THINK IT Services

Since my last blog entry correctly predicted the pace of merger and acquisition activity in the Software-as-a-Service (SaaS) was primed to accelerate just three days before RightNow acquired SalesNet, I figure I’d test my prognostication skills again by predicting another important market trend in the SaaS and managed services sector.

This time I’m predicting that several SaaS and managed service providers are going to team with the major Internet companies and hardware vendors to dramatically expand their channels to market.

I’ve been suggesting this trend privately to my clients for the past six months. And, the series of joint ventures and strategic alliances announced between eBay, Yahoo, Google and Dell in the past week gives me even greater confidence that my prediction is about to come true.

Specifically, I expect eBay, Yahoo, Google and possibly AOL along with leading PC/server vendors to resell various SaaS and managed service offerings to consumers and SMBs (small- and mid-size businesses).

Yahoo has been offering web hosting and other business oriented services for a while. eBay has also been expanding its array of eCommerce software services. In April, Google added the OneBox feature to its Search Appliance. Google OneBox enables users to quickly find relevant information, such as phone numbers or inventory and sales data, that can be easily integrated into various business applications. Charter members of the OneBox program include SaaS providers Employease, Netsuite, Salesforce.com and SAS, as well as Cisco, Cognos and Oracle.

While Google’s OneBox for Enterprises isn’t reselling third-party SaaS solutions, it is significantly enhancing these ‘on-demand’ services by integrating the company’s powerful search capabilities into the third-party CRM, ERP and business intelligence systems.

What’s to prevent Google, eBay, Yahoo or AOL from reselling or even rebranding third-party SaaS and IT management services as part of a bundled solution for SMBs or single office/home office (SOHO) users?

By the same token, now that Dell is adding Google’s desktop search software to its preconfigured PCs, why wouldn’t it–or one of its competitors–also incorporate a set of SaaS and IT management services into their products to strengthen their functionality and improve their reliability?

The quickest way for one of the major PC/server vendors or Internet companies to pursue this strategy would be to align with Salesforce.com’s AppExchange. This would give them immediate access to over 250 applications, as well as the support of one of the most powerful and effective marketing companies in the IT/software industry.

While the AppExchange is primarily populated with business applications at this stage, I expect it will expand to include a variety of managed services, ranging from turnkey messaging to managed security, that will make it easier for consumers and SMBs to keep their PCs/servers up and running, while dramatically improving their functionality.

The hardware vendors and Internet companies that add preconfigured SaaS and IT management services to their PCs/servers and online services will reset the ‘playing field’ and gain a competitive advantage.

(It’s always fun to be right about something. In this case it is the following blog entry which was published on Friday, May 19, just three days before RightNow announced its acquisition of Salesnet, a clear indication of the M&A ramp-up which I describe in this blog. And on May 22, Microsoft acquired Softricity. Click here for my more recent blog on the implications of Microsoft’s acquisition.)

A persistent question being asked during this past week’s Software and Information Industry Association (SIIA) Software Summit in San Francisco was when will we see M&A activity heat up in the Software-as-a-Service (SaaS) industry?

Since I wasn’t tethered to my favorite online news service while I was attending the conference, I gave everyone my pre-established view that a decernible uptick in SaaS-oriented acquisitions would occur in the second half of 2006.

I emphasize acquisitions as opposed to mergers because I think the bulk of the deals will be by established players–ISVs, system vendors, systems integrators, business process outsourcers and even telecom carriers–seeking to buy their way into the SaaS market. Although some of the deals will be called ‘mergers’, I doubt many of the transactions in 2006 will be among pure SaaS providers seeking to combine their capabilities to broaden their portfolios and strengthen their competitive positions. I expect this stage of the M&A game occur in 2007.

Unbeknowst to me, three acquisition announcements were occurring this past week that I think confirm my forecast, if not accelerating it.

On Monday May 15, Infor–a provider of supply chain planning, enterprise asset management, relationship management, demand management, ERP, warehouse management, and business intelligence software–announced its acquisition of SSA Global, a provider of corporate performance management, customer relationship management, product lifecycle management, supply chain management and supplier relationship management software. Many industry analysts viewed this as simply a consolidation move by Infor, but it also gives the company a new, on-demand service delivery capability.

On Wednesday May 17, SAP AG announced it is acquiring Frictionless® Commerce, a privately-held, provider of supplier relationship management (SRM) software. Frictionless Commerce offers a mix of traditional, on-premises and new, on-demand services which will enable SAP to expand its mySAP SRM capabilities, especially in the SaaS area, and appeal to a broader assortment of small- and mid-size businesses (SMBs).

The next day, IBM announced it has reached a definitive agreement to acquire Rembo Technology, a privately held software company based in Geneva, Switzerland. Rembo’s software enables organizations to automatically install or upgrade operating systems on thousands of servers, laptops and desktop computers simultaneously. Strictly speaking, this isn’t a SaaS play but a broader move by IBM to strengthen its overall utility or “autonomous” computing capabilities.

In fact, none of these announcements explicitly stated that they were in response to the escalating demand for SaaS. However, all of these moves strengthen the acquirer’s SaaS capabilities, and will push other ISVs and systems vendors to accelerate their M&A strategies in the SaaS arena.

I also expect the major system integration, business process outsourcers and telecom carriers to enter the market by snatching up SaaS providers and enabling technology suppliers in the coming months.

One measure of the growing level of interest in Software-as-a-Service (SaaS) is the expanding number of forums focused on this movement.

