Application Transformation Case Study Targets Enterprise Bottom Line with Eye-Popping ROI

Transcript of the first in a series of sponsored BriefingsDirect podcasts -- "Application Transformation: Getting to the Bottom Line" -- on the rationale and strategies for application transformation.

Listen to the podcast. Find it on iTunes/iPod and Podcast.com. Download the transcript. Learn more. Sponsor: Hewlett-Packard.

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Gain more insights into "Application Transformation: Getting to the Bottom Line" via a series of HP virtual conferences Nov. 3-5. For more on Application Transformation, and to get real time answers to your questions, register to the virtual conferences for your region:
Register here to attend the Asia Pacific event on Nov. 3.
Register here to attend the EMEA event on Nov. 4.
Register here to attend the Americas event on Nov. 5.

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Dana Gardner: Hi, this is Dana Gardner, principal analyst at Interarbor Solutions, and you’re listening to BriefingsDirect.

This podcast is the first in the series of three to examine Application Transformation: Getting to the Bottom Line. We'll discuss the rationale and likely returns of assessing the true role and character of legacy applications, and then assess the true paybacks from modernization.

The ongoing impact of the reset economy is putting more emphasis on lean IT -- of identifying and eliminating waste across the data-center landscape. The top candidates, on several levels, are the silo-architected legacy applications and the aging IT systems that support them.

We'll also uncover a number of proven strategies on how to innovatively architect legacy applications for transformation and for improved technical, economic, and productivity outcomes. The podcasts coincidentally run in support of HP virtual conferences on the same subjects.

Here to start us off on our series on the how and why of transforming legacy enterprise applications are Paul Evans, worldwide marketing lead on Applications Transformation at HP. Welcome Paul.

Paul Evans: Hi, Dana.

Gardner: We're also joined by Luc Vogeleer, CTO for Application Modernization Practice in HP Enterprise Services. Welcome to the show, Luc.

Luc Vogeleer: Hello, Dana. Nice to meet you.

Gardner: Let's start with you, Paul, if you don't mind. You have this virtual conference coming up, and the focus is on a variety of use cases for transformation of legacy applications. I believe this has gone beyond the point in the market where people do this because it's a "nice to have" or a marginal improvement. We've seen it begin with a core of economic benefits here.

Evans: It's very interesting to observe what has happened. When the economic situation hit really hard, we definitely saw customers retreat, and basically say, "We don't know what to do now. Some of us have never been in this position before in a recessionary environment, seeing IT budgets reduce considerably."

That wasn't surprising. We sort of expected it across all of HP. People had prepared for that, and I think that's why the company has weathered the storm. But, at a very macro level, it was obvious that people would retrench and then scratch their heads and say, "Now what do we do?"

A different dynamic

Now, six months or nine months later, depending on when you believe the economic situation started, we're seeing a different dynamic. We're definitely seeing something like a two-fold increase in what you might call "customer interest." The number of opportunities we're seeing as a company has doubled over the last six or nine months.

I think that's based on the fact, as you pointed out, that if you ask any CIO or IT head, "Is application transformation something you want to do," the answer is, "No, not really." It's like tidying your garage at home. You know you should do it, but you don't really want to do it. You know that you benefit, but you still don't want to do it.

Because of the pressure that the economy has brought, this has moved from being something that maybe I should do to something that I have to do, because there are two real forces here. One is the force that says, "If I don't continue to innovate and differentiate, I go out of business, because my competitors are doing that." If I believe the economy doesn't allow me to stand still, then I've got it wrong. So, I have to continue to move forward.

Secondly, I have to reduce the amount of money I spend on my innovation, but at the same time I need a bigger payback. I've got to reduce the cost of IT. Now, with 80 percent of my budget being dedicated to maintenance, that doesn't move my business forward. So, the strategic goal is, I want to flip the ratio.

I want to spend more on innovation and less on maintenance. People now are taking a hard look at, "Where do I spend my money? Where are the proprietary systems that I've had around for 10, 20, 30 years? Where do these soak up money that, honestly, I don't have today anymore?"

One of the biggest challenges we face is that customers obviously believe that there is potential risk. Of course there is risk, and if people ask us, we'll tell them.

I've got to find a cheaper way, and I've got to find solutions that have a rapid return on investment (ROI), so that maybe I can afford them, but I can only afford them on the basis that they are going to repay me quickly. That's the dynamic that we're seeing on a worldwide basis.

That's why we've put together a series of webinars, virtual events that people can come to and listen to customers who've done it. One of the biggest challenges we face is that customers obviously believe that there is potential risk. Of course there is risk, and if people ask us, we'll tell them.

Our job is to minimize that risk by exposing them to customers who have done it before. They can view those best-case scenarios and understand what to do and what not to do. Remember, we do a lot of these things. We've built up massive skills experience in this space. We're going to share that on this global event, so that people get to hear real customers talking about real problems and the benefits that they've achieved from that.

We'll top-and-tail that with a session from Geoffrey Moore, who'll talk about where you really want to focus your investment in terms of core and context applications. We'll also hear from Dale Vecchio, vice president research of Gartner, giving us some really good insight as to best practices to move forward. That's really what the event is all about -- "It's not what I want to do, but it's what I am going to have to do."

Gardner: I've seen the analyst firms really rally around this. For example, this week I've been observing the Forrester conference via Twitter, reading the tweets of the various analysts and others at the conference. This whole notion of Lean IT is a deep and recurring topic throughout.

It seems to me that we've had this shift in psychology. You termed it a shift from "want to" to "must." I think what we've seen is people recognizing that they have to cut their costs and bite the bullet. It's no longer putting this off and putting this off and putting this off.

Still don't understand

Evans: No. Part of HP's portfolio is hardware. For a number of years, we've seen people who have consulted with us, bought our equipment to consolidate their systems and virtualize their systems, and built some very, very smart Lean IT solutions. But, when they stand back from it, they still say, "But, the line-of-business manager still giving me the heartache that it takes us six months to make a change."

We're still challenged by the fact that we don't really understand the structure of our applications. We're still challenged by the fact that the people who know about these applications are heading toward retirement. And, we're still challenged by the thought of what we're going to do when they're not here. None of that has changed.

Although every day we're finding inherently smarter ways to use silicon, faster systems, blade systems, and scaling out, the fundamental thing that has affected IT for so many years now is right, smack dab in the cross hairs of the target -- people saying that this is done properly, we'll improve our agility, our differentiation, and innovation, at the same time, cutting costs.

In a second, we'll hear about a case study that we are going to talk about at these events. This customer got an ROI in 18 months. In 18 months, the savings they had made -- and this runs into millions of dollars -- had been paid for. Their new system, in under 18 months, paid for itself. After that, it was pure money to the bottom-line, and that's what this series is all about.

Gardner: Luc, we certainly have seen both from the analysts as well as from folks like HP, a doubling or certainly a very substantial increase in inquires and interest in doing legacy transformation. The desire is there. Now, how do we go beyond theory and get into concrete practice?

Vogeleer: From an HP perspective, we take a very holistic approach and look at the entire portfolio of applications from a customer. Then, from that application portfolio -- depending on the usage of the application, the business criticality of the application, as well as the frequency of changes that this application requires -- we deploy different strategies for each application.

We not only focus on one approach of completely re-writing or re-platforming the application or replacing the application with a package, but we go for a combination of all those elements. By doing a complete portfolio assessment, as a first step into the customer legacy application landscape, we're able to bring out a complete road map to conduct this transformation.

This is in terms of the sequence in which the application will be transformed across one of the strategies that we will describe or also in terms of the sequence in time. We first execute applications that bring a quick ROI. We first execute quick wins and the ROI and the benefits from those quick wins are immediately reinvested for continuing the transformation. So, transformation is not just one project. It's not just one shot. It's a continuous program over time, where all the legacy applications are progressively migrated into a more agile and cost-effective platform.

Gardner: It certainly helps to understand the detail and approach to this through an actual implementation and a process. I wonder if you could tell us about the use case we're going to discuss, some background on that organization, and their story?

