Wednesday, April 23, 2008
UPDATE - This BusinessWeek article was written by Jeff Kaplan (Managing Director of THINKSTRATEGIES, and one of the best sources of all things SaaS that I know.) back in April of 2006. I applaud him for catching these trands two years ago.
A few other notes on the space that support the viewpoint for SaaS growth:
1) OnDemand market is currently 6B and growing at a 32% CAGR. The combined market cap of the ondemand vendors that are public is over 17B.
2) It is a fragmented market...the top 10 vendors still are less than 50% of the market. And these are big players like Cisco/WebEx, Microsoft, Salesforce, Citrix and Omniture.
3) This is a broad trend:
HR - Authoria, Taleo, SuccessFactors, Salary.com, HireRight
Finance/Accounting - Netsuite, DealerTrack, Concur, Intacct
Marketing - DemandTec, Vocus, RightNow, Omniture, ConstantContact
CRM - SalesForce, Aria, Genius, Entellium,
Content/Collaboration - Arena, WebEx, Citrix
Supply Chain - Ariba, TradeBeam, ClickCommerce
Just to name a few categories that are working...
Software-as-a-Service Myths [text from BusinessWeek article]
A consultant explains why this new breed of Web-based software has staying powerFor years, organizations of all sizes have suffered the hassles and unexpected costs that accompany deploying and maintaining a variety of traditional software applications that, ironically, were intended to make them more productive. Now a new breed of Web-based services are pushing legacy applications aside and finally giving users the business benefits they've been seeking. This new form of software-as-a-service, or SaaS, has been spearheaded by Salesforce.com's (CRM) customer relationship management and salesforce automation applications, and NetSuite's "net-native" enterprise resource planning applications. These companies have recognized the inherent inefficiencies of the traditional software market, including the tremendous time, effort, and cost that organizations -- especially large-scale midsize businesses -- have to expend to install applications and keep them up and running. Despite the success of these companies, many people are still skeptical about the long-term success of SaaS. Others are concerned that recent Salesforce.com outages represent a fundamental fault line in the SaaS landscape. As someone who has consulted with a variety of SaaS users and vendors and manages a rapidly growing directory of SaaS players, which can be seen at saas-showplace.com, here's my response to some of the most common myths associated with SaaS.
Myth #1: SaaS is still relatively new and untested.Salesforce.com has been in business over five years, has more than 399,000 subscribers at 20,500 companies worldwide, and is growing at about 80% a year. NetSuite has been in business eight years, and company officials say it has thousands of customers globally using its online applications. The oldest and biggest SaaS purveyor? ADP (ADP) -- the world's largest payroll application outfit -- has been in business for nearly 60 years, generated $8.5 billion in revenues last year, and served about 590,000 clients worldwide.
Myth #2: SaaS is just another version of the failed application service provider, or ASP, and hosting models of the past, and will suffer the same fate as its predecessors.While SaaS isn't a new idea, the economic climate and rapid advancements in application development tools have combined to make today's SaaS providers more successful than their predecessors. The ASPs and hosting companies of the dot-com era failed for two reasons. First, they did not fundamentally change the architecture of their software applications, but simply resold legacy applications to organizations that didn't want to house them on their own systems. The up-front and ongoing costs of hosting legacy applications proved to be too much for the ASPs to withstand. The second reason the ASPs and hosting companies failed: Only a small segment of the market was willing to outsource their application needs to relatively untested outfits because most companies during the dot-com era felt that their IT operations and business applications were a strategic asset. Times have changed. Today's economic and competitive pressures make nearly any form of outsourcing fair game. Many companies now consider various IT functions and business applications commodities and not core competencies. This has made SaaS, essentially an outsourced application management business, more attractive today than ASPs and hosting services of the past.
Myth #3: SaaS only relieves companies of the up-front costs of traditional software licenses.SaaS not only alleviates the costs of traditional perpetual licensing fees but also eliminates the need for additional IT infrastructure investments to support new applications. A variety of enabling technologies, such as service-oriented architecture and Web services, permit SaaS to be more easily provisioned and metered based on actual usage levels. This means companies no longer have to pay for excess capacity. The bottom line? Lower total cost of ownership and quicker time-to-value.
