Enterprise Software: Beyond Microsoft Vista

Beyond Vista

Every decade or so, a new platform emerges that reduces the cost of running an IT department to such an extent that vendors have no choice but to embrace it or die. In the 1990s, PCs with powerful operating systems spelled the end of mainframe development and ushered in the client/server era. Today, cheap servers and high-speed Internet connections are triggering a move away from traditional desktop PC software and to software as a service, hosted by a third party and delivered over the Internet.

No company has as much to lose from this shift as Microsoft, which dominated the client/server era on the strength of its Windows operating system. Microsoft is currently enjoying a moment in the spotlight thanks to Vista (the latest version of Windows), the fruit of five-plus years of development and what Microsoft COO Kevin Turner calls the "biggest R&D investment in the history of Microsoft and arguably the history of business." But Vista isn’t a part of the software-as-a-service trend, and all the pomp and circumstance around its release mask a growing concern inside the company, one that comes through in executives’ demeanor, internal communications and candid conversations about what the IT world will look like five years from now: Software as a service is a threat unlike any the company has faced before, and Microsoft must make dramatic changes if it wants to remain the most important technology company in the world.

Microsoft has started to develop a software-as-a-service strategy over the past year. Its initial offerings—Windows Live and Office Live programs—provide Web-based mini-applications. But those services are only a small part of the grand vision that CEO Steve Ballmer, COO Kevin Turner, Chief Software Architect Ray Ozzie and others hope will make Microsoft as indispensable to the Web 2.0 enterprise as it was to the client/server one. In a series of exclusive interviews with CIO, Microsoft executives explain that Web-based applications are just the beginning, and that the company’s future lies in developing the tools CIOs will need to manage the software-as-a-service environment. "It’s easy to whip up a Web app, throw it online, and say it’s for businesses," says Ozzie. "But that’s a naive view of what CIOs have to go through."

To Microsoft’s way of thinking, the Web services world will make a CIO’s life messy and difficult. While each software service that a company subscribes to will be cheaper and easier to operate than its client/server counterpart, collectively they will make the enterprise exponentially more complicated, unless CIOs have tools to provision and manage those services as a suite. Microsoft vows to develop those management tools and make them the centerpiece of its enterprise business.

Once those tools are built and deployed, Microsoft says, it won’t matter if the applications an IT department supports are Web-based services hosted by an outside party, client/server software hosted internally, or a combination of the two. "[CIOs] have to have a way of provisioning an account, providing the initial connection and user interface," regardless of an application’s source, says Ballmer. "At least that’s our vision."

But even Ballmer admits that right now, a vision is all it is. Microsoft has accepted and internalized the idea that the software market has shifted ineluctably to services, and the company has seen there a critical opportunity to move forward. But to succeed, analysts say, to change its corporate strategy, identity and DNA, Microsoft must overcome equally critical barriers of technology, strategy and culture.

Where Microsoft Sees Its Opportunity

The widely preached gospel of software as a service says that companies willing to give up the control that comes from running an application internally will save money by not having to maintain and host those applications and, by freeing up those resources, will become more agile and productive. CIOs running services, the gospel goes, don’t have to buy and operate farms of servers or trudge from desktop to desktop upgrading software. Instead of a model that encourages long, costly upgrade cycles (the very model upon which Microsoft built its enterprise empire), software as a service allows for small, steady, incremental improvements. That’s just one reason it could kill CIOs’ appetites for traditional client/server software like Microsoft’s.

Furthermore, all a user needs to access a Web-based application is a browser—not a robust operating system tightly integrated with the application. Therefore, unlike in its past battles with Netscape and others, Microsoft cannot rely on its Windows strength to pull its bacon out of the fire. And while Microsoft argues compellingly that it would be foolish not to take advantage of all the processing power a PC offers, the company simultaneously is planning for a future that will rely upon less powerful mobile computing devices and ubiquitous high-speed Internet connections.

The hard truth is that Microsoft has no choice but to confront software as a service. But rather than fighting it, Microsoft looked for an opportunity. And, it says, found one.

"Some people say that [software as a service] is a panacea and that everybody should immediately switch off everything they have and go to this world," says Andy Lees, VP of Microsoft’s server and tools marketing, his sarcasm foreshadowing what comes next. "But here’s a problem with it: The first service that you have is beautiful, the second service that you have is kind of nice; from then on you have all of the same problems that you had before."

In other words, the CIO still needs to manage a lot of applications. It’s just that this time the applications are hosted somewhere else. It’s a problem that CIOs are aware of, even if the conventional wisdom (and enthusiasm) surrounding software as a service often ignores it.

"Managing multiple services applications—as well as the things you run yourself—is going to be a challenge," says Joseph Devenuto, CIO of Norton Healthcare, a hospital chain in Kentucky. "You’re looking at a world of headaches."

When someone leaves a company (for dramatic purposes let’s say a disgruntled accounts payable clerk is fired for gross misconduct), instead of deleting her account from the internal systems, a CIO in a services environment would need to make sure that all the software providers—everything from e-mail to CRM—make the change in their systems, Lees says. Since the disgruntled ex-employee can access the hosted applications through a browser on any device, the risks multiply.

"Quick, get all the IT guys and dial in to those six, seven, 15 different systems that you no longer own," says Lees.

