THINK IT Services

With the Software-as-a-Service (SaaS) event season in full throttle, I’ve found myself consulting with a new generation of aspiring SaaS players who are trying to learn about the fundamentals of this rapidly evolving marketplace quickly so they can respond to changing customer requirements and capitalize on new market opportunities.

Starting with SoftLetter’s SaaS Sales and Marketing Seminar in Atlanta which has been upgraded to the SaaS University for Waltham, MA in June, and continuing with OpSource’s SaaS Summit last month in San Francisco, a widening array of incumbent software vendors (ISVs) and old-line technology vendors have approached me seeking help in their efforts to join the SaaS movement.

Some of these companies have lived well for years in niche markets, others have enjoyed cashcow businesses at a mass market level with hardware-based solutions. Now they see a combination of market forces fundamentally changing their worlds and they are trying to transform their business models quickly to respond to a rapidly changing competitive landscape and customer preferences.

Although established SaaS companies clearly understand the differences between the old and new worlds of on-premise software products versus on-demand software services, these new arrivals are still learning about the challenges, as well as opportunities associated with SaaS.

What all of these companies have in common is that they can’t afford to discard their legacy software business in order to capitalize on SaaS opportunities. Instead, they must adopt a hybrid strategy that can support the needs of their existing customers while satisfying the changing expectations of a new generation of software user, without ripping themselves apart in the process.

What these companies are learning is that living in a hybrid world requires two different approaches to software development and delivery, two different go-to-market strategies, two different sales and marketing methodologies, and two different types of personnel.

Agile development replaces the long upgrade cycles of the past. Hosting replaces packaging issues when it comes to software delivery. Online marketing and telesales are more important than direct sales or traditional resellers. And, business-oriented customer support becomes essential rather than tech support to ensure customer loyalty and reference-ability.

Underneath these tangible differences is the more fundamental and subtle differences in attitude between the on-premise and on-demand worlds. In the old world, making the software work was the customer’s problem. The customer bought the software before they were sure it worked, hired the consultants and staff to get it up and running, bought the infrastructure to properly support it, and notified the vendor if something went wrong or they needed more help.

In the new world, making the software work is the SaaS provider’s responsibility. The customer can try it before they subscribe to it. They don’t have to hire additional staff or purchase more servers. They may still hire a few consultants to help with a smaller assortment of deployment issues, or to help with change management and training requirements. And, the customer expects the SaaS provider to keep the software service up and running, and continuously enhance it.

Can traditional software and technology vendors straddle these two worlds?

I think the answer for many of these vendors must be the same as the famous line in the movie Apollo Thirteen, “Failure is not an option.”

The big ISVs–Microsoft, Oracle and SAP–have the deep pockets to finance this balancing act. Other ISVs like Business Objects and Callidus Software are also demonstrating that hybrid models can work.

The smaller firms will have to make sacrifices in order to traverse this transition process. Many are fortunate that they are privately-held companies that don’t have to satisfy Wall Street’s short-term time horizons, especially in today’s frantic economic climate. Others are equally fortunate to have a loyal installed base of customers who will patiently work with them to ensure that the migration process is successful.

But, in each of these cases there will be plenty of potential landmines which will require careful planning and cautious execution. Thoroughly understanding these potential pitfalls will be essential if these new SaaS players are going to succeed in the on-demand marketplace.

Last week’s second annual SIIA On-Demand Conference was a bellwether for the state of the Software-as-a-Service (SaaS) industry. Rather than being composed of the usual suspects of SaaS speakers—Salesforce.com, Microsoft, etc.—the event included an interesting mix of prominent players and start-ups who clearly demonstrated that we are well beyond the ‘why SaaS’ stage and deeply into the ‘how’ phase of this important movement.

The event opened with a packed house of over 300 attendees, many with senior executive titles, and a relatively new name to the SaaS market presenting. Donald Proctor, the Senior Vice President of Cisco Systems’ Collaboration Software Group kicked off the event promoting its vision of the next wave of inter-office SaaS solutions based on WebEx’s collaboration platform which Cisco acquired in March 2007.

