THINK IT Services

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

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

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

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

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

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

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

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

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

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

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

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

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.

One of the most vexing questions in the Software-as-a-Service (SaaS) market, and broader on-demand services industry, is what role traditional channel companies will play in this brave, new world.

While Salesforce.com and other SaaS vendors are touting the enormous advantages of leveraging the ‘cloud’, there are still plenty of companies on Main Street who are just beginning to become familiar with today’s online services. Many of these small- and mid-size businesses (SMBs), and even large-scale enterprises, have relied on their local value-added reseller (VAR) and system integrator (SI) as not only their primary technology supplier but also their ‘trusted advisor’ for their technologies strategies.

These VARs and SIs have been uncertain about the impact of SaaS solutions and on-demand services on their businesses. In fact, many feel down right threatened by these services.

There is no question that SaaS solutions and on-demand services eliminate much of the upfront planning and design, installation and integration, and ongoing support requirements which have been the bread and butter of VARs and SIs’ revenue streams, not to mention the margins they made on hardware and software product sales.

However, there is still plenty of opportunities for channel companies to add value to SaaS and on-demand services across the entire lifecycle of customer requirements from needs assessment through the deployment and management processes. Appirio, Astadia, Bluewolf, SaaSpoint and Sofia Works are living proof of these new market opportunities.

Today, HP and NetSuite announced they are partnering to offer SaaS business applications to SMBs via HP’s vast channel community of 15,000 VARs in the U.S.

Under this agreement, HP and NetSuite will initiate a referral-based program for HP channel partners that will encourage them to recommend NetSuite’s solutions to their customers. They will also offer new value-added implementation and management services as part of the HP Total Care support program.

NetSuite will provide dedicated resources to support the HP resellers, along with a toll-free hotline for channel sales support and a self-service portal for channel partners to access sales tools and online training resources.

This agreement is significant on a number of levels.

First, it gives NetSuite a vast new channel to market to a broad cross-section of SMBs.

Second, it gives a wide array of VARs/SIs an opportunity to jump onto the on-demand services bandwagon with the help of HP.

Third, it gives HP a SaaS solution to sell to SMBs through its channel partners.

And fourth, it gives SMBs an opportunity to obtain a SaaS solution from their existing technology suppliers who they trust.

This agreement is a strong endorsement for NetSuite at just the right time. The company has been trying, without luck, to keep pace with Salesforce.com which continues to command the attention of the on-demand/cloud computing industry because of its brilliant marketing efforts and robust sales growth. Meanwhile, NetSuite has never been a strong marketing company and has seen its stock value severely impacted by failing to meet Wall Street expectations which hasn’t helped its standing in the SaaS industry.

Teaming with HP can be a timely shot in the arm for NetSuite. As a result of its acquisition of EDS, HP is now the largest vendor in the IT industry. HP has spent years building a strong channel network. Its willingness to expose the HP channel partners’ to NetSuite’s solution shows that HP believes it is a good fit for their customers. Otherwise, HP wouldn’t waste its time promoting NetSuite’s solution or jeopardize its channel relationships.

This agreement is also a way for HP to gain entry into the SaaS market where they have lacked a presence. In fact, I’ve been told by HP insiders that the company’s own SaaS initiatives have been slowed by their EDS acquisition. Who knows, HP might become a potential acquirer of NetSuite as a result of this relationship rather than Oracle who has been the most natural candidate in the past. On a more tactical level, the alliance also gives HP to opportunity to sell and promote more of its ProLiant servers and StorageWorks Modular Smart Arrays which are a key component of NetSuite’s service delivery infrastructure.

Ultimately, this alliance has the potential to be a win-win-win-win for all four parties—NetSuite, HP, channel companies and customers.

However, making this agreement a success won’t be easy. It will take time to train the channel companies and devise the right pricing and promotional programs to encourage them to sell NetSuite’s solutions. Even when the channel companies become comfortable with NetSuite and convinced that they can make money in this program, it will still take time to sell a enough NetSuite subscriptions to have an impact on everyone’s financial results.

Nonetheless, the evolution of this alliance will be an important indicator of how traditional channel companies will participate in the SaaS/on-demand services market. While the hoopla at last week’s Dreamforce was squarely focused on the new world of the ‘cloud’, today’s announcement may help to define the role of traditional channel companies in the SaaS market of the future.

Despite the economy, election and lingering questions about whether Software-as-a-Service (SaaS) is enterprise-ready, this week’s Salesforce.com Dreamforce conference drew nearly ten thousand energnetic attendees and exhibitors to celebrate the power of the ‘cloud’.

