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.

In May, I blogged about “Silicon Valley’s first phone company” which was creating a new market opportunity for Software-as-a-Service (Saas) in the voice communications sector.

Today, BT announced its intention to acquire that “Telco 2.0″ platform company, Ribbit, for $105 million in cash. Not bad for a company which just closed a “small” B round of funding, according to the company executives I chatted with this afternoon.

This acquisition clearly demonstrates how far SaaS has come.

SaaS is no longer viewed as just a cheaper and easier alternative to traditional, on-premise applications. Instead, SaaS is becoming recognized as a way to fundamentally transform businesses processes and various industries, such as telecommunications.

My roots are in the telecom industry. I helped to launch IDC’s communications industry research program in 1983 at the time of the original AT&T divestiture. I also enjoyed my most satisfying and successful years in the ‘real-world’ working at International Network Services (INS) in the mid- and late-1990s, which helped incumbent and insurgent telecom companies deploy router-based networks to support a new generation of business applications.

I’ve always viewed BT as among the most visionary of the major telecom companies. It acquired INS in February 2007. It has built a strong working relationship with Microsoft as a hosting company and purveyor of their Software-Plus-Services.

At the time of BT’s acquisition of INS, I wrote in the Web Hosting Industry Review (WHIR) that SaaS could enable telecom companies to escape the commodity business of traditional transport services and create new, application layer opportunities.

BT boldly stated in today’s announcement that the Ribbit “acquisition will accelerate BT”s strategy to transform itself into a next- generation, platform-based, software-driven services company.”

BT not only gets an innovative company, it also gains inroads into the Salesforce.com world of AppExchange partners and its Force.com development platform.

In order to minimize the risk of ‘killing the golden goose’, BT plans to operate Ribbit as a separate subsidiary retaining its name and management team so they can continue to pursue the promise of a new generation of voice-as-a-service solutions.

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.

Salesforce.com rolled out its Force.com Software-as-a-Service (SaaS) enablement platform last week after plenty of fanfare at its Dreamforce conference in September. The launch of the platform has sparked a new round of debates regarding the merits of Salesforce.com’s application development toolkit and its service delivery capabilities.

I’ve said many times in this blog and elsewhere, there is no more important or innovative player in the SaaS market than Salesforce.com. Every SaaS user and SaaS provider owes a debt of gratitude to Marc Benioff and Salesforce.com for pioneering the on-demand software services market and setting the standard for enterprise-class SaaS solutions.

While some elements in Salesforce.com’s strategies and solutions can be criticized as self-serving or ineffective, the company’s overall impact on the growth of the SaaS market cannot be denied.

Salesforce.com has set the bar for designing simple yet effective web-based business applications. It has shown how business applications can replicate the simplicity of popular on-demand services, while proving that SaaS can still meet the rigorous requirements of today’s corporate compliance regulations. It has also devised successful sales strategies for selling these applications to business end-users rather than IT departments.

Salesforce.com could have easily kept these accomplishments to itself in order to build its lead in the SaaS market, but wisely recognized that its long-term success depended on its ability to build an ecosystem of third-party applications and services around its core offerings.

This is the same strategy which has made every software company before it successful, including Microsoft, Oracle and SAP. These companies, and others, built their ecosystems and expanded their market penetration by making it easy for third-party developers to build applications on their software architectures. That is exactly what Salesforce.com set out to do with its AppExchange and is now extending with its Force.com platform.

Others may bicker about the iterative way in which Salesforce.com has evolved its platform capabilities and branding strategy from its AppExchange roots to its current Force.com form. But, what other company has created the same runway for SaaS solutions?

When it comes to SaaS platforms and partner ecosystems, the established players are still getting their acts together. Microsoft is a work in progress. Google is an enigma. Oracle is seen as primarily a database company. And, IBM is primarily good for middleware and hosting services. But, none has created a comparable set of platform tools and partner programs to match Salesforce.com.

Disclosure: Salesforce.com commissioned me to produce whitepapers regarding the Force.com and AppExchange.

The consolidation of the legacy software market continued this past week with SAP’s announced plans to acquire Business Objects, followed by Oracle’s announcement that it intends to buy BEA Systems.

These transactions clearly indicate that the traditional, on-premise software market is undergoing fundamental changes. The most obvious driver of the latest announcements is the growing importance of business intelligence (BI) and analytics as a key ingredient in any meaningful enterprise application.

In an ideal world, these acquisitions would mean that customers no longer have to carry the burden of integrating these capabilities into their enterprise software environments. Instead, it would be logical to expect the business intelligence and analytics capabilities to become a ‘plug and play’ component of the SAP and Oracle’s software portfolios. However, it is more likely that these acquisitions will simply make their software solutions even more complex to implement.

SAP could mitigate this risk by leveraging the fast-growing Software-as-a-Service (SaaS) unit within the Business Objects to accelerate SAP’s own efforts to deliver a successful on-demand solution. However, I’ve been a part of too many acquisitions to believe that SAP will fully exploit this asset while it is also trying to absorb the full extent of Business Objects’ capabilities.

