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.

Maybe a measure of the Software-as-a-Service (SaaS) movement’s success is the growing attention billing systems are now getting from a variety of sources.

Last week, Jamcracker unveiled its new WebStores which will provide front- and back-end service delivery infrastructure, billing and settlement, customer administration and support services for traditional channel companies who want to add on-demand applications to their existing software, hardware and service portfolios.

Today, OpSource announced that it has acquired privately-held and Dublin-based LeCayla Technologies, a provider of billing and customer on-boarding software for SaaS and Web-based applications, to strengthen OpSource’s Web application delivery platform. (Click here to read THINKstrategies’ 2006 profile of LeCayla, or listen to my 2007 podcast with LeCayla’s CEO, Conor Halpin.)

These are just the latest moves by a widening array of players who are offering storefront solutions to make it easier for SaaS vendors to sell and customers to buy their on-demand solutions.

My friend and colleague, Phil Wainewright, recently posted a blog examining Amazon’s DevPay billing and account management service aimed at making it easy for developers to get paid for applications they build on Amazon Web Services.

Why all the attention on a mundane topic like billing?

Now that SaaS is gaining broad-based market acceptance and adoption of SaaS-oriented solutions is accelerating, SaaS vendors are becoming more concerned about how to properly charge for their services and track customer usage.

But, billing for on-demand services isn’t like billing for traditional products. Unlike the static nature of traditional products, on-demand services is a high-transaction and highly dynamic business with lots of moving parts, such as varying packaging options and pricing schedules, never mind variable usage rates and measures. On-demand service providers, including SaaS vendors, are discovering that this business requires a sophisticated billing engine to successfully process transactions.

Most on-demand service providers, especially start-up SaaS vendors, cannot afford to build these kinds of systems themselves. They are operating in a highly competitive environment in which price sensitivity and customer abandonment are a constant concern. They have to focus their energies and limited financial resources on developing superior solutions rather than worrying about front- and back-office operations. So, they are looking for turnkey billing and customer management systems from third-parties which can be easily adopted and economically administered.

In response, SaaS platform players are extending their portfolios beyond software development tools and partner ecosystems to include billing and customer management systems.

Salesforce.com recognized this need and business opportunity in 2006 when it unveiled its AppStore idea. Although its announcement was among the first at the time, the company has said little about this capability since preferring to emphasize the broad-based capabilities of its Force.com platform.

Others are now stepping into the void with their own solutions. Specialists like Aria Systems are being fortified by VCs. eBay may direct some of its vast payment processing capabilities toward the SaaS market. And, traditional payment processing players, like AmEx and MasterCard, might move into the market via acquisition.

As the SaaS market matures, the winners will be those companies which have the most efficient and effective transaction management systems, as well as the strongest SaaS offerings.

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.