THINK IT Services

Years ago, I considered the week leading into Labor Day as the final hurrah of the Summer and tried to preserve it for an end of season vacation to cap off the warm weather months in New England. Then my kids became school age and schools started kicking off before the holiday weekend. (Don’t get me started on this silly practice.)

Now, the tech industry is also making a habit of getting back into stride for the new Fall season before the dog days of August are behind us. One of the important annual venues for kicking off the new season of activity is VMworld.

This year’s event is generating plenty of news, especially regarding cloud-oriented acquisitions and alliances. Here’s a quick sampling:

• VMware Acquires Integrien and TriCipher 
• Verizon and VMware to Launch Enterprise-Class Hybrid Cloud Solution 
• BlueLock Introduces VMware vCloud Datacenter Service with CloudConnector 
• EMC Transforms Management of the Private Cloud, Ionix Unified Infrastructure Manager 2.0 Now in Customer Beta
• Citrix Acquires Virtualisation Firm VMLogix 

Why all the buzz surrounding this event?

Virtualization is one of the critical building blocks for creating cloud computing environments and VMware has become a key player in the cloud computing marketplace. As a result, a widening array of tech companies, service providers and channel organizations are aligning themselves with VMware. At the same time, other virtualization vendors are trying to keep pace with VMware’s capabilities and strategies.

This week’s acquisitions, alliances and other announcements are just the latest illustrations about how this marketplace is evolving and the competitive landscape is shifting.

For instance, performance and access management are pivotal pieces in a public or private cloud computing environment. This is the reasoning behind VMware’s acquisition of Integrien and TriCipher, and part of the thinking that drove Citrix’s acquisiton of VMLogix.

So, while the Dell/HP bidding war over 3Par has captured plenty of attention, other industry players are staking their own claims on a share of the rapidly expanding cloud computing market opportunity.

In a previous blogpost, I suggested that a new breed of consulting and professional service firms are in a very good position to capitalize on the transformation of the technology industry from a product-centric to a web-based services orientation.

Now, even established players are beginning to recognize the importance of their consulting groups in today’s rapidly changing market. No, I’m not reversing my view that companies like Dell and HP are on the wrong path by trying to fortify their wholesale outsourcing businesses with their acquisitions of Perot Systems and EDS respectively. Instead, I’m referring to more specialized consulting units of domain/subject matter experts who can serve as ‘trusted advisors’ to customers, and are a subtle channel-to-market for the broader vendor’s products and services.

This point was brought home yesterday during Iron Mountain’s annual analyst day. I reported on the company’s first annual analyst day three years ago, when I suggested that Iron Mountain had an unusual opportunity to ‘cross the chasm’ from the physical storage business to the brave new world of digital services.

While the company has made progress over the past three years in building its digital services business, it hasn’t fully realized its vision of a highly integrated portfolio of physical and digital services because of a combination of external and internal factors.

The company realigned its executive team in 2010 and is now putting more emphasis on the value of its consulting capabilities as a catalyst for the delivery of integrated physical and digital services. This move is also being driven by the new corporate leadership’s bolder mission for Iron Mountain of becoming the leading provider of information management services rather than its narrower focus on data storage alone in the past.

The timing of this move could be very advantageous given the explosion of data, escalating compliance concerns, uncertain economic climate and confusion surrounding cloud-based services. Organizations of all sizes, but especially mid- and large-scale enterprises in specific industries, are grappling with these issues. Rather than turn to the technology leaders who are viewed as biased product vendors, many of the IT and business decision-makers in these organizations are more comfortable asking their trusted service providers for help.

Putting more emphasis on the company’s consulting capabilities will be particularly timely for Iron Mountain in the healthcare and other industries which are plagued with inefficient systems, tightening budgets and changing market requirements. This was illustrated during panels sessions at the analyst briefing which included Iron Mountain customers at Biogen Idec, CSX Transportation and the New England Baptist Hospital.

(Disclosure: I have published whitepapers on behalf of Iron Mountain and participated in Iron Mountain webcasts.)

