THINK IT Services

Salesforce.com has teamed with Unit 4 Agresso to create a new company, called FinancialForce.com, that will build upon the Coda 2go on-demand financial application.

This move is another indication that CFO receptivity toward SaaS-based accounting, financial management and enterprise resource planning (ERP) applications is rising.

The new joint venture will build on Coda’s original Force.com-based SaaS solution, and the growing momentum in the SaaS accounting and financial management applications market produced by NetSuite , Intacct and others in this area. (Disclosure: I’ve done work with all of these companies.)

This announcement is newsworthy because it is Salesforce.com’s first direct foray into the financial application market and its first joint venture.

There are probably an assortment of marketing and legal reasons why the two companies have formed this joint venture. However, the reality is that  few joint ventures in the tech and software industry have been successful because the partners often have differing priorities or can’t get their business processes to align.

In this case, the two companies are obviously confident they can overcome the shortcomings of typical joint ventures because Salesforce.com has been aggressively promoting Coda as a pioneer user of its Force.com Platform-as-a-Service (PaaS) for a while. By making this additional investment, it suggests one of two primary possibilities regarding Coda’s performance:

1. Either Coda is experiencing tremendous growth and Salesforce.com wants a larger part of the ‘action’.
2. Or, Coda is not getting enough traction and requires more capital to successfully compete in the market long-term.

In the same vein, it raises questions about how Coda’s SaaS capabilities fit into the company’s legacy software environment. Was the company experiencing internal tensions trying to balance its SaaS and legacy businesses? Or, is it simply trying to remove any barriers that the legacy business may pose so it can accelerate the growth of its SaaS business?

In either case, this venture is a mixed blessing to existing players in the SaaS financial apps market, software vendors developing SaaS apps on Force.com, and Salesforce.com’s AppExchange partners.

Salesforce.com’s entrance into this market clearly lends greater credibility and visibility to SaaS-based financial applications as a viable alternative to legacy, on-premise software. Its deep pockets and powerful marketing engine should significantly increase the amount of attention aimed at CFOs. This will certainly help all SaaS companies trying to educate CFOs and others in the executive suite about the business benefits of SaaS.

The new initiative will also send shockwaves through Microsoft, Oracle or SAP, who are already facing serious challenges trying to respond to the rapid rise of customer interest in SaaS alternatives.

But, the joint venture will also raise concerns among many SaaS vendors who have been suscipious of Salesforce.com’s ulterior motives for a while. 

The joint venture is an obvious threat to direct competitors in this segment of the market. It also poses questions for other SaaS and traditional software vendors who may have been considering Salesforce.com’s Force.com PaaS.

Why should they build their applications on the Force.com platform if there is a chance that Salesforce.com might eventually compete with them? Especially, since this isn’t an isolated event.

Salesforce.com has made a series of acquisitions in other areas of the software landscape which have encroached on some of its AppExchange partners’ primary businesses, including content, knowledge and services management which have all led to new Salesforce.com offerings.

This move also puts into question Salesforce.com’s impartiality when it comes to its partner relationships and AppExchange marketplace. For instance, if you do a quick search on the AppExchange for accounting or financial applications, FinancialForce.com is at the top of the list based on “Keyword Relevance”, even though other players are ranked higher based on Popularity or Ratings.

I’m not suggesting that Salesforce.com doesn’t have plenty of good reasons to make this move, and it is certainly within its rights to take these actions. However, it will also create more anxieties and provocate more apprehension among current and aspiring SaaS vendors which could harm its existing and potential partner relationships.

This would be unfortunate since it comes at the same time Salesforce.com is trying to expand its partner ‘ecosystem’ and promoting its new VAR program.

Yet, if Salesforce.com helps to raise the visibility and legitimize the value of SaaS in the eyes of CFOs and other executive decision-makers, it will also create more opportunities for other SaaS vendors to capitalize upon. If this occurs, most SaaS vendors will be willing to put up with the potential tradeoffs.

