THINK IT Services

On November 14, Dell Computer announced its intention to acquire Scottish-based ACS in a deal which signifies that Dell is serious about expanding its business beyond hardware into services.

Headquartered in Glasgow, ACS was founded in 1990 and now has operations in Edinburgh, London, Paris and India. The privately-held company generated pre-tax profit of $3.7 million on revenues of $21.88 million in 2005. It boasts a staff of 200 and is the largest Microsoft partner in Scotland.

Dell has been increasingly pressured to match IBM and HP’s substantial service offerings in order to compete for corporate business. Historically, Dell has preferred to depend on third-parties, such as Unisys, to deliver its on-site services so it can stick with its low-cost product strategy. The acquisition of ACS represents an incremental step in the direction of delivering more in the way of services as customers demand greater support from their strategic suppliers.

As someone who suffered through an acquisition of a service company by a product vendor, I can tell you that the integration process isn’t easy. Service and product companies approach the market entirely differently. They are built around differing business processes. They foster differing corporate cultures. And, they measure themselves on differing business metrics.

I was a part of Lucent’s failed attempt to integrate International Network Services (INS) into its product-centric culture. I also watched IBM take nearly a decade to convert itself from a product-centric to a services-oriented business model.

Dell has wisely chosen to acquire a relatively small company which should be easy to assimilate into its operations. I suspect that it will make similar acquisitions in other parts of the world and focused on other segments of the service business to flesh out its support capabilities.

However, I don’t think Dell will try to replicate IBM and HP’s full service model. This would fundamentally disrupt Dell’s corporate structure and would turn its service partners into competitors.

It is popular in the Software-as-a-Service (SaaS) movement to berate the established independent software vendors (ISVs) as doomed to inevitable extinction. The ISVs face overwhelming challenges as they attempt to convert their on-premise applications and entrenched corporate cultures into on-demand, service-oriented, net-enabled companies.

The established ISVs have become easy targets for Marc Benioff at Salesforce.com, “The End of Software” author Tim Chou, and a wide array of lesser-known industry pundits. In a world in which the difference between right and wrong becomes more indiscernible everyday, software professionals and industry “experts” are still happy to pick sides in an escalating argument over who will win or loss in the rapidly evolving on-demand bazaar.

While I admit to fanning the flames a bit by pointing out in my writings and talks the major challenges facing established ISVs–rearchitecting their software, restructuring their revenue models and rebuilding their corporate cultures–I’m proud to say that I’ve never tried to turn the industry into a battleground of software zealots.

So, after taking plenty of abuse over the past 9-12 months from the SaaS upstarts and their compatriots, this week may have marked the beginning of a comeback for the encumbent ISVs.

Microsoft’s CEO, Steve Ballmer, acknowledged at the company’s annual shareholder meeting, “We believe this shift [toward SaaS] is the most important technological transformation during the next decade.” He went on to say Microsoft’s online services group has become the “fourth core” area within the company, in addition to desktop software, computer server software and entertainment.

Ballmer’s words may have a hollow ring to many cynics who think the company is just tying to buy time as the SaaS market quickly evolves. I’ve even criticized the company in the past for faking a response to the SaaS movement. But, a recent series of events, conversations and initiatives have convinced me that Microsoft is making serious headway in the SaaS market.

My more positive impression of Microsoft’s SaaS initiatives began to take shape after Microsoft’s partner conference in Boston. Attendees told me that it was one of the best events they’d attended in years and they were genuinely turned on by Microsoft’s new offerings.

Then I heard about Microsoft’s initiative to develop and deliver private label versions of its new Live offerings for telecom carriers and major hosting companies.

An overview presentation by Cliff Reeves, a strategist in Microsoft’s ISV partner program, at the SIIA On-Demand Conference painted an even clearer vision of the company’s go-to-market strategy.

The company’s new licensing policies that encourage SaaS start-ups and web hosting companies to leverage Microsoft technologies has cemented my change of heart.

Each of these efforts alone could be discounted for a variety of reasons. But, all of these initiatives, and others, taken together demostrate that Microsoft is not turning inward to determine how to survive the onslaught of the SaaS movement. Instead, Microsoft is unleashing its people to respond from every angle and reassert itself as a pivotal player in the brave, new world of on-demand services. In case there is any doubt, CIO Magazine’s latest cover-story is entitled, “Inside Microsoft’s plan to dominate the Web 2.0 enterprise.”

