by Tien Tzuo, Founder and CEO of Zuora. Originally published on Medium.
Last week Oracle bought NetSuite in one of the largest deals in the company’s history, and the press (and the market) reacted with a collective shrug. Why? Because ERP is on its way out the door.
It’s hard to believe now, but there was a time when ERP was hot. In the 1990s, with the prospect of the Y2K bug hurrying them along, companies replaced aging back-office systems with new enterprise resource planning (ERP) suites that were intended to create a one-stop shop for payroll, invoicing, HR, logistics, supply chains, general ledger and more. Oracle rose on the back of database sales and made billions of dollars in the process.
The first ERP premise was enticing: join up all your disparate engine-room components to have an integrated, holistic view of operations. For over 10 years, this was all fine (if very expensive), as companies had straightforward, transactional processes. But the walls of ERP are crumbling. In the new Subscription Economy, where services are being consumed on a pay-as-you-go basis, the standard ERP model is becoming increasingly obsolete.
Today, more than a decade after the golden age of ERP, companies are faced with a different challenge: adapting systems for a new economy where flexibility is critical to business competitiveness, and where people are moving to subscriptions rather than up-front purchases. ERP was great for managing your widget inventory, but today’s business world is about ongoing services, not stand-alone products.
Today’s innovative companies are increasingly pursuing recurring revenue models, and are relegating their ERP systems to a commodity general ledger in the process. All the value is moving to the Subscription Economy, because they are looking for solutions that neither Oracle or Netsuite can solve.
And on a broader level, this whole category of software is becoming less and less relevant. The old cumbersome “one size fits all” ERP model increasingly means that everything gets billed to Oracle, and nothing gets done particularly well. From customer service to expenses to forecasting to billing, more and more companies are taking advantage of “plug and play” SaaS providers that are maniacally focused on performing one core function really, really well.
Concur does nothing but think about travel expenses all day. Salesforce.com is synonymous with CRM. Aviso is putting the latest machine learning technology into sales forecasts. My company, Zuora, lives and breathes subscription billing, commerce and finance. These SaaS solutions are way more nimble and effective than a massive Oracle installation. That’s how the Rebel Alliance took down the Death Star.
I don’t know many happy Oracle customers. They all know they are spending way too much money, they feel locked in, and it’s sucking the life out of their operational efficiency. Furthermore, it kills their ability to be agile enough to create new business models and offerings that are focused on their future.
Oracle has proven over and over again that they are where all acquired companies go to lay their innovation to rest. Eloqua, PeopleSoft, Siebel Systems…now add Netsuite to the list. At the end of the day, this move demonstrates the downward spiral of traditional ERP economics more than anything else.
A combined Oracle and Netsuite is where all good recurring revenue businesses will go to die.
Learn more about why Wall Street loves subscription models.