THINK IT Services

Since the holidays are traditionally a time for people to take stock of the year past and offer their new year forecasts, here are my top ten predictions why the shift from packaged products to Software-as-a-Service (SaaS), utility computing and managed services will accelerate in 2008:

1. Services are Recession Proof: Escalating oil prices, the uncertain political landscape and faltering financial institutions beset with the aftereffects of the sub-prime lending debacle could mean a tough year for the economy. In this tenuous climate, consumer and executive confidence could decline, leading to an economic slowdown. As a result, many companies could hold back on their capital investments to mitigate their risks. The ability to adopt on-demand services on a pay-as-you-go basis will be a perfect sourcing strategy for businesses seeking greater cost-controls and flexibility.

2. Everyone’s Going Virtual: Most industry pundits and participants view virtualization as a technology trend, but it is also a business trend. Employees are increasingly working outside the four walls of a traditional office. Gen Y workers are always on the move and online. Traditional, on-premise applications and centralized servers sitting behind a firewall can’t effectively serve today’s mobile workers. SaaS and managed services are perfectly suited for these new, virtual business requirements.

3. Amazon, IBM and Google Bet on Utility Computing. After experimenting with its Elastic Compute Cloud (EC2) for the past year, Amazon has found plenty of demand for its computing power on-demand platform from startups, as well as established companies seeking a ‘sandbox’ for their new initiatives. Amazon is now confident it can deliver its computing power in a reliable and cost-effective fashion to a broader market of business users. So, expect more aggressive PR and marketing efforts to promote and sell this powerful utility computing service.

IBM Blue Tune: IBM originated the term on-demand and then walked away from the utility computing market seeking new opportunities among the avatars. When Amazon proved that the utility computing concept could become a reality, IBM repackaged its autonomous computing ideas in the form of a new ‘blue cloud’ initiative. Big Blue will push the idea hard in 2008.

The GooglePlex Makes It Move. Google is tired of sitting on the sidelines while Amazon’s success and IBM’s new ‘blue cloud’ initiative, Google has initiated a PR campaign to promote its ‘cloud’ computing capabilities and strategies. The GooglePlex has long been considered the prototype for a new large-scale computing architecture. Now Google’s incredibly scalable and economical computing engine is getting the attention of business pubs like BusinessWeek, the Wall Street Journal and other mainstream pubs.

4. Nick Carr Returns: In truth, he never left us. It was Carr who gave utility computing a major push with his seminal article in the Harvard Business Review and follow-on book questioning whether IT mattered. Despite venomous criticisms from many IT pubs and professionals, Carr became a popular speaker at corporate events because his message resonated with business executives and end-users. Now, he is putting the finishing touches on his second book, The Big Switch: Rewiring the World, from Edison to Google, which will be published on January 7, 2008. Although IT folks love to hate him, Carr has never lost his luster among corporate executives and end-users who agree with his basic premise that IT is a needless hassle and should be as easy as electricity and as reliable as a utility.

5. SaaS Solves SOX: A year ago, most publicly traded companies and other large-scale enterprises rejected the idea of SaaS because they thought they needed to take greater responsibility for their own compliance requirements. Now, they view the process controls, auditability and offsite hosting features common in most SaaS applications as a perfect solution for their Sarbanes-Oxley (SOX) needs. As a result, enterprise adoption of SaaS will accelerate.

6. Managed Services 3.0, Unified Communications Services and Service Automation: In the 80s, managed services were really outsourcing agreements offered by carriers to their largest corporate customers. In the 90s, a new generation of standalone MSPs promised managed services for SMBs. Neither model succeeded.

Today, we are entering a new age of managed services. Managed Services 3.0 combines the experience of the past with powerful new technologies to respond to growing customer demand. Cisco Systems will be pushing its IP communications and WebEx capabilities hard, while Microsoft promotes the virtues of its various “software plus services” solutions. The two are on a collision course in the unified messaging and communications market, but that will mean that they will each spend plenty on market education and channel sales programs.

At the same time, Dell will be leveraging its SilverBack Technologies and Everdream acquisitions to deliver a new set of automated, remote desktop and server management capabilities through channel partners and direct support services. Expect to hear more from HP and others.

7. Carriers and Channel Companies Find Success With New Services: Carriers have been perplexed about how to package, price and promote profitable managed services. VARs have been afraid that SaaS would ‘dis-intermediate’ them by eliminating their consulting and custom application development business. Carriers now see an opportunity to deliver an integrated package of IT managed services and SaaS business solutions to add value to their commoditized dial-tone services. Channel companies are also discovering that there are still consulting and customization opportunities in the SaaS market. As a result, carriers and channel companies will lend their marketing and sales support to managed services and SaaS.

