Mega-vendors Warming Up to the Cloud - Part 2

Part 1 of this blog series depicted the three evolutionary phases (or waves) of software as a service (SaaS) and cloud computing adoption. The article ended with some glimpses into the future and likely implications for SaaS users.

Part 2 explores the apparent opportunities and accompanying challenges (and inevitable soul-searching exercises) that SaaS aspirants face in their endeavors. Some concrete examples of vendors and their new strategies and solutions will be presented. 

Carpe Diem Is Still There for SaaS Aspirants

The consequences of the upcoming "SaaS wave 3" (mentioned in Part 1) for vendors (especially start-ups) will come from many new markets that are expected to open for growth opportunities (or access, with lesser barriers of entry) in line with the "Long Tail" theory. This theory posits that the ability to sell a large number of unique items (point solutions, in software terms), each in relatively small quantities, to satisfy small target audiences, will open gates for new market entrants.

This ability will require new specialized solutions, rather than a broad distribution of legacy and commoditized ones. "Wave 3" will thus require new delivery platforms and services, whereby services aggregation, assembly, and integration needs are expected to create another huge opportunity. Vertical industry savvy and offerings will be critical for SaaS distribution, delivery hubs, and ecosystems.

While customer relationship management (CRM)/sales force automation (SFA) and human capital management (HCM)/talent management solutions have paved the way in the SaaS world, vertically oriented SaaS offerings will benefit from the belief that departmental CRM or HCM products are not the cure-all for every business in all industries. Finding the right path to customers will be one of the most significant challenges to success in the remainder of 2009 (and in 2010) due to the current cash-starved state of the economy, in which SaaS deployment is a viable alternative.

No One Said It Would Be Easy

However, SaaS and cloud computing endeavors are not for fainthearted independent software vendors (ISVs), since SaaS changes every aspect of an ISV’s operations. Indeed, development, marketing, sales, delivery, and support processes must change, while new channel/partner strategies are also essential.

A wise partnering strategy can reduce the size of the organization and ensure lower costs, while the distribution channel can provide useful and differentiating value-added services. At the end of the day, SaaS and cloud computing are about delivering service (rather than merely product) excellence.

A sound SaaS or cloud computing business strategy requires an ISV’s painstaking introspective analysis and the overcoming of several key challenges, starting with the cultural challenges of embracing this new way of doing things. For one, there is a new vendor’s identity that requires establishing a new communication strategy as a SaaS provider. In fact, will a new brand be required (e.g., Coda 2go vs. traditional Coda Financials)? How will they go about handling the new user community, collaboration, and customer intimacy principles?

Planning a smooth organizational transition plan is a closely related issue here. In other words, is the existing organization designed to support the ISV’s products, will it focus on SaaS products only, or on both the SaaS and traditional on-premise products? One should never forget about the economic and leadership issues in terms of the executive support, funding approvals, managing legacy products, customers, and partners, SaaS pricing, migrating legacy customers, profitability strategy, and so on and so forth.

The technological hurdles go without saying, such as managing research and development (R&D) teams through the transition to the multitenant platform/product (for both functional richness and cost efficiencies). Other technical issues are integration, customization facilities, and technology infrastructure services. Last but not least, operational challenges revolve around information security, security levels and authorizations, system backup and recovery, and defining and exploiting operational metrics.

Still, all these notable challenges can be parlayed into delivering continuous innovation and ongoing functional enhancements. There is a real opportunity for ISV’s to redefine and expand their product portfolios and business values by, e.g. their ability to aggregate benchmark data on customers actual software features’ use, espouse new offerings, and so on.

The Well-established Vendors’ Balancing Act

The “just do it” situation is much clearer for SaaS start-ups that plan to offer a brand new product to brand new customers. Namely, these companies “only” have the immense feat of obtaining the funding and delivering results before the financial backers loose patience and/or confidence and bolt off.

Conversely, established ISVs, which might not have the same funding issues as start-ups, must delicately balance their legacy on-premise and new on-demand businesses. Namely, to rewrite an existing product and offer it to existing customers and target markets would simply mean a cannibalization of the existing on-premise software sales. Now, there are cases of some vendors intentionally gradually converting their existing install base into an on-demand one (with brand new customers being exclusively on-demand). Think of Callidus Software and Aribabut the jury is still out on how these endeavors will ultimately work for these brave vendors.

The jury is also out on the future of the SAP Business ByDesign product. Namely, from hindsight, one cannot argue that SAP’s initial launch of its on-demand product suite over a year ago was anything short of a disaster. The product was unveiled hastily, without a thought-out go-to-market strategy, including the channel strategy and positioning against on-premises brethren products. But the crux of the matter was that the product wasn’t designed to be a cost-effective SaaS product in terms of scalability and true multitenant design.

Analysts and pundits landed on SAP like a ton of bricks at the time, myself admitting here to be “guilty as charged” with my damning blog post from mid 2008. To credit SAP, the pragmatic vendor went back to the drawing board. Although some misinformed or ill-advised analysts continue to refer to the product as dead on arrival (DOA), the situation is quite different now.

Namely, as Josh Greenbaum reports in his recent blog post, a lot has happened since last year, including some technical upgrades and renewed interest in making sure SAP Business ByDesign, already in use by over 40 customers in production (and over 90 charter clients), hits the market in general availability within the year.

SAP Business ByDesign Revisited

SAP Business ByDesign is still in a controlled release mode, and is currently available in the following six markets: Germany, the United States (US), the United Kingdom (UK), France, China, and India. For what it's worth, SAP claims that the controlled release in six countries is not related to the idea to avoid the possible competition and cannibalization of SAP’s on-premise offerings.

Rather, with the selected six countries SAP is covering a majority of the markets where there is a great interest in SaaS. Being successful in these markets means a majority of market share in the global SaaS market.

The current product release SAP Business ByDesign Feature Pack (FP) 2.0 was just announced. The key enhancements of the FP 2.0 release are as follows:

FP 2.0 was a major functionality release. The next one (FP 2.5, slated for some time in 2010) will focus on extensibility for partners, flexibility to accommodate customer’s system adaptation, and cost of operation. For more information, here's the link to SAP’s Business ByDesign Business Center for all relevant information, including customer cases, product demos, and so on.

Other informative readings on the product’s current state of affairs are Michael Krigsman's and Dennis Howlett’s respective ZDNet blog posts, and the InformationWeek article titled “Inside SAP's Idled Business ByDesign Suite.”

What Are Other Mainstream Vendors Doing?

SAP’s example might show us that offering a brand new or a rewritten existing product in a SaaS manner to the same target customers requires some tweaking in terms of the vendor’s go-to-market strategy. Namely, a vendor might want to explore new geographic regions, a new distribution channel, and/or penetrate new markets (i.e., go down or up in terms of the customer size, or into some adjacent segments).

Some examples would be the QAD On-demand industry flavors of the vendor's traditional QAD Enterprise Applications suite or the “Epicor in a Box” prepackaged solution (not necessarily on-demand) for Mexico. In terms of true on-demand offerings, Epicor currently offers Epicor Retail SaaS,a subscription packaged version for smaller retailers.

Part 3 of this blog series will analyze recent SaaS initiatives by mainstream mega-vendors. Some concrete examples of vendors and their new strategies and solutions will follow.

In the meantime, your comments and feedback with regard to the opinions and assertions expressed thus far are welcome. For both users and vendors, what are your SaaS experiences (both in using and delivering a solution) and how far down the SaaS evolution track are you?
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