THINK IT Services

Callidus Software Inc. announced todaythat it has been certified to offer its TrueComp® Suite on Salesforce.com’s AppExchange.

This announcement isn’t likely to generate bold headlines in the business or industry trade press. But, I believe it is a significant bellweather for the software industry and good news for organizations who have been worried that they’d have to make an either/or decision when selecting on-demand versus on-premise software solutions.

Until recently, the rapid rise of Software-as-a-Service (SaaS) as a radical movement to displace legacy applications. As a consequence, SaaS was seen as a fundamental threat to the long-term viability of the independent, or as I prefer to say, “incumbent” software vendors (ISVs).

While on-demand, SaaS solutions represent a real challenge for legacy software vendors, it is no longer a simple battle of good (on-demand) versus evil (on-premise). Instead, both parties are recognizing that they must co-exist in order to survive.

Therefore, companies like Callidus are responding to competitive pressures from on-demand challengers, such as Centive and Xactly, by adding on-demand options to their traditional on-premise software solutions. Similarly, Business Objects has been fighting back the on-demand challenges of companies like LucidERA with its own set of on-demand solutions.

As the 800 pound gorilla of the on-demand world, Salesforce.com has built the most vibrant ‘ecosystem’ of multivendor SaaS solutions, the AppExchange. This online clearinghouse has become a magnet for a widening array of third-party vendors aiming to capitalize on Salesforce.com’s deepening penetration of the market.

The Callidus officials who briefed me about their AppExchange certification prior to today’s announcement admitted that their decision to team with Salesforce.com was driven by escalating interest in SaaS and the growing presence of Salesforce.com among their enterprise customers.

So, Callidus’ rollout of an on-demand solution and certification on Salesforce.com’s AppExchange represents another important endorsement and validation of the SaaS movement. I’ll let Callidus’ on-demand competitors–Centive and Xactly–argue whether the company’s SaaS solutions match their net-native capabilities.

More importantly from a market perspective, it is clear that Salesforce.com’s aggressive efforts to permeate the enterprise sector now includes teaming with established players, like Callidus and Business Objects, rather than simply bashing the old-guard as obsolete relics of the past.

Salesforce.com recognizes that most enterprises want to augment rather than replace their legacy applications and established ISVs with on-demand, SaaS alternatives for the time being. Therefore, it makes sense for Salesforce.com to encourage the established players to join the AppExchange and create integration links which make it that much easier for Salesforce.com to penetrate enterprise accounts.

The good news for IT and business decision-makers is that they don’t have to make a fundamental choice between on-demand or on-premise software alternatives. Instead, they can now seek the option which offers the best application features and third-party integration to meet their needs.

The acquisition hit parade in the IT management arena continues. On Friday, BMC purchased RealOps and on Monday HP acquired Opsware (and Neoware).

The similarilities between the two acquired companies is noteworthy, as is the opportunity for the acquirors to market their new assets to enterprises, as well as managed service providers (MSPs).

IT management has always been an issue of concern, but until recently it has never been a lucrative market for network and system management (NSM) platforms and tools. As IT becomes more pivotal to business operations and optimizing the performance of IT becomes more essential for business success, the importance of effective IT management has grown.

It has become increasingly apparent that enterprises, as well as MSPs, need as many tools as they can find to help them automate as much of the IT management function as possible. Market studies from various research firm has found that most IT/network professionals spend approximately 80% of their time just keeping their IT/network operations up and running. And, ironically the vast majority of network and system failures are due to human error.

Automating many of the routine aspects of NSM can significantly reduce the amount of time IT/network professionals spend performing mundane tasks and reacting to unplanned events. The promise of IT automation systems, such as Opsware and RealOps, is that they can perform these tasks in an automated and proactive fashion that can dramatically increase network and system availability and performance levels.

But, few enterprise IT organizations or MSPs are interested in spending the time selecting and integrating best-of-breed NSM point products to build their own IT management platforms. Instead, they are seeking vendors who can provide an integrated platform which can address the bulk of their IT management needs.

By adding these capabilities to their software portfolios, HP and BMC can appeal to both enterprise IT organizations who are trying to better manage their operations, and MSPs who are trying to more cost-effectively deliver their services.

HP and BMC will be facing competition from independent software vendors (ISVs) such as Kaseya and Software-as-a-Service (SaaS) vendors such as Service-Now.

Dell announced today it plans to acquire privately-held SilverBack Technologies, Inc., one of the original managed service providers (MSPs) who has transitioned its business to offer a service delivery platform that enables MSPs to deliver remote monitoring and management services.

This acquisition is important because it clearly shows that Dell is serious about strengthening its service delivery capabilities as part of its overall effort to regain its momentum in the market. It also adds further validation to the importance of managed services as a key component of today’s vendor and channel strategies.