The event not only dispelled any questions about whether the SaaS movement can withstand today’s economy, it also helped to resolve the needless debate over whether there is a difference between SaaS and cloud computing.

Salesforce.com succeeded in dissolving any line of demarcation which may have existed between the SaaS and cloud computing worlds by:

• Using the terms interchangeably throughout its keynote and breakout sessions
• Unveiling a new round of cloud-based applications and platform capabilities
• Expanding its strategic alliances to include two more pivotal ‘cloud’ players

Salesforce.com’s two most significant announcements were its move into website hosting services, and new alliances with Amazon and Facebook.

The website hosting services add another layer to the company’s capabilities and extend its reach across the value-chain of customer/partner facing interactions. This new layer of services provides a clear ‘use-case’ for Salesforce.com’s VisualForce web design capabilities and fortifies Salesforce.com’s positioning as a strategic source for customers and ISV partners.

The new alliances with Amazon and Facebook are a natural extension of its rapidly growing allegiance with Google. Amazon gives Force.com users added storage and computing power capabilities to enhance and expand their SaaS solutions. The Facebook relationship could finally enable business users to effectively leverage the popular social networking site for more than simple advertising and promotional purposes.

Most importantly from Salesforce.com’s perspective, these new alliances puts the company squarely at the center of the cloud computing world just as Microsoft is beginning to describe how it will deliver its own vendor-centric cloud platform.

Salesforce.com has succeeded in pulling together the key cloud computing players who stretch across the four corners of this rapidly expanding marketplace. I expect these alliances to accelerate new mash-ups and more substantial cloud-based solutions. This foursome of cloud computing players could be viewed as the “Four Horsemen”.

Between the keynote sessions I had two days of back-to-back meetings on the show floor with a mix of SaaS vendors, customers and investors facilitated by the SaaS appointment maker solution, TimeTrade.

The exhibitors were nearly all extremely pleased with the volume of quality leads they generated during the event. As always, I also learned about a variety of subplots among the various vendors in attendance.

All of the people I met were upbeat about the overall SaaS/cloud computing market outlook long-term, but concerned about the short-term impact of the economy on deals already in their sales pipeline. Corporate indecision or company edics to put a hold on all new spending will probably delay many SaaS deals through the end of 2008.

I think this delay in sales, combined with a tightening of VC and other financing, will accelerate a shakeout in the SaaS/cloud computing industry. The most vulnerable players will be those who only offer point products with ‘nice to have’ features rather than ‘must have’ business benefits. The survivors will be those who can demonstrate their strategic value, along with their financial viability in a tough economic climate.

Despite these potential storm clouds, the prospects are still far brighter for the overall SaaS and cloud computing market than traditional, on-premise, legacy software vendors. The energy and enthusiasm of Salesforce.com’s customers at Dreamforce served as a solid confirmation of this very exciting market opportunity.

One of the topics which leading Software-as-a-Service (SaaS) vendors and industry analysts are most vehement about is that software vendors cannot survive and succeed supporting a ‘hybrid’ model.

This issue arises every time an incumbent software vendor–my definition of a “ISV”–rolls out a SaaS solution while also trying to sustain its legacy, on-premise application. There are plenty of impediments to success in this balancing act across the entire lifecycle of a product extending from software development and delivery to sales and support. These technological and organizational challenges are major obstacles to success for ISVs trying to keep pace with the SaaS movement.

However, despite growing interest and adoption of SaaS as well as other ‘cloud’ computing alternatives among organizations of all sizes, many IT and business decision-makers continue to feel that they must make an ‘either/or’ judgement when it comes to on-premise versus on-demand solutions. This often confronts with an unnecessarily polarized set of options rather than giving customers a variety of complementary choices that enable them to locate their applications wherever they like.

I believe that this no longer needs to be the case. Instead, I think SaaS and cloud computing vendors should adopt a different attitude toward the hybrid model to better respond to their customers’ preferences. If vendors adopt this new approach, it could remove one of the last barriers to broad-based acceptance of SaaS and cloud computing among small- and mid-size businesses (SMBs), as well as large-scale enterprises.

As I’ve written, and many others have stated elsewhere, building and selling a traditional software product is fundamentally different than delivering and supporting a SaaS solution. Supporting these two differing models creates internal redundancies and external conflicts which are costly, inefficient and doomed to failure in most cases.