Vogeleer: The Italian Ministry of Instruction, University and Research (MIUR), is the customer we're going to cover with this case, is a large governmental organization and their overall budget is €55 billion.

This Italian public education sector serves 8 million students from 40,000 schools, and the schools are located across the country in more than 10,000 locations, with each of those locations connected to the information system provided by the ministry.

Very large employer

The ministry is, in fact, one of the largest employers in the world, with over one million employees. Its system manages both permanent and temporary employees, like teachers and substitutes, and the administrative employees. It also supports the ministry users, about 7,000 or 8,000 school employees. It's a very large employer with a large number of users connected across the country.

Why do they need to modernize their environment? In fact, their system was written in the early 1980s on IBM mainframe architecture. In early 2000, there was a substantial change in Italian legislation, which was called so-called a Devolution Law. The Devolution Law was about more decentralization of their process to school level and also to move the administration processes from the central ministry level into the regions, and there are 20 different regions in Italy.

This change implied a completely different process workflow within their information systems. To fulfill the changes, the legacy approach was very time-consuming and inappropriate. A number of strong application have been developed incrementally to fulfill those new organizational requirements, but very quickly this became completely unmanageable and inflexible. The aging legacy systems were expected to be changed quickly.

In addition to the element of agility to change application to meet the new legislation requirement, the cost in that context went completely out of control. So, the simple, most important objective of the modernization was to design and implement a new architecture that could reduce cost and provide a more flexible and agile infrastructure.

Gardner: We certainly get a better sense of the scope with this organization, a great deal of complexity, no doubt. How did you begin to get into such a large organization with so many different applications?

So, the simple, most important objective of the modernization was to design and implement a new architecture that could reduce cost and provide a more flexible and agile infrastructure.

Vogeleer: The first step we took was to develop a modernization road map that took into account the organizational change requirements, using our service offering, which is the application portfolio assessment.

From the standard engagement that we can offer to a customer, we did an analysis of the complete set of applications and associated data assets from multiple perspectives. We looked at it from a financial perspective, a business perspective, functionality and the technical perspective.

From those different dimensions, we could make the right decision on each application. The application portfolio assessment ensured that the client's business context and strategic drivers were understood, before commencing a modernization strategy for a given application in the portfolio.

A business case was developed for modernizing each application, an approach that was personalized for each group of applications and was appropriate to the current situation.

Gardner: How many people were devoted to this particular project?

Some 19,000 programs

Vogeleer: In the assessment phase, we did it with a staff of seven people. The seven people looked into the customer's 20 million lines of code using automated tools. There were about 19,000 programs involved into the analysis that we did. Out of that, we grouped the applications by their categories and then defined different strategies for each category of programs.

Gardner: How about the timing on this? I know it's a big complicated and can go on and on, but the general scoping, the assessment phase, how long do these sorts of activities, generally take?

Vogeleer: If we look at the way we conducted the program, this assessment phase took about three months with the seven people. From there, we did a first transformation pilot, with a small staff of people in three months.

After the pilot, we went into the complete transform and user-acceptance test, and after an additional year, 90 percent of the transformation was completed. In the transformation, we had about 3,500 batch processes. We had the transformation. We had re-architecting of 7,500 programs. And, all the screens were also transformed. But, that was a larger effort with a team of about 50 people over one year.

Gardner: Can you tell us about where they ended up? One of the things I understand about transformation is you still needed to asses what you’ve got, but you also need to know where you are going to take it?

We had the transformation. We had re-architecting of 7,500 programs.

Vogeleer: As I indicated at the beginning, we have a mixture of different strategies for modernization. First of all, we looked into the accounting and HR system, and the accounting and HR system for non-teacher employees. This was initially written on the mainframe and was carrying a low level of customization. So, there was a relatively limited need for integration with the rest of the application portfolio.

In that case, we selected Oracle HR Human Resources, Oracle Self-Service Human Resources, and Oracle Financial as the package to implement. The strategy for that component was to replace them with packaged applications. Twenty years ago, those custom accounting packages didn't exist and were completely written in COBOL. Now, with existing suitable applications, we can replace them.

Secondly, we did look into the batch COBOL applications on the mainframe. In that scenario, there were limited changes to those applications. So, a simple re-platforming of the application from the IBM 3070 onto a Linux database was sufficient as an approach.

More important were all the transactional COBOL/CICS applications. Those needed to be refracted and re-architected to the new platform. So, we took the legacy COBOL sources and transformed them into Java.

Also, different techniques were used there. We tried to use automated conversion, especially for non-critical programs, where they're not frequently changed. That represented 60 percent of the code. This code could be then immediately transferred by removing only the barriers in the code that prevented it from compiling.

All barriers removed

We had also frequently updated programs, where all barriers were removed and code was completely cleaned in the conversion. Then, in critical programs, especially, the conversion effort was bigger than the rewrite effort. Thirty percent of the programs were completely rewritten.

Gardner: You said that 60 percent of the code was essentially being supported through these expensive systems, doing what we might consider commodity functionality nowadays.

Vogeleer: Let me clarify what happens with those 60 percent.

We considered that 60 percent of the code was code that was not frequently changed. So, we used automatic conversion of this code from COBOL to Java to create some automatically translated Java procedures. By the way, this is probably not easy to read, but the advantage is that, because it was not often changed, the day that we need to change it, we already have Java source code from which we can start. That was the reason to not rewrite it, but to do automated conversion from COBOL to Java.

Gardner: Now we've certainly got a sense of where you started and where you wanted to end up. What were the results? What were some of the metrics of success -- technical, economic, and in productivity?

End-user productivity, as I mentioned, is doubled in terms of the daily operation of some business processes. Also, the overall application portfolio has been greatly simplified by this approach.

Vogeleer: The result, I believe, was very impressive. The applications are now accessed through a more efficient web-based user interface, which replaces the green screen and provides improved navigation and better overall system performance, including improved user productivity.

End-user productivity, as I mentioned, is doubled in terms of the daily operation of some business processes. Also, the overall application portfolio has been greatly simplified by this approach. The number of function points that we're managing has decreased by 33 percent.

From a financial perspective, there are also very significant results. Hardware and software license and maintenance cost savings were about €400,000 in the first year, €2 million in the second year, and are projected to be €3.4 million this year. This represents a savings of 36 percent of the overall project.

Also, because of the transfer from COBOL to Java technology and the low-cost of the programmers and the use of packaged application, development has now dropped by 38 percent.

Gardner: I think it's very impressive. I want to go quickly to Paul Evans. Is this unusual? Is this typical? How constant are these sorts of returns, when we look at a transformation project?

Evans: Well, of course, as a marketing person I'd say that every time we get this return, and everybody would laugh like you. In general, people are very keen on total cost of ownership (TCO) and ROI, especially the ROI. They say, "Look, maybe I can afford something, but I've got to feel certain that I am going to get my money back -- and quickly."

ROI of 18-24 months

I don't want to say that you're going to get it back in 10 years time. People just aren’t going to be around that long. In general, when we're doing a project, as we did here in Italy, which combines applications modernization and an infrastructure renew, an ROI of around 18-24 months is usually about the norm.

We have tools online. We have a thing called the TCO Challenge. People can insert the configuration of the current system today. Then, we promote a comparable system from HP in terms of power and performance and functionality. We provide not only the price of that system, but, more importantly, we provide the TCO and ROI data. Anyone can go online and try that, and what they'll see is an ROI of around 18 months.

This is why I think we're beginning to see this up-take in momentum. People are hearing about these case studies and are beginning to believe that this is not just smoke and mirrors, and it's not marketing people like me all the time.

People like Luc are out there at the coalface, working with customers who are getting these results. They are not getting the results because there is something special or different. This solution was a type that we deliver every day of the week, and these results are fairly commonplace.

. . . the new programing style is very much integrated with the convergence tool, with the migration tools, and allows the new generation of programmers to work with those migration tools very easily.

