This blog examines the business implications of IT service trends ranging from software-as-a-service (SaaS) and cloud computing to managed services and other on-demand services.
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.
The resignation of Leo Apotheker as CEO of SAP has sparked significant speculation re: the issues which drove this decision and where SAP will go from here.
The significance of this event was clearly underlined by the role SAP’s Co-Founder and Chairman of the Supervisory Board, Hasso Plattner, played as the primary company spokesperson during a corporate conference call this morning.
During the call, Plattner made an emotional defense of the company’s strategies and tactics in response to rising criticism in the face of SAP’s financial struggles. Plattner used the occasion to dispute claims that SAP isn’t moving fast enough to respond to changes in the market by proclaiming that SAP is well on its way to becoming a “multiple product company”. He gave Apotheker credit for “turning around” BusinessByDesign and said the rollout of the v2.5 of the on-demand solution is “close”.
The reality is that BusinessByDesign has only had isolated success in a handful of deployments in the field, and its scalability from a technological and go-to-market point of view is yet to be proven.
The truth is that BusinessByDesign’s lack of success is a reflection of SAP’s lack of commitment to the solution and an overall SaaS strategy.
The company’s leadership has never fully acknowledged the fundamental changes disrupting the software industry as a result of rapidly changing customer preferences and competitive pressures. For example, various SAP leaders in the past have suggested that BusinessByDesign would primarily serve as an ‘on-ramp’ to its on-premise customers rather than a solid standalone solution. This half-hearted approach not only turned off prospective customers, it didn’t incent its own staff to make a concerted effort to develop and deliver a competitive solution.
But, SAP’s reluctance to accept these market realities may finally be giving way to a new awakening about the critical crossroads facing the company.
Although Plattner refused to specify the reasons for Apotheker’s resignation, he admitted that the company was facing growing dissatisfaction among customers in response to SAP’s decision to increase its maintenance fees and a recent employee survey also found growing disenchantment among its own staff. He also acknowledged that the cloud computing model poses a significant challenge for SAP’s underlying software architecture.
As a consequence, Plattner said ”we need to reestablish the trust inside and outside” and “in order to be profitable, SAP has to be a happy company…with happy customers and employees.”
The company has decided the best way to move in this direction is with a Co-CEO leadership structure. Plattner used Larry Ellison and Ray Lane at Oracle, and Bill Gates and Steve Ballmer at Microsoft as models for success, but failed to point out that in neither case did these duos operate as Co-CEOs.
I think the Co-CEO structure may only be a temporary move to stem the negative tide until a single leader can emerge from the current duo or a new CEO can be recruited from the outside to bring fresh leadership to the company.
Ideally, this person will be able to pull the company together under a strong unified strategy backed by a series of solid tactical moves in the same way Lou Gerstner did at IBM in the 90’s.
Whether a leader comes from outside the company or within, SAP’s only hope for success is a strong, long-term commitment to change. SAP’s painful journey down the SaaS path is just the most prominent example of the many reasons why established ISVs are suffering in today’s environment. A strong leader is necessary to withstand today’s challenges.
(Disclosure: I have done consulting work with various groups within SAP.)
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:
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.
In the ongoing tug-of-war between on-premise and on-demand vendors, much was made of Steve Lucas’ jump from the SaaS unit of SAP’s Business Objects to Salesforce.com to lead its new Force.com Platform-as-a-Service (PaaS) initiative a little over a year ago.
With far less fanfare, Lucas returned to SAP last month as its new SVP of Business User Sales for North America. Since Steve is a friend, and SAP and Salesforce.com are also clients, I won’t share any confidential information or insight. However, his move does raise a series of interesting questions about Salesforce.com’s Force.com initiative and SAP’s plans.
Given Salesforce.com’s rapid growth despite the macro-economic slowdown and the major push the company is giving Force.com, it is surprising to see Steve return to SAP which is still struggling to define its Software-as-a-Service (SaaS)/cloud computing strategies and solutions.
While SAP’s struggles have been well documented, Salesforce.com’s PaaS challenges are less well-known. Wall Street analysts have questioned whether Force.com can become a significant revenue generator for the company, and various software vendors and industry observers have debated the merits of building business applications on the platform.
I’ve interviewed a variety of vendors, as well as enterprise decision-makers, who have successfully leveraged Force.com to build business apps and satisfy their corporate objectives. So, I’m convinced that Salesforce.com is heading in the right direction with Force.com. However, there is no question that the PaaS is still embryonic and will go through a series of refinements before it fulfills its promise.
These challenges are minute compared to those facing SAP as it attempts to add SaaS solutions to its legacy applications. So, SAP had to give Steve a pretty good offer to bring him back.
People move between jobs and companies for a combination of personal and professional reasons. Therefore, having one executive jump ship doesn’t necessarily equate to a tidal shift in the marketplace. The SaaS/cloud computing movement continues to accelerate, while legacy software vendors continue to struggle to sustain their sales and profits.
Whatever the reasons were that drove Lucas to return to SAP, it is surprising that the company didn’t capitalize on this opportunity to boast about winning back a key executive in the same way Salesforce.com used Lucas’ defection from SAP to its PR advantage.
More importantly, Lucas’ moves back and forth between the on-premise and on-demand worlds may personify the mixed emotions of various IT/business decision-makers who are also wavering between their legacy on-premise apps and the promise of cloud alternatives.
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.”
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.
Among my predictions for 2009, was that the on-demand services industry will experience a shakeout and consolidation.
I also suggested in a recent post that platform and cloud computing companies which don’t offer a combination of solid enabling technologies plus attractive channels to customers won’t survive the shakeout.
Sure enough, the rumors about the demise of Coghead have come true, and it is among the early entrants to the platform/cloud computing market who are now making an equally early departure.
Coghead may have had terrific technological capabilities, but it lacked a sufficient revenue model to stay afloat in an increasingly competitive market. As a result, investors were unwilling to continue to fund the company and it had to discontinue operations.
The primary reason Coghead couldn’t generate sufficient revenue to stay alive was that it didn’t offer enough value to attract adequate customers. It was a classic ‘Catch 22′ situation – not enough customers bought into Coghead’s value proposition and as a result not enough customers were willing to buy its solutions.
However, it didn’t take long for SAP to capitalize on the situation and acquire Coghead’s assets and a handful of its engineers for a fraction of its paid-in valuation.
The asset sale gives SAP much needed insight into the engineering requirements to play in the Software-as-a-Service (SaaS) and broader cloud computing market.
It comes at a time when SAP openly admits that its internal efforts to develop and deliver a viable SaaS solution are being retooled.
The acquisition of the Coghead technology and engineering team alone will not rectify SAP’s SaaS struggles. But, if this is the first in a series of acquisitions and alliances, which I referred to as the ‘tugboat strategy’in 2007, it could begin to give SAP the new perspective and skills the company desperately needs to get its SaaS and cloud computing efforts turned around and back on track.
The best indication of whether SAP is serious about its intentions in the SaaS and cloud computing market is if it makes more of these opportunistic acquisitions in the months to come.
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.
Welcome to my blog examining cloud computing, Software-as-a-Service (SaaS), managed services, and other on-demand IT management and business software service trends. My views are based on over 25 years working with leading enterprise corporations and IT/network solution providers as a marketing executive, strategy consultant and industry analyst. You can find a full description of my background, experience, consulting services and additional perspectives at www.thinkstrategies.com. Follow me on Twitter @thinkstrategies, connect via LinkedIn: http://www.linkedin.com/pub/jeff-kaplan/0/39a/878, or contact me at jkaplan@thinkstrategies.com.
Subscribe to my feed