THINK IT Services

Google’s latest service outage this past week generated a new round of attention and debate regarding the viability of the ‘cloud computing’ movement.

Although Google’s service disruption raises legitimate concerns about the reliability of today’s web-based solutions, the extent of the press coverage also demonstrated how pervasive the cloud computing movement has become.

The incident was not only reported and analyzed in the IT trade pubs, but in all the major business journals as well. This level of coverage clearly shows that SaaS and cloud computing are no longer peripheral trends, but have become popular alternatives to legacy software and traditional systems.

Another indication of this trend is the latest market forecast from Gartner, who I like to call a ‘lagging indicator’, which predicted last week that the SaaS market will equal $9.6 billion by the end of 2009, a 21.9 percent jump over 2008 revenue of $6.6 billion. Gartner forecasts that the SaaS market for the enterprise application markets will total $16 billion in 2013.

These forecasts come even as Gartner estimates that overall IT spending will decline 3.7 percent in 2009, and spending on IT hardware, including client computing (PCs), servers, storage and printing systems will drop 14.9 percent this year.

Gartner’s rationale for its SaaS predictions echo what THINKstrategies has been reporting for a long time. Yet, they are still hedging their bets when it comes to SaaS adoption in backoffice areas, such as ERP, despite the recent financial results of companies like NetSuite and Plex Systems.

Nonetheless, the latest outage at Google raises a new round of concerns among IT and business decision-makers who remain uncomfortable relying on third-parties for their day-to-day enterprise application or computing requirements.

In my view, these are legitimate concerns but should not prevent organizations of all sizes from ultimately adopting SaaS solutions and cloud computing services. McKinsey has produced an interesting comparative analysis of the total cost of ownership (TCO) or inhouse data centers versus SaaS and cloud computing alternatives.

I remain convinced that an honest self-assessment by IT and business decision-makers will lead to the realization that their data center reliability, security and performance palls in comparison to today’s leading cloud computing vendors. In addition, a thorough evaluation of their time-to-market, flexibility, TCO and ROI would also clearly favor the rapidly evolving SaaS and cloud computing alternatives.

Google reported that its outage was caused by ‘human error’, which is often at the heart of corporate data center disruptions as well. IT and business decision-makers have to determine how often and how long their organizations have to withstand these problems when their inhouse staff is to blame, and are their remedies any better than they would be if they turned to an outside vendor via SaaS or cloud computing. As I’ve stated before, this becomes a quality of support rather than a reliability of service issue.

In response to concerns regarding the quality of cloud computing support, my sources tell me that Google is rapidly hiring additional support people and significantly enhancing its enterprise support capabilities. 

While the SaaS industry has gained broad-based acceptance because of its relatively mature ‘packaged’ applications, the cloud computing sector still has a long way to go to win an equal level of adherents among mainstream organizations.

I had the privilege of participating in Cloud Slam ‘09, a virtual conference, on the state of the cloud computing movement last month. Click here to see and listen to my views on the state of SaaS and cloud computing, and the steps to success in making these markets mainstream.

You can also learn more about the cloud computing market this August when I’ll be chairing CloudWorld, in conjunction with Open Source World and the Next Generation Data Center conference, in San Francisco.

This week, I’m off to Las Vegas for Interop where I’ll be attending the Enterprise Cloud Summit and chairing a panel session regarding “SaaS, PaaS, and More”. I hope to see you there.

While Microsoft’s recent announcement that it had experienced its first down quarter in terms of revenues and profits generated plenty of headlines in the business press, a surge in the sales of Software-as-a-Service (SaaS) solutions aimed at chief financial officers (CFOs) deserves even greater attention.

Two SaaS announcements from NetSuite and Plex Systems clearly illustrate this trend.

NetSuite announced yesterday that its total revenue for the first quarter of 2009 was $41.6 million, a 22% increase over the first quarter of 2008. In my view, NetSuite’s success is due to a combination of factors. The company has done a better job of packaging, pricing, positioning and promoting its solution to CFOs. It has made its offering more modular, which in turn has made the pricing more attractive. It has also more effectively targetted CFOs who are at a crossroads between starter kits like QuickBooks and complex systems like SAP. It is also working more closely with channel partners to meet the needs of its customers. But, most importantly it is finding a more receptive ear among CFOs who are growing increasingly impatient with the inflexibilities and hassles associated with traditional financial systems.

Plex Systems is also finding greater interest in its SaaS-based enterprise resource planning (ERP) solutions geared toward manufacturing companies. Despite being in one of the toughest industrial sectors and being located in one of the most economically devastated areas (Michigan), Plex Systems reported its revenues grew 33% in 2008, and it experienced a 25% jump in revenues during the first quarter of this year over the same period in 2008. Mark Symonds, the company’s President/CEO, told me that Plex Systems’ growth can be attributed, in part, to a rising number of CFOs within manufacturing companies who are trying to better manage their operations in response to the tough economic climate. These CFOs recognize that SaaS solutions, like Plex Systems, are easier and more economical to deploy, but even more importantly provide greater visibility across the organization and its extended supply chain.

As these CFOs experience the benefits of SaaS in meeting their financial management requirements, they will become important proponents for SaaS adoption across the enterprise, encouraging their business units and IT organizations to leverage SaaS as well.

Debating the meaning of ‘cloud computing’ has become a popular pastime among analysts, journalists, vendors and even customers.

The latest entrant into the discussion is the Wall Street Journal which published an article today entitled, “The Internet Industry Is on a Cloud — Whatever That May Mean.” (Registration may be required.)