Gardner: Luc, certainly the scale of this particular activity, this project set, convinces me that the automation is really key. The scale and the size of the code base that you dealt with, the number of people, and the amount of time that were devoted are pretty impressive. What's coming next down the avenue in terms of the automation toolset? I can only assume that this type of activity is going to become faster, better, and cheaper?

Vogeleer: Yes, indeed. What we realized here is that, although we didn't rewrite all the code, 80 percent of the migrated code that we did by automated tools is very stable and
infrequently modified. We have a base from which we can easily rework.

Tools are improving, and we see also that those tools are growing in the direction of being integrated with integrated development environments (IDEs) that the programs can use. So, it becomes very common that the new programing style is very much integrated with the convergence tool, with the migration tools, and allows the new generation of programmers to work with those migration tools very easily.

Gardner: And, the labor pools around the world that produce the skill sets that are required for this are ready and growing. Is that correct?

Vogeleer: Yes, that's right. As I indicated, the savings that were achieved in terms of development cost by changing the programing language, because of the large pool of programmers that we can have and the lower labor cost, dropped the development cost by 38 percent.

Gardner: Very good. We've certainly learned a lot about the paybacks from transformation of legacy enterprise applications and systems. This podcast is the first in a series of three to examine application transformation getting to the bottom-line.

There is also a set of webinars and virtual conferences from HP on the same subject. I want to thank our guests for today’s insights and the use-case of the Italian Ministry of Instruction, University and Research (MIUR). Thanks, Paul Evans, worldwide marketing lead on Applications Transformation at HP.

Evans: Thanks, Dana.

Gardner: We’ve also been joined by Luc Vogeleer, CTO for the Application Modernization Practice in HP Enterprise Services. Thanks so much, Luc.

Vogeleer: Thank you, Dana.

Gardner: This is Dana Gardner, principal analyst at Interarbor Solutions. You’ve been listening to a sponsored BriefingsDirect podcast. Thanks for listening, and come back next time.

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Gain more insights into "Application Transformation: Getting to the Bottom Line" via a series of HP virtual conferences Nov. 3-5. For more on Application Transformation, and to get real time answers to your questions, register to the virtual conferences for your region:
Register here to attend the Asia Pacific event on Nov. 3.
Register here to attend the EMEA event on Nov. 4.
Register here to attend the Americas event on Nov. 5.

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Listen to the podcast. Find it on iTunes/iPod and Podcast.com. Download the transcript. Learn more. Sponsor: Hewlett-Packard.

Transcript of the first in a series of sponsored BriefingsDirect podcasts -- "Application Transformation: Getting to the Bottom Line" -- on the rationale and strategies for application transformation. Copyright Interarbor Solutions, LLC, 2005-2009. All rights reserved.

Making the Leap from Virtualization to Cloud Computing: A Roadmap and Guide

Transcript of a sponsored BriefingsDirect podcast on what enterprise architects need to consider when moving from virtualization to cloud computing.

Listen to the podcast. Find it on iTunes/iPod and Podcast.com. Download the transcript. Learn more. Sponsor: Hewlett-Packard.

Get a free copy of Cloud for Dummies courtesy of Hewlett-Packard at www.hp.com/go/cloudpodcastoffer.

Dana Gardner: Hi, this is Dana Gardner, principal analyst at Interarbor Solutions, and you’re listening to BriefingsDirect.

Today, we present a sponsored podcast discussion on making a leap from virtualization to cloud computing. We’ll hammer out a typical road map for how to move from virtualization-enabled server, storage, and network utilization benefits to the larger class of cloud computing agility and efficiency.

How should enterprise IT architects scale virtualized environments so that they can be managed for elasticity payoffs? What should be taking place in virtualized environments now to get them ready for cloud efficiencies and capabilities later? And how do service-oriented architecture (SOA), governance, and adaptive infrastructure approaches relate to this progression or road map from tactical virtualization to powerful and strategic cloud computing outcomes?

Here to help you answer these questions and to explain more about properly making a leap from virtualization to cloud computing, we are joined by two thought leaders from Hewlett-Packard. Please join me in welcoming Rebecca Lawson, director of Worldwide Cloud Marketing at HP. Hi, Rebecca.

Rebecca Lawson: Hi. Good morning.

Gardner: We're also joined by Bob Meyer, the worldwide virtualization lead in HP’s Technology Solutions Group. Welcome back, Bob.

Bob Meyer: Thanks, Dana. Hi, Rebecca.

Gardner: Let’s start by looking at market maturity. With the economy lately, we've certainly seen enough people looking for efficiencies and seeking out ways of extending the infrastructure so they can support more applications, data, network, and services. But, how do we go to the next level? What should you be thinking about now? Let me take that first to you, Rebecca.

Lawson: What we're seeing is that there has been an acceleration of our customers to start to get their infrastructure in order -- to get it virtualized, standardized, and automated -- because they want to make the leap from being a technology provider to a service provider.

Many of our customers who are running an IT shop, whether it’s enterprise or small and mid-size, are starting to realize -- thanks to the cloud -- that they have to be service-centric in their orientation. That means they ultimately have to get to a place, where not only is their infrastructure available as a service, but all of their applications and their offerings are going in that direction as well.

Gardner: Bob, just by virtualizing doesn’t mean you're services-enabling. Does it?

Focus on the service

Meyer: No, it’s a good start. I couldn’t agree more with Rebecca. We're seeing the same thing. A couple of years ago, people were talking about virtualization. The focus was all on the server and hypervisor. The real positive trend is to focus on the service.

How do I take this infrastructure, my servers, my storage, and my network and make sure that the plumbing is right and the connectivity is right between them to be agile enough to support the business? How do I manage this in a holistic manner, so that I don’t have multiple management tools or disconnected pools of data that I can’t drive my IT with.

What’s really positive is that the top-down service perspective that says virtualization is great, but the end point is the service. On top of that virtualization, what do I need to do to take it to the next level? And, for many people now that next level they are looking at is the cloud, because that is the services perspective.

With inward virtualization, as Rebecca said, there are moves to standardize on hypervisors and on different platforms, and, also as we’ve said in the past, virtualization is like the hand, and automation is like the glove. They fit together.

How do you scale virtualization and apply it more cost-effectively and bringing things like compliance? That’s where automation comes in. So, we are seeing all those things together in the notion of how to do this for the service.

Gardner: This strikes me as somewhat of an abstraction or perhaps scaling issue. In virtualization you might have a number of platforms that you would virtualize. You bring more applications across them and increase your utilization.

You talked about "pool," but when we talk about cloud, we're talking about pools of pools, making that something that you could access with more automation and less complexity.

The funny thing is that a lot of people are trying to make a link between virtualization and cloud computing. We think there is a link, but it’s not just a straight-line progression.

In fact, the people who are managing processes might want to access these pools of resources, rather than a traditional IT road map. Does that make sense to you, Rebecca? Are we talking about an abstraction from virtualization, and that cloud is just more of it?

Lawson: That’s a good question. The funny thing is that a lot of people are trying to make a link between virtualization and cloud computing. We think there is a link, but it’s not just a straight-line progression. In cloud computing, everything is delivered as a service, and that’s pretty intuitive to anybody who has used any cloud service like eBay, for example. Social networking is pretty obvious.

What's really useful about cloud services like those is that they're not necessarily used inside the enterprise, but what they are doing is they are causing IT to focus on the end-game. Very specifically, what are those business services that we need to have and that business owners need to use in order to move our company forward?

Do a few things well

For example, if you're a financial services company, you're focused very specifically on doing a few things well, which may be managing financial instruments. Not only are our customers starting to get successful with their virtualization strategy, building from the bottom up, and getting really efficient with pools of infrastructure, but they are starting to think in a more top-down point of view to say, "What is it that we really need to do well? Is it to provide technologies?" The answer is that they need to provide technology-enabled services, and that reorients their thinking a lot.

