THINK IT Services

This past week’s SaaScon event in San Francisco marked the first conference dedicated to educating end-users about the business benefits of Software-as-a-Service (SaaS).

The vendor response to the event was so strong, that the conference organizers added a track aimed at helping new and established, independent software vendors (ISVs) capitalize on the SaaS movement.

I had the privilege of helping to shape both session agendas, identify conference speakers and moderate many of the panel sessions as a member of the conference advisory board.

While there were some unanticipated audio/video problems due to poor hotel staff and ISV attendance problems due to local traffic, the attendees were nearly unanimously enthusiastic about the quality of the content.

The user-oriented sessions went beyond proselytizing about the virtues of SaaS to dig into the practical steps for successfully deploying this rapidly evolving software alternative in enterprise environments. Many of the sessions used a growing base of customer success stories to suggest industry ‘best practices’.

I moderated the morning keynote panel on emerging market trends that consisted of Ann Winblad, Founder and Partner of Hummer Winblad, a key venture firm in the SaaS market; Tod Loofbourrow, President & CEO, of Authoria, Inc., an on-demand talent management solutions vendor; and Robert Jurkowski, CEO & President, Intacct Corporation, an on-demand enterprise resource management solution vendor.

While Salesforce.com and trends in the customer relationship management (CRM) sector gets most of the attention in the SaaS market, I invited Tod and Bob to participate in the panel so they could educate the attendees about the large-scale deployments they’ve rolled out to their major enterprise customers and the shift they’ve seen in this segment of the market. Ann provided her own perspective on why her firm made early bets on the SaaS market and the widening array of SaaS business plans crossing her desk. One of her bets recently paid off well when Employease, an on-demand human resource management solutions company, was acquired in August by ADP.

I also moderated a panel at the end of the first day of the conference, entitled “Applying SaaS Principles to Meet Your IT Management Requirements.” This panel was composed of Gary Griffiths, V.P. Products, Webex Communications, Inc.; James Maiocco, Chief Executive Officer & Co-Founder, Klir Technologies; Ed Mueller, CMO, Everdream Corporation; and Jay Gardner, VP & General Manager of the On Demand Business Unit, BMC Software Inc.

This session delved into a rapidly evolving segment of the SaaS market, the IT management solutions arena. While the longer standing managed services market continues to struggle, vendors delivering IT management software services are quickly gaining attention from customers. This is because many customers are still reluctant to relinquish the responsibility for managing their operations to a managed service provider (MSP), but would be happy to leverage a service which eliminates the software deployment and administration hassles of traditional management solutions.

I had the privilege of helping to architect the ISV track of SaaScon on the second day of the event, and served as the master of ceremonies and moderator of each of the panel sessions. The goal of the one-day track was to discuss each of the lifecycle challenges facing ISVs–both new net-native ventures and legacy application vendors–seeking to deliver successful SaaS solutions. The agenda included sessions on,

• Selecting the Right Tools, Building Blocks, and Infrastructure for SaaS
• Packaging and Pricing SaaS to Create Competitive Advantage
• Lessons Learned about SaaS Support and Ecosystems from the Gaming Industry
• Overcoming the Data Integration and Migration Problem

SaaScon also generated a significant number of vendor announcements including,

• WebEx’s new Connect ecosystem initiative
• Pervasive and Eloqua’s data integration efforts

Most importantly, SaaScon gained the attention of the Software & Information Industry Association (SIIA) who has agreed to team up to co-locate their Software Strategy Summit with the SaaScon Spring Conference April 17-18, 2007 at the Santa Clara Convention Center.

Anyone who has followed the SaaS market over the past year knows that it is evolving at warp speed. Therefore, you can bet that it will have changed significantly by next April. So, be sure to put the Spring SaaScon conference on your calendar!

On September 12, AT&T announced it will acquire privately held USinternetworking, Inc. (“USi”), one of the early applications service provider (ASPs) pioneers, that has had a hard time maintaining a leadership position in a rapidly changing market.

Like Cognizant’s acquisition of AimNet Solutions earlier this month, this represents another transaction which is reducing the number of the original ASPs and managed service providers (MSPs) in the market. It also reinforces the trend among larger players seeking to expand their service portfolios via acquisition to become more strategic solution providers for their customers and channels for their partners.

Unlike the managed services concept which survived the dot.com bust and is now experiencing solid growth, the ASP model has never gained widespread acceptance for a number of reasons. In particular, ASPs positioned themselves as resellers of traditional software applications that are fundamentally flawed. These enterprise applications are often cumbersome to use and unable to fully leverage Internet connectivity. As a result, ASPs’ business benefits of accelerated application deployment without added the infrastructure investments were offset by the shortcomings of the traditional software applications they supported.

Aggravating the ASPs’ plight were the tremendous upfront investments they made in their service delivery infrastructures and showcase operations centers. This created tremendous cashflow problems for the ASPs that became compounded by the emergence of lower cost and more web-friendly software-as-a-service (SaaS) alternatives.

So why did AT&T decide to buy USi for 1.5-2x revenues?

It is hoping to retain a sufficient number of USi’s 150 enterprise clients in more than 30 countries to substantially expand its own hosting business. It also gains a stronger working relationship with USi’s independent software vendors (ISVs) including Ariba, Demandware, Microsoft, and Oracle/Peoplesoft/Siebel. And, it gains USi’s skilled support staff and facilities, as well as its experienced sales team.

