The problem with disruption

This is a problem that a lot of proprietary companies are having.

As Steve Hamm writes, SAP’s SaaS efforts seem destined to fail. Not because the company doesn’t have 3,000 people and $400M sunk into SaaS. It does, as I’ve written before

No, SAP’s problem is that it has billions of (dollars of) reasons to stay the same. Successful. Until it’s not.

Steve Hamm sums up the problem nicely:

What’s going on here is that SAP has to market its new product without cannibalizing its old cash-cow products. That’s going to be very difficult. It’s clear from the stellar performance of Salesforce.com that on-demand services have struck a chord with corporations of all sizes. And now Dave Duffield, founder of PeopleSoft, has a new company called Workday that’s about to release a whole range of run-the-business applications in the on-demand mode. So SAP has to be in the game. Yet most all of its revenues and profits now come from old fashioned software.

Bruce Cleveland, a venture capitalist who used to run the on-demand division for Siebel Systems, now part of Oracle, did a good job of summing up SAP’s challenges in a response to an e-mail from me today: “As long as they’re a public company, I don’t believe they can make this transformation. It’s absolutely the right strategy, but the internal DNA of the company will defy their ability to support both business models.” Cleveland should know. That’s partly what led to Siebel’s collapse, which forced it to sell out to Oracle.

Why is this a problem for many proprietary companies? It’s nearly impossible to disrupt yourself (a hat tip to Stephe for turning me on to Clayton M. Christensen a few years back at DLS). There’s just too much resistance within a company and too little willingness to cannibalize existing profitable product lines, even if it’s the right thing to do. Spinning off an autonomous wholly owned subsidiary would serve companies like this well, but they seem reluctant to even do that. It remains unclear what they will do medium term, or if they’ll even realize what’s happening until it’s too late. If you haven’t read The Innovator’s Dilemma and The Innovator’s Solution yet, you should do so immediately.

–jeremy

(A note to Matt: I really like your blog and continually find valuable information on it, but the recent move to a partial feed makes it WAY less digestible and decreases the utility greatly.)

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