THINK IT Services

Mark Hurd’s sudden resignation as HP’s CEO has opened a floodgate of speculation regarding who the company will select to succeed him.

Because his departure wasn’t anticipated, there are no clear-cut internal candidates. And, because Hurd himself was a surprise selection for the post in 2006, it is possible that another little-known industry executive may be tapped again for the position this time around.

So, this creates a wonderful opportunity for anyone with a passing interest in HP’s future, and the future of the technology industry as a whole, to throw a few names in the hat.

The HP CEO position is particularly intriguing in part because it has grown to become the largest IT vendor in the industry through a series of acquisitions of Compaq, EDS and others. More importantly, HP like the rest of the IT industry is at a pivotal crossroads brought on by the disruptive forces surrounding cloud computing, globalization, the consumerization of IT, mobility and the economy.

As a consequence, HP and every other established technology (and software) company has to re-think their corporate strategies, redesign their products and services, and restructure their go-to-market tactics.

For HP, this means realigning its hardware, software and service capabilities to more effectively leverage the ‘cloud’ so it can more effectively responding to customers’ rapidly changing requirements and expectations, and compete in an increasingly competitive marketplace.

I was first prompted to think about potential HP CEO candidates immediately after Hurd’s resignation when I was asked by a top-flight headhunter for my quick suggestions and came up with the following names off the top of my head:

• Joe Tucci, EMC’s CEO who has transformed the company from a hardware-centric to a software-driven business model and pulled off a similar feat at Wang Computer where he moved the company from hardware to services. EMC and HP’s corporate capabilities and challenges have many similarities.
• John Chambers, Cisco Systems’ CEO who has successfully transformed the company from a corporate network infrastructure vendor into a multidimensional technology supplier to everyone from major service providers to small office/home office (SOHO) workers. Under Chambers’ leadership, Cisco has withstood every economic and competitive challenge, and is now moving into the data center where HP has made much of its living.
• Marc Benioff, Salesforce.com’s CEO who has transformed the software industry by leading the Software-as-a-Service (SaaS) charge and evangelizing about the added business benefits of moving to a broader array of cloud computing alternatives. If Salesforce.com isn’t going to be acquired by Oracle and Benioff made CEO under Larry Ellison, he would be a great candidate to push HP’s legacy software business into the new world of SaaS and its hardware business into the cloud.
• Steve Mills, IBM’s Software Czar, who has used an aggressive acquisition strategy to recast the company into a powerful middleware vendor within a similar set of hardware, software and service businesses which HP possesses. As a result of his success with the software division, Mills was recently given responsibility for managing IBM’s IBM hardware, storage, and operating systems businesses. But, Mills is also facing a mandatory retirement barrier to further advancement and could put his experience to good use at HP.

My friends, Chris Hoffmann and Scott Donahue at TripleTree, where I am a senior advisor, suggested that we put our heads together to broaden the candidate list. Here’s what we came up with:

