THINK IT Services

As the Software-as-a-Service (SaaS) market matures, it is becoming obvious to everyone involved in this market that selling SaaS solutions can be a complicated.

First, not every SaaS solution can be sold in a simple point-and-click fashion. Many enterprise applications need to be specifically configured to meet the needs of specific customers. A point-and-click procurement system may still be useful in these situations, but an additional configurator or on-line sales support capability may be necessary.

(Many SaaS vendors are discovering that building a cost-effective billing and procurement engine is also more complicated than they expected.)

Second, selling to many mid- and large-scale enterprises still requires face-to-face interaction. This is why Salesforce.com is aggressively recruiting experienced enterprise software salespeople, many of whom I had the privilege of presenting to in Las Vegas two weeks ago at their 2008 kickoff meeting.

Yet, selling a subscription service to mid- and large-scale enterprises doesn’t necessarily produce the same big-ticket contracts and commission checks. Therefore, even a direct sales effort has to be adjusted to recognize the smaller transaction values of SaaS agreements.

That is why most SaaS vendors are building web-oriented, telesales teams that are designed for high volume, but lower value sales environments. These teams are dedicated to penetrating and growing accounts quickly rather than cultivating new customers over an extended period of time.

The good news is that a recent SoftLetter benchmark study found that SaaS salescycles are typically a third to a half the duration of traditional enterprise applications.

But, this requires a different breed of salesperson, different selling process and different compensation policies.

Generating more rapid sales also entails packaging, pricing and promoting the SaaS solution differently. In addition to offering free trials, creating more modular packaging and pricing options are essential to encourage customers to adopt SaaS solutions with minimum risk.

It is also important to recognize that the most successful SaaS vendors designed their solutions to appeal to the end-user rather than the IT decision-maker. They’ve also built their go-to-market sales strategies to target the end-user.

However, many of these end-user/business decision-makers have never heard of SaaS and aren’t looking for a software solution to meet their needs. Instead, they are looking for a business service. So, SaaS vendors must sell the business benefits of their solutions rather than the technical features.

This point was brought home by someone I met at SoftLetter’s SaaS Sales and Marketing seminar in Atlanta earlier this month. Here’s part of the email he sent me last week,

We recently attended the NADA (National Automotive Dealers Association) Show in San Francisco attended by over 120,000 Dealers and Industry Professionals. Every OEM was there in full regalia with cars, trucks, concept vehicles, hydrogen powered cars…you name it, it was there.

In addition to breaking through all of that clutter, we had to compete with other software solutions at the show, like www.DealerTrack.com who hired NFL Hall of Fame Jerry Rice to pose for pictures with Dealers and www.Dealer.com who “engaged” PlayboyBunny Miss January 2008 for autographed pictures of a more revealing nature.

Yet, here we were in our tiny 10′ x 10′ trade show signing up dealers left and right by offering the simple benefits of SaaS. Free Trial. Low Entry Price. Pay As You Go. Not to mention, no hardware or software. Other vendors around us looked on with envy including Microsoft with their Dealer Management System that’s been under development for 3 years and won’t debut until 2010 with only 40 Dealers.

So here’s the interesting part. When we were pitching these sophisticated multi-millionaire Car Dealers, we had to teach them about SaaS like they were kindergarten kids. They had never heard of “Software as a Service”, let along the acronym of SaaS. In fact, they were still trapped into thinking that they had to own their entire IT infrastructure.

It just shows how much work needs to be done to inform business owners about the SaaS world. After all, these are the kinds of folks that are going to provide the fuel (i.e., $$$) to grow the SaaS ecosystem. So we’ve got to start getting the word out beyond the IT and VC communities.

As Charles Barkley says, “I could be wrong, but I doubt it.”

Since Michael Dell returned to the helm of his company, he has been dramatically reshaping its channel and services strategies. He is also putting the IT industry on notice that the way hardware companies define and deliver services is changing.

The old guard of the IT industry recognized in the 1980s and 1990s that tech support, professional services and outsourcing could generate lucrative revenues and create greater lock-in opportunities in an increasingly commoditized hardware business. Lou Gerstner saved IBM by turning it into a services company.

