Vinnie Mirchandani has a question:

Why hasn’t the $75B in software maintenance fees Oracle collected over the last 5 years resulted in more innovation?

He’s created quite a discussion spanning several blogs and writers, which is neatly summarized here.  Even a couple of Oracle spokepersons have gotten involved.

I’m not exactly sure why Oracle is singled out, because you could say the same of pretty much any large software company: SAP, Microsoft, whomever.  I don’t propose to debate that here.  I did point out that Oracle’s strategy of acquisition is an innovation by itself relative to most of its peers.  Vinnie countered that it doesn’t produce the kind of innovation that Intel, Apple, and Cisco have going on.  And so I respond thusly:

Cisco innovates by acquisition.  That’s why they’re on your list, Vinnie.  In fact, they’ve created a thriving ecosystem where an entrepreneur can be acquired more than once by Cisco. 

Personally, I think this is the best route for really large companies to innovate, but it takes a certain culture.  Not sure when your execs are investment bankers whether you think that way.  More likely you think about whether you can get a higher multiple on the revenue stream you acquire, and of course that’s just what they’ve done. 

But there are only so many Big Co’s for them to acquire left.  I think Tom’s note about Ellision’s SaaS investing is pertinent.  Perhaps he views SaaS as the farm team for a future round of acquisitions.  If so, he’s got his own ecosystem, and we just haven’t seen it unfold yet.  Most of those companies aren’t big enough to matter to the Mother Ship.

Vinnie asks a sub-question that I do want to explore here, because it is interesting and doesn’t get talked about much.  In the comments of the post I refer to, he says:

Why should stability require a continued premium? should not SLAs evolve in line with SaaS SLA, quality with CMM and Six sigma advances etc, help desk costs decline with automation and offshoring?

Therein lies an interesting story. 

It turns out the On-premises companies deal with a host of issues that SaaS companies seldom do, and it is these issues that account for a lot of the costs.  I’ve compared notes with a number of CTO’s, and our rough estimate is that something on the order of 40-50% of the engineering budget is consumed by:

–  Patching old versions.  With on-premises, many times customers refuse to move forward to the latest releases.  As a result, vendors are stuck providing patches that can be applied without installing a new release.  This is an extremely time consuming activity.  In the worst case, it requires every bug you’ve fixed in a later release to be individually re-engineered, re-tested, and re-packaged, for each of the older releases.  Just the thought of it is enough to give an organization pause when contemplating any major architecture work because that means the bug might have to be fixed in two completely different ways on either side of the architecture change.  SaaS companies are effectively immune to this because they update releases much more frequently and push the updates to every single customer as soon as they are ready.  I surveyed Customer Service departments for on-prem software companies one time and asked how many of the problems being reported were fixed in the most recent release.  The answers that came back ranged from a low of 40% to a high of 80%.  That’s another way to quantify the tremendous waste that preparing and supporting these patches brings.  Most SaaS customers simply never see the problems because they’re fixed transparently behind the scenes as soon as even one customer has a problem.

–  Supporting multiple platforms:  This is another painful cost.  There is an Unholy Matrix of Testing that is multi-dimensional.  Each dimension is a platform component:  OS, Application Server, and Database Server would be the least number of dimensions to consider.  Add to that various kinds of inter-application integration and any other dependency between two pieces of software.  Now drag out the data sheets for all the versions of a piece of software that are currently being supported.  Mark off every single release of each one of those platform components in a row of the dimension.  It’s a combinatorial explosion.  Yet, if you support all of those combinations and permutations, you are warranting to customers they can choose whatever they’d like and it will work.  Reality is that no vendor tests them all, they test the most common ones.  So there are exceptions that creep in that result in more patches (which per the above get applied to lots of releases that many different customers are using), and that through the magic of continuous process improvement add more steps to doing new releases so they can be avoided in future.   BTW, even for Oracle, this is not under their control.  They bought into all sorts of support commitments.  Peoplesoft and Siebel certainly didn’t only support the Oracle RDBMS, for example.  Also, the platform vendors unilaterally do all kinds of things to mess up your game plan.  They quit supporting versions.  So now you have to certify some new version on one of your old releases so an important customer doesn’t have to go through the expense of upgrading.  How do SaaS companies avoid this?  They only support one canonical platform because its all happening behind their firewall, not yours.  They can keep it as the latest platform and keep every customer on the same one.  Huge savings there.

Is it fair to pass those costs back to customers through lack of innovation for maintenance?  I think so.  After all, much of it is motivated by customer desires.  The desire not to have to upgrade.  The desire to use a particular platform combination. 

There ain’t no such thing as a free lunch!

And, yes Virginia, there are real reasons why SaaS is better and cheaper.  It isn’t just smoke and mirrors.