Having said that, I’m becoming convinced that some ISVs can survive and will succeed by offering customers the choice of an on-premise and on-demand solution. In fact, I think it will be necessary to do so in order to satisfy the demands of those customers who are not comfortable with relying on a ‘cloud’-based solution to meet their IT or business needs.

While customer concerns about where a software solution, or even the application data, resides may not be entirely rational at times, it may not be necessary in the future for ISVs to have to convince them to part with their data or depend on an application hosted in an unknown location.

Instead, a variety of players in the SaaS and cloud computing market are leveraging an ‘appliance’ approach which permits customers to deploy the vendor’s on-demand solution behind the firewall where it is regularly updated and upgraded via a synchronization process similar to that which has become acceptable in a variety of other situations, such as managed storage, back-up and security services. It is also becoming possible with Google Docs offline and Adobe Air.

This idea is already being demonstrated by companies like Cast Iron Systems in the data integration arena; NTRglobal in the remote support management services business; and St. Bernard in the security solutions realm.

Although none of these companies are delivering major enterprise applications, they are all offering customers the choice of deploying their equally important solutions in the ‘cloud’ or behind the firewall.

And, if Google, IBM, Microsoft and others can modularize their data center capabilities into ‘pods’ which can be deployed anywhere, what is to prevent Salesforce.com or other enterprise SaaS vendors from doing the same thing with their applications.

(I’ve been hearing rumors for a while that Salesforce.com is already allowing some of its largest customers to host its applications behind the firewall.)

Now, it is important to note that this approach still requires an ISV to evolve its software design to sit on a single multi-tenant style architecture and code base in order to be operationally feasible and cost-effective.

But, the enabling technologies are quickly evolving to satisfy these requirements. And, customer demand definitely exists to make this approach readily acceptable and profitable.

Let me know if you think I’m crazy or if you know of other examples which support my argument.

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

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

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

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

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

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

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.

In May, I blogged about “Silicon Valley’s first phone company” which was creating a new market opportunity for Software-as-a-Service (Saas) in the voice communications sector.

Today, BT announced its intention to acquire that “Telco 2.0″ platform company, Ribbit, for $105 million in cash. Not bad for a company which just closed a “small” B round of funding, according to the company executives I chatted with this afternoon.

This acquisition clearly demonstrates how far SaaS has come.

SaaS is no longer viewed as just a cheaper and easier alternative to traditional, on-premise applications. Instead, SaaS is becoming recognized as a way to fundamentally transform businesses processes and various industries, such as telecommunications.

My roots are in the telecom industry. I helped to launch IDC’s communications industry research program in 1983 at the time of the original AT&T divestiture. I also enjoyed my most satisfying and successful years in the ‘real-world’ working at International Network Services (INS) in the mid- and late-1990s, which helped incumbent and insurgent telecom companies deploy router-based networks to support a new generation of business applications.

I’ve always viewed BT as among the most visionary of the major telecom companies. It acquired INS in February 2007. It has built a strong working relationship with Microsoft as a hosting company and purveyor of their Software-Plus-Services.

At the time of BT’s acquisition of INS, I wrote in the Web Hosting Industry Review (WHIR) that SaaS could enable telecom companies to escape the commodity business of traditional transport services and create new, application layer opportunities.

BT boldly stated in today’s announcement that the Ribbit “acquisition will accelerate BT”s strategy to transform itself into a next- generation, platform-based, software-driven services company.”

BT not only gets an innovative company, it also gains inroads into the Salesforce.com world of AppExchange partners and its Force.com development platform.

In order to minimize the risk of ‘killing the golden goose’, BT plans to operate Ribbit as a separate subsidiary retaining its name and management team so they can continue to pursue the promise of a new generation of voice-as-a-service solutions.

Last week Appirio announced that it had secured Series B financing of $5.6 million led by Sequoia Capital, the investment firm which has become notorious for also backing Google, Yahoo!, LinkedIn, and PayPal. Sequoia also funded one of my previous employers, International Network Services (INS), one of the high-flyers of the 1990s.

Appirio’s latest round of funding comes on the heals of a Series A investment of $1.1 million which it captured earlier this year from salesforce.com and angel investors. Although there is lots of VC money chasing Software-as-a-Service (SaaS) and cloud computing opportunities, it is rare to have a start-up collect two rounds of funding in the same year.

What makes this latest round of funding for Appirio of interest to me is the implications which it has for the overall on-demand services market.

