THINK IT Services

Plenty of has been written about last week’s disruption of Amazon’s Web Services (AWS) which took hundreds of organizations offline, including many rapidly growing start-ups and evolving aspects of enterprise operations.

(The best I’ve read summarizing the questions raised and lessons to be learned as a result of the AWS outage was by my friend Phil Wainewright.)

After suggesting at the beginning of last week that recent issues surrounding Google could derail the rapid growth of Cloud Computing services, it is obvious that Amazon’s problems must be added to the list of sobering events which will certainly cause many entrepreneurs and enterprise decision-makers alike to re-think their Cloud strategies and deployment tactics.

Google’s support issues, combined with Amazon’s service availability problems, clearly make real two of the three greatest fears which IT and business decision-makers face when considering the widening array of Cloud alternatives. The third primal fear regarding Cloud services is the potential for a serious security infraction. To date, Cloud providers have outperformed many organizations in fending off security threats. But, a well-publicized violation would raise serious concerns about the short-term viability of Cloud services for mission-critical, core applications and business processes.

I say ’short-term’ because we all have short memories, or maybe it is fairer to say higher tolerance levels than we realize when it comes to our fears regarding web-based services. For instance, Salesforce.com has only seen greater growth since it suffered a series of serious service disruptions in 2006, and has not seen any appreciable service abandonment as a result of subsequent outages more recently. Another example is NaviSite which suffered a outage that lasted nearly a week in 2007 and was recently acquired by Time Warner Cable for $230 million.

As I said back in December 2007, “Failure Doesn’t Matter”.

However, if these problems persist not only will Amazon’s credibility and competitive position be compromised, but the commodity-services oriented aspects of the Cloud Computing business will also be set back significantly.

In the meantime, the winners as a consequence of last week’s outage and Google’s support issues are the established players who may not be offering bleeding edge services at the lowest available costs, but are promising more reliable services at reasonable prices. For instance, folks at IBM timed things perfectly with their new SmartCloud services. And, Verizon completed the acquisition of Terremark just in time to capitalize on Amazon’s problems.

There are also lots of smaller players who can win greater attention as a result of Amazon’s outage. I spoke to SmartBear in the midst of the AWS issues last week to learn more about its acquisition of AlertSite and they were eager to discuss how their combined capabilities could help organizations mitigate the risks associated with Cloud availability and performance issues.

Hopefully, Amazon and other Cloud service providers will learn important lessons from last week’s outage which will lead to improved service quality going forward. In the meantime, this event will make corporate decision-makers more aware of the tough questions they must ask the Cloud providers about their services and the standards they should set for their performance.

As I suggested a year ago, I also expect last week’s outage to reset the competitive landscape and the criteria for success, moving the advantage from the price leaders to the quality service providers.

(Disclosure: I have done consulting work with Salesforce.com, NaviSite, IBM and Verizon.)

Time Warner Cable’s planned acquisition of NaviSite not only intensifies the M&A activity in the managed hosting arena that was ignited last week by Verizon’s purchase of Terremark, it also shows how the corporate and consumer web services markets are converging.

As Glenn Britt, Time Warner Cable’s Chairman and CEO, stated in the company announcement, “Our commercial services business is a key growth driver for the company and one in which we continue to see great opportunity.”

Thirty years ago, I was wrapping up a full-time MBA program at Boston College and was fascinated by an article in Data Communications Magazine about the impending diversiture of AT&T and the prospect of new players entering the enterprise data services market. In particular, the article suggested that the rapidly evolving cable companies of that time could capitalize on this opportunity. I pitched a Boston-based cable company on the idea of surveying major corporations in its operating area to see if they would be interested in the company’s “institutional services”. My research project found that the local corporations would be willing to learn about the cable company’s services, but were unlikely to abandon their existing service provider, New England Telephone.

Fast forward thirty years and we see an entirely different competitive landscape. Cable companies are increasingly offering Internet and communications services to small- and mid-size businesses (SMBs). They have generally penetrated SMBs via the small-office/home-office (SOHO) market with services that are not much different from their consumer services.

In retaliation, Verizon (in place of long-gone NE Telephone) is now pushing its Fios residential service to steal away the bread-and-butter home entertainment services provided by cable companies.