Unfortunately, these ASP skills and relationships are quickly lossing their value in a world that is rapidly shifting to a SaaS model.

On September 5, 2006, Illinois Tool Works Inc. (NYSE:ITW) announced will acquire Click Commerce, Inc. (NASDAQ:CKCM), a leading provider of on-demand supply chain management solutions for a variety of worldwide industries.

The total value of the deal, including payment for outstanding stock options, will be approximately $292 million, a 33% premium over the closing price of Click Commerce’s shares at the time, and approximately 4x Click Commerce’s trailing 12 months revenue. This is a healthy premium compared to other recent software transactions.

This is the latest in a series of Software-as-a-Service (SaaS) providers to be acquired by established companies. In August, Employease was acquired by ADP, marking the beginning of the convergence of business services and SaaS. The ITW acquisition of Click Commerce represents the start of a new trend among specific sector leaders seeking to expand their portfolios via SaaS solutions.

While not a household name, ITW is a $12.8 billion, diversified manufacturer of highly engineered components and industrial systems and consumables. ITW has approximately 50,000 employees spread across 700 business units in 48 countries.

The fact that a company of this size is not only aware of Click Commerce’s on-demand solutions, but is attracted enough to them to acquire it, is a clear indication that SaaS is squarely on the radar screen of major corporations, as well as small- and mid-size businesses (SMBs).

Cynics could suggest that the escalating number of SaaS acquisitions by established companies is the same herding exercise we saw during the dot.com era. It is too early to tell if this latest round of transactions will be more successful. But, the tangible benefits which businesses are experiencing from SaaS are already far greater than the hypothetical ones promised by the over-hyped start-ups of the original Internet boom/bust.

If today’s acquirers can succeed in not killing the golden-goose in each of the new deals, they can further validate the practical, business benefits of SaaS, and accelerate its penetration into mainstream industry.

The total value of the transaction, including payment for outstanding stock options, will be approximately $292 million, a 33% premium over the closing price of Click Commerce’s shares at the time, and approximately 4x Click Commerce’s trailing 12 months revenue. This is a healthy premium compared to other recent software transactions.

The convergences of various forms of IT and business process services continues to accelerate.

After witnessing the merger of business services and software-as-a-service (SaaS) in August with the acquisition of Employease by ADP, the latest transaction to signal a new stage in the evolution of the IT services industry is Cognizant’s acquisition of AimNet Solutions.

This transaction is driven by the growing demand among customer organizations of all sizes for their strategic vendors to assume greater responsibility for both their application and infrastructure requirements.

Cognizant is a U.S.-based, offshore IT services company with strong applications development, integration, reengineering, consulting and business process outsourcing (BPO) skills. It is a leading provider of application services for large-scale providers.

AimNet Solutions Inc. offers a suite of managed and professional services aimed at helping a variety of small- and mid-size businesses (SMBs), as well as large-scale enterprises, with their IT infrastructure requirements. Overall, AimNet has over 80 direct customers across various industries, including ten channel re-sellers serving approximately 600 end-user companies.

This acquisition gives Cognizant a combination of remote and onsite application and IT infrastructure services to meet a fuller array of its customers’ needs and new channel relationships to expand its market opportunities.

Specifically, Cognizant gains a stronger, on-shore presence in the U.S. and can now deliver its remote IT infrastructure management services to North American clients via AimNet’s Holliston, MA-based network operations center (NOC). Cognizant can also capitalize on AimNet’s channel relationships with Sprint and Verizon to gain access to smaller customers and deliver a wider range of networking services to its larger customers.

AimNet, profiled by THINKstrategies in 2005, is one of a handful of independent full-service managed services providers (MSPs) that pioneered the managed services market during the dot.com era. The acquisition of NetSolve by Cisco Systems and SevenSpace by Sun Microsystems in 2004 marked the beginning of a new era of major vendors assuming the reins of the managed services market. But, Cisco has yet to determine how to fit NetSolve’s service capabilities into its product portfolio. And, Sun’s strategic challenges have overshadowed its growing array of remote support services powered by the SevenSpace acquisition. This has left the door open for a new generation of MSPs to enter the market. Yet, the major vendors are still trying to gain a foothold as well. In August, IBM bolstered its managed security services capabilities by acquiring Internet Security Systems (ISS).

In addition to giving Cognizant additional IT infrastructure management capabilities and a stronger U.S. presence, this transaction gives AimNet deeper pockets and a broader channel to market to serve large-scale enterprises worldwide.

Delivering a full suite of application and infrastructure services, both remote/managed and onsite/consulting, should be an attractive proposition for Cognizant’s customers. It should help the company broaden and tighten its customer relationships. However, scaling both its remote and onsite services to meet the end-to-end requirements of the companies’ mutual customers and channel partners will also be a significant challenge.

To accomplish this objective will require integrating the companies’ centralized monitoring capabilities; development, deployment and remote management staffs; and sales/marketing operations. This will require the integration of their respective systems, skills and corporate cultures. Having gone through my own acquisition experiences and hearing the war-stories of others in similar situations, it is more common for service-oriented mergers to fail than to succeed.

Fortunately, AimNet Solutions is a relatively small organization which should fit easily within Cognizant’s corporate operations. The test will be whether Cognizant will know how to fully leverage this acquisition within its larger corporate culture.