I want to mention that the scaling that you think of, when you think about cloud services, is not really what most enterprises need to achieve and they won’t achieve it, because they are managing so many different types of workloads. Naturally, every organization has to manage a lot of kinds of workloads. So, the more variation you have the less efficient you will be, but that doesn’t mean you can’t work for its efficiencies.

We're learning lesson from the big cloud service providers on how to standardize, where to standardize, how to automate, how to virtualize, and we're using the lessons that we are seeing from the big-cloud service providers and apply them back into the enterprise IT shop. But, you’ve got to have realistic expectations too. You are not going to get the same economies of scale as an Amazon or Google, if you are just a regular IT shop. Obviously, that’s not going to be the case.

Gardner: At the risk of over-simplifying, Bob, if we look at virtualization as a set of capabilities or a progression to move through, it seems that SOA is also important as a necessary step to be able to scale and get to cloud benefit. Is there a relationship here? Are people starting to embrace SOA, as they start to virtualize, or vice-versa? How does that work?

Meyer: We see them as parallel streams. If you go back a couple of years and get back to the service notion, people had equated virtualization as an infrastructure thing, and SOA as an application thing, and treated them on different tracks. But, when you take them in the notion of how to provide those technology-enabled services that Rebecca talked about, you could start to see how the thoughts merged together.

SOA eventually comes into that conversation, because you work through the service stack, and that’s just another part of the equation.

It’s not only efficiencies in the infrastructure, in the connecting and delivering that together, but you are also applying those same lessons to the application side. They do come together, when you're having a cloud conversation, and that’s the interesting part about it as well.

When people talk to us and ask, “How do I leverage virtualization to get to be an efficient cloud provider,” SOA eventually comes into that conversation, because you work through the service stack, and that’s just another part of the equation.

Gardner: When we look to a payoff, virtualization can often help in terms of return on investment (ROI) and total cost of ownership (TCO) to a certain level, when we're talking about standardization, utilization rates increasing, cutting your energy footprint, labor cost, and so forth.

But, if we can progress to that cloud benefit, where we might be able to actually start using third-party clouds to off-load certain spikes or types and character of workload, that strikes me as a real economic benefit here. Are people who are thinking about virtualization recognizing that they are setting themselves up for a much larger payoff should they make the progression to cloud computing? Let me open that up to either one of you.

Broader implications

Meyer: I’ll just open here and say the cloud discussion is important, because it looks at the way that you consume and deliver services. It really does have broader implications to say that now as a service provider to the business, you have options.

Your option is not just that you buy all the infrastructure components. You plumb them together, monitor them, manage them, make sure they're compliant, and deliver them. It really opens up the conversation to ask, "What’s the most efficient way to deliver the mix of services I have?"

The end result really is that there will be some that you build, manage, and manage the compliance on your own in the traditional way. Some of them might be outsourced to manage service providers. For some, you might source the infrastructure or the applications from the third-party provider.

This cloud conversation really is a conversation about what’s the best mix of service options for me to deliver to the business. And, how do I balance the risk, the cost, and the compliance across all of those? That’s the crux of the conversation. It’s a little bit beyond just a cloud. It becomes about the best and most efficient way for me to provide services to business.

Lawson: In fact, we're using one of the steps between virtualization and going out and sourcing cloud services. That's this notion of converged infrastructure, or as we’ve called it at HP, "adaptive infrastructure."

. . . The industry is starting to appreciate that we are moving from virtualization of just compute to a complete converged infrastructure.

We’ve started to come out with some products that make it incredibly easy to provision and de-provision a complete infrastructure. In other words, that's an in-a-box server storage network, everything ready to go, automation software so that you can spin up a virtualized machine on a logical, virtual, or physical server right from a catalogue that’s embedded into the whole BladeSystem.

So, the industry is starting to appreciate that we are moving from virtualization of just compute to a complete converged infrastructure. That abstracts away so much of the complexity. That means that IT can quickly serve the demand of their constituents who are typically appdev, test, or operations folks who need whatever they need "right now, right now, right now."

It’s actually a pretty exciting time, because we're moving into this converged infrastructure, and virtualization is becoming just part of that fabric. It’s almost embedded in that. It’s assumed that you can use a virtualized environment and that is it not so hard anymore.

That leads you to a place, where you can make, as Bob mentioned, a smart sourcing decision to say -- maybe for certain workloads -- "Do we want to go to a third-party or an outsourced cloud-based infrastructure offering or a cloud-based service that encapsulates infrastructure behind the application?"

Gardner: Perhaps one way to characterize this is that for the investment you make in virtualization, adaptive infrastructure, and SOA, you might get some pretty good payoffs, even in the short-medium term. You are setting yourself up and you are making investments for a much larger return, which is in that flexibility of sourcing and/or finding the right fit at the service level, but with perhaps an underlying fabric on the providing level. Does that make sense?

Lawson: It does. That’s exactly right.

Part of the picture

Meyer: It does. I was just going to say that, from that perspective, it’s really wide. We here at HP say time-and-time again that it’s the service perspective that makes sense, because if you address only the pockets, you only find a pocket for saving. It’s just as likely that, at some point, a cost or a risk may pop up somewhere else, because you're looking at only part of the picture.

When we talk about the whole notion of the service, we're really saying to look at the whole picture from that top-down perspective. That allows you to make sure to put out a fire, if you are saving money in some place, but that you're really saving it and not pushing it to a different place. That’s the perspective you don’t have, if you're looking at just from the infrastructure or from the view of "Here is a management tool I have to choose." You miss out from that perspective.

Gardner: Bob, moving back to this notion of a road map, what is that you need to do in order to come from virtualization as an endeavor and an activity with this new emphasis on getting to the cloud? What do you start thinking? How do you shift in your mentality?

Meyer: We've talked about looking at it from a top-down perspective, but there is bottom-up perspective and bottom-up work to be done. Rebecca ticked off a lot of these at the top of the discussion. She talked about looking at standardization, how that helps, and how you can start to pool and source infrastructure, when you standardize.

Then you start to understand the implications of shifting workloads, not losing specialty tools, and really getting to a point when you standardize. You could start to get to the point of managing a single infrastructure, understanding the costs better, and really be more effective at servicing and provisioning that. Standardizing has to happen in order to get there.

Everybody will have some combination of physical and virtual infrastructure.

We talked about virtualization as another element. I'm not just talking about the server and hypervisor itself. You have to really look across your infrastructure, at the network, server, and storage, and get to that level of convergence. How do I get those things to work together when I have to provision a new service or provide a service?

Most people know how to do the virtualized server stuff really well right now. They tend to see bottlenecks, maybe in provisioning the storage or connecting to the network. How do we get all those to flow seamlessly in harmony and really getting that virtualized infrastructure quickly, along with the physical infrastructure?

The third, or last, thing we look at is from the automation perspective, when you're looking to source something for a service or you're looking to pull assets together. Everybody will have some combination of physical and virtual infrastructure. So, how do I take action when I need a compute resource, be it physical or virtual?

How do I know what’s available? How do I know how to provision it? How do I know to de-provision it? How do I see it if that’s in compliance?" All those things really only come through automation. From a bottom-up perspective, we look at the converged infrastructure, the automation capabilities, and the ability to standardize across that.

Gardner: Are there any examples that you have about organizations that have gotten themselves ready to take the next step of virtualization? What’s been your experience? What may have been different for them than before, when they may have been looking at this a bit myopically?

Focal point

Meyer: I use virtualization as a focal point. It tends to be a series of maturity with virtualization. When most people start, they start with a server and hypervisor, and then they realize the storage and the IO and the automation has to come with it.

It’s that second step, when it’s gone beyond a server and hypervisor approach, and they've looked at the bigger picture, where the costs are actually being saved and pushed. The light goes on, and they say, "Okay, there is more to it than just virtualization and the server." You really do have to look, from an infrastructure perspective, at how you manage it, using holistic management, and how you connect them together.

