Software Licensing & Master Service Agreements : Chicago Software Licensing Lawyer & Attorney : Sam Conforti Law Firm : Master Service Agreements, Negotiations, Outsourcing : Cook County, Illinois

 

SuccessFactors makes software used to manage employee performance, which helps companies decide which employees to retain and how much to pay them. Their stock soared 51% and at the end of trading on December 5, 2011 closed at $39.75 as reported in Ragnhild Kjetland’s and Aaron Ricadela’s article in Bloomberg Businessweek entitled SAP Shed M&A Shyness as Oracle Rivalry Moves to the Cloud. Another good article to read is Ragnhild Kjetland’s article in Bloomberg Businessweek entitled SAP to Buy SuccessFactors for $3.4 Billion to Match Oracle. 

SAP is the world’s largest developer of software for the business community. The premium they paid for the purchase of SuccessFactors demonstrates their commitment to compete head-to-head with Oracle in the Cloud Computing market space. This specific acquisition will aid SAP in selling its full suite of “human capital management” software to its installed base.

Ray Wang, head of San Francisco-based Constellation Research, said in a phone interview,

 “This is a much-needed move by SAP. What SAP had in human resources -- basic transactional software such as payroll -- was good enough for the old era.  In the new era, performance reviews and talent management will be important.”

SuccessFactors has:

·         3500 customers

·         15 million subscribers

·         Present in 168 countries

·         $332 million in revenue for 2011

·         $502 million in revenue predicted by 2013

Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon said,

“We saw Oracle buy RightNow Technologies just a couple of weeks ago at 5.5 times that company’s next year revenue and SAP is going to pay almost 8 times 2012 revenue, but these guys are growing much faster than other people in software on demand, this is a marvelous addition for SAP.”

The new management team at the helm of SAP, co-CEOs Bill McDermott and Jim Hagemann Snabe, are not as reticent to growth through acquisition as compared to the prior management’s philosophy of organic growth internally. Since taking over, they have made three large acquisitions: Sybase, a mobile device maker; Business Objects, a BI developer; and now SuccessFactors. These purchases pale in comparison to Oracle’s $42 Billion buying binge over the last 6 years, but all seems to be coming together as the market evolves from the capital intensive data centers with their huge cash outlays for hardware to software delivered over the web.

SuccessFactor’s CEO, Lars Dalgaard, will oversee SAP’s full line of SaaS (“software-as-a-service”) products, including its Business ByDesign Web programs for midsized companies.

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Dick Benton, principle consultant at GlassHouse Technologies, has written a 2 part article on the trials and tribulations of which Cloud to use entitled; “Cloud Thunder: The Biggest Bang for the Buck, Part 1”. I thought we would deal with the first part, IaaS, and examine his analysis of INTERNAL versus EXTERNAL Infrastructure as a Service (“IaaS”). His article has a bit for everyone, the IT manager, the Finance department, and the contract draftsman. As you all know, I get a little “weak in the knees” with the technical stuff and so I will defer to the techies on those issues. But Benton has some good insight on which “Cloud” to choose and solid advice on how to get there.

Benton starts off by commiserating with the IT Manager because the virtualized world of Cloud Computing does offer many alternatives to reduce cost while at the same time increasing service. He breaks down his discussion in part 1 on IaaS to the benefits and possible disadvantages of Internal IaaS as opposed to External IaaS.

In order to chose the Internal IaaS model, Benton notes that the x86 platform must be virtualized and ITIL (“Information Technology infrastructure Library”) service model has been adopted (See: “weak in the knees” comment above). I’ll leave the previous comment for the techies to determine. The benefits of the Internal IaaS model are:

·         Availability

·         Performance

·         Security

·         Quick provisioning

·         Just as Quick De-provisioning

·         Ease of billing to identify unit cost (Giga-bytes of storage or Giga-hertz of power)

·         Automation improves Service Levels

With IaaS comes ITIL best practices which require automated self-provisioning. For the finance department the billing should have the ability to determine unit costs. And with all the above benefits, Benton still stresses that, “The biggest impediment to the introduction of IaaS under IT is that the service provider is the requirement for some form of portal/Web-based self-provisioning capability.”

