THINK IT Services

Making the transition to a Software-as-a-Service (SaaS) model isn’t easy for incumbent software vendors (ISVs).

Rearchitecting their applications may be the easiest task in the transformation process. Redesigning their go-to-market strategies and ongoing operations; restructuring their revenue recognition models; and reorienting their staff are the more difficult challenges.

Greater service delivery costs combined with lower per unit prices make it is easy to see why most ISVs have tried to resist the SaaS movement and denied its long-term viability.

Yet, a severe slowdown in traditional, packaged, ‘legacy’ application sales has made it imperative for ISVs of all sizes across every segment of the software industry to finally accept SaaS as a reality they can no longer ignore and must finally embrace.

Even Microsoft, Oracle or SAP are promising ‘cloud’ solutions and cranking up their PR machines to promote their promises. But, their SaaS offerings are still primarily hosted versions of their on-premise applications, and these companies are still hoping that their customers will accept their perpetual licenses and inflated maintenance services.

Callidus Software is taking more extreme action in response to today’s realities. The company announced during its second quarter earnings call on July 28, that it is moving its entire operation and set of offerings to a “predictable recurring revenue model”, i.e. SaaS.

Callidus has been offering an ‘on-demand’ solution for a few years, but it has only been viewed as a subset of its primary on-premise business until recently.

The company’s decision to make a ‘big bet’ on SaaS is driven by a combination of changing customer preferences and escalating competitive pressures.

On the customer side, Callidus saw its overall revenues go down 5% in the second quarter of this year compared to the same period a year ago. Callidus also reported its second quarter services revenues were down 18% and license revenues were down 38% compared to the second quarter of 2008. Part of this revenue drop is a result of recognizing the growing on-demand revenue differently. But, it is also a result of slowing perpetual license and maintenance service sales.

The company attributed the declines to its “shift to the on-demand business and the completion of certain implementations, but also delays in significant implementations due to customer budgetary constraints.”

On the competitive front, Callidus has watched Xactly grow rapidly and acquire Centive to consolidate its position as the leading on-demand sales performance management (SPM) vendor.

Having talked to Callidus’ CEO a number of times in the past, I know that he has always been a fan of the SaaS model but had to oblige the investment community’s concerns regarding the revenue recognition issues before making a significant move in this direction. (Callidus, Xactly and Centive, as well as Makana Solutions have all been THINKstrategies clients in the past.)

Rather than continue to try and balance its traditional on-premise and on-demand offerings, Callidus has chosen to put all of its efforts into moving to a SaaS model.

While there are plenty of risks involved with this strategic decision, Callidus’ executives have already seen some early indications of the potential financial benefits of this move.

Recurring services already represent 53% of Callidus’ overall revenues, or $11.8 million, a 17% increase over Q2 a year ago. The company also reported that it had generated 18% margins from its recurring revenues compared to a net loss from its overall operations in the second quarter.

The company recognizes that it is embarking on a difficult journey, but believes that it is the only path that can lead to long-term success. It has already made senior staff changes and additional staff reductions.

Callidus must make additional operational changes as it evolves its on-demand solutions. But its customers, many of them large-scale enterprises,are demanding SaaS alternatives to traditional on-premise software so they can better manage their rapidly changing businesses.

Crossing this chasm won’t be easy for Callidus, but others have proven that it can be done. The most prominent example of a publicly-traded company successfully making this transition is Concur.

Postscript: On August 4, Callidus’ Director Corporate Communications and Web Marketing, Jock Breitwieser, sent me this clarification regarding the company’s future direction in response to my commentary above,

“One comment on your article: While our focus moving forward is on the cloud and on-demand, Callidus still offers it’s proven on-premise solution. We are not abandoning our award winning on-premise offering. However, on-premise is now sold as a subscription service. It’s just a change reflective of our adjusted business model. Going forward for those customers who want our industry-leading On-Premises offering, we will sell subscription-based licenses. The subscription fee will cover both the software license and the maintenance service. This plays well into the current economic climate and, through various client discussions, it’s clear that there’s appeal in this model. The move away from perpetual licenses to subscription-based offerings presents a variety of benefits to the customers, including lower up-front costs, an easier purchasing decision and a better service relationship.”

