2011: The Enterprise Resets

Aaron Levie Jan 2, 2011

This post was written by Aaron Levie, CEO and co-founder of Box.net. His last guest post for us was “Building The Simple Enterprise.”.

On a recent call, an analyst shared a story about a company whose IT infrastructure was completely wiped out in a natural disaster. Forced to start from scratch, the company reinvented the spirit and composition of its enterprise IT strategy, and the set of solutions that emerged from the rubble made their organization inherently more mobile and efficient. Which begs the question: what would enterprise IT look like if all companies were afforded the opportunity to “start over?” In 2011, we might just find out. Other less destructive but incredibly powerful drivers for change are at work, and the coming year will be one of massive transformation in the enterprise.

The cloud has tipped for the enterprise

IDC forecasts that worldwide IT spending will hit $1.6 trillion this year, with 13% growth coming from software and services, and public cloud solutions making up the largest growth area. Cloud services are no longer on the periphery. 2011 will make this undoubtedly clear, bringing a massive wave of adoption, innovation and transformation as the cloud crosses the chasm from the early adopters to larger, more pragmatic organizations.

Evidence that the cloud has tipped is everywhere. It especially hit me when my dad, who works at a blue-chip paper company, told me that one of his business units had recently adopted NetSuite. Microsoft has started advertising their cloud products at airports and on television. In 2010, the US government determined that Google apps is secure enough for the GSA and Microsoft’s BPOSS for the USDA, citing millions in cost savings annually. Even Larry Ellison, one of the cloud’s biggest detractors, opened his Oracle Openworld keynote talking about, well, cloud computing.

Suffice it to say, we’re in the middle of one of the most important computing shifts in history. And as has happened before with other major paradigm transitions, new businesses will emerge to define and dominate markets. Apple and Microsoft took over as we moved from Mainframe to Personal. Google’s power grew alongside the rise of the consumer internet era. Facebook is owning social. We know the drill. We will look back on this period with wonder, when five years from now managing your own servers and infrastructure will seem about as quaint as when Bill Gates supposedly said, “No one will need more than 637KB of memory.”

Cloud in the enterprise is a classic disruption story. It began as a way to deliver lower-end applications that we didn’t yet care about or know we needed. Most incumbent vendors ignored or tried to delay the early indicators. But that’s how all disruption stories start: from the low end, and as the technology matures – more security, uptime, traction – the wave builds momentum. Soon, the enterprise wakes up to the fact that this approach to doing business and IT is not only more time and cost effective, it’s transforming the way their organization operates.

The first cloud deployment in a large enterprise is always the greatest hurdle, but once Walmart implements SuccessFactors for performance management or Chiquita’s CIO decides that Workday is reliable enough to be its system of record for HR, there’s very little holding these organizations back from moving other non-core systems to outside vendors.

And their cloud adoption paves the way for others, creating a ripple effect through organizations of all sizes. If you had surveyed the market a year ago you’d have found many enterprises still wary about the state of cloud solutions for their business, but we’re now seeing the inverse become true: enterprises are no longer comfortable with investing in on-premise systems when trusted web-based alternatives exist.

Just as mainframe computing became obsolete when personal computers and servers matched their power far more efficiently, today’s big iron IT infrastructure may well see its own obsolescence for the majority of needs. In fact, perhaps the most prescient quote of all was from Thomas J. Watson, former president of IBM, when he said, “I think there is a world market for maybe five computers.” He was just about 60 years too early.

The mobile enterprise will finally be realized

Mobility is creating major demand for cloud offerings today, and is a disruptive force on its own. In last year’s summer earnings call, Apple COO Tim Cook shared that, “…in the first 90 days, we already have 50% of the Fortune 500 that are deploying or testing the iPad.” In 2010, AT&T said that nearly 40% of iPhone sales were going to businesses and enterprises, with the most relative growth in enterprise market share coming from Android devices in 2010.

As Aberdeen’s Andrew Borg points out, these devices aren’t completely enterprise ready, yet it doesn’t take much clairvoyance to see that this trend will continue to gain momentum in 2011; and with greater diversity of sophisticated mobile devices in the enterprise comes completely new opportunities for disruption.

For these new devices to be fully corporate-ready, they need seamless access to email systems, business data and intelligence, communication tools, and more. The cloud rewrites the rules here, enabling new handsets and tablets to connect to the “grid” like any other computer, something that is finally making the mobile workplace a reality. And with the truly mobile workforce, completely new computing cases are emerging.

