THINK IT Services

Today’s deepening economic crisis is testing the mettle of IT/business decision-makers, IT solution providers and technology investors alike.

IT and business decision-makers in nearly every industry must make cuts to their capital and operating budgets in order to offset rapid declines in business and tightening credit markets. In many cases, this is forcing them to fundamentally reevaluate the way that they acquire and utilize technology and business applications, and leading them to seriously consider various on-demand service alternatives such as Software-as-a-Service (SaaS), cloud computing, and managed services.

I have recently suggested in commentaries in Datamation and the Business Technology Roundtable that any IT/business decision-maker who isn’t seriously considering these on-demand alternatives is doing their organization a disservice and could be jeopardizing their jobs.

THINKstrategies’ latest customer survey in conjunction with Cutter Consortium clearly shows that organizations of all sizes are adopting SaaS solutions to reap the economic and functional benefits of these on-demand services.

However, many of my clients are also reporting that they are putting a hold on all spending until they get a clearer picture of the state of the economy in 2009. In addition, many are also issuing requests for information (RFIs) to their current suppliers, including SaaS companies they are already using, to obtain additional financial data that can help them determine which vendors are most likely to survive a worsening economy. This is the first step of a broader initiative being undertaken by many of these companies to weed out those suppliers who may fail in the coming months.

Proving their long-term financial viability will become a key challenge for many SaaS, cloud computing and managed service providers (MSPs). Compounding this problem is the growing anxieties within the venture capital (VC) community which is facing severe pressures from their limited partners (LPs)–financial institutions, universities and others–who have been seriously impacted by the economic meltdown. With many of these LPs threatening to renege on their original commitments, the VCs are carefully scrutinizing and setting higher standards for their current and prospective portfolio companies alike.

As a consequence, many of the SaaS, cloud computing and managed service companies who were hoping to capitalize on the current crisis by increasing their sales and marketing efforts to promote their business benefits in a down economy are being forced to go slow or even cut back their spending instead. Many of these on-demand service companies are also facing longer sales cycles as customers delay their purchase decisions and demand more information about the providers’ operations and financial status as a part of their due diligence process.

Given that THINKstrategies’ SaaS Showplace already has over 900 companies from around the world offering over 4500 SaaS solutions organized into 80 Application, Industry and Enabling Technology categories and there may be twice that many companies actually offering on-demand services, an industry shakeout is inevitable and likely to happen sooner than expected.

These trends were the focal point of the recent Software Business and SIIA On-Demand conferences I participated in over the past few weeks. While Salesforce.com’s Dreamforce user conference was a celebration of the accelerating capabilities of cloud computing and SaaS, the Software Business and SIIA On-Demand conferences where more somber industry events were concerns about today’s economic environment were the center of attention.

I think the reality is somewhere between the euphoria and despair these two events. The measurable benefits and growing number of customer success stories that on-demand service providers can boast give them a clear long-term advantage over traditional, on-premise software and systems. However, these companies will face stiffer challenges from incumbent players and conservative decision-makers.

An indication of the competitive challenges facing SaaS and cloud computing vendors was provided by Anthony Lye, the Senior Vice President of Oracle’s customer relationship management (CRM) division, at the SIIA On-Demand conference. Lye spent about 30 minutes of what was supposed to be a “Point/Counter-Point” keynote session challenging the fundamental benefits of on-demand solutions and questioning the long-term viability of the on-demand services model, despite the fact that he is responsible for running Oracle’s on-demand CRM solution which has experienced significant growth over the past year.

Lye’s tough-minded presentation was an example of the same kind of subtefuge which his boss, Larry Ellison, the Chairman/CEO of Oracle, has been conducting for the past year with his own statements aimed at discrediting the on-demand services market despite the fact that Oracle is one of the largest suppliers of databases and middleware for SaaS and cloud computing vendors. (Click here to read THINKstrategies’ profile of Oracle’s SaaS enablement platform strategies and solutions.)

On-demand service providers will have to do a better job than Zach Nelson, the CEO of NetSuite, did at the SIIA conference. Nelson was supposed to offer a SaaS industry response to Lye’s incumbent software vendor (iSV) arguments, but he chose to side with Lye instead and distance NetSuite from the rest of the SaaS community. Rather than dispute any of Lye’s contentions and misrepresentations of the SaaS model, Nelson decided to take only 15 minutes of his portion of the keynote session “debate” to promote NetSuite’s integrated software and new focus on the service industry based on its acquisition of OpenAir.

Anyone who wasn’t aware that NetSuite offers SaaS solutions would have thought it was a traditional software vendor based on Nelson’s presentation. It was a disappointing performance which will do little to endear NetSuite to the rest of the SaaS industry. Instead, it only reinforced the impression that NetSuite and Oracle have a mutual understanding about how they will complement rather than compete with one another.

