THINK IT Services

I often have the privilege of being briefed by companies about their strategies and services prior to them being publicly announced. In many cases, these briefings involve companies which are still in ’stealth’ mode and I must wait patiently until they reveal themselves to the rest of the world before I can talk about them.

One such company is Pathworks Software. I met its President/CEO, Anthony Nemelka, at the SIIA On-Demand Conference last November and was immediately impressed with his vision and company strategy. That strategy and the company’s initial set of solutions were publicly announced at the DEMO ‘08 conference.

At that event, Pathworks Software unveiled the company’s flagship on-demand customer support solution, Helpstream. Pathworks’ new offering is newsworthy because it combines many of the best practices of the open source and Web 2.0 worlds to create a potentially powerful Software-as-a-Service (SaaS) solution to meet today’s help desk needs.

From the open source world, Pathworks Software borrows the freeware idea of giving away its solution for free in favor of funding its operations with ongoing support fees rather than software license fees.

From the Web 2.0 world, Pathworks Software has borrowed the ‘power of community’ idea by building collaboration tools into its Helpstream solution to give users the ability to capture and utilize customer support information from a wider array of sources.

Throw in web-based case management and knowledge management systems, and you have a SaaS help desk platform that could also become a generator of best practice benchmarks over time.

Nemelka has a firm handle on the market opportunity based on stints at IBM, Adobe, Epiphany and PeopleSoft. The company is funded by Foundation Capital and Mohr Davidow Ventures, along with Roger Sippl, the founder of Informix and Vantive.

Pathworks Software’s approach has also gained market validation from its six-month beta that generated over 2000 workspace registrations and 6000 active registered users. Converting these users to paying customers will be essential to Pathworks Software’s long-term success.

In the short-term, the company’s biggest obstacle might be a couple of minor branding issues. Enter http://www.pathworkssoftware.com/ in your browser and you land at http://www.helpstream.biz/, which could confuse some potential customers. And given the company’s SaaS orientation, it might be more appropriate to call the company Pathworks ‘Services’.

However, the big picture opportunities for Pathworks Software far outweigh these minor concerns.

THINKstrategies’ research and consulting work clearly show a rapid rise in customer receptivity towards solutions like Helpstream. Pathworks Software is in a great position to capitalize on this market opportunity.

If Pathworks Software succeeds, it will be another bellweather of the historic migration of companies from on-premise to on-demand solutions.

I had the privilege this week of participating in an interesting webinar sponsored by Makana Solutions regarding the sales implications of Software-as-a-Service (SaaS) and other subscription services.

Tom Wilson, of the Wilson Group; Makana’s founder, chairman, and CEO Liz Cobb; and I discussed how the sales skills and processes differ in the on-demand services world from the traditional packaged product environment. Specifically, on-demand services come at a lower price-point which necessitates higher volume sales to be successful. This requires a transaction oriented sales process and telesales skills, rather than the long salescycles and highly personalized approach of traditional legacy software sales. Therefore, restructuring the sales process and retraining or restaffing the sales team is critical to transitioning to the SaaS and subscription service model.

Similarly, the support function also changes in the on-demand world. Rather than rely on technical support to react to problems implementing and maintaining software, customers expect their on-demand solutions to be easy to deploy and administer. They also expect their SaaS providers to ensure the availability and performance of their online applications, and to proactively assist them in utilizing the solutions and continuously enhance the solutions to make them more useful and easy to use.

Mikael Blaisdell explores these differences in greater detail in his recent blog, “SaaS & The Ghost of Computing Past.” It is worth reading his perspective which he will also discuss during his presentation at SaaScon.

As Treb Ryan of OpSource likes to say, in order to be successful in the SaaS business, vendors must stop thinking like software companies and start acting like web companies.

I’ve referred to this transformation as an ‘inversion’ process because it forces most established software and technology companies to re-think how they operate and how they go to market. It also will force them to replace many of their staff with a new breed of people that view their jobs and their customer relationships differently.

