THINK IT Services

Since 2009 is coming to a close, I thought it would be a good time to review how I did with my predictions for the year regarding the Software-as-a-Service (SaaS) and cloud computing market.

1. On-Demand Services Move From Why To How

According to a Sandhill.com/McKinsey survey of over 850 enterprise customers at the end of 2008, 74% were already favorably disposed to adopting SaaS platforms. As a result, Gartner estimates the SaaS market will have reached approximately $8 billion at the end of 2009, a 21.9% rise from $6.6 billion in 2008. Looks like folks have moved past “why” SaaS to “how” to get the most out of their SaaS deployments.

2. New Hybrid Models

The idea of hybrid SaaS and cloud computing models has been abhorred by industry purists, but the reality is that nearly every business will rely on a combination of on-premise and on-demand resources. In 2009, the concept of “location independence” became bi-directional. It not only means that businesses can move their software and systems to the cloud, but they can now also deploy SaaS and cloud computing solutions behind their firewalls via appliances or ‘applets’. This will enable them to meet their business requirements and satisfy their psychological biases. More importantly, it will exponentially expand the addressable market for SaaS solutions and cloud computing services.

3. Short-Term Slowdown, Long-Term Growth

This is not an easy one to quantify because many SaaS/cloud computing businesses are privately held or operate within bigger companies. However, the publicly-traded SaaS players saw continued albeit slower growth. As the VCs like to say, “flat is the new up!”

4. VC/PE Retrenchment

The VCs were also very concerned in 2009 about how they spent their “dry powder”. As a result, they invested in fewer start-ups and only “topped off” a handful of existing SaaS/cloud computing portfolio companies who they believe hold the greatest promise of a solid exit. The most notorious casualty of this strategy in 2009 was LucidEra, who pioneered the SaaS business intelligence (BI) market, but was not able to generate enough sales to win a new round of funding.

5. Industry Shake-Out and Consolidation

There were many other examples of company failures and acquisitions to illustrate the consolidation and shake-out of the SaaS and cloud computing industry. For instance, Xactly acquired Centiveand Makana Solutions disappeared in the sales compensation segment of the market. NetSuite also acquired and merged together OpenAir and QuickArrow in the professional services automation (PSA) market. 

6. Acquisitions/Alliances Accelerate

There were also a number of interesting alliances initiated in 2009. One of the most innovative was Intacct’s partnership with the American Institute of Certified Public Accountants (AICPA)and its subsidiary CPA2Biz who named Intacct as its preferred provider of financial applications. This alliance gives Intacct access to a vast network CPAs who can serve as referral agents. It also gave the SaaS and cloud computing movement an important endorsement among one of the most conservative yet influential professions.

7. Focus On The Channel

The AICPA/Intacct alliance was just one of many new channel arrangements in the SaaS and cloud computing market. A number of SaaS vendors also launched or expanded their VAR programs in 2009. The most newsworthy was Salesforce.com’s new VAR program aimed at broadening the company’s reach beyond its direct sales team.

8. The Google Generation Becomes Mainstream

Google intensified its focus on cultivating a new generation of office workers via its free Google Apps for educators and the government. It is also teaming with Verizon to offer Android-powered cellphones to capture a share of the market and compete against the iPhone tidalwave.

9. Software/Business/Information/Managed Services Convergence

The convergence of software, business and information services has been evolving for a while. The best example of how this process is manifesting itself is Thomson-Reuters’ use of Salesforce.com’s Force.com platform to create and deliver a new wealth management service to its customers. ConnectWise has also emerged as a major proponent for SaaS and cloud computing in the managed services arena to make it easier for IT workers to do their jobs.

10. Obama Policies Promote On-Demand Services

President Obama’s CIO, Vivek Kundra, told the Wall Street Journal in March 2009, “I’m all about the cloud computing notion. I look at my lifestyle, and I want access to information wherever I am. I am killing projects that don’t investigate SaaS first.” In September, Kundra followed through on his promise to foster the use of on-demand services in the federal government by launching a new online marketplace of SaaS applications and cloud computing services, www.apps.gov.

