THINK IT Services

Salesforce.com unveiled its year-end 2008 financial results earlier this week and, as the company had predicted, it passed the billion dollar mark, reporting total revenues of $1.077 billion, an increase of 44%over the 2007.

This milestone event, combined with the company’s rising earnings per share growth, are clear indications of the overall strength of the Software-as-a-Service (SaaS) market despite the challenges of today’s tough economy.

In fact, Marc Benioff, the company’s Chairman and CEO, is quoted in the company’s press release as saying, “At a time when capital is precious, big-ticket software purchases just don’t make sense.”

I am also a firm believer that Salesforce.com’s continued growth, and that of the overall SaaS industry, will be fueled by today’s economic crisis.  IT and business decision-makers are increasingly recognizing not only the economic advantages of SaaS, but also the fact that SaaS represents a more effective method of supporting a more dispersed workforce and leveraging the latest innovations in software and technology than legacy applications.

However, Salesforce.com’s financial results from last year can’t hide this year’s additional challenges.

Salesforce.com and other established SaaS companies may experience warmer customer receptivity in the coming months, but they will also face greater than normal ‘churn’ as a result of employee layoffs, especially in the financial services sector and other industries hard-hit by the economy.

This is one of the downsides of the SaaS model from a vendor perspective–subscription fees based on number of users are vulnerable to cutbacks despite contractual obligations. Back-filling these lost seats (i.e., revenues) could take more effort and greater sales costs.

I attended Pacific Crest’s 4th Annual Emerging Technology Summit this past week where I met with a series of institutional investors as a part of Pacific Crest’s Mosaicprogram. They were all trying to determine if SaaS is a viable business model long-term, which I assured them it is.

They were also looking for the next big public company in the SaaS market. I told them to look beyond today’s pure SaaS companies at other key players in the broader ‘cloud computing’ market–Amazon, Apple and Google in particular.

These companies have capitalized on the success SaaS to create their own development and delivery platforms. All of them are still in the experimental stage with their services, happy to let early-adopters help them fine-tune their capabilities. But, ultimately they all want to penetrate large-scale enterprises and disrupt the established order of Microsoft, Oracle, SAP, etc.

Meanwhile, the consensus among the CXOs of SaaS/cloud computing companies attending the Pacific Crest conference was that the first half of 2009 will be tough, but they are hopeful that things will settle down in the Spring when IT/business decision-makers have greater visibility into their own situations and will be able to make purchase decisions with greater confidence.

In the meantime, today’s economic challenges will weed out those SaaS companies which lack the leadership, solutions and go-to-market strategies to survive.

Salesforce.com lacks none of these ingredients for continued success and can be expected to continue to invest heavily in building on its momentum and reinforcing its position as the “800 pound gorilla” in the SaaS/cloud computing industry.

Among my predictions for 2009, was that the on-demand services industry will experience a shakeout and consolidation.

I also suggested in a recent post that platform and cloud computing companies which don’t offer a combination of solid enabling technologies plus attractive channels to customers won’t survive the shakeout.

Sure enough, the rumors about the demise of Coghead have come true, and it is among the early entrants to the platform/cloud computing market who are now making an equally early departure.

Coghead may have had terrific technological capabilities, but it lacked a sufficient revenue model to stay afloat in an increasingly competitive market. As a result, investors were unwilling to continue to fund the company and it had to discontinue operations.

The primary reason Coghead couldn’t generate sufficient revenue to stay alive was that it didn’t offer enough value to attract adequate customers. It was a classic ‘Catch 22′ situation – not enough customers bought into Coghead’s value proposition and as a result not enough customers were willing to buy its solutions.

However, it didn’t take long for SAP to capitalize on the situation and acquire Coghead’s assets and a handful of its engineers for a fraction of its paid-in valuation.

The asset sale gives SAP much needed insight into the engineering requirements to play in the Software-as-a-Service (SaaS) and broader cloud computing market.

It comes at a time when SAP openly admits that its internal efforts to develop and deliver a viable SaaS solution are being retooled.

The acquisition of the Coghead technology and engineering team alone will not rectify SAP’s SaaS struggles. But, if this is the first  in a series of acquisitions and alliances, which I referred to as the ‘tugboat strategy’in 2007, it could begin to give SAP the new perspective and skills the company desperately needs to get its SaaS and cloud computing efforts turned around and back on track.

The best indication of whether SAP is serious about its intentions in the SaaS and cloud computing market is if it makes more of these opportunistic acquisitions in the months to come.

THINKstrategies announced today that Xactly Corporation has been named the latest winner of the new Best of SaaS Showplace (BoSS) Awards program, which was launched in January 2009 to promote the measurable business benefits being delivered by today’s Software-as-a-Service (SaaS) solutions.

Xactly Corporation is a leading provider of on-demand sales performance management solutions. The company’s flagship product, Xactly Incent, enables sales and finance executives to design, implement, manage, audit and optimize sales compensation management programs easily and affordably.

A case example of Xactly’s business benefits is Ingres Corporation, a leading provider of open source database management software and support services

Click here to read about the announcement which details the quantitative business benefits Xactly Incent generated for Ingres

Click here to learn more about the BoSS Awards or to submit a nomination for an award.

