THINK IT Services

SAP announced today that Shai Agassi, president of its product and technology group and architect of SAP’s Netweaver software, is leaving the company to pursue his interests in alternative energy and climate change.

While these are honorable reasons to move on, it is very likely that his departure was also prompted by the overwhelming challenges associated with migrating SAP’s software to an on-demand, Software-as-a-Service (SaaS) model, as well as some executive suite politics.

In addition to his broader responsibilities, Agassi was the chief architect and senior champion for SAP’s on-demand efforts which were launched in February, 2006. He joined the company in 2001, when SAP acquired his company TopTier Software. He was also among several SAP executives considered a potential successor to Chief Executive Henning Kagermann, who recently had his employment contract extended through 2009, creating a bottleneck among his lieutenants, including Agassi.

Agassi’s departure compounds SAP challenges fulfilling its promise of delivering on-demand solutions which keep pace with escalating customer demands. Although the company announced that his position will be filled by a team of people, Agassi had the greatest cache and credibility inside and outside the company to drive SAP’s on-demand efforts.

His departure certainly raises enough concerns about SAP’s on-demand strategies and services to open the door for Salesforce.com and other SaaS vendors to steal away customers seeking on-demand solutions in the areas that SAP has traditionally served.

Although it is not a SaaS vendor, Oracle Corporation will also capitalize on Agassi’s departure and intensify its campaign against SAP which has included its acquisitions of PeopleSoft, Siebel Systems and most recently Hyperion.

Agassi’s departure is also the latest example of executive defections among legacy enterprise application companies seeking to migrate to an on-demand services model. Tim Chou, the former head of Oracle’s hosting business, wrote the book on the challenges facing traditional software companies in the face of the on-demand movement, called “The End of Software.” Ken Rudin, a veteran of Siebel Systems’ on-demand efforts, is now the founder and CEO of LucidERA.

Executive defections from entrenched players to promising start-ups aren’t new. In this latest example it will be interesting to see if Agassi pursues his noble interests in alternative energy and climate change, or leverages his on-demand experience and joins a true SaaS vendor. Or, if SAP uses this as an opportunity to acquire a SaaS vendor to obtain a new leader for its on-demand efforts.

With the recent acquisition of WebEx by Cisco Systems, speculation has been rising that Salesforce.com may be the next major Software-as-a-Service (SaaS) company to be bought. You can tell folks that you heard it from me first that the purchase will be made by Oracle within the next 18 months.

No, I don’t have any inside information. But, I can read the tea leafs and they tell me that Salesforce.com is too attractive for an even bigger player not to buy it. The software services company has over 650,000 subscribers and added 90,000 new subscribers during the most recent fiscal quarter ending in January 31.

While profits have slipped due to the company’s investments in new offerings and service infrastructure, the outlook for Salesforce.com’s services has never been better. Not only is customer receptivity growing rapidly, but Salesforce.com’s ability to penetrate new markets and gain a greater share of its current customers’ end-users and budget is also strengthening.

For instance, Salesforce.com’s deal and average installation size are both growing. The company is rolling out a new series of vertical market solutions, starting with on-demand financial services which could disrupt Bloomberg’s stronghold in that sector. And, Salesforce.com is also offering end-to-end, on-demand software development, delivery and distribution support to other SaaS vendors via its AppExchange, AppStore and Apex.

With Marc Benioff serving as its chief evangelistic officer (“ceo”), Salesforce.com is not only the largest independent SaaS vendor by far, it is also the undisputed innovator and spiritual leader of the SaaS movement.

Cisco Systems’ acquisition of WebEx clearly demonstrated that SaaS, and more broadly the idea of subscription services, is becoming a priority among the major technology vendors. Not only did Cisco buy the second largest player in the SaaS sector, it also paid a healthy premium to buy its way into the SaaS marketplace.

Oracle has shown a penchant to do the same thing. Its acqusitions of Siebel, PeopleSoft and, most recently, Hyperion show that the company will use its enormous cash reserves to add more applications to its portfolio, and eliminate competitors in the process.

Larry Ellison seems to take particular pleasure in acquiring companies founded or headed by former Oracle executives, Siebel and PeopleSoft being the most obvious examples. As the industry’s reigning Machivellian leader, Ellison relishes the opportunity to steal away software companies which threaten Oracle’s supremacy and are led by his numerous proteges.

Salesforce.com is such a company and Marc Benioff is one of those proteges. And, it doesn’t hurt that Salesforce.com is headquartered near Oracle’s home base and the company’s operations are built on Oracle databases.

