THINK IT Services

This week I had an opportunity to attend Iron Mountain’s Analyst Day focused on its digital services strategies and offerings. The event convinced me that Storage-as-a-Service is well on its way to becoming a mainstream movement on par with Software-as-a-Service (SaaS), if not greater. It also showed me how a company can build a rational hybrid services model to capitalize on a market opportunity.

The Storage-as-a-Service opportunity may seem obvious given the proliferation of data and multiplying number of consumer-oriented online storage services geared toward consumers looking for a convenient place to place their digital photos and other valuable files. But, the consumer-oriented storage services have also helped to encourage the corporate sector to take advantage of the rapidly growing array of inexpensive back-up services, such as Carbonite and Mozy, to protect their computer records and files.

The explosion of data and emergence of new regulations has been a boon for storage vendors and hosting companies. It has also forced many business executives to rethink how they handle the rising tide of corporate records.

In the same way that many organizations are recognizing the economic and ease-of-use benefits of SaaS business applications, they are also being attracted to the business benefits of on-demand storage services to meet their compliance needs.

For instance, Info-Tech Research Group market research has found only 20% of businesses currently have an e-mail archiving solution in place, but predicts adoption will grow almost 70% in two years.

The Storage-as-a-Service market is attracting a plethora of players. Symantec launched its Protection Network SaaS business with a Storage-as-a-Service solution rather than lead with its strong suit in security. EMC made news earlier this month by acquiring Mozy’s parent company, Berkeley Data Systems. Google and Microsoft are offering storage services. I even received an automated voice message last week from Dell promoting its new online storage services.

(The emergence of the Storage-as-a-Service market raises the question: how do we distinguish it from Software-as-a-Service in the acronym lexicon?)

However, what sets Storage-as-a-Service apart from SaaS is that organizations must contend with a combination of physical and digital records. Many have grown accustomed to using off-site storage services for their paper, disk and tape-oriented files. Now, they have to select the right source for their digital storage needs.

Iron Mountain is well-positioned to capitalize on this opportunity.

It has strong brand recognition based on its years of experience, huge installed base of customers of all sizes, and the prominence of its vast fleet of trucks which cart off the physical records. It has also acquired two pioneers in the online storage and archiving services market, Connected and LiveVault respectively.

But most importantly, Iron Mountain is a services company that understands the economics and operational requirements of a services business. Although there are unique technical challenges to a digital services business, the other aspects are basically the same.

This week’s analyst event was a coming out party for the Iron Mountain Digital unit which will lead the company’s on-demand services efforts. Company and Digital unit executives demonstrated a keen understanding of the straightforward business needs they are addressing, and articulated a compelling, albeit no-nonsense strategy to satisfy these needs.

They outlined their initial set of on-demand services and provided a roadmap for the near-term future. They were not interested in blowing away a typically cynical audience of analysts with grandiose visions or bold technology innovations. Instead, they emphasized their long history in the records management business, focused on their deep understanding of the service business fundamentals, and showcased their track record of success by including testimonial presentations by representatives of Lehman Brothers and Intel.

The company’s practical approach has led it to intentionally pass on many ancillary business opportunities in the past, such as analytics and benchmarking services. As it journeys down the digital services path, it will encounter additional opportunities to become a player in the on-demand content, document and knowledge management services markets.

Unlike legacy application vendors who are concerned about product cannibalization by SaaS, Iron Mountain’s executives are hopeful that its new generation of digital services can replace some of their more costly document transport services.

Adding digital services to their portfolio does have its challenges. The company executives I talked with admitted they are still fine-tuning their go-to-market tactics and support processes to ensure Iron Mountain can properly coordinate their sales and service delivery efforts across the traditional and digital business units to ensure customer satisfaction, maximize account penetration; and optimize revenue and profit opportunities.

My guess is that Iron Mountain will figure this out and become an important player in this market, even if it isn’t the sexiest.

I’ve been predicting for a couple of years that the worlds of business process outsourcing (BPO) and Software-as-a-Service (SaaS) would converge. In fact, you can also add managed services to the mix.

The reason for this prediction is that the BPO companies, especially the offshore companies, can no longer sustain their labor-intensive business models. Competition for skilled labor is intensifying, driving up operating costs and creating service continuity issues as workers jump between firms.

In response, the BPO companies must shift their operations from a labor-centric to a software enabled model. SaaS represents a natural solution for this business challenge. The BPOs will use SaaS to automate their existing processes and services, to expand their service portfolios, and to extend the reach of their operations.