It is for these reasons that many established players will face traumatic changes in 2008 as customer interest and adoption of on-demand solutions will become as mainstream as ecommerce.

Gartner is predicting that economic and organizations forces will combine to fuel greater outsourcing, with SaaS gaining the greatest traction as a viable alternative to traditional IT and business process outsourcing (BPO). Gartner’s market assessment echoes my reasons for forecasting strong growth for on-demand services in 2008.

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.

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.

The Software-as-a-Service (SaaS) movement is rapidly becoming mainstream as organizations of all sizes adopt on-demand services to address various unmet needs or to replace their legacy applications.

The rising acceptance and adoption of SaaS represents a watershed opportunity for new and established independent software vendors (ISVs). But, THINKstrategies has discovered that it is also creating serious challenges for some SaaS companies who are letting escalating competition pressure them into compromising on the fundamental principles of the SaaS delivery model.

Today’s SaaS challenges do not involve the past concerns about the reliability, security or scalability of on-demand solutions. Despite occasional service disruptions, SaaS vendors have proven to be far more reliable than most internal IT departments. They have also been able to avoid security problems which continue to plague enterprises relying on traditional on-premise software. The scalability of on-demand applications has also been clearly demonstrated by a growing number of large-scale deployments.

Instead, the SaaS CEOs I’m talking to are feeling growing tension in two other areas—service pricing and support services.

The service pricing issue centers around the per seat pricing model and $50-100/month pricing range which have become a de facto standard for the SaaS market based on Salesforce.com’s success in the customer relationship management (CRM) and salesforce automation (SFA) segments. Even though other horizontal applications are often used differently than CRM and SFA applications, in too many cases SaaS solutions are being judged by how their pricing structures match Salesforce.com rather than by how their functional capabilities and cost compare with the legacy application which they might displace.

For instance, a CEO of an e-procurement vendor recently lamented to me that he has to work harder selling a six-figure annual subscription service than he did when he sold multi-million dollar legacy applications in his previous job. He has found that potential customers who already have Salesforce.com installed discount the fact that his SaaS solution is more comprehensive and can be implemented in a fraction of the time of a comparable legacy application.

(Compounding this challenge is the strict IT cost allocation schemes many enterprises have established, which penalize and discourage business units from adopting alternative software solutions, even if the alternatives can be more productive and/or less expensive.)

A related pricing issue emerging in the SaaS market is the common method of bundling technical support into the basic price of the service. By hiding the cost of support, many SaaS vendors have opened the door to unlimited tech support calls. They are betting that the ‘bell curve’ theory will hold true and the average number of calls per customer will stay within the estimated support costs budgeted into the price of delivering the SaaS solution. For SaaS companies with relatively simple applications, this bet can pay off. But, for SaaS companies offering more complex enterprise applications, the bundled support cost strategy is creating serious strains on their financial structures. Especially, in those cases in which SaaS vendors are permitting customers to customize their solutions.

A SaaS CEO recently told me that bundling issue is creating strains within his business. Like many SaaS companies which are aggressively trying to win new business, this SaaS vendor has bundled its support costs into its pricing structure. It has been good at defining when a client company should purchase additional professional services to deploy its on-demand solution. But, the company has also been willing to compromise the basic precept of the SaaS model and permitted new customers to customize their on-demand applications in order to win their business. This means the SaaS vendor can no longer update each and every customer in a systematic and cost-effective manner. Instead, the SaaS vendor must hold the hand of the outliers and absorb the added support costs.

Ironically, this CEO reported that many of the customers who insisted on customizing their SaaS solutions to meet their ‘unique’ business requirements are discovering that their requirements were not that unique after all, and they could have met their needs by better leveraging the meta-configuration options that were available from the SaaS company. As a result, they now admit that they’ve made it more difficult for them to fully benefit from the advantages of their SaaS solution and that they’ve caused their SaaS company more heartache than necessary.