Dell bucked this trend by investing in sophisticated supply-chain, fulfillment and customer service processes which enabled it to succeed as a low-cost, high-margin manufacturer.

HP stole a page from Dell’s book and usurped its price advantage. Without a strong services story to serve as a safety-net, Dell was vulnerable to customer defections. It is now seeking to regain its competitive advantage by redefining how services are delivered. In the old world, services were a people-intensive business and highly customized. Dell plans to automate and simplify the way services are delivered.

After acquiring SilverBack Technologies and Everdream in 2007, Dell acquired MessageOne this past week. MessageOne is a leading provider of Software-as-a-Service (SaaS) enabled enterprise-class e-mail business continuity, compliance, archiving and disaster recovery services. MessageOne is in the same business as Postini, which Google acquired last year to fortify its Gmail capabilities and recently rolled out as an enterprise-class email archival service.

What makes Dell’s acquisition intriguing is the fact that it doesn’t offer an email service. But, that isn’t stopping Dell from adding this functionality to its rapidly growing portfolio of SaaS capabilities that now include remote desktop, server, security and helpdesk management services.

Dell has promised to deliver these SaaS capabilities via its growing array of channel partners to support their managed service offerings, but has also admitted that it will utilize them to support some of its customers directly. This direct service capability and a history of ignoring resellers has led to rising concerns among channel companies that Dell is going to commoditize their traditional on-site support business.

Dell isn’t just SaaSifying its services business.

Dell also unveiled this week a new Storage Simplification Assessment program which Dell promises will simplify the process of evaluating and selecting storage, backup, recovery and archiving solutions. Dell will offer these assessments directly and through its channel partners.

Dell has also restructured its customer support portfolio, consolidating its previous offerings into two simple options,

1. ProSupport for IT
2. ProSupport for End-Users

At Ziff-Davis’ recent Channel Summit, Dell’s channel czar in the Americas–Greg Davis–was asked if Dell intends to commoditize services the way it commoditized the hardware business. He said no, it planned to simplify the way services are packaged and priced.

If Dell’s moves are successful, they will encourage customers to set new standards for how services are sold and delivered. This will force other technology companies to restructure their service portfolios and streamline their delivery mechanisms in order to compete. It will also force channel companies to re-think how they package, price and position their services.

Maybe a measure of the Software-as-a-Service (SaaS) movement’s success is the growing attention billing systems are now getting from a variety of sources.

Last week, Jamcracker unveiled its new WebStores which will provide front- and back-end service delivery infrastructure, billing and settlement, customer administration and support services for traditional channel companies who want to add on-demand applications to their existing software, hardware and service portfolios.

Today, OpSource announced that it has acquired privately-held and Dublin-based LeCayla Technologies, a provider of billing and customer on-boarding software for SaaS and Web-based applications, to strengthen OpSource’s Web application delivery platform. (Click here to read THINKstrategies’ 2006 profile of LeCayla, or listen to my 2007 podcast with LeCayla’s CEO, Conor Halpin.)

These are just the latest moves by a widening array of players who are offering storefront solutions to make it easier for SaaS vendors to sell and customers to buy their on-demand solutions.

My friend and colleague, Phil Wainewright, recently posted a blog examining Amazon’s DevPay billing and account management service aimed at making it easy for developers to get paid for applications they build on Amazon Web Services.

Why all the attention on a mundane topic like billing?

Now that SaaS is gaining broad-based market acceptance and adoption of SaaS-oriented solutions is accelerating, SaaS vendors are becoming more concerned about how to properly charge for their services and track customer usage.

But, billing for on-demand services isn’t like billing for traditional products. Unlike the static nature of traditional products, on-demand services is a high-transaction and highly dynamic business with lots of moving parts, such as varying packaging options and pricing schedules, never mind variable usage rates and measures. On-demand service providers, including SaaS vendors, are discovering that this business requires a sophisticated billing engine to successfully process transactions.