Adding moral support to Microsoft’s efforts, Oracle announced this week that its on-demand services surpassed 1.7 million users. Ironically, Tim Chou helped to launch Oracle’s on-demand business before becoming an independent consultant and staking his reputation on the failure of old-guard ISVs. Now, Oracle is serving 2200 corporate customers and experiencing 50% revenue growth in its on-demand business which includes hosted Siebel and PeopleSoft solutions.

I recently saw a high school production of Les Miserables. If you don’t know the play, it follows the initial (albeit failed) uprising of the French Revolution. The parallel to today’s SaaS revolution is striking. Anyone who thinks we’ve seen the end of the software titans, will be surprised by the staying power of the entrenched players.

The past week’s SIIA On-Demand Conference served as another opportunity for the rapidly evolving Software-as-a-Service (SaaS) industry to take stock of where it stands and where it is headed.

One indication of the rapid maturation of the SaaS movement was the lack of discussion or debate about how to define what SaaS stands for. In fact, Brian Jacobs of Emergence Capital–an active investor and proponent of SaaS companies–skipped a slide in his presentation during the first morning of the two-day conference which included a definition of SaaS.

Just as the debate of definitions has pasted, so too has any dispute over whether the SaaS market is for real. The major systems vendors–IBM and HP–lent their perspectives about the forces shaping the SaaS business. The general manager of Microsoft’s .NET platform strategy, Cliff Reeves, outlined how his company is responding to escalating demands for SaaS solutions.

And refreshingly, the conference attendees were spared the usual assortment of industry analyst forecasts projecting exponential growth rates. Instead, we heard from Jason Maynard of Credit Suisse why Wall Street is beginning to get onboard the SaaS bandwagon…to capitalize on the greater profitability and predictability of the SaaS annuity model. We also heard from boardroom powerhouses Accenture and McKinsey who are targeting both the enterprise customer demand and software vendor supply side consulting opportunities. On one of two panels I moderated during the conference, McKinsey’s Abhijit Dubey reported a new survey by his firm recently found that the proportion of CIOs considering SaaS applications has jumped from 38% a year ago to 61% today.

Although some of the keynote sessions were light on substance, a wide array of SaaS specialists and established independent software vendors (ISVs) spoke in keynote panels and breakout sessions about the practical realities and key challenges facing the SaaS sector.

I was pleased to chair a panel on the “Future of On-Demand” which included industry veteran Ken Rudin of LucidERA, TripleTree investment banker Chris Hoffman, long-time ZDnet journalist/cynic Mike Vizard and Dubey of McKinsey that generated a few sparks over the optimal go-to-market and exit strategies for SaaS providers. This discussion carried over to a CEO panel I moderated on the second day of the conference which included John Dillon of Navis, Michael Gregoire of Taleo, Mark Hoffman of Everdream, Subrah Iyar of Webex, and Treb Ryan of OpSource. The relatively tame session turned more entertaining when Treb Ryan proclaimed that the “channel is dead in the SaaS world” only to be immediately debunked by Mark Hoffman and Subrah Iyar whose companies rely heavily on channel partners.

With the exception of a lofty presentation by IBM on the global forces shaping the SaaS market and a light-weight talk by Sabrina Horn of the Horn Group regarding the basic principles and best practices for SaaS PR (in case you didn’t know, “don’t be dishonest”), the SIIA event was packed with practical advice and perspective right through the final sessions about retaining/growing customers and pricing model alternatives.

The composition of the attendees also offered an additional insight about the expanding reach of the SaaS market. They included representatives from big companies as diverse as networking behemoth Cisco Systems and offshore business process outsourcer (BPO) Infosys mingling with a wide array of aspiring SaaS players.

They all gained a clear sense of where the SaaS market stands today and the many paths available for future growth. Most importantly, they learned that the SaaS movement is quickly mirroring the overall software industry. As a result, there is no one model for success. Instead, success will be determined by effectively satisfying specific customer requirements and expectations with a scalable service delivery mechanism and corporate sales/marketing engine.

The SIIA will be posting a video archive of the event soon. Keep an eye on their website at www.siia.net.