Outsourcing IaaS (i.e. External IaaS) has its distinct advantages as well. But, of course, as we have discussed in the past security remains the paramount disadvantage. Your data is stored off-site and the infrastructure is shared with many other entities and dynamically managed as your data is moved from server to server. Benton points out three other necessary issues to consider:

·         Back-out strategy. If your provider does not live up to the service levels promised, how do you get your data back?

·         Scalability. Is this built into your contract? Premiums charged and can the Provider deliver in your time frame?

·         Hybrid approach. Useful when using Internal IaaS and there is extra capacity needed in an overload situation for a special project.

Benton discusses SaaS and PaaS in the second part of his article.

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Dick Benton, principle consultant at GlassHouse Technologies, has written a 2 part article on the trials and tribulations of which Cloud to use entitled; “Cloud Thunder: The Biggest Bang for the Buck, Part 1”. I thought we would deal with the first part, IaaS, and examine his analysis of INTERNAL versus EXTERNAL Infrastructure as a Service (“IaaS”). His article has a bit for everyone, the IT manager, the Finance department, and the contract draftsman. As you all know, I get a little “weak in the knees” with the technical stuff and so I will defer to the techies on those issues. But Benton has some good insight on which “Cloud” to choose and solid advice on how to get there.

Benton starts off by commiserating with the IT Manager because the virtualized world of Cloud Computing does offer many alternatives to reduce cost while at the same time increasing service. He breaks down his discussion in part 1 on IaaS to the benefits and possible disadvantages of Internal IaaS as opposed to External IaaS.

In order to chose the Internal IaaS model, Benton notes that the x86 platform must be virtualized and ITIL (“Information Technology infrastructure Library”) service model has been adopted (See: “weak in the knees” comment above). I’ll leave the previous comment for the techies to determine. The benefits of the Internal IaaS model are:

• Availability
• Performance
• Security
• Quick provisioning
• Just as Quick De-provisioning
• Ease of billing to identify unit cost (Giga-bytes of storage or Giga-hertz of power)
• Automation improves Service Levels

With IaaS comes ITIL best practices which require automated self-provisioning. For the finance department the billing should have the ability to determine unit costs. And with all the above benefits, Benton still stresses that, “The biggest impediment to the introduction of IaaS under IT is that the service provider is the requirement for some form of portal/Web-based self-provisioning capability.”

Outsourcing IaaS (i.e. External IaaS) has its distinct advantages as well. But, of course, as we have discussed in the past security remains the paramount disadvantage. Your data is stored off-site and the infrastructure is shared with many other entities and dynamically managed as your data is moved from server to server. Benton points out three other necessary issues to consider:

• Back-out strategy. If your provider does not live up to the service levels promised, how do you get your data back?
• Scalability. Is this built into your contract? Premiums charged and can the Provider deliver in your time frame?
• Hybrid approach. Useful when using Internal IaaS and there is extra capacity needed in an overload situation for a special project.

Benton discusses SaaS and PaaS in the second part of his article.

 

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Thomas Trappler is Director, UCLA Software Licensing, UCLA. He is the Manager (and I believe he is also the Founding Member) of “Software Licensing Professionals”, a group on LinkedIn which I am a member. Tom has a wealth of experience and his articles and commentary have been an excellent resource for me during my research on Cloud Computing and many other software licensing related topics. His current article in Computerworld entitled “The Cloud Contract Adviser: Service-level agreements” will be very helpful to those of you considering moving some or all of your computing to the Cloud.

