THINK IT Services

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.

IBM announced its intention to acquire Cast Iron Systems today, bringing to an end the long-standing parlor game of which integration tool vendor would be the next to be acquired after Workday grabbed Cape Clear in 2008.

This is an important endorsement of the importance of the integration tools market in general, and Cast Iron Systems in particular.

Integration is often listed as one of the top three concerns among IT and business decision-makers who are thinking about migrating to the ‘cloud’, along with security and reliability.

According to IBM’s software head, Steve Mills, Cast Iron Systems fit IBM’s acquisition criteria by offering “Adjacency” and “Synergy” that can enhance IBM’s capabilities and revenue opportunities in the following areas,

• Websphere middleware
• Process management services
• Professional and hosting services
• Cloud enablement solutions

The integration tools sector has been very competitive with Boomi, Hubspan, Informatica and Pervasive Software recognized as the other leaders.

Cast Iron Systems has differentiated itself around its ‘appliance’ approach to integration. It has also established strong working relationships with Google and Salesforce.com. In fact, I saw a recent Salesforce.com presentation which identified Cast Iron System as its preferred internal integration vendor.

There have been rumors that Cast Iron Systems and the other major integration tool vendors have been in play for a while. This moves eliminates one of the independent integration tools vendors and widens the market opportunities for the remaining players in this space by legitimizing the importance of integration in today’s environment.

The timing of IBM’s announcement coincides with its IMPACT 2010 conference in Las Vegas where IBM is hosting approximately 6,000 attendees including over 1,200 customers and 850 Business Partners. While this announcement will certainly be of interest to many of them, IBM’s other integration tools partners attending the conference will have to put on a good face while they’re asked why they weren’t the ones who were brought to the alter. In some cases, they may actually be gloating because they can still boast about their vendor-independence.

And, there should still be plenty of customer opportunities for IBM/Cast Iron Systems and the remaining independent integration vendors as decision-makers often fall into two categories — those looking for a single-source vendor vs. others willing to piece together best-of-breed elements.

Ultimately, acquisitions of this nature generally result in one of two outcomes — either it exponentially increases the market opportunities for the acquired company, or it creates too many internal distractions which ultimately derails its growth and momentum.

The energy and enthusiasm which I heard from the representatives of Cast Iron Systems and IBM who I spoke with after the companies’ joint videocast suggests that they are in a good position to head down the right path with this transaction. Of course, the proof will be how well they follow through with their promises after the euphoria of the intial honeymoon period wears off.

However, since this acquisition probably won’t noticably ‘move the dial’ in terms of creating substantial new revenue opportunities for IBM, it may be hard to measure its financial impact.

Therefore, it will be more important to watch how IBM blends Cast Iron Systems’ capabilities into the other elements of its portfolio to enhance their overall position in the market.

It will also be interesting to see how often IBM’s Global Services group continues to turn to other integration tools partners to demonstrate to its customers that it is still product-independent.

A series of service outages over the past few days has brought into focus all the worst fears about the ‘cloud’ computing and Software-as-a-Service (SaaS) movement. These incidents have also demonstrated how data center experience doesn’t necessarily translate into cloud computing excellence.

The most damaging outage affected T-Mobile users who lost their contact information in a SideKick server snafu by a Microsoft subsidiary, amazingly called “Danger”.

A severe data center outage grounded Air New Zealand last week. This time, IBM proved to be the culprit responsible for mishandling one of the airline carrier’s mainframe systems as part of a traditional-style outsourcing arrangement.

The cloud computing world wasn’t spared when one of the most promising SaaS vendors also had a system failure last week. Unlike the IBM and Microsoft outages, Workday was able to fully restore its customers’ records and salvage its customers’ satisfaction for important two reasons:

1. It had the proper back-up and recovery systems in place to safeguard the records.
2. It had the right notification and communications policies and procedures in place to keep its customers abreast of the status of their data and services.

These incidents clearly illustrate that whenever organizations entrust their data to a third-party, whether via a cloud computing service or a traditional outsourcing arrangement, it is important to carefully evaluate the vendor’s technical and operational capabilities to fully protect the data to mitigate potential business risks.

Despite IBM’s extensive data center experience and Microsoft’s vast resources, they were not up to this challenge. Instead, it is a relative neophyte (Workday) who outperformed the industry titans.

This is further proof that having the right service-oriented DNA, like at Workday, is far more important to succeed in the SaaS and cloud computing market than IBM’s traditional data center experience or Microsoft’s software product-centric expertise.