THINK IT Services

For the past two weeks, I’ve been debating whether to respond to a commentary in InfoWorld by Neil McAllister which asked, “Is the SaaS Experiment Finally Over?”

But, I couldn’t hold back any longer when one of the many online publications where I’m a contributor, eBizQ, posed the question in a more provocative fashion, “Is SaaS Dead?”

I couldn’t bring myself to respond to McAllister’s column when it was first published because his argument was so ludicrous. He alluded to a variety of past SaaS and cloud vendor service outages to raise concerns about the overall viability of these rapidly expanding markets. And he used a series of Gartnerisms to warn against developer migration to the SaaS model.  

Yet, McAllister ignores the pervasive failures of traditional on-premise software which has inspired organizations of all sizes to explore and increasingly adopt SaaS alternatives to better meet their corporate needs.

The truth is that Gartner has been wrong about SaaS since the beginning. Even today, it has failed to fully recognize the current rate of SaaS adoption because they only talk to their traditional IT clients who are still trying to resist today’s trends because they see them as a threat to their jobs.

For instance, I reported earlier this year about Pacific Crest’s CIO survey which found that they expect to spend approximately 30% of their software budgets on SaaS in 2010, while Gartner is still predicting that organizations will only spend 25% of their budgets on SaaS by 2012.

Gartner also refuses to recognize the growing array of customer success stories which clearly illustrate the tangible and measurable business benefits being generated by SaaS and the broader cloud computing services.

Meanwhile, THINKstrategies has been recognizing SaaS and cloud computing providers nearly every week for the past year and a half which are delivering these business benefits worldwide through our Best of SaaS Showplace (BoSS) and Cloud Computing Business Value Award programs.

Rather than acknowledge the benefits of SaaS, and other cloud computing services, Gartner prefers to publish endless warnings which simply propose commonsense vendor selection and management principles.

The fact is that the SaaS ‘experiment’ is definitely over. It is now a mainstream movement.

Just take a look at the growth of Salesforce.com and SuccessFactors. Or, check out how NetSuite and Workday are encroaching on SAP. Listen to CIOs who are frustrated with being in the server business and want to shift into the services business.

And, pay attention to the major moves which the ‘legacy’ hardware and software players–led by IBM, HP, Microsoft, Oracle and SAP–are taking to transform and even cannibalize their traditional business to respond to rapidly escalating customer demands for change.

Yes, the SaaS experiment is over. It is now for real.

Seven weeks of traveling came to an end in Florida today after attending SAP’s Sapphire user conference and speaking to Tech Data’s TechSelect executives about the channel implications of the rapidly evolving Software-as-a-Service (SaaS) and Cloud Computing market.

Prior to this week’s events, I traversed the country from Boston to the Bay Area six times to speak, host and moderate sessions at SaaScon, Under the Radar, AlwaysOn OnDemand, Pervasive’s Metamorphosis and the SIIA/OpSource All About the Cloud conferences, and conduct strategy sessions with a wide range of clients in between.

The common theme of all these events and client meetings is that SaaS has become a viable alternative to legacy on-premise software across nearly every application segment, and a newer wave of Infrastructure-as-a-Service (IaaS) cloud computing services is quickly disrupting traditional data center models across nearly every industry.

Concerns about hyperbole outdistancing today’s realities are being pushed aside by a growing number of customer success stories which clearly illustrate the tangible and measurable benefits of these ‘cloud’-based services.

SaaS, IaaS and Platforms-as-a-Service (PaaS) are changing the way software and systems are designed, developed, packaged, priced, promoted, acquired, delivered, consumed and supported. 

At nearly every step of this process, the burden of success shifts from the customer to the vendor, with the potential of greater customer satisfaction, loyalty and profitability promising to offset the tremendously painful migration but necessary process for vendors, i.e. the classic ‘innovator’s dilemma’.

In response, a parade of incumbent software vendors (ISVs) are surrendering their efforts to fight off the ‘on-demand’ movement with FUD (fear, uncertainty and doubt) marketing campaigns, and replacing them with their own SaaS initiatives and cloud computing strategies.

CA and BMC have unveiled SaaS IT management solutions built on Salesforce.com’s Force.com PaaS. Software AG is offering a hosted version of its CRM solution, rebranded as update software AG.  (6/15: A spokesperson for update software AG has informed me that it is an independent company which is not associated with Software AG.) And, Microsoft is giving away a free version of Office…and suing Saleforce.com for patent infringements.