• Michael Capellas- He has successfully stepped into even tougher situations at Compaq (now part of HP) and MCI/Worldcom, and is well respected in the tech industry and beyond.
• Bill Campbell - Current Intuit Chairman and former CEO, but more importantly he has been a key advisor at Google and Apple, and is also very well respected in the tech industry.
• Kevin Johnson- Former rising star at Microsoft now running Juniper Networks who understands HP’s products and channels.
• Anne Livermore- Runs HP’s Enterprise unit which brings together its hardware, software and services businesses. He’s been passed over many times but might be the safest best as an inside pick.
• John Thompson- Former CEO, and current Chairman of Symantec, recognized the importance of moving to SaaS but couldn’t overcome channel resistance.
• Meg Whitman - If the Governor thing fizzles…she’s a proven, capable leader who will be looking to prove herself again.
• Ray Lane- Ran Oracle as President, then became an early proponent of the virtues of SaaS as a top-tier VC.
• Charles Philips- Has been driving Oracle’s acquisition strategy and runnng a major portion of its operations. He’s just beginning to learn about the hardware business as a result of the Sun acquisition, but he’s a quick study and forward-minded.
• Jon Rubinstein - Ex-Palm, Ex-Apple…might be too much of an engineer but interesting match for HP. Understand mobility which is where the world is heading, and can help HP fully exploit its Palm acquisition.
• Ed Whitacre- Just announced his resignation from GM where he quicklygot the behemoth back on track with no prior industry experience. Before that, he also pulled together SBC and AT&T, and could bring HP’s far-reaching assets together. He’s in his early 60’s, so it might be a stretch to see him as a long-term CEO at HP. However, he could bring stability until HP cultivates a new leader for the longhaul.   
• Diane Greene- Former CEO of VMware revolutionized IT with virtualization, a key component in HP’s future. Might be too techie, but certainly understands the opportunities and challenges.
• Shantanu Narayen - Well respected, but not well known CEO of Adobe which is a key player in the web development world which is driving cloud services.
• Vivek Paul- CEO of Wipro, known as a visionary in outsourcing, now in private equity, with the global experience which will be essential going forward.

If these industry stalwarts seem too mundane, here are a few frivolous ideas to think about for fun:

• Brett Favre – nominated by my Minneapolis-based friends at TripleTree who worship the indecisive quarterback as a brilliant turnaround artist.
• Joe Montana – my football oriented alternative because of better winning record and Bay Area roots.
• Simon Cowell – he is a tough-minded task-master with time on his hands since he left American Idol.
• Oprah Winfrey – knows how to build businesses and a worldwide following, and might be willing to put aside her upcoming year of long goodbyes as she departs her syndicated talk show.
• Tony Blair- the consummate negotiator who would be a perfect candidate to address the myriad of channel issues which will arise if HP adopts an aggressive SaaS/cloud computing strategy.

As you can see, Mark Hurd’s resignation has given us a great way to while away the dog-days of August with various ideas. I hope this gives you plenty of food for thought for the weekend and welcome your suggestions as well.

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.

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.

As I recover from yesterday’s Thanksgiving festivities, I’ve been struck by two thoughts regarding last week’s Dreamforce conference,

• Salesforce.com’s new Chatter social computing functionality may be a defensive as well as proactive move.
• An acquisition of Salesforce.com by Oracle may be a friendly maneuver rather than a hostile takeover.

As I reported in my previous blogpost, Salesforce.com’s introduction of Chatter last week at Dreamforce was met with mixed reviews. Many customers, partners, analysts, press and even internal staff and salespeople were uncertain about the company’s goals and capabilities in this new area.

I believe that building an ‘enterprise-class’ social networking component makes sense and adds a timely new dimension to salesforce.com’s fundamental functionality.

Marc Benioff justified salesforce.com’s move by claiming in his keynote address at Dreamforce that neither Facebook nor Twitter were willing to fortify their services to meet the needs of enterprise users.

But, what if this isn’t true? What if Facebook and Twitter could add a contact database, tracking mechanisms and other features to their services in the future to meet the needs of enterprises? Would today’s consumer-oriented, social networking sites become tomorrow’s corporate customer relationship management (CRM) systems?

Changing the focus of a consumer-oriented online service is possible. Apple is quickly converting its consumer-oriented iTouch into a powerful business-oriented iPhone with thousands of add-on apps from a widening array of third-party developers.

And, IBM is also moving in this direction with LotusLive, transforming the company’s pioneering but dorment on-premise collaboration application into a viable on-demand business service.

So, salesforce.com may not only be responding to growing demand for social networking tools among corporate end-users, but also demonstrating its astute competitive instincts by quickly strengthening its defensive position against future attack from Facebook, Twitter or others in this realm.

On the acquisition front, I’ve been predicting for a couple of years that Oracle would make a hostile bid to takeover salesforce.com to capitalize on the company’s rapid growth and commandeer the growing SaaS movement. I also predicted that Google would be the ‘white knight’ who would come to salesforce.com’s rescue to preserve this important path to the enterprise market.

