THINK IT Services

A year ago, I published a series of 10 predictions regarding how the Cloud Computing marketplace would evolve in 2011 in E-Commerce Times. Here’s a recap and assessment of my predictions:

1. The Cloud Computing market will grow more rapidly than analyst firms forecast as organizations move from asking “what is Cloud and why is it important” to “where and how can I capitalize on the Cloud today.”
   • I think I did ok on this one, although there remain plenty of organizations who are still trying to define the Cloud and determine why they should seriously consider employing it.
2. This accelerated growth will occur despite a major cloud computing service disruptions and/or significant security infractions, which will heighten customer concerns but won’t discourage wider adoption.
   • This certainly was the case as we watched Amazon’s Web Services (AWS) crash, jeopardizing numerous start-ups and other companies dependent on its Cloud capabilities, yet failing to dissuade more businesses of all sizes to adopt AWS and other Cloud services.
3. A wider array of appliances and applets will be offered by a growing number of Cloud vendors, which will permit users to “download” the functionality they need so they can work offline or deploy cloud-based solutions behind the firewall to satisfy their reliability and security concerns.
   • This wasn’t as prominent a trend as I expected. However, salesforce.com did acquire Navajo Systems, an Israeli-based startup with unique encryption capabilities that are the basis of salesforce.com’s new Data Residency Option (DRO) that permits users to retain control of their data behind their firewall, which could exponentially expand the addressable market for Cloud vendors.
4. Community clouds aimed at specific vertical markets and supply chain relationships will become more prevalent, as various organizations recognize the value of sharing cloud resources and services with their peers.
   • Although the number of community clouds grew in 2011, they didn’t proliferate as much as I expected as most organizations focused their attention on more binary public vs. private cloud alternatives. 
5. Corporate decision-makers will shift their focus from reliability, security and integration concerns to strategic and tactical governance issues, ranging from planning, selection, deployment, monitoring and evaluation to optimization and monetization of cloud initiatives.
   • This trend was more subtle because most corporate decision-makers continue to have serious reliability, security and integration concerns about the cloud, but are also developing corporate policies and procedures to govern their planning, selection, deployment, monitoring and evaluation processes.
6. The rate of cloud company failures and M&A activities will escalate as many startups are unable to keep pace with rising customer expectations and intensifying competitive pressures, and established players attempt to accelerate their development efforts via acquisitions.
   • The magnitude of the Cloud movement permitted the vast majority of startups and established players to prosper. M&A activity has escalated as the year has gone along, capped off with SAP’s acquisition of SuccessFactors, Oracle’s purchase of RightNow and salesforce.com’s recent Rypple buy.
7. Vendors that provide cloud integration tools and professional services, in particular, will be key acquisition targets because they represent a critical component in pulling the various cloud piece-parts together. The acquisitions of Cast Iron Systems and Boomi are just the beginning on the tools side. Consolidation among cloud integration service firms will occur in the coming year.
   • A series of acquisitions by Appirio were the clearest example of this trend on the professional services side of the integration world. But, the number of Cloud integration and consulting companies continues to increase in response to growing demand. The lack of integration tool vendor acquisitions was a bit of a surprise.
8. Social networking will become a required component of enterprise applications, driven by the success of Salesforce.com’s Chatter. By offering Chatter free to a broader population of end-users within its existing accounts, Salesforce.com is not only raising the bar for its direct competitors, but also expanding and redefining its role within the enterprise.
   • Salesforce.com’s intensive marketing campaign promoting the virtues of the ‘Social Enterprise’ have brought broader attention to this idea. It has not only forced other Cloud vendors and established players to promote their social networking capabilities, it helped fuel Jive’s IPO.
9. Datamarts will become a cornerstone of a new generation of cloud-based Data-as-a-Service (DaaS) and Business Process as a Service (BPaaS) solutions, as well as industry benchmark services.
   • Salesforce.com rebranded Jigsaw as Data.com and unveiled Database.com, but examples of BPaaS didn’t get as much attention because they are taking shape within specific vertical markets.
10. New channel programs will be introduced, new channel partners will emerge and new revenue streams will be established. Ironically, the leading cloud vendors — such as Amazon, Google and Salesforce.com — will continue to have the toughest time building successful channel programs because of their direct sales heritage.
    • The success of THINKstrategies’ first Cloud Channel Summit is an indication of the level of interest in building successful partnerships in the Cloud. Although, channel executives from Amazon, Google and Salesforce.com were prominent speakers at this event who have made significant progress with their channel development programs, they all readily admit they are still searching for the right formula for success.

For years, a variety of industry analysts and bloggers have suggested that SAP jumpstart its Software-as-a-Service (SaaS) and broader Cloud initiatives with a major acquisition, such as SuccessFactors. Today’s news that SAP will buy SuccessFactors for $3.4 billion shows that the company’s executives have finally admitted that they can no longer rely on internal development and organic sales efforts to gain a meaningful share of the rapidly growing SaaS/Cloud marketplace.

I can’t say that I’ve been among those advocating this type of bold move because I’ve been a part of a similar acquisition which failed to achieve its strategic objective, and I’m not convinced that SAP will be able to transform its business through this transaction.

