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.

The year of the Cloud has come to a climax at Salesforce.com’s Dreamforce conference in San Francisco where over 30,000 registrants converged to celebrate the rapidly expanding world of ‘on-demand’ solutions and collaboration tools.

Salesforce.com used the event to beat back the recent efforts of Oracle and Microsoft to gain a share of the Cloud Computing market with a new round of initiatives aimed at building on its phenomenal momentum and success.

The two most significant announcements on Day One were Salesforce.com’s offer of free Chatter accounts across its customer base along with a public version of the social networking service in February, and a new Database.com offering as a spin out of its Force.com Platform-as-a-Service (PaaS).

Day Two began with the news that Salesforce.com plans to acquire the Open Source oriented, Ruby-based application development platform, Heroku, for $212 million in cash. Salesforce.com and BMC Software also announced that they are joining together to offer RemedyForce, a new Cloud-based IT service management and support offering built on Force.com. Salesforce.com also unveiled SiteForce, a new and improved version of its website design tool which was introduced previously.

Talking About Chatter

A year ago, Dreamforce attendees responded to the unveiling of Chatter with a lot of apprehension about why they should permit a Facebook-like social networking tool into their organizations. In response to this lukewarm reception, Salesforce.com put its marketing engine to work to overcome this hesitancy and has generated growing customer acceptance. 

Much of the opening session of Dreamforce was focused on the practical benefits of Chatter in corporate environments through a series of demos of use-cases and customer success story testimonials. Salesforce.com also emphasized how Chatter bridges the old and new worlds of the business user by linking to Microsoft Outlook and mobile devices.

Salesforce.com announced Chatter Free to extend its reach further into organizations beyond the sales and marketing departments. This initiative will permit Salesforce.com users to invite others within their organizations to utilize Chatter, in the same way Facebook users can invite friends to join their social networks.

With less fanfare, but possibly of greater significance, Salesforce.com plans to also roll out a public Chatter.com service in February aimed at popularizing Salesforce.com’s social networking capability in the open market. Both these moves will broaden Chatter’s footprint within organizations and brand equity in the marketplace. These moves will also make the folks at Facebook rethink whether they should have pursued the corporate market rather than relinquishing it to Salesforce.com. It will also get the attention of SuccessFactors which has been proclaiming that its Business Execution Software solution has a greater installed base of end-users than Salesforce.com.

Fortifying Force.com

Salesforce.com isn’t just seeking to permeate the enterprises via Chatter. It also wants to convince the developer world, both independent software vendors (ISVs) and internal enterprise developers, that Force.com is a credible PaaS for a new generation of enterprise-class, Cloud-based, mobile apps.

In its typical style, Salesforce.com unveiled Database.com as a new capability even though it is actually a part of Force.com which has been unbundled to create a new standalone offering and point of entry to Salesforce.com’s PaaS environment.

The standalone Database.com capabilities are being offered to respond to the changing way in which applications and databases are being architected in a more pluralistic fashion in the Cloud. The goal of Database.com is to democraticize database development, and give Salesforce.com’s customers and partners another reason to expand their use of its applications and PaaS. 

Salesforce.com has also been working hard to fend off competitive claims and developer concerns that its Force.com PaaS is too proprietary. It made a strong move in this direction with its alliance with VMware earlier this year, which produced VMforce.

Salesforce.com’s acquisition of Heroku reinforces this point, quickly giving Salesforce.com a strong foothold in the Open Source/Ruby application development environment, and immediate access to the rapidly growing Heroku developer community.

Heroku is considered by many to be the top Ruby platform in the Cloud market. The company has experienced 50% growth in application development activity in the past few weeks alone according to its Founder/CEO during his keynote presentation. Heroku will maintain its brand and become Salesforce.com’s seventh Cloud offering.

The Heroku acquisition and Database.com are geared to the new world of social, mobile apps. They are also intended to offset Microsoft’s aggressive efforts to gain customer and partner acceptance of its Azure PaaS, and undercut Oracle’s ‘false cloud’ offerings which it calls “Cloud-in-a-Box”. The Heroku acquisition is also a dramatic contrast to SAP’s purchase of Sybase, with Heroku representing the rapidly growing world of Cloud-based applications and Sybase viewed as an old-world development vendor attempting to recreate itself around mobile apps.

As Salesforce.com’s executives strongly stated during an industry analyst/press briefing, the message which the company is trying to convey to the market with this acquisition is that Force.com will be open and that Salesforce.com is going to be a platform company. A number of enterprise customers confirmed the importance of Salesforce.com’s PaaS efforts in their decisions to select the company as a strategic vendor.

SaaSifying IT Management

Salesforce.com’s announcement of RemedyForce in conjunction with BMC is significant for a number of reasons.

It is the company’s first attempt to provide a solution aimed specifically at the IT organization which is increasingly embracing SaaS-based alternatives to traditional IT management software. I’ve been telling clients and others about that the SaaSification of IT management and why this trend in the Cloud Computing market eliminates another barrier to greater customer adoption.

It is also the first time Salesforce.com has teamed with another company to launch one of its product-lines, or “Clouds”. This represents an important endorsement for BMC, as well as a risk for Salesforce.com. Teaming with an established ISV is an interesting choice for Salesforce.com. Like every established ISV which has attempted to add a SaaS component to its portfolio, it hasn’t been an easy road for BMC. But, the company has a highly committed CEO and has built a SaaS solution on Force.com which is gaining customer acceptance in the market.

This alliance puts Salesforce.com in the peculiar position of depending on a partner for the success of one of its product-lines. It also renews questions and concerns among its other partners about who gets preferential treatment within Salesforce.com’s ecosystem and why.