Since 2009 is coming to a close, I thought it would be a good time to review how I did with my predictions for the year regarding the Software-as-a-Service (SaaS) and cloud computing market.

1. On-Demand Services Move From Why To How

According to a Sandhill.com/McKinsey survey of over 850 enterprise customers at the end of 2008, 74% were already favorably disposed to adopting SaaS platforms. As a result, Gartner estimates the SaaS market will have reached approximately $8 billion at the end of 2009, a 21.9% rise from $6.6 billion in 2008. Looks like folks have moved past “why” SaaS to “how” to get the most out of their SaaS deployments.

2. New Hybrid Models

The idea of hybrid SaaS and cloud computing models has been abhorred by industry purists, but the reality is that nearly every business will rely on a combination of on-premise and on-demand resources. In 2009, the concept of “location independence” became bi-directional. It not only means that businesses can move their software and systems to the cloud, but they can now also deploy SaaS and cloud computing solutions behind their firewalls via appliances or ‘applets’. This will enable them to meet their business requirements and satisfy their psychological biases. More importantly, it will exponentially expand the addressable market for SaaS solutions and cloud computing services.

3. Short-Term Slowdown, Long-Term Growth

This is not an easy one to quantify because many SaaS/cloud computing businesses are privately held or operate within bigger companies. However, the publicly-traded SaaS players saw continued albeit slower growth. As the VCs like to say, “flat is the new up!”

4. VC/PE Retrenchment

The VCs were also very concerned in 2009 about how they spent their “dry powder”. As a result, they invested in fewer start-ups and only “topped off” a handful of existing SaaS/cloud computing portfolio companies who they believe hold the greatest promise of a solid exit. The most notorious casualty of this strategy in 2009 was LucidEra, who pioneered the SaaS business intelligence (BI) market, but was not able to generate enough sales to win a new round of funding.

5. Industry Shake-Out and Consolidation

There were many other examples of company failures and acquisitions to illustrate the consolidation and shake-out of the SaaS and cloud computing industry. For instance, Xactly acquired Centiveand Makana Solutions disappeared in the sales compensation segment of the market. NetSuite also acquired and merged together OpenAir and QuickArrow in the professional services automation (PSA) market. 

6. Acquisitions/Alliances Accelerate

There were also a number of interesting alliances initiated in 2009. One of the most innovative was Intacct’s partnership with the American Institute of Certified Public Accountants (AICPA)and its subsidiary CPA2Biz who named Intacct as its preferred provider of financial applications. This alliance gives Intacct access to a vast network CPAs who can serve as referral agents. It also gave the SaaS and cloud computing movement an important endorsement among one of the most conservative yet influential professions.

7. Focus On The Channel

The AICPA/Intacct alliance was just one of many new channel arrangements in the SaaS and cloud computing market. A number of SaaS vendors also launched or expanded their VAR programs in 2009. The most newsworthy was Salesforce.com’s new VAR program aimed at broadening the company’s reach beyond its direct sales team.

8. The Google Generation Becomes Mainstream

Google intensified its focus on cultivating a new generation of office workers via its free Google Apps for educators and the government. It is also teaming with Verizon to offer Android-powered cellphones to capture a share of the market and compete against the iPhone tidalwave.

9. Software/Business/Information/Managed Services Convergence

The convergence of software, business and information services has been evolving for a while. The best example of how this process is manifesting itself is Thomson-Reuters’ use of Salesforce.com’s Force.com platform to create and deliver a new wealth management service to its customers. ConnectWise has also emerged as a major proponent for SaaS and cloud computing in the managed services arena to make it easier for IT workers to do their jobs.

10. Obama Policies Promote On-Demand Services

President Obama’s CIO, Vivek Kundra, told the Wall Street Journal in March 2009, “I’m all about the cloud computing notion. I look at my lifestyle, and I want access to information wherever I am. I am killing projects that don’t investigate SaaS first.” In September, Kundra followed through on his promise to foster the use of on-demand services in the federal government by launching a new online marketplace of SaaS applications and cloud computing services, www.apps.gov.

