THINK IT Services

The Software-as-a-Service (SaaS) movement is rapidly becoming mainstream as organizations of all sizes adopt on-demand services to address various unmet needs or to replace their legacy applications.

The rising acceptance and adoption of SaaS represents a watershed opportunity for new and established independent software vendors (ISVs). But, THINKstrategies has discovered that it is also creating serious challenges for some SaaS companies who are letting escalating competition pressure them into compromising on the fundamental principles of the SaaS delivery model.

Today’s SaaS challenges do not involve the past concerns about the reliability, security or scalability of on-demand solutions. Despite occasional service disruptions, SaaS vendors have proven to be far more reliable than most internal IT departments. They have also been able to avoid security problems which continue to plague enterprises relying on traditional on-premise software. The scalability of on-demand applications has also been clearly demonstrated by a growing number of large-scale deployments.

Instead, the SaaS CEOs I’m talking to are feeling growing tension in two other areas—service pricing and support services.

The service pricing issue centers around the per seat pricing model and $50-100/month pricing range which have become a de facto standard for the SaaS market based on Salesforce.com’s success in the customer relationship management (CRM) and salesforce automation (SFA) segments. Even though other horizontal applications are often used differently than CRM and SFA applications, in too many cases SaaS solutions are being judged by how their pricing structures match Salesforce.com rather than by how their functional capabilities and cost compare with the legacy application which they might displace.

For instance, a CEO of an e-procurement vendor recently lamented to me that he has to work harder selling a six-figure annual subscription service than he did when he sold multi-million dollar legacy applications in his previous job. He has found that potential customers who already have Salesforce.com installed discount the fact that his SaaS solution is more comprehensive and can be implemented in a fraction of the time of a comparable legacy application.

(Compounding this challenge is the strict IT cost allocation schemes many enterprises have established, which penalize and discourage business units from adopting alternative software solutions, even if the alternatives can be more productive and/or less expensive.)

A related pricing issue emerging in the SaaS market is the common method of bundling technical support into the basic price of the service. By hiding the cost of support, many SaaS vendors have opened the door to unlimited tech support calls. They are betting that the ‘bell curve’ theory will hold true and the average number of calls per customer will stay within the estimated support costs budgeted into the price of delivering the SaaS solution. For SaaS companies with relatively simple applications, this bet can pay off. But, for SaaS companies offering more complex enterprise applications, the bundled support cost strategy is creating serious strains on their financial structures. Especially, in those cases in which SaaS vendors are permitting customers to customize their solutions.

A SaaS CEO recently told me that bundling issue is creating strains within his business. Like many SaaS companies which are aggressively trying to win new business, this SaaS vendor has bundled its support costs into its pricing structure. It has been good at defining when a client company should purchase additional professional services to deploy its on-demand solution. But, the company has also been willing to compromise the basic precept of the SaaS model and permitted new customers to customize their on-demand applications in order to win their business. This means the SaaS vendor can no longer update each and every customer in a systematic and cost-effective manner. Instead, the SaaS vendor must hold the hand of the outliers and absorb the added support costs.

Ironically, this CEO reported that many of the customers who insisted on customizing their SaaS solutions to meet their ‘unique’ business requirements are discovering that their requirements were not that unique after all, and they could have met their needs by better leveraging the meta-configuration options that were available from the SaaS company. As a result, they now admit that they’ve made it more difficult for them to fully benefit from the advantages of their SaaS solution and that they’ve caused their SaaS company more heartache than necessary.

Nonetheless, the burden falls on SaaS vendors to hold firm and resist the temptation to succumb to customer demands for special treatment in order to win their business. As Tod Loofbourrow, the CEO of Authoria, put it, “It is incumbent on the SaaS vendor to keep the customer within the guardrails”

In addition to being more disciplined about resisting customers’ desire to customize their SaaS solutions, SaaS vendors must also start focusing on selling the value-add of their solutions rather than competing on price. This means selling the superior value of their SaaS solution compared with similar legacy applications, rather than using a simple per unit pricing structure that isn’t relevant to their business.

I’m also advising SaaS companies to unbundle their support costs. I expect SaaS companies to return to the three-tier packaging and pricing model of silver, gold and platinum support levels that has been the norm in the IT industry for decades. I believe sophisticated enterprise decision-makers will accept this well-established service pricing and packaging model as a reasonable cost of ensuring the success of their SaaS subscription.

