THINK IT Services

One of the most vexing questions in the Software-as-a-Service (SaaS) market, and broader on-demand services industry, is what role traditional channel companies will play in this brave, new world.

While Salesforce.com and other SaaS vendors are touting the enormous advantages of leveraging the ‘cloud’, there are still plenty of companies on Main Street who are just beginning to become familiar with today’s online services. Many of these small- and mid-size businesses (SMBs), and even large-scale enterprises, have relied on their local value-added reseller (VAR) and system integrator (SI) as not only their primary technology supplier but also their ‘trusted advisor’ for their technologies strategies.

These VARs and SIs have been uncertain about the impact of SaaS solutions and on-demand services on their businesses. In fact, many feel down right threatened by these services.

There is no question that SaaS solutions and on-demand services eliminate much of the upfront planning and design, installation and integration, and ongoing support requirements which have been the bread and butter of VARs and SIs’ revenue streams, not to mention the margins they made on hardware and software product sales.

However, there is still plenty of opportunities for channel companies to add value to SaaS and on-demand services across the entire lifecycle of customer requirements from needs assessment through the deployment and management processes. Appirio, Astadia, Bluewolf, SaaSpoint and Sofia Works are living proof of these new market opportunities.

Today, HP and NetSuite announced they are partnering to offer SaaS business applications to SMBs via HP’s vast channel community of 15,000 VARs in the U.S.

Under this agreement, HP and NetSuite will initiate a referral-based program for HP channel partners that will encourage them to recommend NetSuite’s solutions to their customers. They will also offer new value-added implementation and management services as part of the HP Total Care support program.

NetSuite will provide dedicated resources to support the HP resellers, along with a toll-free hotline for channel sales support and a self-service portal for channel partners to access sales tools and online training resources.

This agreement is significant on a number of levels.

First, it gives NetSuite a vast new channel to market to a broad cross-section of SMBs.

Second, it gives a wide array of VARs/SIs an opportunity to jump onto the on-demand services bandwagon with the help of HP.

Third, it gives HP a SaaS solution to sell to SMBs through its channel partners.

And fourth, it gives SMBs an opportunity to obtain a SaaS solution from their existing technology suppliers who they trust.

This agreement is a strong endorsement for NetSuite at just the right time. The company has been trying, without luck, to keep pace with Salesforce.com which continues to command the attention of the on-demand/cloud computing industry because of its brilliant marketing efforts and robust sales growth. Meanwhile, NetSuite has never been a strong marketing company and has seen its stock value severely impacted by failing to meet Wall Street expectations which hasn’t helped its standing in the SaaS industry.

Teaming with HP can be a timely shot in the arm for NetSuite. As a result of its acquisition of EDS, HP is now the largest vendor in the IT industry. HP has spent years building a strong channel network. Its willingness to expose the HP channel partners’ to NetSuite’s solution shows that HP believes it is a good fit for their customers. Otherwise, HP wouldn’t waste its time promoting NetSuite’s solution or jeopardize its channel relationships.

This agreement is also a way for HP to gain entry into the SaaS market where they have lacked a presence. In fact, I’ve been told by HP insiders that the company’s own SaaS initiatives have been slowed by their EDS acquisition. Who knows, HP might become a potential acquirer of NetSuite as a result of this relationship rather than Oracle who has been the most natural candidate in the past. On a more tactical level, the alliance also gives HP to opportunity to sell and promote more of its ProLiant servers and StorageWorks Modular Smart Arrays which are a key component of NetSuite’s service delivery infrastructure.

Ultimately, this alliance has the potential to be a win-win-win-win for all four parties—NetSuite, HP, channel companies and customers.

However, making this agreement a success won’t be easy. It will take time to train the channel companies and devise the right pricing and promotional programs to encourage them to sell NetSuite’s solutions. Even when the channel companies become comfortable with NetSuite and convinced that they can make money in this program, it will still take time to sell a enough NetSuite subscriptions to have an impact on everyone’s financial results.

Nonetheless, the evolution of this alliance will be an important indicator of how traditional channel companies will participate in the SaaS/on-demand services market. While the hoopla at last week’s Dreamforce was squarely focused on the new world of the ‘cloud’, today’s announcement may help to define the role of traditional channel companies in the SaaS market of the future.

HP’s decision to acquire EDS cannot be faulted when measured against all the standard metrics for doing a mega-deal in the traditional technology world. It gives both companies greater scale and access to more corporate customers without a lot of overlap.