Although I might suggest that this wave of inter-office SaaS solutions is well underway and the acquisition slowed WebEx’s Connect ecosystem efforts, Proctor’s SIIA presentation was a clear indication that the networking company plans to put its shoulder firmly behind a renewed campaign to establish WebEx as an important platform for SaaS developers and corporate customers.

Erik Larson, Director of Marketing and Product Management for Adobe Systems’ Business Productivity Business Unit followed the Cisco presentation with Adobe’s stance regarding corporate collaboration via SaaS solutions. He demonstrated Adobe’s enabling technology for SaaS applications, and described its vision for a web-based future.

My colleague, Phil Wainewright, moderated a customer panel which included a cross-section of large (Chevron) and small (Pacific Northwest Economic Region Tourism Division) organizations leveraging SaaS to achieve their business objectives. While their views were timely, Phil and I had hoped to recruit enough customers to fill two panel sessions rather than just one. However, SaaS providers are still having trouble convincing their customers to publicly endorse their solutions in this fashion.

I had the privilege of moderating a panel regarding integration challenges consisting of representatives of Boomi, Informatica, Interweave and Pervasive Software. They all boasted about their individual approaches to delivering integration on-demand and admitted that there is still plenty of customization required.

Three of the most interesting speakers presented on the second day of the conference.

Dr. Werner Vogels, the Vice President and Chief Technology Officer of Amazon.com described how his company has commercialized its internal operations platform to support SaaS companies’ storage and service delivery infrastructure requirements. In my view, Amazon has single-handedly resurrected the utility computing concept, and has made it work for a growing assortment of SaaS vendors and other business users. As a result, Amazon now looms as a major force in the on-demand marketplace, not just as a channel to market but also as an enabling vendor.

Jason Maynard, the software industry analyst for Credit Suisse and the strongest advocate of SaaS on Wall Street, suggested that on-demand solutions could create a new level of value which he called “Software as an Answer”. His concept reinforced the views I’ve espoused in my writings and consulting engagements that SaaS provides an unprecedented opportunity for vendors to aggregate, analyze and distribute data based on application usage patterns and statistics. This data can be used for benchmarking, marketing, sales and operations purposes. It can even create new business opportunities for entrepreneurs.

Anthony Lye, Senior Vice President of Oracle’s CRM OnDemand division, gave the SIIA audience a preview of the company’s new generation of SaaS solutions which will be unveiled at this week’s OpenWorld conference. They include an impressive user-friendly interface which borrows heavily from the best of the Apple iPod Touch, combined with a robust set of social networking and mash-up capabilities.

The most important message from Lye is that Oracle’s enhancements are not aimed at satisfying the needs of small- and mid-size businesses (SMBs), but to meet the growing demands of enterprise customers. This echoed Proctor’s presentation on behalf of Cisco. This shouldn’t be surprising given the recent partner agreement between Cisco and Oracle. Oracle’s PR machine will undoubtedly generate a stream of third-party endorsements of its new on-demand capabilities as part of its OpenWorld festivities, such as today’s announcement of an integration with Xactly.

These were important proclamations for a market where SaaS is too often viewed as a simpler and cheaper solution for SMBs alone. (A misconception reinforced by a recent statement by SAP.) Instead, Oracle and Cisco are confirming my longstanding view that SaaS offers unique capabilities which fit the escalating demands of an increasingly decentralized and financially strained enterprise market.

Ironically, some of the attendees who had not been to previous SIIA events lamented the conference was too focused on the enterprise. While I understand their frustration, I still believe the seriousness of Cisco and Oracle’s efforts to climb onboard the SaaS bandwagon will further legitimize this movement. This will lend greater credibility to SaaS as a viable alternative to traditional, on-premise legacy applications. In turn, SaaS will become that much more attractive to SMBs as well.

However, the SIIA conference also demonstrated that industry best practices regarding service provisioning and delivery, integration, support, sales and marketing are still embryonic. An example of the risks which the SaaS market must still withstand was the extended outage suffered by NaviSite. And an indication of the growing focus on service provisioning was the announcement by Aria Systems as the SIIA conference convened that it had closed a $4.0 million Series A financing round led by Hummer Winblad Venture Partners.

