THINK IT Services

Microsoft is finally recognizing the fundamental ways in which people’s lives and work-styles are changing, and it as a company and its technologies must respond to these changes.

Welcome to the world of Software-as-a-Service (SaaS)!

Live Mesh is Microsoft’s attempt to catch up to the Web 2.0 movement which has quickly evolved into an Enterprise 2.0 migration process in which a rapidly growing number of companies of all sizes are shifting their IT strategies from on-premise products to on-demand services.

This trend is being led by Salesforce.com and Google, and being supported by hundreds of other start-ups and established vendors, including Cisco Systems, Dell and EMC.

Salesforce.com and Google’s alliance which produced a new set of integrated services last week is the most recent challenge to Microsoft’s dominance in the workplace.

Cisco Systems has been talking about the melding together of network-centric business processes for years, and has elevated its vision of the market to include new collaboration opportunities to showcase its WebEx acquisition.

Dell is seeking to redefine how companies will manage their servers, desktops and other devices by leveraging web-based managed services.

EMC is repackaging its storage systems into SaaS solutions, led by its Mozy acquisition.

By coincidence, I attended Salesforce.com’s Tour de Force roadshow in Boston yesterday where Marc Benioff and a series of guest speakers spoke persuasively about the power of its Force.com platform. In order to make the point that its platform capabilities can appeal to any software developer in any type of business, the event speakers included:

• Cheryl O’Connor, Worldwide CRM strategy manager of Analog Devices.
• Narinder Singh, Co-Founder and CTO, Appirio
• Jeremy Roche, CEO, CODA

Microsoft is now trying to define this trend in its own terms. Conceptually, it is hard to argue with the company’s view that the world is changing. Its latest initiative goes beyone the “Software Plus Services” ideas it has been promoting for the past two years. Practically speaking, it will be interesting to see how far Microsoft is willing to go to respond to these changes, and how successful it will be convincing corporate and consumer customers that it has the right portfolio of web-based services to satisfy their changing requirements and preferences.

Since the holidays are traditionally a time for people to take stock of the year past and offer their new year forecasts, here are my top ten predictions why the shift from packaged products to Software-as-a-Service (SaaS), utility computing and managed services will accelerate in 2008:

1. Services are Recession Proof: Escalating oil prices, the uncertain political landscape and faltering financial institutions beset with the aftereffects of the sub-prime lending debacle could mean a tough year for the economy. In this tenuous climate, consumer and executive confidence could decline, leading to an economic slowdown. As a result, many companies could hold back on their capital investments to mitigate their risks. The ability to adopt on-demand services on a pay-as-you-go basis will be a perfect sourcing strategy for businesses seeking greater cost-controls and flexibility.

2. Everyone’s Going Virtual: Most industry pundits and participants view virtualization as a technology trend, but it is also a business trend. Employees are increasingly working outside the four walls of a traditional office. Gen Y workers are always on the move and online. Traditional, on-premise applications and centralized servers sitting behind a firewall can’t effectively serve today’s mobile workers. SaaS and managed services are perfectly suited for these new, virtual business requirements.

3. Amazon, IBM and Google Bet on Utility Computing. After experimenting with its Elastic Compute Cloud (EC2) for the past year, Amazon has found plenty of demand for its computing power on-demand platform from startups, as well as established companies seeking a ‘sandbox’ for their new initiatives. Amazon is now confident it can deliver its computing power in a reliable and cost-effective fashion to a broader market of business users. So, expect more aggressive PR and marketing efforts to promote and sell this powerful utility computing service.

IBM Blue Tune: IBM originated the term on-demand and then walked away from the utility computing market seeking new opportunities among the avatars. When Amazon proved that the utility computing concept could become a reality, IBM repackaged its autonomous computing ideas in the form of a new ‘blue cloud’ initiative. Big Blue will push the idea hard in 2008.

The GooglePlex Makes It Move. Google is tired of sitting on the sidelines while Amazon’s success and IBM’s new ‘blue cloud’ initiative, Google has initiated a PR campaign to promote its ‘cloud’ computing capabilities and strategies. The GooglePlex has long been considered the prototype for a new large-scale computing architecture. Now Google’s incredibly scalable and economical computing engine is getting the attention of business pubs like BusinessWeek, the Wall Street Journal and other mainstream pubs.

