THINK IT Services

With the Software-as-a-Service (SaaS) movement becoming generally accepted among organizations of all sizes, a growing number of SaaS vendors are seeking to differentiate themselves by creating on-demand solutions specifically designed to address the unique requirements of particular industries or vertical markets.

THINKstrategies’ SaaS Showplace includes nearly 600 company listings by industry. Many of these companies are simply targeting specific industries rather than offering industry-specific solutions. However, a growing number are designing their on-demand solutions to cater to the specific needs of targeted industries.

The shift in attention is timely according to THINKstrategies’ latest SaaS survey in conjunction with Cutter Consortium. In the second installment of our three-part series on the findings of this survey we will discuss how a substantial proportion of the survey respondents are either currently using industry-specific SaaS solutions or considering them.

Leading SaaS vendors, such as Salesforce.com and NetSuite, have recognized the growing opportunities for industry-specific SaaS solutions. NetSuite launched its SuiteFlex ecosystem to respond to this opportunity, and Salesforce.com recently followed suit by expanding its AppExchange to encourage vertical market solutions.

Another indication of the growing focus on industry-specific SaaS solutions is the entry of venture capital (VC) funding for industry-specific SaaS vendors. A recent example is Procore, a SaaS vendor focused on the construction industry, which announced that it had completed its Series B financing led by Great Pacific Capital.

This same phenomena is also emerging in the managed services sector. In contrast to the SaaS trend, overall market acceptance of managed services has been slower for a variety of reasons, so managed service providers (MSPs) are attempting to stimulate greater demand by making their services more appealing to specific market segments.

A pioneer in industry-specfic marketing of managed service solutions is Perimeter eSecurity, previously known as Perimeter Internetworking. Perimeter began as a full-service network service provider, but found particular acceptance of its security-oriented services among community banks. It decided to focus nearly all of its sales and marketing resources on the community banking sector, and today is the dominant player in that market.

Through a series of acquisitions–most recently Message Secure, a managed security services provider (MSSP) focused on financial institutions and other businesses in the U.S.–and alliances with Internet Service Providers (ISPs), Perimeter has expanded into other segments of the market.

I think the verticalization of the SaaS and managed services markets will be one of the major trends in 2007.

Although any of the following news items could warrant an entire posting to delve into their individual implications, time only permits a quick assessment at this stage. Contact me if you’d like to discuss them in greater depth.

Salesforce.com’s Winter ‘07 Extravaganza: Once again Salesforce.com (SFDC) has exceeded expectations. The company had promised to release its new Apex development toolkit at this time, but at its Winter ‘O7 event SFDC added a few more features and new initiatives to extend its leadership in the Software-as-a-Service (SaaS) market.

• The Apex now permits customers and developers to more easily and extensively customize the SFDC user interface and reconfigure the on-demand application templates. The new development toolkit also permits extended data model customization and workflow modifications.
• AppExchange is being expanded to focus on vertical market applications. Building on its tremendous first-year success focused primarily on horizontal applications, SFDC is now encouraging its AppExchange partners to develop vertical market solutions aimed at specific industry requirements. This will make the on-demand applications more relevant to a broader population of potential customers. It will also further frustrate NetSuite who has been trying to keep pace with SFDC by focusing on vertical market applications via its SuiteFlex integration platform. SFDC claims it already has over 100 vertical market applications ready to go.
• SFDC also unveiled a new Call Center Edition of its application which supports computer telephony integration (CTI), integrates with softphone capabilities and permits screen pop-up records. The new application will integrate with Cisco, Alcatel, Nortel, Avaya, Genesys, Pandora Networks and Five 9 platforms.
• Further demonstrating the enterprise appeal of SFDC’s on-demand applications, the company announced that it had signed new agreements with Ashland, Plantronics, P&G, Baker Hughes, UGS, Dupont, Symantec, Kaiser Permanente, The Hartford and Qualcomm in the last quarter.

Cognos joined the SaaS movement this week by acquiring Celequest. This move follows Business Objects’ purchase of Nsite in November. It is another example of incumbent software vendors (ISVs) trying to buy their way into the on-demand marketplace.

Unlike Business Objects’ decision to acquire a net-native player, Cognos has chosen to purchase a hybrid vendor. Celequest has gained attention with its Lava dashboarding capabilities because it is delivered in either an appliance or SaaS form. However, Celequest is still dealing with many of the same operational issues facing other ISVs. It is still supporting a traditional product portfolio and even its new Lava solution requires considerable professional services help upfront to be properly deployed by customers.

