Just Say No?

Like any great company, Dorado is a customer-focused (maybe even customer-obsessed) organization. We strive mightily to respond affirmatively when our customers ask us to do something on their behalf because it’s generally good for them and good for our business. But – is that always the right answer? Is there a good time to just say no?

Before World War II, all mechanical shovels for excavation used a series of cables and pulleys. An elite set of companies, like Osgood General, dominated the market. But after the war, the excavation industry witnessed a truly disruptive technology -- hydraulics. At first, hydraulics didn't offer the reach, capacity, or power of cable-based technology. Osgood didn’t (or couldn't) capitalize on hydraulics because its customers said they wanted more capacity for fewer dollars – and hydraulics couldn’t deliver at the time.

Give Osgood its due: the company was properly customer-focused. But that focus left it unable to identify the impact that the disruptive technology would have as it inevitably evolved. Other companies – like John Deere and Caterpillar – saw the opportunity more clearly and entered the market with hydraulic backhoes, for instance -- an emerging market that required mobility more than capacity. Within 20 years, Osgood was out of business and the new entrants owned the market. Although their first offerings were feature-poor, Deere and Caterpillar steadily added capabilities and functions and eventually surpassed cable shovels. Maybe if Osgood listened a little less to their existing customers, they might have adapted and survived.

INNOVATE OR DIE?

But we’re talking computers, not excavation, right? Well, unfortunately, we can find relevant examples here, too. The market for mainframe hard disk drives was owned by IBM, Burroughs, and Control Data. Forgivably, perhaps, they focused on their very narrow customer base that wanted more capacity for less money -- mainframe manufacturers. All of the R&D went into sustaining engineering. Form-factor wasn't a priority.

Along came a disruptive technology that focused on size. At first, these new 8-inch drives cost more and had less capacity – what threat could they possibly pose to disk makers, since their customers – the mainframe manufacturers – saw no value? But – although the market was small – these disks enabled the new minicomputer market to take off. Old disk makers went out of business and new ones emerged.

Then came the 5.25-inch disks from new companies like Seagate. Their customers were PC manufacturers. Then 3.5-inch drives emerged to support laptops. Conner drives started to erode Seagate’s position. In each case, the new market entrant offered no value to established customers – but the new customers that were emerging took advantage. In each case, existing disk makers died because they listened too closely to their customers and couldn't take advantage of disruptive technologies.

WE’VE SEEN THIS MOVIE BEFORE

This same dynamic is constantly taking place in the software industry. For instance, Linux didn't matter to desktop computer makers or the high-end UNIX server market. Microsoft and Sun Microsystems couldn't use Linux to serve their customers. It was too feature poor, their customers said. But the low-end server market and the rise of the Internet enabled Red Hat to enter the OS market against huge odds – and stake out a winning position.

Another great example going on right now is the Google phenomenon.

Google's disruptive technology is actually its business model that enables very small businesses to advertise easily via keywords and text as opposed to the expensive (and unsuccessful) methods using banner ads and pop ups. Expensive ad agencies didn't want text ads because they couldn't differentiate. Yahoo – dominant in banner ads – listened too closely to what it thought was its customers – the ad agencies. Google saw it differently and seized the new opportunity.

Now Google and other firms like Amazon and even Sun are bringing a new disruptive technology -- cloud computing -- to the market. The market is very small right now. Can companies like Cisco, IBM, Oracle, and Microsoft exploit this disruption? After all, this isn’t where they make their money today. There's no margin in cloud computing. The capability is too immature to be valuable to their customer base. But it will happen and it will likely come from a new entrant unencumbered by an established customer base.

The SaaS model is clearly one of the most important disruptive technologies to ever hit the software industry. Initially, it was feature-poor compared to entrenched players like Oracle, SAP, or Seibel (or even vertical leaders like Fiserv or IBM), SaaS provides a model that has negligible value to the customer bases of those companies. Those companies can’t profitably sell thin software that wasn't hosted behind the firewall. After all, what can Seibel do with a product that can’t be customized to large enterprise needs? However, over time, SaaS features are filling out and SaaS companies are adding customers and even eroding the installed bases that those legacy companies count on.

In our market – lending – it’s the same. Some enterprises want it all in-house. Others want a 100-percent customized solution -- a one-off. However, if we respond to those customers, we lose our disruptive advantage. SaaS is cheaper, greener, lower risk, more stable, always there, and fully networked to the world. By contrast, service-oriented architectures or workflow alone are not entirely disruptive -- they are merely incremental technology advancements. Eventually, the incumbent will match those features. At some point, Fiserv will have an SOA architecture and the early entrants will wither away. SOA technology in an application as a SaaS model however, is disruptive.

It’s not an easy challenge. We need to customize. We need to listen. We need to respond with value and a total solution. But we also need to be careful. We need to trust our own vision and lead lenders through this disruptive technology.

We all need to absolutely believe in SaaS and that takes a little while; it’s sometimes hard to let go of older paradigms. Early customers are less profitable while entrenched players make money through professional services or more bloated features. But I am more convinced than ever that it is precisely because of our size and experience that we can compete as an early entrant and win.

Eventually everyone will be using cloud computing -- even to run mission-critical enterprise applications for lending and insurance. It’s inevitable. And I’m unwavering in my desire to lead our customers through this exciting, game-changing opportunity.

Dain

Dain Ehring
CEO Dorado Corporation
dehring@dorado.com
650-227-7330

Note: Some of the examples I cite in this post were taken from Clayton M. Christiansen's groundbreaking 1997 book, "The Innovators‚ Dilemma."