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.

I had the privilege of being a columnist for the Web Hosting Industry Review (WHIR) for nearly three years from its inception in 2004 to mid-2007. (Click here to read these columns.) During that time only a handful of hosting companies saw the potential of the rapidly evolving Software-as-a-Service (SaaS).

The majority of those hosting companies who saw the SaaS market opportunity primarily focused on pushing their managed services and co-location capabilities. OpSource was the first to recognize a broader set of business opportunities and became a thought-leader in the industry offering a wider array of services, augmented by set of third-party technologies.

Other hosting companies may have been generating greater revenues from independent software vendors (ISVs), but didn’t pursue the broader array of business opportunities associated with SaaS. As a result, OpSource won the lion share of industry attention and ‘mindshare’.

Now that the SaaS and wider ‘cloud computing’ movement is accelerating, a growing number of hosting companies are focusing their attention on this market. Their escalating efforts to prove that they are viable suppliers of SaaS enablement services is not only being driven by the exponential growth of the SaaS/cloud computing market. It is also being driven by the emergence of various ‘platform’ vendors who are promising a similar set of hosting and service infrastructure capabilities.

SAVVIS unveiled a new SaaS enablement program yesterday and it has come with a new twist. In addition to offering a set of Core Infrastructure Services and full range of Lifecycle Services, SAVVIS is seeking to differentiate itself in an increasingly commoditized hosting industry with a new “Marketplace” which promises to give ISVs access to its larger population of enterprise and ISV customers. In essence, SAVVIS is offering to be a channel to market for its SaaS ISV customers in addition to being their enablement partner.

The marketplace idea can also benefit SAVVIS’ enterprise customers who can gain access to an assortment of SaaS solutions which can help them address specific business requirements and achieve their corporate objectives.

I’ve been suggesting this idea to a number of hosting companies over the past year and will be interested in seeing how well SAVVIS is able to deliver this new level of value to its customers.

Last week’s OpSource SaaS Summit was a milestone event for the on-demand services market on a number of levels.

The first SaaS Summit in Silverado in 2006 was a gathering of industry pioneers to discuss the potential of the on-demand movement. Last year’s Summit in Monterey was an opportunity to celebrate the growing success of the SaaS movement. This year’s Summit offered a chance to take stock of what it will take to scale SaaS to meet the needs of the mainstream market. The theme was platforms and web services, but the event also raised other issues.

With over 600 registered attendees, this year’s SaaS Summit was the largest vendor-oriented conference focused entirely on the rapidly growing Software-as-a-Service (SaaS) market to date. While Salesforce.com’s Dreamforce user conference is still the biggest SaaS event of all, OpSource’s SaaS Summit has represented the benchmark for vendor-oriented conferences since its inception in 2006.

This year’s Summit marked the first time that many of the leading names were overshadowed by lesser known players with far more compelling messages.

Microsoft’s General Manager of U.S. ISV and System Integrator Partner Businesses, Greg Urquhart, outlined the company’s SaaS enablement capabilities but did little to convince the conference attendees that Microsoft is committed to quickly delivering its own SaaS solutions.

By the same token, Salesforce.com’s President and Chief Customer Officer, Jim Steele, wasted an opportunity to convince the Summit attendees that Salesforce.com is a leader in the rapidly evolving cloud computing market by dwelling too long on the basic virtues of SaaS.

Everyone I spoke with at the Summit agreed that it was Josh James, Co-Founder and CEO of Omniture, who stole the show. James provided an engaging and enlightening presentation about the factors which have led to the phenomenal success of his company. James provided valuable information and insight, punctuated by a key takeaway that every successful company should have a ‘number’ that drives its growth. In the case of Omniture, it is a monthly statistic based on a formula calculating sales growth specifically for its web performance metrics business.

I was privileged to moderate a panel of journalists that concluded the Summit. The panel consisted of Eric Knorr, Editor – Infoworld, John Pallatto, West Coast News Editor – eWEEK.com, Ben Worthen, Staff Reporter – The Wall Street Journal, and Aaron Ricadela, Writer – BusinessWeek. These prominent business and tech industry writers offered their candid perspectives regarding the state of the SaaS market and the key obstacles that must be overcome in order for SaaS to become truly mainstream.

Ironically, Forrester Research issued a new report prior to the Summit suggesting that the SaaS market will cool off in the small- and mid-size market in 2008. A drop in the rate of growth is conceivable because of the law of big numbers, but is unlikely because there are so many vertical and horizontal market segments still to be addressed.

As is often the case, the real value of last week’s SaaS Summit was the opportunity it gave attendees to network with their peers and get a reality check about industry best practices from informal discussions rather than formal presentations.

My guess is next year’s SaaS Summit will be far bigger someplace in Vegas and we will be discussing an even broader array of business opportunities and challenges.

In the meantime, this month’s SaaScon user-oriented event will be the next opportunity to gauge the state of the SaaS movement.

