Now he uses his skills to spot trends and invest in new technologies.
When Ray Lane talks software, people listen – as well they might since Lane’s industry track record takes some beating. This is a man who knows what he’s talking about, which is just as well as his current role is general partner at venture capitalist Kleiner Perkins Caufield & Byers.
As such he is setting and changing corporate agendas through his choice of investments and his financial backing of emerging markets and technologies. But he is still best known to most people as second-in-command at database giant Oracle in the mid-1990s where he oversaw growth from $1 billion a year in 1992 to the $10 billion run rate when he ‘left’.
Prior to his time at Oracle, he was senior partner with Booz-Allen & Hamilton where he set up and led its Information Systems Group, spent 10 years with IBM in a variety of product management, sales and marketing posts as well as time as a divisional vice-president with EDS.
So when he declares that there is a storm brewing across the software industry and that it is set to benefit the customer, it is worth paying attention. His thesis is based on the assumption that in the 1990s, the enterprise software industry focused too much on selling and not enough on user needs. That is set to change and change the industry’s agenda, he predicts – and not before time. “We forgot about the users for a couple of years in the 90s but really the software industry has always been about customer value and that’s what we’re swinging back to now,” he says.
“The emergence of the new model of on-demand computing or software as a service (SaaS) is what’s proving to be the big inflection point. That model has been delivering end user value for a long time but it had been missing a couple of things that are now in place.”
"We forgot about the users for a couple of years in the 90s but really the software industry has always been about customer value and that’s what we’re swinging back to now"
Ray Lane, general partner, Kleiner Perkins Caufield & Byers
He believes that IT heads can test that theory. “There’s an interesting experiment that you can do as a CIO which is to talk to a traditional software vendor customer and have them debate whether they feel they are getting what they’re paying for. Every time you do that, I guarantee they will lie to you or you’ll just see them looking embarrassed,” he says.
“The money that CIOs have been spending on software has been going into delivering basic functionality in sales, marketing, customer service or whatever application area you choose. It’s not been about delivering service and value to the customer. With the on-demand model, you’re paying for what you’re getting. That changes things even if CIOs inside some large enterprises still find reasons to dismiss newer companies like Salesforce.com because they don’t believe that it’s going to be real. But that’s the classic innovator’s dilemma.”
Another dynamic coming into play that will strengthen the CIO hand is consolidation among vendors. “There are a lot of dead men walking in the software industry,” says Lane.
“In some market sectors you have companies like Symantec or Oracle who own the category in which they operate. That’s good. They drive consolidation and spend huge amounts on R&D to the extent that if you are one of the 30 or 40 competitors in that space you just can’t keep up. Then it’s only a matter of time before you’re judged to be non-competitive.”
He argues that vendors need to have a continuous process of innovation. “If Oracle delivers a new version of its database, then that’s innovation and frankly no one else in the database industry has the budget to get into that space. Then you have the start-ups who have the benefit of not having a legacy base that they need to protect. Out of every 1,000 start-ups there will be some that survive, become challengers and set new agendas.”
Up for grabs
“The industry has the largest no man’s land in history,” says Lane. “The top 25 companies are leaders with continuous innovation. There are thousands of start-ups, a fraction of which are doing fundamental ‹ innovation and a couple of hundred attacking the current paradigm. That leaves 5,000 companies competing against big companies or start-ups.
“Now we all know that around 75 per cent of the money being made in the software industry is going to three companies – Oracle, SAP and Microsoft – so that doesn’t leave a whole lot of profit to go around all the competitors. That leads to consolidation. The new on-demand model of computing will take out the big fat middle chunk of the industry first. It won’t hurt the top-end vendors much yet and it will be driven by the start-ups but those in the middle will be hurt. So, as a CIO do you put your money into paying for yet more maintenance costs or do you go and look for an online provider where you can spend the money more effectively?”
Growth of SaaS
Lane believes that the on-demand model will encroach on all forms of end user enterprise. “It will grow virally within organisations,” he predicts. “I talk to CIOs at Fortune 100 firms and ask them about how they’d feel about having users adopt online systems one at a time and grow out virally.
“I thought I’d have my head handed back to me but in fact they all have open arms about the idea. Software adoption has always been about going top down; the new model will be bottom up. The grassroots adoption of the on-demand model is what it’s all about.”
