THINK IT Services

Last week Appirio announced that it had secured Series B financing of $5.6 million led by Sequoia Capital, the investment firm which has become notorious for also backing Google, Yahoo!, LinkedIn, and PayPal. Sequoia also funded one of my previous employers, International Network Services (INS), one of the high-flyers of the 1990s.

Appirio’s latest round of funding comes on the heals of a Series A investment of $1.1 million which it captured earlier this year from salesforce.com and angel investors. Although there is lots of VC money chasing Software-as-a-Service (SaaS) and cloud computing opportunities, it is rare to have a start-up collect two rounds of funding in the same year.

What makes this latest round of funding for Appirio of interest to me is the implications which it has for the overall on-demand services market.

As I mentioned, I was a part of a Sequoia Capital-funded company in the 90s. Like Appirio, INS was a professional services company. While Appirio is focused on the on-demand services market, we were focused on the internetworking market. Like Appirio, we followed the 800-pound gorilla in the market at the time, Cisco Systems. Nearly every time Cisco won a big router contract with a service provider or enterprise customer, INS won the deployment contract because Cisco didn’t want to build a costly field service organization. Appirio has built a similar business helping companies develop and deploy solutions based on the salesforce.com and Google platforms because both of these companies have shied away from building their own consulting arms.

The Appirio and INS stories are also similar because they were both smart enough to see an opportunity to convert individual customer engagements into packaged service solutions.

INS’ engineers recognized the shortcomings of traditional network/systems management (NSM) platforms and built a network performance management software solution, EnterprisePRO, which we sold as a subscription service before the application service provider (ASP) and managed service provider (MSP) concepts were borne. Today, Appirio is productizing the end results of its customer engagements and reselling them on salesforce.com’s AppExchange.

Many analysts and trade pub reporters have questioned whether there is a role for consulting and professional services in the SaaS market. There is no question that traditional professional services firms such as Accenture and CAP Gemini are still searching for the right way to scale down their methodologies and costs to fit the on-demand services market. However, Appirio’s revenues have grown more than 400% in the last three months, during which over 1500 customers in 80 countries have adopted its on-demand solutions.

Appirio isn’t alone in experiencing tremendous success in the on-demand consulting business. Astadia, Bluewolf and SaaSpoint have also caught this tiger by the tail and are growing rapidly.

I’m pleased to be moderating a panel at the SIIA’s On-Demand conference in November that will include executives of Appirio, Astadia and SaaSpoint talking about the SaaS and cloud computing markets from their street-level professional services perspectives. I look forward to seeing you there.

Two announcements last week served as reminders that, despite growing interest in on-demand solutions, professionals services remain an essential part of the technology landscape.

On January 30, Salesforce.com announced a strategic alliance with Deloitte Consulting to extend the Software-as-a-Service (SaaS) leader’s reach into the enterprise market. Salesforce.com already has a similar agreement in place with Accenture. But, the Deloitte alliance confirms the growing interest in SaaS among large-scale enterprises and the desire of a growing number of established consultancies to join the SaaS movement.

As I’ve stated many times, any suggestion that SaaS will eliminate the role of channel organizations in the software industry is ludicrious. However, there is no question that many value-added resellers (VARs) and consultancies will need to shift their focus from technology integration to process or change management projects. A clear example of this shift, as well as the attractive opportunities in the SaaS market for consulting companies is Bluewolf Group who boasts the largest number of Salesforce.com deployments despite its relatively unknown name.

Now that Salesforce.com is pushing its application development platform, Apex, to third-parties there will be even greater opportunities for consulting companies, like Deloitte, as well as VARs to provide a new layer of integration and customization services to end-user organizations.

Although SaaS will definitely make it easier for many organizations to deploy and administer enterprise applications, there will still be plenty of opportunities for professional services and consulting to continue to flourish in the on-demand world.

Although the network professional services has experienced a contraction since the dot.com bust and telecommunications industry downturn, the need for specialized planning, design, project management and infrastructure support consulting skills have not gone away. This ongoing need led British Telecom (BT) to acquire International Network Services (INS) on February 1.

As a former marketing guy for INS who suffered through its first painful acquisition by Lucent in 1999 and watched the company shrink within the withering telecom equipment vendor for three years before being spit out for a penny on the dollar, I’m very pleased with the BT announcement.

I’ve always viewed BT as being far more advanced in its systems integration and outsourcing capabilities than the U.S.-based telcos. And, I’ve always felt that the telcos, along with many other companies vying for a piece of the IT management services market, must offer a combination professional and managed services to win and retain long-term customers.

BT is on its way to building that integrated portfolio of services while also establishing a strong presence in the U.S. with its acquisition of INS and Counterpane, a managed security services provider (MSSP). In addition to INS’ overall network professional services experience and proven processes, it also has a particularly strong security consulting team and experience in the MSS business, having previously acquired Predictive, an INS wannabee with a MSSP capability.

In addition, INS has a software business which BT might also chose to expand into a broader set of SaaS or managed service offerings. It is the combination of strong professional services and intriguing software capabilities which led to BT to acquire for a >2x premium on current revenues.

For INS it is the deep pockets, access to a larger customer base and broader geographic reach which made BT an attractive suitor.