THINK IT Services

Last July, I offered my views on the similarities and differences between Software-as-a-Service (SaaS) and cloud computing. This past week, I had an opportunity to elaborate on the relationship between these two worlds and terms, along with Platforms-as-a-Service (PaaS), during a webcast hosted by Symplified entitled, “Beyond the Buzzwords”.

Then and now I believe cloud computing is an outgrowth of the success of the SaaS market and web-based, packaged applications. Cloud computing represents a rapidly growing array of web-based tools which enable users to build their own applications or utilities that can be deployed via the Internet (“cloud”) or ‘downloaded’ to an on-premise environment.

Much like the open source world, the cloud computing environment enables users to take advantage of a wide assortment of piece-parts from a variety of sources to create their own solutions for various project and production purposes. They both rely on incredibility economical development resources and generous community-minded contributors willing to share and swap ideas and outputs.

During last week’s webcast, the question was asked how Platforms-as-a-Service (PaaS) relates to SaaS and cloud computing. In my view, PaaS is a vendor-centric set of tools and resources which permit users to build apps and utilities which not only take advantage of the vendor’s holistic portfolio of technological capabilities, ranging from development to delivery, but also leverage the company’s customer base and/or channels to market.

I dissected some of these ideas and leading platform players last month. I also will be moderating a panel session at Interop in Las Vegas on May 19 entitled “SaaS, Pass and More: A Taxonomy of On-Demand Applications”, that will include executives from Cisco Systems, LongJump and Salesforce.com.

These topics will also be discussed at other events I’m attending and participating in over the coming weeks.

You can also obtain useful insights about how SaaS vendors are leveraging platforms in SoftLetter’s new SaaS Benchmark Study. My colleagues at Triple-Tree also published a useful report on platforms last year.

I suggested in a previous blog that a new model of a ‘hybrid’ software company is emerging in which Software-as-a-Service (SaaS) and cloud computing vendors are offering downloadable appliances, or ‘applets’, which permit users to utilize their web-based solutions off-line or behind the firewall.

My friends at Salesforce.com and other SaaS zeolots in the industry said I was crazy. But, many SaaS other vendors told me they were already offering an appliance option to their customers.

This week Google endorsed my idea by announcing that it is offering a offline version of its Gmail service.

Some folks expected this functionality in 2007, when Google introduced Gears, its browser plug-in aimed at providing offline access to Web-hosted applications. In fact, Google has been offering an on-premise search appliance for a while.

I believe the Gmail announcement is another example of a growing array of offline enhancements being added to SaaS/cloud computing solutions that will become commonplace in the years to come.

SaaS and cloud computing purists might view this development as a bastardization of the on-demand service ideal. In my view, Google’s new option and other offerings like Microsoft Silverlight or Adobe Air are simply the latest advancements in technology aimed at addressing real customer needs and preferences. In fact, Zoho unveiled its own offline email solution in October.

I think these offline capabilities will make SaaS/cloud computing more convenient for users, and will eliminate one more customer objection to adopting on-demand, web-based services which will help to accelerate the growth of the market.

Software-as-a-Service (SaaS) and cloud computing are often referred to as ‘on-demand’ services. Yet, in many cases these web-based solutions must be procured for a minimum timeframe, can take time to deploy, and cannot be terminated immediately when their task is done.

In response to these shortcomings, a new array of ’situational applications’ are emerging. Jonathan Sapir of SilverTree Systems has become an advocate of these situational applications and has created a website which promotes them called, Power in the Cloud.

Jonathan invited me to contribute a guest post to the blog on his site about the business implications of situational applications which you can find here…

I’ve just returned from two days in a chilly Florida where I was participating in a sales kickoff meeting for an independent software vendor (ISV) that is preparing to add a Software-as-a-Service (SaaS) component to its portfolio.

I’ve presented to plenty of sales teams about SaaS, cloud computing and managed services, what made this session unique was that this ISV isn’t planning on rolling out its new SaaS solutions for another 9-10 months.

To the credit of the company’s management team, they know that it will take a long time to fully prepare the sales team to properly sell their new SaaS solutions.

Especially, because they’ve been successfully selling the value of their legacy, on-premise applications against a competitor’s “ASP” solution for the past five years.

While the company was confident that it has employed the latest in Web 2.0 technologies and techniques to leapfrog its competitor functionally, it knows that it still has plenty of work to do operationally and from a sales perspective to be successful.

The company asked me to participate in the meeting to educate the sales team about the market forces which are driving the on-demand services market, explain how SaaS differs from the old ASP model, and coach them about how to talk to IT and business decision-makers about the functional benefits and cost-advantages of SaaS solutions.

In addition to giving a one-hour keynote presentation about the overall marketplace, I participated in three breakout sessions aimed at addressing the sales team’s specific questions and concerns.

I was joined in these sessions by company executives who provided candid insights about their SaaS goals, objectives and even uncertainties. They readily admitted that they are making a ‘big bet’ on SaaS and still have plenty of piece parts to put in place regarding how the new offerings will be packaged, priced and positioned.

Their candor was refreshing and rewarded with an enthusiastic response from the sales team which recognizes that times are changing, and they have an opportunity to offer their customers new game-changing SaaS solutions and greater options to meet their corporate objectives.

The sales team and company management both know that it could be a bumpy ride into the SaaS world, but they are giving themselves plenty of time to make the proper preparations.

While I’m happy to help aspiring SaaS vendors at any stage of their evolution, it is nice to be invited in early rather than be called when a company is trying to recover from a false start.

I had the privilege of moderating a fascinating panel session at the SIIA On-Demand Conference this past November entitled, “Systems Integrators: A Firsthand, Face-to-Face View on the State of SaaS”.