8. Failure Doesn’t Matter: NaviSite suffered an extended outage in November and the on-demand services movement didn’t miss a beat. The trade press is now looking for horror stories rather than success stories regarding SaaS and managed services, but the vast majority of stories have been positive. In fact, my third annual SaaS survey in conjunction with Cutter Consortium found 100% satisfaction among the companies currently using on-demand software services. The upcoming SaaScon conference will highlight some of these customer success stories. THINKstrategies will also spotlight these stories throughout 2008.

9. IT Discovers Services are the Solution: In the past, the IT department was the biggest barrier to managed services and SaaS adoption. Many IT professionals were afraid these on-demand solutions would eliminate their jobs. Now, a growing proportion of IT people see managed services and SaaS as a way to out-task mundane work or overcome complex application/technology deployment and maintenance responsibilities. As they learn to take advantage of these on-demand solutions, IT departments will finally be able to put their daily firefights aside and focus on addressing the strategic needs of their business users.

10. Wall Street Buys Into Services: Some of the most successful IPOs of 2007 were in the SaaS market. Wall Street loves the predictability of subscription services and now that it has a solid set of market ‘comps’ to measure business success in the services market, it will be encouraging more privately held companies to go through the IPO door. At the same time, private equity funds will be encouraging publicly traded software companies to go private to enable them to shift to a SaaS model without the public market pressures. And, the investment bankers will be pushing a wide array of M&A activity. Expect the offshore IT/business process outsourcers (IT/BPO) and business services companies to buy SaaS vendors. Look for more consolidation in the managed services market.

Bonus Driver of Services Growth in 2008: THINKstrategies will be expanding its consulting and marketing programs aimed at educating IT/business decision-makers about the benefits of on-demand services, and continuing to help software and technology providers develop and deliver successful service solutions. Stay tuned to the SaaS and Managed Services Showplaces for more information and insight about these new programs and features.

Anyone who has been in the networking industry for over ten years will recall when the term ‘new world service providers’ (xSPs) was coined to denote a new breed of carriers who promised to disrupt the telecommunications industry. Some of these xSPs were competitive local exchange carriers (CLECs), others were Internet service providers (ISPs) or hosting companies.

Although they emerged with plenty of fanfare and promised to deliver a broad set of powerful new data services, when the dot.com bubble burst the majority of these companies disappeared as the telecommunications industry fell into a long, dark, ‘nuclear winter’.

The recent surge in demand for web-based services has rekindled the original dreams of those xSPs who survived and is attracting a new generation of service providers hoping to capitalize on this new round of business opportunities.

Over the past six months, a series of xSPs have informed me of their intentions to deliver a combination of managed IT services and Software-as-a-Service (SaaS) solutions in response to growing customer adoption of these ‘out-tasking’ alternatives.

Two of these companies, Telus and XO Communications, are working with Jamcracker—another survivor of the dot.com era—to provide managed IT services and SaaS solutions. They are leveraging Jamcracker’s ‘aggregation’ platform which enables carriers and other channel companies to resell a widening array of on-demand services.

Verio, a division of NTT Communications, recently unveiled a portfolio of Business Solutions that includes a set of managed security and storage services, as well as SaaS customer relationship management (CRM) and collaboration solutions.

Wayport, which many know as a leading provider of internet access services in hotels and other travel locations, is also expanding its portfolio of services. It is the provider of AT&T’s private labeled WiFi service in McDonald’s outlets. It is collaborating with Wyndam Hotels to support the hospitality company’s loyalty program. It is providing other hotel chains an assortment of facilities management services via its remote service capabilities.

Each of these xSPs sees a new world of on-demand service opportunities, and are scheming and teaming to capitalize on them. Although they each face significant challenges achieving long-term success, today’s ‘perfect storm’ can propel them to more positive results than in the past.

Widely deployed broadband networks and an assortment of other enabling technologies make it easier and more cost-effective to deliver managed IT services and SaaS solutions. And, a new set of business pressures are making companies of all sizes more receptive to these services and solutions.

Last week’s announcement by Salesforce.com that it had surpassed one million paying customers marks a milestone for the Software-as-a-Service (SaaS) movement, as well as the company.

THINKstrategies‘ latest industry survey in conjunction with Cutter Consortium has found a third of companies are already utilizing some form of SaaS to help them operate their business and meet their corporate objectives. Our survey found 100% satisfaction among these customers with their SaaS solutions.

This level of satisfaction is unprecedented. It is not only motivating current customers to acquire more SaaS solutions to meet their IT/business needs, but it is encouraging them to recommend SaaS to their peers. This is fueling the growth of SaaS in every segment of the software industry and across every segment of the market.

