on to Amazon. but to assess the overall health of the economy. 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. Again. Of course. the United States’ government contracts with Visa and MasterCard to understand aggregated data of how much each of us. spends. We’re much closer to the Beginning of Software. or what some call the “Golden Age of Software. whether you’re part of a large software company or three people with a great idea in Olathe. But. Kansas. Publication and resale of identifiable private data obviously violates legal regulations and privacy laws. as many will be nervous about their trade secrets being published as best practices. such usage of customer data remains a controversial topic. 215 .
106 applications frequency of change. 15–17 traditional (Model One). 46 Brooks. 91 SAP financial. 98 Computer 2000.com. and Integration). Gloria. 98 Capossela. 5–7 outsourcing (Model Three). 207 change management. 47 Benioff. 29 Amazon. 177–80 Chardon. Marc. 17–22 open source (Model Two). 16. 173 churn. 119–20. 169 contractual service levels. Localization and Integration (CEMLI). 115. Marc. 177–80 indirect. 17. 113 Brooks’ Law. 214 companies. 132 Chacin. 132 Callidus Software. 65 footprint. 3–5 CAL (central application logging). 171–72 216 . 117 central application logging (CAL). 187 CMM (Capability Maturity Model). 91–92 weight. Ed. 128–30. 40–42 consumer Internet applications. 29 Bruck. 25 carbon emissions. 35–43 Blueroads. 97 Brown. 116–20 CEMLI framework. 203 ADP. 28–30. 15 Capability Maturity Model (CMM). 214 Configuration. 179 Blum. 108 CEMLI (Configuration. 141 business models hybrid (Model Four). 17 contracts. 90–91 availability management. 14–15 Internet (Model Seven). Modification. Extension. 7–9 Software as a Service (Model Six). 11. 172 channels alternate. 139 Beasly. 30 Bootstrapping Your Business: Start and Grow a Successful Company with Almost No Money (Gianforte).INDEX Acquisition strategy to transition from Model One. Chris. 179 Concur. 130. 8 Ahuja. Chris. 120 Apex. Alberto. Michael. Fred. 201. Vivek. 169–70 negotiating guidelines. 130 backup power generators. Extension. 116–20 Constant Contact. 92 usage spectrum. 172 management at eBay. 9–14 hybrid+ (Model Five). Modification. 96–98. 61 Barrett. Boyd. Localization.
46–48 Gibbs. corporate. 17. 12 Haarmans. 119 grid computers. The (Chou). 30 free software movement. Bill. 124 Harris. viii Entwined strategy to transition from Model One. Josh. 43 Emerging SaaS Channel. Jay. Michael. 155 facilities. 7 electrical power backup. 46 Garrehy. 210 eBay. 165 Greenstein. 131 EDS. Greg. 65 outages. 61–66. Don. 177–80 Infosys. Gelman. Guido. 109–11 Facebook Era. 198 Goldberg. 199–201 Cost of Power Disturbances to Industrial and Digital Economy Companies. The (Shih). 61–66. 206–7 ERP II: best practices for successfully implementing an ERP upgrade (ACM). The (Moore. 61–66 power consumption. 51–54 deep Web. 47 Hatz. 197 Graves. 129 Estimating Total Power Consumption by Servers in the U. Lars. Pat. 65 database architecture. 40–42 Google. 17–22. 34 Goodman. 120–22. 61 Crossing the Chasm (Moore). Bibby). 5 Global Services.S. 191 Facebook. 30. Johnson. Tony. data center power. against relying on venture capital. 130–33 availability management. 194 internal security threats. 5 Goldberg. 178 End of Software. Larry. The (Gates). Subrah. 198–99 Flock IT. 65 evaluation criteria. 191 finding people. The (TenWolde. 34 Hilson. Kevin. 50 Force.CLOUD corporate culture. 119–20 Hsieh. The (EPRI). financial. Abhijit. 112 data center facilities power. 152 Hilton.com. 103 Gluecode Software. 38–40. 186 217 . 195 culture. 94. 33–34. 102 Gianforte. 6. Bill. 104 Gorilla Game. Gail. 7. 103–4 App Engine. Evan. 5 funding. 35–36 Danvill Group. 8 Innovator’s Dilemma. Kippola). 65 financial evaluation criteria. 192 IBM. Scott. Dilip). 61 Ellison. 211 distribution channels. 177–80 Dot Dead (Raffel). 115. Cooke). 30–31. 130 software upgrades. 93–94 DealerTrack. 36 Gregoire. 8 indirect channels. 103–4 Bigtable. 199–201 Dalgaard. 106 Ford. Randy. 199 Hummer Winblad. 102 Iyar. 203 Dubey. Michael. 5 J ames. and the World (Koomey). Joe. cost of. 141 Internet Tidal Wave. 112 Haig. 142–43 Delivering Software as a Service (Dubey. 61–66 consumption. Ken. 61–66. 112 Gates. 129 ERP Trends (Peterson. 61–66 power consumption. process. Bruce. 17.