4. Nick Carr Returns: In truth, he never left us. It was Carr who gave utility computing a major push with his seminal article in the Harvard Business Review and follow-on book questioning whether IT mattered. Despite venomous criticisms from many IT pubs and professionals, Carr became a popular speaker at corporate events because his message resonated with business executives and end-users. Now, he is putting the finishing touches on his second book, The Big Switch: Rewiring the World, from Edison to Google, which will be published on January 7, 2008. Although IT folks love to hate him, Carr has never lost his luster among corporate executives and end-users who agree with his basic premise that IT is a needless hassle and should be as easy as electricity and as reliable as a utility.

5. SaaS Solves SOX: A year ago, most publicly traded companies and other large-scale enterprises rejected the idea of SaaS because they thought they needed to take greater responsibility for their own compliance requirements. Now, they view the process controls, auditability and offsite hosting features common in most SaaS applications as a perfect solution for their Sarbanes-Oxley (SOX) needs. As a result, enterprise adoption of SaaS will accelerate.

6. Managed Services 3.0, Unified Communications Services and Service Automation: In the 80s, managed services were really outsourcing agreements offered by carriers to their largest corporate customers. In the 90s, a new generation of standalone MSPs promised managed services for SMBs. Neither model succeeded.

Today, we are entering a new age of managed services. Managed Services 3.0 combines the experience of the past with powerful new technologies to respond to growing customer demand. Cisco Systems will be pushing its IP communications and WebEx capabilities hard, while Microsoft promotes the virtues of its various “software plus services” solutions. The two are on a collision course in the unified messaging and communications market, but that will mean that they will each spend plenty on market education and channel sales programs.

At the same time, Dell will be leveraging its SilverBack Technologies and Everdream acquisitions to deliver a new set of automated, remote desktop and server management capabilities through channel partners and direct support services. Expect to hear more from HP and others.

7. Carriers and Channel Companies Find Success With New Services: Carriers have been perplexed about how to package, price and promote profitable managed services. VARs have been afraid that SaaS would ‘dis-intermediate’ them by eliminating their consulting and custom application development business. Carriers now see an opportunity to deliver an integrated package of IT managed services and SaaS business solutions to add value to their commoditized dial-tone services. Channel companies are also discovering that there are still consulting and customization opportunities in the SaaS market. As a result, carriers and channel companies will lend their marketing and sales support to managed services and SaaS.

8. Failure Doesn’t Matter: NaviSite suffered an extended outage in November and the on-demand services movement didn’t miss a beat. The trade press is now looking for horror stories rather than success stories regarding SaaS and managed services, but the vast majority of stories have been positive. In fact, my third annual SaaS survey in conjunction with Cutter Consortium found 100% satisfaction among the companies currently using on-demand software services. The upcoming SaaScon conference will highlight some of these customer success stories. THINKstrategies will also spotlight these stories throughout 2008.

9. IT Discovers Services are the Solution: In the past, the IT department was the biggest barrier to managed services and SaaS adoption. Many IT professionals were afraid these on-demand solutions would eliminate their jobs. Now, a growing proportion of IT people see managed services and SaaS as a way to out-task mundane work or overcome complex application/technology deployment and maintenance responsibilities. As they learn to take advantage of these on-demand solutions, IT departments will finally be able to put their daily firefights aside and focus on addressing the strategic needs of their business users.

10. Wall Street Buys Into Services: Some of the most successful IPOs of 2007 were in the SaaS market. Wall Street loves the predictability of subscription services and now that it has a solid set of market ‘comps’ to measure business success in the services market, it will be encouraging more privately held companies to go through the IPO door. At the same time, private equity funds will be encouraging publicly traded software companies to go private to enable them to shift to a SaaS model without the public market pressures. And, the investment bankers will be pushing a wide array of M&A activity. Expect the offshore IT/business process outsourcers (IT/BPO) and business services companies to buy SaaS vendors. Look for more consolidation in the managed services market.

Bonus Driver of Services Growth in 2008: THINKstrategies will be expanding its consulting and marketing programs aimed at educating IT/business decision-makers about the benefits of on-demand services, and continuing to help software and technology providers develop and deliver successful service solutions. Stay tuned to the SaaS and Managed Services Showplaces for more information and insight about these new programs and features.

Last week’s second annual SIIA On-Demand Conference was a bellwether for the state of the Software-as-a-Service (SaaS) industry. Rather than being composed of the usual suspects of SaaS speakers—Salesforce.com, Microsoft, etc.—the event included an interesting mix of prominent players and start-ups who clearly demonstrated that we are well beyond the ‘why SaaS’ stage and deeply into the ‘how’ phase of this important movement.