Few ISVs have more at stake and face tougher challenges as a result of this transformation process than SAP.

Over the past four decades, SAP has built a portfolio of complex enterprise applications which are at the heart of the operations of the world’s largest corporations, and thousands of others. It has created an equally vast internal organization and intricate set of channel relationships to develop, deliver and support its products, and serve its customers.

SAP’s shift to SaaS has been plagued by a series of perceptual, philosophical, developmental and sales missteps. The company underestimated the level of customer discontent with traditional software and their willingness to adopt ‘on-demand’ alternatives. It also discounted the architectural and operational requirements of developing and delivering competitive SaaS solutions.

After two false starts with its Business ByDesign (ByD) flagship SaaS offering, the company’s leaders are now more determined than ever to get it right. This week’s Sapphire conference was a coming out party to convince SAP’s customers and partners, as well as press and analysts, that ByD is now on the right path.

SAP has rebuilt the application with a new multi-tenant architecture to make it more scalable and economical. Even more importantly, ByD is being positioned as a part of a broader, corporate-wide portfolio of cloud solutions which the company’s leadership is hoping will be ”game-changing”.

As a guest of the company (SAP is a client, and paid my way to the conference) I had the privilege of meeting one-on-one with key corporate executives for a series of candid conversations about their new strategies. 

They intend to differentiate ByD, and the broader cloud portfolio, by embedding greater analytics into the solutions and offering an integrated suite of modules spanning nearly every corporate functional area across on-premise and on-demand environments, as well as various mobile devices.

Although ByD sits within the SAP’s Small- and Mid-Size Enterprise (SME) division, key executives are now willing to offer ByD to large enterprise (LE) divisions and regional offices as well.

While SAP has put a lot of investment into rebuilding the ByD architecture, it still has a long way to go to match today’s market leading solutions from a user experience perspective. ByD’s straightforward functional capabilities lack the type of dynamic, user-friendly interface common in most SaaS applications. As a result, it has limited user configurability and can be inflexible at times according to one customer I spoke with. Despite these limitations, ByD is winning more customers who are pleased with its operational and financial benefits.

I also got demos of the latest versions of SAP’s StreamWork collaborative decision-making tool and its Carbon Impact and Sustainability service. Both demonstrate SAP’s growing understanding of the type of dynamic user experience expect in today’s market, which will hopefully find its way into ByD soon.

Underlying SAP’s growing portfolio of SaaS and cloud computing solutions is the analytic expertise and skills of SAP’s Business Objects unit. Company executives are hoping they can also leverage the Sybase acquisition to fortify its in-memory capabilities to support its SaaS solutions and extend its mobility capabilities.

There is no question that SAP is determined to succeed in the SaaS and cloud computing arena. Ironically, the company’s biggest challenge will be the tendency of company executives and its army of developers to over-engineer SAP’s solutions.

In the past, SAP succeeded by focusing its vast resources on the enormous complexities of enterprise environments. Today, a growing number of SAP’s customers are seeking to streamline and simplify their operations, so they can become more agile and responsive to rapidly changing market requirements. In many cases, the customers are willing to accept less functionality if it improves their productivity, effectiveness and profitability.

SAP must recalibrate its efforts and solutions to match these changing requirements and expectations. If SAP’s leaders and staff can learn this lesson from the SaaS movement, they can become an important player in the maturation of the broader cloud computing industry.

My travels this week have taken me from Miami to San Francisco, for Parallels Summit and Pacific Crest Securities’ Emerging Technology Summit to hear and see the latest developments in the ‘clouds’.

In Miami, I witnessed the emergence of a key new player in the rapidly evolving cloud computing industry. Parallels is not a new company, but it has recently realigned its various corporate capabilities into a singular focus on cloud computing enablement.

The company is specifically targeting the vast community of service providers – hosting companies, VARs and telcos — that are supporting the IT needs of small businesses with limited or no IT staff.

In short, Parallels is seeking to help these service providers replicate the success of Amazon Web Services (AWS) in the mainstream small business marketplace.

Although AWS has found a very receptive audience among start-ups and enterprise developers, it hasn’t generated much interest with mainstream small businesses which lack IT skills and demand ongoing support. These small businesses are already turning to various hosting companies, telcos and VARs to support their traditional IT needs and would welcome a broader assortment of cloud services, ranging from packaged Software-as-a-Service (SaaS) apps to pay-as-you-go storage and processing power from these same service providers.