109 Morrell Bob. 208 McCoy. 186 Magner. 117 applications. 15. 117 support. Bill. strategy to transition from Model One. 16 Miller. 208 Model Five. Hank. Kris. Fred. Traditional. 201–2 Knol. 145 Oracle. 111 Nelson. 6 Karsan. Russia. Brenda. Internet. 177 channels. Open Source. 30 LucidEra. 9–14 Model One. 10–11 upgrades. Martin. Joe. 30–33 Kenexa. Mark. 197 Knife Switch. 12 Lipscomb. 30–31. 33 outsourcing Brazil. Dave. 6. Dave. 152 Nelson. 111–13. Luis. 5–7 Monthly Recurring Revenue (MRR). 171–72 Nyirjesy Bragale. Christine. Geoffrey. 97 Nordstrom’s guarantee. 3 Koomey. 15–17 Model Three. Tom. Zach. See Open Source Initiative Ouellet. 36 Lederman. Bob. Ray. Software as a Service. Amy. Priscilla. 183 Morin. 9 India. 107 MySQL. China. 184 Moore. 96 Nazir Siara. 3 Oracle On Demand configuration. 145–46 Openwater Networks. 118 Manber. Hybrid+. Jonathan. 120. 41 MMORPG (Massively Multi-player Online Role Playing Games). 144 Konary. 8 Ozzie. 17–22 Model Six. 195 Morgan. 9–12. Zack. Eastern Europe. 204 Omniture. 29 Meisler. 161 Magic Number. Rudy. 207 Service Level Agreements. 91. 65 Leadley. 122 No Silver Bullet: Essence and Accidents of Software Engineering (Brooks). Laura.INDEX JasperSoft. 116 customization. 38 O’Neil. 30–31 Netsuite. 116 Entwined strategy example. 5 open source software. 10. 186 Open Source Initiative (OSI). 7–9 Model Two. types of calls. Outsourcing. 6 Mythical Man Month (Brooks). Hybrid. 190 NetLedger. Udi. 52 Olson. 163 Kippola. reasons for adding software. 12 OSI. 142 traditional software business model. Courtney. 30–31 Netflix. 169 Lentz. 191 Leingang. 153–54 Massively Multi-player Online Role Playing Games (MMORPG). 30–33 King. 38–40. 15. John. 14–15 Model Four. 144 Linux. 5–7 Openwater. 3–5 Model Seven. 144 marketing cost of. 17 investment in. 37 Lervick. 207 Microsoft. 102 218 . 147–49 search optimization. 28.