Looks like I did pretty well with my predictions. Of course, I wouldn’t be reviewing them if I knew I had done poorly!

With my past success now behind me, I’ll post my predictions for the new year and decade ahead soon. Stay tuned.

Phil Wainewright provided a very interesting analysis of Intalio’s new ‘hybrid’ Software-as-a-Service (SaaS) and cloud computing offering which echos the approach I suggested last Fall.

My original blog was inspired by the belief that technology is advancing at a fast enough rate to make it possible to offer a fully contained SaaS ‘appliance’ deployable behind the firewall to alleviate customer concerns regarding data security, service availability and/or performance.

While some of my friends at Salesforce.com said my idea was crazy, my blog post prompted many SaaS and cloud computing vendors to comment that they were already offering flexible deployment options to satisfy various customer preferences.

Of course, the key to this go-to-market strategy is the ability to lock-down the code base so that the SaaS vendor is only supporting one version of the its solution, no matter where it is is deployed.

By putting their SaaS solution into a ‘lockbox’ that can be deployed wherever the customer prefers, vendors can now substantially expand their addressable market for their ‘on-demand’ solutions.

Intalio is also offering a managed service option in which the company will administer the customer’s behind-the-firewall deployment of its solution. I published a profile of BMC’s attempts to offer these three options in 2006. BMC was unable to make this approach work because its solution was not truly multitenant and its corporate culture wasn’t properly aligned to support this go-to-market strategy.

In my view, SaaS vendors will not be alone  in offering location-independent solutions. You should expect to see the rapidly growing array of ‘cloud computing’ vendors also heading in this direction. While many users will prefer to take advantage of the online, offsite aspects of these services, a significant number of organizations–large and small–will be comforted to know that they can also deploy them on-premise to meet their specific needs or satisfy their individual preferences.

The bottomline is that offering customers various deployment choices may become a key to gaining long-term success in the SaaS and cloud computing market.

The proliferation of Software-as-a-Service (SaaS) and cloud computing platform players continues to accelerate despite the failure of some early entrants and likelihood of more Platform-as-a-Service (PaaS) casualties to come.

This past week, three more companies announced new platform strategies and solutions — Jaspersoft, ExpenseWatch.com, LongJump.

Open-source business intelligence (BI) vendor Jaspersoft unveiled its v3.5 integrated analysis capabilities as part of what it calls the industry’s first SaaS-enabled BI platform. The new platform promises easy-to-use integrated analysis that doesn’t require a data warehouse or OLAP server. It also includes new in-memory analysis capabilities that enables the delivery of customizable SaaS and Cloud-based BI applications which can be integrated into reports and dashboards.

ExpenseWatch.com announced an open expense control platform which will permit small and midsized businesses (SMBs) to integrate their expense management data with a variety of business application. The new “non-proprietary approach” promises to allow SMBs to create more streamlined processes to manage their expenses.

LongJump announced that its previously available LongJump Business Applications Platform can now be licensed for use within an enterprise’s data center or licensed by independent software vendors (ISVs) who want to build and host their own SaaS applications. This new ‘portability’ is in response to the growing demands among enterprises to house their SaaS apps behind the firewall. It is also another example of the rapid technological advancements in the SaaS/cloud computing industry which increasingly permits this new form of ‘hybrid’ solution to occur.

While LongJump asserted itself as a PaaS vendor a while ago and its solution truly permits enterprise users and ISVs to build new SaaS apps via its development environment, ExpenseWatch.com and JasperSoft appear to be stretching the meaning of the PaaS idea to bring greater attention to their new integration capabilities.

Rather than being a toolkit upon which others can build SaaS apps, they are really offering easy-to-integrate functional capabilities which can be plugged into homegrown or third-party SaaS apps. This is still a valuable advancement of their previous capabilities, and represent the latest examples of the growing plug-and-play nature of the SaaS/cloud computing industry.

But given the proliferation of platform players and recent demise of Coghead, a pioneer in the PaaS market, I think SaaS/cloud computing companies would be better served by using different terminology to describe their integration capabilities.