As consumers and corporations become fixated on web-based (“Cloud”) services, the opportunity to bridge the gap between these two markets has never been greater.

For instance, Amazon has leveraged its extensive consumer experience and the strength of its consumer brand to create its powerful Amazon Web Services (AWS) capabilities and generate unprecedented success in the corporate world.

The consumerization of IT began as the unauthorized acquisition of personal computers and handheld devices, and has evolved to include sanctioned procurement of Software-as-a-Service (SaaS) applications to meet a widening array of corporate needs. The success of the SaaS movement has spawned the larger Cloud Computing phenomenon. Both have been driven by corporate ‘consumers’.

The Time Warner Cable acquisition of NaviSite is the latest response to this trend. I’m betting that Comcast will make a similar move soon, unless its NBC Universal acquisition proves to be too much of a distraction.

Dell’s acquisition of Boomi today is the latest example of the tech industry’s herd mentality.

In the same way that Dell followed HP’s example when it purchased Perot Systems after HP acquired EDS, Dell is now copying IBM’s acquisition of Cast Iron Systems with its own move into the integration business.

Besides trying to keep up with other ’systems’ vendors, Dell is also attempting to fortify its Cloud Computing capabilities which hinge on helping potential customers cost-effectively migrate and integrate data from various legacy applications and databases into a new set of cloud services.

Dell indicated at an analyst briefing in Boston last week that it wants to ‘move up the stack’ and build a platform which can help enterprises and independent software vendors (ISVs) develop and deliver applications. Dell can’t compete with the other major Platform-as-a-Service (PaaS) vendors — including Salesforce.com, Google and Microsoft — from a software development standpoint. But, it can challenge them and others, such as Amazon and IBM, from an Infrastructure-as-a-Service (IaaS) point of view.

Why Boomi?

Because it is small enough for Dell to digest easily to test the integration market opportunities and requirements. It is still assimilating Perot Systems into its operations and corporate culture, and may not have been ready to acquire a bigger player, like Informatica or Pervasive.

Why is Boomi selling at this time?

My sense is they were at risk of becoming a victim of their own success and their rapid growth was creating operational strains which would take significant new investment to offset. Rather than make this investment, Boomi’s investors and management team felt that the Dell deal would not only give them a solid ‘exit’ but also the corporate resources necessary to ‘cross the chasm’.

It will be interesting to see if Dell is able to do a better job assimilating and growing Boomi’s business than it has with some of its previous Software-as-a-Service (SaaS) acquisitions — Everdream, SilverBack Technologies and MessageOne.

By coincidence, I heard about today’s news while attending Pervasive Software’s IntegratioNEXTconference, down the road from Dell in Austin, TX. You can bet there were a lot of smiling faces among the Pervasive staff who expect Dell’s move to trigger additional integration vendor acquisitions. I’m sure Pervasive’s counterparts at Informatica, which is also hosting a partner conference this week, were equally excited about Dell’s move.

While speculation about a Boomi acquisition has been rising since the Cast Iron Systems purchase by IBM, Dell was not high on the list of potential suitors suggested by various industry observers, including myself. Instead, the clearer candidates seemed to be HP, SAP, Oracle, EMC or even Microsoft.

All these companies continue to be likely acquirers for the handful of remaining integration vendors, including Hubspan and SnapLogic, in addition to Pervasive and Informatica. Not to be overlooked as potential buyers are also Google and Cisco Systems.

Two announcements on the same day this week vividly illustrated the scalability and ubiquity of today’s Cloud Computing phenomenon. They also showed the diversity of users seeking to take advantage of Cloud Computing services.

The first was Amazon’s announcement that it is offering a free usage tier of its Amazon S3, Amazon Elastic Block Store, Amazon Elastic Load Balancing, and AWS data transfer services for new users for a full year. 

Amazon Web Services’ (AWS)  innovative and groundbreaking approach to packaging, pricing and delivering computing power has been the primary impetus and standard bearer of the Cloud Computing movement. Its commodity and even spot-pricing techniques have captured the attention of entrepreneurs and enterprises alike.

