By Steven Norton and Clint Boulton
Recognizing growing competition from cloud-based companies like
Salesforce.com, large, established software vendors including
Oracle Corp. and SAP AG are rewriting their applications so
customers can run them online rather than in their own costly data
centers.
But many of those software vendors' biggest customers are in no
rush to make the switch, particularly when it comes to the
applications that manage key parts of their businesses.
There is no doubt that cloud software is gaining ground among
corporate users of all sizes. Revenue for Oracle's cloud businesses
in the quarter ended May 31 totaled $450 million, up about 22% from
a year earlier, although it remains a relatively small portion of
the company's overall revenue.
While many larger companies have turned to cloud software to
manage systems like human-resources management, they are slower to
adopt the cloud for applications that handle inventory management,
billing and other processes they rely on to run their businesses on
a daily basis.
For companies using this type of software to do things like
manage the filling, sealing, shipping and billing for thousands of
shampoo bottles every hour, there is still too much risk associated
with potentially unreliable Internet connections and a dependence
on third parties to manage computer servers. The chief information
officer of a global consumer packaged-goods company said, "if our
[enterprise resource planning system] goes down for five days,
we're out of business."
Most ERP systems still run in corporate data centers, and have
been customized at great expense to fit each company's specific
needs. Roman Coba, CIO of McCain Foods Ltd., which uses SAP's ERP
software, said moving such an ERP system to the cloud would be akin
to a "heart transplant."
But corporate customers recognize that cloud-based systems can
offer greater efficiency and flexibility, and they are switching to
the cloud where practical. For example, Xerox Corp. uses on-premise
applications from both SAP and Oracle to manage critical business
needs such as billing, and uses cloud software from Oracle and
Salesforce.com to manage sales accounts and human resources. But
CIO Stephen Little said thinking about the complexity of moving the
ERP systems to the cloud "makes my head hurt."
SAP says it has hundreds of customers using its cloud ERP
software, and says it wants to accommodate customers at whatever
rate they choose to move. "If customers are happy to continue to
invest on premise, SAP will continue to support them," said Irfan
Khan, senior vice president of SAP's database and technology unit.
"There's not a compelling event that states by a said date
everybody must switch from one environment across to another."
"A lot of our effort has been helping customers pick up new
product offerings and modules in the cloud while enabling them to
coexist with what a company already has," said Thomas Kurian,
senior vice president of product development at Oracle.
Cloud adoption from large enterprises often comes at the
divisional level and through add-on modules. While Oracle offers
services to help facilitate the switch to cloud, many core
enterprise ERP platforms remain on-premise.
A recent survey by UBS AG of 101 CIOs in the U.S. and Europe
found that more than half would move some workloads to a public
cloud, but it would be a gradual process, while a third of
respondents said they were moving to a public cloud as quickly as
possible.
Barry Brunetto, vice president of information systems at Blount
International Inc., says he has moved some SAP applications to the
cloud that help manage secondary business functions such as
credit-card processing, and plans to move his data warehouse there
as a test. If the transition is successful, the firm will consider
doing more. If it fails or costs more, "we would just use our
on-premise one and it's no impact to the business."
Larger customers are also unlikely to switch from, say, Oracle's
on-premise applications to cloud applications sold by a startup.
Brian Lillie, CIO of Equinix Inc., said the cloud billing and
order-management software he has evaluated from startups lack the
features and functionality of more-polished Oracle apps. As a
result, he said companies have few incentives for people to change
core legacy systems--for the time being.
But Sandra Kurtzig, CEO of cloud ERP startup Kenandy Inc., said
while Oracle probably has more features, large businesses choosing
Kenandy are satisfied with its functionality. She said they prefer
software that runs on the cloud because they are tired of upgrading
and custom-programming software.
The shift to cloud for the major tech vendors will likely hit
top-line revenue in the short term. Instead of purchasing software
and services upfront and paying monthly maintenance fees, cloud
services are delivered through a subscription model that spreads
revenue out over time.
One area Mr. Lillie says he is open to switching is in
traditional office functions like email, and document writing and
sharing. Equinix recently decided to use Microsoft Corp.'s Office
365 service, which will help reduce the cost of storing email and
other data.
Unlike ERP, there is little to lose by migrating email and
office productivity software to a cloud provider. "You show me the
most well-run email systems in the world and I'll show you no
competitive advantage that results from it," said Chris Laping, CIO
of casual-dining chain Red Robin Gourmet Burgers Inc.
John Case, corporate vice president of Microsoft Office, said
Office 365 could eventually provide customers an on-ramp to the
company's other cloud software. Getting customers on Office 365
"will make other Microsoft cloud products look more attractive,"
said Mr. Case.
Industry analysts say the pace of adoption of cloud computing is
dictated to a large extent by industry segment. Research firm
Gartner Inc. says at least 30% of service-centric companies will
move most of their ERP applications to the cloud by 2018. Many
companies will likely embrace the "hybrid" model, using both cloud
and on-premise functions.
Kenandy's Ms. Kurtzig says large customers look to cloud ERP
software when they need to get an acquisition up and running
quickly, or are looking to expand into new markets. But ultimately,
she says this shift to the cloud is more about modernizing
technology.
"People are talking to us because we have the [cloud] system
that's built for the future, not for the past."
Write to Steven Norton at Steven.Norton@wsj.com and Clint
Boulton at Clint.Boulton@dowjones.com
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