In addition to raising the fundamental question about how to properly define cloud computing, the WSJ article also mentions Oracle CEO/Chairman’s Larry Ellison’s comments over the past few years downplaying the market opportunity for cloud computing and Software-as-a-Service (SaaS) solutions.

Although I’ve offered my own views on this topic before in this space, here are some additional thoughts in response to the WSJ article:

1. What is cloud computing?

Cloud computing is a set of web-based enabling tools and services which permit users to acquire computing capabilities to build or support applications, or perform specific functions on a pay-as-you-go basis.

2. What are the key characteristics of cloud computing?

Web-based, easily provisioned, highly economical, very flexible and reliably scalable.

3. How is cloud computing segmented, e.g. SaaS, PaaS, etc.?

Everyone uses SaaS and cloud computing interchangeably, starting with Salesforce.com and the press. THINKstrategies distinguishes them in the following way – Cloud computing has emerged a broad set of loosely coupled web-based enabling tools and services in response to the success of SaaS. SaaS solutions are ‘packaged’ applications acquired in a pay-as-you-go fashion and delivered via the Web. PaaS is an integrated set of development and delivery tools and services which permit a vendor or user organization to build their own SaaS solutions.

4. What makes this different than the old ASP model?

ASPs were outsourcers who were simply moving the same old crappy apps out of the customer’s data center and operating it in a centralized and remote data center. They didn’t have a better pricing model or offer any new functionality.

Today’s SaaS/PaaS/cloud computing solutions have been built to reside on the web, where it can better serve a more dispersed and mobile customer base with more user-friendly and flexible pricing and packaging.

5. Why has Larry Ellison resisted the SaaS/cloud computing movement?

It is a Machiavellian subterfuge aimed at downplaying the market opportunity to discourage potential competitors, such as SAP, from entering the market.

Ironically, Ellison originated the idea of the ‘thin client’ during the dot.com boom and Oracle was a pioneer in the ASP era. Today, Oracle is a major supplier of database systems for many of the largest SaaS companies, including Salesforce.com. 

Oracle is also the purveyor of a widening array of on-demand software services, starting with Siebel On-Demand and most recently adding Sourcing On-Demand. And of course, Ellison is also a personal investor in Salesforce.com and NetSuite.

6. Why is cloud computing a major transformation of the IT/software industry and not just another overhyped trend?

First, because SaaS/cloud computing solutions are delivering measurable business benefits, and generating high customer satisfaction and referral rates.

Second, corporate executives and end-users need and want a better way to acquire and utilize technology and business applications to meet their rapidly changing business and workplace requirements.

Third, a new generation of workers—Generation “F” for Facebook, as Gary Hamel described in the WSJ Tuesday—are entering the market who have grown up online and will demand web-based services to do their jobs.

Finally, because today’s tough economic climate demands that organizations of all sizes fundamentally change the way they do business, and few will resist the temptation to revamp the way they procure and use technology and applications so they can get a better ROI at a lower TCO.

One of my predictions for 2009 was that this would be the year of the channel in the Software-as-a-Service (SaaS) market.

While the direct sales and delivery model associate with SaaS fundamentally disrupts the traditional role of the channel, the SaaS industry still needs to establish an successful channel strategy to cost-effectively extend its footprint across various market segments and win greater mainstream adoption.

In addition to relying on various resellers as channels to market, legacy software vendors also viewed other independent software vendors (ISVs) as potential channel partners because they extended their software functionality into new market segments. The same holds true in the SaaS industry.

The latest example of this strategy is NetSuite’s announcement that it is putting greater emphasis on its ISV partnering efforts via a new SuiteCloud Developer Network (SDN) and SuiteApp.com single-source online marketplace.

These new offerings are not innovative, but they are timely because they could help NetSuite maintain the momentum which it reported at the end 2008.

NetSuite has been far behind Salesforce.com in size and growth in part because it hadn’t placed as much emphasis on building an ecosystem of third-party ISVs as a key component of its overall go-to-market strategy.

Part of the problem was that NetSuite had to establish a sufficient track-record of success to attract a critical mass of ISVs interested in utilizing NetSuite’s solution as a platform to address specific industry requirements. This has been a tougher task for NetSuite than Salesforce.com because it is far harder to convince a CFO to buy a SaaS solution than a renegade salesperson.

NetSuite compounded this challenge by insisting on building an all-in-one solution which looked more like a traditional enterprise resource planning (ERP) solution from SAP and Oracle than the easy-to-use SaaS solutions which have gained widespread customer acceptance in other segments of the market. NetSuite’s all-in-one product packaging also added a layer of complexity which made it difficult for ISVs to create their own unique industry-specific solutions.

Now that NetSuite is finally gaining acceptance among CFOs and has begun to modularize its SaaS solution, it is in a better position to appeal to other ISVs.

Company executives who briefed me regarding the new SDN also admitted that they hadn’t put enough effort into helping ISVs be successful in the past. They are now committed to providing partners more hand-holding and greater sales/marketing support. The company has even recruited partner development specialists from Salesforce.com to staff the program.

This new initiative comes on the heels of NetSuite’s previous announcement that it has teamed with HP to educate and encourage value-added resellers (VARs) to sell and deliver its SaaS solution.

The company executives who I spoke with last week also conceded that they will probably not match the vast number of ISVs which Salesforce.com has attracted to its AppExchange and Force.com platform. Instead, they are hoping that their new partner program will attract a smaller number of specialized ISVs who can help NetSuite penetrate new market segments.

It remains to be seen whether NetSuite will be successful in the execution of its new partner program. But, it will be worth watching whether third-party ISVs and VARs can take NetSuite’s solution into new markets successfully and demonstrate the channel opportunities for SaaS companies.

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.