The consolidation of the legacy software market continued this past week with SAP’s announced plans to acquire Business Objects, followed by Oracle’s announcement that it intends to buy BEA Systems.

These transactions clearly indicate that the traditional, on-premise software market is undergoing fundamental changes. The most obvious driver of the latest announcements is the growing importance of business intelligence (BI) and analytics as a key ingredient in any meaningful enterprise application.

In an ideal world, these acquisitions would mean that customers no longer have to carry the burden of integrating these capabilities into their enterprise software environments. Instead, it would be logical to expect the business intelligence and analytics capabilities to become a ‘plug and play’ component of the SAP and Oracle’s software portfolios. However, it is more likely that these acquisitions will simply make their software solutions even more complex to implement.

SAP could mitigate this risk by leveraging the fast-growing Software-as-a-Service (SaaS) unit within the Business Objects to accelerate SAP’s own efforts to deliver a successful on-demand solution. However, I’ve been a part of too many acquisitions to believe that SAP will fully exploit this asset while it is also trying to absorb the full extent of Business Objects’ capabilities.

Meanwhile, Salesforce.com has taken a different tact to satisfy its customers’ BI/analytics requirements. Rather than acquire a company in this area or build its own BI/analytics capabilities, Salesforce.com has encouraged third-party companies to develop solutions which enhance its SaaS capabilities via the AppExchange.

By providing an assortment of application program interfaces (APIs) and web services that permit third-party integration with its core on-demand applications, Salesforce.com is able to meet its customers’ needs without having to make a direct investment in the added functionality.

I/THINKstrategies think the legacy software vendors (LSVs) can steal a page from Salesforce.com’s playbook and use a similar ‘tugboat strategy’ to move more quickly toward an on-demand capability.

Just like aircraft carriers can take a long time to turn around without the help of a fleet of tugboats, the LSVs can also be expected to take a long time to change their software architectures, revenue structures and corporate cultures in order to become viable on-demand software vendors unless they encourage an army of SaaS companies to integrate with their legacy software products to enhance and extend their core functionality.

Why would SaaS companies want to integrate with legacy software products?

To gain access to existing customers, in many cases enterprise customers they would not be able to access otherwise. Since it is unlikely that customers will discard their existing software products anytime soon, SaaS companies have a better chance of penetrating customer environments if they complement their installed software rather than displacing it.

Ironically, the LSV is less likely to be displaced if they get close to their ‘enemy’. Instead, they can use the SaaS companies to strengthen their positon within these accounts and in the market as a whole by attracting third-party on-demand functionality to complement their on-premise products. They can also get a first-hand glimpse at how the SaaS solutions work and evaluate potential acquisiton candidates.

These Machiavellian tactics are certainly in the repertorie of the major LSVs. They just happen to be exercising a different set of tactics in the latest round of acquisition transactions.

Waiting for a delayed flight to Chicago from Vegas, as I try to make my way home to Boston, is an opportune time to recap a week of travels across the Software-as-a-Service (SaaS) and managed services landscape.

This past week began at Salesforce.com’s annual Dreamforce user conference. It was another lovefest that attracted a record crowd of over 7000 users, partners, press and analysts, up from fewer than 5000 a year ago. The 40% growth in total attendees was eclipsed by a tripling in the number of partners showcasing their on-demand capabilities, despite a big increase in the price for booth space.

The focal point of the event was Salesforce.com’s introduction of its new Platform-as-a-Service (PaaS), called force.com. The company also introduced a user interface on-demand solution (IaaS), visualforce.com. (Click here, to read THINKstrategies’ whitepaper regarding the new PaaS.)

These announcements are the latest examples of the company’s brilliant ability to continuously iterate its corporate capabilities and accompanying marketing messages to monopolize SaaS industry mindshare. Force.com is an extension of the development toolkit and Apex code Salesforce.com has offered to its customers and partners for the past year.

Salesforce.com has been moving toward positioning itself as a platform player for a while, but the PaaS announcement was the clearest assertion of its intentions in this area to date.