Hosting companies, telcos and VARs have recognized this opportunity, but have been unable to fully address it because it has required considerable technical skills and financial resources to build the service delivery infrastructure, provisioning and management engine to support a cloud computing business.

While there are plenty of virtualizations vendors, led by VMware, and business service management vendors, including BMC and HP, they are primarily focused on the enterprise, as well as the major telcos’ operational support systems (OSS). Jamcracker has also struggled trying to help telcos generate meaningful revenue from its SaaS marketplace capabilities.

This has left a gap in the market for an ‘end-to-end’ cloud services solution which Parallels is attempting to fill. Its product portfolio has evolved via a series of acquisitions and organic development to now include the following elements,

• Server virtualization
• Management automation
• Service provisioning & billing
• SaaS marketplace creation

These elements enable a service provider to build and administer a cloud computing business which can help them win and retain customers who are seeking a strategic source for their widening array of on-demand service needs.

This is a very appealing value proposition for service providers who have found themselves in an increasingly competitive marketplace and need to better differentiate themselves and reduce the risks of customer churn.

With these ideas in mind, Parallels appropriately used the tagline of “Profit from the Cloud” as the theme for this year’s Summit. The timeliness of this theme and Parallels’ newly realigned portfolio was clearly illustrated by the jump in the conference registrants, from 800 last year to 1400 this week, and sponsors, doubling from 30 to 60, including Google, HP, Intel, Novell and Microsoft.

The tone and energy of this event reminded me of the ConnectWise Partner Summit which I attended last year.

It is also important to note that Parallels has added senior executives from Amazon, Microsoft, VMware and other major players to accelerate the company’s growth. I had an opportunity to meet with the executive team during an analyst briefing session the day before the conference. (Disclosure: Parallels paid for my travel expenses for this trip.)

The company has not only aligned its product portfolio around cloud enablement, it has moved its headquarters to the epicenter of cloud innovation, Seattle. This puts the company closer to the pioneer in this market, Amazon, and Parallels’ key partner, Microsoft. 

I couldn’t stay for the entire Parallels conference because I had to fly to San Francisco for the Pacific Crest Securities event where much of the discussion centered on how Amazon is revolutionizing the computing industry in the same way Salesforce.com and an assortment of SaaS vendors have disrupted the software industry. (I serve as a member of Pacific Crest’s Mosaic expert program.)

As further confirmation of the timeliness of Parallels’ cloud enablement strategy, Pacific Crest reported that its latest CIO survey found that the organizations it is tracking expect to dedicate upwards of 30% of their software spending on SaaS solutions in 2010. This is two years ahead of the pace which Gartner predicted.

In my latest column for E-Commerce Times, I suggest that “once again, Microsoft may be a late entrant in the market with a set of solutions that lag those offered by today’s industry innovators, but it is still in a good position to regain its momentum and become a dominant force in the rapidly evolving cloud computing marketplace.”

Click here to read why.

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.

As the new year and decade get underway, here are a few of the areas of the cloud computing market which I think will be important competitive battlefields for established and emerging players:

1. Collaboration Wars: Collaboration is the ‘killer app’ in the Software-as-a-Service (SaaS) segment of the cloud computing market. The rapid adoption of Google Apps has demonstrated the latent demand for these web-based solutions. Now, IBM is promoting the enterprise-class qualities of its LotusLive offering to win a share of the market. Cisco Systems is also intensifying its efforts to promote its collaboration solutions built around WebEx and Telepresence. I also think Microsoft will accept a greater level of cannibalization of its Office products to win a bigger share of the collaboration market with OfficeLive.
2. Business-Oriented Social Networks: These are closely linked to collaboration and have gained a tremendous amount of attention because of the explosive growth of Facebook and Twitter. Although many corporate executives are still uncertain about how to harness social networks, Salesforce.com’s introduction of Chatter at Dreamforce clearly shows that offering an enterprise-class solution can create a competitive advantage.
3. Platforms-as-a-Service Wars: Salesforce.com will continue to push its Force.com PaaS capabilities hard. And, Google App Engine will continue to be a popular development environment with start-ups and tech heads. But, I think Microsoft Azure will experience surprising success in 2010 because the company has a better understanding of how to work with third-party developers and is less likely to create channel conflicts because it would prefer not to develop and deliver its own SaaS solutions. There are also plenty of niche PaaS vendors who will be acquisition candidates in 2010.
4. Cloud Governance: HP, IBM and an assortment of niche players are capitalizing on the lack of unified management systems for cloud computing services. While price competition threatens to commoditize raw Infrastructure-as-a-Service (IaaS) offerings, management vendors that can help the IaaS providers and their customers monitor and control their cloud resources will gain a competitive advantage. HP and IBM are realigning their legacy management portfolios to address these needs. A proliferation of niche players are also seeking to win a share of the market, especially focused on single sign-on and access control.
5. IT and Service Management: IT professionals are learning about how SaaS-based management solutions can help them do their day-to-day jobs more cost-effectively. In response, a plethora of new web-based players are emerging and established players, such as BMC and CA, are shifting their attention toward SaaS-based solutions. Salesforce.com has also helped to bring greater attention to the ’service cloud’, where other SaaS companies like RightNow and Service-now.com are experiencing rising demand.
6. Communications-as-a-Service (CaaS): HP and Cisco Systems are on a collision course to compete for unified communications enablement opportunities among service providers and end-user organizations, large and small. Unified communications has been an ideal for over a decade, and now cost-effective, web-based solutions are becoming a reality. CaaS can also be a key enabler of end-to-end enterprise collaboration solutions.
7. eHealth and Energy Management: With the Obama administration promising to plow billions of dollars into modernizing healthcare systems and everyone trying to reduce the cost of their ‘carbon footprint’, these segments of the market are ripe for SaaSification. Brand-name corporations, as well as a new generation of web-based ventures, will ratchet up their efforts to win mindshare as well as marketshare offering cloud-oriented services to address these important issues.
8. Millennials and Generation Z: Companies positioning themselves for the longhaul are already trying to win the hearts and minds of our children. Apple has converted years of cultivation work within the classroom into a new generation of corporate workers who prefer Macs over PCs. Google is attempting to do the same by encouraging public school systems and universities to use its Apps. Although many kids use Microsoft’s Xbox, few have any allegiance to Microsoft Office and are adopting Google Apps. Other vendors will try to follow Apple and Google’s lead into the classroom.

Escalating cloud computing battles in these areas will also fuel additional acquisitions by established players seeking to accelerate the rollout of new services and penetration of new markets. Oracle and Cisco have been active acquirers for years. Salesforce.com will likely make additional acquisitions and continue to be a target of acquisition speculation as well.

I also think SAP will make a substantive SaaS/cloud acquisition in 2010, in an attempt to overcome some of the internal obstacles which have prevented it from successfully rolling out its BusinessByDesign solution. An acquisition could also offset the growing success NetSuite has had nimbling away at the SAP customer base.

Let me know if there are other important competitive battlefields I missed.

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.

A series of service outages over the past few days has brought into focus all the worst fears about the ‘cloud’ computing and Software-as-a-Service (SaaS) movement. These incidents have also demonstrated how data center experience doesn’t necessarily translate into cloud computing excellence.

The most damaging outage affected T-Mobile users who lost their contact information in a SideKick server snafu by a Microsoft subsidiary, amazingly called “Danger”.

A severe data center outage grounded Air New Zealand last week. This time, IBM proved to be the culprit responsible for mishandling one of the airline carrier’s mainframe systems as part of a traditional-style outsourcing arrangement.

The cloud computing world wasn’t spared when one of the most promising SaaS vendors also had a system failure last week. Unlike the IBM and Microsoft outages, Workday was able to fully restore its customers’ records and salvage its customers’ satisfaction for important two reasons:

1. It had the proper back-up and recovery systems in place to safeguard the records.
2. It had the right notification and communications policies and procedures in place to keep its customers abreast of the status of their data and services.

These incidents clearly illustrate that whenever organizations entrust their data to a third-party, whether via a cloud computing service or a traditional outsourcing arrangement, it is important to carefully evaluate the vendor’s technical and operational capabilities to fully protect the data to mitigate potential business risks.

Despite IBM’s extensive data center experience and Microsoft’s vast resources, they were not up to this challenge. Instead, it is a relative neophyte (Workday) who outperformed the industry titans.

This is further proof that having the right service-oriented DNA, like at Workday, is far more important to succeed in the SaaS and cloud computing market than IBM’s traditional data center experience or Microsoft’s software product-centric expertise.

