THINK IT Services

Continuing to push the envelope, Salesforce.com announced its new AppStore today, and boldly entered the on-line payment transaction management business.

Building on the momentum of its successful AppExchange platform and clearinghouse for Software-as-a-Service (SaaS) providers, Salesforce.com has taken the next step in becoming an end-to-end mechanism for independent software vendors (ISVs) looking for help developing and marketing their on-demand solutions.

In October, Salesforce.com unveiled a new Apex developer’s toolkit at its Dreamforce conference. Apex is aimed at making it easier for customers and partners to customize Salesforce’s applications.

Now, Salesforce.com is making it easier for its AppExchange partners to sell their solutions via the web. The new AppStore will include a two-tier referral program and automated checkout capabilities. ISVs can choose between a standard or premium referral service. The standard service includes search engine optimization and other marketing services for a 10 percent referral fee that is paid to Salesforce.com on all transactions closed via AppExchange. The premium referral service includes additional custom marketing services for a 25 percent referral fee. The AppStore Checkout capability will include online ordering, billing, invoicing and collection services for an ongoing 20 percent commission.

Some ISVs may cringe when considering whether to pay up to 45 percent of their AppStore-related revenue to Salesforce.com for the privilege of employing these new services during their first year in the program. However, THINKstrategies believes many will see the AppStore as a valuable new channel to market which eliminates the hassles of building and administering their own online transaction and marketing capabilities. These ISVs will also be attracted to the broader base of potential customers which Salesforce.com can provide which can generate net new revenues.

There is still reason for some ISVs, as well as many of Salesforce.com’s competitors to cast a wary eye toward this latest initiative. Rather than rely on a third-party payment program to serve its needs, Salesforce.com recognized that it will be in a stronger position by creating its own online transaction service. Of course, its partners must weigh how ‘locked in’ they are willing to be by taking advantage of the new AppStore capabilities. And, Salesforce.com’s competitors must determine whether they need to match the new online merchandizing capabilities in order to continue to attract partners and customers.

Skeptics have challenged the logic of Salesforce.com’s every move since its inception, and the company has succeeded in proving them wrong every time. THINKstrategies believes Salesforce.com will make the AppStore a winner also and force others to respond to its rule-changing maneuvers.

On November 30, 2006, Business Objects announced its intention to acquire Nsite Software, Inc., a software-as-a-service (SaaS) provider of channel, quote and proposal management applications that has been shifting its focus towards developing a library of enabling tools for SaaS developers.

Like a growing number of SaaS providers, Nsite has been migrating from a product-centric to a platform orientation. This shift has been inspired by Salesforce.com’s success with its AppExchange initiative which has clearly shown a strong platform can also become a magnet for a potent partner ‘ecosystem’ that can exponentially expand a SaaS provider’s market reach.

Business Objects’ acquisition of Nsite enables the business intelligence software vendor to leverage Nsite’s on-demand application platform and engineers to accelerate its internal development efforts. It also gives Business Objects access to approximately 27,000 Nsite subscribers.

Like many established, publicly-traded independent software vendors (ISVs), Business Objects has been contending with numerous challenges as it attempts to join the SaaS movement. In order to become a successful SaaS provider Business Objects must rearchitect its existing applications and recast its workforce to become more service-oriented as it restructures its revenue recognition systems to accommodate the pay-as-you-go SaaS model. This is a steep climb for every major ISV.

In order to overcome these obstacles, a growing number of established ISVs will be following Business Objects and acquiring promising SaaS providers. The acquisitions will allow them to accelerate their development efforts and expand their customer base. In Business Objects’ case, the Nsite gives it tools and skills to enhance its broaden its on-demand business intelligence solutions beyond crystalreports.com. Nsite’s tools and relationships will also give Business Objects an opportunity to build an ecosystem that will strengthen its position as a business intelligence solution provider.

However, the IT industry’s track record of success isn’t very good when it comes to acquisitions. The most infamous example in the on-demand arena was Siebel’s failed acquisition of UpShot, Inc. As a veteran of more than one acquisition, I can talk from direct experience about how the conflicting egos and economics can get in the way of success when it comes to acquisitions. Ironically, the same dynamics which drove Business Objects to acquire Nsite to accelerate its on-demand business could just as easily conspire to deny it success.

(Ken Rudin, the founder and CEO of business intelligence SaaS provider LucidERA, can speak with even more authority about the specifics of the Siebel/UpShot debacle since he was in the middle of that transaction.)

