THINK IT Services

This week’s NetworkWorld includes an article about SpiceWorks’ new, free, desktop management solution. The on-demand service enables IT professionals to manage up to 250 devices. The company claims the free solution includes discover, inventory, monitoring, tracking, reporting and remote hardware and software problem resolution capabilities.

Giving away free IT/network management solutions isn’t a new idea. This is the same thing a company called VitalSigns did in the application performance management space a decade ago to penetrate the market before the company I was a part of, International Network Services (INS), acquired it to enhance our network performance management service called EnterprisePRO.

More recently, Klir Technologies has been using this same strategy to penetrate the market with its on-demand network performance management solution.

The broader trend is that IT professionals are becoming increasingly receptive to Software-as-a-Service (SaaS) and managed service ‘out-tasking’ alternatives to traditional network/system management (NSM) systems. Although IT people have been resistant to SaaS and managed services in the past, they are increasingly frustrated with traditional, on-premise management platforms. They also recognize that their jobs are in jeopardy if they can’t produce better IT/network availability, security and performance.

You can find my perspectives on this topic in NetworkWorld and the June issue of Business Communications Review. You can also find a listing of the latest on-demand solutions aimed at IT professionals on THINKstrategies’ SaaS and Managed Services Showplaces.

Just like the frenzy and speculation that surrounds every high-profile couple before they tie the knot in today’s pop culture, the build up over the past few weeks around a pending announcement between Google and Salesforce.com was destined to fall short of many people’s overblown expectations.

Much of the speculation centered on whether Google would acquire Salesforce.com in an attempt to dramatically strengthen the search vendor’s foray into desktop and business applications. In March, I made my bet that Oracle would be the first suitor to try to capitalize on Salesforce.com’s meteoric rise in the on-demand business apps world.

Although I can certainly see the logic in a Google/Salesforce.com marriage, I thought it was premature for the companies to do this kind of deal at this stage. Unless, Oracle initiated a hostile takeover attempt for Salesforce.com, the on-demand vendor wasn’t incented to seek an acquisition elsewhere. And, Google had other acquisition priorities more closely related to its core business of online advertising to be in such a hurry to acquire Salesforce.com’s on-demand business app platform and ecosystem.

So, anyone who was waiting for an announcement of a Google/Salesforce.com merger was bound to be disappointed when they simply unveiled a strategic alliance overnight. This new formal alliance is based on a more informal working relationship which the two companies have built around their open application program interfaces (APIs) and web services platforms which have enabling third-parties to create ‘mash-ups’ for a while.

In their joint announcement and in a prior briefing which they gave me last night, the two companies revealed they will kick off their new formal relationship with a narrowly focused enhancement of the Salesforce.com for Google Adwords solution which enables companies to acquire and administer Google’s popular online advertising mechanism via Salesforce.com’s customer relationship management (CRM) and salesforce automation (SFA) applications. This integration process began with Salesforce.com’s acquisition of Kieden Corporation last August, a start-up built on Salesforce.com’s AppExchange platform aimed at leveraging the Salesforce.com’s apps to measure the effectiveness of Google Adword expenditures. The acquisition led to the rollout of Salesforce.com for Google Adwords.

What makes the new offering different and more significant than the existing service is that this is the first time the two companies have officially sat down to develop and deliver fully integrated joint solutions. The initial offering targets very small organizations that have not used Salesforce.com and/or Google Adwords in the past, and are looking for an easy, turnkey solution that makes the online advertising and sales management process simple and cost-effective.

While this might look like a non-event, it is actually a logical first step for two companies who share a common vision about how they would like to disrupt the traditional software business. It also demonstrates that they are not joining together just to steal headlines, but are sincerely interested in building a strong working relationship which produces tangible business benefits for their mutual customers. They are also looking for ways that they can each extend their market reach through this alliance. In this first offering, they have succeeded by making their existing solutions more accessible to a population of small companies who were previously reluctant to advertise via Google Adwords or adopt Salesforce.com’s on-demand CRM and SFA applications.

I expect plenty of press and analyst furor in the coming days that the Google and Salesforce.com announcement failed to meet the market’s unrealistic expectations.

However, I also expect the two companies to build on the success of their first joint offering and create a long-term relationship which may ultimately lead to the same place many had expected today, namely a merger of two very like-minded companies.

In the meantime, stay tuned for a steady stream of additional offerings which tighten the bond between the two companies, accelerates the adoption of on-demand solutions, and benefits not only Google and Salesforce.com’s mutual customers, but also their respective ecosystems of strategic partners.

With last week’s announcement of a private equity buyout of major computer hardware and software distributor, CDW, speculation is escalating about where this new influx of investors will strike next within the information technology (IT) industry.

The CDW deal comes two weeks after computer and database services provider Acxiom Corp. agreed to be bought by Silver Lake Partners and ValueAct Capital Partners LP for about $2.24 billion. Now, some see Dell as a likely buyout candidate, others are speculating about whether computer chip software design vendor Cadence will ‘go private’.

I think a series of private equity deals will be aimed at a wide array of publicly-traded, incumbent software vendors (ISVs) in the coming months. These ISVs will boast a significant installed base of customers, but will also be facing significant challenges keeping pace with the Software-as-a-Service (SaaS) movement. I also believe that private equity firms’ focus on the SaaS market will carryover into the hosting and managed services sectors.

These are not necessarily bold predictions. If you follow the software and services sectors closely, you know that in August 2005, a consortium of private equity investment firms organized by Silver Lake Partners acquired SunGard, the disaster recovery and back-up services solutions provider. The consortium also included Bain Capital, The Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co. L.P., Providence Equity Partners and Texas Pacific Group.

Bain Capital was also among those that pulled USinternetworking (USi) out of bankruptcy in January 2002, which led to its acquisition by AT&T in October 2006.

As recently as March of this year, Silver Lake Partners were rumored to be negotiating to purchase a share of SAP.

However, I think one of the primary motivators for more private equity deals in the software sector will be escalating pressure among ISVs to fundamentally transform their business operations to adopt the SaaS model.

Moving to SaaS requires three traumatic changes in ISV operations—a new web services oriented software architecture; a new amortized subscription pricing revenue recognition methodology; and a new go-to-market sales structure.

Few publicly-traded ISVs will be able to cross this chasm. The majority will be unable to make the necessary investments in R&D, sales and marketing teams at the same time they are coping with flattening revenues, due to SaaS’ pay-as-you-go pricing schedule.

This will drive many ISVs to seek shelter in private equity deals that can take them out of the microscopic spotlight of the public market. These transactions will give the ISVs time to transform their operations before reentering the glare of the public marketplace.

The private equity firms will be happy to capitalize on these opportunities because many ISVs have a strong hold on their current customers by virtue of their entrenched legacy applications and maintenance agreements. Despite plenty of customer dissatisfaction, many of them are essentially held captive by their ISVs or would be willing to remain with their current software vendors if their applications can be made easier and more cost-effective to use.

This means that under the right conditions these ISVs could make the move to SaaS and their private equity investors could reap the rewards of the subscription pricing and annuity revenue model.

These same dynamics will spillover into the web hosting services market where companies like Navisite, in addition to USi, have gained a new lease on life with the infusion of private equity funding. These investments will also be fuelled by the growing popularity of ‘Hardware-as-a-Service’ (HaaS) utility computing service offerings from companies such as Amazon.

It is for these reasons you can expect the tide of private equity deals to rise in the software and services sectors of the IT industry.