Looks like I did pretty well with my predictions. Of course, I wouldn’t be reviewing them if I knew I had done poorly!

With my past success now behind me, I’ll post my predictions for the new year and decade ahead soon. Stay tuned.

When I published my previous post questioning whether recent executive departures at salesforce.com were an indication of a slowdown in the company’s business, I debated whether to also leave the door open to the possibility that some of these individuals might be jumping to other job opportunities.

Sure enough, salesforce.com’s former president and chief strategy officer, Steve Cakebread, has resurfaced already at Xactly Corporation where it was announced this morning he will serve as the company’s new CFO, a role he also held at salesforce.com.

This hire gives Xactly even greater market validation and credibility after its recent acquisition of Centive.

The announcement also suggests my suspicions about potential problems at salesforce.com may have been premature. The company’s latest financial results are scheduled to be announced on February 25.

Meanwhile, NetSuite announced its financial results for 2008 yesterday. The company had a record year with revenues up 40.5% overall, reaching $152.5 million. Even its fourth quarter revenue of $41.4 million was up 30.5% over the fourth quarter of 2007. NetSuite added 350 new customers and ended the year with a quarterly profit. Pretty good for a company which is selling a mission-critical application to a tough buyer, the CFO.

So, the warming winter temperatures seem to have also brought some much needed good news regarding the state of the SaaS movement.

Xactly’s announcement today that it is acquiring Centive is another indication of the Software-as-a-Service (SaaS) industry shakeout and consolidation I predicted would occur in 2009.

Xactly and Centive have been fierce competitors in the sales performance management (SPM) market with both offering pure SaaS alternatives to traditional on-premise software applications.

While both companies were growing as a result of accelerating customer interest and adoption of SaaS, they also found themselves competing more with each other than the established players. Rather than continue to fight one another, they decided to combine forces to better position themselves and capitalize on growing customer demand.

This decision was especially timely given the challenges of today’s economic climate and intensifying competition.

While both companies offer solid solutions with compelling value-propositions, combining their technical capabilities and eliminating the costs of continued head-to-head competition can strengthen Xactly’s position as ‘legacy’ software players escalate their own SaaS efforts.

You can expect to see more mergers and acquisitions of head-to-head competitors in other segments of the SaaS market as these players recognize that they must combine forces to survive.

Happy New Year!

Let me be the first to offer predictions for the on-demand services market on this first day of 2009. These predictions are based on THINKstrategies’ latest survey research and ongoing consulting work with IT/business decision-makers, IT solution providers and various technology investors.

I recognize that plenty of predictions have been made already, but hope mine offer a different perspective on the future direction of the on-demand services market.

Contact me if you’d like to discuss or debate any of these predictions.