THINKstrategies announced today that Silverpop’s Engage B2B has been named the latest winner of the Best of SaaS Showplace (BoSS) Awards program, which is aimed at promoting the measurable business benefits being delivered by today’s Software-as-a-Service (SaaS) solutions.

The BoSS Awards program was announced in January 2009 as the latest initiative by THINKstrategies to bring attention to SaaS and cloud computing companies which are producing tangible business benefits for specific user organizations. These benefits include increased sales, lower costs, higher customer satisfaction, faster operations, and greater profitability.

Silverpop’s Engage B2B marketing automation platform seamlessly scores sales leads, nurtures them through the pipeline and measures campaign return-on-investment. The Engage B2B solution helps companies maximize their marketing efforts, engage their prospects with targeted communications, improve their efficiency, increase revenue and accelerate the lead-to-sale timeline.

Click here to read about Silverpop Engage B2B’s award winning capabilities.

Click here to read more about the BoSS Awards program and how to apply for an award.

Yesterday’s announcement that NetSuite is acquiring QuickArrow and merging it with OpenAir is the most recent example of a consolidation process in the Software-as-a-Service (SaaS) industry which I predicted would accelerate at the beginning of the year.

This particular transaction is very similar to Xactly’s acquisition of Centive in January. Rather than combining functional capabilities to create a more robust solution, the companies are combining forces to create greater scale.

In both cases, the transactions eliminate head-to-head competitors who looked too much alike to be able to clearly differentiate themselves from one another. Their similarities made it harder to compete for customers and VC funding, especially in today’s tough economy.

Merging, with the help of NetSuite’s deeper pockets, allows the two companies to focus on new customer acquisition, channel relationships and geographic expansion.

This acquisition is the latest indication that the SaaS market is entering a new stage in which the winners will be those companies that can demonstrate their long-term viability as strategic sources, rather than best-of-breed niche players whose long-term survival is suspect.

Merging QuickArrow and OpenAir with NetSuite’s broader capabilities should make IT and business decision-makers more comfortable doing business with the combined entity. It also prevents QuickArrow from falling into the hands of a NetSuite competitor.

The acquisition also strengthens NetSuite’s hand against Salesforce.com’s growing initiatives in the service automation arena. Earlier this year, Salesforce.com unveiled its Service Cloud offer. It has also supported the professional services automation solution developed by Appirio.

Knowing the principals at both OpenAir and QuickArrow, as well as the executives at NetSuite, I think this is a good ‘outcome’ for all of the parties involved. I also think their mutual customers and channel partners can benefit from this transaction.

I also expect other lookalike SaaS companies in other segments of the industry to experience similar exits in the months to come.

THINKstrategies announced today that e-Builder has been named the latest winner of the Best of SaaS Showplace (BoSS) Awards program, which is aimed at promoting the measurable business benefits being delivered by today’s Software-as-a-Service (SaaS) solutions.

The BoSS Awards program was announced in January 2009 as the latest initiative by THINKstrategies to bring attention to SaaS and cloud computing companies which are producing tangible business benefits for specific user organizations. These benefits include increased sales, lower costs, higher customer satisfaction, faster operations, and greater profitability.

e-Builder provides a web-based, fully integrated capital program and project management software suite for organizations managing facility planning, construction, and operations. North America’s leading facility owners use e-Builder to improve project execution, resulting in increased productivity and quality, reduced cost, and faster project delivery. The system is modular in nature and can be deployed in phases. The primary modules include: Cost, Schedule, Business Process, Document Management, Reports, and Dashboards.

Click here to read more about e-Builder’s award-winning SaaS solution.

Click here to learn more about the BoSS award program and to apply for an award.