So, the on-demand services movement will continue to be led by Salesforce.com, Google, Amazon, Facebook and other innovators. It will also be led by bold, new leaders. Although Marc Benioff of Salesforce.com is the figurehead of the movement and Treb Ryan of OpSource is another important evangelist. Josh James of Omniture has emerged as an important spokesperson as well. James delivered a captivating presentation at the SIIA On-Demand conference which elaborated on a similar talk which gave at OpSource’s SaaS Summit last February regarding the key management metric for measuring SaaS sales effectiveness–the ‘magic number’.

It will take bold ideas and actions to succeed in the on-demand services market going forward. The winning on-demand service companies will be those who can convey a compelling message regarding the fundamental business benefits of their SaaS, cloud computing and managed service solutions, and deliver these tangible results in a cost-effective manner.

Like the well known line from Charles Dickens’ book “Tale of Two Cities” goes, these will be the best of times and the worst of times for the on-demand services movement.

THINKstrategies’ fourth annual Software-as-a-Service (SaaS) customer survey, in conjunction with Cutter Consortium, revealed that 63% of the responding organizations are using a SaaS solution, almost double the 32% who were using SaaS solutions in 2007!

Over the past four years, THINKstrategies and Cutter have been charting the growth of the SaaS market with a series of yearly customer surveys. Our surveys were the first to find widespread interest and substantial adoption of SaaS in 2005.

In 2006, we began to see businesses of all sizes adopting SaaS solutions specifically designed to meet their vertical market needs, as well as their horizontal application requirements.

In 2007, we found customers were beginning to examine the platform capabilities of SaaS vendors as they sought to identify those vendors that could serve as strategic sources for their SaaS requirements. We also found growing acceptance of SaaS solutions by IT professionals who were beginning to adopt SaaS solutions to help them better manage their IT operations.

This year, our vanguard research has uncovered a new round of important market trends that have implications for IT and business decision makers, SaaS providers and independent software vendors (ISVs), channel companies, integrators, and investors. In addition, our survey found customer satisfaction has risen to a whopping 97% of responders!

Click here to obtain the first of a series of three Executive Update reports based on our latest SaaS survey results. Contact me if you’d like to discuss the implications of our findings on your company, or to learn more about our services aimed at helping companies capitalize on SaaS to achieve their business objectives.

One of the most vexing questions in the Software-as-a-Service (SaaS) market, and broader on-demand services industry, is what role traditional channel companies will play in this brave, new world.

While Salesforce.com and other SaaS vendors are touting the enormous advantages of leveraging the ‘cloud’, there are still plenty of companies on Main Street who are just beginning to become familiar with today’s online services. Many of these small- and mid-size businesses (SMBs), and even large-scale enterprises, have relied on their local value-added reseller (VAR) and system integrator (SI) as not only their primary technology supplier but also their ‘trusted advisor’ for their technologies strategies.

These VARs and SIs have been uncertain about the impact of SaaS solutions and on-demand services on their businesses. In fact, many feel down right threatened by these services.

There is no question that SaaS solutions and on-demand services eliminate much of the upfront planning and design, installation and integration, and ongoing support requirements which have been the bread and butter of VARs and SIs’ revenue streams, not to mention the margins they made on hardware and software product sales.

However, there is still plenty of opportunities for channel companies to add value to SaaS and on-demand services across the entire lifecycle of customer requirements from needs assessment through the deployment and management processes. Appirio, Astadia, Bluewolf, SaaSpoint and Sofia Works are living proof of these new market opportunities.

Today, HP and NetSuite announced they are partnering to offer SaaS business applications to SMBs via HP’s vast channel community of 15,000 VARs in the U.S.

Under this agreement, HP and NetSuite will initiate a referral-based program for HP channel partners that will encourage them to recommend NetSuite’s solutions to their customers. They will also offer new value-added implementation and management services as part of the HP Total Care support program.

NetSuite will provide dedicated resources to support the HP resellers, along with a toll-free hotline for channel sales support and a self-service portal for channel partners to access sales tools and online training resources.

This agreement is significant on a number of levels.

First, it gives NetSuite a vast new channel to market to a broad cross-section of SMBs.

Second, it gives a wide array of VARs/SIs an opportunity to jump onto the on-demand services bandwagon with the help of HP.

Third, it gives HP a SaaS solution to sell to SMBs through its channel partners.

And fourth, it gives SMBs an opportunity to obtain a SaaS solution from their existing technology suppliers who they trust.

This agreement is a strong endorsement for NetSuite at just the right time. The company has been trying, without luck, to keep pace with Salesforce.com which continues to command the attention of the on-demand/cloud computing industry because of its brilliant marketing efforts and robust sales growth. Meanwhile, NetSuite has never been a strong marketing company and has seen its stock value severely impacted by failing to meet Wall Street expectations which hasn’t helped its standing in the SaaS industry.