(Contact me if you’d like to be notified when these survey findings are published.)

While Salesforce.com’s milestone is the clearest example of the growth of SaaS, I was privileged to participate in an event in the Boston area this week which marked a different kind of milestone with a similar implication.

This past Tuesday, Hosted Solutions and the Massachusetts Technology Leadership Council (MTLC) combined with F5, Level 3 and Ping Identity to host a celebration of the recent IPOs of three Massachusetts-based SaaS companies–Athena Health, Constant Contact and Salary.com.

Anyone who has been a part of an IPO knows that this is an enormous accomplishment. A successful IPO is a clear indicator that you’ve built a business that is sustainable and a worthwhile bet for the future. The attendees of this week’s IPO celebration gained some useful insights and plenty of encouragement from the CEOs of the three honored companies.

Jonathan Bush of Athena Health, repeated his declaration from a previous MTLC event that “software is dead, dead, dead, dead!” He told the attendees that the key to SaaS success is to offer a ‘business’ service that makes the software invisible and satisfies a obvious problem at a lower cost and better quality than a user can accomplish on their own.

Gail Goodman of Constant Contact suggested that aspiring SaaS companies have to continuously iterate in order to find the right formula for success, but continuously focus on the quality of the customer experience from an ease-of-use standpoint.

Kent Plunkett of Salary.com offered ten ’steps to success’ that centered on building a solid multi-tenant architecture, a consistent packaging and pricing model, and a strong service and support capability to ensure scalable, reliable, secure and satisfying solutions.

If more SaaS companies can adopt these best practices, the SaaS movement will gain even greater momentum and market acceptance in 2008.

Check out THINKstrategies’ SaaS Showplace to see how many companies are offering SaaS solutions by Application and Industry, as well as the enabling technologies which make SaaS possible.

IBM’s acquisition of Arsenal Digital Solutions is the latest transaction driven by the growing concern among businesses of all sizes that they have to do more to protect their electronic files in order to safeguard against natural disasters and satisfy escalating regulations.

What makes this trend even more interesting is that it has brought greater attention to the fundamental advantages of using a “hosted”, managed service to respond to these business concerns. This has made a widening array of storage, e-discovery and other managed service providers (MSPs) very attractive acquisition targets for an expanding assortment of potential buyers.

Here are a few of the acquisitions which preceeded IBM’s announcement,

• Seagate $185 million purchase of EVault
• EMC’s $76 million acquisition of Berkeley Data Systems Inc.’s Mozy storage service
• Autonomy’s $375 million acquisition of email archiving service provider Zantaz Inc.
• A series of acquisitions by Iron Mountain, including the $158 million purchase of Stratify, Inc., an e-discovery services firm.

Even Google’s acquisition of Postini was driven, in part, by the need to provide greater archiving capabilities within Gmail if it is to be accepted by mid- to large-scale businesses.

The explosion of digital files, ranging from email to patients’ records, is forcing businesses of all sizes to reevaluate their storage strategies and archival systems. Intense media coverage of the latest natural disasters has made everyone more sensitive to the risks associated with failing to properly back-up and store valuable computer files.

What began as a simple consumer craze with services like Flickr to handle personal pictures, has quickly morphed into a potentially lucrative managed service opportunity.

As consumers move from personal worlds into their professional workplaces, they are becoming equally aware of the need to better protect their corporate documents and records. And having enjoyed the ease-of-use and economic advantages of a back-up and retrieval service for their personal needs, they are seeking a similar solution for their business requirements.

So, it shouldn’t be surprising that storage vendors like Seagate, EMC and now IBM are adding these services to their corporate portfolios via acquisitions. Telcos, ISPs and hosting companies are already leveraging their communications infrastructure and server facilities to offer similar managed storage, back-up and disaster recovery services. Even Microsoft and Dell are offering inexpensive storage services to their customers. Expect HP and others to follow suit.

This trend represents a challenge and opportunity for traditional business continuity and disaster recovery service providers, such as Sungard. The challenge is that they must rearchitect their services to compete with the more focused and less expensive managed services of today. The opportunity is that if they succeed in their restructuring efforts, they will have a far larger market opportunity to attack.

Utility computing is one of those IT industry concepts which has taken a long time to evolve into reality.

While discussions about this idea were mostly theoretical when it first emerged at the turn of this new century, today a new generation of players is turning the theory into an actuality.

After it helped to originate the idea, IBM is now trying to play catch up in the rapidly evolving utility computing market.

You can read my views about this ironic twist of fate on ITworld’s Utility Computing portal.