UBS Securities estimates that Amazon will generate $500 million in 2010 and $750 million in 2011, making it the largest Cloud vendor by far with minimal marketing effort. Yet, this still only represents less than 3% of Amazon’s total revenues. But, Jeff Bezos is suggesting that AWS could generate as much revenue (and maybe more profits) than its e-commerce business. This is a major reason why Amazon has tripled its capital spending on infrastructure, and why it is attempting to eliminate any economic barriers to user adoption of its AWS capabilities by offering its services for free to encourage even greater growth of its Cloud Computing service business.

Verizon also announced on the same day that it had won a portion of a major new contract issued by the General Services Administration (GSA) of the U.S. federal government aimed at migrating its operations to a private cloud environment.

Under this agreement, Verizon will provide cloud computing services – including server, network and storage capacity – to federal government agencies. The company will provide Infrastructure-as-a-Service (IaaS) capabilities and will help federal agencies meet their virtualization and data center consolidation requirements. The IaaS platform will consist of virtual and physical servers, storage services, backup services, and application support services to create a more responsive and cost-effective, on-demand computing environment.

Verizon was among eleven (11) awardees selected by the GSA to negotiate with government agencies and provide services under a blanket purchase agreement valued at $76.5 million over five years.

These announcements exemplify how rapidly the Cloud Computing movement is expanding.

Yesterday’s announcement by HP that it is cutting 9000 workers and hiring another 6000 as part of a $1 billion multi-year effort to redesign its data center operations and automate its enterprise services is the latest indication of the traumatic impact which today’s cloud computing phenomenon is having on the tech industry.

HP readily admitted in its announcement that its goal is to,

“…Consolidate Enterprise Services’ commercial data centers, management platforms, networks, tools and applications to create a more scalable, modernized and automated IT infrastructure that will better serve its clients’ needs.”

Although the company didn’t specify where its cuts would take place, I suspect that the bulk of the downsizing effort within the Enterprise Services division will involve offloading the legacy data center facilities and staff which came from the EDS acquisition.

My sources within the company have confirmed my original concerns about the acquisition that the EDS deal brought more baggage and little innovation to HP’s oldline outsourcing business.

Anybody who follows the traditional IT outsourcing business knows that it has suffered as a result of the emergence of more cost-effective and less risky cloud computing alternatives.

Like the incumbent software vendors (ISVs) who have had a tough time keeping pace with the rapid rise of Software-as-a-Service (SaaS) insurgents, traditional hardware (“systems”) vendors are facing a similar challenge in the Infrastructure-as-a-Service (IaaS) segment of the cloud computing market.

After years of internal infighting, which did little to bring about a clear cloud computing strategy or set of solutions, HP is now forced to make dramatic moves in order to ensure that it doesn’t fall significantly behind the cloud computing leaders–Amazon, Google, Rackspace, etc.

Unfortunately, HP’s housecleaning efforts will likely cause even more internal strife and distractions among the company’s employees before it produces tangible business benefits for its customers.

However, if HP doesn’t take these painful steps it risks far greater consequences as the cloud computing movement becomes mainstream.

HP’s efforts to rearchitect its operations and retool its staff is not only an important bellweather for tech vendors, but should send a clear message to CIOs and corporate executives with enterprise organizations as well. They should be taking a hard look at the way they operate to ensure it is relevant in today’s rapidly changing business environment.

I recently recorded two podcasts for TechTarget’s SearchCloudComputing web portal regarding the new IT skills and vendor management requirements which are critical in cloud computing.

This week’s announcement that Microsoft and Intuit are linking their respective Platform-as-a-Service (PaaS) capabilities has attracted lots of attention and generated plenty of speculation. It is also the latest escalation of the PaaS wars I predicted would take center-stage this year.

Although Salesforce.com’s Force.com PaaS has gained the lion’s share of industry attention because of the company’s unparalleled marketing machine, I’ve felt that Intuit’s Partner Platform (IPP) represented a dark-horse in the PaaS race because of the vast installed base of small- and mid-sized businesses (SMBs) using Intuit’s QuickBooks and QuickBase, along with its powerful channel relationships.

I’ve also believed that Microsoft would make considerable progress in penetrating the cloud computing market this year, not because of the technical capabilities of its Azure PaaS, but because of its historical prowess in building a vast partner network of ISVs and developers.