Bastardizing the idea of platforms and PaaS will only clutter the marketplace and confuse potential customers. It will also increase the likelihood of an industry shakeout which will further discourage IT/business decision-makers from leveraging these ‘platform’ solutions.

I moderated a panel at OpSource’s SaaS Summit this week entitled “Selling SaaS to the Enterprise” which included representatives from Cast Iron Systems, Oracle and the Business Objects unit of SAP, as well as the Manager of Global Operations Business Technology at Pfizer.

They all agreed that SaaS and cloud computing are making serious inroads into the enterprise but still face significant challenges, including scalability, security and flexibility issues.

In response to the flexibility topic, there was general consensus among the panelists that customers want a choice of on-premise and on-demand alternatives to serve various corporate requirements.

Although I’m very proud to have correctly predicted many of the major trends which have shaped the SaaS market evolution, I’ve never believed that the world would move entirely to an all on-demand environment for a variety of customer and vendor-driven reasons. Therefore, I’ve always expected most organizations to operate in an hybrid environment.

As the SaaS movement gains mainstream acceptance, it also becomes less of a revolution. As a result, the radical view of an all, on-demand world has given way to a more realistic expectation of a mixed computing environment, albeit dramatically less dependent on inefficient, legacy on-premise hardware and software.

My previous blog post suggested that the heterogeneous computing requirements of customers calls for a new definition of hybrid solutions based on the portability of SaaS solutions so they can offer customers a choice of on-demand and on-premise alternatives.

The post generated a long list of responses from a wide array of SaaS vendors offering these alternatives, as well as a few purists who said it couldn’t or shouldn’t be done.

Microsoft’s GM of ISV and National System Integrator Partners, Greg Urqhart, gave an updated version of the company’s ‘Software Plus Services’ pitch at the SaaS Summit which Microsoft has been promoting for a few years.

It has been easy for industry purists to ridicule Microsoft’s S+S idea as a self-serving rationalization for justifying its legacy, on-premise business while also attempting to hold current and prospective customers by promising competitive on-demand solutions sometime in the future.

While these are legitimate criticisms which I share, I also believe that Microsoft’s view of customers’ preference for computing choices is right on.  The question is when and how will Microsoft fulfill its promise to deliver a viable and competitive portfolio of on-demand solutions which satisfy customers’ rapidly changing technical and business requirements.

In the meantime, Microsoft is depending on a series of incremental innovations, along with the power of its brand, ISV partner network and channel relationships to safeguard its immediate reputation and long-term revenue against the onslaught of today’s SaaS and cloud computing challenges.

These attributes also fit the criteria I laid out for winning in the Platform-as-a-Service (PaaS) business. Of course, it again depends on how well Microsoft can execute on its promises.

I suggested in a previous blog that a new model of a ‘hybrid’ software company is emerging in which Software-as-a-Service (SaaS) and cloud computing vendors are offering downloadable appliances, or ‘applets’, which permit users to utilize their web-based solutions off-line or behind the firewall.

My friends at Salesforce.com and other SaaS zeolots in the industry said I was crazy. But, many SaaS other vendors told me they were already offering an appliance option to their customers.

This week Google endorsed my idea by announcing that it is offering a offline version of its Gmail service.

Some folks expected this functionality in 2007, when Google introduced Gears, its browser plug-in aimed at providing offline access to Web-hosted applications. In fact, Google has been offering an on-premise search appliance for a while.

I believe the Gmail announcement is another example of a growing array of offline enhancements being added to SaaS/cloud computing solutions that will become commonplace in the years to come.

SaaS and cloud computing purists might view this development as a bastardization of the on-demand service ideal. In my view, Google’s new option and other offerings like Microsoft Silverlight or Adobe Air are simply the latest advancements in technology aimed at addressing real customer needs and preferences. In fact, Zoho unveiled its own offline email solution in October.

I think these offline capabilities will make SaaS/cloud computing more convenient for users, and will eliminate one more customer objection to adopting on-demand, web-based services which will help to accelerate the growth of the market.

Happy New Year!