Nonetheless, the burden falls on SaaS vendors to hold firm and resist the temptation to succumb to customer demands for special treatment in order to win their business. As Tod Loofbourrow, the CEO of Authoria, put it, “It is incumbent on the SaaS vendor to keep the customer within the guardrails”

In addition to being more disciplined about resisting customers’ desire to customize their SaaS solutions, SaaS vendors must also start focusing on selling the value-add of their solutions rather than competing on price. This means selling the superior value of their SaaS solution compared with similar legacy applications, rather than using a simple per unit pricing structure that isn’t relevant to their business.

I’m also advising SaaS companies to unbundle their support costs. I expect SaaS companies to return to the three-tier packaging and pricing model of silver, gold and platinum support levels that has been the norm in the IT industry for decades. I believe sophisticated enterprise decision-makers will accept this well-established service pricing and packaging model as a reasonable cost of ensuring the success of their SaaS subscription.

If SaaS companies offering complex, enterprise applications fail to demonstrate discipline in their response to customers’ demands for custom solutions, and do not adopt more rational pricing and support models, they won’t survive and the SaaS movement will be seriously impaired.

At the sametime, if customers continue to insist upon needlessly customizing their on-demand applications, they will kill the golden goose of SaaS.

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.

Two announcements last week served as reminders that, despite growing interest in on-demand solutions, professionals services remain an essential part of the technology landscape.

On January 30, Salesforce.com announced a strategic alliance with Deloitte Consulting to extend the Software-as-a-Service (SaaS) leader’s reach into the enterprise market. Salesforce.com already has a similar agreement in place with Accenture. But, the Deloitte alliance confirms the growing interest in SaaS among large-scale enterprises and the desire of a growing number of established consultancies to join the SaaS movement.

As I’ve stated many times, any suggestion that SaaS will eliminate the role of channel organizations in the software industry is ludicrious. However, there is no question that many value-added resellers (VARs) and consultancies will need to shift their focus from technology integration to process or change management projects. A clear example of this shift, as well as the attractive opportunities in the SaaS market for consulting companies is Bluewolf Group who boasts the largest number of Salesforce.com deployments despite its relatively unknown name.

Now that Salesforce.com is pushing its application development platform, Apex, to third-parties there will be even greater opportunities for consulting companies, like Deloitte, as well as VARs to provide a new layer of integration and customization services to end-user organizations.

Although SaaS will definitely make it easier for many organizations to deploy and administer enterprise applications, there will still be plenty of opportunities for professional services and consulting to continue to flourish in the on-demand world.

Although the network professional services has experienced a contraction since the dot.com bust and telecommunications industry downturn, the need for specialized planning, design, project management and infrastructure support consulting skills have not gone away. This ongoing need led British Telecom (BT) to acquire International Network Services (INS) on February 1.

As a former marketing guy for INS who suffered through its first painful acquisition by Lucent in 1999 and watched the company shrink within the withering telecom equipment vendor for three years before being spit out for a penny on the dollar, I’m very pleased with the BT announcement.

I’ve always viewed BT as being far more advanced in its systems integration and outsourcing capabilities than the U.S.-based telcos. And, I’ve always felt that the telcos, along with many other companies vying for a piece of the IT management services market, must offer a combination professional and managed services to win and retain long-term customers.

BT is on its way to building that integrated portfolio of services while also establishing a strong presence in the U.S. with its acquisition of INS and Counterpane, a managed security services provider (MSSP). In addition to INS’ overall network professional services experience and proven processes, it also has a particularly strong security consulting team and experience in the MSS business, having previously acquired Predictive, an INS wannabee with a MSSP capability.

In addition, INS has a software business which BT might also chose to expand into a broader set of SaaS or managed service offerings. It is the combination of strong professional services and intriguing software capabilities which led to BT to acquire for a >2x premium on current revenues.

For INS it is the deep pockets, access to a larger customer base and broader geographic reach which made BT an attractive suitor.