I don’t think I've seen anybody who skips that first step at the server and hypervisor, but it really takes some time and maturity. Hopefully, at HP we can help make that progression faster, because we’ve worked with so many companies through this progression. But really it takes moving beyond the hypervisor approach, understanding what it needs to do in the context of the service, and then looking at the bigger picture.

Gardner: Rebecca, a similar question to you. Cloud computing isn’t just about providing services. It’s also being able to consume them well. Is there something going on for those companies that are already thinking about cloud that they should be then thinking about how to consume virtualized servers and services better?

Lawson: There's hardly a customer that doesn’t know that people in their organization are out there consuming cloud-based infrastructure services. That may be okay, but I think most IT organizations want to be aware and help govern what actually gets consumed.

There needs to be a governing entity, supported by tools and governance practices, that say what’s acceptable for the corporation and what’s not acceptable.

That’s hard to do, because it’s easy to have rogue activity going on. It’s easy to have app developers, testers, or even business people go out and just start using cloud services. That might be okay, but there also might be problems associated with that. So, there needs to be a governing entity, supported by tools and governance practices, that say what’s acceptable for the corporation and what’s not acceptable.

For example, you can get yourself in a lot of trouble, if you're consuming a service -- let’s say it’s a financial service -- and you, as a business person, don’t realize where your data lives. That could be problem from a corporate governance point of view, because where your data resides is important to a lot of organizations.

Sometimes, there are legal issues, and sometimes it has to do with the country that you live in. There are a lot of governance implications. People in the lines of business don’t always realize this, because that’s not their job. Their job is to get something done to execute a process or to get a certain result. They don’t take the time or have the understanding of all the implications of using some cloud service.

For sure, our customers are very interested in figuring out how can they put their arms around it, without seeming like they are trying to control everything, because that gives IT kind of a bad rep when they come in with a strong arm. There are definitely ways to do that.

Catalog of services

If IT is willing and able to step back and provide a catalog of all services that the business can access, that might include some cloud services. Maybe you have Amazon EC2 as one of the services that you provide that’s been pre-screened, and it’s appropriate for your particular organization. Or, maybe it’s appropriate for some people and some countries of your organization, but not others.

We think it’s important. We try to encourage our customers to use the tools, techniques, and the approach that says, "Let’s embrace all these different kinds of services, understand what they are, and help our lines of business and our constituents make the right choice, so that they're using services that are secure, governed, that perform to their expectations, and that don’t get them into trouble."

Gardner: It’s still early in this whole cloud discussion. We talked earlier about this hybrid model. There are not very many companies that I am aware of that are doing that, other than perhaps at a pilot level or maybe within the app-dev tool side of things.

Are there any examples that you are aware of, Rebecca, where that appreciation for the consumption and the governance has provided some benefits, and/or what would they be? Is there anything we can measure? I know that governance is a tough one to measure.

Lawson: What I'm seeing right now in customers is more of a softer measurement. For example, I was talking to a customer who knew that there was a lot of rogue activity going on. In their minds, it was rogue, because it wasn’t going through IT. They really wanted to have a way to encourage their stakeholders to use services from IT. So, they decided that in order to do that, they wanted to make it just as easy for appdev to secure a virtual instance from IT, as it was from Amazon.

Employees always want to do the right thing and now they had motivation to go back to IT and start using the internally provisioned infrastructure.

So, they worked on that, they put together about 10 different configurations that included storage, computing, network and all that stuff, and they made it available to the app developers. They said, "You can go outside for this stuff and pay for it, or you can use ours. By the way, if you use ours, we're going to be able to provision you just as fast, just as quickly. You are inside the firewall, and everything is cool."

They had a kind of pull mechanism, where they made it really easy for their constituents to use the services that were pre-approved. That’s really the right approach. The measurement of that is that, all of a sudden, they had an up-tick on their services. Employees always want to do the right thing and now they had motivation to go back to IT and start using the internally provisioned infrastructure.

That was a big win for them. All they did to do that was to look at the outside providers and looked at what kinds of promises, service level agreements (SLAs), and provisioning they use, and they just replicated that inside their shop. It worked really well.

Gardner: Right. A service is a service.

Lawson: There's no excuse not to do that these days, because the tools and technologies exist to allow you to do that. At HP, we’ve been doing that for many years. It’s not really brand new stuff. It’s new to a lot of organization that haven’t used it, but we’ve got a lot of experience in that area.

Gardner: Of course, the benefit of doing it through your own IT department is that you can go from test to dev in your production with a heck of a lot more ease than if you had to bring it in from a “rogue activity,” right?

Central governance

Lawson: That’s exactly right, and it may turn out that 30 percent of your infrastructure actually goes out to a third-party, like an Amazon, EDS, or some other third-party. But, the idea is that you want a central governance of what’s okay and what’s the right way to go, based on the value equation, not just based on the cost equation. That’s the direction we're steering our customers in.

Gardner: On this progression -- on the road map from tactical to strategic thinking and behaving more like a cloud provider and consumer -- it seems that there is a behavioral, cultural best practices aspect to this as well. Do those organizations that are seeking this need to plug into their road map something like ITIL, or a shared services approach?

Lawson: Absolutely. If you look at what ITIL Version 3 talks about, it’s all about service strategy and the lifecycle of each service. So, ITIL Version 3 is really important, underpinning to this whole idea.

Gardner: Let's look at the future a little bit,. With cloud-bursting benefits, I can spin up instances of a runtime for an adaption or a dataset, maybe even some network services, telephony, communication services, asynchronous communications, or collaboration. If I can start to do that, I'm going to need to manage this public/private divide somehow.

The catalog drives the right kind of discussion. Once you have that in place, you can start to make changes around what you offer out to the business and, by implication, what you don’t offer.

I wonder what HP is thinking about in terms of how to enable that. As you say, there are some of these aspects going on for years, but this whole notion of the hybrid crossing those boundaries is something a bit fresh.

Perhaps, you can describe what we might expect. I don’t expect to pre-announce products, but functionally what we should expect in terms of managing this hybrid capability.

Lawson: From a top-down approach, we encourage our customers to start immediately working on a service catalog. Because when you have a service catalog, you're forced into the right cultural and political behaviors that allow IT and lines of business to kind of sync up, because you sync up around what’s in the catalog.

It allows you to have that discussion of what’s really important and what’s not important. It also allows you to ferret out where are the squeaky wheels getting attention, but maybe they shouldn’t be. How can we better standardize our offerings? All that happens around the catalog.

So, the catalog drives the right kind of discussion. Once you have that in place, you can start to make changes around what you offer out to the business and, by implication, what you don’t offer. Once you have a services catalog, it might have services from the cloud, some internal services, mainframe services, or whatever., it’s going to be a whole mixed bag.

Control, manage, measure

Then you can start to control, manage, and measure across that hybrid ecosystem with standard IT management tools. For example, if you want to measure the performance and availability of every service -- whether it’s being served up from in-house, you're getting it from a managed service provider, or it’s a cloud service -- you want to have the same performance availability and security metrics on every single service.

Once you're organized, the organizing principle is the technology-enabled service. Then you can be consistent. You can say, "This external email service that we're using is really performing well. Maybe we should look at some other productivity services from that same vendor." You can start to make good decisions based on quantitative information about performance availability and security.

What you can expect to see from HP is continuing along that line of reasoning that says, "What are the right tools that IT can use to have full transparency into all of the elements of an SLA, regardless of where that service comes from, because we know that services are going to come from lots of different types of delivery models, lots of different form factors and technology attributes. And so that consistent transparency from an SLA point of view is really important and you'll see a lot more happening in that area from HP.

When you talk about standardization, it’s not just standardizing on a specific type of server or a specific management tool. It’s really standardizing on how you measure the services.

Gardner: How about you, Bob? You mentioned standardization a couple of times. How do we take standardization across cloud provider boundaries? Is there a neutrality or a certain set of agreements or contracts or de facto standards that need to happen there?