The event opened with a packed house of over 300 attendees, many with senior executive titles, and a relatively new name to the SaaS market presenting. Donald Proctor, the Senior Vice President of Cisco Systems’ Collaboration Software Group kicked off the event promoting its vision of the next wave of inter-office SaaS solutions based on WebEx’s collaboration platform which Cisco acquired in March 2007.

Although I might suggest that this wave of inter-office SaaS solutions is well underway and the acquisition slowed WebEx’s Connect ecosystem efforts, Proctor’s SIIA presentation was a clear indication that the networking company plans to put its shoulder firmly behind a renewed campaign to establish WebEx as an important platform for SaaS developers and corporate customers.

Erik Larson, Director of Marketing and Product Management for Adobe Systems’ Business Productivity Business Unit followed the Cisco presentation with Adobe’s stance regarding corporate collaboration via SaaS solutions. He demonstrated Adobe’s enabling technology for SaaS applications, and described its vision for a web-based future.

My colleague, Phil Wainewright, moderated a customer panel which included a cross-section of large (Chevron) and small (Pacific Northwest Economic Region Tourism Division) organizations leveraging SaaS to achieve their business objectives. While their views were timely, Phil and I had hoped to recruit enough customers to fill two panel sessions rather than just one. However, SaaS providers are still having trouble convincing their customers to publicly endorse their solutions in this fashion.

I had the privilege of moderating a panel regarding integration challenges consisting of representatives of Boomi, Informatica, Interweave and Pervasive Software. They all boasted about their individual approaches to delivering integration on-demand and admitted that there is still plenty of customization required.

Three of the most interesting speakers presented on the second day of the conference.

Dr. Werner Vogels, the Vice President and Chief Technology Officer of Amazon.com described how his company has commercialized its internal operations platform to support SaaS companies’ storage and service delivery infrastructure requirements. In my view, Amazon has single-handedly resurrected the utility computing concept, and has made it work for a growing assortment of SaaS vendors and other business users. As a result, Amazon now looms as a major force in the on-demand marketplace, not just as a channel to market but also as an enabling vendor.

Jason Maynard, the software industry analyst for Credit Suisse and the strongest advocate of SaaS on Wall Street, suggested that on-demand solutions could create a new level of value which he called “Software as an Answer”. His concept reinforced the views I’ve espoused in my writings and consulting engagements that SaaS provides an unprecedented opportunity for vendors to aggregate, analyze and distribute data based on application usage patterns and statistics. This data can be used for benchmarking, marketing, sales and operations purposes. It can even create new business opportunities for entrepreneurs.

Anthony Lye, Senior Vice President of Oracle’s CRM OnDemand division, gave the SIIA audience a preview of the company’s new generation of SaaS solutions which will be unveiled at this week’s OpenWorld conference. They include an impressive user-friendly interface which borrows heavily from the best of the Apple iPod Touch, combined with a robust set of social networking and mash-up capabilities.

The most important message from Lye is that Oracle’s enhancements are not aimed at satisfying the needs of small- and mid-size businesses (SMBs), but to meet the growing demands of enterprise customers. This echoed Proctor’s presentation on behalf of Cisco. This shouldn’t be surprising given the recent partner agreement between Cisco and Oracle. Oracle’s PR machine will undoubtedly generate a stream of third-party endorsements of its new on-demand capabilities as part of its OpenWorld festivities, such as today’s announcement of an integration with Xactly.

These were important proclamations for a market where SaaS is too often viewed as a simpler and cheaper solution for SMBs alone. (A misconception reinforced by a recent statement by SAP.) Instead, Oracle and Cisco are confirming my longstanding view that SaaS offers unique capabilities which fit the escalating demands of an increasingly decentralized and financially strained enterprise market.

Ironically, some of the attendees who had not been to previous SIIA events lamented the conference was too focused on the enterprise. While I understand their frustration, I still believe the seriousness of Cisco and Oracle’s efforts to climb onboard the SaaS bandwagon will further legitimize this movement. This will lend greater credibility to SaaS as a viable alternative to traditional, on-premise legacy applications. In turn, SaaS will become that much more attractive to SMBs as well.