Until then, we should all be thanking OpSource for making the SaaS Summit possible and using it to help drive the success of the SaaS industry.

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.

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.

Microsoft today unveiled a new SaaS Incubation Center Program to help independent software vendors (ISVs) adopt the Software as a Service (SaaS) delivery model. Microsoft’s new program will provide ISVs with business and technical consulting services, a hosting channel to market, and incentive discounts to Microsoft’s enabling technology.

Not long ago, the incubator idea seemed to be a distant memory associated with the demise of the dot.com era. But, with the advent of a new surge of Web 2.0 opportunities, the incubator concept has also been reborn.

Microsoft isn’t the first to launch an incubation program in the SaaS space. OpSource, Salesforce.com, and others have created their own programs. What sets Microsoft’s program apart from the others is how it is attempting to link ISVs with hosting companies as a channel to market.

For the ISVs, this will give them a wider assortment of service delivery infrastructure partners to choose from. For the participating hosting providers, Microsoft’s program gives them access to a widening array of ISVs seeking to expand their customer base and drive revenue.

The SaaS Incubation Center Program will build on the Microsoft Solution for Windows®-based Hosting for Applications and the SaaS On-Ramp Program to give hosting providers training and tools to support the ISVs’ unique SaaS business and service delivery needs. The Microsoft SaaS Incubation Center Program will include a series of structured business consulting and software architecture training sessions. The Windows-based Hosting for Applications platform also gives hosters tools to more easily and effectively build and monitor their service delivery infrastructures and establish strong service-level agreements (SLAs).

The global incubator program will include seven hosting companies initially—Affinity, Navisite, NTT Communications, Opsource, Rackspace, 7Global, Siennax, Wizmo.

Microsoft also announced Phase II of its SaaS On-Ramp Program based on its Service Provider Licensing Agreement (SPLA) which gives ISVs discounted licensing for Windows Server® and Microsoft SQL Server™ licenses. ISVs can now acquire discounted SKUs for these servers through enrolled hosting providers, rather than just directly with Microsoft. This enables the hosting providers to offer an attractive combination of enabling technologies and delivery services to ISVs.

The key point of Microsoft’s announcement is that the company recognizes that its greatest differentiator in the SaaS market could be its ability to link ISVs with a channel to market. Channel opportunities and strategies have been a topic of debate in the SaaS industry. Salesforce.com’s AppExchange doesn’t address this issue and IBM’s SaaS efforts are still evolving in this area.

Microsoft is making a concerted effort to build a viable channel for its more than 20,000 ISV partners via hosting companies, as well as network service providers such as the telecommunications carriers and cable operators. You can expect to hear more about Microsoft’s SaaS enablement efforts in conjunction with the network service providers.

While Salesforce.com and its Founder/CEO/Chairman, Mark Benioff, get most of the attention and credit for setting the standard for the Software-as-a-Service (SaaS) movement, OpSource and its Founder/CEO, Treb Ryan, have done more than their share to evangelize the business benefits of SaaS and educate the software industry about the steps to success in this market.

Treb saw the opportunity to differentiate OpSource from the floundering hosting business by focusing on a nascent SaaS marketplace early. The company asserted itself as the “SaaS Experts” by establishing a professional services arm which helped aspiring on-demand companies understand the business of SaaS. It also initiated an aggressive marketing campaign in 2005-2006 which included an incubation program, countless webinars and the SaaS industry’s first conference, the SaaS Summit.

The company used the occasion of its second annual SaaS Summit in Monterey, CA, this week to unveil its new portfolio of SaaS enablement capabilities. Borrowing a page from Salesforce.com’s AppExchange platform strategy, OpSource 2.0 includes a similar platform approach with a set of SaaS tools and services which harness the technology and skills of its ecosystem of partners.

OpSource 2.0 is built on an Optimal Services Bus (OSB), a service-oriented architecture that permits on-demand applications which run on OpSource’s Optimal On-Demand platform to leverage additional OpSource and third-party components.

The first of these components is Optimal Insight, based on Visual Mining graphical dashboarding capabilities, which will give SaaS companies an integrated, real-time view into the business and operational performance of their on-demand applications.

In April 2007, OpSource will introduce Optimal Billing, an end-to-end billing, payment and collections processing capability, built on Aria Systems’ billing and payments system.

Later this year, OpSource will roll out Optimal Research, which will give SaaS vendors the ability to conduct user surveys, and test marketing and sales promotions.

OpSource’s goal is to provide SaaS vendors a complete, Web-based development environment to build and deliver successful on-demand applications.

The company may not be able to match the physical resources and financial assets of the larger players in the market, but that hasn’t stopped it from becoming a pivotal player and important catalyst in the SaaS industry.

A measure of OpSource’s importance in the SaaS industry has been the size of its Summit gatherings, and the stature of the speakers and attendees at these events.

If Salesforce.com and Mark Benioff are setting the standard for boldness in the SaaS industry, OpSource and Treb Ryan aren’t far behind.