PS  Vinnie mentions outsourcing.  Oracle had been famous for this, or more properly for offshoring.  Used to be that when you lost someone on the team, you could get 2 replacement reqs instead of 1 as long as the 2 were offshore.  Last news I heard from a formal Oracle dev manager was that this hadn’t worked out so well for productivity and they were backing away from it.  Given today’s economy and the availability of onshore resources more cheaply, I should hope so.  Offshoring makes innovation MUCH harder.  Now I’ll wait for the chorus of responses to that one.

PPS Just heard Vinnie was referred to by none other than Marc Benioff in his earnings call!

The US prides itself on being the world’s innovator, but the US government has been working overtime in recent years to kill innovation.   Consider things like Sarbanes Oxley or the way our patent system works.  Both are set up to work against innovation.

Sarbanes Oxley was created in the wake of the Enron disaster to protect investors from similar kinds of problems involving malfeasance by company management.  It’s called the Public Company Accounting and Protection Act of 2002.  There’s just one little problem with SOX: it makes it dramatically harder for companies to go public.  The average newly public or about-to-be public company spends $6 million getting itself in shape for SOX and another $3 to $4 million each year thereafter.  For a company that’s barely making a profit, that’s a lot of money.  It delays profitability until substantially later, forcing companies to grow much larger before they can go public.  How does this impact innovation?  Going public is a liquidity event, one of the driving reasons investors put up venture capital for new ideas.  Without the possibility of IPO, many companies have to look to already public companies to acquire them.  As a result, VC James Patricof recently moved from a $30B fund to a $75M fund.  He’s accepted that the landscape has changed, and that startups need to plan for $20-$100M exits instead of IPO’s.  If this is the future of venture capital, as Patricof believes, there’s going to be a lot less capital to go around, and a lot less innovation as a result.  Note that all this is part of the Law of Unintended Consequences for a bill that was designed to protect the public from companies like Enron.  Just before it went down, Enron was booking revenue of over $100 billion dollars.  That’s billion with a “B”.  Yet the government in its infinite wisdom is penalizing all comers of all sizes with the same treatment.  The end result is that small companies are penalized much more severely than large companies.

Another area that works against small companies is the current patent system.  VC Fred Wilson says Patent Trolls are a tax on innovation, and he’s right.  But wait, the patent proponents say.  Patents are there to protect the little guy.  Without them, big companies could steal their ideas blind.  There’s just one problem: the big companies can defend themselves and the small ones can’t.  The patent code favors big in two ways.  First, Patent Trolls are gaining access to what are essentially bogus patents.  These are not patents associated with any going concern business that’s creating jobs.  They can’t be, because the best patents for the Trolls are overly broad patents that never should have been granted anyway.  A typical example would be a patent on any system that applies rules to databases.  If SQL statements aren’t rules, I don’t know what are, yet such a patent exists and it was filed after SQL was well established.  Evidently the USPTO is incapable of distinguishing good patents from bad.  Trolls love these broad patents because they can go after anyone and everyone with them.  The second half of the Patent Troll business is the asymmetry of coverage provided by the system.  Put simply, it tremendously favors the plaintifs over defendants.  This in a country with a constitution that states we are innocent until proven guilty.  I’ve been involved with patent trolls before, and attorneys advised my company that it would cost us $1 million just to get to trial.  The cheapest route at that point would be to prove we did not infringe the patent.  If we have to try to get the patent thrown out, that will cost millions more.  The cost to a Patent Troll to bring a case to court?  A couple of hundred thousand dollars.  When the Troll wants $500K to go away, guess what the answer is?  There is no point fighting it as it will cost twice that to get to trial, much more to finish, and the outcome is uncertain.  Trolls like to bring suit in the backwaters of Texas were a jury of your peers has no clue what’s being discussed or how obvious the Troll’s “invention” may be.  Trolls also like to attack small companies.  It helps them to establish precedent and build their war chests to go after bigger prey.  But the reality is that Big Companies can defend themsevles while Small Companies are at the mercy of these characters.  Fred Wilson says one of his portfolio firms recently spent 10% of their round of financing fighting off a Troll.  How does that help innovation in any way?

But there is a new sheriff in town in the form of Barack Obama.  Various parties are crowing about how the stimulus package is finally geared towards High Tech and Innovation.  The NY Times writes:

    What oil was to President Bush, some say, clean energy and technology are to the Obama White House. “We have a president who gets it,” said Dean Garfield, the president of the Information Technology Industry Council.

We’re giving $7B for broadband, $19B to automate healthcare record keeping, and billions more to create a “smart grid” for energy distribution.  What does it all mean?  Is this innovation?  In a word, “No!” 

