THINK IT Services

As the concepts of software-as-a-service (SaaS) and managed services gain mainstream acceptance and adoption among enterprises of all sizes, we are also beginning to see some of the adverse side-effects of a rapid growth market taking hold.

For instance, every established independent software vendor (ISV) must now determine how they are going to play in the SaaS market. For some, this means simply offering a relatively unchanged, hosted version of their existing packaged apps to satisfy to ‘on-demand’ preferences of a segment of their customers. Microsoft’s Live Office and SAP’s CRM On-Demand offerings fall into this category. For others, it means fundamentally transforming their applications to make them truly web-enabled and versatile. Differentiating between the two camps is already becoming tough for some unsophisticated companies.

In the managed services realm, various players are just rebranding, rather than truly restructuring their traditional maintenance, systems integration and outsourcing services as managed service offerings to capitalize on the rising hype. These include technology vendors, resellers and carriers who are trying to combat the threat of independent managed service providers (MSPs) by convincing their customers that they can supply a comparable set of services.

I’ve published numerous commentaries about the shortcomings of these marketing efforts from a provider standpoint. But, the confusion which these deceptive marketing tactics create goes beyond extending the salescycle. They can also lead an enterprise to adopt an ill-conceived and even counterproductive sourcing strategy.

For instance, an enterprise recently asked THINKstrategies to help them devise a “managed service” strategy to address their application development requirements. The company had already outsourced its IT operations, and wanted to ensure that the outsourcer could accommodate a new application. The company recognized that part of the burden would fall on the application developer to comply with the outsourcer’s operational requirements. But, rather than assume the responsibility to bring the two parties together itself to make sure they cooperated on the project, the enterprise wanted to issue a separate “managed service” RFP to have a “managed service provider” facilitate the work of the application developer and outsourcer.

It was obvious that this arrangement would only complicate the situation, and THINKstrategies advised the client to leverage the existing contractual obligations of the application developer and outsourcer to ensure the success of the project.

However, the episode illustrates how the concept of managed services continues to be confusing for many organizations and may increasingly be misapplied or taken to an extreme to achieve a corporate objective.

Although the trend among enterprises of all sizes is to outsource, or ‘out-task’, an increasing proportion of their IT operations to third-parties to reduce costs and increase operating efficiencies, the rate of adoption continues to vary between managed services and software-as-a-service (SaaS).

According to THINKstrategies research, SaaS is gaining acceptance among organizations of all sizes in almost every industry, while managed services continue to be of greater interest to small- and mid-size businesses (SMBs). And, even in this category managed service providers (MSPs) still find the sales cycles longer than they would like, making the managed service business more challenging than they imagined.

Ironically, managed services and SaaS are similar in many ways and the terms are often used interchangeably. Both assume responsibility for performing an IT or business function. Both alleviate the hassles and upfront costs of performing the function. Both rely on a centralized provisioning process to deliver their solutions. And, both monitor and manage their solutions in a continuous and remote fashion to ensure the availability and performance of their solutions in economic fashion.

Given the fundamental similarities between managed services and SaaS, why is there a dichotomy between the adoption rates of the two out-tasking alternatives?

The first major difference is that MSPs are asking potential customers to trust them with the management responsibility of some aspect of the customers’ IT operations, while SaaS providers are simply making it easier to utilize a business application. The level of perceived risk is very different between relinquishing control of an IT function and acquiring the right to use an application. Although an application failure can adversely impact an organization, the impact can often be isolated to specific business area. IT management problems could disrupt an entire organization.

Given the greater level of perceived risk, organizations must have a higher level of trust in their MSP than a SaaS provider. In many cases, unless an organization already knows the MSP they are unlikely to relinquish even poorly operating IT functions. On the other hand, organizations are less apprehensive about trying a new application from a relatively unknown SaaS provider that can enhance their business operations. As a result, many SaaS providers are able to sell their applications via the web with minimum human interaction. On the contrary, most MSPs must still use face-to-face, direct sales techniques to convince customers to acquire their services.

As a result of the hesitancy among organizations to adopt managed services from providers they don’t know, many MSPs are attempting to sell their services via local resellers and integrators who already have an established customer base. Although many of the local companies are seeking a new revenue stream and method to strengthen their customer satisfaction and loyalty, few fully understand the business implications of becoming a MSP. This has forced many MSPs to dedicate more time and money on training and education programs to teach their local channel partners how to succeed in the MSP business. They must also develop a sales, support and revenue-sharing model that work for both the local reseller or integrator and the MSP.

