THINK IT Services

For everyone in the U.S., Labor Day weekend represents the spiritual end of the summer. It is also a time when many of us sit back and take stock of our lives and the world around us as we prepare to re-enter the regular work routine.

The first thing to be said about the current state of our world is there is nothing routine about it. Obviously, the economy has had a major impact on the business environment and everyone’s psyches as well. But, even if we are fortunate enough to see an uptick in the financial climate as we approach the last quarter of the calendar year, I believe the rapid migration to cloud-based services will continue to accelerate and fundamentally transform the competitive landscape of almost every industry, including the public sector.

Although I remain a vehement proponent of the cloud computing and on-demand services movement, I also have growing concerns about the long-term impact of the commodization process which this trend is producing. As Tom Foremski blogged on ZDnet in June, the Internet devalues everything it touches.

I think this reverse alchemy is already having a detrimental affect on the SaaS and broader cloud computing market, either pushing down prices or putting an artificial cap on price levels. This price sensitivity of this market is due to three forces,

1. Customer perceptions of value are declining.
2. Technology advancements are reducing the operational costs.
3. The proliferation of players is creating greater price competition.

Given these realities, who will be most likely to sell the value of their solutions and avoid the death spiral of commodization in the cloud?

Here are a few candidates,

• Strategic vendors who offer end-to-end solutions or multi-dimensional portfolios. Customers will pay a premium price for the convenience of obtaining a set of solutions from a single source in an integrated fashion.
• Brand leaders who offer the promise of long-term financial viability and potential of a broader portfolio of solutions (organic or third-party) over time. Customers will gravitate toward proven vendors who are unlikely to disappear in an industry shakeout even if their solutions are not market leading.
• New Breed SIs/VARs who can cobble together cloud computing components or cater horizontal SaaS apps into industry-specific solutions. Appirio is the premiere player in the cloud-based systems integration arena. Veeva Systems  (formerly, Verticals OnDemand) is a good example of a new breed VAR who has reconfigured salesforce.com’s CRM solution to satisfy the unique requirements of the pharma industry.

The strategic vendors and brand leaders maybe one and the same. They may also be many of the legacy vendors who might have been late to the market but benefitted from their timing, tradition and being able to tap an existing customer base. What these companies have learned in many cases is how to make up for their technical deficiencies by offering stronger customer support capabilities. (You can read more of my views on this point in Ecommerce Times.)

While some traditional HW/SW vendors may be able to survive the on-demand services and cloud computing movement, I don’t think traditional SIs and VARs will be so lucky. They are too costly and cumbersome to succeed in an increasingly streamlined sector.

I hate to say this during Labor Weekend when we are celebrating the achievements of workers, but it is no secret and it is not news that the value and relevance of many workers is disappearing. This includes tech engineers, consultants and salespeople boasting old-world skills and high salaries.

Therefore, labor-intensive SIs and IT/business process outsourcers (BPOs) along with legacy system/software-centric VARs are at risk in today’s rapidly shifting world.

Ironically, more streamlined SIs and VARs who leverage a new generation of web-savvy workers may be in the most advantageous position to capitalize on the SaaS and cloud computing opportunity. This new breed of worker will not only have the right technical skills, but will also possess good analytic and people-skills to understand how to cater today’s cloud computing and SaaS capabilities to the specific business processes. But, in order to be effective, they will also have to be backed up by an efficient, cloud-based operating environment which also leverages the best attributes of SaaS…ubiquitous access, information-sharing, agility and scalability.

So, as the differentiation between various horizontal applications diminishes, it will be those SaaS and cloud computing companies which offer the most specialized skills and strongest customer support services that will attain a competitive advantage.

The baton has been passed to a new generation of workers and SIs/VARs with new skills and business models which can address a different set of technical complexities and deliver a new set of solutions in a more rapid and cost-effective fashion.

Unlike the cliche of the gold-rush era that those who sold the shovels got rich while the prospectors went home poor, in today’s ‘cloud-rush’ the tools vendors may not do as well as the tour-guides…the new SIs and VARs.

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.