Anyone knowledgeable about the SaaS model will tell you that it is a tough balancing act to support traditional on-premise and new on-demand applications simultaneously. It places a strain on everyone from R&D and marketing to sales and support. It requires dual development, go-to-market, delivery and financial models, adding inefficiencies and complications to day-to-day operations.

So, while the Celequest acquisition may move Cognos into the SaaS market, it will take them extra time to become an impact player.

Meanwhile, Verizon Business Data Center Services is beginning to assert itself as a player in the SaaS market. The division of Verizon Communications announced a agreement this week to support NOW Solutions’ new emPath service. NOW Solutions is a provider of human resource management, payroll and benefit administration services. EmPath is a new web-based version of its software services.

Verizon will be providing the “ping, pipes and power” for EmPath, including the carrier-class data infrastructure, redundant power supplies and network connectivity, physical and data security, and 24/7 monitoring and management.

Verizon’s data center and SaaS enablement capabilities come from amalgamation of Verizon’s past acquisitions and internal resources. In 2006, Verizon’s Internet colocation centers, known as Premium Data Centers. received Statement on Auditing Standards No. 70 (SAS 70) certification from Ernst & Young LPP.

These three announcements in the past week are added proof of the accelerating growth of the SaaS market and the rapid changes underway in the competitive landscape. Contact me if you’d like to discuss the implications of these announcements further.

I’m pleased to add THINKstrategies to the burgeoning list of podcast producers.

Our focus initially will be on the Software-as-a-Service (SaaS) marketplace, but we hope our podcast series will expand to encompass the entire landscape of rapidly changing IT and business services.

Our goal is to educate and evangelize about the business benefits of today’s exciting new SaaS and other on-demand solutions, such as utility computing and managed services, as well as examine ways in which customers and solution providers are innovatively leveraging more traditional services to achieve their business objectives.

Our first podcast focuses on the challenges surrounding the metering and billing for SaaS solutions, especially in complex enterprise environments. In this podcast we talk with Conor Halpin, the founder and CEO of LeCayla Technologies, a Irish company which has developed unique methods to track software utilization and enable organizations to more effectively charge for software services. Click here to listen.

I hope you find this podcast informative and worthwhile. Please sign up for our new RSS feed to keep informed of future podcasts. Also, contact us if you know of innovative companies and services which deserve our attention and broader visibility in the market.

Cisco Systems’ announcement that it will acquire IronPort Systems, Inc. of San Bruno, CA, on January 4, 2007, could add a new dimension to the networking leader’s arsenal.

IronPort is more than just a leading provider of messaging security appliances that combat spam and spyware. It continuously updates its appliances via a service delivery capability which gives Cisco a new managed security services capability.

Managed security services (MSS) have grown in popularity over the years as the rate of new security threats has escalated. Historically, organizations have had to dedicate their inhouse staff to the endless task of continuously battling the latest security threats. Now, an increasing proportion of organizations, both corporations and government agencies, are recognizing that it makes more sense to enlist the help of specialized firms with greater security expertise and experience to perform this function. This permits the enterprises to redirect their limited inhouse resource toward more strategic, business-oriented responsibilities.

According to a recent THINKstrategies survey of 550 IT professionals, conducted in conjunction with Business Communications Review and CMP, found that over a quarter (26%) are already using a MSS and another 20% are considering one.

The rapid growth of MSS has attracted an expanding array of players to the market via acquisitions of specialized managed security service providers (MSSPs) including Symantec who acquired @stake, Verisign’s purchase of Guardant, IBM’s acquisition of Internet Security Systems (ISS) and BT’s recent acquisition of Counterpane.

These acquisitions also show how a growing number of traditional, product vendors are also recognizing that they need to expand their portfolios to more fully satisfy their customers’ changing needs. Rather than simply accept a rapid response to problems, customers today expect their vendors to help them mitigate the risks of issues arising that can disrupt their business operations.

In response, nearly every vendor is offering a broadening set of managed services. IBM is now offering remote desktop and back-up services to go along with its managed security services, as is HP. EMC is offering remote storage services to complement its MSS. Many of these companies have also entered the market via acquisition.

In the networking arena, Lucent/Alcatel, Avaya and Siemens are all offering a variety of managed services, especially around IP communications. In addition, all of the service providers (xSPs) and many value-added resellers (VARs) have added managed services to their portfolios.

The managed services business is also being fueled by the parallel growth of the Software-as-a-Service (SaaS) movement. Just as IT professionals are tired of the day-to-day hassles of managing IT, they are equally fed up with the frustrations associated with deploying and administering traditional software applications, including management software packages.