Last July, I offered my views on the similarities and differences between Software-as-a-Service (SaaS) and cloud computing. This past week, I had an opportunity to elaborate on the relationship between these two worlds and terms, along with Platforms-as-a-Service (PaaS), during a webcast hosted by Symplified entitled, “Beyond the Buzzwords”.

Then and now I believe cloud computing is an outgrowth of the success of the SaaS market and web-based, packaged applications. Cloud computing represents a rapidly growing array of web-based tools which enable users to build their own applications or utilities that can be deployed via the Internet (“cloud”) or ‘downloaded’ to an on-premise environment.

Much like the open source world, the cloud computing environment enables users to take advantage of a wide assortment of piece-parts from a variety of sources to create their own solutions for various project and production purposes. They both rely on incredibility economical development resources and generous community-minded contributors willing to share and swap ideas and outputs.

During last week’s webcast, the question was asked how Platforms-as-a-Service (PaaS) relates to SaaS and cloud computing. In my view, PaaS is a vendor-centric set of tools and resources which permit users to build apps and utilities which not only take advantage of the vendor’s holistic portfolio of technological capabilities, ranging from development to delivery, but also leverage the company’s customer base and/or channels to market.

I dissected some of these ideas and leading platform players last month. I also will be moderating a panel session at Interop in Las Vegas on May 19 entitled “SaaS, Pass and More: A Taxonomy of On-Demand Applications”, that will include executives from Cisco Systems, LongJump and Salesforce.com.

These topics will also be discussed at other events I’m attending and participating in over the coming weeks.

You can also obtain useful insights about how SaaS vendors are leveraging platforms in SoftLetter’s new SaaS Benchmark Study. My colleagues at Triple-Tree also published a useful report on platforms last year.

When I published my previous post questioning whether recent executive departures at salesforce.com were an indication of a slowdown in the company’s business, I debated whether to also leave the door open to the possibility that some of these individuals might be jumping to other job opportunities.

Sure enough, salesforce.com’s former president and chief strategy officer, Steve Cakebread, has resurfaced already at Xactly Corporation where it was announced this morning he will serve as the company’s new CFO, a role he also held at salesforce.com.

This hire gives Xactly even greater market validation and credibility after its recent acquisition of Centive.

The announcement also suggests my suspicions about potential problems at salesforce.com may have been premature. The company’s latest financial results are scheduled to be announced on February 25.

Meanwhile, NetSuite announced its financial results for 2008 yesterday. The company had a record year with revenues up 40.5% overall, reaching $152.5 million. Even its fourth quarter revenue of $41.4 million was up 30.5% over the fourth quarter of 2007. NetSuite added 350 new customers and ended the year with a quarterly profit. Pretty good for a company which is selling a mission-critical application to a tough buyer, the CFO.

So, the warming winter temperatures seem to have also brought some much needed good news regarding the state of the SaaS movement.

Over a year ago, I stated that the Software-as-a-Service (SaaS) market would be recession-proof as we entered 2008. And, last year proved to be a boom-time for nearly every SaaS company with a quality service aimed at a legitimate business need.

Now that the economy has sunken into a deeper economic decline than almost anyone anticipated, the SaaS industry is feeling the same pain that has afflicted every other major sector.

Fear, uncertainty and doubt–the classic FUD factor–has hit home in the SaaS community.

Despite the compelling business benefits of SaaS, corporate and IT decision-makers are holding back on purchases. And, corporate layoffs are cutting into the subscription levels of current contracts.

The latest victim of today’s economic realities appears to be Salesforce.com, which acknowledged at the end of last week that three corporate executives had recently left the company, including the company’s president and chief strategy officer.

Although the company was unclear about the circumstances of these departures, it appears these executives may have been let go because Salesforce.com is facing serious challenges.

I don’t have any inside information to confirm this, but executive shake-ups are usually a sign of problems, and it is easy to see that Salesforce.com is facing a tough situation.

The company has been the posterchild for the SaaS market since its inception, and it is now the most prominent proponent for ‘cloud computing’ in the corporate world. But, Salesforce.com is also facing the ‘law of big numbers’, which makes it increasingly difficult to continue to achieve greater growth rates when the base of your operations is getting bigger.

Salesforce.com’s challenges are compounded when you consider the bulk of its growth has come from large-scale enterprises, especially in the financial services sector. Not only have procurement decisions among many major corporations ground to a halt, but many of the banking companies where Salesforce.com made tremendous inroads over the past few years are now gone or facing consolidation.

I’m convinced Salesforce.com will withstand the current crisis, just as I’m confident that the SaaS and broader cloud computing market will prosper long-term despite of today’s economic challenges. Salesforce.com is still the biggest and among the most influential players in the SaaS and cloud computing market. And, I’d much rather be in the on-demand services sector than the housing or automotive industries.

However, the latest moves at salesforce.com are a clear indication that the boom days of the SaaS movement are behind us, and every SaaS company must buckle down in order to survive the current economic crisis.

This means more tough decisions ahead for SaaS executives and tough times for people in the industry.

The keys to success and survival for SaaS companies will be emphasizing the tangible and measurable business benefits their solutions deliver, especially if they include greater cost-savings, higher sales productivity or better operating efficiency and customer satisfaction.