THINK IT Services

My friend Phil Wainwright’s latest blog post re: LucidEra’s new pre-sales program, Pipeline Healthcheck, confirms many of my initial observations when the company first introduced the program in October. Phil’s post includes a number of interesting stats which LucidEra’s founder, Ken Rudin, also shared with me at Salesforce.com’s Dreamforce event.

LucidEra’s decision to move away from the typical free-trial approach to selling SaaS is significant because it exemplifies a subtle trend which is brewing in the on-demand services market.

Although many SaaS solutions can be sold using a ‘try and buy’ technique, a growing number of SaaS vendors are discovering that they must employ other sales tactics to sell their solutions. In some cases, like the LucidEra example, it is because they are trying to demonstrate the power of their functionality to a target buyer who is unfamilar with the basic idea. In other cases, the SaaS vendor is offering a more complex solution which is going to have a significant impact on the customer’s operations and requires greater sales skills and resources.

An example of this second scenario is Salesforce.com’s growing focus on large-scale enterprise sales. Selling its customer relationship management (CRM) solution to Global 2000 companies requires more than a 30-day trial to be successful. That is why the company has been aggressively recruiting traditional software salespeople from companies like Oracle and SAP to attack major accounts. I had an opportunity to speak to over 700 of these ‘big-game hunters’ at Salesforce.com’s North America sales kickoff meeting last February.

This shift in sales strategies and tactics has raised concerns among the VC and broader investment community about the long-term viability of the SaaS industry. These investors are worried that adding more high-powered salespeople and creating more complicated sales processes will increase the cost of sales and reduce the operating margins of SaaS companies. They are concerned that this will undercut the price advantage of SaaS over traditional, on-premise software vendors.

An example of this thinking is a recent post by Evangelos Simoudis of Trident Capital. While there is a legitimate concern that many SaaS vendors, like companies in general, have a tendency to be inefficient in the way they allocate their sales and marketing budgets, I believe some of the investment community’s angst is based on an industry benchmark which is no longer relevant.

That benchmark is the exorbinant operating margins which incumbent software vendors (iSVs) have enjoyed over the years. Investors are concerned because they haven’t seen profit margins of over 60% from SaaS companies like those they’ve been accustomed to seeing in the packaged software industry.

However, if you look closely iSVs are finding it equally difficult to sustain their profit margins as customers become disenchanted with high upfront perpetual license fees and escalating maintenance costs. So, comparing emerging SaaS vendor profitability with historic iSV profitability is no longer valid.

I debated Bruce Richardson of AMR Research on this point earlier this year. Bruce was questioning whether the SaaS industry could sustain itself given the high cost of sales and marketing reported by the publicly traded SaaS vendors. My view then and now is that the long-term profitability of SaaS is not reflected in today’s financial reports for two reasons,

1. The SaaS industry is still in its infancy and SaaS vendors must spend a disproportionate amount of their revenues, and/or VC funds, on sales and marketing to educate customers about the intrinsic value of their on-demand solutions. This includes the ‘try and buy’ and other sales and marketing techniques aimed at encouraging rapid adoption.
2. Companies like Omniture, Salesforce.com and SuccessFactors are intentionally overspending on sales and marketing to aggressively win market share. As Josh James of Omniture has stated in his blog and at industry conferences, SaaS companies which know their ‘magic number’–the incremental revenues generated by every additional sales and marketing dollar spent–are obliged to put the ‘foot to the metal’ now so they can win as much market share as possible before the industry consolidates.

So, my concern isn’t whether SaaS is a profitable business model. Instead, my concern is whether the VCs, private equity firms and other traditional funding sources are going to retreat from the SaaS market because they have unrealistic expectations for this sector.

While it is reasonable for them to be more conservative in their funding strategies and investments given today’s economic crisis, it would be disappointing to see them abandon the SaaS market because they’ve lost faith in the business model.

Sometimes, even a free trial isn’t good enough to convince potential customers to buy a Software-as-a-Service (SaaS) solution.

A case in point is LucidEra’s on-demand business intelligence (BI) solution. Even though the company is undoubtedly the thought-leader in this segment of the SaaS market and has experienced some success selling its solutions, the company has discovered that it takes more than the standard ‘try and buy’ sales approach to get customers to take advantage of its capabilities.

This is because LucidEra is aiming its on-demand BI solution at small- and mid-size businesses (SMBs), as well as those large-scale enterprises, which have not deployed BI products in the past because of their costs and complexities. Therefore, these prospective customers have little experience using a BI solution and need some hand-holding to fully understand how to utilize even a relatively easy solution like LucidEra’s.

To remedy this issue, LucidEra unveiled a new Pipeline Healthcheck Service today which is based on a beta version which was tested over the summer. The Pipeline Healthcheck Service is a free consulting engagement in which LucidEra uses its on-demand BI solution to quickly analyze a prospective customer’s Salesforce.com sales data to identify ways they can generate better sales results and decrease potential sales risks.