I expect Dell to leverage SilverBack’s capabilities to add a new layer of managed services to its product portfolio. I believe Dell is in a unique position to capitalize on SilverBack’s capabilities because it has a strong relationship with customers as a result of its direct sales heritage. This relationship permits Dell to deliver managed services that can demonstrate a greater commitment to ensure the reliability, security and business value of its products.

However, achieving these objectives isn’t a ’slam-dunk’. Cisco Systems and Sun Microsystems, among others, have also tried to buy their way into the managed services business with limited success. (See, my 2004 and 2005 NetworkWorld commentaries.)

In addition to having the right enabling technology, being successful in the managed services business also requires an entirely different set of management skills and operational processes. Rather than reacting to customer problems as most vendors and channel partners do in the old world of tech support, managed services requires a proactive approach which reduces the risk of system failures or performance issues. Not only does this require different skills and processes, but it also forces the MSP to develop different methods of demonstrating their value.

Complicating matters for Dell is its initiative to add more channels-to-market to its direct sales approach. This effort will require Dell to segment its managed service offerings to fit its direct and indirect channel strategies. As Cisco, Sun and other vendors have learned, this is not an easy balancing act.

Leaving these challenges aside, Dell’s acquisition of SilverBack is still a significant bellweather of the changing nature of the IT market. As I’ve said many times before, we are moving away from a technology centric industry to a services driven business.

Yesterday’s announcement that SunGard intends to acquire VeriCenter clearly indicates that the competitive landscape in the hosting business is rapidly changing.

Not only is this another indication of industry consolidation and the growing role of private equity firms in the IT services sector, it is also another example of how the managed and Software-as-a-Service worlds are converging.

The first message that this transaction sends to any hosting company that hopes to be a market leader is that they can no longer depend on the simple annuity of managed server and co-location services. Instead, hosting industry leaders will need to offer a broader portfolio of managed and SaaS capabilities in order to become a strategic source for their enterprise customers.

Sungard is a perfect example of the power of private equity. On March 29, 2005 the company was acquired by a consortium of seven private equity investment firms for $11.3 billion, the largest private equity transaction at that time. The firms involved were Silver Lake Partners, Bain Capital, Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co., Providence Equity Partners, and Texas Pacific Group.

The timing of their acquisition couldn’t have been better. A growing number of corporations were turning to hosting companies to offload their server management and processing requirements. Concerns about disaster recovery and business continuity were also escalating.

Today, SunGard generates over $4 billion in revenues serving over 25,000 customers in more than 50 countries, including the 50 largest financial services companies in the world. The company has also established a strong customer base in the higher education and the public sector.

VeriCenter will be merged with SunGard’s Availability Services division. This unit boasts 3 million square feet of operations space in over 60 data centers, linked by a 25,000 mile-dedicated network, and augmented by over 50 mobile facilities. The unit’s service delivery infrastructure supports over 30 computing platforms for over 10,000 businesses and institutions across North America and Europe. Although VeriCenter has a smaller installed base of approximately 600 business customers, it offers a broader portfolio of managed services.

While many industry observers view the managed services and SaaS market as separate albeit related business opportunities, smart hosting companies are recognizing they can capitalize on both. In addition to offering the standard set of centralized server management and co-location services, hosting companies can now deliver a wider array of remote managed services aimed at helping customers administer their on-premise systems, and offload their security and storage requirements. Leading edge hosting companies are also positioning themselves as a channel to market for a rapidly expanding array of SaaS solutions.

The SunGard/VeriCenter deal also represents another example of the continuing consolidation of the hosting business. Another example was the acquisition of Data Return by Terremark Worldwide, Inc. in May.

I expect these trends to accelerate in the coming months.

Last week, NetSuite announced that it was finally ready to enter the public market with an Initial Public Offering (IPO), and this week two other Software-as-a-Service (SaaS) oriented players found a private exit via acquisitions.

The NetSuite acquisition had been highly anticipated and is another indication of the growing support of the SaaS model within the investment community. NetSuite’s S-1 shows that the company is experiencing strong growth while also reducing the proportion of its revenues being spent on software development, sales and marketing. Although NetSuite isn’t a rocket-ship like Salesforce.com, it has established a broad enough customer base and is gaining sufficient momentum to disprove any lingering misconceptions that SaaS can’t satisfy businesses’ back-office or financial management needs.

A successful IPO by NetSuite, combined with growing receptivity to IPOs in general within the investment community, will widen the door for other SaaS vendors to follow this same path.

Google’s acquisition of Postini is another indication that the SaaS market is becoming more serious. Postini is a leading provider of security and archiving services aimed primarily at email but expanding into instant messaging (IM) as well. Its on-demand solutions will enable Google to compete more effectively in the enterprise market by strengthening the security and compliance capabilities of Google’s desktop, email and other web-based applications. Postini’s capabilities will also fit nicely with Google’s recent acquisition of Grand Central Communications, a VOIP phone aggregation solution provider.