However, my views have changed over the past month with Marc Benioff’s invitation to speak at Oracle OpenWorld and the publication of his new book, “Behind the Cloud”.

Having Benioff speak at OpenWorld clearly showed that Oracle doesn’t view salesforce.com as a simple competitor. Instead, it illustrated the more complex relationship between the companies.

While Larry Ellison has enjoyed making disparaging remarks about the long-term profitability and viability of the SaaS business model, he has also been very happy to accept salesforce.com’s money as one of Oracle’s biggest database customers.

At the sametime, Benioff is recognizing that he no longer has to play the role of revolutionary to evangelize about the business benefits of SaaS and ‘cloud computing’. Instead, he now knows that it is more important to convince a broader cross-section of enterprise decision-makers – both IT and executive – that SaaS and cloud computing services are not radical ideas and can easily integrate into their legacy environments and enhance their current operations.

This tact exponentially increases salesforce.com’s addressable market opportunity by appealing to a broader array of organizations who may have been too risk-adverse to accept SaaS and cloud computing alternatives if they viewed them as an ‘either-or’ proposition.

With Oracle on the cusp of acquiring Sun Microsystems (depending on the disposition of various regulatory hurdles), it may be ready to make a more aggressive move to consolidate its position in the SaaS and cloud computing marketplace by moving ahead with a salesforce.com acquisition.

I no longer believe Benioff would resist such a move. Throughout his new book, Benioff repeatedly gives Ellison credit for his personal success and the success of salesforce.com. He refers to Ellison as his personal mentor and describes instances in which Ellison’s decisions helped salesforce.com overcome critical challenges.

So, if Benioff doesn’t view Ellison as an adversary will he be willing to risk the future success of salesforce.com by accepting an Oracle acquisition. It won’t be his decision. If Oracle offers a good enough price, Benioff is obligated to accept it.

The question is now whether Google, Cisco Systems or another company will try to outbid an Oracle offer to enhance their own position in the SaaS and cloud computing market.

I was astonished to learn that salesforce.com’s founder and CEO, Marc Benioff, is speaking at next week’s Oracle Open World customer/partner conference.

Although Benioff is an alumnus of Oracle and Oracle’s founder/chairman/CEO Larry Ellison was an initial investor in salesforce.com, there has been no love lost between them publicly because salesforce.com was conceived to compete against Oracle’s Siebel division long before it became a part of Oracle.

Benioff has spent the past decade ridiculing the inefficiencies of on-premise customer relationship management (CRM) software and other legacy enterprise applications, along with traditional hosting models associated with Oracle. Ellison has returned the fire with his own tirades about the impossible economics of the Software-as-a-Service (SaaS) model. And, Ellison’s lieutenants in the Siebel On-Demand division have made increasingly aggressive efforts to undercut the success of salesforce.com over the past year.

Yet, folks I know who are a part of the Oracle inner-circle have said that Benioff and Ellison have been able to maintain a warm personal relationship despite their public saber-rattling. And, Oracle has benefited from the fact that salesforce.com’s has relied heavily on Oracle database solutions since its inception as a key component of its service delivery infrastructure.

I always viewed Ellison’s diatribes against SaaS, and more recent rants about the cloud, as a subterfuge aimed at deflecting attention from this fertile marketplace.

But, Benioff’s appearance at next week’s Oracle Open World conference may represent more than an appeasement against these ideas and political detente between the companies. The title of Benioff’s talk is, “The Best of Both Worlds: Customer Success in the Cloud with Oracle and salesforce.com.”

While Ellison was not a fan of SaaS in public, Oracle has fully embraced the concept of cloud computing from a marketing perspective, especially since announcing its intention to acquire Sun Microsystems.

My guess is that folks in Oracle’s On-Demand Siebel division are pretty upset about Benioff’s Open World appearance because they figure they can also pitch the benefits of the cloud, without inviting a competitor to talk to their current and prospective customers.

