I had been warned by friends inside Oracle that some of the company’s executives had taken exception to a recent blog post I had written—Who Drives Software Innovation? The “Best-of-Breed vs. Giants” Debate. Sure enough, we had barely sat down for our meeting with Sonny Singh before the Oracle SVP brought up the topic. And he wasn’t the only one to mention it.
As it turns out, my post came out just as Oracle was putting the finishing internal touches on a new 100 Days of Innovation campaign to tout the company’s development skills. As one marketing executive explained to me, Oracle is doing this to counter all the negative press about the poor state of the economy and promote the company’s organic innovation. “There is a perception in the Valley that we have to acquire innovation. That’s not true,” the executive said.
The campaign kicks off July 1 with the launch of Oracle Fusion Middleware 11g and will continue through to Oracle OpenWorld (October 11–15, 2009). The company intends to showcase unique advances in applications, middleware, Beehive collaboration software, On Demand applications, Oracle VM, and the like. It will also herald some of the company’s unsung development heroes as well as some of the projects underway with customers and partners. Look for more details on the Oracle website.
Goliath’s focus: Commercialization versus commoditization
It’s likely that this is the paragraph from my blog post that caused blood pressures to spike:
Call me cynical, but I believe today’s large vendors are more interested in commoditization than innovation. Ideally, they want to be able to sell a generic version that will appeal to customers across dozens of verticals, hundreds of countries, and tens of thousands of customers. For them, true breakthrough innovation doesn’t scale.
In our 75-minute meeting, Mr. Singh raised several interesting points that bear repeating. He opened by saying that “software is a fixed cost business...all investment goes into building the product” until it becomes generally available. He continued, “The most important factor is scale so that you can amortize R&D across a broad base,” thus driving down the fixed cost per customer.
Scale is often the most elusive prize for small vendors. Mr. Singh argued that “getting the first 10 customers is relatively easy. Then the 11th wants globalization, foreign language support, or an architectural revolution.” According to Mr. Singh, the 11th customer—or the 26th or 101st, for that matter—represents “n+1,” where your business is forced to change. Now CEOs and their investors have to rethink scale.
The discussion segued to my point on commoditization. Mr. Singh said that commercialization would have been a better word choice. “You need margins and you don’t get that from commoditization. You need to commercialize and scale.”
His final point was that I had to distinguish between the funding sources of innovation. “VCs place a large number of bets on startups. They know that most will fail and hope that a couple will be very successful.” Public companies like Oracle don’t have the luxury of sustaining a low batting average because of the company’s “shareholder responsibility.”
He’s right about the VCs. Remember the quote about the last dot-com boom, “Features became companies”? It was because the VCs saw the ability to attract an initial base of n customers, but had no strategy for n+1. He closed by saying that “VCs and public companies had fundamentally different economic models.”
Innovation at the point of convergence
My post didn’t define innovation. Mr. Singh sees innovation at the point of convergence, and offered two examples. One is innovation at the user interface. In this case, he described the “seamless convergence of structured information and transactions with unstructured information and transactions.” Examples of unstructured transactions would include search or collaboration. The net result is a much more productive user experience.
For his second example, he pointed to Oracle’s Application Integration Architecture (AIA): “AIA is not ‘net new,’ but what it delivers is innovation.” He then described a customer that had spent more than a year working with an integrator to build a custom billing system. Today, that customer could use AIA to orchestrate or sew software components into a seamless, end-to-end business process. The whole project could be completed in a fraction of the time.
As I sit writing this on my flight back to Boston, I think Mr. Singh’s most important point may be the n+1. On the first leg of my flight, I read “Google Searches for Ways to Keep Big Ideas at Home” in The Wall Street Journal (June 18). Google is now conducting formal innovation reviews to accelerate its ability to capitalize on new ideas before employees leave to share their concepts with VCs. Will Google ever find a second market with the scale of ad words? Has the sale of ad words reached n status?
n+1 also reminds me of the challenges facing smaller software vendors that have built clever algorithms for pricing optimization, service parts planning, and multi-echelon inventory management. While many companies could use their products, it seems these vendors collectively reach total market saturation with a few hundred customers.
What do you think?
Can the Goliaths outpace the best-of-breed companies in innovation? Does breakthrough innovation scale? Is the n+1 analogy a good basis for understanding why few software companies ever get to 2n? Will Google become the next Lotus, unable to unearth the second goldmine?
As always, I welcome your feedback and ideas— brichardson@amrresearch.com. And please check out The Future of Enterprise Software for insights on Oracle’s acquisition of the IP assets of Conformia.