Last week, Gartner attempted to derail the Software-as-a-Service (SaaS) movement by issuing a press release regarding its latest customer survey which found that SaaS users are “underwhelmed by their current experience of it and sense that SaaS is not quite the panacea it often promised to be.”

For some reason, it took Gartner more than six months to interpret the results of its survey of users and prospects of SaaS solutions in 333 enterprises in the U.S. and the U.K. which was conducted in December 2008. Maybe because the data didn’t say what they were hoping and it took more time to twist the results into a story that fit their reality and could generate a few headlines.

Gartner’s press release starts by stating that “SaaS is more mainstream and less controversial than ever before”, an important admission from a research firm which a few years ago said SaaS would only represent 25% of software sales by 2011.

But, the research firm goes on in its survey announcement to play the role of contrarian, which is typically held by Forrester, and suggest that all isn’t rosy in the SaaS world.

Gartner’s research vice president Ben Pring says in the release,

“Our research findings did not exactly provide a ringing endorsement of SaaS, in fact I would go as far as to say that satisfaction levels among SaaS users are little more than lukewarm. Although macroeconomic factors would seem to favor SaaS providers, almost two thirds of respondents said that they planned only to maintain their current levels of SaaS in the next two years.”

Although the overall satisfaction level of 4.74 on a 7-point scale among the SaaS users surveyed by Gartner may not have been stellar, the other data revealed in the press release suggests that these ratings are also not as bad as they look. And, other realities of the market and Gartner’s world are also worth noting to bring the survey findings into proper perspective.

Given today’s turbulent economic climate in which many organizations are actually downsizing their operations, maintaining SaaS current levels isn’t necessarily a bad thing. Instead, it demonstrates the staying power of SaaS solutions and how the more flexible pay-as-you-go SaaS subscription approach is well-suited for today’s economic uncertainties.

But, more importantly, Gartner’s press release fails to emphasize the positive news that 90% of the survey respondents are satisfied enough to maintain or expand their use of SaaS solutions, and only 5% are planning to terminate their services, with the remainder considering reducing their subscription levels.

This latter group could be motivated by downsizing in their organizations and would not have had the same flexibility if they chose a traditional on-premise application with an upfront perpetual license fee.

Anyone familar with the economics of the SaaS business knows that 90% renewal rates are not only the norm for the industry but are necessary to maintain a positive cashflow and achieve long-term profitability.

Given that Gartner’s clientele and the primary respondents to its survey are generally IT people who are still learning about the benefits of SaaS and evaluating it from a traditional set of technical criteria, it is not surprising that they might be less satisfied with the SaaS solutions than their business end-users which the bulk of today’s SaaS solutions target.

In fact, there are still plenty of situations in which IT staff are particularly unhappy with SaaS solutions which were acquired unilaterally by individual end-users or business units without IT involvement or approval.

It would be interesting to do a cross-tab analysis of Gartner’s survey results to see if there is any correlation between the low satisfaction ratings and the level of involvement the respondents had in the selection processes.

It also would have been interesting to compare the SaaS satisfaction levels with similar satisfaction ratings among those users of today’s legacy applications. My guess is that their ratings would be well below the SaaS levels, especially given their added costs and inflexibility in today’s tough economic times.

Fortunately, a growing number of IT decision-makers and organizations are recognizing that SaaS is satisfying the needs of their end-users and corporate executives, and are doing their best to help their business users select the right SaaS solutions to meet their operating objectives.

THINKstrategies’ SaaS surveys, in conjunction with Cutter Consortium, uncovered the growing acceptance of SaaS among IT professionals in 2007.

These enlighted IT professionals are also discovering that there is a rapidly expanding array of SaaS-based IT management solutions available which are making it easier for IT organizations to perform their day-to-day responsibilities.

Unlike Gartner’s survey research, THINKstrategies’ customer surveys have consistently found SaaS satisfaction levels, renewal rates and willingness to recommend at or above 90% over the past three years.