The problem is that we are in the midst of a fundamental change in the way customers acquire technology and the way they perceive their vendors. The HP/EDS combination doesn’t fit this new world order.

There is no question that EDS strengthens HP’s hand when it comes to building and managing complex enterprise data centers. The acquisition also gives EDS ready access to HP’s installed base of customers.

Wherever there are big systems integration and ongoing management projects to be won, HP/EDS will be in a better position to compete with IBM and the off-shoring companies than they were a day ago as two separate companies.

However, many corporations are looking for new ways to leverage technology that permit them to be less dependent on traditional data centers. This no longer means simply outsourcing their data centers to the IBM’s and EDS’s of the world, but transforming where and how they obtain computing power.

Check the market stats of the leading research firms who follow the outsourcing business and you’ll see the number and size of traditional IT outsourcing (ITO) deals has been declining for the past few years.

Corporations are fed up with the hassles of managing their own IT operations, but they are equally dissatisfied with the poor track record of traditional ITO deals.

The ineffectiveness of legacy systems and software combined with the inflexibility of traditional ITO arrangements has driven a growing number of companies of all sizes to evaluate and adopt a widening array of on-demand Software-as-a-Service (SaaS) and managed services.

This is a shift I first identified in 2006. Gartner finally recognized this trend two years later when it proclaimed in January,

“…the outsourcing market has reached a tipping point with regard to utility delivery models, and that change and innovation will take hold and accelerate in this area through 2008 and beyond. More providers are developing utility-based offerings across infrastructure, application and business process domains. The trend toward software-as-a-service (SaaS) is gaining the most traction…”

Unfortunately, EDS brings nothing to the table when it comes to SaaS, managed services or other utility-based offerings. Instead, it saddles HP with lots of aging people, facilities and business ideas that haven’t kept pace with today’s realities.

Since HP has also failed to establish any thought-leadership or demonstrate any market leading capabilities in the SaaS or managed services markets, it isn’t likely that it will be a catalyst for change within EDS’ calcified operations.

So, the question is how long will it take for the EDS acquisition to bring HP down or can the combined entities wake up in time to respond to the changing marketplace?

For years, I’ve been advocating that hardware and software vendors along with their channel partners and telecommunications carriers have the opportunity to leverage Software-as-a-Service (SaaS) solutions and managed services models to generate powerful benchmark statistics and produce valuable best practice studies that can enhance their customer relationships and strengthen their position in the market.

Today, TriActive and THINKstrategies published the first of a series of benchmark studies which clearly demonstrates this unique capability.

The study examines end-user software utilization patterns across over 125,000 endpoints in 460 companies managed by TriActive’s Asset Management Suite™. The study found many companies where Microsoft Office installations are underutilized or not used at all. This means that many companies have more software licenses than necessary or have purchased higher than necessary versions of the software to meet their needs.

Based on this actual software utilization data, the study found that many companies can save 50% or more on their Microsoft Office software licensing costs by better matching their purchases to actual useage levels.

Ironically, many of the companies studied had deployed TriActive’s Asset Management Suite via managed service providers (MSPs) and value-added resellers (VARs) because they were concerned that they may have illegal copies of Microsoft software in their businesses and expected to have to ‘true-up’ to ensure they were in compliance. Rather than pay more, many of these companies will actually experience significant cost-savings as a result of TriActive’s Asset Management capabilities and findings of this study.

The TriActive-THINKstrategies study illustrates the power of today’s SaaS-based managed services not just as a more economical method of managing IT operations and tracking real software utilization, but also as a means of delivering a new level of value to customers.

Having helped launch META Group’s (remember them?) benchmarking practice in the 1990s, I’ve had first-hand experience grappling with the costs and complexities of traditional benchmark methodologies which too often failed to generate meaningful information or insight.

In contrast, today’s SaaS solutions permit service providers (xSPs) and channel companies to obtain actual useage statistics that can provide actionable data for individual companies and powerful perspective for a broader community of customers.

While I was running International Network Services’ (INS) strategic marketing group in the late 1990s, we launched an industry research program which generating survey findings and gave us tremendous visibility in the market that catapulted INS to the top of Yankee Group and UpSide Magazine’s leading IT consulting company list in 1999–above Anderson Consulting, CSC, EDS, HP and IBM. That designation led to INS being acquired by Lucent for 12 times revenues or $3.7 billion, the most ever paid for an IT services company and surpassing what IBM paid for PWC Consulting. (INS is still doing its industry surveys as a part of BT today.)