However, the SIIA conference also demonstrated that industry best practices regarding service provisioning and delivery, integration, support, sales and marketing are still embryonic. An example of the risks which the SaaS market must still withstand was the extended outage suffered by NaviSite. And an indication of the growing focus on service provisioning was the announcement by Aria Systems as the SIIA conference convened that it had closed a $4.0 million Series A financing round led by Hummer Winblad Venture Partners.

With the recent acquisition of WebEx by Cisco Systems, speculation has been rising that Salesforce.com may be the next major Software-as-a-Service (SaaS) company to be bought. You can tell folks that you heard it from me first that the purchase will be made by Oracle within the next 18 months.

No, I don’t have any inside information. But, I can read the tea leafs and they tell me that Salesforce.com is too attractive for an even bigger player not to buy it. The software services company has over 650,000 subscribers and added 90,000 new subscribers during the most recent fiscal quarter ending in January 31.

While profits have slipped due to the company’s investments in new offerings and service infrastructure, the outlook for Salesforce.com’s services has never been better. Not only is customer receptivity growing rapidly, but Salesforce.com’s ability to penetrate new markets and gain a greater share of its current customers’ end-users and budget is also strengthening.

For instance, Salesforce.com’s deal and average installation size are both growing. The company is rolling out a new series of vertical market solutions, starting with on-demand financial services which could disrupt Bloomberg’s stronghold in that sector. And, Salesforce.com is also offering end-to-end, on-demand software development, delivery and distribution support to other SaaS vendors via its AppExchange, AppStore and Apex.

With Marc Benioff serving as its chief evangelistic officer (“ceo”), Salesforce.com is not only the largest independent SaaS vendor by far, it is also the undisputed innovator and spiritual leader of the SaaS movement.

Cisco Systems’ acquisition of WebEx clearly demonstrated that SaaS, and more broadly the idea of subscription services, is becoming a priority among the major technology vendors. Not only did Cisco buy the second largest player in the SaaS sector, it also paid a healthy premium to buy its way into the SaaS marketplace.

Oracle has shown a penchant to do the same thing. Its acqusitions of Siebel, PeopleSoft and, most recently, Hyperion show that the company will use its enormous cash reserves to add more applications to its portfolio, and eliminate competitors in the process.

Larry Ellison seems to take particular pleasure in acquiring companies founded or headed by former Oracle executives, Siebel and PeopleSoft being the most obvious examples. As the industry’s reigning Machivellian leader, Ellison relishes the opportunity to steal away software companies which threaten Oracle’s supremacy and are led by his numerous proteges.

Salesforce.com is such a company and Marc Benioff is one of those proteges. And, it doesn’t hurt that Salesforce.com is headquartered near Oracle’s home base and the company’s operations are built on Oracle databases.

While the upfront cost of acquiring Salesforce.com may be extravagent, the long-term benefits could be enormous. THINKstrategies’ research clearly shows that the SaaS movement isn’t a momentary fad, but a fundamental seachange in the way organizations of all sizes are acquiring software functionality to meet their business requirements. Although standalone SaaS companies must face significant financial hurdles ramping up a sufficient revenue stream from subscriptions, Salesforce.com has crossed this chasm and is becoming a high-growth annuity revenue and profit machine.

Others have speculated that Google will be the buyer of Salesforce.com. This may be true, but I doubt it. However, I think it is likely that Google will take a run at Salesforce.com when Oracle does make a bid for the company. And, I wouldn’t be surprised if Google wins a tug of war with Oracle to gain control of Salesforce.com. It has plenty of money. It has a similar corporate culture and executive leadership committed to changing the old rules. It could also leverage Salesforce.com’s application portfolio, service delivery infrastructure and AppExchange partner ‘ecosystem’ to gain new channels to market to corporate customers.

Don’t get me wrong, I would hate to see Salesforce.com be acquired. It has been instrumental in accelerating the growth of the SaaS movement. An acquisition by Oracle, or someone else, would leave a leadership void in the SaaS market which would be difficult to fill. Although the SaaS movement would continue to move forward, it would lose momentum and might never reach the level of importance which it is quickly attaining with Salesforce.com at the forefront.

Salesforce.com yesterday unveiled its first concerted effort to focus the power of its AppExchange partner network and Apex programming platform at a specific vertical market opportunity. Salesforce.com’s new initiative targets the financial services sector, in general, and the wealth management segment, in particular.

The new on-demand services come at a time when THINKstrategies’ research indicates that companies of all sizes are not only becoming more receptive to Software-as-a-Service (SaaS), but are increasingly looking for industry-specific solutions.