With those thoughts in mind, here’s my take on the strategic business implications of this alliance,

1. Both companies are aggressively attempting to catch up to Salesforce.com’s Force.com PaaS initiatives both in terms of mindshare and marketshare. Both companies want to quickly expand their reach into the ISV/developer community to strengthen their competitive position in the PaaS market. (Disclosure: I’ve written a series of whitepapers on behalf of Salesforce.com regarding the Force.com capabilities.)
2. Both companies also want to demonstrate the ‘openness’ of their PaaS capabilities to offset the alliances which Salesforce.com has made with Amazon, Google and Facebook, and capitalize on accusations that Salesforce.com’s Force.com PaaS is limited because it is built on a ‘proprietary’ language.
3. Gaining greater market penetration via access to the other party’s installed base of customers and partners is a given, but capitalizing on their respective functional capabilities and channel relationships is important.
4. Intuit is primarily seeking to make its IPP more attractive to developers by expanding the functionality it can provide its PaaS users. Adding Microsoft’s development and collaboration tools, including the Business Productivity Online Suite (BPOS) which consists of SharePoint Online, Communications Online, Exchange Online, and Office Live Meeting gives developers greater functional capabilities to satisfy their customers’ needs.
5. Microsoft is primarily interested in adding the service management capabilities embedded in Intuit’s Partner Platform (IPP) which include service provisioning and monitoring, along with pay-as-you-go billing and pricing. Adding these capabilities makes Azure more relevant to developers from a business perspective.

While this alliance is squarely focused on small businesses, it could also appeal to the regional offices or small divisions of larger enterprises. It could also attract crossover opportunities in the consumer market, especially when you consider the growing influence of consumerization in the corporate world.

But, most importantly it could open new opportunities within traditional channels and create new channel opportunities for cloud services and vendors. Salesforce.com, Google, Amazon and Facebook have not made much progress penetrating the channel and will face serious challenges gaining the trust and confidence of traditional channel organizations who feel threatened by the cloud computing phenomenon. Intuit and Microsoft can leverage their established relationships with key channel companies to overcome their concerns.

This alliance is the most recent in Microsoft’s escalating efforts to regain its dominant position in the software market which has been quickly slipping away with the accelerated growth of SaaS and broader cloud computing services. Microsoft also announced earlier this month that it is teaming with HP in a three-year, $250 million initiative to develop and deliver a new generation of cloud-based solutions.

Conspiracy theorists will also point out that Microsoft announced last June that it is discontinuing its Money software service, which leaves a convenient gap for Intuit to fill with its QuickBooks solutions.

While ‘coopetition’ is not a new idea or business practice in the tech industry, this week’s Microsoft-Intuit alliance is certainly an important new test of the concept. Whether this proves to be a win-win relationship or simply a Machiavellian maneuver by these companies remains to be seen.

It is also important to note that this isn’t a mutually exclusive alliance. Microsoft is already working with Amazon, for instance. In fact, it will probably spark additional discussions and agreements with the other players by both parties.

Google’s new Nexus One Android phone has created a lot of buzz as a ‘game-changer’ in the smart-phone business. Many believe this device, and Google’s new business model which supports it, could redefine the phone industry.

It is always exciting to witness a company challenge the status quo in an established industry by offering a bold new value-proposition to customers.

Yet, most companies have responded to today’s economic malaise and extended downturn with a risk-adverse, reflective stance which has manifested itself in more aggressive cost-cutting strategies rather than more innovations.

I can’t blame them for shying away from the innovation tact. The cynic in me also recoils from the business pub jargon which would have us believe that any company can adopt a bold strategy to recreate themselves in this type of environment.

However, there is plenty to be said for taking this risk and attempting to redefine your business in such a way that you also redefine an industry.

When Apple was struggling to stay alive in the computer business, it decided to recreate itself into a media distribution company, and look at what iTunes, iPod and the iPhone have produced. They’ve redefined the music, movie and broader entertainment industry while also breathing new life into its core computer business.

