THINK IT Services

As the Software-as-a-Service (SaaS) “gold-rush” intensifies, industry consolidation is inevitable. The latest example of this consolidation process is today’s announcement by NetSuite that it intends to acquire OpenAir.

This announcement not only reaffirms the SaaS industry consolidation trend, but it also is the latest example of a company profiled by THINKstrategies being acquired shortly thereafter. Other examples include,

• Vtrenz which was acquired by Silverpop
• Everdream was acquired by Dell
• AimNet was acquired by Cognizant
• Corio was acquired by IBM

(Contact me if you’d like a copy of our Strategic Thinking profiles on these companies.)

I had the privilege of talking with Zach Nelson, CEO of NetSuite, and Morris Panner, the CEO of OpenAir, moments before today’s announcement was made public. They indicated that the acquisition was based on a trend which THINKstrategies has seen coming for a few months now.

Prospective SaaS users are not only seeking more industry-specific SaaS solutions, they are also looking for more strategic sources for these SaaS solutions. Instead of contracting for a series of SaaS point products from a wide array of vendors, corporate decision-makers, both business and IT, are taking a closer look at the SaaS vendors’ overall portfolios, platforms, partner ecosystems and financial viability so they can establish broader, long-term relationships with a fewer number of SaaS suppliers.

While the OpenAir acquisition gives NetSuite a stronger foothold in the professional services market, I think the acquisition also gives NetSuite a stronger set of human resource management (HRM) capabilities in its horizontal portfolio of enterprise applications.

Although the acquisition is another example of a Boston-based tech vendor being acquired by a west coast based company, the good news for OpenAir’s employees and the Boston area SaaS community is that NetSuite plans to use the acquisition as a beachhead for further investment aimed at establishing a greater east coast presence centered in the Hub.

Interestingly, NetSuite refers to its OpenAir plans as based on Oracle’s acquisition model and plans to operate OpenAir as a stand-alone product group with tighter integration to NetSuite’s platform. This reference just reinforces market perceptions of the close alignment of NetSuite with Oracle, and keeps alive suspicions that NetSuite may be acquired by Oracle in the future.

In the meantime, Zach Nelson and Morris Panner told me they will do all they can to maintain OpenAir’s relationship with Salesforce.com via the AppExchange, and build on their other third-party relationships, including their respective channel partners.

Having gone through a number of unsuccessful acquisitions, I know first-hand about the various issues that can get in the way of these transactions achieving their business objectives. However, I think NetSuite and OpenAir have a very good chance of succeeding because they have the right combination of complementary executive personalities, solution capabilities, channel partners and geographic orientations.

The next question is what this acquisition means for OpenAir’s primary competitor, QuickArrow? My bet is that they will also be an acquisition target in the coming months.

As I’ve suggested multiple times, the major hardware and software vendors are aggressively pursuing the tremendous business opportunities in the managed services market.

Now, the key questions are how will they bring these offerings to market and what role will their channel partners play in provisioning these new services?

The two most recent examples are IBM’s new Express Advantage security-as-a-service offerings and Dell’s April 24 closing of its MessageOne acquisition.

IBM’s security-as-a-service solutions are its first on-demand offerings based on its acquisition of Internet Security Systems in August 2006. The new solutions will primarily serve small and midsize businesses (SMBs). They include Express Penetration Testing Services; Express PCI Assessments; Express Multi-Function Security Bundle, which includes protection against worms, spyware, anti-virus and spam in a unified threat management offering; and Express Managed Protection Services for Servers.

These solutions have been historically been offered as on-premises offerings, but Peter Evans, director at IBM ISS, is quoted in eWeek as saying,

“Spending on security is rising 6 percent a year… But spending on the labor needed to manage that security is rising 11 percent a year; therefore we need to help SMBs remove some of the cost by offering solutions as fully managed services.”

IBM will sell these services to SMBs through its ISS channels, but you can bet it will also offer them directly to some of its larger, key accounts.

Meanwhile, in its announcement of the completion of its $155 million acquisition of MessageOne, the company said:

“With its acquisition of SilverBack Technologies, Inc., Everdream Corp., ASAP Software Express, Inc. and now MessageOne, Dell is architecting an integrated service delivery platform of SaaS applications that will enable it to remotely monitor, maintain, troubleshoot and address the majority of routine IT infrastructure issues that challenge businesses of all sizes. The company anticipates that services such as patch management, anti-virus, online backup and recovery, asset tracking, software license management and e-mail continuity delivered and managed over the Internet will reduce the cost of infrastructure management and free budget for the IT driven innovation that grows business.”

This statement makes more explicit the strategic implications which I outlined earlier this year.

Dell’s President of Global Services, Steve Schuckenbrock, goes on to say that Dell is “building a services supply chain” that will give customers greater flexibility regarding how they support their IT environments.

Again, Dell is offering these services to its growing array of channel partners but is also expecting to deliver these services directly to its key accounts.

So, channel organizations must determine how to fully leverage these offerings while at the same time effectively differentiating themselves from others, including the vendors, who will be offering the same managed services.

Since Michael Dell returned to the helm of his company, he has been dramatically reshaping its channel and services strategies. He is also putting the IT industry on notice that the way hardware companies define and deliver services is changing.

The old guard of the IT industry recognized in the 1980s and 1990s that tech support, professional services and outsourcing could generate lucrative revenues and create greater lock-in opportunities in an increasingly commoditized hardware business. Lou Gerstner saved IBM by turning it into a services company.