Teaming with HP can be a timely shot in the arm for NetSuite. As a result of its acquisition of EDS, HP is now the largest vendor in the IT industry. HP has spent years building a strong channel network. Its willingness to expose the HP channel partners’ to NetSuite’s solution shows that HP believes it is a good fit for their customers. Otherwise, HP wouldn’t waste its time promoting NetSuite’s solution or jeopardize its channel relationships.

This agreement is also a way for HP to gain entry into the SaaS market where they have lacked a presence. In fact, I’ve been told by HP insiders that the company’s own SaaS initiatives have been slowed by their EDS acquisition. Who knows, HP might become a potential acquirer of NetSuite as a result of this relationship rather than Oracle who has been the most natural candidate in the past. On a more tactical level, the alliance also gives HP to opportunity to sell and promote more of its ProLiant servers and StorageWorks Modular Smart Arrays which are a key component of NetSuite’s service delivery infrastructure.

Ultimately, this alliance has the potential to be a win-win-win-win for all four parties—NetSuite, HP, channel companies and customers.

However, making this agreement a success won’t be easy. It will take time to train the channel companies and devise the right pricing and promotional programs to encourage them to sell NetSuite’s solutions. Even when the channel companies become comfortable with NetSuite and convinced that they can make money in this program, it will still take time to sell a enough NetSuite subscriptions to have an impact on everyone’s financial results.

Nonetheless, the evolution of this alliance will be an important indicator of how traditional channel companies will participate in the SaaS/on-demand services market. While the hoopla at last week’s Dreamforce was squarely focused on the new world of the ‘cloud’, today’s announcement may help to define the role of traditional channel companies in the SaaS market of the future.

Despite the economy, election and lingering questions about whether Software-as-a-Service (SaaS) is enterprise-ready, this week’s Salesforce.com Dreamforce conference drew nearly ten thousand energnetic attendees and exhibitors to celebrate the power of the ‘cloud’.

The event not only dispelled any questions about whether the SaaS movement can withstand today’s economy, it also helped to resolve the needless debate over whether there is a difference between SaaS and cloud computing.

Salesforce.com succeeded in dissolving any line of demarcation which may have existed between the SaaS and cloud computing worlds by:

• Using the terms interchangeably throughout its keynote and breakout sessions
• Unveiling a new round of cloud-based applications and platform capabilities
• Expanding its strategic alliances to include two more pivotal ‘cloud’ players

Salesforce.com’s two most significant announcements were its move into website hosting services, and new alliances with Amazon and Facebook.

The website hosting services add another layer to the company’s capabilities and extend its reach across the value-chain of customer/partner facing interactions. This new layer of services provides a clear ‘use-case’ for Salesforce.com’s VisualForce web design capabilities and fortifies Salesforce.com’s positioning as a strategic source for customers and ISV partners.

The new alliances with Amazon and Facebook are a natural extension of its rapidly growing allegiance with Google. Amazon gives Force.com users added storage and computing power capabilities to enhance and expand their SaaS solutions. The Facebook relationship could finally enable business users to effectively leverage the popular social networking site for more than simple advertising and promotional purposes.

Most importantly from Salesforce.com’s perspective, these new alliances puts the company squarely at the center of the cloud computing world just as Microsoft is beginning to describe how it will deliver its own vendor-centric cloud platform.

Salesforce.com has succeeded in pulling together the key cloud computing players who stretch across the four corners of this rapidly expanding marketplace. I expect these alliances to accelerate new mash-ups and more substantial cloud-based solutions. This foursome of cloud computing players could be viewed as the “Four Horsemen”.

Between the keynote sessions I had two days of back-to-back meetings on the show floor with a mix of SaaS vendors, customers and investors facilitated by the SaaS appointment maker solution, TimeTrade.

The exhibitors were nearly all extremely pleased with the volume of quality leads they generated during the event. As always, I also learned about a variety of subplots among the various vendors in attendance.

All of the people I met were upbeat about the overall SaaS/cloud computing market outlook long-term, but concerned about the short-term impact of the economy on deals already in their sales pipeline. Corporate indecision or company edics to put a hold on all new spending will probably delay many SaaS deals through the end of 2008.

I think this delay in sales, combined with a tightening of VC and other financing, will accelerate a shakeout in the SaaS/cloud computing industry. The most vulnerable players will be those who only offer point products with ‘nice to have’ features rather than ‘must have’ business benefits. The survivors will be those who can demonstrate their strategic value, along with their financial viability in a tough economic climate.

Despite these potential storm clouds, the prospects are still far brighter for the overall SaaS and cloud computing market than traditional, on-premise, legacy software vendors. The energy and enthusiasm of Salesforce.com’s customers at Dreamforce served as a solid confirmation of this very exciting market opportunity.