Or, when Amazon was trying to elevate itself above the clutter of web-based retailers, it rediscovered its roots as a distribution company and started selling processing power by the ‘drink’, giving birth to the cloud computing business. In turn, Amazon Web Services (AWS) has redefined the IT industry.

Apple and Amazon set out to disrupt markets when they were first born, but their originally targets were the computer and retail markets, not media and IT.

While both of these companies had the advantage of bold leaders and plenty of brain-power to push them into new markets, they still represent compelling case study examples for others to emulate.

Let me know of other companies you think fall into this category of innovators, or if you’re looking for help redefining your business and industry.

Phil Wainwright has posted a terrific blog entry regarding the ‘green crystals’ that power Salesforce.com’s multi-tenant platform.

The concept of multi-tenancy has been a cornerstone of the Software-as-a-Service (SaaS) movement and a key element of the rapidly evolving cloud computing environment as well.

For anyone who is unfamiliar with the term ‘multi-tenancy’, it is borrowed from the housing market and aims to compare today’s leading SaaS/cloud computing vendors to condominium owners who can obtain more luxurious living quarters without the hassles of owning a single-family home by sharing a common infrastructure and operational services.

While this arrangement offers plenty of conveniences, it also requires some sacrifices when it comes to how far you can customize your particular unit, or version of software in the case of SaaS.

While the value proposition of multi-tenancy is easy to understand, it is hard to get a lot of details about how leading SaaS and cloud computing vendors are actually architecting their multi-tenant platforms to develop and deliver their solutions.

Phil’s blog provides valuable insight into Salesforce.com’s approach. But, what he doesn’t fully answer is the question why Salesforce.com is placing greater emphasis on its approach to multi-tenancy today.

I started to notice Marc Benioff and other company officials promoting their multi-tenant architecture prior to the launch of its Force.com Platform-as-a-Service (PaaS), and have watched this aspect of their well-choreographed marketing efforts become more prominent over the past year.

I think there are two primary reasons for Salesforce.com’s growing focus on the multi-tenant topic:

1. The growing popularity of SaaS has attracted a proliferation of players, including legacy independent software vendors (LISVs) who are trying to enter the market with hosted versions of their single tenant applications. Salesforce.com is trying to fend off these late entrants by educating IT/business decision-makers about the benefits of multi-tenancy.
2. Salesforce.com is also trying to convince various software vendors, start-ups as well as LISVs, that its Force.com PaaS capabilities are superior to the plethora of competing platforms in the market by revealing more about its ‘green crystals’. This is especially timely because Salesforce.com is accused by many of having a proprietary platform, rather than an open architecture like others.

Phil correctly suggests that it is essential for Salesforce.com to convince enterprise decision-makers of the unique qualities of its multi-tenant architecture. It is also imperative that Salesforce.com do the same for ISVs as it faces growing competition from PaaS offerings from Amazon, Google, IBM, Microsoft and others.

Salesforce.com unveiled its year-end 2008 financial results earlier this week and, as the company had predicted, it passed the billion dollar mark, reporting total revenues of $1.077 billion, an increase of 44%over the 2007.

This milestone event, combined with the company’s rising earnings per share growth, are clear indications of the overall strength of the Software-as-a-Service (SaaS) market despite the challenges of today’s tough economy.

In fact, Marc Benioff, the company’s Chairman and CEO, is quoted in the company’s press release as saying, “At a time when capital is precious, big-ticket software purchases just don’t make sense.”

I am also a firm believer that Salesforce.com’s continued growth, and that of the overall SaaS industry, will be fueled by today’s economic crisis.  IT and business decision-makers are increasingly recognizing not only the economic advantages of SaaS, but also the fact that SaaS represents a more effective method of supporting a more dispersed workforce and leveraging the latest innovations in software and technology than legacy applications.

However, Salesforce.com’s financial results from last year can’t hide this year’s additional challenges.

Salesforce.com and other established SaaS companies may experience warmer customer receptivity in the coming months, but they will also face greater than normal ‘churn’ as a result of employee layoffs, especially in the financial services sector and other industries hard-hit by the economy.

This is one of the downsides of the SaaS model from a vendor perspective–subscription fees based on number of users are vulnerable to cutbacks despite contractual obligations. Back-filling these lost seats (i.e., revenues) could take more effort and greater sales costs.