Let me be the first to offer predictions for the on-demand services market on this first day of 2009. These predictions are based on THINKstrategies’ latest survey research and ongoing consulting work with IT/business decision-makers, IT solution providers and various technology investors.

I recognize that plenty of predictions have been made already, but hope mine offer a different perspective on the future direction of the on-demand services market.

Contact me if you’d like to discuss or debate any of these predictions.

1. On-Demand Services Move From Why To How - Now that SaaS has achieved widespread market penetration and the idea of cloud computing has become popularized in the business as well as trade press, the discussion will shift in 2009 from why organizations should adopt SaaS/cloud computing services to how to do it effectively. This shift will also encompass the best ways to adopt managed services to optimize IT operations. IT/business decision-makers will seek help evaluating the functionality and financial viability of the various vendors; better understanding the integration and security requirements; monitoring vendor performance and service level compliance; and measuring the economic impact and business benefits of these services.
2. New Hybrid Models - The technological evolution of on-demand services will enable SaaS and cloud computing vendors to offer customers the choice between on-premise and off-site hosted versions of their solutions without compromising the operational and financial efficiencies of the multi-tenant architecture that underlies these services. SaaS/cloud computing vendors will be able to ‘shrink-wrap’ their solutions into appliances or ‘applets’ which can be deployed behind the customer’s firewall and synchronized with the vendor’s primary service delivery infrastructure.
3. Short-Term Slowdown, Long-Term Growth - Although SaaS proved to be recession proof for most of 2008 as I predicted, SaaS vendors have not been able to avoid the speed-bump caused by the deepening economic crisis. IT/business decision-makers in organizations have been instructed to put a hold on all procurements until the economic uncertainty subsides. They are especially hesitant to make acquire solutions from new vendors who they believe won’t survive the current crisis. However, when the dust settles, organizations of all sizes will adopt SaaS and cloud computing services because the business case for these web-based alternatives is too strong and compelling. Click here to see my video recording on this topic.
4. VC/PE Retrenchment - The credit crunch and devastation of the financial markets has had a tremendous impact on the venture capital (VC) and private equity (PE) sectors. With limited IPO exit opportunities available and their limited partners (LPs) either unable to fulfill their funding commitments or demanding better returns from their investments, the VCs and PE firms are setting higher standards for performance from prospective and portfolio companies, and holding back on additional investments. Many VCs and PE firms may even shut their doors, leaving fewer funding sources available for SaaS/cloud computing companies.
5. Industry Shakeout and Consolidation – The past year may have been the peek of the ‘cloud-rush’ that produced a proliferation of SaaS and cloud computing players. The new year will see a shakeout of many of these players and consolidation of the market. IT/business decision-makers in user organizations of all sizes will shift their procurement strategies from best-of-breed vendors to strategic suppliers who they believe have a better chance of surviving today’s economic crisis. This will make it hard for niche vendors to compete against more prominent players with broader portfolios and stronger brands.
6. Acquisitions/Alliances – With the valuation of SaaS/cloud computing companies going down, the buying power of incumbent software vendors (iSVs) will rise. Companies like Microsoft, Oracle and SAP will acquire a series of SaaS/cloud computing players to accelerate their migration to the on-demand services world. Hardware vendors such as Dell, HP and IBM, as well as offshore companies like Infosys, Tata and Wipro will also make acquisitions to enhance their systems and automate their services respectively. With traditional funding sources drying up, many SaaS/cloud computing companies will seek corporate alliances which can provide alternative financing options and strengthen their positions in the market.
7. Focus On The Channel - The changing economic climate and rising costs of sales will drive a growing number of SaaS/cloud computing companies to seek new channels to market. At the same time, a growing number of traditional systems integrators, value-added resellers, hosting companies and other service providers will seek to add SaaS/cloud computing capabilities to their corporate portfolios. In some cases, this will blur the line of demarcation between SaaS/cloud computing and managed services companies.
8. The Google Generation Becomes Mainstream - The Google affect on the market will expand from eCommerce to the enterprise. Google Apps will gain acceptance in businesses of all sizes as a result of broader adoption among individuals, better support services aimed at corporate users, and broader alliances with companies like Salesforce.com. An indication of this trend can be found in primary schools and universities where use of Google Apps is expanding from individuals to the entire institutions in a systematic fashion. Just as Apple succeeded in building a new generation of users via schools and universities, Google is taking the same path to permeate the market.
9. Software/Business/Information/Managed Services Convergence - The line of demarcation is not only fading between software services, such as SaaS and cloud computing, and managed services, but also with business and information services. Business services companies, such as ADP and AmEx, are adding software services, such as Centive’s sales compensation management and Concur’s expense management capabilities their service portfolios, respectively. Thomson Reuters has teamed with Salesforce.com to deliver its information services via Salesforce.com’s SaaS solutions. It has also recently acquired Paisley—a governance, risk and compliance SaaS vendor—to broaden its capabilities. Meanwhile, managed service providers (MSPs), such as mindSHIFT, are adding a layer of SaaS solutions to their IT management capabilities.
10. Obama Economic Policies Promote the Web - President-elect, Barak Obama, has made it clear that he views the Internet as an important incubator of new business opportunities and jobs, and as a mechanism for better government services and more effective education programs, as well as a clean-tech alternative that can reduce people’s carbon-footprint. The Obama administration has promised to create a program, much like the Work Projects Administration (WPA) during the New Deal, which will fund public initiatives that encourage the growth and broader adoption of web-based services. This program will increase the visibility and viability of on-demand services.