Meyer: Right, we’d go back to something that Rebecca said the about the importance of your internal processes. A lot of people talk about ITIL. They think about change management and change control. All of those elements really talk of standardization. Even the catalog Rebecca was talking about forces standard measurement, so you can really do an apples-to-apples comparison.

When you talk about standardization, it’s not just standardizing on a specific type of server or a specific management tool. It’s really standardizing on how you measure the services. In order to do that, you do need certain fundamentals in place. You need to have a service catalogue. It’s critical.

People are also talking about a configuration management database (CMDB) or a configuration management system (CMS) that holds all that information, so you can get those unified views.

So, yes, it's standardized contracts, but importantly your measurements standardized across whatever you agree that commonality is across the different service sourcing type. You have to come down to an apples-to-apples comparison and make sure that you are measuring and monitoring in the same way so that you can compare the values.

Common measurements

A lot of times, what we see is people have a set of measurements from managed services, another set for the traditional source services, and now even a third way of billing or measuring for virtualized services. You can’t really start to do that comparison, until you get to a common set of measurements and understandings across services. When we talk about standardization, it’s definitely much more than just the standardizing servers, although that’s important, and then standardizing on the storage.

Gardner: Let me drill down on the configuration data comment. It seems to me that moving across cloud service sets -- whether it’s internal, external or both -- many of the underlying services might be standardized or similar. It’s really going to change and be integral to an application activity, a user, or a process, with configuration information about the integration, about the application, the users, access, control, and so forth.

Does it make sense for organizations to get their configuration management act together now, as a precursor to SOA or standardization around virtualization, as a really important necessary step to take advantage of cloud.

Meyer: I wouldn’t want to say that that you have to stop everything you do and re-architect a CMDB that cuts across everything, but hopefully if people have been following and implementing ITIL for the last couple of years, they have a good majority of data.

. . . Then you have to rely on the human factor to pull all that information together into a common report and come up with common measurements and methodologies. That takes time and introduces human error.

Most people, at this point, have a CMDB or a CMS that federates from different data sources. It is important, if you want to measure from the service and you want to understand your options of insourcing/outsourcing, that you have that set of data. If you have it, federate it in the single repository with common measurement. It makes that job much easier and it makes you more agile.

If you don’t, then you have to rely on the human factor to pull all that information together into a common report and come up with common measurements and methodologies. That takes time and introduces human error. It is possible to do without, but that possibility means more expense and more risk, because you are open to non-compliance and lower agility.

Gardner: Rebecca, perhaps you are including this in your discussion about catalog, but let’s just take a quick pause and look at the configuration management issue if you don’t mind.

Change management

Lawson: If you start from the catalog, when somebody makes a selection -- let’s say you choose to on-board an employee -- all of the things that have to happen from that point onwards need to go and hit change management CMDB. The reason you are doing configuration management is to have the service of a change, because every time you make a change, whether it’s pre-approved or it has to go through the change advisory board, you're exposing yourself to something going wrong.

That’s why you want change management as practice, so that you know what configuration items you have. You know why they're important. You know what they're attached to, so that when it is time to make a change, that happens in an organized way and with full transparency.

I sometimes call change and configure "the artery system," because you can’t really do anything, unless you have the whole system well enough managed, so that, when a change happens, if you’ve got full transparency into what occurs, the good, the bad, and the ugly, it’s only then that you can either roll back, measure success, or replicate success by doing successful changes.

Change in config is at the heart of the whole equation. Regardless of this, cloud services are not cloud services. Every time you make a change to your policies about consuming an external service, that should go through change as well, which then hits config. I don’t know if that answered your question.

Gardner: I think it’s an affirmative.

Lawson: Yes.

Gardner: We’ve been learning a little bit more about the road map from virtualization strategies toward more cloud-like benefits, some of the necessary steps, and how things can be looked at with that foresight of, "I'm going to want to do other cloud like activities later."

Helping us sort through this road map to move from virtualization to cloud computing, we have been joined by Rebecca Lawson, director of Worldwide Cloud Marketing at HP. Thank you, Rebecca.

Lawson: Thank you very much, Dana.

Gardner: Also Bob Meyer, worldwide virtualization lead for HP Technology Solutions Group. Thanks again, Bob.

Meyer: Thanks to you.

Gardner: This is Dana Gardner, principal analyst at Interarbor Solutions. You’ve been enjoying a sponsored BriefingsDirect podcast. Thanks for listening, and come back next time.

Listen to the podcast. Find it on iTunes/iPod and Podcast.com. Download the transcript. Learn more. Sponsor: Hewlett-Packard.

Get a free copy of Cloud for Dummies courtesy of Hewlett-Packard at www.hp.com/go/cloudpodcastoffer.

Transcript of a sponsored BriefingsDirect podcast on what enterprise architects need to consider when moving from virtualization to cloud computing. Copyright Interarbor Solutions, LLC, 2005-2009. All rights reserved.

Executive Interview: Workday’s Aneel Bhusri on Advancement of SaaS and Cloud Models for Improved ERP

Transcript of a sponsored BriefingsDirect podcast with Workday’s co-CEO on the future of delivering HR and ERP solutions as cloud services to large enterprises.

Listen to the podcast. Find it on iTunes/iPod and Podcast.com. Download the transcript. Learn more. Sponsor: Workday.

Dana Gardner: Hi, this is Dana Gardner, principal analyst at Interarbor Solutions, and you’re listening to BriefingsDirect. Today we present a sponsored podcast executive interview with a software-as-a-service (SaaS) provider upstart, Workday.

This human capital management (HCM), financial management, payroll, worker spend management, and workday benefits network provider is raising the bar on employee life-cycle productivity, by lowering IT support costs through the SaaS model. More than that, Workday is also demonstrating what I consider a roadmap to the future advantages in cloud computing.

We are here with Workday’s co-founder and co-CEO, Aneel Bhusri, who is responsible for the company’s overall strategy and day-to-day operations. Welcome to BriefingsDirect, Aneel.

Aneel Bhusri: Thank you.

Gardner: Workday has come an awfully long way in a fairly brief amount of time, since your launching in November of 2006 -- that's less than three years. Workday also attracted a significant additional round of venture capital support earlier this year. I believe it was $75 million, Level E.

Aneel, what explains this quick level of adoption on your user side, and then also this vigorous support from investors?

Bhusri: The adoption from the user side, I think, is very straightforward. SaaS is just a better way for these legacy systems around HR, payroll, and accounting. Our customers typically achieve benefits within a four- to six-month time period and they are typically saving 50 percent of their cost.

If you look around the world and you see the move toward cloud computing, it's for a reason. It's a better way than the legacy, on-premise technology.

As to the funding, I would hope that, number one, it's a big market opportunity that we are pursuing. We're not looking at a niche. We're looking to replace the full enterprise resource planning (ERP) platform over time, much like we did at PeopleSoft.

The pedigree of the team starts with my co-founder, Dave Duffield. He's an icon in the software industry. He's known for high integrity, innovation, and customer service. Many of us, like me, have been with him for 17 years now and we share that vision and that culture with him. We have set out to build the next great software company. I think people have recognized that.

Dave has mostly self-funded the company. We took this last round of funding as a validation of what we were doing. The best part of the validation is that the new investor, NEA, did reference calls with our customers. They said that those were the best reference calls to the customers that they have done in the last 10 years.

Gardner: You mentioned PeopleSoft, and, of course, that was acquired by Oracle. What was it about that PeopleSoft experience for you that helped shape the vision that you are now putting together for Workday?

Employees first

Bhusri: We're very similar to PeopleSoft in some areas, and in other areas, quite different. We have the same culture -- focused on employees first and customers second. We focus on integrity. We focus on innovation. We brought that same culture to Workday, and our customers are very happy.

We have a very loyal employee base. Fewer than five people have voluntarily left the company since we started back in 2005. People like working here. They like the other people that they are working with here. There are no politics. It's that kind of environment that we brought with us.

Much like PeopleSoft, we are taking advantage of a technology shift. PeopleSoft benefited from the shift from mainframe to client-server. When Workday started, people weren’t as focused on how big the shift was from client-server or on-premise computing to what is now called cloud computing or, back then, SaaS.