The new wealth management offering combines Salesforce.com’s core customer relationship management (CRM) and salesforce automation (SFA) software solutions with a set of third-party applications and business services focused on financial advisors who want to better serve their customers. It includes a set of standard features and functions upon which business partners and corporate customers can add their own components and capabilities.

The new wealth management service leverages Salesforce.com’s application dashboard and partner relationships to create a new financial services portal which will compete with Bloomberg, the dominate player in the sector.

Bloomberg has built a virtual monopoly with its information service terminals which have become a pivotal part of the day-to-day lives of money managers who depend on an integrated view of realtime information to make their investment decisions and effectively advise their clients.

As with any monopolist, Bloomberg users have a love/hate relationship with the information services company. They’ve grown dependent on the convenience of Bloomberg’s platform, but frustrated by its costs and limitations. The cost factor has also confined its market penetration to only the largest financial service companies, which can afford the hefty fees for its services. While Bloomberg has grown rich serving a quarter of a million users, it has left another 3.8 million financial advisors without a comparable information and client management source, according to statistics provided by Salesforce.com during its new launch briefing in NYC.

Salesforce.com is stealing a page from its past by focusing on the masses of unserved financial advisors with its new on-demand wealth management services. This is the same strategy Salesforce.com adopted with its original on-demand CRM and SFA solutions that were aimed at salespeople who were either unable to take advantage of enterprise applications from Siebel, SAP and others, or unhappy with the clumsiness and costs associated with these traditional on-premise applications.

Not only is Salesforce.com’s new wealth management service retailing at a fraction of the cost of a Bloomberg subscription, it will also provide users with an important new level of value—integrated CRM, SFA and other business applications. While the Bloomberg service provides users with plenty of information, it doesn’t come with built-in integration to important account management and business process-oriented functionality. This is where the new Salesforce.com wealth management service will shine.

It is also the reason why I think Salesforce.com poses more of a threat to Bloomberg than other industry observers may recognize. Although the obvious target for the new service of small to mid-size firms is beyond the reach of Bloomberg’s service, Salesforce.com’s Chairman and CEO, Mark Benioff, didn’t shy away from attacking the shortcomings of Bloomberg’s solutions in larger financial service companies during his introductory comments at the NYC unveiling. As he’s done with Siebel, SAP, Microsoft and Oracle, Benioff cast Bloomberg as a dinosaur that has outlived its usefulness.

To reinforce this point, Salesforce.com also announced during the launch event that it had recently won its largest contract to date, expanding a pilot program within Merrill Lynch from 4,000 to 25,000 employees. In addition to Salesforce.com’s growing base of large-scale enterprises, THINKstrategies’ research has found significant adoption of a broadening range of on-demand solutions within this market segment. This is another reason why Salesforce.com’s new wealth management service also boasts Dow Jones, Thomson Financial, Cisco, Dell and ten other charter partners.

Salesforce.com is promising that the new service is just the start of a stream of similar industry-specific solutions aimed at the Financial Services market, including Banking, Capital Markets, Insurance and Mortgage editions.

The company is also planning to attack other industries, according to my sources, starting with the Media industry.

While Salesforce.com continues to push the envelope and set a pace which no other SaaS vendor has been able to match, it is also making sure that no one takes the company’s accomplishments and capabilities for granted. At yesterday’s briefing, Benioff dedicated a major portion of his presentation to highlight the tremendous investment his company has made in building its service delivery infrastructure and business process management capabilities. His comments were intended to encourage more companies to leverage Salesforce.com’s platform and take advantage of its best practices, and also discourage potential competitors from trying to replicate Salesforce.com’s success.

At the moment, it will be hard for another emerging or established software vendor to challenge Salesforce.com’s stature in the industry. However, the company’s latest initiative reminds me of the frenetic expansion efforts which led to Novell’s collapse in the 1990s. Just like Salesforce.com, Novell was the gold standard for the rapidly growing networking market at that time and decided to use its wealth and power to expand into desktop applications and other areas which pitted the company against a wider array of major competitors. As a result, the company lost site of its core competency and lost control of its primary networking business to Microsoft and Cisco. Novell is still trying to recover from this strategic error.

Unlike Novell, Salesforce.com is not moving far from its core business. Instead, it is smartly leveraging its core competencies and partners to repackage their combined capabilities into a new set of on-demand services. As a result, Salesforce.com is in a good position to capitalize on the immediate vertical market opportunity and broader industry-oriented strategy.