Over the next two weeks, the SIIA Software Summit and Pacific Crest Securities’ On-Demand Conference will examine SaaS market opportunities and software industry challenges.

While I expect these software and investor events to be valuable, I’m really looking forward to IDG World Expo’s new user-oriented show in September, called SaaScon.

There are also an increasing array of webcasts, some that I’m privileged to be a part of. One series worth paying attention to is Credit Suisse’s “Mavericks vs. Microsoft”. The series kicked off this week with a fantastic discussion between Credit Suisse’s Jason Maynard and Patrick Grady, CEO of Rearden Commerce. Anyone who hasn’t heard Grady speak is in for a treat. You can here the archived session until May 18. Just call (800) 642-1687. Here are the upcoming sessions,

• Bill Coleman, CEO of Cassatt Inc.
  May 16, 2006 10:00am PST- Technology transition to service oriented architectures.
  Domestic (800) 340-6942, International (706) 679-7197, ID# 8870707
• Larry Augustin, Open Source Investor and Advisor
  May 25, 2006 8:00am PST – The adoption and rationale of Open Source software.
  Domestic (800) 340-6942, International (706) 679-7197, ID# 8870832
• Zach Nelson, CEO of NetSuite
  June 2, 2006 8:00am PST – On Demand application suites for the under served middle market. Domestic (800) 340-6942, International (706) 679-7197, ID# 8870953

Although it gained little industry attention, Microsoft demonstrated its chutzpah on May 1 by unveiling a platform and set of “tools and best practices” to enable other independent software vendors (ISVs) and hosting companies to jump onto the SaaS bandwagon. This announcement came even as Microsoft fends off criticism regarding the viability of its own software-as-a-service (SaaS) offerings.

According to the company, the Microsoft® Solution for Windows®-based Hosting for Applications Version 1.0 will provide ISVs “with the tools and guidance to design service-enabled software applications and facilitate user provisioning, performance monitoring, usage tracking, and reporting and service aggregation.”

Microsoft claims that its new solution will address four critical hosted application needs: uptime, service provisioning, security and management. Specifically, Microsoft is offering,

• Microsoft Operations Manager (MOM) 2005 to address the uptime needs.
• Microsoft Provisioning System to handle the business service management needs.
• Windows-based Hosting for Applications to automate the security update and patch management processes.

In addition, Microsoft is offering a Services Provider License Agreement (SPLA) on a monthly subscription basis with no upfront investment or commitment necessary from the ISV.

Microsoft claims that its solution “provides a comprehensive set of modular and tightly integrated components, scripts and guidance that enable them to build environments that are operationally efficient and highly scalable for delivering software as a service.”

Well, you have to give Microsoft credit for not being afraid to try to turn lemons into lemonade!

Even as the company is struggling to release its own SaaS alternative to its legacy applications–Microsoft Live!–it has the audacity to try and position itself as an enabling technology vendor in the SaaS market.

To give them their due, many of Microsoft’s database and development tools are being utilized by today’s SaaS providers to build their applications. But, to suggest that by offering some of the piece-parts for SaaS entitles Microsoft to position itself as a qualified platform provider and ‘best practices’ proponent is a stretch.

Adding to the bitter taste of Microsoft’s announcement is the ‘hosting’ terminology. While the term is still used by many ISVs to describe their SaaS solutions today, a growing number of knowledgeable users recognize the fundamental differences between the ineffective, hosted applications of the past and the more sophisticated, user-friendly, on-demand software solutions of today. Microsoft’s decision to use the hosting rather than software-as-a-service terminology may be an admission that its strongest suit is in the old guard business rather than today’s red-hot SaaS market.

Just take a look at THINKstrategies’ SaaS Showplace if you want to find a list of companies from A-Z that already have more viable enabling technology skills and solutions in each of the areas that Microsoft is targeting.

For instance, Aria Systems offers on-demand user provisioning and usage tracking solutions for a growing list of entertainment gaming companies, as well as a variety of service providers (xSPs). And, WrappedApps has a 30-day application conversion solution for ISVs. Even OpSource, who is quoted in Microsoft’s announcement, has far more expertise and experience to offer a portfolio of SaaS enablement solutions. (None of these companies are THINKstrategies clients.)

I don’t want to appear naive about this marketing gambit by Microsoft. This certainly isn’t the first time the company has tried to establish itself as a leader in a market segment where it was failing. And, Microsoft isn’t the only major vendor who has tried this ploy to capture mindshare and retain, if not gain marketshare.

And, putting aside any immediate indignation over Microsoft’s announcement, it’s good to add another important endorsement of the SaaS concept from a pivotal software player. In January, it was easy to criticize SAP’s meek entry into the SaaS market, but necessary to recognize how SAP’s entrance validated the SaaS movement. Today, we can easily question the substance of Microsoft’s announcement, but should again thank Microsoft for the endorsement and validation of SaaS.

However, if I were making the decisions in Redmond, I would have positioned this announcement differently.

Rather than simply promote my own questionable ’solutions’ and qualifications as a SaaS enabler, I would have borrowed a page from Salesforce.com and established an AppExchange-like ‘ecosystem’ of third-party SaaS enabling tools that would give Microsoft greater credibility in the industry, while winning Microsoft more allies and inroads into the SaaS marketplace.

Microsoft may still move in this direction. Until it does, Microsoft will have a long way to go to establish itself as a serious SaaS enabling technology vendor. Of course, most experienced IT professionals, as well as enterprise decision-makers, know better than to adopt any solution that is labeled Version 1.0!