One of the topics which leading Software-as-a-Service (SaaS) vendors and industry analysts are most vehement about is that software vendors cannot survive and succeed supporting a ‘hybrid’ model.

This issue arises every time an incumbent software vendor–my definition of a “ISV”–rolls out a SaaS solution while also trying to sustain its legacy, on-premise application. There are plenty of impediments to success in this balancing act across the entire lifecycle of a product extending from software development and delivery to sales and support. These technological and organizational challenges are major obstacles to success for ISVs trying to keep pace with the SaaS movement.

However, despite growing interest and adoption of SaaS as well as other ‘cloud’ computing alternatives among organizations of all sizes, many IT and business decision-makers continue to feel that they must make an ‘either/or’ judgement when it comes to on-premise versus on-demand solutions. This often confronts with an unnecessarily polarized set of options rather than giving customers a variety of complementary choices that enable them to locate their applications wherever they like.

I believe that this no longer needs to be the case. Instead, I think SaaS and cloud computing vendors should adopt a different attitude toward the hybrid model to better respond to their customers’ preferences. If vendors adopt this new approach, it could remove one of the last barriers to broad-based acceptance of SaaS and cloud computing among small- and mid-size businesses (SMBs), as well as large-scale enterprises.

As I’ve written, and many others have stated elsewhere, building and selling a traditional software product is fundamentally different than delivering and supporting a SaaS solution. Supporting these two differing models creates internal redundancies and external conflicts which are costly, inefficient and doomed to failure in most cases.

Having said that, I’m becoming convinced that some ISVs can survive and will succeed by offering customers the choice of an on-premise and on-demand solution. In fact, I think it will be necessary to do so in order to satisfy the demands of those customers who are not comfortable with relying on a ‘cloud’-based solution to meet their IT or business needs.

While customer concerns about where a software solution, or even the application data, resides may not be entirely rational at times, it may not be necessary in the future for ISVs to have to convince them to part with their data or depend on an application hosted in an unknown location.

Instead, a variety of players in the SaaS and cloud computing market are leveraging an ‘appliance’ approach which permits customers to deploy the vendor’s on-demand solution behind the firewall where it is regularly updated and upgraded via a synchronization process similar to that which has become acceptable in a variety of other situations, such as managed storage, back-up and security services. It is also becoming possible with Google Docs offline and Adobe Air.

This idea is already being demonstrated by companies like Cast Iron Systems in the data integration arena; NTRglobal in the remote support management services business; and St. Bernard in the security solutions realm.

Although none of these companies are delivering major enterprise applications, they are all offering customers the choice of deploying their equally important solutions in the ‘cloud’ or behind the firewall.