Start with the broadband.  It’s largely about delivering broadband to rural areas, so the Department of Agriculture (a real hotbed of innovation) is getting almost half the money right up front.  There are no speed requirements at all, leaving the Federal Government free to declare victory however it likes.  This is pork.  You may as well consider it the Internet to Nowhere and put it up alongside Alaska’s Bridge to Nowhere.  Sure we’d love to make Internet access ubiquitious.  Will this package actually do that?  I won’t hold my breath.  And meanwhile, what does it do for non-rural areas?  Absolutely nothing. 

Contrast that with a plan by South Korea to spend $24.6B dollars, create 120K jobs, and deliver 1 Gigabit per second internet connectivity to the entire country.  Which one sounds more innovative, and more likely to spur innovation to you? 

Smart Grids?  Automated Online Health Records?  These don’t sound like innovation either.  I debated whether to even start in on the Stimulus Package until I read a series of exchanges by the Enterprise Irregulars.  They snapped me out of feeling like a curmudgeon and into seeing pork for what it is. 

Sam Diaz says Silicon Valley is finally getting some respect from the White House, but that isn’t it at all.  The companies that are going to benefit from this package are not Silicon Valley companies, they’re big tech companies.  IBM, Fujitsu (not even a US company), and similar large companies are the ones commonly talked about.  We’ve replaced the Bush administration’s pets like Halliburton with a few slightly more techie names that are still giant corporations.  This is not helping the little guy or innovation.

Why all the emphasis on the Small Companies, BTW?  Because that’s who creates the jobs.  That’s who innovates.  Isn’t that what we need right now?  More jobs?  More Innovation?  Look to Small Companies, not big ones to do that.  Take a look at this chart, for example:

That gigantic spike in job creation all the way on the left is courtesy of Small Business, and represents the vast majority of jobs created from 1987 – 2005.  President Obama, if you can’t get the Small Sector fired up, how do you expect to replace all the jobs the economy has lost so far (not to mention those yet to come as more shoes drop)?

Tim O’Reilly has it right when he agrees with this Twitter quote about the origins of success and failure:

    “privatize success (by chalking it up to individuals) & socialize failure (by blaming it on large systemic problems).”

Obama and the Rest of Government, take note of what you’re doing to Innovation and give us back a system that favors the Individual Innovators in Small Businesses and quits forcing Failure.  Do what you want with the stimulus package, it’s pork already promised, but reform the patent system and get rid of Sarbanes Oxley except for companies with at least $1B in revenues.  You’ll be amazed at what it’ll do by way of turning things around.  And it doesn’t cost anything at all compared to what the stimulus package itself costs.

Related Articles

Suddenly, startups and the stimulus package are an exciting topic.   LinkedIn’s Reid Hoffman on Techcrunch asks Obama Claus to give us Small Business Loans, No limit on H1B visas, and Matching Funds for VC’s and Angels.  But Reid misses the bigger point: availability of capital is a non-issue if liquidity is available.  Which brings me back to the point of this post.  Eliminate SOX for small companies and make liquidity easier and you’ll have private capital moving to the sector in droves.  You don’t have to pay for all this from the taxpayer’s pocketbook.  Fix the incentive side and the capital side fixes itself.  That’s how capitalism works.

Awesome post by Todd Dagres pointing out the linkage between SOX, the lack of IPOs since SOX, and the impact on innovation.

There is an old story about three blind men and an elephant that is said to have originated from India.  Each one touches a different part of the elephant, one the trunk, one a leg, and one the tail.  None of them can agree on what an elephant really is.

Here is a modern parable based on the elephant story:

The sales guy wants to know, “What size companies are our target customers, small, medium, or large?”  Translation:  How big are my deals, how many do I need to close to hit my quota, and how shall I go about closing them?

The marketing guy wants to know, “Where do our target customers go to learn about new products?”  Translation:  Where should I buy ads?  Who should I buy mailing lists from?

The CFO wants to know, “What kind of margin do we get on that business?”  Translation:  What am I telling the Board and Investors about profitability?

The engineer wants to know, “What kind of hardware and software will they run my software on?” and “Why would customers want to do that?”  Translation:  How will customers interfere with my pristine architecture?

The professional services person wants to know, “How many hours can I bill while installing this software?  How little training can I get by on giving my consultants?”  Translation:  I just want to bill profitable hours: as many and as often as possible!

The elephant they’re touching is the customer.  None of them see the customer as they really are, but only as the customer affects them.

I was listening to someone tell me the other day about budgets and how it is hard to sell something that’s good for a company but doesn’t fit any one’s budget or goals.  Everyone will applaud the new idea, but then point there finger to the next guy to take responsibility. 

That’s the problem with Elephants.  And Customers.  No real organization, or at least no successful one, is quite as polarized as the parable suggests, but even a little polarization can obscure important issues that stand in the way of success.

What are you doing to make sure your organization sees Customers and not Elephants?