THINK IT Services

As the Software-as-a-Service (SaaS) movement gains momentum, it is experiencing a ‘gold-rush’ affect with software, systems and service companies of all shapes and sizes trying to win a share of this rapidly growing market.

The inevitable outcome of this proliferation of aspiring SaaS players is a bastardization of the SaaS term and escalating debate about what actually constitutes a valid SaaS company or offering.

Most analysts and commentators insist on a strict definition of SaaS that hinges on the vendor having a multi-tenant architecture. In their view, if the vendor’s offering isn’t built on this architecture, then it isn’t SaaS.

I’ve always been more lenient when it comes to this architectural issue. I believe the definition of SaaS is in the eye of the beholder, and the most important arbiter of what is SaaS is the customer. If the customer is happy with a single-instance, hosted solution or one that is streamed to their desktop rather than built on a more sophisticated multi-tenant platform, then so be it.

That is why I think multi-tenancy is less of a determinant of SaaS success than other factors. Here are the characteristics which really set a leading SaaS company apart from SaaS wannabes:

• Networked applications – One of the primary drivers of the SaaS movement is the need for increasingly mobile workers and geographically dispersed customers/partners to share information and collaborate with one another more effectively. Web-native applications which leverage wide-area networks (WAN) are better suited to fulfill this need than the highly centralized, on-premise applications of the past.
• Enhanced user experience – Another key driver of SaaS is user frustration with the cumbersome, inflexible nature of legacy applications. These on-premise apps were generally designed to accommodate the technical demands of data center systems and corporate databases rather than appeal to the real-world workflows of businesses and intuitive senses of end-users.
• Variable pricing – Corporate decision-makers are also fed up with the capital investments and significant risks associated with legacy apps. They no longer want to be locked into perpetual licenses and escalating maintenance agreements. Having the opportunity to try software solutions before they buy them, and then being able to use their operating budget to acquire the software functionality they need as they need it is especially appealing in today’s recessionary environment.
• Real-time analytics – Given the economic climate and intensifying competitive landscape, companies of all sizes need to generate greater intelligence from their applications. It is for this reason that analytics is becoming an increasingly important feature in nearly every type of enterprise SaaS application, rather than just an assortment of standalone business intelligence SaaS solutions.
• Continuous enhancements – We are also living in a time in which the rate of change is accelerating and customers expect their vendors to respond to their constantly changing needs. Therefore, leading SaaS solutions are those which rely on agile development techniques to incrementally improve their solutions on a continuous basis rather than depending on long development cycles to roll out disruptive ‘upgrades’ to their legacy applications.
• Self-provisioned, dynamic toolkits – Corporate end-users are also becoming more tech savvy and more willing to take advantage of a rapidly expanding reservoir of gadgets, widgets and other mash-up devices to solve business problems or achieve their corporate objectives without the help of internal developers or outside consultants.
• Aggregated data & benchmark studies – Smart SaaS companies are beginning to recognize that the SaaS model gives them unprecedented insight into their customers’ operations based on their SaaS usage patterns. These SaaS companies are accumulating activity data which can be converted into valuable benchmark statistics and best-practice studies. This puts the SaaS company in an advantageous position to provide a new level of value to their customers that gives them an opportunity to transform their user base into a powerful ‘club’ where users get insight in addition to software functionality.

Companies that can deliver these benefits will be in a better position to survive and succeed in the SaaS market.

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.

While much of the information technology (IT) industry and many CIOs, concerned about their traditional legacy business intelligence (BI) applications, were focused on the market implications of Oracle’s acquisition of Hyperion Software, new entries into the market may represent a more important milestone in the evolution of this segment of the software industry.

On March 6, 2007, LucidERA unveiled its new Software-as-a-Service (SaaS) business intelligence solution. The company is founded by one of the truly good guys of the industry, Ken Rudin, who also has a unique perspective on the opportunities and challenges represented by the SaaS model.

Ken started his career at Oracle. He then co-founded and was CEO of Emergent Corporation, a consulting firm focused on data warehousing projects for Fortune 500 companies which was sold to Keane, Inc. in 1999. At that point, Ken joined a new company, called Salesforce.com, where he became SVP of Products. He then moved to Seibel Systems where he became the VP and General Manager of the company’s CRM OnDemand solution. When Seibel was acquired by Oracle, Ken moved on to become a founding advisory board member of NetSuite.

These experiences have driven him to launch LucidERA to challenge the established BI players with a pure SaaS alternative. Ken and I first met a year ago at a Pacific Crest investors conference, and have been on various industry panels together since. Drawing on his vast industry experience, Ken is one of the most compelling industry speakers regarding the fundamental challenges facing incumbent software vendors (ISVs) as they attempt to transition to a SaaS model.

Based on his industry experience, Ken recognizes that long-term success in the software industry, as well as within the SaaS movement, depends on building a solid platform rather than creating hot products. In response, LucidERA is positioning itself as an on-demand BI platform provider, rather than just an on-demand BI application vendor. In this role, it will supply a set of BI applications and integration tools, called ‘data connectors’, to permit other developers to link their solutions into the LucidERA’s platform.

LucidERA isn’t the only new player entering the BI market with a SaaS strategy in mind. Oco has been building hosted BI solutions for customers for a number of years. The company recently announced that it had obtained $10 million in a Series C financing from Highfields Capital Management LP, as part of a total Series C issuance of $14.5 million. The company intends to use this new round of funding to shift its business from a project-oriented, hosted BI solution model to a true, multi-tenant SaaS model.

In addition to announcing its latest round of funding, Oco also introduced its new President/CEO, William (Bill) Copacino, formerly Accenture’s Group Chief Executive for Global Business Consulting, responsible for its BI and supply-chain management consulting practices. While Copacino certainly comes to Oco with plenty of expertise in the BI world and probably has a solid Rolodex to get CXO-level meetings, he lacks experience in the software business, especially in the rapidly evolving SaaS world.

Not to be overlooked in the rapidly changing BI market are recent acquisitions by Business Objects and Cognos to strengthen their positions in the SaaS market.

Don’t be surprised if you see Salesforce.com and many of its AppExchange partners, who collect and analyze data from multiple sources, attempt to shave off a portion of the BI market for themselves.