While the upfront cost of acquiring Salesforce.com may be extravagent, the long-term benefits could be enormous. THINKstrategies’ research clearly shows that the SaaS movement isn’t a momentary fad, but a fundamental seachange in the way organizations of all sizes are acquiring software functionality to meet their business requirements. Although standalone SaaS companies must face significant financial hurdles ramping up a sufficient revenue stream from subscriptions, Salesforce.com has crossed this chasm and is becoming a high-growth annuity revenue and profit machine.

Others have speculated that Google will be the buyer of Salesforce.com. This may be true, but I doubt it. However, I think it is likely that Google will take a run at Salesforce.com when Oracle does make a bid for the company. And, I wouldn’t be surprised if Google wins a tug of war with Oracle to gain control of Salesforce.com. It has plenty of money. It has a similar corporate culture and executive leadership committed to changing the old rules. It could also leverage Salesforce.com’s application portfolio, service delivery infrastructure and AppExchange partner ‘ecosystem’ to gain new channels to market to corporate customers.

Don’t get me wrong, I would hate to see Salesforce.com be acquired. It has been instrumental in accelerating the growth of the SaaS movement. An acquisition by Oracle, or someone else, would leave a leadership void in the SaaS market which would be difficult to fill. Although the SaaS movement would continue to move forward, it would lose momentum and might never reach the level of importance which it is quickly attaining with Salesforce.com at the forefront.

While Salesforce.com and its Founder/CEO/Chairman, Mark Benioff, get most of the attention and credit for setting the standard for the Software-as-a-Service (SaaS) movement, OpSource and its Founder/CEO, Treb Ryan, have done more than their share to evangelize the business benefits of SaaS and educate the software industry about the steps to success in this market.

Treb saw the opportunity to differentiate OpSource from the floundering hosting business by focusing on a nascent SaaS marketplace early. The company asserted itself as the “SaaS Experts” by establishing a professional services arm which helped aspiring on-demand companies understand the business of SaaS. It also initiated an aggressive marketing campaign in 2005-2006 which included an incubation program, countless webinars and the SaaS industry’s first conference, the SaaS Summit.

The company used the occasion of its second annual SaaS Summit in Monterey, CA, this week to unveil its new portfolio of SaaS enablement capabilities. Borrowing a page from Salesforce.com’s AppExchange platform strategy, OpSource 2.0 includes a similar platform approach with a set of SaaS tools and services which harness the technology and skills of its ecosystem of partners.

OpSource 2.0 is built on an Optimal Services Bus (OSB), a service-oriented architecture that permits on-demand applications which run on OpSource’s Optimal On-Demand platform to leverage additional OpSource and third-party components.

The first of these components is Optimal Insight, based on Visual Mining graphical dashboarding capabilities, which will give SaaS companies an integrated, real-time view into the business and operational performance of their on-demand applications.

In April 2007, OpSource will introduce Optimal Billing, an end-to-end billing, payment and collections processing capability, built on Aria Systems’ billing and payments system.

Later this year, OpSource will roll out Optimal Research, which will give SaaS vendors the ability to conduct user surveys, and test marketing and sales promotions.

OpSource’s goal is to provide SaaS vendors a complete, Web-based development environment to build and deliver successful on-demand applications.

The company may not be able to match the physical resources and financial assets of the larger players in the market, but that hasn’t stopped it from becoming a pivotal player and important catalyst in the SaaS industry.

A measure of OpSource’s importance in the SaaS industry has been the size of its Summit gatherings, and the stature of the speakers and attendees at these events.

If Salesforce.com and Mark Benioff are setting the standard for boldness in the SaaS industry, OpSource and Treb Ryan aren’t far behind.

Cisco was very clear about the primary reasons it decided to acquire WebEx this week,

1. Add a new layer of web-based applications to its infrastructure-oriented product portfolio
2. Add a new subscription service business to its product-dependent revenue model
3. Gain access to 2.2 million registered end-users as well as additional corporate customers

The announcement immediately placed Cisco in the middle of the Software-as-a-Service (SaaS) movement, expanded the scope of the SaaS movement into the communications and messaging sector, and created an intriguing new area of competition between Cisco and Microsoft.

The announcement also gave SaaS greater credibility as a viable alternative to traditional shrink-wrapped products and an increasingly attractive business model for future success.

However, there is another dimension of the acquisition which hasn’t been mentioned in the many trade publication and industry analyst commentaries.

One of WebEx’s strongest solution areas is remote support services. Its ability to remotely access, diagnose, resolve and manage devices via the web represents a powerful new weapon in Cisco’s growing arsenal.

While the company was hesitant to acknowledge my suggestion that its IronPort acquisition would move it toward a services model, it is now very clear about its desire to gain entry into the subscription services business via the WebEx purchase.

