For years, a commonplace in software investing was that the value of application software lies in data , not in technology. Companies like Salesforce, Workday, and ServiceNow are valuable because they are the system of record( SoR ), or single source of truth, for their clients most valuable information, such as customer records or employee data.
As a result, they become deep embedded in their customers business procedures, making them hard to rip out. That dedicates them tremendous revenue predictability and pricing power. The technology itself databases combined with workflow engines is not particularly innovative; its the information captured by the technology thats important.
The newest crop of software applications turns this logic on its head. They imitation consumer companies by using technology as a wedge to gain widespread adoptionand dont even try to become systems of record.
Instead, they are systems of engagement( SoE ), meaning apps that employees actually use to get their work done. For example, take Slack, which Forbes recently identified as the most valuable private cloud company.
The data in Slack is either low value( water-cooler dialogues) or already lives in existing systems of record. The same is true for many other fast-growing apps, like Intercom( client interaction ), Clari( sales ), Culture Amp( employee feedback) and Front( shared inbox ).
Digging deeper, the specific areas of technology where these companies have innovated are ones that historically people have ignored integration and design.
At big companies, integration is the ugly step-child of any product roadmap: everyone wants it to run, but no one wants to work on it. Heres an example: a senior executive at a leading SaaS company tells me that twenty people from different groups across the company is an indication for the billing meeting, where its decided how billing will integrate with core features. But no one wants to work on the billing squad, creating those integrations.
Startups have capitalized on that by creating high performance, scalable integrations, solving hard technological problems like how to sync without putting excessive loading on the underlying system.
Integration companies, while not glamorous, can build marketplace power by positioning themselves at the center of an ecosystem and creating an ecosystem network impact, whereby they become a de facto standard. Okta and Segment are both on their style to achieving this.
But most new applications use integration to gather, coordinate, and analyze data. They win the hearts of their users through great design. Thats no small challenge, devoted growing data used, shrinking screen sizes, and ever shorter attention spans, which is why the concept of design has become a huge differentiator.
It runs because its a win-win. Startups making systems of engagement get users and revenue, by leveraging data in the systems of record. They also increase the datas value, by utilizing it more and adding to it. That stimulates the big software vendors happy, as( they believe) it increases their customer lock-in and helps them become more of a platform.
Whats not clear is whether this will continue. Big companies like Salesforce want to innovate through technology. For instance, the center-piece at this months Dreamforce, its annual conference, is a new artificial intelligence( AI) initiative marketed as Einstein, which layers predictive models over its existing applications.
Conversely, once a startups product is being used every day like Slack, it may start maintaining more information within it and over day wean people off whatever the issue is utilizing before( Outlook, Sharepoint, etc ).
The game-changer could well be artificial intelligence: if AI software could extract signal from the unstructured product feedback in Intercom or the sales forecasting information in Clari, the data in those systems could become more valuable than the limited fields captured in todays systems of record.
But thats a long way off. For current startups, the message is clear. Dont try to be Salesforce to Seibel, Workday to Peoplesoft or Coupa to Ariba. Those battles are over, and wont be repeated. Instead, utilize technology consolidation, design, perhaps machine learning or AI as your wedge into the market.
Play nice with existing systems, and then analyze how people are utilizing your product. Feed that back into new product developing and drive more engagement, ideally creating a virtuous circle between usage and design that keeps you ahead of competitors.
For examples of who does this well, seem no further than the large consumer companies. Its no coincidence that the two most awe-inspiring enterprise businesses today( AWS and Google Apps) both have a consumer heritage.
Thats the winning strategy for today, and most likely tomorrow.