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.

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.

I’m pleased to announce that THINKstrategies unveiled today a new set of packaged services aimed at helping Software-as-a-Service (SaaS) and Managed Service providers (MSPs) ensure that they have properly designed and can reliably deliver their web-based solutions.

Our new Readiness Assessment Services (RAS) have been developed in response to the rapid rise in demand for SaaS and Managed Service alternatives to traditional, packaged applications and network/system management (NSM) solutions among end-user organizations of all sizes. This demand is attracting a rapidly expanding array of start-ups and established vendors attempting to capitalize on this new market opportunity.

We at THINKstrategies have found that many of these companies are not fully prepared to succeed in the SaaS and managed services markets because they’ve under-estimated the organizational, operational, sales, marketing and financial requirements of these service-oriented, subscription-based businesses.

Despite the growing interest and acceptance of SaaS and managed services, many providers are still uncertain how to successfully package, price, promote, sell, deliver and support these web-based services. Improper design and delivery of these services can seriously harm customer satisfaction and lead to customer abandonment.

THINKstrategies’ new Readiness Assessment Service includes a structured scorecard to evaluate the strength of SaaS or Managed Service providers’ strategies and solutions. The multi-dimensional scorecard examines the following key indicators:

• Target Market Segmentation
• Competitive Landscape
• Corporate Management
• Functional Capabilities & Features
• Solution Packaging
• Pricing & Revenue Realization
• Service Delivery Platform & Architecture
• Security and Availability Assurance
• Service Provisioning, Billing and Testing
• Contracting, SLAs and Reporting
• Sales Strategies and Skills
• Strategic Partnering/Ecosystem Strategies
• Marketing and Positioning
• Customer Support Capabilities
• Financing and Capital Structure

The scorecard will identify SaaS and Managed Service providers’ strengths and weaknesses so that they can address important issues before they affect the provider’s ability to deliver quality solutions. THINKstrategies will recommend specific remedies to fill these gaps so the provider can achieve their corporate objectives.

THINKstrategies is also establishing a series of partnerships and alliances with a variety of third-parties to meet clients’ specific needs, including application design companies, service delivery infrastructure providers, enabling technology vendors, financial services and investment firms, and specialized consultancies.

These new consulting services are based on THINKstrategies’ extensive SaaS and Managed Services experience and indepth expertise. THINKstrategies was founded in 2001 to specifically address the unique business challenges in an increasingly services-oriented world. Since its inception, THINKstrategies has helped over 100 client companies achieve their business objectives by leveraging the power of services. THINKstrategies was the first consulting and analysis firm to identify growing interest and adoption of SaaS and managed services in 2005, among organizations of all sizes, based on its survey research in conjunction with Cutter Consortium and the MSP Alliance.

In January 2006, THINKstrategies unveiled the SaaS Showplace® (http://www.saas-showplace.com/ or http://www.thinksaas.com/) and Managed Service Showplace® (http://www.msp-showplace.com/ or http://www.thinkmsp.com/) online directories and web-based resource centers with easy-to-use listings of SaaS solutions by application and MSPs by service category, and extensive information and insight about industry best practices to help organizations fully leverage the growing array of SaaS solutions and managed services.

Today, over 500 companies have registered to be listed on the SaaS and Managed Services Showplaces, offering over 2,000 on-demand solutions, making the Showplaces the largest, vendor- independent, online directories in the on-demand services market worldwide.

Please contact me if you have any questions regarding these new consulting services.

Dell announced today it plans to acquire privately-held SilverBack Technologies, Inc., one of the original managed service providers (MSPs) who has transitioned its business to offer a service delivery platform that enables MSPs to deliver remote monitoring and management services.

This acquisition is important because it clearly shows that Dell is serious about strengthening its service delivery capabilities as part of its overall effort to regain its momentum in the market. It also adds further validation to the importance of managed services as a key component of today’s vendor and channel strategies.

I expect Dell to leverage SilverBack’s capabilities to add a new layer of managed services to its product portfolio. I believe Dell is in a unique position to capitalize on SilverBack’s capabilities because it has a strong relationship with customers as a result of its direct sales heritage. This relationship permits Dell to deliver managed services that can demonstrate a greater commitment to ensure the reliability, security and business value of its products.

However, achieving these objectives isn’t a ’slam-dunk’. Cisco Systems and Sun Microsystems, among others, have also tried to buy their way into the managed services business with limited success. (See, my 2004 and 2005 NetworkWorld commentaries.)