The same is probably true for the senior executives and staff at NetSuite, another Oracle spinoff and Ellison SaaS investment, which has always viewed salesforce.com as a sibling rival but hasn’t been invited to the Oracle party even though most industry observers believed it is more closely aligned with Oracle.

Two and a half years ago, I suggested that Oracle would buy salesforce.com in a hostile takeover to derail its success in the SaaS marketplace. Now, I’m beginning to wonder if it may be a friendly acquisition to capitalize on its escalating success.

After I initially speculated that Oracle would make a hostile takeover bid, I suggested that Google would be the white knight who would come to salesforce.com’s rescue because it couldn’t afford to lose this valuable partner and channel to the enterprise market. I’m not sure if Google would make the same move if Oracle initiates a friendly takeover bid.

The bottomline is that Benioff’s appearance at next week’s conference, and the topic of his talk, is another indication that SaaS and cloud computing are becoming more mainstream ideas and more viable methods to increase the effectiveness of enterprise applications and data centers.

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.”

Oracle took advantage of IBM’s failed efforts to acquire Sun Microsystems and swooped in with a more lucrative bid today which could reap greater rewards for the company’s rapidly expanding cloud computing strategy.

Oracle’s acquisition of Sun could recast the entire computer industry by giving Oracle control of Sun’s Java software and access to its vast developer community, plus Sun’s Solaris-based server technology. These elements could bolster Oracle’s database systems and serve as a powerful web delivery engine for the company’s widening array of business applications and third-party developers.

Oracle had to be sweating bullets during the IBM/Sun negotiations because, “The Sun Solaris operating system is the leading platform for the Oracle database, Oracle’s largest business…”, according to Oracle’s press release today.

Don’t let Larry Ellison’s past pronouncements that the Software-as-a-Service (SaaS) and cloud computing trends are just over-hyped ideas. Folks within Oracle have been working hard to make sure that the company can benefit from the rapid evolution of the on-demand movement. Now, they have the ability to not only expand their software development arsenal, but add to their computing platform as well.

These assets will not only come in handy for third-party developers and enterprise users who want to acquire them, they will also fortify Oracle’s hosting business and help Oracle quickly convert its hosting capabilities into a true cloud computing environment.

According to Oracle’s President Charles Phillips, “Our largest customers have been asking us to step up to a broader role to reduce complexity, risk and cost by delivering a highly optimized stack based on standards.”

I may be looking at the world through cloud-colored glasses, but this sounds like the preview of a new round of cloud computing initiatives to me.

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.

I moderated a panel at OpSource’s SaaS Summit this week entitled “Selling SaaS to the Enterprise” which included representatives from Cast Iron Systems, Oracle and the Business Objects unit of SAP, as well as the Manager of Global Operations Business Technology at Pfizer.

They all agreed that SaaS and cloud computing are making serious inroads into the enterprise but still face significant challenges, including scalability, security and flexibility issues.

In response to the flexibility topic, there was general consensus among the panelists that customers want a choice of on-premise and on-demand alternatives to serve various corporate requirements.

Although I’m very proud to have correctly predicted many of the major trends which have shaped the SaaS market evolution, I’ve never believed that the world would move entirely to an all on-demand environment for a variety of customer and vendor-driven reasons. Therefore, I’ve always expected most organizations to operate in an hybrid environment.

As the SaaS movement gains mainstream acceptance, it also becomes less of a revolution. As a result, the radical view of an all, on-demand world has given way to a more realistic expectation of a mixed computing environment, albeit dramatically less dependent on inefficient, legacy on-premise hardware and software.

My previous blog post suggested that the heterogeneous computing requirements of customers calls for a new definition of hybrid solutions based on the portability of SaaS solutions so they can offer customers a choice of on-demand and on-premise alternatives.