I attended Pacific Crest’s 4th Annual Emerging Technology Summit this past week where I met with a series of institutional investors as a part of Pacific Crest’s Mosaicprogram. They were all trying to determine if SaaS is a viable business model long-term, which I assured them it is.

They were also looking for the next big public company in the SaaS market. I told them to look beyond today’s pure SaaS companies at other key players in the broader ‘cloud computing’ market–Amazon, Apple and Google in particular.

These companies have capitalized on the success SaaS to create their own development and delivery platforms. All of them are still in the experimental stage with their services, happy to let early-adopters help them fine-tune their capabilities. But, ultimately they all want to penetrate large-scale enterprises and disrupt the established order of Microsoft, Oracle, SAP, etc.

Meanwhile, the consensus among the CXOs of SaaS/cloud computing companies attending the Pacific Crest conference was that the first half of 2009 will be tough, but they are hopeful that things will settle down in the Spring when IT/business decision-makers have greater visibility into their own situations and will be able to make purchase decisions with greater confidence.

In the meantime, today’s economic challenges will weed out those SaaS companies which lack the leadership, solutions and go-to-market strategies to survive.

Salesforce.com lacks none of these ingredients for continued success and can be expected to continue to invest heavily in building on its momentum and reinforcing its position as the “800 pound gorilla” in the SaaS/cloud computing industry.

Platforms have been proliferating and it is not surprising that there are already signs we may be on the cusp of a shakeout.

Today’s platform players range from start-ups, like Bungee Labs, to Software-as-a-Service (SaaS) and cloud computing movement standard-bearers, Salesforce.com and Google with Force.com and Google App Engine respectively.

This has created a somewhat confusing array of players and platform alternatives which have been divided into various segments.

This week’s announcement about Salesforce.com’s new “Service Cloud” illustrates the way SaaS vendors are leveraging platforms to redefine their business in order to extend their market reach and strengthen their position in the marketplace.

SpringCM is heading down this same path with its new platform which enables independent developers and resellers to build applications or more easily integrate to SpringCM’s electronic content management (ECM) capabilities.

Platforms enable these vendors to convert their internal technologies into development and delivery mechanisms which can be resold to third-parties.

In Salesforce.com’s case, this means reselling the development code which underlies its core customer relationship management (CRM) and salesforce automation (SFA) application, along with the service delivery infrastructure which supports it. It also means that it can recast its business to include web hosting and customer service.

In the case of Amazon, it is repackaging and repositioning its vast data centers and eCommerce capabilities into on-demand development and storage facilities, as well as a distribution mechanism.

Vendors can also use a strong customer base as the basis of a platform strategy. For Facebook and MySpace, their vast user populations provide developers a ready-made channel to market.

Intuit is seeking to leverage its vast user base and powerful brand equity to attract third-party developers to its new Partner Platform, formerly the QuickBase Development Environment.

IBM, Oracle and Progress Software are promoting a combination of database systems and middleware capabilities to position themselves as platform players.

Adobe has also become a key player because of the pivotal role of its development tools and growing assortment of applications. Of course, Microsoft is trying to play catch up by promising its own development platform, Azure.

Here’s a quick list of the essential ingredients which a platform player has to have in place in order to win a meaningful share of the market,

• Easy to use, ’standards’ oriented development code
• Reliable and secure development environment
• Automated and flexible procurement capabilities
• Name recognition and brand equity
• Customer base and channels to market
• Developer/Partner network

Put together, these assets can create a powerful competitive advantage.  However, if a platform player can’t offer a combination of these attributes they have little hope of survival.

An example of the rising risks facing the weaker of the players is the recent rumor on VentureWire that Coghead is in talks to sell itself to an unidentified buyer after failing to secure Series C funding.

Software vendors, enterprise developers and IT/business decision-makers will need to take a closer look at the long-term financial viability and other business assets of their platform suppliers, in addition to their technical capabilities.

This raises questions about the future of the Cogheads of the world. But, it also suggests that relatively new entrants in the platform market, like Intuit and Apple, could become strong players.

How many of us saw Amazon being a leading platform player and major force in the SaaS/cloud computing market 2-3 years ago?