THINK IT Services

I’ve just returned from two days in a chilly Florida where I was participating in a sales kickoff meeting for an independent software vendor (ISV) that is preparing to add a Software-as-a-Service (SaaS) component to its portfolio.

I’ve presented to plenty of sales teams about SaaS, cloud computing and managed services, what made this session unique was that this ISV isn’t planning on rolling out its new SaaS solutions for another 9-10 months.

To the credit of the company’s management team, they know that it will take a long time to fully prepare the sales team to properly sell their new SaaS solutions.

Especially, because they’ve been successfully selling the value of their legacy, on-premise applications against a competitor’s “ASP” solution for the past five years.

While the company was confident that it has employed the latest in Web 2.0 technologies and techniques to leapfrog its competitor functionally, it knows that it still has plenty of work to do operationally and from a sales perspective to be successful.

The company asked me to participate in the meeting to educate the sales team about the market forces which are driving the on-demand services market, explain how SaaS differs from the old ASP model, and coach them about how to talk to IT and business decision-makers about the functional benefits and cost-advantages of SaaS solutions.

In addition to giving a one-hour keynote presentation about the overall marketplace, I participated in three breakout sessions aimed at addressing the sales team’s specific questions and concerns.

I was joined in these sessions by company executives who provided candid insights about their SaaS goals, objectives and even uncertainties. They readily admitted that they are making a ‘big bet’ on SaaS and still have plenty of piece parts to put in place regarding how the new offerings will be packaged, priced and positioned.

Their candor was refreshing and rewarded with an enthusiastic response from the sales team which recognizes that times are changing, and they have an opportunity to offer their customers new game-changing SaaS solutions and greater options to meet their corporate objectives.

The sales team and company management both know that it could be a bumpy ride into the SaaS world, but they are giving themselves plenty of time to make the proper preparations.

While I’m happy to help aspiring SaaS vendors at any stage of their evolution, it is nice to be invited in early rather than be called when a company is trying to recover from a false start.

I had the privilege of moderating a fascinating panel session at the SIIA On-Demand Conference this past November entitled, “Systems Integrators: A Firsthand, Face-to-Face View on the State of SaaS”.

The panel consisted of three experienced professionals in the systems integration (SI) business,

• Chris Barbin, CEO, Appirio
• Cary Fulbright, President, North America Operations, Saaspoint
• Lonnie Wills, Senior Vice President, CIO Practice, Bluewolf

The SIIA recently posted a video of this session on their site. Click here to watch the discussion.

THINKstrategies launched a new awards program today aimed at showing how Software-as-a-Service (SaaS), cloud computing and other on-demand services are helping organizations of all sizes across every industry grapple with the operational challenges created by today’s unprecedented economic crisis.

The new Best of SaaS Showplace (BoSS) Awards are aimed at promoting the tangible benefits which web-based services can deliver.

The awards will be given to SaaS and cloud computing companies listed on the SaaS Showplace which can demonstrate that their on-demand solutions have produced measurable business benefits for specific user organizations. These benefits could be increased sales, lower costs, higher customer satisfaction, faster operations, etc.

Click here for more details regarding the nomination process, criteria for selection, fees and award program benefits.

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.

Given the proliferation of Software-as-a-Service (SaaS) and cloud computing players over the past year in response to the rapid rise of customer interest and demand, it was easy to predict that a shake out in the on-demand services market was inevitable. The question is whether today’s turbulent economic environment will accelerate this shake out process and kickstart a series of mergers and acquisitions heading into 2009.

One school of thought is that many of the weaker players in the on-demand services market are not mature enough to attract buyers and, therefore, the volume of acquisitions will not be any greater than normal.

Compounding this situation is the fact that many potential acquirers are facing their own financial challenges and lack the currency to take advantage of a “buyer’s market” and make acquisitions.

I’m not an expert in the art and science of M&As, that’s why I’ve established alliances with key players in this business. But, I am intimately involved with many on-demand service providers who recognize that they must strengthen their competitive positions in order to survive and succeed in an increasingly challenging economic climate and competitive landscape.