Meanwhile, Salesforce.com has taken a different tact to satisfy its customers’ BI/analytics requirements. Rather than acquire a company in this area or build its own BI/analytics capabilities, Salesforce.com has encouraged third-party companies to develop solutions which enhance its SaaS capabilities via the AppExchange.

By providing an assortment of application program interfaces (APIs) and web services that permit third-party integration with its core on-demand applications, Salesforce.com is able to meet its customers’ needs without having to make a direct investment in the added functionality.

I/THINKstrategies think the legacy software vendors (LSVs) can steal a page from Salesforce.com’s playbook and use a similar ‘tugboat strategy’ to move more quickly toward an on-demand capability.

Just like aircraft carriers can take a long time to turn around without the help of a fleet of tugboats, the LSVs can also be expected to take a long time to change their software architectures, revenue structures and corporate cultures in order to become viable on-demand software vendors unless they encourage an army of SaaS companies to integrate with their legacy software products to enhance and extend their core functionality.

Why would SaaS companies want to integrate with legacy software products?

To gain access to existing customers, in many cases enterprise customers they would not be able to access otherwise. Since it is unlikely that customers will discard their existing software products anytime soon, SaaS companies have a better chance of penetrating customer environments if they complement their installed software rather than displacing it.

Ironically, the LSV is less likely to be displaced if they get close to their ‘enemy’. Instead, they can use the SaaS companies to strengthen their positon within these accounts and in the market as a whole by attracting third-party on-demand functionality to complement their on-premise products. They can also get a first-hand glimpse at how the SaaS solutions work and evaluate potential acquisiton candidates.

These Machiavellian tactics are certainly in the repertorie of the major LSVs. They just happen to be exercising a different set of tactics in the latest round of acquisition transactions.

Callidus Software Inc. announced todaythat it has been certified to offer its TrueComp® Suite on Salesforce.com’s AppExchange.

This announcement isn’t likely to generate bold headlines in the business or industry trade press. But, I believe it is a significant bellweather for the software industry and good news for organizations who have been worried that they’d have to make an either/or decision when selecting on-demand versus on-premise software solutions.

Until recently, the rapid rise of Software-as-a-Service (SaaS) as a radical movement to displace legacy applications. As a consequence, SaaS was seen as a fundamental threat to the long-term viability of the independent, or as I prefer to say, “incumbent” software vendors (ISVs).

While on-demand, SaaS solutions represent a real challenge for legacy software vendors, it is no longer a simple battle of good (on-demand) versus evil (on-premise). Instead, both parties are recognizing that they must co-exist in order to survive.

Therefore, companies like Callidus are responding to competitive pressures from on-demand challengers, such as Centive and Xactly, by adding on-demand options to their traditional on-premise software solutions. Similarly, Business Objects has been fighting back the on-demand challenges of companies like LucidERA with its own set of on-demand solutions.

As the 800 pound gorilla of the on-demand world, Salesforce.com has built the most vibrant ‘ecosystem’ of multivendor SaaS solutions, the AppExchange. This online clearinghouse has become a magnet for a widening array of third-party vendors aiming to capitalize on Salesforce.com’s deepening penetration of the market.

The Callidus officials who briefed me about their AppExchange certification prior to today’s announcement admitted that their decision to team with Salesforce.com was driven by escalating interest in SaaS and the growing presence of Salesforce.com among their enterprise customers.

So, Callidus’ rollout of an on-demand solution and certification on Salesforce.com’s AppExchange represents another important endorsement and validation of the SaaS movement. I’ll let Callidus’ on-demand competitors–Centive and Xactly–argue whether the company’s SaaS solutions match their net-native capabilities.

More importantly from a market perspective, it is clear that Salesforce.com’s aggressive efforts to permeate the enterprise sector now includes teaming with established players, like Callidus and Business Objects, rather than simply bashing the old-guard as obsolete relics of the past.

Salesforce.com recognizes that most enterprises want to augment rather than replace their legacy applications and established ISVs with on-demand, SaaS alternatives for the time being. Therefore, it makes sense for Salesforce.com to encourage the established players to join the AppExchange and create integration links which make it that much easier for Salesforce.com to penetrate enterprise accounts.

The good news for IT and business decision-makers is that they don’t have to make a fundamental choice between on-demand or on-premise software alternatives. Instead, they can now seek the option which offers the best application features and third-party integration to meet their needs.

Last week, I had the opportunity to return to Dublin, Ireland, to participate in the second Software-as-a-Service (SaaS) Summit which I’ve helped Enterprise Ireland (EI), the country’s economic development agency, organize and moderate in the past nine months.

After a very successful launch of this symposium series in October with the first SaaS Summit, decided to host another round. The goal of our first session in the Fall was to educate Irish companies and entrepreneurs about the opportunities in the SaaS market. Our objective last week was to make them aware of the major challenges and offer steps to success, especially for those local companies seeking to penetrate the U.S. market.

In addition to identifying and recruiting each of the Summit speakers, I also had the privilege of kicking off the day with a keynote presentation summarizing the state of the SaaS market and identifying the key technical and business issues that aspiring SaaS vendors must overcome.