In the ongoing tug-of-war between on-premise and on-demand vendors, much was made of Steve Lucas’ jump from the SaaS unit of SAP’s Business Objects to Salesforce.com to lead its new Force.com Platform-as-a-Service (PaaS) initiative a little over a year ago.

With far less fanfare, Lucas returned to SAP last month as its new SVP of Business User Sales for North America. Since Steve is a friend, and SAP and Salesforce.com are also clients, I won’t share any confidential information or insight. However, his move does raise a series of interesting questions about Salesforce.com’s Force.com initiative and SAP’s plans.

Given Salesforce.com’s rapid growth despite the macro-economic slowdown and the major push the company is giving Force.com, it is surprising to see Steve return to SAP which is still struggling to define its Software-as-a-Service (SaaS)/cloud computing strategies and solutions.

While SAP’s struggles have been well documented, Salesforce.com’s PaaS challenges are less well-known. Wall Street analysts have questioned whether Force.com can become a significant revenue generator for the company, and various software vendors and industry observers have debated the merits of building business applications on the platform.

I’ve interviewed a variety of vendors, as well as enterprise decision-makers, who have successfully leveraged Force.com to build business apps and satisfy their corporate objectives. So, I’m convinced that Salesforce.com is heading in the right direction with Force.com. However, there is no question that the PaaS is still embryonic and will go through a series of refinements before it fulfills its promise.

These challenges are minute compared to those facing SAP as it attempts to add SaaS solutions to its legacy applications. So, SAP had to give Steve a pretty good offer to bring him back.

People move between jobs and companies for a combination of personal and professional reasons. Therefore, having one executive jump ship doesn’t necessarily equate to a tidal shift in the marketplace. The SaaS/cloud computing movement continues to accelerate, while legacy software vendors continue to struggle to sustain their sales and profits.

Whatever the reasons were that drove Lucas to return to SAP, it is surprising that the company didn’t capitalize on this opportunity to boast about winning back a key executive in the same way Salesforce.com used Lucas’ defection from SAP to its PR advantage.

More importantly, Lucas’ moves back and forth between the on-premise and on-demand worlds may personify the mixed emotions of various IT/business decision-makers who are also wavering between their legacy on-premise apps and the promise of cloud alternatives.

Last year, I predicted that 2009 would be the year of the channel in the Software-as-a-Service (SaaS) market and a growing number of SaaS industry leaders have obliged me by expanding their sales efforts in this direction.

The latest is Salesforce.com which announced today that it is launching a new value-added reseller (VAR) program to encourage third-party companies to build on its Force.com platform and extend the reach of its AppExchange into new market segments.

Salesforce.com’s announcement comes on the heels of NetSuite’s recent enhancements to its VAR program aimed at strengthening its position in the market.

Because of Salesforce.com’s greater prominence in the marketplace, its new initiative is bound to bring even more attention to the rapidly evolving role of channel companies in the SaaS market. In Salesforce.com’s case, there move represents an important milestone in the company’s evolution and that of the SaaS movement as a whole.

Until now, the company has placed all of its sales efforts on selling directly to end-users. Although it was also well-aware of the importance of encouraging third-party developers to build applications that enhanced its core applications via the AppExchange and ultimately the Force.com platform, it readily admitted in the past that it didn’t see much opportunity to build channel partners into its go-to-market strategies. As a result, the company aggressively recruited enterprise salespeople instead to attack the mid- and large-scale enterprise market.

In my view, the following forces have combined to change Salesforce.com’s attitude toward VARs in the SaaS market,