1. On-Demand Services Move From Why To How - Now that SaaS has achieved widespread market penetration and the idea of cloud computing has become popularized in the business as well as trade press, the discussion will shift in 2009 from why organizations should adopt SaaS/cloud computing services to how to do it effectively. This shift will also encompass the best ways to adopt managed services to optimize IT operations. IT/business decision-makers will seek help evaluating the functionality and financial viability of the various vendors; better understanding the integration and security requirements; monitoring vendor performance and service level compliance; and measuring the economic impact and business benefits of these services.
2. New Hybrid Models - The technological evolution of on-demand services will enable SaaS and cloud computing vendors to offer customers the choice between on-premise and off-site hosted versions of their solutions without compromising the operational and financial efficiencies of the multi-tenant architecture that underlies these services. SaaS/cloud computing vendors will be able to ‘shrink-wrap’ their solutions into appliances or ‘applets’ which can be deployed behind the customer’s firewall and synchronized with the vendor’s primary service delivery infrastructure.
3. Short-Term Slowdown, Long-Term Growth - Although SaaS proved to be recession proof for most of 2008 as I predicted, SaaS vendors have not been able to avoid the speed-bump caused by the deepening economic crisis. IT/business decision-makers in organizations have been instructed to put a hold on all procurements until the economic uncertainty subsides. They are especially hesitant to make acquire solutions from new vendors who they believe won’t survive the current crisis. However, when the dust settles, organizations of all sizes will adopt SaaS and cloud computing services because the business case for these web-based alternatives is too strong and compelling. Click here to see my video recording on this topic.
4. VC/PE Retrenchment - The credit crunch and devastation of the financial markets has had a tremendous impact on the venture capital (VC) and private equity (PE) sectors. With limited IPO exit opportunities available and their limited partners (LPs) either unable to fulfill their funding commitments or demanding better returns from their investments, the VCs and PE firms are setting higher standards for performance from prospective and portfolio companies, and holding back on additional investments. Many VCs and PE firms may even shut their doors, leaving fewer funding sources available for SaaS/cloud computing companies.
5. Industry Shakeout and Consolidation – The past year may have been the peek of the ‘cloud-rush’ that produced a proliferation of SaaS and cloud computing players. The new year will see a shakeout of many of these players and consolidation of the market. IT/business decision-makers in user organizations of all sizes will shift their procurement strategies from best-of-breed vendors to strategic suppliers who they believe have a better chance of surviving today’s economic crisis. This will make it hard for niche vendors to compete against more prominent players with broader portfolios and stronger brands.
6. Acquisitions/Alliances – With the valuation of SaaS/cloud computing companies going down, the buying power of incumbent software vendors (iSVs) will rise. Companies like Microsoft, Oracle and SAP will acquire a series of SaaS/cloud computing players to accelerate their migration to the on-demand services world. Hardware vendors such as Dell, HP and IBM, as well as offshore companies like Infosys, Tata and Wipro will also make acquisitions to enhance their systems and automate their services respectively. With traditional funding sources drying up, many SaaS/cloud computing companies will seek corporate alliances which can provide alternative financing options and strengthen their positions in the market.
7. Focus On The Channel - The changing economic climate and rising costs of sales will drive a growing number of SaaS/cloud computing companies to seek new channels to market. At the same time, a growing number of traditional systems integrators, value-added resellers, hosting companies and other service providers will seek to add SaaS/cloud computing capabilities to their corporate portfolios. In some cases, this will blur the line of demarcation between SaaS/cloud computing and managed services companies.
8. The Google Generation Becomes Mainstream - The Google affect on the market will expand from eCommerce to the enterprise. Google Apps will gain acceptance in businesses of all sizes as a result of broader adoption among individuals, better support services aimed at corporate users, and broader alliances with companies like Salesforce.com. An indication of this trend can be found in primary schools and universities where use of Google Apps is expanding from individuals to the entire institutions in a systematic fashion. Just as Apple succeeded in building a new generation of users via schools and universities, Google is taking the same path to permeate the market.
9. Software/Business/Information/Managed Services Convergence - The line of demarcation is not only fading between software services, such as SaaS and cloud computing, and managed services, but also with business and information services. Business services companies, such as ADP and AmEx, are adding software services, such as Centive’s sales compensation management and Concur’s expense management capabilities their service portfolios, respectively. Thomson Reuters has teamed with Salesforce.com to deliver its information services via Salesforce.com’s SaaS solutions. It has also recently acquired Paisley—a governance, risk and compliance SaaS vendor—to broaden its capabilities. Meanwhile, managed service providers (MSPs), such as mindSHIFT, are adding a layer of SaaS solutions to their IT management capabilities.
10. Obama Economic Policies Promote the Web - President-elect, Barak Obama, has made it clear that he views the Internet as an important incubator of new business opportunities and jobs, and as a mechanism for better government services and more effective education programs, as well as a clean-tech alternative that can reduce people’s carbon-footprint. The Obama administration has promised to create a program, much like the Work Projects Administration (WPA) during the New Deal, which will fund public initiatives that encourage the growth and broader adoption of web-based services. This program will increase the visibility and viability of on-demand services.