THINK IT Services

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.

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.

A little over a year ago, I contributed a commentary to eWeek’s Channel Insider, entitled “On-Demand a Boon for the Channel”, that stated the Software-as-a-Service (SaaS) movement doesn’t have to be the death-kneel for channel organizations.

At that time, many resellers and integrators feared that SaaS would ‘dis-intermediate’ them because of its direct sales and simpler deployment characteristics. There is no question that these attributes will certainly disrupt the traditional business models of many resellers and integrators who capitalized on the complexities of the legacy applications in the past. However, there is still plenty of complexity in today’s enterprise-oriented SaaS solutions to give innovative resellers and integrators a new round of business opportunities to pursue.

Just as in the past, customization and integration remain challenges in the new world of enterprise SaaS solutions. A year ago, I discussed in the eWeek article about how Bluewolf Group had grown to become the largest independent integrator of Salesforce.com deployments. I also discussed how retailers, like CompUSA teaming with NetSuite, were seeking to become viable channels to market for SaaS.

Shortly after my Channel Insider commentary was published, ADP and AmEx also entered the SaaS market as potent new players with their acquisition of Employease and alliance with Rearden Commerce respectively. There entry clearly demonstrated how the SaaS market was quickly growing into a business services opportunity. It also showed that a new set of channel partners are primed to play a part in the SaaS movement.

More recently, other new entrants are also illustrating how a new array of channel opportunities can be fostered by the SaaS movement.

Yesterday, Business Objects and Thomson Financial announced an alliance to deliver financial information on-demand. Under this new agreement, Thomson Financial’s data will be delivered in pre-built, easy-to-use online reports via Business Objects’ Information OnDemand solution.

Last month, Verticals onDemand unveiled the first of a series of industry-specific customer relationship management (CRM) solutions built on the Salesforce.com platform. The company’s new VBioPharma on-demand solution is aimed specifically at the managed care requirements of U.S. pharmaceutical companies. Verticals onDemand promises to rollout other industry-specific SaaS solutions on the Salesforce.com platform.

Saaspoint is an Ireland-based integrator that has experienced the same success in Europe which Bluewolf Group has found in the U.S. Not satisfied with focusing on the European market only, Saaspoint has opened an office in Silicon Valley and plans to expand its operations across the U.S.

These examples are further proof that plenty of channel opportunities exist in the SaaS market and are ripe for the taking for those innovators who want to capitalize on this rapidly growing movement.

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, NetSuite announced that it was finally ready to enter the public market with an Initial Public Offering (IPO), and this week two other Software-as-a-Service (SaaS) oriented players found a private exit via acquisitions.

The NetSuite acquisition had been highly anticipated and is another indication of the growing support of the SaaS model within the investment community. NetSuite’s S-1 shows that the company is experiencing strong growth while also reducing the proportion of its revenues being spent on software development, sales and marketing. Although NetSuite isn’t a rocket-ship like Salesforce.com, it has established a broad enough customer base and is gaining sufficient momentum to disprove any lingering misconceptions that SaaS can’t satisfy businesses’ back-office or financial management needs.

A successful IPO by NetSuite, combined with growing receptivity to IPOs in general within the investment community, will widen the door for other SaaS vendors to follow this same path.

Google’s acquisition of Postini is another indication that the SaaS market is becoming more serious. Postini is a leading provider of security and archiving services aimed primarily at email but expanding into instant messaging (IM) as well. Its on-demand solutions will enable Google to compete more effectively in the enterprise market by strengthening the security and compliance capabilities of Google’s desktop, email and other web-based applications. Postini’s capabilities will also fit nicely with Google’s recent acquisition of Grand Central Communications, a VOIP phone aggregation solution provider.

Another acquisition on July 9 was overshadowed by the Google/Postini deal. Unica–a leading provider of traditional, on-premise enterprise marketing management (EMM) software–purchased Marketing Central, a rapidly growing on-demand marketing resource management ( MRM) solution provider.

The transaction clearly demonstrates the rising level of interest and demand Unica is seeing among its customers and prospects for on-demand alternatives and add-ons to its traditional on-premise solutions. Although it will take some time to fully integrate the companies’ capabilities, this transaction enables Unica to quickly add an on-demand option to its on-premise portfolio.

This isn’t the first transaction of this type. Another example is Business Objects’ acquisition of Nsite. You can be sure that many SaaS providers are aggressively seeking a similar exit. And, there are plenty of legacy application vendors, integrators and outsourcers, and a variety of business services companies who are trolling for good SaaS acquisitions.

Consolidation within the SaaS community is also accelerating. For example, Silverpop recently acquired Vtrenz to broaden its portfolio of on-demand marketing solutions. (Click here to obtain THINKstrategies’ profile of Vtrenz just prior to this acquisition.)

I’m pleased to be a contributor to TripleTree’s most recent research report concerning these trends entitled, “Sales, Marketing and Service Convergence: How SaaS Ecosystems and Collaboration Tools are Redefining CRM.” I recommend you download a copy.

I expect the volume of IPOs, mergers and acquisitions within the SaaS market to accelerate dramatically over the next 6-12 months. As Microsoft’s CEO, Steve Ballmer, proclaimed at the company’s Worldwide Partner Conference in Denver on Tuesday,

“This fundamental transformation to software and service is upon us. It will affect us all, and I guarantee you Microsoft will lead in driving this next generation of computing and user-interface models just as we have the last couple of generations.”

With companies like Microsoft, Google and Salesforce.com leading the way, and private equity monies freely flowing along with public equity opportunities, the SaaS market is primed to be the center of attention for the remainder of 2007 and beyond.

More importantly, customers are becoming very comfortable with the idea of leveraging online/on-demand applications to meet their achieve their business objectives. This expanding customer receptivity will be the fundamental catalyst of sustained SaaS growth.

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.