For the most part, SaaS providers don’t have this problem. They can generally sell their applications directly to their customers, avoiding the channel development and coordination challenges and costs faced by MSPs.

SaaS providers also don’t have to worry about complicated start-up procedures and costs when they acquire a new customer. In most cases, the customer follows a few easy steps to begin using a SaaS solution and can get the tech support they need online or with a quick phone call.

In contrast, many managed services require an assessment of an organization’s IT systems and service issues before the managed services can be properly deployed. After the organization’s IT management needs are determined, the MSP must then design its technology and services to address the organization’s specific needs. This requires costly technicians and customization on the MSP side, and demands that the customer accommodate the MSP’s management technology and techniques.

In many cases, this also means that the MSP must penetrate the customer’s firewall to assess the current state of their systems and continue to monitor the customer’s systems on an ongoing basis to properly manage them. This creates a variety of security concerns for the customer.

MSPs also face a greater packaging and promotion challenge than their SaaS counterparts. Successful SaaS providers often offer free trials or single-user versions of their applications to entice new customers. They can also offer month-to-month subscription rates. This eliminates the financial risk in the SaaS transaction. The complexity and the cost of deploying most managed service offerings preclude MSPs from offering similar incentives.

Until MSPs are able to overcome these issues they will continue to lag the growth rates of SaaS providers.

I had the privilege of participating in Opsource’s SaaS Summit March 1-3 at the Silverado Resort in Napa Valley, CA.

The event brought together everyone from the 800 pound guerilla of the Software-as-a-Service (SaaS) industry–Salesforce.com–to an assortment of neophides still formulating their SaaS strategies and solutions. The attendees and speakers included system vendors like IBM and Hewlett-Packard, software vendors like Microsoft and Business Objects, as well as many of the top venture capitalists and investment bankers focusing on the SaaS market.

OpSource’s senior executives and marketing staff deserve praise for not only taking the bold step of hosting this industry event, but having the skill to pull it off in first-class fashion. The company has aggressively asserted itself as a pivotal player in the SaaS market by not only organizing the Summit but also evangelizing the business benefits of SaaS and establishing a ‘best practices’ based consulting practice and incubator program to help ISVs adopt the SaaS model.

Here are some of my observations from the event:

• Bobby Napiltonia, SVP of WW Channels and Alliances at Salesforce.com, opened his keynote presentation with a videotaped interview with Tom Friedman, author of “The World is Flat”, evangelizing about the virtues of SaaS. With Friedman onboard the SaaS bandwagon, those corners of Corporate America who haven’t already recognized SaaS’ business benefits will take a closer look.
• The SaaS market is entering the ‘gold-rush’ stage, as it gains acceptance in almost every segment of the market and players from nearly every vantage point in the IT industry are seeking to capitalize on the opportunity.
• Salesforce.com is the epicenter of the market and AppExchange is a key channel to market, but it hasn’t captured the market completely because there are plenty of non-CRM/SFA SaaS opportunities.
• Salesforce.com is also quickly moving from evangelist/savior of SaaS to potential behemoth/bad guy a la Siebel vs. Oracle in a previous era. The company’s size and recent system outages has created apprehension about its market power.
• The key lesson of Salesforce.com and AppExchange is ‘ecosystems’. In addition to partnerships and ecosystems being a common theme of the event, the Summit was a demonstration of OpSource’s own growing ecosystem and increased significance within the SaaS market. SaaS players that fail to build broad-based partners will fade away.
• IBM and Microsoft understand the SaaS market dynamics and importance of ecosystems, and they are focusing on enabling SaaS as much as offering proprietary SaaS solutions. (HP was a sponsor–but not a speaker–at the Summit, pushing its server products at a table-top display in the exhibitor area and failing to tell the attendees where the company stands in the SaaS market.)
• There isn’t one definition or business model for SaaS. Customers have varying requirements, ISVs have varying capabilities, and applications can come in various flavors yet still satisfy the overall goals and intent of SaaS.
• As a result, many SaaS providers are still trying to determine how to package, price, promote, sell and deliver their solutions profitably.
• ISVs who are attempting to add SaaS to their portfolios or migrate entirely to a SaaS model face the greatest hurdles as they adjust to the transaction-oriented, subscription-based pricing model, especially when it comes to sales compensation strategies and structures.

You can read more about my views re: SaaS ecosystems on ITworld’s Utility Computing website.