Putting the two transactions together, along with its earlier acquisition of managed service provider (MSP) NetSolve, gives Cisco an impressive portfolio of managed service capabilities which it could deliver via its vast channel network of resellers and service providers.

Among the reasons why many organizations are still hesitant to adopt Software-as-a-Service (SaaS) is the concern that it will be difficult to integrate their existing data sources into their new, on-demand software services.

While this may be a real challenge for some large enterprises that must contend with a plethora of custom applications, it is becoming less of a issue for other companies with relatively common applications and database structures, as a result of rapidly evolving SaaS solutions.

The latest innovation in the integration arena was unveiled by Informatica last week when the company announced its new On Demand Data Replicator, the first multi-tenant, cross-enterprise data integration on-demand service.

The On Demand Data Replicator enables organizations to quickly and easily replicate SaaS-related data to their on-premise transactional and master databases. The service is initially aimed at organizations relying on Salesforce.com and third-parties tied into Salesforce.com’s AppExchange. However, Informatica promises to make it available to a broader range of SaaS solutions.

The new offering is part of Informatica’s three-pronged strategy to deliver integration solutions to large-scale enterprises, small- and mid-size businesses (SMBs), and service providers. The company plans to continue to deliver its PowerCenter products for complex environments. But, Informatica sees an attractive new market opportunity in the SaaS movement to provide a wide array of ‘connectors’, starting with the initial On-Demand Data Replicator, to address relatively routine data integration tasks in an automated and self-provisioned fashion. The new offerings will also integrate with Infomatica’s PowerCenter products.

In order to ensure that its new On-Demand offering appeals to the growing population of SaaS users, Informatica has adopted a standard per user/per month pricing model.

While Informatica’s offering is the first truly turn-key integration solution in the SaaS market, the company isn’t the first to promote the idea of Integration-as-a-Service (IaaS). Pervasive Software and Bluewolf Group have also been advocates of this idea. Pervasive has been leveraging its long history of delivering data integration software solutions to address the new round of integration issues associated with SaaS. Bluewolf Group is the leading, independent, professional services firm specializing in SaaS deployments and has built a structured methodology for handling integration issues.

Informatica’s new On-Demand Data Replicator solution brings a new level of speed and simplicity to the SaaS integration process. It should also help to eliminate an important concern of the past among many organizations regarding the viability of SaaS.

While much of the information technology (IT) industry and many CIOs, concerned about their traditional legacy business intelligence (BI) applications, were focused on the market implications of Oracle’s acquisition of Hyperion Software, new entries into the market may represent a more important milestone in the evolution of this segment of the software industry.

On March 6, 2007, LucidERA unveiled its new Software-as-a-Service (SaaS) business intelligence solution. The company is founded by one of the truly good guys of the industry, Ken Rudin, who also has a unique perspective on the opportunities and challenges represented by the SaaS model.

Ken started his career at Oracle. He then co-founded and was CEO of Emergent Corporation, a consulting firm focused on data warehousing projects for Fortune 500 companies which was sold to Keane, Inc. in 1999. At that point, Ken joined a new company, called Salesforce.com, where he became SVP of Products. He then moved to Seibel Systems where he became the VP and General Manager of the company’s CRM OnDemand solution. When Seibel was acquired by Oracle, Ken moved on to become a founding advisory board member of NetSuite.

These experiences have driven him to launch LucidERA to challenge the established BI players with a pure SaaS alternative. Ken and I first met a year ago at a Pacific Crest investors conference, and have been on various industry panels together since. Drawing on his vast industry experience, Ken is one of the most compelling industry speakers regarding the fundamental challenges facing incumbent software vendors (ISVs) as they attempt to transition to a SaaS model.

Based on his industry experience, Ken recognizes that long-term success in the software industry, as well as within the SaaS movement, depends on building a solid platform rather than creating hot products. In response, LucidERA is positioning itself as an on-demand BI platform provider, rather than just an on-demand BI application vendor. In this role, it will supply a set of BI applications and integration tools, called ‘data connectors’, to permit other developers to link their solutions into the LucidERA’s platform.

LucidERA isn’t the only new player entering the BI market with a SaaS strategy in mind. Oco has been building hosted BI solutions for customers for a number of years. The company recently announced that it had obtained $10 million in a Series C financing from Highfields Capital Management LP, as part of a total Series C issuance of $14.5 million. The company intends to use this new round of funding to shift its business from a project-oriented, hosted BI solution model to a true, multi-tenant SaaS model.

In addition to announcing its latest round of funding, Oco also introduced its new President/CEO, William (Bill) Copacino, formerly Accenture’s Group Chief Executive for Global Business Consulting, responsible for its BI and supply-chain management consulting practices. While Copacino certainly comes to Oco with plenty of expertise in the BI world and probably has a solid Rolodex to get CXO-level meetings, he lacks experience in the software business, especially in the rapidly evolving SaaS world.