Innovative SaaS and managed service providers can achieve even greater thought-leadership and win greater mindshare today by capturing and compiling valuable activity data through their ongoing interaction with customers. They can utilize this data and analysis to better serve their customers and better position themselves in the market.

I look forward to working with more companies who recognize this exciting opportunity. Contact me if you want to discuss this opportunity further.

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.

IBM’s acquisition of Arsenal Digital Solutions is the latest transaction driven by the growing concern among businesses of all sizes that they have to do more to protect their electronic files in order to safeguard against natural disasters and satisfy escalating regulations.

What makes this trend even more interesting is that it has brought greater attention to the fundamental advantages of using a “hosted”, managed service to respond to these business concerns. This has made a widening array of storage, e-discovery and other managed service providers (MSPs) very attractive acquisition targets for an expanding assortment of potential buyers.

Here are a few of the acquisitions which preceeded IBM’s announcement,

• Seagate $185 million purchase of EVault
• EMC’s $76 million acquisition of Berkeley Data Systems Inc.’s Mozy storage service
• Autonomy’s $375 million acquisition of email archiving service provider Zantaz Inc.
• A series of acquisitions by Iron Mountain, including the $158 million purchase of Stratify, Inc., an e-discovery services firm.

Even Google’s acquisition of Postini was driven, in part, by the need to provide greater archiving capabilities within Gmail if it is to be accepted by mid- to large-scale businesses.

The explosion of digital files, ranging from email to patients’ records, is forcing businesses of all sizes to reevaluate their storage strategies and archival systems. Intense media coverage of the latest natural disasters has made everyone more sensitive to the risks associated with failing to properly back-up and store valuable computer files.

What began as a simple consumer craze with services like Flickr to handle personal pictures, has quickly morphed into a potentially lucrative managed service opportunity.

As consumers move from personal worlds into their professional workplaces, they are becoming equally aware of the need to better protect their corporate documents and records. And having enjoyed the ease-of-use and economic advantages of a back-up and retrieval service for their personal needs, they are seeking a similar solution for their business requirements.

So, it shouldn’t be surprising that storage vendors like Seagate, EMC and now IBM are adding these services to their corporate portfolios via acquisitions. Telcos, ISPs and hosting companies are already leveraging their communications infrastructure and server facilities to offer similar managed storage, back-up and disaster recovery services. Even Microsoft and Dell are offering inexpensive storage services to their customers. Expect HP and others to follow suit.

This trend represents a challenge and opportunity for traditional business continuity and disaster recovery service providers, such as Sungard. The challenge is that they must rearchitect their services to compete with the more focused and less expensive managed services of today. The opportunity is that if they succeed in their restructuring efforts, they will have a far larger market opportunity to attack.

The acquisition hit parade in the IT management arena continues. On Friday, BMC purchased RealOps and on Monday HP acquired Opsware (and Neoware).

The similarilities between the two acquired companies is noteworthy, as is the opportunity for the acquirors to market their new assets to enterprises, as well as managed service providers (MSPs).

IT management has always been an issue of concern, but until recently it has never been a lucrative market for network and system management (NSM) platforms and tools. As IT becomes more pivotal to business operations and optimizing the performance of IT becomes more essential for business success, the importance of effective IT management has grown.

It has become increasingly apparent that enterprises, as well as MSPs, need as many tools as they can find to help them automate as much of the IT management function as possible. Market studies from various research firm has found that most IT/network professionals spend approximately 80% of their time just keeping their IT/network operations up and running. And, ironically the vast majority of network and system failures are due to human error.

Automating many of the routine aspects of NSM can significantly reduce the amount of time IT/network professionals spend performing mundane tasks and reacting to unplanned events. The promise of IT automation systems, such as Opsware and RealOps, is that they can perform these tasks in an automated and proactive fashion that can dramatically increase network and system availability and performance levels.

But, few enterprise IT organizations or MSPs are interested in spending the time selecting and integrating best-of-breed NSM point products to build their own IT management platforms. Instead, they are seeking vendors who can provide an integrated platform which can address the bulk of their IT management needs.

By adding these capabilities to their software portfolios, HP and BMC can appeal to both enterprise IT organizations who are trying to better manage their operations, and MSPs who are trying to more cost-effectively deliver their services.

HP and BMC will be facing competition from independent software vendors (ISVs) such as Kaseya and Software-as-a-Service (SaaS) vendors such as Service-Now.