On the positive side, the Business Objects acquisition represents another validation of the rising tide of the SaaS movement. The company has already made a significant commitment of marketing dollars to build a presence in the SaaS market, serving as a major sponsor at SIIA events and Salesforce.com’s Dreamforce conference. The challenge will be for Business Objects to nurture rather than smother its new Nsite assets. Regardless of the success of this specific acquisition, you can bet on more before year’s end and in 2007.

Some industry observers and independent software vendors (ISVs) suggest that Software-as-a-Service (SaaS) is just another way of delivering software. They use this argument to discount the significance of the SaaS movement and suggest that delivering software as a service will become commonplace in a few years.

What these observers and vendors overlook is the structural impact this trend will bring to more than just the software industry. As a consequence, traditional companies will be forced to redefine how they look at software and services. In fact, as I suggested in a previous blog we are already seeing a breakdown in the line of demarcation between the software and business services industries.

The first indication of this phenomena came in August when ADP acquired software services company Employease. This deal brought together ADP’s well-known payroll services with Employease’s less-known, but rapidly growing, on-demand human resource management software services. ADP followed that acquisition with another SaaS vendor purchase in October of VirtualEdge Corporation, a provider of recruiting and talent lifecycle management solutions for HR organizations.

Following ADP’s example, Intuit Inc. acquired Digital Insight Corporation, a leading provider of online banking services, on November 30. The acquisition enables Intuit to move beyond simply supplying financial management software to delivering online banking services to millions of small businesses and consumers. As a result of the acquisition, Intuit will now be able to serve over 5,000 financial institutions, almost 25 million consumers and 7 million small businesses.

The acquisition reshapes the banking industry by recasting one of the most popular software vendors into a potent new, online banking solutions provider. It also clearly proves that SaaS is more than just another way to deliver software. It is a powerful mechanism that can fundamentally change the dynamics of whole industries.

One of the common misconceptions about Software-as-a-Service (SaaS) is that it can’t be easily integrated with legacy applications.

While this myth has been quietly disproved by various SaaS players over the past year, one of Salesforce.com’s latest initiatives lends a louder voice and provides a more powerful proof-point that SaaS/legacy application integration should no longer be a barrier to success for organizations who want to migrate from on-premise to on-demand software.

On November 27, 2006, Salesforce.com unveiled its latest innovation, ApexConnect, a new set of on-demand integration tools that build on the success of its AppExchange partner program and the promise of its new Apex development platform.

ApexConnect adds a new ConnectOut feature to the Apex development platform which permits the industry’s first on-demand outbound messaging API. Salesforce.com has kicked off the ApexConnect initiative with a new ConnectOracle API for integrating Salesforce with Oracle 11i, historically one of the biggest integration challenges for major enterprises.

(The ConnectOracle API also represents an interesting new chapter in the subplot between Oracle, Salesforce.com and NetSuite. The founders of the two on-demand software companies share a common lineage as co-workers at Oracle. Marc Benioff of Salesforce.com has relished his role as an industry rebel and the black-sheep of the Oracle family, while Evan Goldberg at NetSuite has maintained a closer working relationship with Oracle than his renegade cousin. While ConnectOracle API makes it easier for Salesforce.com and Oracle to co-exist, it eliminates Oracle integration advantage NetSuite has promoted and further agitates the personal dynamics between these personalities.)

Salesforce.com is also adding a new ApexConnect category of integration partners to its AppExchange to encourage third-party adoption of its new tool set and to foster third-party services to help enterprises leverage the new integration tools.

The ApexConnect integration capabilities is the latest manifestation of Salesforce.com’s multi-tenant architecture. They are also the most recent and strongest example of the determination of the SaaS movement to knock down the practical and psychological barriers which continue to inhibit many enterprises from adopting on-demand software.

While the proportion of organizations joining the SaaS movement and adopting on-demand software is rising, a quarter of the respondents to a recent THINKstrategies SaaS survey in conjunction with Cutter Consortium are still hesitant to make the move because they are not convinced SaaS can be customized to meet their corporate requirements. Customization and integration often go hand-in-hand. (Contact me if you’d like to learn more about THINKstrategies’ latest SaaS survey.)

THINKstrategies expects Salesforce.com and a rapidly expanding array of other SaaS players to help a rapidly growing population of customers overcome these obstacles in 2007.