If SaaS companies offering complex, enterprise applications fail to demonstrate discipline in their response to customers’ demands for custom solutions, and do not adopt more rational pricing and support models, they won’t survive and the SaaS movement will be seriously impaired.

At the sametime, if customers continue to insist upon needlessly customizing their on-demand applications, they will kill the golden goose of SaaS.

This past week’s SaaScon gathering in Santa Clara, CA, gave the rapidly growing SaaS industry another opportunity to take stock of its current state and where it is headed.

I was very pleased to serve as the event’s Master of Ceremonies and a member of the Advisory Board—along with Amy Wohl and Phil Wainwright—that helped to shape the conference agenda and recruit the speakers.

The event drew well over twice the number of attendees and sponsors of our inaugural conference last September. And, this was despite facing competition from the SIIA’s Software Strategy Summit and the Web 2.0 conference taking place in San Francisco.

SaaScon gave a wide array of companies—large and small, new and ‘old’—an opportunity to present and learn about the opportunities and challenges surrounding ‘on-demand’ services. The mix of formal sessions and informal networking gave everyone plenty to digest. It also provided a convenient place for many attendees to explore partnering opportunities with one another.

While the event drew fewer customers than we would have preferred, there wasn’t a lack of interesting content, noteworthy speakers and important announcements.

On the news front, Symantec used the event to launch its new Symantec Protection Network of on-demand SaaS solutions starting with a data storage, back-up and recovery service.

Among the noteworthy speakers were Dave Duffield, the founder of PeopleSoft and now Workday; SaaS pioneer, Greg Gianforte, founder/CEO of RightNow; and Jeffrey Nick, EMC’s CTO tasked with driving the vendor’s foray into SaaS.

Duffield and Workday’s co-founder, Aneel Bhusri, outlined how Workday is quickly rolling out a portfolio of on-demand services and capturing an impressive assortment of customers and partners, including Accenture. While still small, Workday could become a major force in the software industry, challenging NetSuite in the SaaS sector and established players like Oracle and SAP.

(Oracle made a weak attempt to steal some attention away from SaaScon with an announcement that coincided with the opening day of the event about enhancements to its own on-demand services.)

Greg Gianforte demonstrated once again why he has been one of the most effective evangelists for the SaaS movement using his own company’s growth as a measure of the growing acceptance of SaaS in both the commercial and public sectors.

Although EMC hasn’t unveiled its SaaS strategy or portfolio yet, Jeffrey Nick impressed his SaaScon audience with his theories about how SaaS will enable companies to better achieve their information lifecycle management (ILM) goals.

Paul Johnston, President/CEO of Entellium, also dazzled the attendees with his views about how SaaS vendors should apply the features of today’s successful online games to their business applications.

In sum, it was an informative and productive two days in Santa Clara. Contact me if you couldn’t attend and would like additional insight about what you missed.

And, stay tuned for details about the next SaaScon and other SaaS events that are on my calendar.

Microsoft today unveiled a new SaaS Incubation Center Program to help independent software vendors (ISVs) adopt the Software as a Service (SaaS) delivery model. Microsoft’s new program will provide ISVs with business and technical consulting services, a hosting channel to market, and incentive discounts to Microsoft’s enabling technology.

Not long ago, the incubator idea seemed to be a distant memory associated with the demise of the dot.com era. But, with the advent of a new surge of Web 2.0 opportunities, the incubator concept has also been reborn.

Microsoft isn’t the first to launch an incubation program in the SaaS space. OpSource, Salesforce.com, and others have created their own programs. What sets Microsoft’s program apart from the others is how it is attempting to link ISVs with hosting companies as a channel to market.

For the ISVs, this will give them a wider assortment of service delivery infrastructure partners to choose from. For the participating hosting providers, Microsoft’s program gives them access to a widening array of ISVs seeking to expand their customer base and drive revenue.

The SaaS Incubation Center Program will build on the Microsoft Solution for Windows®-based Hosting for Applications and the SaaS On-Ramp Program to give hosting providers training and tools to support the ISVs’ unique SaaS business and service delivery needs. The Microsoft SaaS Incubation Center Program will include a series of structured business consulting and software architecture training sessions. The Windows-based Hosting for Applications platform also gives hosters tools to more easily and effectively build and monitor their service delivery infrastructures and establish strong service-level agreements (SLAs).

