Andy on Enterprise Software

Less is more when it comes to innovation

November 18, 2005

A survey by the Economist Intelligence Unit (sponsored by PWC) just released today has a very interesting finding that backs up something I have written about before: when it comes to innovation, don’t look for it in large companies.

In answer to the question:

“Small or start up competitors are more likely than large, established companies to create breakthrough products or business models” no less than 70% of senior executives “agreed” or “strongly agreed”, with only 10% disagreeing. Given the vastly greater resources and R&D budgets available to large companies, why the dearth of innovation there?

It is easy to argue that bureaucracy is the cause but I think there is another reason that I have not seen written about. I had some dealings with Oracle in the 1990s when they were concerned about the emergence of object databases, and they wanted customer input as to whether this was a real threat to them. What struck me in several meetings in Redwood City as I met with a range of senior Oracle technologists, was how that the most impressive people were the ones working on the database kernel, the core of the Oracle product. Less impressive were ones working on the applications, and least of all were some working on the tools layer above. This makes sense: if you are a top developer and join Oracle then you probably want to work on the crown jewels. Similarly in my dealings with my favorite Walldorf-based ERP vendor I have found the best people to have worked on the basis, the next best the modules, and the least impressive ones on the peripheral tools. Again, the key to SAP’s success has been its integrated ERP system, so it is hardly surprising that the top people gravitate there. Moreover the area which made the company initially successful is probably the one where the greatest understanding of the customer issues resides. The farther you move away from this the less likely it is that the best people will be working, and also the less likely it is that the senior executives (who built the company n the first place around a core technology) will grasp the opportunity and back innovation. Hence the ideas leak out of the company as those passionate about them leave to set up start-ups.

3 comments so far

It was a pleasure to go through the common sense approach of yours towards the ERP projects and reading through not so uncommon issues one faces during the implementation or support. Being relatively new to ERP industry (SAP) but gone through couple of implementation, it was like reading our Do’s and Don’ts at the end of the project. But the sad part as you quoted is “The software industry is not good at learning from previous lessons and mistakes.”.
I thoroughly enjoyed reading your blog and, self-interestedly, I wish that you keep writing your insight about this industry so that I can pick bit and pieces of your invaluable experience.

Thanks for your kind words Rajeev. I am very glad that it is proving interesting to you and resonating with your own experiences.

[...] This is unhealthy, and not just for small enterprise software companies.  As I have written before, innovation rarely comes from industry behemoths, so by creating an environment where companies are buying only from “safe” companies they are in fact damaging the ecosystem which will bring them their next new and exciting software application.  By sticking to the giant software vendors CIOs are creating an environment where smaller companies struggle, which causes VCs to invest less, which means that fewer and fewer enterprise software companies get started at all.  This in turn allows the giant vendors to charge whatever they want in upgrades (witness those margins) as they now lack serious competition.  Cartels are never a healthy thing for customers, and yet in this case the customers are bringing it on themselves by creating the conditions for a cartel to effectively exist. [...]

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