While some SaaS vendors and VCs might cringe at the idea of giving away free consulting services in order to sell subscription services, LucidEra has seen a substantial increase in customer ‘take’ rates along with shorter sales cycles during the beta trial of the Pipeline Healthcheck Service. The net result has been greater sales productivity despite the appearance of a more labor intensive sales process. And, LucidEra’s executives are convinced they can automate and streamline the Pipeline Healthcheck Service delivery process to reduce its costs and increase its scalability.

This is a perfect example of the creative sales techniques which a growing number of SaaS companies are going to have to adopt in order to convince prospective customers to adopt their SaaS solutions.

Despite growing customer adoption of Software-as-a-Service (SaaS), many companies and conservative industry observers still believe that SaaS solutions are simply a skinnied-down version of traditional, on-premise applications that offer little value add other than quicker deployment times and lower upfront costs.

IT/business decision-makers need look no further than at how today’s SaaS solutions are addressing age-old sales and marketing challenges to see that their capabilities go well beyond yesterday’s legacy software.

For instance, LucidEra announced a new offering today, called Lead Insight, which enables companies to analyize how marketing programs impact sales productivity. The LucidEra Lead Insight on-demand service offers over 65 prebuilt templates which enable users to analyze the quality and performance of their marketing leads and how effectively the sales team is converting these leads into opportunities and closed deals.

LucidEra’s new service enables companies to measure the cost effectiveness and return on investment (ROI) of their marketing programs. It also ensures a tighter bond between sales and marketing departments by tracking how well the sales team follows up on marketing leads. And, the service includes reporting capabilities which allows all the key stakeholders within the company–executives, salespeople and marketing folks–to track their performance over time and see how various tactics and strategies can impact sales success.

LucidEra has been a pioneer in the SaaS business intelligence sector and recognizes that sales intelligence is the area of greatest concern to most companies. Although its new service touches on measuring the performance of marketing programs as well, LucidEra recognizes that there are numerous SaaS solutions aimed at managing and analyzing the effectiveness of marketing programs. Therefore, it is positioning its solution as complementary to these.

One such company is called Printable, a provider of intelligent marketing solutions. Printable’s SaaS solutions enable enterprise users and print service providers to manage their online and hardcopy collateral to permit personalized marketing campaigns. Built into Printable’s solutions are extensive analytic and reporting tools that allow users to measure the effectiveness of their campaigns.

Another example is Clickability, a leading SaaS content management company, which has built analytics into its solutions that enable corporate, sales and marketing decision-makers to more effectively measure and manage their activities.

While ease of deployment/use and lower cost of ownership are important attributes of SaaS solutions, providing powerful and practical analytics is the key differentiating quality of today’s leading SaaS companies.

Click here to find my blog about other key attributes of being ’saasy’.

Callidus Software Inc. announced todaythat it has been certified to offer its TrueComp® Suite on Salesforce.com’s AppExchange.

This announcement isn’t likely to generate bold headlines in the business or industry trade press. But, I believe it is a significant bellweather for the software industry and good news for organizations who have been worried that they’d have to make an either/or decision when selecting on-demand versus on-premise software solutions.

Until recently, the rapid rise of Software-as-a-Service (SaaS) as a radical movement to displace legacy applications. As a consequence, SaaS was seen as a fundamental threat to the long-term viability of the independent, or as I prefer to say, “incumbent” software vendors (ISVs).

While on-demand, SaaS solutions represent a real challenge for legacy software vendors, it is no longer a simple battle of good (on-demand) versus evil (on-premise). Instead, both parties are recognizing that they must co-exist in order to survive.

Therefore, companies like Callidus are responding to competitive pressures from on-demand challengers, such as Centive and Xactly, by adding on-demand options to their traditional on-premise software solutions. Similarly, Business Objects has been fighting back the on-demand challenges of companies like LucidERA with its own set of on-demand solutions.

As the 800 pound gorilla of the on-demand world, Salesforce.com has built the most vibrant ‘ecosystem’ of multivendor SaaS solutions, the AppExchange. This online clearinghouse has become a magnet for a widening array of third-party vendors aiming to capitalize on Salesforce.com’s deepening penetration of the market.

The Callidus officials who briefed me about their AppExchange certification prior to today’s announcement admitted that their decision to team with Salesforce.com was driven by escalating interest in SaaS and the growing presence of Salesforce.com among their enterprise customers.

So, Callidus’ rollout of an on-demand solution and certification on Salesforce.com’s AppExchange represents another important endorsement and validation of the SaaS movement. I’ll let Callidus’ on-demand competitors–Centive and Xactly–argue whether the company’s SaaS solutions match their net-native capabilities.

More importantly from a market perspective, it is clear that Salesforce.com’s aggressive efforts to permeate the enterprise sector now includes teaming with established players, like Callidus and Business Objects, rather than simply bashing the old-guard as obsolete relics of the past.

Salesforce.com recognizes that most enterprises want to augment rather than replace their legacy applications and established ISVs with on-demand, SaaS alternatives for the time being. Therefore, it makes sense for Salesforce.com to encourage the established players to join the AppExchange and create integration links which make it that much easier for Salesforce.com to penetrate enterprise accounts.

The good news for IT and business decision-makers is that they don’t have to make a fundamental choice between on-demand or on-premise software alternatives. Instead, they can now seek the option which offers the best application features and third-party integration to meet their needs.