Remote sales teams are pulling down inventory or product information from the cloud while on-site with just their iPad in hand. Construction workers on rooftops are viewing up-to-date digital blue prints from the main office. Good luck doing that with SharePoint. Mobile devices are becoming a catalyst for completely new enterprise applications, and vice versa. The marriage of the two is so uniquely powerful that businesses will experience a wave of productivity transformation over the next few years.

The polygamous enterprise and the fall of Microsoft monogamy

While enterprises of prior decades may have gotten by predominantly on a combination of software developed in Redmond and Redwood Shores, this won’t be the case for the enterprise in 2011. The mandate of the modern enterprise IT department is transitioning from maintaining and upgrading systems from a limited set of vendors, to piloting and implementing a diverse set of services to solve problems.

We’re even seeing this shift on the hardware side, as Macs enter corporations in greater proportions, seeing double and in some cases triple digit growth within large enterprises and the government. The era of near-religious adoption of vertically integrated tools from behemoth vendors is coming to an end, providing an unprecedented opening for best-of-breed solutions to compete for enterprise customers.

Microsoft will likely be the most affected party, but enterprises in 2011 will start to feel both the upsides and management strain immediately. With the floodgates open for new and heterogeneous solutions, we’ll continue to see massive adoption of technology directly from employees themselves. This is quickly becoming the fastest entry point for new software and hardware, and these tools aren’t being immediately turned off by IT.

During an audience survey at this year’s Dreamforce conference half the group said they had SharePoint in their organization; yet when asked how many were looking to switch off SharePoint in the coming year, more than half of the group kept their hands up. Ballmer and company are still trying to figure out how to operate in a world that isn’t centered around them, and the rise of cloud and mobile is producing just exactly that. Microsoft—a company that has traditionally grown through complexity and new product lines—is going to have to fight to stay competitive.

Social and personalization will permeate all business apps

All this variety would normally create chaos, except that these applications are becoming connected in incredibly powerful ways. They’ll work harder for us, surfacing more relevant information for a passive user than an active user could ever possibly discover in their silo-ed legacy software.

Social capabilities will transform how we interact with our applications, and not just within the category of enterprise social software, which is finally beginning to move from the periphery to mainstream, with Gartner estimating a $1B market size in 2011. To get much further than this, Rob Koplowitz of Forrester points out that business value has to be established, and organizations must learn to embrace a different kind of risk, suggesting there’s more danger today by not sharing enough than having too much transparency.

This is not just about our software becoming more social in the contemporary sense, with status messages and communication between users. It’s about our software becoming much more personalized for our job functions, and being smarter than us in the areas it has more knowledge. Your content management solution should surface information and collaborators that are relevant to your current projects.

Your social software platform should recommend experts for a team you’re putting together without being prompted. LinkedIn should tell you what candidates fit the position for which you’re hiring. And as the business social layer continues to grow, a rich ecosystem of applications that connect to one another will emerge. This will lead to the ability to write mashups on top of our business social software, have viral business applications that live on top of the “graph,” and an enterprise experience in 2011 that is far more personalized and contextual to our own work behaviors.

The disruption story of cloud in the enterprise is still in its early chapters, but in 2011 it will be impossible to deny. Don’t be surprised if the rise of mobility, the fall of vendor hegemony, and the spread of social capabilities across all business applications creates massive upheaval in the enterprise software market—more than we’ve seen in the past five years combined. (I may be biased here since I run an enterprise cloud startup, but I may also be right).

It will also create short-term challenges for IT departments as they find their footing in a world with more applications and devices to manage than ever before, but with a long-term upside of significantly reduced system maintenance and a role that is inherently more strategic and dynamic. For users, however, this disruption only brings benefits. The devices they want to use are finally the ones they’re being armed with, and thanks to cloud applications, they can now work from anywhere.

The technology they’re using is best-of-breed rather than chosen by default or vendor lock-in. And the social capabilities that have revolutionized their personal lives are now being applied to their work lives in ways that are arguably even more powerful. Welcome to 2011.

Photo credit: Flickr/Jennifer Konig

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CrunchBase Information

Box.net

Website:	box.net
Location:	Palo Alto, California, United States
Founded:	2005
Funding:	$29.6M

After starting as a college business project in 2005, Box.net was officially launched in March of 2006 with the vision of connecting people, devices and networks. Box.net provides more than 4 million users with secure cloud content management

Goldman invests in Facebook at $50 bln valuation

January 2, 2011, 11:31 pm Venture Capital

By ANDREW ROSS SORKIN and EVELYN M. RUSLI

Tony Avelar/Bloomberg News

The deal could double the personal fortune of Mark Zuckerberg, Facebook’s co-founder.