He begins his article by breaking down SaaS, IaaS, and PaaS to its simplest terms, and that is “Service”. As Trappler points out, the key concern for the licensee should be “Uptime”. The service availability should be memorialized in the contract itself. Trappler cautions us about the vendor’s claims of 99.9% uptime. As he comments, the initial impression to the licensee to such a claim is favorable, but as the cliché goes, read the fine print. Such service availability and the vendor’s responsibility for downtime are not always computed as part of the 99.9% claims if your internet connection is lost. Also not included in the percentage is scheduled maintenance. Trappler also suggests that in the contract definition of service availability the percentage can be affected if it is measured by consecutive minutes or such downtime is spread over a certain period of time. Any or all of these components can be included in the contract definition of service availability or downtime.

Trappler’s section in his article on the remedies built into the contract is very useful. He states that this is the place where the draftsman builds in certain incentives to help assure compliance with the 99.9% uptime claims. These incentives usually come in the form of credits to be applied to future billings. I’ve been practicing law for close to 25 years and I have a particular angst when I hear my opposing counsel say something like “I’ve never heard of that before”, but I have to admit I was not familiar with one of the suggested remedies, as Trappler labels it, the reputational remedy. Apparently, one might consider including a remedy which would require the vendor to take out a full page ad in a newspaper of general circulation announcing missed service levels. A strong motivator, no doubt; but getting it into the contract itself might be a bit tricky.

 

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Kamesh Pemmaraju heads cloud computing research for Sand Hill Group. He writes a weekly blog, Leaders in the Cloud for weekly updates on developments in the cloud market. In an opinion piece for Sand Hill entitled Cloud Leaders Face a Changing Tide he reports to us on the latest Sand Hill survey of 100 software CEOs and senior executives and their responses regarding their firms expected revenues from Cloud Computing for the next few years, their customer’s attitudes and readiness to adopt Cloud Computing, and which products and services seem to be catching hold.   What appears to be obvious to Pemmaraju from the results of the survey is that these vendor’s customers want to be in the Cloud and the execs recognize this demand and no longer expect their customers to accept the existing products for sale. The survey respondents seem to feel that the global recession is ending and they expect considerable growth in the Cloud Computing market space.

85% of the respondents already had cloud products and service offerings ready for sale to their customers and 43% expect that Cloud Computing sales will make up the majority of their sales in the next 5 years:

The survey showed an interesting dichotomy between small firms (i.e. revenues of $250M or less) and large firms. The larger firms will grow their revenue from Cloud Computing but at a much slower pace in the next 5 years:

Pemmaraju identifies the key to success for these software vendors are to recognize the value their customers see in the applications and the platforms on which these applications are developed. Hence these software vendors “also need to create platforms to attract developers to extend and build new applications.” The concerns from all parties are very real and consist of:

·         PaaS (Platform as a Service) is still relatively new and unproven

·         Enterprise customers are stocked with on-premises development tools

·         Customers want to avoid being locked into one vendor

Although SaaS is the primary model today, Pemmaraju reports that the surveys show that PaaS is the choice for most respondents in the next 3 years:

The paradigm is shifting once again and as the software vendors learn and adapt there will be many missteps along the way. Pemmaraju sums it up nicely in his opinion piece:

“But as customers move away from traditional licensing models, software vendors—particularly the incumbents—face challenges in adjusting their products, go-to-market strategies and pricing models. How can they move towards cloud computing without cannibalizing their existing product revenues? Even the metrics or methods that software firms use to track their business are evolving rapidly. Moreover, nearly 50 percent of the executives surveyed said the cloud offerings today are not yet ready for enterprise use, and the current lack of standards is a growth inhibitor.”