The post generated a long list of responses from a wide array of SaaS vendors offering these alternatives, as well as a few purists who said it couldn’t or shouldn’t be done.

Microsoft’s GM of ISV and National System Integrator Partners, Greg Urqhart, gave an updated version of the company’s ‘Software Plus Services’ pitch at the SaaS Summit which Microsoft has been promoting for a few years.

It has been easy for industry purists to ridicule Microsoft’s S+S idea as a self-serving rationalization for justifying its legacy, on-premise business while also attempting to hold current and prospective customers by promising competitive on-demand solutions sometime in the future.

While these are legitimate criticisms which I share, I also believe that Microsoft’s view of customers’ preference for computing choices is right on.  The question is when and how will Microsoft fulfill its promise to deliver a viable and competitive portfolio of on-demand solutions which satisfy customers’ rapidly changing technical and business requirements.

In the meantime, Microsoft is depending on a series of incremental innovations, along with the power of its brand, ISV partner network and channel relationships to safeguard its immediate reputation and long-term revenue against the onslaught of today’s SaaS and cloud computing challenges.

These attributes also fit the criteria I laid out for winning in the Platform-as-a-Service (PaaS) business. Of course, it again depends on how well Microsoft can execute on its promises.

Salesforce.com unveiled its year-end 2008 financial results earlier this week and, as the company had predicted, it passed the billion dollar mark, reporting total revenues of $1.077 billion, an increase of 44%over the 2007.

This milestone event, combined with the company’s rising earnings per share growth, are clear indications of the overall strength of the Software-as-a-Service (SaaS) market despite the challenges of today’s tough economy.

In fact, Marc Benioff, the company’s Chairman and CEO, is quoted in the company’s press release as saying, “At a time when capital is precious, big-ticket software purchases just don’t make sense.”

I am also a firm believer that Salesforce.com’s continued growth, and that of the overall SaaS industry, will be fueled by today’s economic crisis.  IT and business decision-makers are increasingly recognizing not only the economic advantages of SaaS, but also the fact that SaaS represents a more effective method of supporting a more dispersed workforce and leveraging the latest innovations in software and technology than legacy applications.

However, Salesforce.com’s financial results from last year can’t hide this year’s additional challenges.

Salesforce.com and other established SaaS companies may experience warmer customer receptivity in the coming months, but they will also face greater than normal ‘churn’ as a result of employee layoffs, especially in the financial services sector and other industries hard-hit by the economy.

This is one of the downsides of the SaaS model from a vendor perspective–subscription fees based on number of users are vulnerable to cutbacks despite contractual obligations. Back-filling these lost seats (i.e., revenues) could take more effort and greater sales costs.

I attended Pacific Crest’s 4th Annual Emerging Technology Summit this past week where I met with a series of institutional investors as a part of Pacific Crest’s Mosaicprogram. They were all trying to determine if SaaS is a viable business model long-term, which I assured them it is.

They were also looking for the next big public company in the SaaS market. I told them to look beyond today’s pure SaaS companies at other key players in the broader ‘cloud computing’ market–Amazon, Apple and Google in particular.

These companies have capitalized on the success SaaS to create their own development and delivery platforms. All of them are still in the experimental stage with their services, happy to let early-adopters help them fine-tune their capabilities. But, ultimately they all want to penetrate large-scale enterprises and disrupt the established order of Microsoft, Oracle, SAP, etc.

Meanwhile, the consensus among the CXOs of SaaS/cloud computing companies attending the Pacific Crest conference was that the first half of 2009 will be tough, but they are hopeful that things will settle down in the Spring when IT/business decision-makers have greater visibility into their own situations and will be able to make purchase decisions with greater confidence.

In the meantime, today’s economic challenges will weed out those SaaS companies which lack the leadership, solutions and go-to-market strategies to survive.

Salesforce.com lacks none of these ingredients for continued success and can be expected to continue to invest heavily in building on its momentum and reinforcing its position as the “800 pound gorilla” in the SaaS/cloud computing industry.