THINK IT Services

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.

Just like the frenzy and speculation that surrounds every high-profile couple before they tie the knot in today’s pop culture, the build up over the past few weeks around a pending announcement between Google and Salesforce.com was destined to fall short of many people’s overblown expectations.

Much of the speculation centered on whether Google would acquire Salesforce.com in an attempt to dramatically strengthen the search vendor’s foray into desktop and business applications. In March, I made my bet that Oracle would be the first suitor to try to capitalize on Salesforce.com’s meteoric rise in the on-demand business apps world.

Although I can certainly see the logic in a Google/Salesforce.com marriage, I thought it was premature for the companies to do this kind of deal at this stage. Unless, Oracle initiated a hostile takeover attempt for Salesforce.com, the on-demand vendor wasn’t incented to seek an acquisition elsewhere. And, Google had other acquisition priorities more closely related to its core business of online advertising to be in such a hurry to acquire Salesforce.com’s on-demand business app platform and ecosystem.

So, anyone who was waiting for an announcement of a Google/Salesforce.com merger was bound to be disappointed when they simply unveiled a strategic alliance overnight. This new formal alliance is based on a more informal working relationship which the two companies have built around their open application program interfaces (APIs) and web services platforms which have enabling third-parties to create ‘mash-ups’ for a while.

In their joint announcement and in a prior briefing which they gave me last night, the two companies revealed they will kick off their new formal relationship with a narrowly focused enhancement of the Salesforce.com for Google Adwords solution which enables companies to acquire and administer Google’s popular online advertising mechanism via Salesforce.com’s customer relationship management (CRM) and salesforce automation (SFA) applications. This integration process began with Salesforce.com’s acquisition of Kieden Corporation last August, a start-up built on Salesforce.com’s AppExchange platform aimed at leveraging the Salesforce.com’s apps to measure the effectiveness of Google Adword expenditures. The acquisition led to the rollout of Salesforce.com for Google Adwords.

What makes the new offering different and more significant than the existing service is that this is the first time the two companies have officially sat down to develop and deliver fully integrated joint solutions. The initial offering targets very small organizations that have not used Salesforce.com and/or Google Adwords in the past, and are looking for an easy, turnkey solution that makes the online advertising and sales management process simple and cost-effective.

While this might look like a non-event, it is actually a logical first step for two companies who share a common vision about how they would like to disrupt the traditional software business. It also demonstrates that they are not joining together just to steal headlines, but are sincerely interested in building a strong working relationship which produces tangible business benefits for their mutual customers. They are also looking for ways that they can each extend their market reach through this alliance. In this first offering, they have succeeded by making their existing solutions more accessible to a population of small companies who were previously reluctant to advertise via Google Adwords or adopt Salesforce.com’s on-demand CRM and SFA applications.

I expect plenty of press and analyst furor in the coming days that the Google and Salesforce.com announcement failed to meet the market’s unrealistic expectations.

However, I also expect the two companies to build on the success of their first joint offering and create a long-term relationship which may ultimately lead to the same place many had expected today, namely a merger of two very like-minded companies.

In the meantime, stay tuned for a steady stream of additional offerings which tighten the bond between the two companies, accelerates the adoption of on-demand solutions, and benefits not only Google and Salesforce.com’s mutual customers, but also their respective ecosystems of strategic 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.

While Salesforce.com was unveiling the first iteration of its new generation of on-demand vertical market software services aimed at the financial services sector this past week, Google was flexing its muscles as a viable Software-as-a-Service (SaaS) vendor with its first round of fee-based, packaged online desktop solutions aimed at enterprise customers.

Google’s new Google Apps includes integrated word processing and spreadsheet applications, as well as BlackBerry support for Gmail for $50/user, a fraction of the price of Microsoft’s Office suite. In order to overcome corporate apprehension about the quality of its new services, Google is offering guaranteed uptime, IT management tools, technical support, and increased e-mail storage. Yet, to show how far Google must go to fulfill its promise as a viable provider of on-demand enterprise apps, Google Gmail users suffered from a series of service failures during the first week of the company’s expanded offerings.

Nonetheless, Google put its service guarantees to good use and reacted quickly by offering service credits to its customers and should be able to restore its credibility just as Salesforce.com did a year ago when it also experienced service outages. And, with Google’s vast war-chest of cash, growing installed base of corporate customers, popularity among consumer users, and rapidly growing hosting and service delivery infrastructure, it is in an enviable position to become a potent player in the SaaS business.

Google has become a popular target of entrepreneurial software developers who have created new online solutions, or ‘mash-ups’, by tying their on-demand functionality to Google’s search and other online applications. Whether it is the widespread Google Map oriented solutions or Salesforce.com for Google Adwords type of mash-up solutions, the Google API has become an increasingly common component for many new on-demand solutions.

Now, a new round of software enterpreneurs are capitalizing on the Google platform to generate a set of Google-centric enterprise applications which could compete with the incumbent software vendors (ISVs) such as Microsoft, Oracle and SAP, and even Salesforce.com. For instance, Etelos is a software start-up that recently unveiled a CRM for Google on-demand application and is promoting the Etelos Ecosystem for developing and deploying other on-demand applications.

IBM is also capitalizing on the SaaS movement as an opportunity to cut into Microsoft’s dominance of the technology marketplace by teaming with both Google and Salesforce.com. Although IBM announced a strategic alliance with Salesforce.com in 2000, it has only begun to put real muscle behind its relationship more recently. This is in response to Salesforce.com’s growing acceptance among large-scale enterprises, IBM’s primary stronghold, and rapidly expanding alliances with competitors of IBM’s Global Services division, including Accenture, Deloitte and various offshore outsourcers.

This past week, IBM used the occasion of Google’s rollout of its new on-demand, enterprise application suite as a convenient time to announce that it would be the first major vendor to bring Google Gadgets™ — an assortment of previously consumer-oriented web utilities — into IBM’s WebSphere Portal. This is the latest in a series of moves as a part of a low-profile alliance between IBM and Google which could have far-reaching implications for the software industry as well as corporate customers and consumers.

As a result of this new integration, users can leverage any of the approximately 4,000 Google Gadgets into their corporate environments. The Gadgets include language translators, package delivery tracking, Podcast searches, Wikipedia information, and YouTube postings .

On first glance, many of these tools may seem irrelevant to a corporate environment. However, just as Instant Messaging (IM) has become a common corporate communications and productivity tool over the past year, many of the Web 2.0 Google Gadgets are being tested to determine how they can enable increasingly dispersed workers or complex supply-chain partners to work better together.

The past week has clearly demonstrated that the SaaS movement is gaining acceptance within the corporate world, and Google is positioning itself to be a major player in the next chapter of this rapidly evolving story.