 

 

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Intellectual Property Magazine - Cloud Computing: What In-House Counsel Needs to Know

Intellectual Property Magazine asked me to write an article for their March 2011 issue. We discussed various topics and ultimately settled on the subject matter in the title of this Blog posting above. Our arrangement allows me to publish my work in my Blog. The graphics in the published article are really quite amazing. What follows is the text of my article minus the graphics:

 

Cloud Computing: What In-House Counsel Needs to Know

The only constant is change. I remember being at an Oktoberfest back in the late ‘80’s. My friends and I noticed a young man wearing a phone on his belt. We laughed and thought how self-important he must think he is. Well, I confess that today I do not leave the house without my Smart-Phone firmly attached to my belt. I can make and receive calls, send and receive emails, surf the net, and even take a picture if needed. The old adage “Change, embrace it” holds true in today’s technological environment. 

It is said that the speed of processing chips doubles every 18 months. There does not seem to be an end in sight in the growth in sales for the ubiquitous mobile phones. Apple’s iPad is all the rage and the Apple stores cannot keep them on the shelves. The number of applications to be written for all mobile computing devices in the coming year is staggering. So the next phase in innovation in this burgeoning IT industry is Cloud Computing. The term “Cloud” gives the concept a rather nebulous tone. Studies show the sales in the Cloud Computing marketplace have doubled in the last few years and there is no slowdown in sight. Let’s first define exactly what Cloud Computing is in order to rid ourselves of the uncertainty and then examine its advantages and disadvantages.

Cloud Computing – What is it?

Software as a Service, also known as SaaS or On-Demand, is the term most closely associated with Cloud Computing. The key word is “Service”. SaaS acts similar to a linked network of computers, or a cluster of linked networked computers, to perform different functions. This cluster of networked computers acts as a virtual supercomputer. Each person working on his or her own laptop computer is provided with the exact application they need to work and perform the tasks on their part of a project or to perform their assigned tasks in their area of work in the corporate entity. These applications are provided to that person via the internet. The user can work remotely and the applications needed are accessed by them from the internet through their web-browser. It is a seamless delivery system and it appears to the user that the applications are installed on their lap-top. The software and the data generated are not stored on the premises or the user’s own hard drive, but rather on shared servers at the vendor’s site.

What are its advantages?

The major reason usually given for Cloud Computing is that SaaS is faster to get up and running into a productive environment when compared to a full blown enterprise wide implementation and therefore a much less expensive alternative. Hand in hand with the touted speed to productivity is the claim that the enterprise can avoid the upfront capital expenditures for additional or specialized hardware that are usually required in most Enterprise Resource Planning (“ERP”) implementations. The servers are not on premises. It is a shared server array at the software vendor’s site. Since it is a service, the pricing is based on a per seat use rate and so the millions in the initial cash outlay for the software suite are non-existent. The theory is that the enterprise pays for what one uses and no more. Depending on the application, the pricing might not be exactly pay as you go, but a hybrid. The software vendor may have a subscription based pricing for the estimated number of users or hits required over a shorter period of time. This pricing model can then be adjusted as events require. Another advantage to this delivery model is that it is easily scalable and provides flexibility as projects or the enterprise at large experiences growth. Users, storage space, and upgrades to new versions and releases to the software can all be dealt with as the needs arise.

What are its disadvantages?

Security is the paramount concern. Where’s my software? Where’s my data? We have government regulations to adhere to. There are new banking regulations and new privacy rules. What about protecting non-public personal information? How do you assure me that my data does not get mixed up with another entity’s data? And the list can go on and on. 

How do we address these concerns?

Cloud Computing is inevitable. Given the centralized nature of Cloud Computing, security becomes more efficient. Instead of fighting the concept, it might be wiser to prepare for its eventual acceptance and implementation.  It is a good idea to train your IT department personnel for the change so they can have a shorter learning curve when the switch is made. One way to approach this matter is to initiate trials for your personnel by creating an innovation sandbox in the cloud. Contractually, this is the time when in-house counsel needs to lean on the “techies” on the business team. Actually both sides must feel comfortable with the solutions to the security issues. Let the business teams gather all the questions and all the means to address those concerns. Then it is the contract draftsman’s job to memorialize these areas of concern and the consequences into the contract to be signed if such matters are not met. 