In addition to having the right enabling technology, being successful in the managed services business also requires an entirely different set of management skills and operational processes. Rather than reacting to customer problems as most vendors and channel partners do in the old world of tech support, managed services requires a proactive approach which reduces the risk of system failures or performance issues. Not only does this require different skills and processes, but it also forces the MSP to develop different methods of demonstrating their value.

Complicating matters for Dell is its initiative to add more channels-to-market to its direct sales approach. This effort will require Dell to segment its managed service offerings to fit its direct and indirect channel strategies. As Cisco, Sun and other vendors have learned, this is not an easy balancing act.

Leaving these challenges aside, Dell’s acquisition of SilverBack is still a significant bellweather of the changing nature of the IT market. As I’ve said many times before, we are moving away from a technology centric industry to a services driven business.

The findings of a 2006 survey recently released by Gartner has brought renewed attention to the fundamental shortcomings of today’s major network/system management (NSM) platforms from companies such as IBM, HP, CA and BMC.

The survey found that 40% gave their NSM vendors a mediocre “C” and nearly 30% of the respondents gave their vendors a “D” because of their frustrations with the costs and hassles involved in deploying and administering the vendors’ platforms.

These frustrations aren’t news. When I was the director of strategic marketing at International Network Services (INS), we were the first company to rollout a network performance management software service on a subscription pricing basis in response to these same frustrations. Our EnterprisePRO solution was unveiled in 1996, prior to the advent of the managed service provider (MSP) and application service provider (ASP) ideas.

Unfortunately, although there were plenty of IT managers and business executives who were dissatisfied with the total cost of ownership (TCO) and return on investment (ROI) of their NSM platforms, most were unwilling to entrust their NSM responsibilities to remote services offered by unproven providers. This led INS to convert its EnterprisePRO software service into a shrink-wrap software product, incorporating the application performance management capabilities we acquired as a part of VitalSigns into our solution. This same customer resistance led to the collapse of the MSP/ASP business with the demise of the dot.com era.

Today, we are living in a different economic, business and technological climate. Most organizations would prefer to offload the hassles of day-to-day IT operations, especially if they can find someone who can do it better and cheaper. An indication of this change in attitude can be found in Gartner’s survey which found many IT managers are considering open source and software-as-a-service (SaaS) solutions. This confirms THINKstrategies’ research which has found the same attitudinal changes are fueling the growing receptivity toward managed services as well.

Click here to read my latest commentary in NetworkWorld on this topic and learn about some of the new SaaS solutions aimed at helping IT managers overcome their NSM frustrations.

With the Software-as-a-Service (SaaS) movement becoming generally accepted among organizations of all sizes, a growing number of SaaS vendors are seeking to differentiate themselves by creating on-demand solutions specifically designed to address the unique requirements of particular industries or vertical markets.

THINKstrategies’ SaaS Showplace includes nearly 600 company listings by industry. Many of these companies are simply targeting specific industries rather than offering industry-specific solutions. However, a growing number are designing their on-demand solutions to cater to the specific needs of targeted industries.

The shift in attention is timely according to THINKstrategies’ latest SaaS survey in conjunction with Cutter Consortium. In the second installment of our three-part series on the findings of this survey we will discuss how a substantial proportion of the survey respondents are either currently using industry-specific SaaS solutions or considering them.

Leading SaaS vendors, such as Salesforce.com and NetSuite, have recognized the growing opportunities for industry-specific SaaS solutions. NetSuite launched its SuiteFlex ecosystem to respond to this opportunity, and Salesforce.com recently followed suit by expanding its AppExchange to encourage vertical market solutions.

Another indication of the growing focus on industry-specific SaaS solutions is the entry of venture capital (VC) funding for industry-specific SaaS vendors. A recent example is Procore, a SaaS vendor focused on the construction industry, which announced that it had completed its Series B financing led by Great Pacific Capital.

This same phenomena is also emerging in the managed services sector. In contrast to the SaaS trend, overall market acceptance of managed services has been slower for a variety of reasons, so managed service providers (MSPs) are attempting to stimulate greater demand by making their services more appealing to specific market segments.

A pioneer in industry-specfic marketing of managed service solutions is Perimeter eSecurity, previously known as Perimeter Internetworking. Perimeter began as a full-service network service provider, but found particular acceptance of its security-oriented services among community banks. It decided to focus nearly all of its sales and marketing resources on the community banking sector, and today is the dominant player in that market.

Through a series of acquisitions–most recently Message Secure, a managed security services provider (MSSP) focused on financial institutions and other businesses in the U.S.–and alliances with Internet Service Providers (ISPs), Perimeter has expanded into other segments of the market.

I think the verticalization of the SaaS and managed services markets will be one of the major trends in 2007.