Closing Thoughts

One of the lingering complaints about Salesforce.com’s solutions is their premium price. Marc Benioff even joked about this point in his opening remarks at Dreamforce and got a hearty laugh from the audience. In an attempt to capitalize on this issue, Microsoft has launced a marketing campaign offering $200/user rebates  to Salesforce.com customers who jump ship in favor of Microsoft’s Dynamics CRM Online.  Benioff made light of Microsoft’s PR ploy by bringing the actor/model who is pictured in the Microsoft ads on stage during the Day Two morning keynote session and successfully convincing him to come back to Salesforce.com.

All joking aside, Salesforce.com’s premium prices hasn’t slowed its tremendous growth and hurt customer satisfaction/retention rates, or diminished the enthusiasm of the customers and partners attending Dreamforce this year.

The buzz and activity at Dreamforce 2010 is not only a clear indication of the Salesforce.com’s growing success, but also an impressive illustration of the widening movement to the Cloud.

[Disclosure: Salesforce.com paid for my hotel accommodations during my attendance at Dreamforce.]

Software-as-a-Service (SaaS) and Cloud Computing market consolidation appears to be heating up with the second important acquisition announcement of the day coming from SuccessFactors who plans to buy CubeTree, a “social business platform” which permits greater communication and collaboration across organizations.

This is also SuccessFactors’ second acquisition, following its purchase of Inform in February.

Integrating social networking software into enterprise environments has been a hot topic since the idea of Web 2.0 first emerged. It has gained even greater urgency as Facebook and Twitter have become mainstream communications tools among business professionals on an ad hoc basis and corporations in a more concerted fashion.

But, the utopia that everyone is seeking is an integrated approach to social networking which embeds its capabilities into broader enterprise applications in a ’seamless’ fashion that eliminates the integration issues, alleviates compliance concerns and encourages end-users to take fuller advantage of the applications from a productivity standpoint.

Salesforce.com has been doing a terrific job demonstrating the potential of this idea with its demonstrations and aggressive marketing programs promoting Chatter. They have also used acquisitions to accelerate the development and rollout of their social networking capabilities.

As a privately-held company, CubeTree’s revenues are not publicly available. Nonetheless, as a relatively young company which was only beginning to demonstrate its revenue potential, CubeTree has been able to convince SuccessFactors to give its team and investors $20 million in SuccessFactors stock initially, plus a contingent cash payment three years from the transaction closing date which will bring the total value to $50 million based on the long-term promise of enterprise social networks.

Although this isn’t a significant transaction from a financial standpoint, it is an important deal from a market point of view.

SuccessFactors, Inc. announced today that it is acquiring Inform Business Impact, an Australia-based provider of workforce analytics and planning solutions.

Here are my quick impressions about the business implications of this announcement:

1. This move confirms my prior predictions that the pace of acquisitions within the Software-as-a-Service (SaaS) would accelerate and that major U.S.-based SaaS vendors would put greater emphasis on growing internationally in 2010.
2. The acquisition of an Australia-based SaaS vendor, on the heals of yesterday’s revelation that Salesforce.com recently acquired a Scotland-based SaaS vendor, illustrates that the on-demand services movement is taking root globally. In fact, approximately 30% of the over 1200 companies listed on THINKstrategies’ SaaS Showplace are headquartered outside the U.S.
3. This is SuccessFactors’s first acquisition, and it is clear that it plans to do many more because the company also announced today the hiring of Cisco Systems veteran Judy Blegen as its new VP of M&A integration. Few companies have made more acquisitions over the past decade than Cisco, and Blegen has been in the middle of their many transactions.

SuccessFactors announced yesterday that Siemens AG has agreed to adopt its Software-as-a-Service (SaaS) based, on-demand performance and talent management solutions across its worldwide operations of approximately 420,000 users across 80 countries in 20 different languages.

This is the latest indication of the rapid adoption of SaaS-based solutions by companies of all sizes across nearly every industry and geography.

Specifically, this announcement is significant because,

1. It clearly illustrates that SaaS is well-suited for global enterprises, and further dispels the myth that it is just for small- and mid-size businesses (SMBs) that can’t afford the luxury of traditional, on-premise enterprise applications.
2. It also shows that European companies are becoming more comfortable adopting SaaS solutions despite past concerns about off-site and/or out-of-country hosting of corporate data.
3. It demonstrates the declining power of incumbent vendors within customer accounts, as SuccessFactors outmaneuvered SAP which already had its software installed at Siemens and shares the same country of origin.

Siemens contributed the following quotes from two senior level executives to SuccessFactors’ announcement reinforcing the significance of the importance which they give this selection,

• “We conducted an in-depth market evaluation of 30 leading vendors and seven system providers Siemens already had over five months, with our end-users stress testing the software quality, global scalability, and innovation potential. “
• “SuccessFactors will be instrumental in helping us achieve [our] core objectives by closing the gap between strategy and execution. It will also enable us to globalize onto a single platform…” 
• “The Enterprise Cloud Computing business model is a strategic direction for us. It not only lowers IT costs, and creates faster end to end processes, but can also grow with our requirements both globally and locally.”

Global 2000 companies, like Siemens AG, don’t have to publicize their vendor/solution selections, and certainly don’t have to contribute quotes to vendor press releases that are this emphatic.  Nonetheless, we saw GE make a similar move when they encouraged Aravo Solutions to publicize the deployment of their SaaS-based supplier information network within GE to catalogue and coordinate over 500,000 third-party suppliers.

Siemens’ decision to provide this type of quote not only illustrates the level of importance which they give this selection, but also shows how moving toward a SaaS and cloud computing approach is becoming viewed by senior executives as a corporate strategy which can win them additional points in the overall marketplace.