The company’s Chairman/CEO, Marc Benioff, even went so far as to suggest in his keynote unveiling of the PaaS and IaaS that these are the last pieces of the puzzle in Salesforce.com’s corporate portfolio. While this is hard to believe, it is clear Salesforce.com has recognized that, as the 800 pound guerilla of the SaaS market, it has the opportunity to capitalize on its success and resell the foundation of its on-demand applications to customers and other independent software vendors (ISVs) who want to accelerate their SaaS development cycles, overcome their service delivery challenges, and leverage proven on-demand tools.

Despite the significant new revenue opportunities and important strategic positioning potential of this move, Benioff assured Dreamforce attendees that Salesforce.com is not abandoning its primary application business which still has plenty of upside potential of its own.

Some SaaS watchers have questioned whether Salesforce.com can balance its platform and application businesses. This balancing act hasn’t defeated Microsoft or Oracle, but instead has made them stronger and has been a pivotal reason for their success. Like them, Salesforce.com has the brains and brawn to succeed at the platform level in the same way it has in its core on-demand application areas.

An indication of its brilliance and market strength is the amount of attention this week’s PaaS announcement generated among its competitors. The day of the announcement, NetSuite sent an email to industry analysts and press pointing out how it had beaten Salesforce.com to market with an on-demand platform and interface years ago. Yet, once again Salesforce.com’s marketing team has succeeded in generating far greater attention than the less flamboyant NetSuite.

SAP also tried to counteract the buzz surrounding Salesforce.com’s announcements by unveiling its latest effort to enter the SaaS market, Business ByDesign. While there were plenty of interesting aspects of SAP’s latest on-demand software plans, I’m taking a wait and see attitude given its failure to fulfill its previous SaaS promises. It is worth noting that SAP is only committing itself to a hosted rather than a multi-tenant solution. As a result, some SaaS watchers are discounting SAP’s offering. However, Oracle is doing quite well with a similar hosting approach. In my view, the more significant meaning of SAP’s latest promises is that it demonstrates how important the SaaS movement and Salesforce.com have become.

My week only began in San Francisco at Dreamforce, I then flew to Chicago for the Ziff-Davis Channel Summit where SaaS and managed services were on everyone’s minds as vendors and channel companies debated the potential impact of these trends on their mutual go-to-market strategies. I had the privilege to participate in a panel focusing on the organizational challenges facing established channel companies seeking to become managed service providers (MSPs). If you’re a faithful reader of this blog or my other writings, you would have found little new in our panel discussion. But, I was struck by the palpable tension between the vendors and channel companies regarding the market implications of the on-demand movement. Both parties will need plenty of help repositioning themselves in this rapidly changing marketplace.

I capped off the week in Vegas speaking at Verio’s Partner Summit where the company was unveiling its new Business Solutions portfolio of SaaS and managed services to its channel partners. Verio did a great job packaging and positioning the new portfolio to the satisfaction of its channel partners who responded positively to the new offerings and were eager to present them to their customers. While I’ll accept a little credit for helping Verio refine the packaging and positioning of its offerings, the company deserves the bulk of the credit for listening to its partners and telling them that the new offerings will be adjusted in response to customer and partner feedback.

My Fall travels are just beginning. This coming week, I’ll be back in San Francisco facilitating a client’s customer advisory council meeting, and then to NY for a client strategy session. The following week it is on to Charlotte for a Carolina SaaS Users Group gathering, and LA for another client strategy session. I’m then in Austin for Pervasive Software’s IntegratioNext conference and NYC where I’ll be speaking about SaaS at Interop.

So, as I crisscross the country and add frequent-flyer miles to my account, I’ll continue to give you my perspective regarding the latest announcements and trends in the on-demand market.

In its continuing effort to outpace its competition, Salesforce.com unveiled a new “SOA as a service” strategy today.

This is the company’s latest attempt to extend its footprint across the software landscape and increase its relevance to a wider population of users, developers and partners. This move also offers another clue for how established independent (read: incumbent) software vendors (ISVs) can better position themselves in the rapidly evolving Software-as-a-Service (SaaS) market.

(By coincidence, IBM kicked off its IMPACT 2007 user conference today by spotlighting its software and services aimed at the $160 billion SOA opportunity.)