Myth #4: SaaS is only for small- and midsize businesses and will not be accepted by large-scale organizations.Companies of all sizes are taking advantage of SaaS. The scalability of the new generation of SaaS solutions enables users to test the reliability and performance of on-demand applications in limited deployments, and expand their adoption incrementally. Many SaaS vendors have emulated Salesforce.com's market penetration strategy of appealing to individual users with free trials or low-cost single-user subscription fees with the intent of permeating the market, and then winning business unit and enterprise-level adoption in major corporations. Today, Salesforce.com counts a growing number of Global 2000 and other brand-name companies as its customers, including AOL (TWX), Avery Dennison (AVY), Nokia (NOK), Perkin-Elmer (PKI) and SunTrust (STI). Myth #5: SaaS only applies to applications such as customer relationship management and salesforce automation.While SaaS certainly makes sense for many front-office functions and team-oriented collaboration purposes, SaaS solutions are emerging to address nearly every business application need. These range from accounting and financial applications to supply chain and channel management solutions. For example, Aramark (RMK), Dow Chemical (DOW) , HP (HPQ), Honeywell (HON), Hyatt Hotels, Roche, and Wachovia (WB) rely on Taleo's (TLEO) SaaS talent management solution. On-demand supply chain management vendor Click Commerce (CKCM) boasts Arrow Electronics (ARW), Delta, Tyco (TYC) and Volvo (VOLVY) as customers. Myth #6: SaaS will only have a minor impact on the software industry and will fade over time.A third of the respondents to THINKstrategies' recent survey said they are already using SaaS, and another third said they are planning to adopt SaaS in 2006. Other research firms have generated even higher ratios. As SaaS gains mainstream acceptance, it is becoming an important disruptive force in the software industry. And as long as the quality and reliability of SaaS solutions continues to improve, the appeal of SaaS isn't going to go away. In response to these numbers and other industry trends, Microsoft Chairman Bill Gates stated in an internal memo that became public last fall: "This coming 'services wave' will be very disruptive....Services designed to scale to tens or hundreds of millions will dramatically change the nature and cost of solutions deliverable to enterprises or small businesses."
Myth #7: It will be easy for the established software vendors to offer SaaS and dominate this market.Nearly every established software vendor is being forced to determine how to revamp their legacy application business models to join the SaaS movement. This isn't a small challenge. Legacy software companies have to re-architect their applications to make them work on the Web. They also have to redesign their sales and financial models to accommodate the pay-as-you-go SaaS fee structures. And they have to rebuild their corporate cultures to make them more service-oriented rather than product-centric. It could be argued that Siebel was acquired by Oracle (ORCL) last year because it wasn't up to the task of fighting off Salesforce.com. Now Oracle, Microsoft (MSFT), and SAP (SAP) must respond to the SaaS movement while trying to avoid cannibalizing their existing software business in the process.
Myth #8: SaaS is only for corporate users.Anyone who uses McAfee (MFE) or Symantec (SYMC) antivirus software to protect their home PCs likely uses their subscription and 'live update' features, which represent another example of SaaS. Microsoft's new "Live" version of its popular Office productivity applications is aimed at small and midsize businesses and the home user. And don't look now, but online gaming and video-on-demand also can be considered forms of SaaS.
Wednesday, April 16, 2008
Earlier this week I was invited by the FountainBlue Forum to take part in a panel discussion about Enterprise 2.0 (how web 2.0 is influencing/penetrating the enterprise market). I have attached the summary of the event written by the organizer, Linda Holroyd.
I wanted to comment on one topic that came up during the discussion relating to the classification of Enterprise 2.0. I view the definition of Enterprise2.0 (if this really is a category) as much more than online collaboration tools for inside the enterprise. The definition needs to be broad enough to encompass some of the really interesting trends that are happening:
SaaS - People who work at companies are consumers when they leave the office. These people want the same quality and user interface at work and at home. No one wanted to use green screens at the office and client-server at home. Today, no one wants great web2.0 style interfaces at home and clunky desktop solutions at the office.