I was followed by Eugenio Pace, Microsoft’s SaaS Architecture Strategist, who discussed the technical considerations for building and hosting SaaS applications. Clint Oram, the GM of SugarCRM in Europe, how the SaaS and Open Source movements are interconnected. He also raised questions about whether SaaS can succeed in a pure on-line, on-demand form. John Maughan, the Director of Engineering of Cape Clear Technologies, then identified the integration requirements for SaaS applications. We concluded the morning with a Q & A session in which the Summit attendees asked the speakers to delve deeper into some of the issues they raised.

The afternoon began with a talk by Phil Wainewright, the well-known SaaS blogger for ZDNet, on the differences between the U.S. and European markets. In addition to identifying some of the reasons for these differences, Phil also identified some of the interesting European-based SaaS vendors who are becoming prominent players in the market.

Phil was followed by Christopher Gesell, the Director Product Marketing at Verizon Business, who outlined how aspiring SaaS vendors can leverage global infrastructure providers to optimize their service delivery capabilities. Conor Halpin, the founder and Chief Executive Officer of LeCayla Technologies, then demonstrated how SaaS vendors must escape the constraints of traditional business models by deftly untangling himself from a straitjacket during his presentation. Conor’s entertaining display was followed by an equally enlightening talk by Frank McCracken, the founder of Saaspoint, an Ireland-based professional services and development company that has experienced rapid growth by focusing on Salesforce.com’s AppExchange opportunities.

Of course, no gathering in Dublin is complete without capping it off with a few pints at the local Guinness brewery. The next morning, I had a series of fascinating one-on-one meetings with very interesting Ireland-based SaaS companies–CashCollector, OpenPlain, Iquate and NetTeam.

As I found during my first visit to Dublin, the country’s booming economy, broad-based technology sector, supportive government agencies and collaborative entrepreneur climate make it a perfect ecosystem for SaaS companies.

Keep an eye on the SaaS Summit website for copies of the presentations, and contact me if you’d like to get more perspective on SaaS activities in Ireland.

Salesforce.com today announced its latest acquisition and newest extension to its Apex platform and on-demand service capabilities aimed at applying Web 2.0 tools and best practices to the age-old issue of knowledge management in corporate environments.

This represents a bold move which will not only expand the population of end-users who can benefit from Salesforce.com’s solutions, but will also raise some new questions for its partners who are trying to determine how to successfully dance with the Software-as-a-Service (SaaS) industry’s 800 pound gorilla.

Today’s announcement unveiled Salesforce.com Apex Content and Salesforce ContentExchange which are intended to help organizations better manage their documents and unstructured data within their existing Salesforce CRM applications.

Salesforce.com is promising that Apex Content will be offer a content management platform for unstructured data sources such as office documents, HTML, video/audio files and email. It will also enable developers to create new content management applications for a variety of horizontal and vertical market purposes. It will also have an AJAX user interface for easy customization, workspace management, library services, content classification schema, full text index, and workflow services. Salesforce ContentExchange will make it easier for users to share, tag, subscribe, rate, comment and recommend documents just as they do with popular consumer-oriented websites today.

Pricing and availability of Salesforce ContentExchange and Apex Content is scheduled to be announced later this calendar year.

These new capabilities are being built on technology developed by Koral Technologies, a start-up quietly acquired by Salesforce.com in March 2007. The terms of the acquisition were not disclosed, but you can bet the acquisition was a steal given the strategic implications of this move.

Anyone who simply looks at this announcement as another opportunistic marketing ploy aimed at heightening Salesforce.com’s visibility in the market should take a good look at the quote included in the company’s press release from Marc Benioff, Salesforce.com’s chairman and CEO:

“Salesforce Content represents a decisive step towards our vision of managing all information on demand…Salesforce Content will liberate customers from complex content management software like EMC Documentum and Microsoft SharePoint by extending the on-demand model and Web 2.0 innovation throughout the enterprise.”

This is a bold statement which will not only raise alarms among the major players Benioff has identified, but is also raising concerns among some of Salesforce.com’s AppExchange partners who already offer on-demand document management solutions and are wondering what today’s moves mean to them.

With each new initiative that Salesforce.com has unveiled since it rolled out its AppExchange partner platform in 2005, apprehension has quietly but steadily grown among its partners who worry that Salesforce.com’s new offerings may be encroaching on their businesses rather than encouraging them.

In past cases, such as last month’s AppSpace offering which included portal capabilities, everyone rationalized that the threat was offset by the added attention Salesforce.com’s moves gave its partners. The partners would also in the past questioned whether Salesforce.com was making a significant enough investment to truly compete with its more focused partners.

Although Salesforce.com probably didn’t pay a lot for Koral, its acquisition of a SaaS vendor to expand into an area where its established partners already reside is unprecedented. That is why two of its document management partners have already expressed concerns to me since this morning’s announcement.

No one can fault Salesforce.com for making a smart acquisition and continuing to set an aggressive pace in its expansion efforts. But, while the company plays a corporate version of ‘catch me if you can’, it will also have to figure out how to continue to play ‘nice’ with its partners who are becoming increasingly apprehensive about its ambitions.