The teams must agree on the specifications of how the data is to be isolated and protected. Include language that allows and mandates that the customer’s data is retrievable in a format that is desirable and safe. The ability to retrieve your data in the right format should be part of any Disaster Recovery language and the policies and procedures discussed and inserted into the contract. Your data should be backed-up periodically on a regular basis and copies of the back-ups should be stored off-site at another secure facility. Support levels and upgrades are part of the selling feature of any SaaS initiative and so these must be clearly spelled out in the contract, usually via a separate Support Schedule attached to the terms and conditions and incorporated by reference. In addition to clearly defining what is included in Support, make sure to have your team develop in conjunction with in-house counsel and the vendor’s team a Software Support Response Schedule for inclusion into the contract. Such a Response Schedule should have up-time availability percentages for the Productive System and a sufficient penalty if these availability percentages are not met. Do not be afraid to include tough penalties for failure to achieve the agreed upon up-time availability to adequately incentivize the On-Demand vendor to meet their promised availability times. These penalties usually are a dollar percentage credit to the customer’s monthly or quarterly use fees. The teams should work on clearly defining different levels of priority and the times to respond to such calls for support (e.g. Level 1 is Very High Priority due to Productive System Shutdown. Response time after reported is 1 hour).   The contract must clearly state that the vendor is SAS 70 certified and such certificate must be made available to the customer upon signing of the contract. It should go without saying, but verify that all of the promises made have been confirmed by a team from the customer by an on-site visit to the vendor’s facilities. The on-site visit should be able to confirm all the physical security claims and the policies and procedures discussed in the contract negotiations. Once the promised savings materialize due to reduced costs on maintenance and upfront costs for specialized hardware, the enterprise can use these funds and direct its efforts to more innovative ways of running the business.

Is complete surrender the only alternative?

Depending on the type of business your company is engaged in, considering the move to Cloud Computing and the nature of the data to be processed, the concerns over security might be just too high a hurdle to overcome. The new Privacy Laws and computer hacking and new government regulations sometimes present an insurmountable obstacle.  Another approach is to perform a cost benefit analysis of just certain parts of your business and the results might make the transition to Cloud Computing more palatable. On-demand service providers, another name of SaaS software vendors, are coming up with hybrid delivery approaches to Cloud Computing. If the enterprise has a myriad of smaller customer interfacing transactions at a multitude of cites, why not make use of the Cloud with all its advantages of scalability and pricing based on use while leaving the more sensitive data processed and stored on premises in a single tenancy traditional approach. This allows the enterprise to take advantage of the cost savings of using Cloud Computing while still maintaining the integrity of the more sensitive data stored on premises.

Where do we go from here?

The worldwide recession has kept the lid on software vendors raising prices. But this economic downturn cannot last forever. During this time, there has been a consolidation of software developers in the ERP industry. In April 2009 Oracle purchased Sun Microsystems. This purchase alone gave Oracle, one of the prime players in the ERP market space, access to not only Sun’s premiere hardware capabilities, but also the keys to some of Sun’s stalwart software applications, most importantly the Java programming language. Along with Oracle’s purchase of Sun came the Solaris operating system asset as well. With all the assets of the Sun Microsystems purchase, including both the software and hardware, Oracle has placed itself in a position to provide the foundation to build its SaaS and Cloud Computing services. 

SAP, who has been partnering with IBM since the late 90’s, plans on developing along with IBM a product that will facilitate the creation of an in-house cloud. SAP’s new endeavor, the “Reservoir” cloud computing project’s aim is to spread the utilization of requested applications across the enterprise’s servers thus addressing under utilization and spikes in usage.

Intel, the world’s prime chip manufacturer, purchased McAfee, a leader in network security industry. With this purchase Intel hopes to integrate security directly into the architecture of its chip. If this is accomplished, Intel’s potential to enter such new markets as network security, smart phones, and PC tablets is boundless.  