Next Generation Marketing - Lyle Fong of Lithium who joined us on the panel has an interesting company that helps large brand companies identify the key users/influencers/evangelists of their products and engages them. This is a new world of marketing and engagement with your customers - and I think one of the best examples I can think of for a definition of Enterprise2.0. Afterwards Lyle pointed me to the new Forrester book, Groundswell, for more background.
Social Science - We have a company, Baynote, which leverages the science behind the wisdom of the crowds to bring deep product search and recommendation engines to ecommerce sites. I think this is another great example of Enterprise 2.0 - an underlying technology engine that enterprises are using to keep up with the expectations of their customers.
Now to the official summary of the event. Email me if you have further thoughts or questions.
Thank you for attending FountainBlue's High Tech Entrepreneurs' Forum on the topic Web 2.0 - from Consumer to Enterprise Opportunities and Business Models. Please join me in thanking our sponsors at Pillsbury Winthrop Pittman & Shaw LLC for their sponsorship and support.
Please join me also in thanking our knowledgeable, informative, and entertaining panelists for sharing their knowledge and advice on the topic:
· Facilitator Gary Benton, Partner, Pillsbury Winthrop Shaw Pittman LLP
· Dr. Cheemin Bo-Linn, CEO & President, Peritus Partners
· Lyle Fong, CEO and Co-Founder, Lithium
· Anand Iyer, Developer Evangelist, Microsoft Corporation
· Lars Leckie, Partner, Hummer Winblad Venture Partners
· Eugene Lee, CEO , Socialtext
Web 2.0 solutions have centered around personal communities and consumer solutions. But as the solutions have evolved and the technologies have advanced, business professionals are adapting solutions previously targeting consumer audiences, to investigate enterprise opportunities and business models. Below is a summary of notes from our conversation:
The Evolution of the Web:
· Enterprise Web 2.0 is not just for the consumer, it’s for corporations and businesses.
· Business Models for Enterprise Web 2.0 are evolving, but may include page-view payments funded by corporations rather than by advertising.
· There is a groundswell of people using Web 2.0 consumer solutions demanding the same functionality in corporate contexts, which, among other factors, is leading to a convergence of consumer and enterprise solutions. Forward-thinking companies are thinking creatively about how to leverage this opportunity.
· The demand for Enterprise Web 2.0 solutions is triggered in general by the younger generation and those also adverse to traditional enterprise software.
· Web 1.0 is about presented structured information in a structured format. Web 2.0 is more about taking unstructured information and putting it into a structured format. Perhaps Web 3.0 is more about taking unstructured information and leaving it in an unstructured format.
Characteristics of Successful Enterprise Web 2.0 Solutions:
· They solve business needs:
o They may turn customers into assets and advocates and channels working in community.
o They create a community which connects customers and supporters and others with each other.
o They make it easier to support customers, partners and other stakeholders.
o They increase productivity and/or build connections within an organization.
· They have sophisticated technologies which make the solution broadly accessible, with inter-connected elements and back-end components.
· They address an identified pain in specific, measurable ways
· There is a fun, social, yet result-focused objective for having people join and participate in a community. It’s not just about having fun (like in Second Life), it’s also about serving a purpose which can be measured in ROI reports (like collaboratively solving technical problems with a project for example, or gathering innovative ideas in community).
· They create high-trust communities with similar interests:
o They encourage communication and collaboration between members both to build connections and to solve business problems.
o Members make suggestions which others act on.
o Users remain engaged in the community
o Users continue to drive value for the company (see above).
o There is a viral element which supports on ongoing growth of the community.
· They may make it easier for companies to connect traditionally silo-ed groups through sharing of information, resources, connections, etc.,
· Collaboratively-created content creates value and helps build the community, thereby adding value to the corporation.
Advice on Selling Web 2.0 Solutions to the Enterprise:
· The culture of an organization is a key factor on which Enterprise Web 2.0 solutions will take hold and how it will be used internally for the company, and externally for creating and supporting communities partnering with the organization. Factor this in when planning your sales strategy and approach.
· It is essential to work with IT departments who may feel threatened by Enterprise Web 2.0 solutions. The decision-maker/advocate is likely not in that department.
