At some point in every business school student, undergraduate business major, or for that matter, any executive begins to understand the short term value of customer lock-in. By preventing your customers from being able to switch to a competitor, then you are at a lower risk of losing market share and can continue to focus on acquiring new customers and thus growing revenue. This is particularly true in the market for enterprise software. For the longest time software vendors have been very good at locking their customers into their software. To see this just look at the three largest business applications software vendors; Microsoft, SAP, and Oracle. Throughout their history all of them have employed a series of strategies that make it difficult for customers to migrate to another platform.
While this sounds like it is an aggressive strategy that looks to hold the customers hostage, in many cases that is not the case. Customers do not want to switch software vendors that often. There is considerable expense associated switching platforms. In addition to the software licensing, the systems integration expense, and a loss in productivity as the employees are trained on the new software. So in many cases customers do not want to shift platforms too often. As long as the software vendor is providing solutions to their problems at a reasonable cost, customers will generally stay put.
This situation does however bring up an interesting choice for the software vendors. They know that the customers do not want to switch platform that often, so they can take one of two approaches to developing additionally functionality of their software. They can close the platform to other developers and effectively try to force customer to deploy their applications or extensions, or they can open up the platform to an ecosystem of developers who can build product on the platform.
In the short run, the first option is likely to yield better results. You can quickly gain share of wallet by identifying needed features, building them into your software, and then making it difficult for customers to use a competitors products. The problem with this approach is that over the long term it is not sustainable. Customers want choices. So by restricting that choice, the software vendor risks alienating their customers. Over time these alienated customers will begin to replace the incumbent’s platform with a competing vendor’s platform resulting in a short term gain and a possible long term loss. The other approach is to open up the platform so that a variety of developers can build applications on the platform. This was the approach that Microsoft initially took with the windows operating system. They enabled hardware manufacturers and software vendors to build on the OS. Over time they began to dominate the desktop environment.
Over the next few years, there is going to be a dramatic shift in the way that enterprises consume software. Cloud is already changing the business models for software vendors. Against this change, the major software vendors are going to have to make a choice associated with how they want to go to market. Simplistically, do they want to pursue a strategy of building a closed ecosystem or do they want to open the platform up to a variety of developers? So far it looks like SAP and Microsoft are heading down the path of opening up their platform. SAP is currently partnering with Birst, the data visualization and discovery vendor, to have Birst functionality available on SAP HANA. This shows the trend towards SAP opening the platform as Birst directly competes with SAP Lumeria. So SAP is allowing a direct competitor to build on the HANA platform. This shows the early stages of commitment to keeping HANA an open platform. Microsoft also sounded like they were committed to building an open platform during their recent Worldwide Partner Conference. This is not to mean that the other software vendors are not also going to pursue an open platform strategy, save Microsoft work it is that these two are particularly strong examples of vendors that are pursuing that strategy.