"The hardware industry went through a very hard repricing around 20 years ago and a lot of companies fell away. That hasn’t happened to the software industry yet but it’s beginning to start now"
Ray Lane, general partner, Kleiner Perkins Caufield & Byers
Ultimately the on-demand computing model will also start to bite into the current mainstream high-end vendors and Lane predicts that they will find it hard to adjust. “It’s a DNA problem for those companies,” he argues. “Think about Microsoft. If you own 98 per cent of the world’s desktops, are you really going to screw with that? If you’re Microsoft, you need to be preoccupied with Google right now. It is about priorities. When I was at Oracle, we started Business Online as far back as 1996 but Oracle has never really seen delivering software as an online service as a priority. I remember having a conversation with you know who about it back then.”
‘You know who’ is of course Oracle CEO Larry Ellison. Ellison and Lane worked incredibly well for many years, Lane providing the business acumen and strategic grounding to counter-balance Ellison’s flamboyant exuberance.
Wall Street was happy with the pairing: it liked Ellison’s rampant entrepreneurialism but felt happier with Lane in the passenger seat ready to rein in its worse excesses. Of course, it was inevitable that this would end in tears as, from Ellison’s perspective, this was eventually going to mean that Lane was the grown-up spoiling his fun.
And so it came to pass that Lane found himself increasingly marginalised from decisions as Ellison went through one of his periodic – and typically short lived – hands on CEO phases. In one case, Ellison was reported to have told a group of senior executives that they “report to me now and not Ray. Make no mistake about it.”
Eventually Lane walked away. He recalled later: “I told [Ellison], ‘you no longer consult with me or ask me about decisions’. I asked him if he wanted me to leave. He said: ‘No, we just need to communicate more. I want you to know what is in my head and I want us to be seen in public more. So there’s no confusion among employees and customers as to the company’s direction’.”
But this did not last and further decisions were taken on policy without Lane’s involvement. “Again, it was a case where changes were going to be made under Larry’s game plan and I disagreed with them. I told him it seemed like it was time for me to go. And he agreed,” he says.
Such a conflict was probably always on the cards. The renegade buccaneer of the software industry had ways of doing things and a seeming ethical flexibility that the more conservative, business-focused Lane was unlikely to stomach. For example, there was Ellison’s hiring of private detectives to investigate two research groups that supported Microsoft during its antitrust trial with the Justice Department, which saw gumshoes attempting to buy rubbish from the rival vendor’s dustbins. Ellison was unrepentant. “I feel very good about what we did,” he said afterwards. “Our investigative organisation may have done unsavoury things but it’s not illegal.” His president and chief operating officer was conspicuous in his lack of vocal support.
Defining the next ‘new’ software products
- Meet individual need. The product must be able to create value for a single individual or and become more powerful as it serves a group.
- Virally adopted. Users will hear about it via word of mouth. Someone downloads it and says: “Try this.”
- Contextually personalised information. Products need to know the location of the user, the reason for being there and what information the user might need because of these factors.
- Intuitive usability. Users can bring up the application, enter some information and begin to use it without training.
- Instant value. As soon as users begin to use the application, they realise its value.
- It is who you know. Products will leverage the vast network of social and organisational connections attached to each individual for new connections and better information.
- CIO disintermediation. CIOs remain critical in determining how technology is utilised by the company but no longer have to make all the decisions. Products can be adopted without IT’s approval.
But then no one has questioned Lane’s integrity. Former employees admit that he was tough – “he scared the shit out of us!” recalls one – but ultimately fair. It is difficult to find anyone with a bad word to say about him among the Oracle veterans of the era.
Since then Lane has been involved in tracking new trends in the industry and backing them with cash and advice. “People ask what the next big thing is going to be which is the wrong question,” he says. “We have a tendency in business to try and put labels on things. The elegance of on-demand is that it moves the future into something that the customers decide upon. I can make a new application that is a mash-up of supply chain management, CRM and databases and build something new.
“Moreover it will be inexpensive to do. When software developers sit down to produce new applications, 80 per cent of the effort goes on things like infrastructure and very little on building the functionality. If with on-demand I can bring things together quicker and with no infrastructure then I can get things to market more quickly and with less cost. And if I decide to kill it in a year’s time, then it won’t matter as much because I haven’t invested so much. It would be great if we could get to a stage where we have a new business model where developers produce a new application every month and not care if it gets sunsetted a year later. That would totally change the mindset of the industry.
“The problem for the software industry is that software is a drug,” he concludes. “The hardware industry went through a very hard repricing around 20 years ago and a lot of companies fell away. That hasn’t happened to the software industry yet but it’s beginning to start now. There will be a software industry repricing in the next five years and costs will come down.”