SAP announced today that Shai Agassi, president of its product and technology group and architect of SAP’s Netweaver software, is leaving the company to pursue his interests in alternative energy and climate change.

While these are honorable reasons to move on, it is very likely that his departure was also prompted by the overwhelming challenges associated with migrating SAP’s software to an on-demand, Software-as-a-Service (SaaS) model, as well as some executive suite politics.

In addition to his broader responsibilities, Agassi was the chief architect and senior champion for SAP’s on-demand efforts which were launched in February, 2006. He joined the company in 2001, when SAP acquired his company TopTier Software. He was also among several SAP executives considered a potential successor to Chief Executive Henning Kagermann, who recently had his employment contract extended through 2009, creating a bottleneck among his lieutenants, including Agassi.

Agassi’s departure compounds SAP challenges fulfilling its promise of delivering on-demand solutions which keep pace with escalating customer demands. Although the company announced that his position will be filled by a team of people, Agassi had the greatest cache and credibility inside and outside the company to drive SAP’s on-demand efforts.

His departure certainly raises enough concerns about SAP’s on-demand strategies and services to open the door for Salesforce.com and other SaaS vendors to steal away customers seeking on-demand solutions in the areas that SAP has traditionally served.

Although it is not a SaaS vendor, Oracle Corporation will also capitalize on Agassi’s departure and intensify its campaign against SAP which has included its acquisitions of PeopleSoft, Siebel Systems and most recently Hyperion.

Agassi’s departure is also the latest example of executive defections among legacy enterprise application companies seeking to migrate to an on-demand services model. Tim Chou, the former head of Oracle’s hosting business, wrote the book on the challenges facing traditional software companies in the face of the on-demand movement, called “The End of Software.” Ken Rudin, a veteran of Siebel Systems’ on-demand efforts, is now the founder and CEO of LucidERA.

Executive defections from entrenched players to promising start-ups aren’t new. In this latest example it will be interesting to see if Agassi pursues his noble interests in alternative energy and climate change, or leverages his on-demand experience and joins a true SaaS vendor. Or, if SAP uses this as an opportunity to acquire a SaaS vendor to obtain a new leader for its on-demand efforts.

While much of the information technology (IT) industry and many CIOs, concerned about their traditional legacy business intelligence (BI) applications, were focused on the market implications of Oracle’s acquisition of Hyperion Software, new entries into the market may represent a more important milestone in the evolution of this segment of the software industry.

On March 6, 2007, LucidERA unveiled its new Software-as-a-Service (SaaS) business intelligence solution. The company is founded by one of the truly good guys of the industry, Ken Rudin, who also has a unique perspective on the opportunities and challenges represented by the SaaS model.

Ken started his career at Oracle. He then co-founded and was CEO of Emergent Corporation, a consulting firm focused on data warehousing projects for Fortune 500 companies which was sold to Keane, Inc. in 1999. At that point, Ken joined a new company, called Salesforce.com, where he became SVP of Products. He then moved to Seibel Systems where he became the VP and General Manager of the company’s CRM OnDemand solution. When Seibel was acquired by Oracle, Ken moved on to become a founding advisory board member of NetSuite.

These experiences have driven him to launch LucidERA to challenge the established BI players with a pure SaaS alternative. Ken and I first met a year ago at a Pacific Crest investors conference, and have been on various industry panels together since. Drawing on his vast industry experience, Ken is one of the most compelling industry speakers regarding the fundamental challenges facing incumbent software vendors (ISVs) as they attempt to transition to a SaaS model.

Based on his industry experience, Ken recognizes that long-term success in the software industry, as well as within the SaaS movement, depends on building a solid platform rather than creating hot products. In response, LucidERA is positioning itself as an on-demand BI platform provider, rather than just an on-demand BI application vendor. In this role, it will supply a set of BI applications and integration tools, called ‘data connectors’, to permit other developers to link their solutions into the LucidERA’s platform.

LucidERA isn’t the only new player entering the BI market with a SaaS strategy in mind. Oco has been building hosted BI solutions for customers for a number of years. The company recently announced that it had obtained $10 million in a Series C financing from Highfields Capital Management LP, as part of a total Series C issuance of $14.5 million. The company intends to use this new round of funding to shift its business from a project-oriented, hosted BI solution model to a true, multi-tenant SaaS model.

In addition to announcing its latest round of funding, Oco also introduced its new President/CEO, William (Bill) Copacino, formerly Accenture’s Group Chief Executive for Global Business Consulting, responsible for its BI and supply-chain management consulting practices. While Copacino certainly comes to Oco with plenty of expertise in the BI world and probably has a solid Rolodex to get CXO-level meetings, he lacks experience in the software business, especially in the rapidly evolving SaaS world.

Not to be overlooked in the rapidly changing BI market are recent acquisitions by Business Objects and Cognos to strengthen their positions in the SaaS market.

Don’t be surprised if you see Salesforce.com and many of its AppExchange partners, who collect and analyze data from multiple sources, attempt to shave off a portion of the BI market for themselves.