Dear CIO: Stop Writing Big Checks for Commodity (Database) Software

Dear CIO,

What’s wrong this picture?

• At 50%+, Oracle’s operating margins have never been higher

• The differentiation of Oracle’s database technology, however, has never been lower and the number of both core and specialized alternatives has never been greater.

So what’s going on? You, kind Sir or Madam, are being milked. What’s worse is that you, in an example of collective behavioral dysfunction, have inadvertently played a role in setting up the milking. What happened?

• Like all smart CIOs you followed a bit of herd mentality when it came to core technology. Pity the poor fools who, back in the day, bet big on Ingres or Sybase. You played it safe and went with Oracle, IBM, or if your requirements weren’t too heavy, Microsoft.

• The problem is, of course, that everyone executed the same strategy you did. Hence, the market created a system of increasing returns where the strong vendors got stronger and the weak ones died. The result: the RDBMS market is an (order of magnitude) $10B/year market, structured as an oligopoly with 3 players. Most other software markets worked out the same way.

• You were focused on standardization. You realized that through a combination of decentralized IT decision making and growth-by-acquisition your organization had become a kitchen sink of enterprise software. You had everything. In order to reduce the administrative, training, and license acquisition costs, you fought tooth and nail with your divisions to standardize the environment. You said, “Heck, it’s all the same stuff in the end, folks, so let’s make Oracle our DBMS standard, Business Objects our BI standard, Documentum our ECM standard, and SAP our ERP standard.”

• And you won. Mostly. There’s still some Cognos in finance. And marketing didn’t totally give up on Interwoven. But, for the most part, you won. You reduced the entropy of your IT environment and drove cost savings for your organization.

The problem is you’ve won the battle but lost the war. Why? Because if, as you say, the “stuff really is all the same” you shouldn’t standardize on the most expensive product. You should standardize on the cheapest.

• Do you really need to be paying those big fees to Oracle for enterprise licenses? Wouldn’t MySQL do?

• Are you really using all the functionality of that $1M/year Documentum ECM system? Wouldn’t SharePoint or Alfresco do?

• For BI, do you need all the bells and whistles of BusinessObjects? Wouldn’t Pentaho or Qlikview do a fine job, at a fraction of the cost?

But these alternatives are obvious. Heck, even “the establishment” (i.e, Gartner) says it’s safe to tread in the open source water. So the question is, what’s holding you back?

• Switching costs. It’s hard to move off Oracle or Documentum and you don’t want to pay the nut to do so.

• Organizational inertia. Your whippersnapper DBAs who were in their 30s in the 1980s are now in their 50s. They’re thinking that change devalues their knowledge and experience; some just want to cruise into retirement. But that’s their personal agenda, not your enterprise one.

• Accounting: you made it free for your divisions to keep using Documentum, Oracle, or BusinessObjects because you bought an enterprise license. While this appeared to “save” you money on a per-license basis, and it helped support your standardization initiative, it squashed innovation in your divisions, reinforced the organization inertia, and has a lot of people using the wrong tool for the job, resulting in projects that either take more or more expensive hardware than necessary (Oracle is good at this), that take too long to develop, or that simply fail.

So, what do I recommend doing about all this? I suggest that you adopt these policies, which –- for full disclosure, are at least partially in the self-interest of this blog’s author:

• Stop writing big checks for commodity software. Every time a big check comes along, ask yourself: is this software differentiated or commoditized? Be willing to pay a premium for differentiated software, and price shop commodity software. Call a group of your smartest staff together periodically to help you make the commodity versus differentiated call.

• When you see a big check coming for commodity software, make a migration plan. My hunch is that most of the time, you can create a nice 3-year ROI in the transition from premium to cheaper software. (This reminds me of the time I visited an investment bank’s CIO asking about their Documentum strategy. The answer: “our Documentum strategy is to get off Documentum,” because we’re paying too much and using too little.)

• Stop doing enterprise agreements that create poor economic incentives within your organization. Don’t pay $XM at the enterprise level, spread that as a “tax” across your divisions, and then make use of certain software “free.” It distorts project reality, creates false incentives, squashes innovation, and generates lots of hidden costs. If you want to negotiate a master agreement and discount rate, that’s fine. Shoot for centralized discounts without central planning.

• Don’t worry that the prior policies will create mayhem. While I understand that you don’t want arbitrary taste differences increasing the entropy of your enterprise software portfolio, recognize that with the first policy you’ve solved that problem already. If you deem a category (e.g., core RDBMS, enterprise search) commoditized, then you are going to force people to pick on cost. You’ll get standardization on the commodity categories –- just on the least expensive alternatives. The only entropy you’ll need to manage will be on the differentiated software which, having dispatched the commodity majority, you’ll have time to explore, study, and exploit.

Why I am taking the time to write this note to you? Back in the 1980s I was a foot soldier in the relational database revolution, and today I’m the CEO of one specialized DBMS company and on the board of another.

• Mark Logic makes an XML server which can save great amounts of time and money in creating applications against unstructured information, replacing the combination of an RDBMS, an enterprise search engine, and an application server. Not only can Mark Logic manage 100s of TB of XML, the system eliminates the object / relational/ hierarchical impedance mismatch between Java, SQL, and XML that hampers developer productivity. Mark Logic was recently named the fourth fastest-growing IT company in Silicon Valley.

• Aster Data makes a specialized data warehouse DBMS that runs on low-cost commodity hardware with a shared nothing architecture and leverages in-database MapReduce technology for parallelism and high scalability.

And during the past 25 years or so I’ve watched the market evolve. While I fully understand the policies and market forces that have led
us to where we are, I feel like we’ve come full circle. Vendor power is now concentrated in the big three. Vendor margins top 50%. Big vendors don’t innovate; they consolidate. Inertia has set in customer organizations. And there’s a major platform shift in progress; last time it was mainframe to minicomputer, this time it’s cloud.

Things feel a lot to me the way they did in 1985, just past dawn of the relational revolution. So in one way I’m writing to point out the oft-overlooked obvious: stop paying premium prices for commodity items. And in another way I’m saying, take the money you save in so doing and invest it in innovation technologies that:

• Drive competitive advantage (which will matter again as we come out of the Great Recession)

• Enable the Internet-scale applications you’ll need to face the coming information deluge

• Reform the application development stack in ways that make sense for the coming generation of information applications, not that made sense for the last generation of data-centric ones.

Thank you for reading my note. If you have any questions or comments, please give me a ping at dave-dot-kellogg-at-marklogic-com or comment on this post.

Sincerely,

Dave Kellogg