Ironically, a week after Gartner issued its SaaS survey findings it announced that the worldwide market for customer relationship management (CRM) applications grew 12.5% last year, fuelled by a 33% jump in SaaS-based solutions, which now represent 20% of the CRM market.

There is no question that as the SaaS industry grows, service quality will become diluted and customer expectations will vary more broadly.  So, there is nothing wrong with warning customers and SaaS vendors alike to remain vigilant. I issued my own warning back in 2007. And, I continue to be concerned about the quality of support in the SaaS and broader cloud computing market.

But, when these warnings border on an indictment of the overall quality of SaaS solutions and the viability of this movement, it does a disservice to a marketplace which is fundamentally changing the way organizations leverage software to achieve their business objectives and the measurable business benefits they are experiencing.

Much has been written regarding Google’s latest challenge to Microsoft–its announcement last week that it plans to unveil a new operating system (OS) in the second half of 2010.

There is no question that Google’s ambitious plans can have a significant impact on the computing world. And, because computing has become an integral part of everyone’s day-to-day world, the Google-Microsoft war deserves plenty of attention, even in the mainstream media and among Main Street businesses.

However, it shouldn’t come as any surprise that Google would move in this direction. It has been nibbling away at the edges of Microsoft’s fortress for a number of years.

Google Desktop does a better job finding files within Micrsoft Office than Microsoft’s own software. Gmail is easier to use than Outlook. And, Google Apps have become a viable alternative to Microsoft Office within a growing number of businesses, non-profit agencies and governmental institutions.

Even more importantly, Google has been making a concerted effort to penetrate the education sector in the same way Apple did over the past three decades to win the hearts and minds of a new generation of computer users–college, high school and middle-school students. Their teachers are even bringing Google Apps into the classroom unilaterally to encourage greater collaboration and make it easier to track school-work.

Despite the fact that many of these same kids grew up with Microsoft Xbox, Microsoft has failed to convert their affection for its games, which are increasingly played online, into any real allegiance to Microsoft’s Office or OS.

So, while Microsoft has been obsessed with derailing Google’s dominance in the search business, Google has been equally focused on dislodging Microsoft from its OS and office ‘productivity’ perch.

Since Microsoft now appears to be making some headway in attacking Google’s core search business with its new Bing search engine, Google figures the time is right to ratchet up its efforts to attack Microsoft’s core OS business as well.

Since last week’s announcement, some analysts have questioned whether the world needs another OS. Widespread dissatisfaction with the costs, complexities and security issues associated with Microsoft OS, applications and Internet Explorer has left the door wide open for a viable alternative to emerge.

Other commentators have questioned whether Google can truly disrupt Microsoft’s monopoly. Industry statistics already show a decline in Microsoft’s marketshare as a result of greater acceptance of Open Source Linux and Apple OS. Yet, neither can be considered as potent a potential competitor as Google.

The recent decline in Microsoft’s quarterly revenues and profits may be another indicator that customer defections are on the rise, and the market shift toward web-based, Software-as-a-Service (SaaS) and cloud computing alternatives.

In the late 60’s, few people took Japanese cars or electronics seriously. Today, American automakers are struggling to survive, and there are no major American electronics companies making their own equipment.

The Japanese auto and electronics manufacturers outflanked their American counterparts by producing simpler, more reliable and less expensive products. They also adopted more streamlined manufacturing, distribution, marketing and sales operations. But, most importantly they were willing to be patient, establishing a ten-year plan to achieve their long-term business objectives.

Google is also promising to deliver a simpler, more reliable and less expensive alternative. It has also put a long-term plan in place. However, don’t be surprised if it rolls out its new Chrome OS before the late 2010 due date.

I suspect that many of the technical aspects of the new OS are already being tested and could easily be delivered before the second half of 2010. However, Google knows that its biggest challenge isn’t perfecting the technology, it is putting the right skills and mechanisms in place to properly support corporate customers.

Organizations will not migrate to a new OS until they are convinced that the vendor is fully prepared to support them. Google’s executives acknowledged that they must do a better job of convincing customers that they can support their needs by putting an end to their “Beta” branding of their Google Apps. Businesses don’t want their day-to-day operations to depend on half-baked applications or operating systems.