Another acquisition on July 9 was overshadowed by the Google/Postini deal. Unica–a leading provider of traditional, on-premise enterprise marketing management (EMM) software–purchased Marketing Central, a rapidly growing on-demand marketing resource management ( MRM) solution provider.

The transaction clearly demonstrates the rising level of interest and demand Unica is seeing among its customers and prospects for on-demand alternatives and add-ons to its traditional on-premise solutions. Although it will take some time to fully integrate the companies’ capabilities, this transaction enables Unica to quickly add an on-demand option to its on-premise portfolio.

This isn’t the first transaction of this type. Another example is Business Objects’ acquisition of Nsite. You can be sure that many SaaS providers are aggressively seeking a similar exit. And, there are plenty of legacy application vendors, integrators and outsourcers, and a variety of business services companies who are trolling for good SaaS acquisitions.

Consolidation within the SaaS community is also accelerating. For example, Silverpop recently acquired Vtrenz to broaden its portfolio of on-demand marketing solutions. (Click here to obtain THINKstrategies’ profile of Vtrenz just prior to this acquisition.)

I’m pleased to be a contributor to TripleTree’s most recent research report concerning these trends entitled, “Sales, Marketing and Service Convergence: How SaaS Ecosystems and Collaboration Tools are Redefining CRM.” I recommend you download a copy.

I expect the volume of IPOs, mergers and acquisitions within the SaaS market to accelerate dramatically over the next 6-12 months. As Microsoft’s CEO, Steve Ballmer, proclaimed at the company’s Worldwide Partner Conference in Denver on Tuesday,

“This fundamental transformation to software and service is upon us. It will affect us all, and I guarantee you Microsoft will lead in driving this next generation of computing and user-interface models just as we have the last couple of generations.”

With companies like Microsoft, Google and Salesforce.com leading the way, and private equity monies freely flowing along with public equity opportunities, the SaaS market is primed to be the center of attention for the remainder of 2007 and beyond.

More importantly, customers are becoming very comfortable with the idea of leveraging online/on-demand applications to meet their achieve their business objectives. This expanding customer receptivity will be the fundamental catalyst of sustained SaaS growth.

Last week, I had the opportunity to return to Dublin, Ireland, to participate in the second Software-as-a-Service (SaaS) Summit which I’ve helped Enterprise Ireland (EI), the country’s economic development agency, organize and moderate in the past nine months.

After a very successful launch of this symposium series in October with the first SaaS Summit, decided to host another round. The goal of our first session in the Fall was to educate Irish companies and entrepreneurs about the opportunities in the SaaS market. Our objective last week was to make them aware of the major challenges and offer steps to success, especially for those local companies seeking to penetrate the U.S. market.

In addition to identifying and recruiting each of the Summit speakers, I also had the privilege of kicking off the day with a keynote presentation summarizing the state of the SaaS market and identifying the key technical and business issues that aspiring SaaS vendors must overcome.

I was followed by Eugenio Pace, Microsoft’s SaaS Architecture Strategist, who discussed the technical considerations for building and hosting SaaS applications. Clint Oram, the GM of SugarCRM in Europe, how the SaaS and Open Source movements are interconnected. He also raised questions about whether SaaS can succeed in a pure on-line, on-demand form. John Maughan, the Director of Engineering of Cape Clear Technologies, then identified the integration requirements for SaaS applications. We concluded the morning with a Q & A session in which the Summit attendees asked the speakers to delve deeper into some of the issues they raised.

The afternoon began with a talk by Phil Wainewright, the well-known SaaS blogger for ZDNet, on the differences between the U.S. and European markets. In addition to identifying some of the reasons for these differences, Phil also identified some of the interesting European-based SaaS vendors who are becoming prominent players in the market.

Phil was followed by Christopher Gesell, the Director Product Marketing at Verizon Business, who outlined how aspiring SaaS vendors can leverage global infrastructure providers to optimize their service delivery capabilities. Conor Halpin, the founder and Chief Executive Officer of LeCayla Technologies, then demonstrated how SaaS vendors must escape the constraints of traditional business models by deftly untangling himself from a straitjacket during his presentation. Conor’s entertaining display was followed by an equally enlightening talk by Frank McCracken, the founder of Saaspoint, an Ireland-based professional services and development company that has experienced rapid growth by focusing on Salesforce.com’s AppExchange opportunities.

Of course, no gathering in Dublin is complete without capping it off with a few pints at the local Guinness brewery. The next morning, I had a series of fascinating one-on-one meetings with very interesting Ireland-based SaaS companies–CashCollector, OpenPlain, Iquate and NetTeam.

As I found during my first visit to Dublin, the country’s booming economy, broad-based technology sector, supportive government agencies and collaborative entrepreneur climate make it a perfect ecosystem for SaaS companies.

Keep an eye on the SaaS Summit website for copies of the presentations, and contact me if you’d like to get more perspective on SaaS activities in Ireland.