Nick Carr writes that IT doesn’t matter, and cites WallMart’s recent switching from proprietary to packaged software as the proof point.  Carr has written along these lines for some time.  What’s missing from the analysis is a realization that productivity stems from creating an advantage that is a moving target.  Create one advantage, perhaps a sophisticated supply chain system, and your competitors will relentlessly try to adopt the advantage for themselves.  Once they’ve succeeded, your advantage moves to simply being a cost of doing business.  IT groups that rest on their laurels will wake up one day to realize they’ve become overhead and not the competitive weapon they once were.

I remember an email conversation years ago with Ethernet inventor Robert Metcalfe.  He was writing a column on IT productivity, and the apparent lack of measurable productivity gains from all the IT spending.  My position with Metcalfe at the time was that all the spending was just “keeping up with the neighbors” and would not translate to productivity until someone innovated.

It’s not always easy to find new ways to innovate with IT.  In recent years IT has given away a lot of its ability to innovate internally through outsourcing and reliance on packaged software.  Nevertheless, those organizations that do innovate will have a decided advantage over those who do not.  To succeed, CIO’s have to reserve a certain amount of their budget for looking for the unique problems that aren’t yet solved and then attacking them in a way others are not following. 

This is yet another corollary of my punctuated equilibrium concept applied to competitive IT.  If you’re simply doing what the rest of the crowd does, at best you will keep up, and at worst you’ll be beaten by an innovator.  Fortunately, it is early days yet in at least two big areas IT could choose to use for innovation:  SaaS and Web 2.0.  How much of your computing infrastructure can you move into the cloud and achieve results radically more cheaply and reliably than your competitors?  Should you be in the datacenter business at all, or should you be outsourcing all of that?  How can Web 2.0 (which I’ll define as using collaboration and conversation with your employees and customers) be harnessed as a competitive weapon?

What big bets are you making today that will bump your productivity curve above that of your competitors?  Or, as Apple says, “Are you thinking different?”

Phil Wainewright has just posted about SaaS vendor Workstream’s choice to offer virtualized single instances to large customers instead of multitenancy.  Workstream gave him a collection of reasons for the choice:

1. Customization for large customers requires separate instances.  Workstream say, “clients have a need for system changes to match key cycles — like their pay for performance cycles. As a result, there is a demand for more tightly controlled, client-unique system changes.”
2. Security and inappropriate data access.
3. Impact of other clients on their system performance.
4. Inability to establish and pay for their own, higher service levels (common among large companies).
5. Being forced into an upgrade.
6. Inability to support the level of client specific configurations and even customizations as necessary.
7. Inability to obtain client level user acceptance testing
8. Inability to determine the precise production/go live dates for the system.

Wainewright awards equal merit to all 8 reasons, and because of that, concludes that customization is just a small piece of the puzzle.  I think there’s room to examine customization more deeply, so I dug out the company’s 10K and found some interesting data.  Their professional services revenue, which the 10K defines “from implementation of software applications and from customer training, customization and general consulting”, is about half their SaaS revenue.  Neither is very large, by the way.

I find that professional services number to be worrisome, because it says customers are spending a huge amount to customize the system.  When you look at how the revenue recognition works for SaaS, the professional services are even more out of whack.  The reason is that some amount of the SaaS revenue, perhaps even the lion’s share, is for systems that are already up and running.  The professional services are largely only applicable to installing and customizing new systems.  This implies a very large up-front customization engagement is necessary to get this SaaS application going.  Professional Services might be several times the annual SaaS contract value here.

More power to these guys for having a SaaS offering, and I totally understand that large organizations (and especially their government and education customers) can be very dictatorial.  But I think we can miss an important issue if we sweep all that under the rug of the remaining objections.  Looking at those remaining objections, 2 through 7 are classic objections to SaaS.  Every SaaS vendor deals with them, and many, such as Concur who has one customer with 180,000 seats, are able to do business with large enterprises despite the objections.  Workstream wants to be able to say “yes” to customers no matter what, and that’s fine too, but there is a cost to it in terms of losing a lot of SaaS benefits along the way.  The 8th reason I can’t fathom at all.  An “inability to determine precise go-live dates” smacks again of the customization theme.

The point I come to on this is that I don’t see Workstream as presenting a virtualization quandry for SaaS vendors so much as it underscores the customization quandry in my mind.  For SaaS to work well, it needs to be self-service from the customer’s perspective.  Big professional services engagements add a lot of friction to the SaaS machine.  It’s my contention that solving the customization conundrum for a particular segment that requires it is probably a more strategic issue than whether to go virtual or multitenant.  It has to be possible to do all the customization needed with the following qualities:

• It’s approachable by non-technical users
• It involves metadata, not code changes, and the metadata can run in a multitenant single-instance world without disturbing other tenants.
• The work to configure a new customer is a tiny fraction of the annual SaaS contract even if you farm the work out to consultants.

This can be done even for extremely complex domains.  Sales compensation is a field I’m very familiar with and business logic there is Byzantine.  Yet, SaaS vendor Xactly does an implementation with about 6 weeks of inexpensive consulting, and the whole thing runs multitenant.

There’s been huge focus on multitenancy as the defining technology behind SaaS, and as a technological barrier to would-be SaaS vendors.  Workstream is a great example of why for many domains there is a big elephant called customization sitting in the room that nobody wants to talk about.

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