A combination of work, travel and summertime distractions have prevented me from commenting on a series of small, yet significant announcements and activities over the past couple of weeks in the Software-as-a-Service (SaaS) and cloud computing market.

My latest travels started last week at Pacific Crest’s 11th Annual Technology Leadership Forum in Vail, CO, where I met with a series of the investment firm’s ‘buy-side’ clients as a part of its Mosaic program, and interacted with a variety of cloud computing executives and VCs in a SaaS workshop.

Nearly all of Pacific Crest’s clients are concerned about the financial implications of the cloud computing movement on their large-cap investments in companies such as Microsoft, Oracle and SAP on the software side, and IBM, HP, EMC, Dell and other systems vendors on the hardware side. They are also curious about whether Amazon, Google, Salesforce.com, SuccessFactors and other upstart SaaS/cloud companies can sustain their onslaught against the established players. My response to their inquiries echoed the commentary which I published in E-Commerce Times last month, the SaaS/cloud computing movement is already fundamentally changing the the technology industry but doesn’t necessarily mean the demise of the established players. Those legacy players who can adjust their business models to respond to changing customer demands can survive the industry tranformation.

The discussion during the SaaS workshop at the PacCrest forum also reflected the rapidly changing realities of today’s marketplace. While the CXOs and VCs in attendance during the session confirmed that demand for SaaS and cloud computing solutions is accelerating, they also acknowledged that tightening corporate budgets and growing confusion due to vendor proliferation were combining to make it more difficult to succeed and survive. As a result, PacCrest’s staff and the attendees agreed with my prediction that the SaaS/cloud computing industry will see more company failures and greater M&A activity in the latter half of the 2009 and first half of 2010.

Despite these concerns, customer interest and adoption of SaaS and cloud computing alternatives continues to grow. A reflection of the growing interest was last week’s first Cloud World conference in San Francisco which I had the privilege to chair. The event was co-located with IDG World Expo’s OpenSource World and Next Generation Data Center conference. Despite the event happening in a down economy and dead of August, it attracted approximately 2000 attendees.

I chaired a terrific keynote roundtable session entitled, “Assessing the Real Market Opportunities and Obstacles for Making Cloud Computing Mainstream”,  at the end of the first day of the event which included Joe Weinman of AT&T Business Solutions, Sam Charrington of Appistry, James Urquhart of Cisco Systems and the CNET Blog Network, and Timothy Chou of Ming Holdings. The second morning of the conference, I also had a chance to introduce Lew Tucker, vice president and CTO of cloud computing at Sun Microsystems.

Cloud Bursts: Here are a few other news items which crossed my radar-screen over the past two weeks which are worth noting:

• Coupa Offers Its On-Demand Procurement Solution to the Government for Free. Salesforce.com has had a lot of success giving its on-demand customer relationship management (CRM) solutions to non-profit agencies for free. This altruistic move also produces huge benefits to Salesforce.com because it not only generates good PR and goodwill, but also exposes the members of the board and other volunteers who come from the corporate world to the power of Salesforce.com’s solutions. If Coupa can convince the government to take it up on its offer, it could get a tremendous bounce by exposing corporate contractors and others to its on-demand procurement capabilities.
• Fujitsu Consulting Teams with NetSuite to Offer On-Demand ERP Solutions to Mid-Size Enterprises in Japan. NetSuite’s latest partner deal clearly illustrates how rapidly the SaaS market has evolved. This is not your typical, joint press release agreement. Instead, it specifically states, “The plan calls for 500 new customers within three years.” This bold statement wasn’t necessary to bring attention to the alliance, but proves that SaaS is taking hold in the back-office and gaining acceptance worldwide, even in relatively conservative regions such as Japan.
• i2 Looks to Spur Sales with SaaS. Another indication of the rapid growth of SaaS and the disruption it is causing traditional, legacy application vendors is the recent strategy move by i2 Technologies to add SaaS solutions to its portfolio. Like many legacy software vendors, i2 has seen a significant slowdown in sales and sees SaaS as an essential element in resuscitating its business. The success of Plex Systems and other SaaS vendors in the manufacturing sector has proven that companies in this industry are ready to acquire SaaS alternatives to meet today’s tough challenges.
• Microsoft Acquires Office.com URL. Microsoft continues to take a variety of steps to fortify its defenses against the growing competitive threat of Google Apps and other on-demand office productivity solutions. Grabbing the Office.com URL will certainly strengthen its search engine optimization (SEO) and branding efforts. But, Microsoft still has a long way to go to deliver a coherent message and compelling SaaS/cloud computing solutions.