The BPOs will use managed services to do the same in the IT infrastructure management arena.

The clearest example of this convergence process is Cognizant Technology Solutions Corporation, which last week announced its intention to acquire marketRx, Inc., a provider of web-based analytics and related software services to global Life Sciences companies in the pharmaceutical, biotechnology and medical devices market. This $136 million transaction follows Cognizant’s acquisition of IT infrastructure managed service provider (MSP) AimNet Solutions in September, 2006.

Although neither Cognizant nor marketRx refers to this acquisition as the coming together of SaaS and BPO, marketRX offers web-based Sales Management & Operations, Brand Marketing & Product Management and Market Research solutions which clearly complement Cognizant’s traditional services.

The acquisition also gives Cognizant deeper inroads into the Life Sciences sector by capitalizing on marketRx’s installed base of 75 customers that includes the 20 largest pharmaceutical companies and 4 of the top 5 biotech companies.

This transaction shows how the line of demarcation between SaaS and BPO is blurring. This point was also brought home in a conversation I had with the founder/CEO of a small payment processing services company last week who wasn’t sure whether to categorize itself as a SaaS or BPO company.

My answer was/is that it depends on the audience. Industry analysts and investors may be concerned about these categorizations, but most customers will see this company and larger vendors like Cognizant as business services companies.

The convergence of SaaS and BPO will enable business services companies to more economically develop and deliver their solutions. Therefore, I expect to see more SaaS acquisitions among the BPOs this year and in 2008.

The consolidation of the legacy software market continued this past week with SAP’s announced plans to acquire Business Objects, followed by Oracle’s announcement that it intends to buy BEA Systems.

These transactions clearly indicate that the traditional, on-premise software market is undergoing fundamental changes. The most obvious driver of the latest announcements is the growing importance of business intelligence (BI) and analytics as a key ingredient in any meaningful enterprise application.

In an ideal world, these acquisitions would mean that customers no longer have to carry the burden of integrating these capabilities into their enterprise software environments. Instead, it would be logical to expect the business intelligence and analytics capabilities to become a ‘plug and play’ component of the SAP and Oracle’s software portfolios. However, it is more likely that these acquisitions will simply make their software solutions even more complex to implement.

SAP could mitigate this risk by leveraging the fast-growing Software-as-a-Service (SaaS) unit within the Business Objects to accelerate SAP’s own efforts to deliver a successful on-demand solution. However, I’ve been a part of too many acquisitions to believe that SAP will fully exploit this asset while it is also trying to absorb the full extent of Business Objects’ capabilities.

Meanwhile, Salesforce.com has taken a different tact to satisfy its customers’ BI/analytics requirements. Rather than acquire a company in this area or build its own BI/analytics capabilities, Salesforce.com has encouraged third-party companies to develop solutions which enhance its SaaS capabilities via the AppExchange.

By providing an assortment of application program interfaces (APIs) and web services that permit third-party integration with its core on-demand applications, Salesforce.com is able to meet its customers’ needs without having to make a direct investment in the added functionality.

I/THINKstrategies think the legacy software vendors (LSVs) can steal a page from Salesforce.com’s playbook and use a similar ‘tugboat strategy’ to move more quickly toward an on-demand capability.

Just like aircraft carriers can take a long time to turn around without the help of a fleet of tugboats, the LSVs can also be expected to take a long time to change their software architectures, revenue structures and corporate cultures in order to become viable on-demand software vendors unless they encourage an army of SaaS companies to integrate with their legacy software products to enhance and extend their core functionality.

Why would SaaS companies want to integrate with legacy software products?

To gain access to existing customers, in many cases enterprise customers they would not be able to access otherwise. Since it is unlikely that customers will discard their existing software products anytime soon, SaaS companies have a better chance of penetrating customer environments if they complement their installed software rather than displacing it.

Ironically, the LSV is less likely to be displaced if they get close to their ‘enemy’. Instead, they can use the SaaS companies to strengthen their positon within these accounts and in the market as a whole by attracting third-party on-demand functionality to complement their on-premise products. They can also get a first-hand glimpse at how the SaaS solutions work and evaluate potential acquisiton candidates.

These Machiavellian tactics are certainly in the repertorie of the major LSVs. They just happen to be exercising a different set of tactics in the latest round of acquisition transactions.