Most on-demand service providers, especially start-up SaaS vendors, cannot afford to build these kinds of systems themselves. They are operating in a highly competitive environment in which price sensitivity and customer abandonment are a constant concern. They have to focus their energies and limited financial resources on developing superior solutions rather than worrying about front- and back-office operations. So, they are looking for turnkey billing and customer management systems from third-parties which can be easily adopted and economically administered.

In response, SaaS platform players are extending their portfolios beyond software development tools and partner ecosystems to include billing and customer management systems.

Salesforce.com recognized this need and business opportunity in 2006 when it unveiled its AppStore idea. Although its announcement was among the first at the time, the company has said little about this capability since preferring to emphasize the broad-based capabilities of its Force.com platform.

Others are now stepping into the void with their own solutions. Specialists like Aria Systems are being fortified by VCs. eBay may direct some of its vast payment processing capabilities toward the SaaS market. And, traditional payment processing players, like AmEx and MasterCard, might move into the market via acquisition.

As the SaaS market matures, the winners will be those companies which have the most efficient and effective transaction management systems, as well as the strongest SaaS offerings.

Google made two announcements this week which received limited attention because they had been anticipated for some time. Nonetheless, these two new offerings will still have an impact on the Software-as-a-Service (SaaS) and managed services markets.

Google’s first announcement unveiled a series of security “products” based on the email message filtering, encryption and archiving capabilities Google acquired when it purchased Postini. Although Google refers to these offerings as products, they are being sold on a subscription service direct to customers or via channel partners who can package these capabilities into managed services.

Google’s objective when it acquired Postini was to fortify its messaging and archival capabilities so it could appeal to a broader cross-section of business customers, especially large-scale, publicly traded enterprises who are facing stricter compliance requirements. Google’s new Message Filtering, Security and Discovery offerings provide a solid, yet simple and economical solution to respond to these demands. Anyone who doubts the scalability of these capabilities should note that Postini’s solutions are already being used by nearly 40,000 customers and 14 million users a day.

These new offerings represent a double-edge sword for managed service providers (MSPs). Google’s growing role in the delivery of managed security services helps to validate this business and should expand the market opportunity. But, it also raises the bar by lowering the price points for these services. MSPs must demonstrate how they add value if they are going to compete against Google’s lower cost services.

Google also unveiled its new Apps Team Edition for business customers and schools. This new suite of free applications are clearly aimed at dislodging Microsoft Office as the de facto standard for business solutions. Not only is Google challenging one of Microsoft’s cash-cows from an economic standpoint with its free offerings, it is also challenging Microsoft Office by emphasizing the greater collaborative qualities of its web-based apps.

Google has also borrowed a best practice from Apple and other technology leaders who have learned that the best way to win marketshare is by targeting customers when they are young. And, the best place to gain their attention is in the schools. It is no accident that Google emphasizes the benefits of Apps Team Edition for both business users and students in this week’s announcement.

Google has also established a clear service roadmap that enables users of this new suite of free services to easily upgrade to Google Apps Standard, Premier or Education editions which include administrative controls for setting access and sharing options, business integration capabilities and 24/7 support, including phone support.

So, while Microsoft is seeking to usurp some of Google’s power in the online search world with its proposed acquisition of Yahoo!, Google is escalating its efforts to undercut Microsoft’s dominance in the productivity software market.

Rather than view this escalating battle as a parlor game, aspiring SaaS vendors and MSPs as well as IT/business decision-makers should pay attention to how Google and Microsoft’s moves are reshaping the software and services markets. There are many lessons to be learned from their maneuvers and new market/sourcing opportunities that can be capitalized upon.

I often have the privilege of being briefed by companies about their strategies and services prior to them being publicly announced. In many cases, these briefings involve companies which are still in ’stealth’ mode and I must wait patiently until they reveal themselves to the rest of the world before I can talk about them.

One such company is Pathworks Software. I met its President/CEO, Anthony Nemelka, at the SIIA On-Demand Conference last November and was immediately impressed with his vision and company strategy. That strategy and the company’s initial set of solutions were publicly announced at the DEMO ‘08 conference.