The global incubator program will include seven hosting companies initially—Affinity, Navisite, NTT Communications, Opsource, Rackspace, 7Global, Siennax, Wizmo.

Microsoft also announced Phase II of its SaaS On-Ramp Program based on its Service Provider Licensing Agreement (SPLA) which gives ISVs discounted licensing for Windows Server® and Microsoft SQL Server™ licenses. ISVs can now acquire discounted SKUs for these servers through enrolled hosting providers, rather than just directly with Microsoft. This enables the hosting providers to offer an attractive combination of enabling technologies and delivery services to ISVs.

The key point of Microsoft’s announcement is that the company recognizes that its greatest differentiator in the SaaS market could be its ability to link ISVs with a channel to market. Channel opportunities and strategies have been a topic of debate in the SaaS industry. Salesforce.com’s AppExchange doesn’t address this issue and IBM’s SaaS efforts are still evolving in this area.

Microsoft is making a concerted effort to build a viable channel for its more than 20,000 ISV partners via hosting companies, as well as network service providers such as the telecommunications carriers and cable operators. You can expect to hear more about Microsoft’s SaaS enablement efforts in conjunction with the network service providers.

Salesforce.com today announced its latest acquisition and newest extension to its Apex platform and on-demand service capabilities aimed at applying Web 2.0 tools and best practices to the age-old issue of knowledge management in corporate environments.

This represents a bold move which will not only expand the population of end-users who can benefit from Salesforce.com’s solutions, but will also raise some new questions for its partners who are trying to determine how to successfully dance with the Software-as-a-Service (SaaS) industry’s 800 pound gorilla.

Today’s announcement unveiled Salesforce.com Apex Content and Salesforce ContentExchange which are intended to help organizations better manage their documents and unstructured data within their existing Salesforce CRM applications.

Salesforce.com is promising that Apex Content will be offer a content management platform for unstructured data sources such as office documents, HTML, video/audio files and email. It will also enable developers to create new content management applications for a variety of horizontal and vertical market purposes. It will also have an AJAX user interface for easy customization, workspace management, library services, content classification schema, full text index, and workflow services. Salesforce ContentExchange will make it easier for users to share, tag, subscribe, rate, comment and recommend documents just as they do with popular consumer-oriented websites today.

Pricing and availability of Salesforce ContentExchange and Apex Content is scheduled to be announced later this calendar year.

These new capabilities are being built on technology developed by Koral Technologies, a start-up quietly acquired by Salesforce.com in March 2007. The terms of the acquisition were not disclosed, but you can bet the acquisition was a steal given the strategic implications of this move.

Anyone who simply looks at this announcement as another opportunistic marketing ploy aimed at heightening Salesforce.com’s visibility in the market should take a good look at the quote included in the company’s press release from Marc Benioff, Salesforce.com’s chairman and CEO:

“Salesforce Content represents a decisive step towards our vision of managing all information on demand…Salesforce Content will liberate customers from complex content management software like EMC Documentum and Microsoft SharePoint by extending the on-demand model and Web 2.0 innovation throughout the enterprise.”

This is a bold statement which will not only raise alarms among the major players Benioff has identified, but is also raising concerns among some of Salesforce.com’s AppExchange partners who already offer on-demand document management solutions and are wondering what today’s moves mean to them.

With each new initiative that Salesforce.com has unveiled since it rolled out its AppExchange partner platform in 2005, apprehension has quietly but steadily grown among its partners who worry that Salesforce.com’s new offerings may be encroaching on their businesses rather than encouraging them.

In past cases, such as last month’s AppSpace offering which included portal capabilities, everyone rationalized that the threat was offset by the added attention Salesforce.com’s moves gave its partners. The partners would also in the past questioned whether Salesforce.com was making a significant enough investment to truly compete with its more focused partners.

Although Salesforce.com probably didn’t pay a lot for Koral, its acquisition of a SaaS vendor to expand into an area where its established partners already reside is unprecedented. That is why two of its document management partners have already expressed concerns to me since this morning’s announcement.

No one can fault Salesforce.com for making a smart acquisition and continuing to set an aggressive pace in its expansion efforts. But, while the company plays a corporate version of ‘catch me if you can’, it will also have to figure out how to continue to play ‘nice’ with its partners who are becoming increasingly apprehensive about its ambitions.