This has opened the door for a new generation of IT management vendors with SaaS solutions to enter the market, such as Klir Technologies. Even Microsoft is escalating its managed service and SaaS efforts to respond to escalating customer demands for more reliable and secure operating systems and business applications.

The rapid rise of managed services and SaaS has not gone unnoticed by Cisco. It acquired NetSolve, a pioneer in the managed services market, in 2004. However, Cisco has yet to rollout any managed services of its own as a result of that acquisition.

Part of Cisco’s hesitancy to unveil a set of managed services is its reliance on its channel partners to sell and support its products. Rather than create a potential conflict with its partners by offering its own set of managed services, Cisco has used the NetSolve transaction to better understand the managed services business, so it can better support its xSP and VAR partners’ managed services efforts.

While Cisco may be more knowledgeable about the nuances of the managed services business now, it has also been slow to produce a clear, managed services strategy. With the IronPort acquisition, Cisco not only fortifies its security capabilities, it also strengthens its managed service delivery capabilities.

The representatives of IronPort I’ve talked to believe this acquisition will inspire Cisco to finally support its own set of managed services. While I believe these services will be primarily sold and delivered through Cisco’s channel partners, I expect many of Cisco’s major customers to demand that Cisco also sell and deliver it directly to them as well.

You can find a listing of MSSPs on THINKstrategies’ Managed Services Showplace and SaaS-oriented IT management solution providers on our SaaS Showplace.

The start of a new year is always a good time to pull out the crystal ball to anticipate what’s in store over the next twelve months. Here’s what I foresee for the Software-as-a-Service (SaaS) and Managed Services markets.

SaaS Goes Mainstream

In many ways, I firmly believe SaaS achieved mainstream status in 2006 because an increasing proportion of individuals and businesses were willing to give SaaS a try to satisfy their day-to-day software needs.

Much of the momentum has been driven by the explosion of on-demand, consumer-oriented services. As individuals have comfortable taking advantage of on-demand audio, video, storage and security services in their personal lives, they are also beginning to expect the same ease of use and economic advantages in their professional, work lives.

Over the course of the past year, 64% of the people visiting THINKstrategies’ SaaS Showplace who chose to participate in our quick poll stated they view Saas as essential to their operations. THINKstrategies’ second annual SaaS survey, in conjunction with Cutter Consortium, conducted this past fall, found that the percent of survey respondents considering SaaS has jumped from 34% in 2005 to 43% in 2006.

Over a third of the survey respondents reported they are considering SaaS to replace their existing legacy applications–a statistic which should send shivers down the spines of established independent software vendors (ISVs). The remainder of the survey respondents are considering SaaS to address unmet needs.

I think one of the greatest drivers of accelerated growth in the SaaS market will be the emergence of a vast set of brand-name, global corporations who are already using SaaS applications and will be willing to talk about their experiences in 2007. These customer success stories will lend support to the business benefits of SaaS and encourage many companies who have been apprehensive about the pitfalls associated with SaaS to give it a try.

Managed Services Gain Acceptance

The managed services will also experience significant growth in 2007, albeit well below the rate of the SaaS market.

Nearly two-thirds of the visitors to THINKstrategies’ Managed Services Showplace believe managed services are essential to their operations. A recent survey we conducted, in conjunction with Business Communications Review, of 550 IT professionals and business executives found that approximately 40% are using one or more managed services.

Additional growth will be driven by greater recognition among IT and business decision-makers that many mundane IT management functions can be offloaded or ‘out-tasked’ to managed service providers (MSPs). This permits organizations to redirect their limited internal IT staff to more strategic or valuable activities. As the number of customer success stories grows, the confidence level among potential customers will also rise.

However, managed services still lacks some of the key drivers which are fueling the extraordinary growth in the SaaS sector:

1. Managed services are inherently more risky than SaaS solutions. IT professionals see managed services as a threat to their jobs, while business managers are apprehensive about relinquishing responsibility for all or part of their IT operations to a third-party.

2. MSPs have a harder time packaging free trials of their services like those offered by SaaS vendors. This prevents MSPs from leveraging the same ‘try and buy’ sales engine which has been instrumental to the SaaS success.

3. It is more difficult for many traditional IT suppliers to shift their operations and corporate cultures from a product-centric to a services-oriented model.

4. The managed services market lacks a clear leader and flamboyant evangelist like Marc Benioff of Salesforce.com in the SaaS sector. As a result, there is no model for success or higly visible spokesperson advocating on behalf of the business benefits of managed services.

Nonetheless, I believe the managed services market will continue to mature.

You can find more of my views regarding the outlook for on-demand services in 2007 in my latest NetworkWorld commentary.