THINK IT Services

Last week’s travels took me from Boston to Washington, DC, for NetworkWorld’s latest stop of the IT Roadmap and then on to San Jose, CA , for the SIIA’s OnDemand conference.

In DC, I had the privilege of presenting in the Convention Center’s main ballroom THINKstrategies’ perspectives regarding cloud computing, Software-as-a-Service (SaaS) and managed services.

A year ago, less than 50 people attended my breakout session on this topic as these new services were just beginning to hit the radar-screens of government agencies as they anticipated the arrival of the newly elected Obama administration.

Last week, the number of attendees in my session was over twice the previous year’s total, the latest milestone in a steady rise which I’ve seen throughout 2009 of both public sector and commercial interest in on-demand alternatives to on-premise systems and software.

In the case of these government-oriented attendees, it is clear that the new administration’s push toward cloud computing is having a significant impact on their IT management policies and sourcing strategies. However, they are still uncertain about the true meaning of cloud computing and business implications of these services.

They are also very concerned about the security and reliability of cloud computing alternatives. These concerns were made very clear in a private luncheon session which I moderated during the NetworkWorld conference. Nonetheless, the representatives of government agencies and private contractors serving the government who attended the session recognized that the cloud computing movement is real and they must respond to it.

I had the privilege of sharing the mainstage on the DC Convention Center with Mladen Vouk, North Carolina State’s Information Technology Department Head, Professor and AVP. Mladen gave an excellent presentation regarding the university’s successful deployment of an internal cloud computing service.

Although his presentation clearly demonstrated the functional and economic benefits of cloud computing, the concerns of many of the attendees still represent an ongoing challenge facing on-demand providers, many of whom attended the SIIA’s OnDemand conference in San Jose last week.

The event was an important gathering of corporate executives of leading on-demand companies, as well as representatives of established firms trying to transition to SaaS and cloud computing models, along with a varity of entrepreneurs and investors.

The consensus of the crowd is that corporate acceptance of SaaS is rising, but confusion about cloud computing lingers. They also were frustrated by the current economic climate which is driving greater interest in on-demand alternatives, but also slowing the procurement process.

While the SIIA conference didn’t produce any revelations, it did confirm that the industry is likely to experience greater growth and turbulence in 2010.

Last year, I predicted that 2009 would be the year of the channel in the Software-as-a-Service (SaaS) market and a growing number of SaaS industry leaders have obliged me by expanding their sales efforts in this direction.

The latest is Salesforce.com which announced today that it is launching a new value-added reseller (VAR) program to encourage third-party companies to build on its Force.com platform and extend the reach of its AppExchange into new market segments.

Salesforce.com’s announcement comes on the heels of NetSuite’s recent enhancements to its VAR program aimed at strengthening its position in the market.

Because of Salesforce.com’s greater prominence in the marketplace, its new initiative is bound to bring even more attention to the rapidly evolving role of channel companies in the SaaS market. In Salesforce.com’s case, there move represents an important milestone in the company’s evolution and that of the SaaS movement as a whole.

Until now, the company has placed all of its sales efforts on selling directly to end-users. Although it was also well-aware of the importance of encouraging third-party developers to build applications that enhanced its core applications via the AppExchange and ultimately the Force.com platform, it readily admitted in the past that it didn’t see much opportunity to build channel partners into its go-to-market strategies. As a result, the company aggressively recruited enterprise salespeople instead to attack the mid- and large-scale enterprise market.

In my view, the following forces have combined to change Salesforce.com’s attitude toward VARs in the SaaS market,

1. Today’s economic environment has made it more difficult to penetrate new accounts. With the cost of sales escalating, SaaS vendors must find more economical ways to win new business instead of relying on high-priced sales executives. (Salesforce.com recently recruited Doug Dennerline from Cisco’s Collaboration/WebEx unit to become its new Executive VP for enterprise sales in the Americas to reinvigorate its direct sales efforts.) 
2. VARs are a natural target for sales expansion. Although customers are fed up with their legacy applications, they are still wedded to their ‘trusted’ suppliers, and are reluctant to move to new products or technologies without the help of their current suppliers. These ‘trusted’ suppliers tend to be their local and/or industry-specific VARs.
3. Enlightened VARs are increasingly recognizing that they must migrate to a SaaS orientation in order to survive and thrive in the future. Traditional VARs have been fearful and resistent to SaaS solutions because they threatened their fundamental value proposition (complexity) and potentially undercut their relationship with the customer (account control). Now, they are willing to explore ways to build SaaS into their business model.  
4. Technological advancements are also facilitating third-party development and delivery of SaaS applications. Today’s Platform-as-a-Service (PaaS) offerings, such as Force.com, make it possible for VARs to develop and deliver industry-specific solutions.
5. Maturing SaaS vendors are identifying new revenue-sharing opportunities in the SaaS supply/value-chain that can permit them to enlist VARs, and other channnel partners, without seriously hurting their operating margins.

In addition to these market forces, Salesforce.com’s VAR program is built on its own history of success working with companies, such as Veeva Systems (formerly, Verticals OnDemand), who have been configuring its basic apps into industry-specific solutions for years. I suspect that more companies of this nature will emerge as a result of Salesforce.com’s new program.

At the same time, a new generation of professional services/system integrator is also arising. This new breed is typified by Appirio which not only helps customers build unique apps on top of PaaS offerings, but they also retain the marketing rights to these custom apps so they can be resold via AppExchange and other online outlets. In so doing, these new PS/SI companies are blurring the line of demarcation between their role and that of the traditional VAR.

A case in point is Appirio’s latest professional services automation (PSA) offering, which escalates its growing competition with NetSuite’s PSA suite built on the combined resources of OpenAir and QuickArrow.

All of this adds up to an exciting new dimension of third-party activity surrounding the rapidly evolving SaaS and cloud computing world.

PS: In addition to reporting and consulting on these topics on an ongoing basis, I’m pleased to be participating in the following industry events which will also examine the implications of these trends: Cloud Futures and the SIIA’s OnDemand Conference.

Contact me at info@thinkstrategies.com if you’d like to discuss these trends further or need help addressing these issues.