At that event, Pathworks Software unveiled the company’s flagship on-demand customer support solution, Helpstream. Pathworks’ new offering is newsworthy because it combines many of the best practices of the open source and Web 2.0 worlds to create a potentially powerful Software-as-a-Service (SaaS) solution to meet today’s help desk needs.

From the open source world, Pathworks Software borrows the freeware idea of giving away its solution for free in favor of funding its operations with ongoing support fees rather than software license fees.

From the Web 2.0 world, Pathworks Software has borrowed the ‘power of community’ idea by building collaboration tools into its Helpstream solution to give users the ability to capture and utilize customer support information from a wider array of sources.

Throw in web-based case management and knowledge management systems, and you have a SaaS help desk platform that could also become a generator of best practice benchmarks over time.

Nemelka has a firm handle on the market opportunity based on stints at IBM, Adobe, Epiphany and PeopleSoft. The company is funded by Foundation Capital and Mohr Davidow Ventures, along with Roger Sippl, the founder of Informix and Vantive.

Pathworks Software’s approach has also gained market validation from its six-month beta that generated over 2000 workspace registrations and 6000 active registered users. Converting these users to paying customers will be essential to Pathworks Software’s long-term success.

In the short-term, the company’s biggest obstacle might be a couple of minor branding issues. Enter http://www.pathworkssoftware.com/ in your browser and you land at http://www.helpstream.biz/, which could confuse some potential customers. And given the company’s SaaS orientation, it might be more appropriate to call the company Pathworks ‘Services’.

However, the big picture opportunities for Pathworks Software far outweigh these minor concerns.

THINKstrategies’ research and consulting work clearly show a rapid rise in customer receptivity towards solutions like Helpstream. Pathworks Software is in a great position to capitalize on this market opportunity.

If Pathworks Software succeeds, it will be another bellweather of the historic migration of companies from on-premise to on-demand solutions.

Microsoft’s proposed acquisition of Yahoo has gained plenty of attention because of its blockbuster pricetag and obvious attempt to blunt Google’s success in the online search advertising business.

However, I think the acquisition also has significant implications for the future of on-demand services. Yahoo’s popular portal will certainly be a great new channel to market for Microsoft’s on-demand games and Zune entertainment initiatives.

I’ve also been saying for the past two years that Yahoo and other major online outlets will become the new channels to market for Software-as-a-Service (SaaS) solutions and managed services. This is because many corporate customers are gaining confidence in SaaS and managed services as a viable alternative to traditional on-premise products result of their overall comfort with consumer-oriented on-demand services like Amazon, eBay, YouTube and iTunes. This consumer to corporate buyer crossover makes Yahoo an appealling outlet for on-demand business services.

Yahoo has been offering services to small businesses for a number of years that help them “Get Online”, “Sell Online” and “Market Online”. While these services only include simple hosting and email today, they could easily be expanded to include a broad array of SaaS business applications and a broader set of managed services powered by Microsoft and its ISV partners.

Leveraging the Yahoo portal as a channel to market for Microsoft’s “software plus services” solutions and partner offerings built on Microsoft’s platform would give them greater visibility to a broader audience of potential customers.

However, this assumes two things:

1. Microsoft has to successfully acquire and integrate Yahoo into its corporate structure and culture. Although no definitive data exists, most studies suggest that 50-80% of corporate acquisitions and mergers fail to achieve their original business objectives. This is especially true with mega-deals that place big bets on producing a strategic impact for the companies involved and more often create a major disruption in their operations.
2. Microsoft has to convert its “software plus services” strategy into a real portfolio of competitive offerings. Although Microsoft can make a compelling case for customers extending the functionality of its current products via web-oriented extensions, a growing proportion of businesses are looking for true web-based solutions that eliminate the hassles and inherent shortcomings of premised-based applications. Microsoft’s current strategies and solutions do not recognize these changing attitudes or satisfy customers raising expectations.

Unless Microsoft can overcome these challenges, it will not be able to fully capitalize on the Yahoo acquisition.