Therefore, a number of companies are looking at ways they can expand their market penetration via acquisition. For instance, I’ve have the privilege of serving as a senior advisor to Triple-Tree, LLC, which has seen a significant uptick in its pipeline of deals over the past few months. Triple-Tree has announced two deals in the past week alone,

• Paisley–a governance, risk and compliance SaaS vendor–has signed a definitive agreement with Thomson Reuters, a provider of intelligent information for businesses and professionals. Thomson Reuters is acquiring Paisley to provide customers a ‘one-stop’ compliance management and internal financial control solution.
• SearchAmerica–a provider of payment prediction data and analytics to the U.S. healthcare industry–has been acquired by Experian, a global provider of information, analytical, and marketing services to organizations and consumers to help manage the risk and reward of commercial and financial decisions. The acquisition will permit Experian to extend its Credit Services and Decision Analytics activities in North America to help healthcare providers manage their billings and cash flows.

These were not ‘asset’ sales. Instead, they are deals which enable the respective acquirers to expand their portfolios and market reach, and permit the acquired companies to achieve a solid exit. These transactions also typify the blurring of the lines between software, business and information services sectors.

You can expect to see a steady stream of these deals through 2009 as the on-demand services industry evolves and is reshaped by broader macro-market trends.

One of the primary concerns of IT and business decision-makers regarding Software-as-a-Service (SaaS) applications is security.

Although most SaaS vendors have been able to demonstrate that their cloud-based applications are secure from an operational point-of-view, there are still access control issues which enterprises need to address to ensure their corporate data is fully secure from an end-user perspective.

It is becoming particularly important to address these issues because SaaS applications are gaining popularity in today’s increasingly challenging economic climate.

The economy is also producing a new round of layoffs which means businesses need to be especially vigilant about how they manage user access to their SaaS applications to be sure laid off employees do not inadvertently or intentionally compromise sensitive or proprietary corporate data.

I’ve had the privilege of participating in two recent webcasts regarding these issues hosted by OutProtect and Symplified. These companies, and others such as Conformity, Ping Identity and Tricipher, are offering varying approaches to single sign-on (SSO) access control, usage tracking and centralized management of multiple SaaS applications.

Although on-demand SaaS has proven to be more secure than most on-premise applications, these SaaS security and management solutions are still worthwhile because cost-effective, end-user management and security will become even more essential as the SaaS market experiences accelerated growth due to the current economic crisis.

The financial crisis which came to a head last week may only be the latest chapter of an ongoing saga, but it is certainly going to be another driver that will push the on-demand services movement to a new level of market acceptance and growth.

In December 2007, I predicted that the Software-as-a-Service (SaaS) market would not only survive a deepening recession but would grow because of it.

My prediction was based on the premise that financial uncertainty would compel organizations of all sizes to adopt procurement policies which would favor the more flexible pricing model and more rapid deployment capabilities of SaaS, rather than continue to make significant capital investments in traditional on-premise software and systems with long deployment cycles and limited odds for success.

Ten months later and the economic climate has only gotten worse. Spiralling gas prices have compounded the severe financial issues surrounding the subprime mortgage mess that caused the extraordinary events of the past few weeks.

I’ve been on the road nearly every week this year speaking at industry events or meeting with corporate clients. The IT/business decision-makers I’ve met have all confirmed that they are adopting SaaS and cloud computing solutions to address a widening array of IT management and business requirements. The SaaS and cloud computing vendor executives I’ve talked with have also seen a significant rise in adoption of their on-demand solutions.

Add to the economic and energy concerns, rising recognition among business executives and end-users that we all have to be more concerned about the ecology, reduce our carbon footprints and go ‘green’.

So, here are the three key drivers for continued growth of the on-demand services market,

1. The turbulent economy
2. The rise in energy costs
3. The fragile ecology

The Three Es.

PS: Another indicator of the fundamental shift in today’s business climate is the addition of Salesforce.com to the S&P 500, replacing Freddie Mac.

