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In the traditional enterprise IT sales scenario, big companies cough up six or seven figures for new software licenses, server and/or networking gear every year and then spend the next nine months deploying that stuff. Or maybe not deploying it — the amount of “shelfware” at big accounts is probably mind boggling.
But companies go through the motions because a: that’s what they’ve always done and b: they want to stay legal. That model may not be dead yet, but its days are numbered, at least according to some observers. What’s contributing to its decline is the increasing use of public cloud infrastructure like Amazon(s amzn) Web Services which together with Software-as-a-Service offerings pretty much obliterates the need for most on-site server and software upgrades.
Trying-before-buying model gains steam
And, more enterprise customers — not just startups anymore — have glommed onto the try-before-you-buy model that lets them download software, use it as they see fit, and when the time comes to deploy across company or to get support, all they have to do is pick up the phone.
Sunil Dhaliwal, who founded Amplify Partners, a VC firm that backs infrastructure startups, sees a massive transition underway in how companies buy IT. “This threatens the big infrastructure and enterprise IT companies to their core. It’s even bigger than changes in the technology itself,” he told me recently. (GigaOM’s Stacey Higginbotham wrote about Amplify here.)
The real deal, he said, is that enterprise customers are “very tired of getting the short end of the stick in their sales experience.”
Enterprise customers arise
Paul Santinelli, partner at North Bridge Venture Partners, agreed. Many companies just don’t have to install software for many core functions any more. Instead they try out things like Box for document sharing and storage or Okta for identity management. “You download it, try it and then buy it without ever meeting the sales guy,” Santinelli said.
And, there’s a generational shift among IT buyers. Younger people are happy to download and try things and let business units make their own choices.
That’s not the kind of sale companies like EMC(s emc), Oracle(s orcl), IBM(s ibm) and even VMware(s vmw) — all with big well-paid sales organizations — want to hear about.
Granted the transition will take time and the legacy vendors are not stupid — they see it happening but it’s hard for them to react fast. “This is not about them not getting it. EMC gets it. The problem is the classic Clayton Christensen Innovator’s Dilemma stuff — they have to make their quarters and you don’t do that by cutting your direct sales people,” he said. But companies like EMC, which Dhaliwal called the “best-ever factory for turning BC football players into highly-compensated sales guys,” will have to adapt eventually.
Newer generations of IT buyers won’t want to relinquish the freedom of downloading specialized software from young, nimble vendors instead of locking into one or two huge vendors for a wide array of applications.
Exception that makes the rule
One thing that may mitigate against faster change is the current regulatory and compliance climate. Companies in the financial services industry, for example, must show that all their technology is up to date and fully supported. That explains why companies still pony up for Red Hat(s rhat) Enterprise Linux as opposed to CentOS, even though many see no substantive differences between the two.
And vendors play right into that fear of being out of compliance. A VP with a large New York-based bank told me vendors like IBM and Oracle “give you full access to all their software to use or not but then come in with an audit or the threat of an audit to make sure you pay for every bit of it and try to lock you into an enterprise license agreement,” he said, indicating he is not at all pleased with that situation.
But, regulations aside, change will come, Santinelli and Dhaliwal agreed. Enterprise buyers are so fed up with the old model that they’re willing to take risks.
“One reason that OpenStack has gotten so much traction for something that’s not cooked is because it’s an alternative to [VMware] vCloud Director and companies don’t want to see vCloud as the new Microsoft CAL-style license lock-in,” he said.
Microsoft is famous for using its client access licenses, which are often initially cheap or free for new products, to get companies using those products and then jack up the license prices. That’s just the sort of enterprise sales technique that companies resist.
Financial services companies are locked into Oracle — and its sales people — for now, Santinelli said. The top IT guy “will keep buying Oracle from a rep in a suit but many of the people who work for that guy are already running applications like Hadoop or Couchbase on a server under their desk or in a VM in the public cloud. Those people will likely replace that IT guy in 5 or 7 years. Then they’ll be buying software, compute and storage just like you buy electricity — on a monthly usage-based rate. They won’t need to own the power plant.”
Feature photo courtesy of Shutterstock user Peshkova