So, in the end, Google’s success will depend on putting together the right combination of technical and organizational capabilities to satisfy corporate customers. Google’s new OS doesn’t have to be more sophisticated. It just has to work better.

After all, no one ever accused Microsoft of having the best OS either. It just happened to have the best business model for the past thirty years.

But, the times and customer requirements are changing.

The on-premise world is giving way to an on-demand environment in the ‘cloud’. Packaged applications and proprietary systems are being replaced by Software-as-a-Service (SaaS) and cloud computing alternatives.

As a result, a changing of the guard is also likely.

THINKstrategies announced today that Book4Time Inc. has been named the latest winner of the Best of SaaS Showplace (BoSS) Awards program.

The BoSS Award program is aimed at promoting the measurable business benefits being delivered by today’s Software-as-a-Service (SaaS)  and cloud computing companies. These benefits include increased sales, lower costs, higher customer satisfaction, faster operations, and greater profitability.

Book4Time offers an enterprise-class, SaaS solution for managing real-time reservations, online bookings and spa management for the leisure and lifestyle industry.

Click here to read about business benefits of Book4Time’s web-based, on-demand solution.

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

No, I haven’t gone over to the darkside and abandoned the Software-as-a-Service (SaaS) movement.

But, I just gave a keynote presentation regarding the state of the SaaS and cloud computing market at SoftLetter’s latest SaaS University in Chicago, where the challenges of developing and delivering successful SaaS solutions were once again brought home in the discussions among the software executives and SaaS professionals attending the event.

Despite it being scheduled on the last day of the quarter and first week of many people’s summer vacation, the event succeeded in attracting about 70 CXOs from a cross-section of established independent software vendors (ISVs) and SaaS start-ups seeking insights about how to succeed in this rapidly growing industry.

Like past SaaS University sessions, the attendees were treated to a variety of tutorials from industry practitioners with a minimum of self-promotion. And, this group of attendees distinguished themselves by asking very pointed questions from the opening bell about specific operational issues associated with the SaaS model.

But, it wasn’t until we got to the working lunch session on the second day of the two-day event that their anxieties came to head. It was during the session focused on the latest accounting rules governing revenue recognition in the SaaS model that frustrations among the established ISV executives began to boil over as they learned that:

• After making significant investments in (re)architecting their applications to be delivered as an ‘on-demand’ solutions,
• After building hosting facilities or selecting a hosting partner to deliver their services,
• After determining how to package, price and promote their solutions,
• After developing a service level agreement (SLA) or comparable legal agreement that clearly outlines the company’s contractual obligations,
• After convincing a committee of IT/business decision-makers to try their solution,
• After determining how much ‘customization’ they can do for specific customers without breaking the common SaaS application and underlying service delivery model,
• After accepting a fraction of the value of application in an initial subscription fee agreement,
• And, accepting all the responsibility for the availability, reliability, security and  performance of their SaaS solution…
• The aspiring SaaS vendors then discovered they would only be able to recognize their subscription revenues on a month-to-month basis, decimating their traditional software revenue recognition models.

This harsh reality is what has kept the CXOs of the legacy, on-premise ISVs up at night hoping that the SaaS and cloud computing movement would disappear or be derailed by a major outage that would send customers fleeing back to the comfort of their on-premises software and systems safely hidden behind the firewall. Of course, the opposite has been true and SaaS/cloud computing market growth is accelerating as a result.

No, from a vendor point of view, SaaS isn’t as easy as it looks.

It can be disruptive and painful. And, the rewards can take a while to be realized.

But, unless a major service disruption or ongoing service failures occur, the SaaS/cloud computing services market isn’t going to go away because it offers customers too many business benefits. And, ultimately it’s the customer point of view that really counts.

And, by the way, there are a growing number of SaaS vendors, and established ISVs as well, who are figuring out how to be successful in this deceptively difficult business.