Making the transition to a Software-as-a-Service (SaaS) model isn’t easy for incumbent software vendors (ISVs).

Rearchitecting their applications may be the easiest task in the transformation process. Redesigning their go-to-market strategies and ongoing operations; restructuring their revenue recognition models; and reorienting their staff are the more difficult challenges.

Greater service delivery costs combined with lower per unit prices make it is easy to see why most ISVs have tried to resist the SaaS movement and denied its long-term viability.

Yet, a severe slowdown in traditional, packaged, ‘legacy’ application sales has made it imperative for ISVs of all sizes across every segment of the software industry to finally accept SaaS as a reality they can no longer ignore and must finally embrace.

Even Microsoft, Oracle or SAP are promising ‘cloud’ solutions and cranking up their PR machines to promote their promises. But, their SaaS offerings are still primarily hosted versions of their on-premise applications, and these companies are still hoping that their customers will accept their perpetual licenses and inflated maintenance services.

Callidus Software is taking more extreme action in response to today’s realities. The company announced during its second quarter earnings call on July 28, that it is moving its entire operation and set of offerings to a “predictable recurring revenue model”, i.e. SaaS.

Callidus has been offering an ‘on-demand’ solution for a few years, but it has only been viewed as a subset of its primary on-premise business until recently.

The company’s decision to make a ‘big bet’ on SaaS is driven by a combination of changing customer preferences and escalating competitive pressures.

On the customer side, Callidus saw its overall revenues go down 5% in the second quarter of this year compared to the same period a year ago. Callidus also reported its second quarter services revenues were down 18% and license revenues were down 38% compared to the second quarter of 2008. Part of this revenue drop is a result of recognizing the growing on-demand revenue differently. But, it is also a result of slowing perpetual license and maintenance service sales.

The company attributed the declines to its “shift to the on-demand business and the completion of certain implementations, but also delays in significant implementations due to customer budgetary constraints.”

On the competitive front, Callidus has watched Xactly grow rapidly and acquire Centive to consolidate its position as the leading on-demand sales performance management (SPM) vendor.

Having talked to Callidus’ CEO a number of times in the past, I know that he has always been a fan of the SaaS model but had to oblige the investment community’s concerns regarding the revenue recognition issues before making a significant move in this direction. (Callidus, Xactly and Centive, as well as Makana Solutions have all been THINKstrategies clients in the past.)

Rather than continue to try and balance its traditional on-premise and on-demand offerings, Callidus has chosen to put all of its efforts into moving to a SaaS model.

While there are plenty of risks involved with this strategic decision, Callidus’ executives have already seen some early indications of the potential financial benefits of this move.

Recurring services already represent 53% of Callidus’ overall revenues, or $11.8 million, a 17% increase over Q2 a year ago. The company also reported that it had generated 18% margins from its recurring revenues compared to a net loss from its overall operations in the second quarter.

The company recognizes that it is embarking on a difficult journey, but believes that it is the only path that can lead to long-term success. It has already made senior staff changes and additional staff reductions.

Callidus must make additional operational changes as it evolves its on-demand solutions. But its customers, many of them large-scale enterprises,are demanding SaaS alternatives to traditional on-premise software so they can better manage their rapidly changing businesses.

Crossing this chasm won’t be easy for Callidus, but others have proven that it can be done. The most prominent example of a publicly-traded company successfully making this transition is Concur.

Postscript: On August 4, Callidus’ Director Corporate Communications and Web Marketing, Jock Breitwieser, sent me this clarification regarding the company’s future direction in response to my commentary above,

“One comment on your article: While our focus moving forward is on the cloud and on-demand, Callidus still offers it’s proven on-premise solution. We are not abandoning our award winning on-premise offering. However, on-premise is now sold as a subscription service. It’s just a change reflective of our adjusted business model. Going forward for those customers who want our industry-leading On-Premises offering, we will sell subscription-based licenses. The subscription fee will cover both the software license and the maintenance service. This plays well into the current economic climate and, through various client discussions, it’s clear that there’s appeal in this model. The move away from perpetual licenses to subscription-based offerings presents a variety of benefits to the customers, including lower up-front costs, an easier purchasing decision and a better service relationship.”