The proliferation of on-demand services has been driven by the promise that these Software-as-a-Service (SaaS) and ‘cloud computing’ alternatives to traditional on-premise software products will be faster to deploy, easier to use and quicker to produce tangible value.

While this is generally true, it doesn’t mean that these web-based applications are entirely fool-proof or without their challenges. Sometimes there are technical nuances which have to be overcome. Other times there are integration, customization or optimization issues which have to be addressed. And like any application, sometimes on-demand solutions encounter service disruptions which need to be resolved.

Until recently, SaaS support services were taken for granted. Many SaaS vendors bundled support services into the price of their SaaS solutions, and offered ad hoc support to quickly respond to specific questions or problems. Much of this support was delivered via online services or email, with phone support offered as only a last resort.

However, a growing number of SaaS executives have been telling me that their support costs have been escalating and customer concerns about the quality of support rising as the population of SaaS users has expanded and the number of cloud computing service outages has grown.

The success of on-demand services is predicated on the speed at which vendors can acquire new customers and the rate at which they can retain and grow these accounts. Put another way, on-demand service providers cannot afford customer dissatisfaction, abandonment and churn.

At the same time, customers who are recognizing that on-demand services are a viable alternative to on-premise products are recognizing that they cannot afford to adopt point solutions from a myriad of providers. Instead, they must select a smaller set of strategic vendors who can supply the best combination of on-demand services. As a result, IT/business decision-makers are taking a closer look at the quality of support offered by on-demand service providers.

While many of the more mature SaaS vendors have recognized this growing requirement, it is just beginning to gain industry-wide attention. In response to the growing importance of customer support as a key selection criteria for SaaS solutions and pivotal part of ensuring customer satisfaction, NetSuite unveiled a new portfolio of technical support, training and professional service capabilties this week.

SuiteSuccess™ includes multi-tier technical support options that include 60 days of free support with any NetSuite solution and NetSuite support personnel on-call around the clock. It also includes free, on-demand e-learning sessions.

The company’s SuiteConsulting is based on its NetSuite One methodology that helps customers implement and customize NetSuite’s SaaS solution for their specific business needs. NetSuite is also offering Shared Consulting in which customized projects are jointly managed by NetSuite and the customer, and Guided Consulting for customers who need more standardized solutions with help from a NetSuite specialist.

Anyone who has followed the support side of the software and technology industry may not be impressed with these offerings because they follow a familar pattern and borrow from proven customer support frameworks. But, that is the point. NetSuite’s new support program is a clear indication that the on-demand services market is maturing, and trying to meet the standards of support which were established in traditional software and technology world.

The real interesting question is whether the on-demand services movement can redefine the meaning of support just as it has redefined the way solutions are delivered.

THINKstrategies is pleased to announce the launch of its new “Market Leaders” webcast series which showcases companies who are delivering innovative, on-demand solutions to meet the rapidly changing needs of large-scale enterprises, as well as small- and mid-size businesses (SMBs).

Our webcasts differ from the traditional, structured webinar format by combining the candid, unscripted, conversational qualities of podcasts with the visual benefits of online presentations.
As the producer and host of the Market Leaders webcast series, my goal is to provide a more interesting and engaging discussion with senior executives of companies who are in the forefront of the on-demand market. The webcasts will be pre-recorded, archived and 20-30 minutes in length so you can view them whenever fits your busy schedule.

In our first webcast, we examine how the rapid growth of the on-demand market has created new operating challenges for entrepreneurs and established software vendors who must implement more robust systems to manage and track customer transactions from procurement to provisioning in a highly dynamic environment.

In this webcast, I talk with Steve Booth, VP of Business Development at Aria Systems, about how he sees this transaction management issue evolving, and the Monetization Maturity Model which Aria has developed to respond to this important challenge. Click here to view this webcast.

I hope you find this webcast valuable and welcome your feedback regarding our approach to this new series. You can also click here to read THINKstrategies’ whitepaper about the transaction management challenges and opportunities in the on-demand services market.

Please contact me if you’re interested in learning more about Aria Systems, THINKstrategies or this webcast series.

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.