Behind Microsoft's Yammer acquisitionJune 26, 2012: 1:48 PM ET
The spending spree on social business upstarts makes clear the forces transforming enterprise software.
By Ryan Holmes, contributor
FORTUNE -- Microsoft is snatching up business social networking tool Yammer - a.k.a Facebook for the workplace - for $1.2 billion. This acquisition hints at a major shift in the way the planet's largest companies use and choose software.
The Wall Street Journal notes that the Yammer purchase shows "Microsoft may be trying to plug holes in its ubiquitous Office software." It goes much farther than that. Enterprise software - the tools used by companies to do everything from process payroll to monitor customer leads and make spreadsheets - is right now in the midst of an unprecedented renaissance and "full-blown reawakening," according to no less an authority than Peter Levine, general partner at Andreessen Horowitz, the venture capital gurus that have invested in Facebook (FB), Twitter and Zynga (ZNGA).
The proof? In just the last month, enterprise giants including Oracle (ORCL), Salesforce (CRM) and now Microsoft (MSFT) have shelled out $2.25 billion for social business upstarts like Vitrue, Buddy Media and Yammer. The spending spree reflects the fact that enterprise software is swiftly evolving and tech's titans are fighting to keep up.
Going - if not quite gone - are the clunky, licensed business products once churned out by the likes of Microsoft, Oracle and SAP. Up and coming are cloud-based, intuitive, software-as-a-service applications with social components created by a host of young, disruptive companies ranging from Dropbox to Asana and - until last week - Yammer.
And at stake is one whopper of a payday. According to research firm Gartner, the global enterprise software market is valued at $280 billion, roughly equivalent to Greece's annual GDP.
A silent revolution in enterprise IT is already underway. Here are five hallmarks of the new wave:
1) The consumerization of enterprise software: What happens when a generation raised using intuitive, multimedia networks like Facebook - tools that are accessible from day one, no training required - enters the workplace? Suddenly, traditional enterprise software, like those monster spreadsheets on Excel, seems positively archaic by comparison. Today's business users expect a sexy, easy-to-use user interface, and the next generation of business software - think Dropbox, Yammer, Box - increasingly obliges, while also offering the security and compliance features traditionally demanded by enterprises.
2) Software becomes a cloud-based service, not a product: Microsoft, Oracle, Adobe and other behemoths of enterprise software built their empires by licensing copies to individuals or companies. This system - selling software just like TVs, sofas or any other product - worked great for them. But it demanded a lot from business users, including heavy upfront costs and the need to maintain pricey on-premises servers.
Software-as-a-service (SaaS) instead treats software as a pay-as-you-go subscription, much like cable or phone service. Hardware and software is all centrally managed by the provider on cloud-based servers, including upgrades, backups and security. For businesses, SaaS solutions - Salesforce, Google Apps, Hubspot, etc. - often represent a clear win-win, promising both lower costs and fewer headaches than licensed alternatives.
3) The CIO gets crowd-sourced: Back in the day, writes TechCrunch's Rip Empson, the CIO was god, "sitting in his high chair in a grey suit barking orders, making the product decisions for big companies with even larger user bases." And little surprise. Stakes were exceedingly high: Choosing the wrong product could doom a company to years of clunky, ineffectual computing and cost millions.
These days, software decisions in enterprises are increasingly made from the bottom-up. Free SaaS solutions like Dropbox and LastPass percolate through the workplace organically, introduced casually by employees. If these apps indeed fill a niche, eventually CIOs take notice, opting into premium, enterprise-wide versions (Herein lies the virtue of the freemium pricing model). Yammer's own CEO David Sacks explains a typical progression: "Employees can start using [Yammer] for free, message with their coworkers, and then the company can decide to endorse it, pay for it, that sort of thing."
4) Enterprise software goes social: Social networking may have originated as a consumer phenomenon, but it clearly has wide-reaching business applications. Internal, Yammer-like networks enable companies to carry on Facebook-esque dialogues behind the firewall. Hierarchies are flattened; working groups can be organized that transcend office walls; ideas and projects are nurtured collaboratively in ways impossible via traditional Web 1.0 channels like email.
Broader still, new enterprise software incorporates social features into functions as diverse as task management (Asana) and document creation (Google Docs). This mirrors how projects actually get done in real life - not in silos by lone employees but collectively, with each team member contributing a piece of the puzzle. Collaborative project execution represents one of the most profound - and widely overlooked - advantages of new-generation enterprise software.
5) Business computing goes mobile: The CIO of SAP recently purchased 40,000 iPads for his employees - a reflection of the fact that many people were already bringing tablets to work. It's been years since we were tied to our home desktops. There are frankly very few reasons why workplace computing still needs to be desk-bound. As CNET's David Rosenberg writes, why wouldn't we want "to make business-critical data available anywhere, anytime," wherever our employees might be?
Indeed, it's the move to mobile that has driven, in large part, the changes roiling enterprise IT. Mobile devices run on cloud-based software, accessible from anywhere. They demand apps with slick, easy-to-use interfaces. The BYOD (Bring Your Own Device) phenomenon lets employees circumvent and subvert clunky, legacy PCs bloated with yesterday's enterprise software. And tablets and smartphones are aggressively social. Microsoft's launch of its new Surface tablet should bring even Apple-averse workplaces into the mobile fold.
In the wake of the Facebook IPO, investors have wondered out loud whether tech is down for the count. While consumer social media may be cooling for the summer, the enterprise market is certainly not. As Inc's Erik Sherman writes, useful is always better (and more profitable) than cool: "[There] still isn't a new economy to run on love and links," he explains. Enterprise software - i.e. tools with clear corporate applications and a clear path to monetization - is a perennial performer.
All in, annual spending on last-generation enterprise computing - on-premises software, data centers and PCs - comes to a staggering $600 billion. As those clunky legacy systems get phased out, opportunities exist for cloud-based, SaaS enterprise solutions built for the mobile era.
Ryan Holmes is the CEO of HootSuite, a social media management system with four million users, including 79 of the Fortune 100 companies. In the trenches everyday with Facebook, Twitter and the world's largest social networks, Holmes is an expert at the intersection of social media and big business. He is consulted regularly by The New York Times, Wall Street Journal and other outlets and speaks at TEDx, SXSW and major tech conferences.