It now seems like it's even bigger than the shift from mainframe to client-server. This is a massive shift and you see it all across. That's the big difference. We are obviously leveraging a very different technology base. The thing that Dave and I both took away from PeopleSoft is that you have to stay on top of innovation, and that's what Workday is doing. We are innovating where the large ERP vendors have stopped.

Gardner: Some people would say that this notion of taking on and replacing ERP is a quixotic endeavor and that you are tilting against windmills of some kind. Why do you think ERP is vulnerable and that you can “replace" it?

Bhusri: When we first started the company, quite a few people thought we were crazy. Why would you take on these core systems? Why not take on these point systems?

If you look at the history of technology, every 10-15 years, there is a sea change and new application vendors emerge. The big winners are the ones that are the system of record -- the HR system, the accounting system, and the order management system-of-record. Those are the ones that become the PeopleSofts, the SAPs, and the Oracles.

In between, you have point solutions -- recruiting, talent management, and supply chain solutions -- that bolt on. Most times, you're not afforded the opportunity to be a system of record, because of your timing. But we were lucky enough that, when we started Workday, we were at the start of this change.

So, if you have your choice, you would much rather be the system-of-record vendor. Oracle has a $100 billion market cap, and SAP, a $40 billion market cap. Even PeopleSoft, as the third player, was a $10 billion market cap company, when we sold to Oracle. That's not the success you see from the niche vendors.

Dramatic change

It's that, along with the fact that ERP is now 15 years old and just needs to be rewritten. The world has changed so dramatically since the original ERPs were written.

Back then, companies were thinking about being global. Now, they are global. People were not even thinking about the Internet, and now the Internet exists. That was before Sarbanes-Oxley and before the emergence of the iPhone and BlackBerry. All these things pile together to say that it's time to go back and rewrite core ERP. It's no longer valid in today’s world.

Gardner: So, we see an inflection point in ERP, perhaps a detriment to incumbency. We see a shift in technology, more toward cloud types of activities, but we are also seeing a very difficult economic environment. Is there something about the economy that is providing you a catalyst or an accelerant to the adoption of a SaaS-based human resources portfolio?

Bhusri: Absolutely. These last nine months have been challenging for everyone. We, as a system-of-record vendor, saw fewer projects out there. At the same time, because of our new model and the cost benefits of the SaaS solutions, we were probably more relevant than we might have been without the economic downturn.

We had companies that were planning on implementing the traditional legacy systems, but could not afford it. They looked at different alternatives, came across Workday, found out that we are further along than they thought we were, and then decided that this is a much better path.

A great example is Sony Pictures Entertainment. They already own the licenses to the SAP HR system, and yet, after careful consideration, determined they didn't have the budget to implement it. They chose Workday. At the end of the first quarter, they will be live in five months, and they will get the benefit of about a 50 percent cost savings, if not more. They basically quoted it as one-half the time at one-third the cost.

A major upgrade is much like a new implementation and it's cost prohibitive.

Gardner: So, we've seen this fortuitous confluence of external forces along the trajectory of the evolution of technology. Can you tell us what these customers that you have -- I think it's up to 100 now in your first three years, which is pretty dramatic -- what they are doing with your services? Are they swapping one thing out? Are they using it to augment something? Are these people who didn’t do HR from a system-of-record perspective and are now doing that? All the above? What's the mix?

Bhusri: I'd say all of the above, but most are replacing a current legacy system that either is SAP, PeopleSoft, or Oracle. That's the predominant customer we're seeing.

They're replacing it for several reasons. Typically, they've decided that they were not going to take the major upgrade from one of those vendors. A major upgrade is much like a new implementation and it's cost prohibitive.

Usability is important

Second, they are looking at the systems and saying, "What do we get for that upgrade?" The world has changed. Talent is now more important, and usability is a lot more important.

They care about having systems that are accessible to their employees, that look more like eBay and Amazon, and that don't look like an ugly enterprise system. They're looking for systems that are flexible and keep up with their organizations. Workday happens to be a good solution for those systems.

They switch over and they get the benefit right away of going forward. Upgrades are our issue, not theirs, which is a huge, huge difference. That's the elephant in the room. Upgrades are really the bane of the existence of anybody running enterprise IT systems, and it's only getting worse with time.

Another piece is that they are now on a modern system with a user interface that looks like a consumer Internet system. As a result, people use the system. The most important measure of how good a system is whether people like using it, because that makes it more valuable.

Lastly, with our focus on continuing innovation, they are not stuck in time. Every customer gets upgraded every four months to the most current version of the system. So as we are innovating, they are all taking the advantage of that innovation, whether it's in usability, functionality, or a new business model. So, those are really the differences.

Gardner: That strikes me as potentially a game changer -- this idea that the cycle for adoption in a traditional license software model can be three to five years. It's very expensive, very complex, and disruptive. The incentives are against upgrading. But, you at Workday can get out in front of your competitors, with features, performance, and innovation, reacting to the external environments, and then bake that in almost seamlessly and invisibly to your customers.

We're able to leverage those same principles that they are and bring out capabilities very quickly, so a customer can identify something that's important to them.

You are at Workday version 8, already in three years. Am I right? Is this a game changer that the SaaS model can give you a huge advantage over anybody that you compete with?

Bhusri: Absolutely. I like to think about it as building at web speed, and that's how Google, Amazon, and eBay think about it. New features come out very quickly. There are no old versions of Amazon and eBay that they have to worry about supporting. It's one system for all users. We're able to leverage those same principles that they are and bring out capabilities very quickly, so a customer can identify something that's important to them.

We've gotten a lot of requests for an iPhone client. Within one update cycle, four months, we had an iPhone client built. We got a request for BlackBerry, and the next update cycle, four months later, there was a BlackBerry client built. In a traditional enterprise, with cycles of 12-18 months, by the time the release comes out, the world has changed.

So yes, it's SaaS, but it's more, because we build like the other consumer Internet companies and we look to them as our role model. The only enterprise company I look to as a role model is Salesforce, but they embrace many of the same views and technologies as we do.

Gardner: Let me pursue that a little bit. How do you see yourselves different -- either in character, culture, or the way you enter the market -- from Salesforce.com?

Application vendor

Bhusri: I think we are a lot like Salesforce. Dave and I have a very good relationship with Marc Benioff. They're focused on CRM, and we're focused on ERP. I think the big difference is that they are focused on becoming a platform vendor, and we are really very focused on staying as an application vendor.

We will not have a Force.com equivalent. We are really focused on building the best applications that we can, and maintaining a good partnership with Salesforce. We don't plan to be in the CRM world, and we have a very nice integration built to their systems.

They started out in the small and medium business (SMB) world and are moving into the larger enterprises. In some part, thanks to them, we were able to focus on the larger enterprises at the start and really did not focus on the SMB. So, that's a difference. But, really there are more similarities than differences to our approaches.

Gardner: I imagine -- given that you acquired Cape Clear Software and have significant integration capabilities -- that the data sets that exists within a Salesforce engagement with a customer, and your data sets, provide an opportunity to somehow mix and match here. This would allow business intelligence (BI) of some nature, or perhaps even some joining of these data sets?

Bhusri: Absolutely. As we roll out our financial products, we have prototyped some BI work that we have built on the Force.com platform. It takes CRM data from Salesforce, and accounting data and HR data from Workday, and presents it in a Force.com way. It's very slick, and, as we get into the market, we'll probably come up with more examples like that.

Our view is that the bigger bang for the buck, in terms of the cost savings and the real value for the technology, happens with larger companies. We started out serving companies in the 1,000-5,000 range, but our goal is to serve the largest companies.

The Cape Clear technology is really key to our success. Those of us who started Workday are all applications people. The last generation of applications didn't really care about integration, but today's world is very different.