The panel consisted of three experienced professionals in the systems integration (SI) business,

• Chris Barbin, CEO, Appirio
• Cary Fulbright, President, North America Operations, Saaspoint
• Lonnie Wills, Senior Vice President, CIO Practice, Bluewolf

The SIIA recently posted a video of this session on their site. Click here to watch the discussion.

Anyone who follows the Software-as-a-Service (SaaS) market knows that every major SaaS player, starting with Salesforce.com, uses the success of consumer-oriented, on-line services as the model for their business-to-business solutions.

SaaS vendors, executives and ‘experts’ (myself included) point to the way these web-based services created an enjoyable, effective and economical user experience as the centerpiece of their success.

The most prominent example of this approach has been Apple iTunes.

Ironically, Apple has never taken advantage of its prominence and positioned itself as a SaaS or cloud computing player.

It appears that this may be changing. At this past week’s MacWorld, Apple unveiled a new, web-based version of its iWork productivity suite. Just as Microsoft’s Software-Plus-Services strategy is an acknowledgement of the growing interest and adoption of web-based apps, so is Apple’s move down the same path.

Apple is also moving in this direction to build on the momentum it has gained penetrating the corporate environment. At the desktop and laptop levels, Apple capitalized on customer discontentment with Microsoft’s move to Vista to win a greater share of the corporate PC market. The iPhone has also been a big hit among corporate customers.

So, Apple is in a far better position to succeed in its SaaS/cloud computing initiative than Microsoft.

Apple has the online procurement and delivery mechanisms to facilitate the new service, as well as the end-user devices (desktops, MacBooks and iPhones).

It is known for its innovations, and will immediately attract a broadbase of curious and committed fans to test the beta version of the new on-demand service.

Apple can also exploit the growing ‘consumerism’ within the corporate IT environment which has seen end-users bring their personal systems and services into the workplace to get their jobs done.

Finally, Apple can also leverage a vast assortment of developers, channel partners and strategic relationships to distribute and enhance its SaaS solutions.

So, the ‘poster child’ for the SaaS movement appears to be making its move to claim a share of the rapidly growing SaaS/cloud computing market.

In an InformationWeek interview on Tuesday, SAP’s CEO and president of global field operations, Bill McDermott, downplayed the platform capabilities and enterprise-readiness of Software-as-a-Service (SaaS) and cloud computing.

Although Salesforce.com’s outage this week gave McDermott’s comments some immediate validation, they were still reminiscent of the views of a previous generation of tech industry executives who discounted the value of PCs in the corporate world. As a result of the myopic ideas of those former tech titans, companies like Digital Equipment Corporation and Wang Computers no longer exist.

Denial didn’t work out well for them and it won’t work for SAP either.

Executives at SAP aren’t alone in their efforts to downplay SaaS. The CEO of Lawson Software made even more atrocious comments a few months ago, as did Oracle’s CRM head at November’s SIIA On-Demand conference.

Of course, much of their ridicule is aimed at fending off the competitive threat which the SaaS/cloud computing movement represents to their core business.

AMR Research expects the overall enterprise application market to only grow 3% between 2008 and 2009, and that % factors in the 25% growth of the SaaS portion of the market. In fact, AMR believes the SaaS market could grow as much as 40% if the economy continues to struggle, while on-premise apps continue to stagnate.

For a myriad of reasons, SAP and other ‘legacy’ application vendors face stiff challenges migrating their software to an on-demand platform and business model. Therefore, it is easier to discount the viability of on-demand solutions.

However, given rising customer adoption and strong customer satisfaction which SaaS is enjoying, the legacy vendors are better served embracing rather than stonewalling the SaaS/cloud computing movement.

There are numerous ways these companies can move in this direction without significantly disrupting their operations.

For instance, SAP can leverage its vast services organization to learn about the realities of deploying SaaS solutions in SAP environments and leverage that knowledge to help its product development team build solid SaaS solutions of their own.  The services organization can also build ‘good will’ by helping SAP customers adopt and optimize their SaaS solutions in SAP environments.

SAP can also employ the ‘tugboat’ strategy I suggested over a year ago. This strategy encourages SaaS companies to build solutions which integrate with SAP’s software to enhance its capabilities and satisfy SAP’s customers. Working with SaaS companies can help SAP better understand the technical requirements for building and delivering SaaS solutions, and accelerate the development process.

As Niccolò di Bernardo dei Machiavelli famously suggests in his famous book, The Prince, it is better to stay close to your enemies than to distance yourself from them.

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.

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.

The most recent issue of Forbes magazine has a scathing article questioning the financial returns being generated by venture capital (VCs) firms.

This article will encourage many institutional investors who serve as the VCs’ limited partners (LPs) to look elsewhere for places to invest their monies.

A broad-based abandonment of the VC community by these LPs will make it doubly difficult for entrepreneurs to find funding in 2009.

Many VCs will be forced to put a moratorium on new investments, others will refrain from making additional investments in current portfolio companies, and some will shut their doors entirely.

Combine the poor track record of many VCs with the downright mismanagement of individual and institutional investments by hedge funds and private equity firms who funneled monies into Madoff’s ponzi scheme, as well as the virtual shutdown of the IPO market, and the prospects don’t look good for funding opportunities in 2009 for privately held companies.

This could significantly slow the growth of the Software-as-a-Service (SaaS), cloud computing and broader on-demand services market.

SaaS, cloud computing and on-demand services companies with strong prospects will still find funding. For instance, Aria Systems (a THINKstrategies client) recently won a new round of funding from Venrock.

However, weaker companies will have a hard time surviving in this more challenging economic climate.