Not to be overlooked in the rapidly changing BI market are recent acquisitions by Business Objects and Cognos to strengthen their positions in the SaaS market.

Don’t be surprised if you see Salesforce.com and many of its AppExchange partners, who collect and analyze data from multiple sources, attempt to shave off a portion of the BI market for themselves.

While Salesforce.com was unveiling the first iteration of its new generation of on-demand vertical market software services aimed at the financial services sector this past week, Google was flexing its muscles as a viable Software-as-a-Service (SaaS) vendor with its first round of fee-based, packaged online desktop solutions aimed at enterprise customers.

Google’s new Google Apps includes integrated word processing and spreadsheet applications, as well as BlackBerry support for Gmail for $50/user, a fraction of the price of Microsoft’s Office suite. In order to overcome corporate apprehension about the quality of its new services, Google is offering guaranteed uptime, IT management tools, technical support, and increased e-mail storage. Yet, to show how far Google must go to fulfill its promise as a viable provider of on-demand enterprise apps, Google Gmail users suffered from a series of service failures during the first week of the company’s expanded offerings.

Nonetheless, Google put its service guarantees to good use and reacted quickly by offering service credits to its customers and should be able to restore its credibility just as Salesforce.com did a year ago when it also experienced service outages. And, with Google’s vast war-chest of cash, growing installed base of corporate customers, popularity among consumer users, and rapidly growing hosting and service delivery infrastructure, it is in an enviable position to become a potent player in the SaaS business.

Google has become a popular target of entrepreneurial software developers who have created new online solutions, or ‘mash-ups’, by tying their on-demand functionality to Google’s search and other online applications. Whether it is the widespread Google Map oriented solutions or Salesforce.com for Google Adwords type of mash-up solutions, the Google API has become an increasingly common component for many new on-demand solutions.

Now, a new round of software enterpreneurs are capitalizing on the Google platform to generate a set of Google-centric enterprise applications which could compete with the incumbent software vendors (ISVs) such as Microsoft, Oracle and SAP, and even Salesforce.com. For instance, Etelos is a software start-up that recently unveiled a CRM for Google on-demand application and is promoting the Etelos Ecosystem for developing and deploying other on-demand applications.

IBM is also capitalizing on the SaaS movement as an opportunity to cut into Microsoft’s dominance of the technology marketplace by teaming with both Google and Salesforce.com. Although IBM announced a strategic alliance with Salesforce.com in 2000, it has only begun to put real muscle behind its relationship more recently. This is in response to Salesforce.com’s growing acceptance among large-scale enterprises, IBM’s primary stronghold, and rapidly expanding alliances with competitors of IBM’s Global Services division, including Accenture, Deloitte and various offshore outsourcers.

This past week, IBM used the occasion of Google’s rollout of its new on-demand, enterprise application suite as a convenient time to announce that it would be the first major vendor to bring Google Gadgets™ — an assortment of previously consumer-oriented web utilities — into IBM’s WebSphere Portal. This is the latest in a series of moves as a part of a low-profile alliance between IBM and Google which could have far-reaching implications for the software industry as well as corporate customers and consumers.

As a result of this new integration, users can leverage any of the approximately 4,000 Google Gadgets into their corporate environments. The Gadgets include language translators, package delivery tracking, Podcast searches, Wikipedia information, and YouTube postings .

On first glance, many of these tools may seem irrelevant to a corporate environment. However, just as Instant Messaging (IM) has become a common corporate communications and productivity tool over the past year, many of the Web 2.0 Google Gadgets are being tested to determine how they can enable increasingly dispersed workers or complex supply-chain partners to work better together.

The past week has clearly demonstrated that the SaaS movement is gaining acceptance within the corporate world, and Google is positioning itself to be a major player in the next chapter of this rapidly evolving story.

In January, THINKstrategies joined the growing legion of multimedia Internet producers with our Spotlight on Software-as-a-Service (SaaS) podcast series aimed at educating and evangelizing about the business benefits of today’s new SaaS solutions.

We are now expanding the scope of our podcasts to discuss encompass Managed Services as well. As with our initial podcasts, we will continue to examine ways in which customers and solution providers are leveraging managed services to achieve their business objectives.

Our latest podcast is a discussion of managed service trends, as well as SaaS developments, with Chris Hoffmann and Scott Donohue, two of principals of Triple-Tree, LCC, a leading investment bank which helps emerging and established companies achieve their corporate objectives in the on-demand services industry.

Click here to listen to THINKstrategies’ latest podcast.

I hope you find the podcast series valuable. 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.