Obviously, you can do that, says Ballmer, but the problem is that doing so will devour a disproportionate amount of time and resources. Microsoft’s vision is to come up with products and services that allow CIOs to manage Web applications—as well as internal client/server ones—from a single place. In addition to providing a central place for provisioning, Microsoft, according to Lees, will let CIOs set rules and enforce policies—for example, all orders must be processed by 3:30 in the afternoon. And workflow features will help CIOs automatically manage exceptions, he adds. Today’s CIOs "spend all their time configuring and changing and monitoring," Lees says.

"[CIOs] feel like cost and complexity weigh them down," says Ballmer. "I want to make sure we’re eliminating that cost and complexity and letting them focus on taking advantage of new innovations and things that can add value to the company."

What’s the Answer? Steve? Kevin? Ray?

Microsoft is a product company, and for the past decade its Windows and Office products have stood head and shoulders above all others. Historically, those two business units have been responsible for almost all of the company’s earnings. However, that’s changed over the past several years. Revenue for Windows and Office has remained relatively flat, while the server and tools division has posted double-digit revenue growth for 16 straight quarters. Today, the server and tools division is almost as large as the veteran groups—generating 22 percent of Microsoft’s $44 billion in revenue, compared with 29 percent and 25 percent for the Windows and Office business units respectively.

If the company is going to reinvent its enterprise business around one of its units, this is the one to pick, says Rick Sherlund, an analyst who covers Microsoft for Goldman Sachs.

But creating tools that allow CIOs to manage, configure and provision a suite of disparate applications is both a technical and strategic challenge. And no one, inside the company or out, can articulate exactly how Microsoft is going to get there.

Ballmer says that Microsoft has many of the tools in place but that they are "certainly not anywhere close to sufficient," adding that "no one product is this vision." However, he believes that Microsoft has the right combination of enterprise and Web experience to pull it off. Oracle and SAP, he argues, have a scope limited to their suite of products. IBM has reinvented itself around consulting services. No other company besides Microsoft, says Ballmer, combines as much enterprise and Web experience with a rich understanding of business process.

Analysts, however, say Microsoft’s competitive position may not be as strong as Ballmer describes. For starters, managing a customer’s computing resources is something that Microsoft has historically left up to partners. "They have to piece about moving toward managing services," says John Rymer, an analyst at Forrester Research. Microsoft knows how to help CIOs manage its own products, but incorporating other companies’ products is a substantial leap, Rymer says.

The biggest leap, without a doubt, is that Microsoft’s vision requires it to embrace a heterogeneous computing environment. Yet Microsoft executives, historically averse to working with anything they haven’t built themselves, seem united in their commitment to supporting non-Microsoft technology.

"We want to do it whether you’re developing [applications] or whether you’re consuming them, and whether we’re delivering them or whether someone else is [delivering] them for you," says Lees.

One factor could make Microsoft’s work supporting this plethora of applications easier: Software-as-a-service applications all have the same delivery mechanism—the Internet—which requires that they be built with a specific set of standards. These standards—XML, SOAP, WSDL and UDDI—are the same ones that Microsoft and IBM helped push through standards organizations like the W3C and Oasis at the beginning of the decade. (For the history of the standards process, see "The Battle for Web Services," at www.cio.com/100103.) Microsoft will have an easier time using these standard protocols to integrate with Web-based services than it would integrating with a more traditional client/server application that uses a proprietary standard, says Dwight Davis, an analyst with Ovum Summit.

There’s probably a market for Microsoft’s vision, says Dave Girouard, general manager of arch rival Google’s enterprise division—and it may not be that difficult to achieve, since software-as-a-service providers are going to want their applications to work with a CIO’s existing infrastructure. But provisioning and single sign-on are one thing; deeper integration, like porting data from an online CRM system into a legacy ERP package, will be complicated, promises Girouard.

And in the end, superficial integration will not be enough to charm CIOs. The reason that companies will adopt a particular software as a service is that its features are a good fit, says Roger Kay, president of consultancy Endpoint Technologies. Giving CIOs a single place where they can manage their software services is a great idea—but only as long as the management interface preserves the array of features that drove a company to choose a particular software service in the first place, Kay says.

Can Microsoft truly make all sorts of Web applications communicate well and play nicely?

"That’s really ambitious," says Kay, noting that Microsoft will have to interact with all kinds of proprietary file formats. "It doesn’t mean that they can’t do it, but it will be hard."

If Microsoft really wants to be the vendor that companies turn to for managing their IT assets, it will have to learn how to support, well, all of a company’s IT assets. "They have to be willing to go cross-platform, and historically Microsoft hasn’t been willing to do that," says Goldman Sachs’s Sherlund. "It’s a bold strategy that will require broad support of other platforms and knowledge of other systems."

At the moment, all Microsoft is offering is talk. But at least it’s talk that CIOs already using open source want to hear.

"The reality of the world is a lot of companies are built through acquisition," says Ron Markezich, Microsoft’s CIO. "As you build through acquisition you have a lot of different platforms, and the CIO doesn’t always have the power or the budget to standardize." Markezich says that it will be up to Microsoft to learn how to work with the other systems. "Take open source," he says. "We interact with it now, but it’s difficult. But it’s something we have to do."

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