1. Today’s economic environment has made it more difficult to penetrate new accounts. With the cost of sales escalating, SaaS vendors must find more economical ways to win new business instead of relying on high-priced sales executives. (Salesforce.com recently recruited Doug Dennerline from Cisco’s Collaboration/WebEx unit to become its new Executive VP for enterprise sales in the Americas to reinvigorate its direct sales efforts.) 
2. VARs are a natural target for sales expansion. Although customers are fed up with their legacy applications, they are still wedded to their ‘trusted’ suppliers, and are reluctant to move to new products or technologies without the help of their current suppliers. These ‘trusted’ suppliers tend to be their local and/or industry-specific VARs.
3. Enlightened VARs are increasingly recognizing that they must migrate to a SaaS orientation in order to survive and thrive in the future. Traditional VARs have been fearful and resistent to SaaS solutions because they threatened their fundamental value proposition (complexity) and potentially undercut their relationship with the customer (account control). Now, they are willing to explore ways to build SaaS into their business model.  
4. Technological advancements are also facilitating third-party development and delivery of SaaS applications. Today’s Platform-as-a-Service (PaaS) offerings, such as Force.com, make it possible for VARs to develop and deliver industry-specific solutions.
5. Maturing SaaS vendors are identifying new revenue-sharing opportunities in the SaaS supply/value-chain that can permit them to enlist VARs, and other channnel partners, without seriously hurting their operating margins.

In addition to these market forces, Salesforce.com’s VAR program is built on its own history of success working with companies, such as Veeva Systems (formerly, Verticals OnDemand), who have been configuring its basic apps into industry-specific solutions for years. I suspect that more companies of this nature will emerge as a result of Salesforce.com’s new program.

At the same time, a new generation of professional services/system integrator is also arising. This new breed is typified by Appirio which not only helps customers build unique apps on top of PaaS offerings, but they also retain the marketing rights to these custom apps so they can be resold via AppExchange and other online outlets. In so doing, these new PS/SI companies are blurring the line of demarcation between their role and that of the traditional VAR.

A case in point is Appirio’s latest professional services automation (PSA) offering, which escalates its growing competition with NetSuite’s PSA suite built on the combined resources of OpenAir and QuickArrow.

All of this adds up to an exciting new dimension of third-party activity surrounding the rapidly evolving SaaS and cloud computing world.

PS: In addition to reporting and consulting on these topics on an ongoing basis, I’m pleased to be participating in the following industry events which will also examine the implications of these trends: Cloud Futures and the SIIA’s OnDemand Conference.

Contact me at info@thinkstrategies.com if you’d like to discuss these trends further or need help addressing these issues.

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.

The service disruption which Salesforce.com experienced this week came at a bad time for the Software-as-a-Service (SaaS) and cloud computing market.

Although I believe the long-term prospects for SaaS and cloud computing remain strong, there are plenty of short-term challenges facing SaaS and cloud computing vendors in today’s tough economic environment.

Salesforce.com’s outage reignites the debate about the reliability of web-based services, and will intensify the concerns of those IT and business decision-makers who have been reluctant to adopt on-demand solutions.

It also validates the claims of legacy software vendors that SaaS and cloud computing are not viable platforms for enterprise applications.

The ultimate irony is that the public website which Salesforce.com created after it experienced a series of outages in 2005-2006 to demonstrate greater accountability, www.trust.salesforce.com, also went down during the latest outage.

In 2006, Salesforce.com was quick to turn its problems into marketing opportunities. This time there is even more at stake. Salesforce.com will have a hard time convincing software vendors and enterprise customers to adopt its Force.com platform unless it can build greater confidence in its service delivery capabilities. 

It is not only important for Salesforce.com to quickly restore its own reputation, but also rebuild customer confidence in the overall SaaS/cloud computing industry. This is essential for SaaS/cloud computing companies to capitalize on their competitive advantage over legacy apps in today’s tough economic environment and rapidly changing workplace.

In fairness, Salesforce.com’s uptime record is still the envy of many IT and business decision-makers. That is why an increasing number of IT organizations are not only supporting the adoption of SaaS and cloud computing, but also benchmarking themselves their operations against these on-demand service providers.

However, legacy software vendors will attempt to exploit this latest disruption to make their case for sticking with on-premise applications. For example, Oracle has publicly stated it is targeting Salesforce.com accounts and promoting its ‘pod’ approach as a hosted alternative.

PS: Click here to read about the lingering concerns of some customers who participated in THINKstrategies’ most recent customer survey in conjunction with Cutter Consortium.