· It is easier than ever to set up an infrastructure and create a web 2.0 solution, but because of that, there are a lot of web 2.0 solutions, and you must be able to define your niche and your potential enterprise customers and the pain which they need to have addressed.
· Have ROI reports and case studies to present to your prospects.
Advice to Web 2.0 Founders:
· Know the problem you want to solve and why you are passionate about solving it. Keep focused on that.
· Know which customers and partners will help you focus on that objective and work with them, rather than continually chasing the low-hanging fruit.
· Remember that it’s not about the technology, it’s about the whole solution and the problem you’re solving.
· Consider the market size.
· Build an experienced team that can deliver.
Friday, April 04, 2008
First, I want to thank the panel members who took time away from running their SaaS companies to share their experiences:
Lyle Fong – CoFounder and CEO of Lithium Technologies. Lithium is a very successful and profitable SaaS company that builds online communities and a social customer engagement platform for some of the biggest brands (Dell, Nokia, Blackberry, etc)
Ed Sullivan – Founder and CEO of Aria Systems. Aria is the market leader in Subscription Revenue billing and the associated infrastructure. Phil Wainwright just covered them with an excellent post on ZDNet.
Brad Peters – Founder and CEO of SuccessMetrics. Brad’s company has some great traction, in his words, “six and seven figure deals” selling a SaaS platform for deep analytics around revenue uplift.
A few takeaways from the discussion:
SaaS Light and SaaS Heavy
One interesting point that came up in the discussion was that the SaaS market is not homogeneous in nature. An interesting segmentation that I want to put forward is SaaS heavy vs SaaS light.
SaaS light, which I think much of the dialog on SaaS refer to, is one which has a large number of end customers and has some crossover into consumer type companies. Examples of this would be WebEx and SalesForce. These companies tend to be price per seat level.
On the other end of the spectrum lies SaaS heavy applications such as Omniture, Aria, Lithium and SuccessMetrics. These companies tend to have fewer (but larger)customers, more integration requirements, sell into core enterprise functions and a more enterprise-like sales model (direct and channel). The pricing here tends to be more on a usage or value metric. One can almost extend this segmentation to B2C vs B2B companies where B2B is SaaS heavy and B2C is SaaS light. In this case the C would be individuals and groups who may be businesses but don’t buy/engage that way.
The economics and capital allocation for these two categories is different. Our panel leaned more to the SaaS Heavy side but we were able to talk to both sides.
SaaS Light SaaS Heavy
#1 Marketing Infrastructure
#2 Marketing Sales
Bumps in the Road
During the discussion we talked about how the current economic conditions could impact the spending plans for SaaS companies. While there is a general feeling the SaaS companies perform well during tighter budget cycles and that the recurring revenue model helps ease this problem from an operating side – it is the roll of startup founders to be optimists – the key point was that these companies should be gauging their success more by market share. If the overall market/economy is struggling but the companies continue to be able to increase their relative market penetration they will continue to invest for growth. It is too much of a short term perspective to only look at the company revenue growth.
Areas of Investments
Two of the companies on the panel listed their primary reason for seeking external financing was to keep pace with the market. Both had built their business in a bootstrapped manner but saw signals that the market timing for the company had arrived – and they wanted capital to enable them to capture as much of the market as they could. Venture financing also gave the SaaS heavy companies more credibility with their enterprise customers who have a robust enterprise purchasing process that includes due diligence of the vendor balance sheet.
The areas of investment for the companies on the panel post funding varies a little bit with infrastructure/product at the top followed by sales investment. Marketing was next on the list, but given the SaaS heavy nature it was lower than investing in the sales team.
From the venture perspective, our goal is to invest in the areas that make and keep the company number one in their category. Brad pointed out that in traditional software markets, and he hypothesized for SaaS too, that the market leadership position will yield the best companies. Number one in the market tended to end up with 60% of the market, number two ended up with 20% and the last 20% was a clutter of the companies that didn’t quite make it. If market share is a good proxy for enterprise value then it makes sense to set market leadership as the guiding principal for setting company budget allocations.
Thanks again for all those who attended the panel. Let me know if I missed any part of the discussion that you thought was important.