Service-oriented architecture (SOA) has become a popular software development framework aimed at making applications more responsive to business requirements. Although the hype regarding the benefits and market acceptance of SOA far exceeds the reality, there is little debate that the proper implementation of SOA can generate meaningful returns and for that reason SOA is gaining greater interest and acceptance.

And, the principles behind SOA are also fueling the growth of SaaS. Namely, corporate executives and end-users are longing for a new breed of applications which can respond to their business requirements and provide a viable alternative to the costs and complexity associated with legacy applications. This means software which is designed to reflect the business processes and workflows of a corporate environment rather than software which is designed to accommodate the limitations of the IT architecture.

The appeal of this promise in the SaaS world is personified by the success of Salesforce.com. But, Salesforce.com’s success has been driven by more than the quality of its SaaS solutions. In fact, many customers acknowledge that Salesforce.com’s on-demand applications are not necessarily the best in class or the best from a pricing perspective. Instead, Salesforce.com has convinced customers, developers and partners that it is the best SaaS provider by building a SaaS platform, ecosystem and channel to market that is second to none.

Salesforce.com’s AppExchange partner ecosystem has attracted a growing population of third-party developers to build their SaaS solutions on Salesforce.com’s SaaS platform. By opening its Apex code to third-party developers and end-users, Salesforce.com has made it easier for SaaS companies and corporate customers to integrate their applications with Salesforce.com’s solutions. Salesforce.com’s new “SOA as a service” mechanism enables developers to offer a set of web services and application programming interfaces (APIs) to make it easier to link Salesforce.com’s on-demand solutions to third-party applications.

The brilliance of Salesforce.com’s approach is that it encourages third-parties to enhance and strengthen Salesforce.com’s position in the market.

Ironically, this is the same strategy which Microsoft leveraged in the 1980s-90s. By encouraging a broad population of third-party developers to build their applications on its operating systems, databases and business solutions, Microsoft cornered the desktop and workgroup marketplace. Microsoft is trying to repeat its success in the SaaS market with various enablement initiatives based on the same strategy.

Meanwhile, SAP AG is laboring to rollout its SOA offerings and trying to deliver a credible SaaS story to the market. Earlier this month at the Software 2007 conference in Santa Clara CA, Hasso Plattner—one of the co-founders of SAP AG and has been Chairman of the Supervisory Board—gave a bewildering keynote presentation promoting the company’s SOA strategy and SaaS go-to-market plan which left all of the attendees I spoke to perplexed about how the company will fulfill its promises.

Part of the problem is SAP is too entrenched in its on-premise software mentality and perpetual licensing approach to make a dramatic shift to an on-demand model. These internal constraints will make it difficult for SAP to join the SaaS movement without significant development costs and a fundamental transformation of its business operations and corporate culture.

In order to overcome these obstacles, I think SAP should emulate the best practices which have made Salesforce.com and Microsoft successful. Rather than focus on building its own SaaS solutions, SAP should encourage SaaS developers to create web services and APIs that connect to SAP’s products. This approach can reinforce SAP’s position within enterprises.

Why would SaaS developers create web services and APIs that support SAP’s applications?

SAP has a vast installed base of customers who are hungry for SaaS solutions, but they aren’t interested or willing to throw aside their SAP software after investing considerable time and money to put it in place. Instead, they would be happy to augment their SAP applications with third-party SaaS plug-ins that enhance their original investment.

The fact is that SAP isn’t going to disappear anytime soon. So, it has time to develop a viable SaaS strategy and set of on-demand solutions. However, SAP will be in a better position to capitalize on the SaaS movement if it establishes its own ecosystem of third-party SaaS relationships and portfolio of SaaS add-ons which strengthen its position in the market.

While implementing this type of partner strategy could reap quicker returns for SAP than building its own SaaS solutions at this stage, the company shouldn’t underestimate the time, effort and money an effective SaaS ecosystem still requires. WebEx announced its Connect ecosystem initiative in September 2006, and is still trying to generate a meaningful response from the SaaS community to establish itself as a peer of Salesforce.com.

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.