And, if Google, IBM, Microsoft and others can modularize their data center capabilities into ‘pods’ which can be deployed anywhere, what is to prevent Salesforce.com or other enterprise SaaS vendors from doing the same thing with their applications.

(I’ve been hearing rumors for a while that Salesforce.com is already allowing some of its largest customers to host its applications behind the firewall.)

Now, it is important to note that this approach still requires an ISV to evolve its software design to sit on a single multi-tenant style architecture and code base in order to be operationally feasible and cost-effective.

But, the enabling technologies are quickly evolving to satisfy these requirements. And, customer demand definitely exists to make this approach readily acceptable and profitable.

Let me know if you think I’m crazy or if you know of other examples which support my argument.

With the Software-as-a-Service (SaaS) event season in full throttle, I’ve found myself consulting with a new generation of aspiring SaaS players who are trying to learn about the fundamentals of this rapidly evolving marketplace quickly so they can respond to changing customer requirements and capitalize on new market opportunities.

Starting with SoftLetter’s SaaS Sales and Marketing Seminar in Atlanta which has been upgraded to the SaaS University for Waltham, MA in June, and continuing with OpSource’s SaaS Summit last month in San Francisco, a widening array of incumbent software vendors (ISVs) and old-line technology vendors have approached me seeking help in their efforts to join the SaaS movement.

Some of these companies have lived well for years in niche markets, others have enjoyed cashcow businesses at a mass market level with hardware-based solutions. Now they see a combination of market forces fundamentally changing their worlds and they are trying to transform their business models quickly to respond to a rapidly changing competitive landscape and customer preferences.

Although established SaaS companies clearly understand the differences between the old and new worlds of on-premise software products versus on-demand software services, these new arrivals are still learning about the challenges, as well as opportunities associated with SaaS.

What all of these companies have in common is that they can’t afford to discard their legacy software business in order to capitalize on SaaS opportunities. Instead, they must adopt a hybrid strategy that can support the needs of their existing customers while satisfying the changing expectations of a new generation of software user, without ripping themselves apart in the process.

What these companies are learning is that living in a hybrid world requires two different approaches to software development and delivery, two different go-to-market strategies, two different sales and marketing methodologies, and two different types of personnel.

Agile development replaces the long upgrade cycles of the past. Hosting replaces packaging issues when it comes to software delivery. Online marketing and telesales are more important than direct sales or traditional resellers. And, business-oriented customer support becomes essential rather than tech support to ensure customer loyalty and reference-ability.

Underneath these tangible differences is the more fundamental and subtle differences in attitude between the on-premise and on-demand worlds. In the old world, making the software work was the customer’s problem. The customer bought the software before they were sure it worked, hired the consultants and staff to get it up and running, bought the infrastructure to properly support it, and notified the vendor if something went wrong or they needed more help.

In the new world, making the software work is the SaaS provider’s responsibility. The customer can try it before they subscribe to it. They don’t have to hire additional staff or purchase more servers. They may still hire a few consultants to help with a smaller assortment of deployment issues, or to help with change management and training requirements. And, the customer expects the SaaS provider to keep the software service up and running, and continuously enhance it.

Can traditional software and technology vendors straddle these two worlds?

I think the answer for many of these vendors must be the same as the famous line in the movie Apollo Thirteen, “Failure is not an option.”

The big ISVs–Microsoft, Oracle and SAP–have the deep pockets to finance this balancing act. Other ISVs like Business Objects and Callidus Software are also demonstrating that hybrid models can work.

The smaller firms will have to make sacrifices in order to traverse this transition process. Many are fortunate that they are privately-held companies that don’t have to satisfy Wall Street’s short-term time horizons, especially in today’s frantic economic climate. Others are equally fortunate to have a loyal installed base of customers who will patiently work with them to ensure that the migration process is successful.

But, in each of these cases there will be plenty of potential landmines which will require careful planning and cautious execution. Thoroughly understanding these potential pitfalls will be essential if these new SaaS players are going to succeed in the on-demand marketplace.