Back in 1999, I worked for a fast-growing network professional services company, called International Network Services (INS), which was acquired by Lucent Technologies for $3.7 billion, or 12x revenues! Lucent’s goal was to transform the telco equipment vendor into a multidimensional services provider, like IBM’s Global Services unit. INS’ leaders were given responsibility to run Lucent’s services business in hopes they could reinvigorate the unit and gain market leadership. Despite all the grandiose promises made at the time of the acquisition announcement, deeply rooted corporate politics and a corporate culture which discouraged innovation within Lucent conspired to bury INS’ strengths. As a result, the acquisition couldn’t help Lucent avoid an inevitable death spiral which it never recovered from, and the INS unit was divested three years later for a penny on the dollar.

Today’s announcement states that SuccessFactors’ CEO and Founder Lars Dalgaard will assume responsibility of SAP’s SaaS and Cloud business, and SuccessFactors will continue to operate as an independent business unit. While both these moves are the right way to go for SAP, my guess is that a year from now the luster will be off the rose and many of SuccessFactors’ key executives and employees will be gone when their payouts are fulfilled or the SAP’s politics have driven them out to find new opportunities elsewhere.

This is not an indictment of SAP in particular, but a law of nature in general. There have been few corporate transformations in any industry, especially in the tech sector, fueled by bold acquisitions. Young, aggressive companies don’t fit well into old, entrenched companies. Executive and employee motives, and corporate policies and politics differ too severely to mix well. For example, you can bet many of the key personal at RightNow will also disappear from Oracle a year from now as many of their predecessors have done after past Oracle acquisitions.

I hope I’m wrong. SuccessFactors (and RightNow) has been an important force in the SaaS movement. I know plenty of people within SAP who sincerely want to deliver competitive SaaS/Cloud solutions to satisfy their customers’ changing needs and escalating demands. But, SAP’s leadership and legacy software, operating systems and salary structures will need to be significantly realigned to successfully absorb SuccessFactors and make it a real catalyst for change that will make SAP a market leader in the SaaS/Cloud marketplace.

It will take more than a bold-stroke acquisition to put SAP on a fast-path to success. It will require changing the deeply embedded dynamics which have stood in the way of the company fully accepting the reality of SaaS and magnitude of the Cloud. It will take a long-term and broadbased effort to make SAP a leader in the new world order.

The good news is that the SaaS/Cloud movement is just starting to gain broad-based acceptance and SAP has time to take advantage of the market momentum. But, any indication that the company isn’t truly committed to delivering competitive offerings will drive more current and prospective customers to its SaaS/Cloud-centric competitors, such as Workday.

There are many myths that are propagated by legacy software vendors to discredit the insurgent Software-as-a-Service (SaaS) and cloud computing movements. But, the SaaS industry has also harbored its own myths for many years as well.

For instance, many SaaS vendors aren’t truly ‘on-demand’. You can’t acquire and utilize their web-based applications instantaneously because they lack the automated provisioning capabilities. And, in many cases they don’t want you to use their online applications ‘by the drink’ because it undercuts the predictable revenue stream which is essential to the SaaS model.

The second and related myth is that most SaaS solutions are not ‘pay-as-you-go’. Instead, you are often asked to pay for a one-year agreement up front before you can utilize the SaaS app.

Despite these limitations, SaaS solutions have flourished because they are still far more flexible and more cost-effective than their legacy predecessors.

Nonetheless, a growing number of experienced SaaS users, as well as some prospective customers, are becoming frustrated with the traditional sales tactics and increasingly complex contracting policies emerging in the SaaS industry.

RightNow issued a “Cloud Challenge” this week to counteract the SaaS industry’s dark side, and make SaaS vendors more accountable and user friendly, while attempting to reset the competitive playing field based on more flexible contracting practices.

The centerpiece of RightNow’s new initiative is the Cloud Services Agreement (CSA), a user-driven approach to SaaS licensing. The CSA provides:

• Annual Usage Alignment Up or Down
• Three-Year Price Commitment, Plus Three-Year Renewal Price Cap
• Annual Termination for Convenience
• Annual Pools of Capacity
• Cash Service Level Credits
• Unlimited Capacity for 90-Day Pilots

Click here to find more information regarding the key elements of RightNow’s challenge.

RightNow made its announcement via a live Internet feed that included strong customer testimonials by Ken Harris, CIO of Shaklee Corporation, and Jim Huser, CIO at Guthy-Renker. The Cloud Challenge video is at, http://www.rightnow.com/resource-video-cloud-challenge.php.

RightNow’s challenge not only raises the bar for legacy software vendors who are still struggling to migrate to a SaaS model, but also some of the SaaS industry leaders who have succeeded without fully meeting all the expectations of the ‘on-demand’ terminology. In particular, RightNow was happy to single out Salesforce.com for criticism.

(Disclosure: I’ve done work for both firms.)

There has already been plenty of discussion and debate regarding cloud ‘governance’ issues. Now, SaaS contracting practices are going to be added to the controversial questions surrounding the market.

The good news is that if other companies meet RightNow’s challenge they can reduce another point of ‘friction’ in the SaaS adoption cycle. By standardizing and simplifying the contracting process, and making it more transparent as well, SaaS companies are able to alleviate a lot of the uncertainty customers have about the unknown aspects of SaaS procurement.

In my opinion, RightNow’s challenge represents a healthy new step in the maturation of the SaaS market and cloud computing industry. Its challenge will be keeping up the drumbeat to keep its competitors’ feet to the fire. I’m sure the legacy software vendors and many SaaS providers are hoping this topic fades away.

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.