What is making enterprise innovation possible

December 14, 2011, 7:57 PM UTC

By Aaron Levie, contributor

FORTUNE — Grabbing market share through muscle, not innovation, has served Microsoft and other leading enterprise behemoths well: they play in a $250 billion-plus industry that asymmetrically favors a few vendors. But not surprisingly, this model has not been particularly effective in producing technology breakthroughs — rather, it has stifled innovation within incumbents’ organizations, as well as the broader industry by making the barrier to entry impossibly high. And it has certainly hasn’t served customers well. For decades, they’ve dealt with complicated integrations, infrastructure that’s too hard to maintain, overwhelmingly expensive technology, and services and support that overpower the price of the original system by a factor of five to ten.

Fortunately for customers and emerging vendors, this reign of the enterprise oligarchy is coming to an end. In 1995, a pre-comeback Steve Jobs claimed that the Internet was exciting “because Microsoft (MSFT) doesn’t own it and I don’t think they can.” While this level of democratization came to consumer landscape first — with Google (GOOG), Facebook, Amazon (AMZN), and other leaders emerging in the past decade because of the web’s openness — it’s now made its way into the enterprise.

The democratic, “un-ownable” nature of the Internet is playing out in full force as organizations transition to the cloud, and the legacy players’ very strengths are fast becoming their weaknesses. The needs of corporations have finally outstripped the power and capabilities of most of the technology they have, and traditional vendors have been too slow to respond. We’re moving into a new world, one where markets aren’t won by customer lock-in, but rather through speed, relentless innovation, and above all, openness.

“Mo Money, Mo Problems”
Fifteen years ago, Notorious B.I.G. summed up the technology problems of today’s enterprises quite succinctly. Using Biggie’s wisdom as a guide, the more budget you have, and the longer you let projects run on, the more likely you are to face utter failure more problems in the future. This has long been the unfair and un-virtuous cycle of the software industry.

For years, organizations large and small have been promised that the sum of their systems would produce some magical rainbow of enterprise value. But instead of a pot of gold at the other end, nearly every corporation has found itself with a stack of technology that must be wrangled together, customized, and painstakingly integrated. Take, for instance, the process of putting together a traditional enterprise collaboration experience: the IT department is charged with connecting storage and web servers, software from Microsoft, and a search engine appliance, all of which must then be placed behind a network from yet another vendor. Then, when any of these pieces require an upgrade, the whole stack falls apart — the customizations become obsolete or precludes the refresh altogether. This prevents vendors from moving – or innovating — too quickly, and it means that IT organizations are so bogged down by maintaining and integrating existing systems, that experimenting with new technologies only gets a fraction of their time and energy.

Larger enterprises have long been told that they could spend their way to success, but Biggie’s lyrics continue to ring true, as this will just produce more problems. And smaller organizations have always found the proposition too costly to even chase the rainbow.

Traditional vendors’ solution to this complexity, of course, is to offer a consolidated technology stack. Oracle is scooping up hardware and software companies to build more vertically integrated technology offering. Microsoft bundles its entire suite of collaboration, communication and customer relationship services together, and makes these applications first-class citizens on Windows Mobile (which, with 2% market share, isn’t all that helpful for customers). And while consolidation may mean fewer vendors for IT departments to manage, the customer lock-in and competitive lock-out of these offerings ensure innovation starvation for the businesses they serve.

So should enterprises stop pursuing that elusive rainbow altogether, or can we do things differently?

Why New Entrants Can Now Compete
Microsoft, Oracle (ORCL) and others won in a world defined by barriers: limited and tightly controlled distribution channels, users blocked from choosing their own tools, and technology platforms so complex they required a swat team of consultants. With the cloud, these barriers have fast eroded. On nearly every dimension that can be disrupted — speed, cost, performance, design, delivery and openness — new technologies are emerging at an ever-increasing rate to capitalize on the newly democratic nature of the enterprise software landscape.

The viral nature of these new tools completely turns the competitive dynamics of the enterprise software market on its head. Finally, upstarts can compete around the giants instead of taking them head-on, infiltrating organizations through individuals and teams and then expanding, or fulfilling a narrow use case at first and then chipping away at a larger vendor’s poorly-executed sweet spot. Not surprisingly, after years of stagnation in enterprise software, new technologies are coming to market in droves. Software investments are at a 10-year high, beating out growth in all other investment categories, and Accel just announced a $100M fund to invest exclusively in big data startups. SAP purchased SuccessFactors for $3.4 billion, making it the second largest software-as-a-service company of all time, just behind Salesforce. The enterprise floodgates have opened.

Further amplifying this trend, the enterprise pie is growing. Some estimates suggest there are nearly 500 million knowledge workers worldwide, creating a considerably large market for new tools. With billions of connected devices, there are entirely new challenges that need be addressed by today’s software. And it’s not just device demographics that have evolved – it’s the people, too. 76 million Millennials effectively raised on the internet have already entered the workforce, or will soon, fundamentally changing the DNA of the archetypal office employee. Every new cycle of worker brings a new set of expectations into the workplace, and those belonging to the Napster and Facebook generation will find the complexity of today’s legacy systems unbearably jarring.

Openness Will Drive Innovation
Most large vendors agree that the cloud is the future, but they haven’t truly capitalized on its most disruptive component: openness. The true power of the cloud isn’t that it helps brings services to market faster, more cheaply (although those are huge drivers of adoption). Rather, it’s the underlying open nature of the cloud that will really shake up the enterprise software landscape. Instead of an entire technology stack delivered by a single vendor, requiring homogeny of solutions, cloud services can offer enterprises the ability to solve problems in a way that’s optimal for their business. And developers no longer have to stay within the confines of Microsoft’s innovation-stifling playground.

Want Asana or Do.com for tasks; Workday or Netsuite for ERP; Heroku or CloudFoundry for your app platform; or GoodData, Domo or Tidemark for business intelligence? Businesses can now make these calls, as opposed to relying on a single point of failure, and vendor, for all of their IT value. And this is advantageous, not unwieldy, because next generation applications connect to one another through open APIs and services like Okta or Snaplogic, enabling a completely new kind of enterprise value proposition. Yammer recently made an announcement that it would publish activity events from leading software apps into its feed, allowing for activity in one application – say your expense report from Expensify or customer request from Zendesk – to propagate instantly to the appropriate people in your enterprise social network. Jive and Chatter similarly allowed for enterprises to connect its apps as well this year.

And it’s not just about creating seamless integrations between apps. It’s also about creating powerful, customized experiences built on top of them. Once the barrier to introducing new applications into an organization drops to zero, and infrastructure is fully elastic and abstracted, enterprises can focus on building the most strategic technology for their companies. IT departments can spend their time on building value in the connections between applications, or customized solutions for specific use cases or verticals, rather than the maintenance of infrastructure and systems. At Box, we recently spoke with a major airline that is building applications to help them deliver critical data to pilots using iPads. This is coming from the airline industry. One of the world’s largest engineering firms is doing the same in Healthcare. This customization, mobilization, and social-ization of technology is happening in every industry, from finance to construction.

We’re entering the most innovative period the enterprise has ever seen. Closed systems, tightly controlled distribution channels and customer lock-in are no longer the path to market dominance for vendors, and they’re certainly not the path to customer success. Instead, markets will be won by companies who deliver amazing user experiences, innovate constantly, and play nicely with other applications to deliver unprecedented value for businesses.

Aaron Levie is the CEO and co-founder of Box.net.