Dell bucked this trend by investing in sophisticated supply-chain, fulfillment and customer service processes which enabled it to succeed as a low-cost, high-margin manufacturer.

HP stole a page from Dell’s book and usurped its price advantage. Without a strong services story to serve as a safety-net, Dell was vulnerable to customer defections. It is now seeking to regain its competitive advantage by redefining how services are delivered. In the old world, services were a people-intensive business and highly customized. Dell plans to automate and simplify the way services are delivered.

After acquiring SilverBack Technologies and Everdream in 2007, Dell acquired MessageOne this past week. MessageOne is a leading provider of Software-as-a-Service (SaaS) enabled enterprise-class e-mail business continuity, compliance, archiving and disaster recovery services. MessageOne is in the same business as Postini, which Google acquired last year to fortify its Gmail capabilities and recently rolled out as an enterprise-class email archival service.

What makes Dell’s acquisition intriguing is the fact that it doesn’t offer an email service. But, that isn’t stopping Dell from adding this functionality to its rapidly growing portfolio of SaaS capabilities that now include remote desktop, server, security and helpdesk management services.

Dell has promised to deliver these SaaS capabilities via its growing array of channel partners to support their managed service offerings, but has also admitted that it will utilize them to support some of its customers directly. This direct service capability and a history of ignoring resellers has led to rising concerns among channel companies that Dell is going to commoditize their traditional on-site support business.

Dell isn’t just SaaSifying its services business.

Dell also unveiled this week a new Storage Simplification Assessment program which Dell promises will simplify the process of evaluating and selecting storage, backup, recovery and archiving solutions. Dell will offer these assessments directly and through its channel partners.

Dell has also restructured its customer support portfolio, consolidating its previous offerings into two simple options,

1. ProSupport for IT
2. ProSupport for End-Users

At Ziff-Davis’ recent Channel Summit, Dell’s channel czar in the Americas–Greg Davis–was asked if Dell intends to commoditize services the way it commoditized the hardware business. He said no, it planned to simplify the way services are packaged and priced.

If Dell’s moves are successful, they will encourage customers to set new standards for how services are sold and delivered. This will force other technology companies to restructure their service portfolios and streamline their delivery mechanisms in order to compete. It will also force channel companies to re-think how they package, price and position their services.

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, Dell made its second acquisition of a remote management services company in less than six months. After buying into the remote server management business with its acquisition of SilverBack Technologies in June, Dell expanded its remote management capabilities to encompass the desktop and mobile devices with last week’s acquisition of Everdream.

(A recent THINKstrategies whitepaper sponsored by Everdream gives some indication of how Dell will leverage the Everdream acquisition.)

Both transactions are a part of Dell’s larger strategy to expand its product and service portfolio with a variety of automated solutions. The biggest of Dell’s recent acquisitions with this goal in mind was its EqualLogic purchase for $1.4 billion in cash, which will give Dell automated iSCSI storage area network (SAN) solutions optimized for virtualization environments.

While the EqualLogic acquisition dwarfs the SilverBack and Everdream buys, and has garnered far more press attention, the latter two have generated plenty of concern among channel organizations. I think there are even broader implications.

Both SilverBack and Everdream are former managed service providers (MSPs) who shifted away from providing direct services to end-user organizations in favor of offering automated remote IT management capabilities to resellers and other aspiring MSPs. Both also recognized the virtues of a multi-tenant, Software-as-a-Service (SaaS) model to deliver their services.

While they were both making some headway in their efforts to build a channel program, neither was blowing the doors down because they both faced an uphill battle educating channel companies about the benefits of managed services and helping them transform their businesses to capitalize on this opportunity.

SilverBack was one of the first enabling technology companies in the managed services market to recognize this challenge and established a ‘franchise’ strategy to help its partners with their business needs. Everdream was in the midst of developing a similar channel education and support program when Dell made its move.

Some VARs are suspicious that Dell may be building a direct support capability at the same time that it is trying to expand its channels to market to jumpstart its recent slump in sales. Dell has made a point of stating that the SilverBack and Everdream acquisitions are aimed at enhancing its channel strategy.

Dell claims that SilverBack and Everdream will help channel partners deliver a new level of remote management services, i.e. managed services, which can better position them in a world where product differentiation is fading, particularly among mid-size businesses.

Although I tend to agree with Dell’s view that the SilverBack and Everdream functionalities can strengthen channel companies’ service delivery capabilities and tighten their bond with their customers, I think Dell has broader ambitions with these acquisitions.

The company has acknowledged that it must also strengthen its position among large-scale enterprise customers where it plans to continue to sell direct, and it also must automate its support capabilities for small businesses to remain profitable. During a briefing with Dell and Everdream representatives, they pointed out that the Everdream and SilverBack functionality can scale up to meet the needs of enterprise customers, and down to support small businesses as well. But, these representatives stopped short of revealing Dell’s service strategies aimed at these two segments of the market.

While I think Dell has a sincere interest in making a new generation of automated, remote management services available to its channel partners, don’t be surprised to also see a set of direct remote management services from Dell aimed at large enterprises and small businesses in the near future.

You should also consider Dell’s latest acquisition as an important endorsement of SaaS aimed at the IT management environment which will be copied by other major hardware and software vendors.