As I mentioned, I was a part of a Sequoia Capital-funded company in the 90s. Like Appirio, INS was a professional services company. While Appirio is focused on the on-demand services market, we were focused on the internetworking market. Like Appirio, we followed the 800-pound gorilla in the market at the time, Cisco Systems. Nearly every time Cisco won a big router contract with a service provider or enterprise customer, INS won the deployment contract because Cisco didn’t want to build a costly field service organization. Appirio has built a similar business helping companies develop and deploy solutions based on the salesforce.com and Google platforms because both of these companies have shied away from building their own consulting arms.

The Appirio and INS stories are also similar because they were both smart enough to see an opportunity to convert individual customer engagements into packaged service solutions.

INS’ engineers recognized the shortcomings of traditional network/systems management (NSM) platforms and built a network performance management software solution, EnterprisePRO, which we sold as a subscription service before the application service provider (ASP) and managed service provider (MSP) concepts were borne. Today, Appirio is productizing the end results of its customer engagements and reselling them on salesforce.com’s AppExchange.

Many analysts and trade pub reporters have questioned whether there is a role for consulting and professional services in the SaaS market. There is no question that traditional professional services firms such as Accenture and CAP Gemini are still searching for the right way to scale down their methodologies and costs to fit the on-demand services market. However, Appirio’s revenues have grown more than 400% in the last three months, during which over 1500 customers in 80 countries have adopted its on-demand solutions.

Appirio isn’t alone in experiencing tremendous success in the on-demand consulting business. Astadia, Bluewolf and SaaSpoint have also caught this tiger by the tail and are growing rapidly.

I’m pleased to be moderating a panel at the SIIA’s On-Demand conference in November that will include executives of Appirio, Astadia and SaaSpoint talking about the SaaS and cloud computing markets from their street-level professional services perspectives. I look forward to seeing you there.

As the Software-as-a-Service (SaaS) “gold-rush” intensifies, industry consolidation is inevitable. The latest example of this consolidation process is today’s announcement by NetSuite that it intends to acquire OpenAir.

This announcement not only reaffirms the SaaS industry consolidation trend, but it also is the latest example of a company profiled by THINKstrategies being acquired shortly thereafter. Other examples include,

• Vtrenz which was acquired by Silverpop
• Everdream was acquired by Dell
• AimNet was acquired by Cognizant
• Corio was acquired by IBM

(Contact me if you’d like a copy of our Strategic Thinking profiles on these companies.)

I had the privilege of talking with Zach Nelson, CEO of NetSuite, and Morris Panner, the CEO of OpenAir, moments before today’s announcement was made public. They indicated that the acquisition was based on a trend which THINKstrategies has seen coming for a few months now.

Prospective SaaS users are not only seeking more industry-specific SaaS solutions, they are also looking for more strategic sources for these SaaS solutions. Instead of contracting for a series of SaaS point products from a wide array of vendors, corporate decision-makers, both business and IT, are taking a closer look at the SaaS vendors’ overall portfolios, platforms, partner ecosystems and financial viability so they can establish broader, long-term relationships with a fewer number of SaaS suppliers.

While the OpenAir acquisition gives NetSuite a stronger foothold in the professional services market, I think the acquisition also gives NetSuite a stronger set of human resource management (HRM) capabilities in its horizontal portfolio of enterprise applications.

Although the acquisition is another example of a Boston-based tech vendor being acquired by a west coast based company, the good news for OpenAir’s employees and the Boston area SaaS community is that NetSuite plans to use the acquisition as a beachhead for further investment aimed at establishing a greater east coast presence centered in the Hub.

Interestingly, NetSuite refers to its OpenAir plans as based on Oracle’s acquisition model and plans to operate OpenAir as a stand-alone product group with tighter integration to NetSuite’s platform. This reference just reinforces market perceptions of the close alignment of NetSuite with Oracle, and keeps alive suspicions that NetSuite may be acquired by Oracle in the future.

In the meantime, Zach Nelson and Morris Panner told me they will do all they can to maintain OpenAir’s relationship with Salesforce.com via the AppExchange, and build on their other third-party relationships, including their respective channel partners.

Having gone through a number of unsuccessful acquisitions, I know first-hand about the various issues that can get in the way of these transactions achieving their business objectives. However, I think NetSuite and OpenAir have a very good chance of succeeding because they have the right combination of complementary executive personalities, solution capabilities, channel partners and geographic orientations.

The next question is what this acquisition means for OpenAir’s primary competitor, QuickArrow? My bet is that they will also be an acquisition target in the coming months.