Innovation will not come from the usual suspects any more. Companies like Apple and Microsoft have been the most influential innovators over the past ten years, but Google and “Other” non-traditional companies will dominate in the next ten years.
In fact, some of the companies that used to lead innovation such as Microsoft and IBM are falling behind on profit revenues and missing financial projections. Traditional companies are having trouble adapting to new technology platforms and approaches to business, which is causing them to see financial declines and a struggle to remain profitable. These companies are spending more time catching up to trends like the cloud, rather than innovating.
In a talk at the Gartner Symposium in Barcelona last week, Neil McMurchy, Managing Vice President at Gartner Research, pointed out that companies should reimagine, reinvent, re-engineer, redesign, and transform the way they build out the applications that support their newly digitized businesses.
Transforming Software Business
Businesses that once relied on selling hardware are having to find new ways to earn profits. While companies like Microsoft, IBM, and SAP were built on large license fees and maintenance contracts customers had to pay upfront, businesses are shifting to subscription-based revenue models. Though this model may require charging lesser fees, it allows these businesses to earn revenue from cloud services and maintenance, a type of revenue they need to stay afloat. These companies have to be willing to reinvent and adjust to changing technology trends.
Joining the Cloud
Microsoft, SAP, Oracle, and IBM are the four largest enterprise software companies in the world. However, Microsoft is leading with $5B in revenue from cloud services, although it still trails Amazon Web Services’ $7B. Oracle and SAP are late to the market, as they are only now building out their cloud service platforms.
As these businesses begin to offer cloud-based services, such as SAP’s HANA, an in-memory database and Microsoft’s Office 365 cloud software and Azure cloud hosting service, the cloud remains the primary business model for these aging companies.
SAP is aware that they need to innovate and this year released new products aimed at taking advantage of HANA. They are the biggest ERP software company in the world, and their CEO sees the need for these new products such as the simplified business suite, SAP S/4HANA to be successful and earn revenue, if not, it could signal doom for the company.
SaaS is Coming
The SaaS (software as a service) trend threatens companies like SAP. SaaS is a type of cloud computing, where companies rent apps that are delivered as a service and pay a subscription fee. And since SAP has mostly done business by licensing apps, buying service, building data centers, etc., SaaS provides direct competition because it presents a cheaper, faster alternative to the old way of doing things.
According to McMurchy, there’s been above market grown in all application segments of pure SaaS, and some markets are earning more than 50% of their revenue from SaaS, such as CRM. Companies should prioritize their investments in tools like advanced analytics and business intelligence, mobile and wireless, and cloud computing. As megavendors are growing less than general market growth rate, applications should be built with services and custom packages in mind.
Still, many businesses are investing more in record and differentiation applications than in innovation, even though they perceive their investments to be the other way around.
The Future of Innovation
It’s CEOs that drive digital business transformation in a top down effect. Companies should focus on creating value with new business models that will help them build their digital transformation.
Though SAP, Oracle, Microsoft, and IBM are making strides in cloud services, and although Apple and Facebook still have a lot of influence today, it’s Google that will play the most important role when it comes to innovation in the coming years. It’s not only that Google has its hands in different parts of the Internet, it’s that the company has invested in the cloud, wearables, and mobile devices. And also, Google is innovating things like self-driving cars and, most importantly, investing in other disruptive, and innovative startups and companies. In fact, Google has just hired Diane Greene, cofounder of VMware, to lead a new team that will combine all of Google’s cloud businesses including Google for Work and Google Apps. Choosing Greene shows that Google wants to attract the cloud enterprise sector to its cloud, since she is well-respected in both the cloud startup community and the corporate enterprise community. Google CEO Sundar Pichai says, “[Greene is] someone who understands enterprise needs very well.”