We found out upfront, when we launched Workday with Cape Clear as a partner, that most of our early customers were focused not just on the application, but on the integration to the systems. So, we decided to bring the two companies together. Now, integration is part of everything we think about. Your example is one very good example, but there are a lot of other examples as well, and we don't think about it as an afterthought the way we used to.

Gardner: You mentioned that a significant portion of the adoption for Workday comes from the swapping out of legacy systems. This strikes me as something that would be from very large organizations, Global 2000 enterprises. That, I believe, is your focus. Why, as a SaaS provider, have you focused on large enterprise and not the expected SMBs?

Bhusri: Our view is that the bigger bang for the buck, in terms of the cost savings and the real value for the technology, happens with larger companies. We started out serving companies in the 1,000-5,000 range, but our goal is to serve the largest companies.

As the system has gotten more robust, we've really focused on the Fortune 1000 companies, our biggest being Flextronics. Those large, complex organizations with global requirements have a great opportunity for cost savings. That's number one.

Large-enterprise focused

Number two, with our PeopleSoft backgrounds we are large-enterprise focused. It's what we know. It's what we know how to build. It's what we know how to market. It's what we know how to sell. SMB is not in our DNA, and we believe that there is a big enough market in the large enterprises. That was the natural place to go.

Gardner: What are the economics of this? Some debate we have heard in the past around SaaS is whether it's a cost saver or a long-term wash? How do you view it? If you are going into these large organizations, I assume that you have got a sense of the economic metrics and what the return on investment (ROI) might be?

Bhusri: With the downturn in the economy, we have very detailed analysis, because every selection came down to the ROI case in the selection of a vendor. The data we have now is not theoretical. It's now based on 60 of our 90 customers, of our 99 customers. Being in production, we have been able to go back and monitor it.

The good news about our cost is that it's all-in-one subscription cost, so we know exactly what the costs were for running the Workday system.

The trickier part is that the customers typically underestimate the cost of running legacy. They don't think about the mainframe, the hardware upgrades, the database administrators that they need, or the networks that they have dedicated to their on-premise systems. A lot of outside costs don't really get calculated in.

When you add it altogether, really do it on an apples-to-apples basis, and look at what we have taken over for the customers, it averages out consistently to about a 50 percent cost saving over a five-year period.

When you add it altogether, really do it on an apples-to-apples basis, and look at what we have taken over for the customers, it averages out consistently to about a 50 percent cost saving over a five-year period. There are cases where it's less than that and there are cases where it's more that that, but it averages around 50 percent.

The most important assumption in that five period is that we don't count on a major upgrade of the legacy system. I personally think that's very conservative, because if you are running PeopleSoft, SAP, or Oracle, you should be upgrading at least once every five years. We are falling really far behind.

Gardner: If there is a certain set of applications that you can offload to a SaaS provider, that opens up quite a bit of capacity in your data center, which perhaps forestalls the need to replace a data center, which could cost $40 million or $50 million.

New breed of CIOs

Bhusri: Absolutely. I think the new breed of CIOs, and it's not based on age or experience, thinks differently than the last generation of CIOs did. They think about it as a business issue, not as a technology issue. If you can get your administrative applications, your non-mission critical applications -- CRM, HR, payroll, and accounting -- delivered from a vendor, and you can manage them to service-level agreements (SLAs), why not focus your resources on the core enterprise apps you have?

If you're a Wall Street firm, those are trading applications. If you're an insurance company, that's claims processing. If you're a retail company, it's merchandise management. Leave the rest to vendors who can deliver those levels of service and focus on your core business.

More and more CIOs are getting that. It does free up data-center space. It also frees up human resources and IT to focus in on what's core to their business. HR and accounting don't have to be specialized in running that system. They have to know HR and accounting, but they don't have to be specialized in running those systems.

Gardner: I suppose we can put ERP in that same category. Tell me a little bit about where you are going next. We've seen you come up with HR products and payroll products. You have obviously declared the ERP category, which is large and can be specialized from vertical to vertical. What should we look to next in terms of application sets from Workday?

Bhusri: Our big focus was HR and I think it will continue to be, but, right now, HR has, we believe has reached parity with the legacy systems. In 2009 there has been a big push on payroll, getting those to parity with the legacy systems, because many of the large companies run HR and payroll together. You can't replace just HR, if you leave them with the payroll headache.

We'll expand out of core accounting into procurement and order management and really be the full ERP suite for the services economy.

Going forward, next year, our view is that we want to be an ERP replacement suite, but not for manufacturers. We will sell our HR and payroll accounting system to manufacturers, but we are not looking to manage the shop floor manufacturing, the way an SAP might. We'll expand out of core accounting into procurement and order management and really be the full ERP suite for the services economy.

We've started many of those applications. We've started the procurement applications. We've got this application called Worker Spend, as well. The next big push for us will be in the order management, revenue management, and revenue generation side of the business. The best way to think about it is that we will effectively replace the full footprint we had at PeopleSoft, which was again ERP for the services industries.

Gardner: I want to close out with a little bit of thought leadership or vision direction around the cloud-computing opportunity. I've got a certain theory that Moore's Law carried IT quite a way in the past. For decades, productivity could be almost expected as a given, with this increase in the density of what silicon could produce. I think we are now at a new opportunity level, which is business process innovation.

Do you think that if we refine it, look for the ecosystem partnerships, go for the best opportunity, regardless of the sourcing location or organization, we can see a new level, a different law, perhaps some sort of a cloud law?

Fear of the cloud

Bhusri: I believe so. The only things that will get in the way of that are really two things. One is people's risk aversion. I think that right now people are scared of the cloud, what it means to open up their world into the cloud, and what does social networking do to their businesses.

I actually think that all these things are good things -- sharing of information, sharing of relationships, and being able to source in a way that's very different than the traditional world. So one is the risk aversion.

The second piece, which is a big unknown, is what will the governments do, as these clouds transcend national boundaries. Right now, all the governments are way behind in figuring out how to deal with these.

But, if the governments can stay away and risk aversion reduces over time, cloud computing is going to transform the way people communicate and the way people do business. These business processes will be meta-business processes that span multiple organizations, and they are organic, as opposed to hard-coded the way they are today.

Partners will become partners and fall apart as partners, somewhat organically, depending on the specific project. That's a pretty exciting world that we are headed into.

Partners will become partners and fall apart as partners, somewhat organically, depending on the specific project. That's a pretty exciting world that we are headed into.

Gardner: Do you think that the days are over for 46-percent profit margins from software vendors, and the whole idea of large enterprise devoting 4-5 percent of revenue to IT spend? Are those days over?

Bhusri: I think so, particularly in the latter category of what percent gets devoted to IT. Even some of the companies that have based their businesses on IT are looking at 2-3 percent. So, it's half. That's pretty universal. That's going to come out from somewhere. I think it will impact the margins.

One of the reasons why the margins are so high for those companies is that they are at the tail end of the technology life cycle. They are not really innovating. They are collecting maintenance payments. We all know that maintenance is very, very profitable. Well, when you start in a new technology, it's mostly investing. Usually, when the profitability rates get that high, it means that there is a new technology around the corner that will start cutting into those profitability rates.

Gardner: Well, I certainly look forward to a cloud economy. I'm not sure it will live up to Moore's Law, but perhaps there is something there that's very significant.

We've been talking about Workday, a fiscal management, payroll, and human capital management SaaS provider. Joining us has been Aneel Bhusri, co-founder and c0-CEO. Thanks so much for joining us.

Bhusri: Thanks, Dana, my pleasure.

Gardner: This is Dana Gardner, principal analyst at Interarbor Solutions. You have been listening to a sponsored BriefingsDirect Podcast. Thanks for listening, and come back next time.

Listen to the podcast. Find it on iTunes/iPod and Podcast.com. Download the transcript. Learn more. Sponsor: Workday.

Transcript of a sponsored BriefingsDirect podcast with Workday’s co-CEO on the future of delivering HR and ERP solutions as cloud services to large enterprises. Copyright Interarbor Solutions, LLC, 2005-2009. All rights reserved.