Monday, April 17, 2006

Disruptive Innovation, Co-option and JBoss

I started reading the latest book by Clayton M. Christensen- Seeing What's Next. He is also the author of Innovator's Dilemma and Innovator's Solution. An interesting case study to apply his book's theories is JBoss. JBoss was clearly a disruptive innovator that targeted low-end customers with a good enough product at a lower cost of ownership (or at least cheaper licenses). However in getting acquired by RedHat, the combined entity is looking more and more like other big giant software companies.

The Value Chain that JBoss was leveraging started out as quite different from existing software vendors but in its quest to increase revenues, the likes of JBoss have started focusing more and more on the typical enterprise customer. In doing so, their value networks are overlapping increasingly with those of existing vendors. By Christensen's Value Chain Evolution (VCE) theory, this makes co-option by existing vendors easier. Larry Ellison talked yesterday about interest in having its own Linux offering and in the recent past considering Novell for an acquistion. These developments show that JBoss in particular and the open-source software companies in general are becoming an increasingly easy target for co-option.

The threat from open-source to large software vendors may be on its path to neturalization. By attempting to go after the same customer base as traditional vendors, the open-source vendors have made themselves more vulnerable.

I am also noticing the same trend with SaaS (Software as a Service) vendors like They started out attacking the un-served and under-served market by providing a limited functionality easy-to-use tool. In their quest for revenue growth, they are aggresively hiring sales teams slowly turning themselves into just yet another Siebel. Larry Ellison in his interview correctly pointed out that customers do not care how the SaaS vendors run their software and as these 'true' SaaS vendors try to attack Siebel, SAP and others, their business model & values become similar to those of the large enterprise software vendors. In this space, the large software vendors have an edge and co-option of smaller entities like and NetSuite becomes a valid strategy.

In summary, the success of SaaS and Open-source and the attention they received from customers and media was predicated on how different they are- in how they build, sell and service their software. As these vendors try to encroach upon the customer base of large software vendors, they run a very high risk of loosing their uniqueness- in value chain and in target markets. Larry Ellison may be right- yet again!

(Disclaimer: The views expressed here are personal and do not represent views of my employer or any other entity mentioned above. To read full disclaimer click on my profile.)


Anonymous said...

It may well be that the path to SaaS success will not be via the software market. The focus must be on the service; the “software” is merely a means to delivering it. ADP (the payroll people) is little more than a SaaS provider, but the company rarely talks about its systems. If SaaS vendors try to take on the major perpetual license software companies, they’re making a huge mistake. SaaS is a demand-driven phenomenon primarily because the end user is fed up with the oligopolistic antics of behemoths like Oracle, SAP, etc. For SaaS to be truly disruptive, vendors need to provide customers with greater value; first, however, SaaS companies need to distance themselves from perpetual license companies. The problems with SaaS vendors’ “quest for revenue” and attempts to “attack” the larger vendors stem from most SaaS companies’ foundation in the traditional software business. Even though the early adopters recognize that the traditional perpetual license model is irreparably broken, they are often uncomfortable thinking too far out of the box and/or looking to other (i.e., non-software) industries for proven solutions.

Ken Boasso

Unknown said...

On SaaS, I could not agree with you more. Most large software vendors don't get it and probably never will. However, initially these vendors didn't get open-source either and now IBM, Oracle, Novell are plugged into the open-source value chain and taking advantage of it to sell more software and competing with the likes of Microsoft. IBM etc. do not build great open-source software but know how to leverage it thus minimizing the threat from Red Hat and MySQL. Similarly, I do not expect Oracle and SAP to become SaaS vendors but if the SaaS vendors play by tradional software rules, over time these big vendors will figure out a way to surround and limit SaaS. For example, Microsoft could come in and let you use through the Office suite rather than just the browser. This is a win-win but if it were to happen (MSFT+Salesforce) it would limit the disruptive power of Salesforce. I agree with you that the DNA of these SaaS companies is too close to that of big software vendors- again making it easier to co-opt or buy out as the cultural differences will be fewer. The key question (that we both agree on perhaps) is whether or not SaaS business build a Value Chain that is distinct from that of SAP, Oracle etc. There long term success will depend on that.
And yes, I concur that ADP, Fidelity Information Services, Digital Insight, etc - companies that provide end-to-end solutions including 'software' are true service providers as they don't just focus on software but the service. And their DNA is fairly different too. I had an occasion to work with TALX, for example, and found them innovatively using Web Services to provide businesses and local governments with payroll data on ex-employees. These companies have vertical industry knowledge, are focused on service and not software and are least likely to be absorbed by the likes of SAP, Oracle etc.

Thanks for posting the comment.