Facebook, the popular social networking site, has raised $500 million from Goldman Sachs and a Russian investor in a deal that values the company at $50 billion, according to people involved in the transaction.

The deal makes Facebook now worth more than companies like eBay, Yahoo and Time Warner.

The stake by Goldman Sachs, considered one of Wall Street’s savviest investors, signals the increasing might of Facebook, which has already been bearing down on giants like Google.

The new money will give Facebook more firepower to steal away valuable employees, develop new products and possibly pursue acquisitions — all without being a publicly traded company. The investment may also allow earlier shareholders, including Facebook employees, to cash out at least some of their stakes.

The new investment comes as the Securities and Exchange Commission has begun an inquiry into the increasingly hot private market for shares in Internet companies, including Facebook, Twitter, the gaming site Zynga and LinkedIn, an online professional networking site. Some experts suggest the inquiry is focused on whether certain companies are improperly using the private market to get around public disclosure requirements.

The deal could add pressure on Facebook to go public even as its executives have resisted. The popularity of shares of Microsoft and Google in the private market ultimately pressured them to pursue initial public offerings.

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So far, Facebook’s chief executive, Mark Zuckerberg, has brushed aside the possibility of an initial public offering or a sale of the company. At an industry conference in November, he said on the topic, “Don’t hold your breath.” However, people involved in the fund-raising effort suggest that Facebook’s board has indicated an intention to consider a public offering in 2012.

There has been an explosion in user interest in social media sites. The social buying site Groupon, which recently rejected a $6 billion takeover bid from Google, is in the process of raising as much as $950 million from major institutional investors, at a valuation near $5 billion, according to people briefed on the matter who were not authorized to speak publicly.

“When you think back to the early days of Google, they were kind of ignored by Wall Street investors, until it was time to go public,” said Chris Sacca, an angel investor in Silicon Valley who is a former Google employee and an investor in Twitter. “This time, the Street is smartening up. They realize there are true growth businesses out here. Facebook has become a real business, and investors are coming out here and saying, ‘We want a piece of it.’ ”

The Facebook investment deal is likely to stir up a debate about what the company would be worth in the public market. Though it does not disclose its financial performance, analysts estimate the company is profitable and could bring in as much as $2 billion in revenue annually.

Under the terms of the deal, Goldman has invested $450 million, and Digital Sky Technologies, a Russian investment firm that has already sunk about half a billion dollars into Facebook, invested $50 million, people involved in the talks said.

Goldman has the right to sell part of its stake, up to $75 million, to the Russian firm, these people said. For Digital Sky Technologies, the deal means its original investment in Facebook, at a valuation of $10 billion, has gone up fivefold.

Representatives for Facebook, Goldman and Digital Sky Technologies all declined to comment.

Goldman’s involvement means it may be in a strong position to take Facebook public when it decides to do so in what is likely to be a lucrative and prominent deal.

As part of the deal, Goldman is expected to raise as much as $1.5 billion from investors for Facebook at the $50 billion valuation, people involved in the discussions said, speaking on the condition of anonymity because the transaction was not supposed to be made public until the fund-raising had been completed.

In a rare move, Goldman is planning to create a “special purpose vehicle” to allow its high-net-worth clients to invest in Facebook, these people said. While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman’s proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients.

It is unclear whether the S.E.C. will look favorably upon the arrangement.

Already, a thriving secondary market exists for shares of Facebook and other private Internet companies. In November, $40 million worth of Facebook shares changed hands in an auction on a private exchange called SecondMarket. According to SharesPost, Facebook’s value has roughly tripled over the last year, to $42.4 billion. Some investors appear to have bought Facebook shares at a price that implies a valuation of $56 billion. But the credibility of one of Wall Street’s largest names, Goldman, may help justify the company’s worth.

Facebook also surpassed Google as the most visited Web site in 2010, according to the Internet tracking firm Experian Hitwise.

Facebook received 8.9 percent of all Web visits in the United States between January and November 2010. Google’s main site was second with 7.2 percent, followed by Yahoo Mail service, Yahoo’s Web portal and YouTube, part of Google.

For Mr. Zuckerberg, the deal may double his personal fortune, which Forbes estimated at $6.9 billion when Facebook was valued at $23 billion. That would put him in a league with the founders of Google, Larry Page and Sergey Brin, who are reportedly worth $15 billion apiece.

Even as Goldman takes a stake in Facebook, its employees may struggle to view what they invested in. Like those at most major Wall Street firms, Goldman’s computers automatically block access to social networking sites, including Facebook.