John. 171–72 metrics.CLOUD Packard. 139. 171–72 objectives. 37 SaaS. 105–9. 121 219 . 6 Rocha. John. 165–66 profit and loss. 210 performance architecting for. 155 SI (system integrators). 61 problem management. price. Ken. See Software as a Service sales compensation. 170 revenue recognition. 183 RightNow Technologies. 49 QA. number of. 16. 10. 191 SAP. 153 Rudin. Katy. 141 Service Level Agreements (SLA). 33 Red Hat. 173 Software as a Service. Steve. 136–37 performance management. Keith. Clara. 130. 140 standards. 133. 141 Security Threats from Within (Bruck). 145 Ross. 17 lead generation. 177–80 Siebel. 3 testing. 9 Seven business models. backup. Everette. 107 Roberts. 177–80 Restructuring Outsourcing Agreements: An Indication of Failure. See software:Quality Assurance Raffel. precision vs. 70). David. 172–73 Oracle On Demand. 202 SLA. or a Tool to Increase Value? (TPI). 129. 172 Mexico treasury secretary example. Aaron. 46–48 Risk Management Solutions. 182–85 support. Michael. Bob. 167 spectrum. 16. 25–28. 172–73 Nordstrom’s guarantee. 14. 3 SAS 70 (Statement on Auditing Standards No. internal. 139 Schulman. 28–30. 168 lead qualification. 10–11 Service Science. 161 Rudman. 122 support fee. 35–43. Lynn. 92 traditional software business model. 158 Salesforce. 167. Todd. 205–6 Singh. 173 compensation guidelines. x Shih. 204 Schultze. 174 cost of. 93 internal threats. cost of. 116 Riskonnect. 195–96 Seven Vices or Seven Virtues (Chou). 198 resellers. financial. 102–15. See Service Level Agreements social networking. 207 Quality Assurance (QA). 168 productivity. 139 databases. 91 applications. 141 management. Axel. 30 power consumption. 154–57 software cost of. 167–68 Roth. 203 recruiting. 173 programmers. 16. 155 Pestana. 139 threats. 56 seven stages of success. 38 Phillips. Rick. 61 power outages. 171. 153–54 security Care Rehab example. 170–73 contractual service levels. 198–99 Recruitsoft. 179 search optimization. 167 size of teams.com. 102–15. 136–37 Perry. 6 Reedy. 65 power generators. 141–42. 136–37 management.
206–7 fee. 158 support. 206–7 Knife Switch. multi. 128–30 upgrading. 3–5 traditional software companies. 34 growth. 56 contracts. 29 challenges. 195–96 Successfactors. 49 specialization.INDEX upgrading. 201–2 software programmers. 3 monetizing. 108 standardization. negotiating guidelines. 91–92 value added resellers (VAR). 119. 33 Thoma. 34 traditional software business model. 203 from Model One. Knife Switch. 206–7 from Model One. 191 key characteristics of SaaS companies. 15–17 companies' key characteristics. 6. 6 upgrades. 95 Spohrer. Model One. 6 revenue recognition. 9 SPS Commerce. 91 transitioning from Model One Acquisition.single vs. 35–36 SugarCRM. Error! Not a valid bookmark in entry on page 83 support call types. 142–43 Survey Reveals Scandal of Snooping IT Staff (Cyber-Ark Software). 203 Entwined. 139 Stover. seven. 141 system integrators (SI). Christoph. 48–51. 29 challenges of. seven stages. Tien. David. 91 transitioning from Model One. 113 stages of success. seven. 6 recruiting. 6 Sun Microsystems. 116–20 performance. 70 (SAS 70). Leslie. 10–11 services. Jim. Chuck. 131 Software as a Service (SaaS) business model. 131 UpShot. process at eBay. 158 support. Louis. 4–5 surface Web. 169 financial evaluation criteria. 16. 116–20 customizing. 192 Model One. 198–99 revenue recognition. 95 Statement on Auditing Standards No. 204–5 usage spectrum. Entwined. 30 Stretch. 183 services. 93–94 Tetu. 15 success. Marian. 6 upgrades. 128–30 process at eBay. 193 open source. 192 Model One. 169–70 contracts. 34 growth. 33–34. 177–80 220 . 195–96 StakeWare. number of. 142 Entwined strategy. 48–51 traditional. 136–37 software companies. costs and challenges. 3–5 sales and marketing. 195–96 business models. 214 tenancy. 116 Taleo. 177–80 Szefler. 201–2 Tzuo. 3–5 sales and marketing. 47 upgrading software costs and challenges. Acquisition. 193 configuring. 182–85 specialization. Model Four. 177–80 VAR (value added resellers). 189 Udzinski. 184.
211 Wainewright. 190 221 . 16. Phil. 33 Visual Sciences. 199–201 Zipcar. 37–38 VSOE (vendor-specific objective evidence). 17 Zaidenweber. 106 Vocus. xiii. 40 Winblad. Dilip. 182 Wagle. 208 Yahoo. 191–93 World of Warcraft. 40 Visualforce. Natan. 182 Viasite.CLOUD vendor-specific objective evidence (VSOE). 165–66 WebSideStory. Ann. 108 Zappos. 15. 106 WebEx.
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