Google, purveyor of the prime search engine of choice, has recreated itself into a vendor of mobile devices, operating systems, and Cloud Computing. Other big IT players such as CISCO, IBM, and HP, now flush with cash and seeing the impending paradigm shift in the industry, have gone on a shopping spree purchasing unified communications vendors, and network security companies, and business intelligence vendors. Oddly enough all of these companies apparently are perceived as being outside of the acquirer’s original area of expertise.  

With this consolidation in the market many of the potential ERP customer’s choices will be eroded as only a handful of ERP vendors will remain. It’s a fair assumption that prices will be on the rise. Your IT budgeters should expect the need to request increases in funding for the usual items that accompany an ERP Business Suite purchase such as increased costs for support, higher rates for users, and the ever burdensome costs of a full blown enterprise wide implementation with all its foibles and miscues.   One way to counteract the consolidation in the ERP market space is to examine the alternative methods for deployment of the needed IT services. Cloud Computing, Software as a Service, a hybrid approach, or Managed Services are options your IT department should be considering. As I have discussed the insurmountable hurdles to Cloud Computing can be overcome. With the right contracting model, adequate assurances and protections, along with sufficient penalties to incentivize adherence to agreed upon terms of protection, Cloud Computing can be the viable alternative for your IT department. Change is coming. Embrace it.

Epilogue : My editor asked me to develop a “To Do” list for the readers. The graphics in the published piece consist of a yellow legal pad with the following bullet points:

To-do-list

·         When implementing cloud computing, it is a good idea to train your IT department personnel for the change so they can have a shorter learning curve when the switch is made. 

·         In addition to clearly defining what is included in support, make sure to have your team develop in conjunction with in-house counsel and the vendor’s team a software support response schedule for inclusion into the contract.

·         The contract must clearly state that the vendor is SAS 70 certified and such certificate must be made available to the customer upon signing of the contract.

·         Make use of the cloud with its advantages of scalability and pricing based on use while leaving the more sensitive data processed and stored on premises in a single tenancy traditional approach. 

 

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There has been a lot happening recently. I have found three articles I think will be of interest to all of you. The first presents anecdotal evidence that SaaS is steadily becoming accepted in the IT world, but doubts still linger regarding security. The article presents some interesting clues on what’s important from a contracting standpoint. The second article provides some insight into the global marketplace’s emergence from the slump of demand for IT (i.e. companies increase spending for IT services). And the third article is a very witty compilation of the Board Room melodramas over the past few months. Space constraints prevent me from a full analysis of the three articles, but I think I can give you enough information to whet your appetites for more, and of course I’ll provide the links.

I.                    SaaS Adoption Continues:

Patrick Thibodeau provides examples of the continued adoption to the SaaS cloud based system in his article in Computerworld.com entitled IT shifts to the cloud; anecdote by anecdote. It appears that the reasons given by the CIO’s and IT Managers are of no surprise. Mark Stone, the CIO at Safety-Kleen Systems Inc. states:

“With a cloud-based approach, he said, "I can go today to a variety of SaaS providers and put in software that's every bit as functionally rich as anything I've developed on-site" -- without having to worry about the upkeep of an IT infrastructure.”

Lien Chen, CIO at RAE Systems Inc. had an Oracle ERP system that she wanted to integrate with Salesforce CRM. She could have purchased an integration package, which of course would necessitate hiring consultants to implement (i.e. factor in those costs as well). Instead she opted for the less costly cloud-based integration from Informatica. Security issues prevent her from moving all apps to the cloud.

From a contracting perspective the comments I found most informative were from Robert Scott, managing partner at Scott & Scott LLP, a Dallas-based law firm that advises clients on IT contractual issues. He acknowledges the angst over security concerns. His advice when developing the contract for cloud-based services is “You own everything you bring and everything you pay for.” Scott went on to say:

“That means, for instance, that if a cloud vendor undertakes integrations and customizations or builds templates and layouts, users have to be certain they can take that work with them if they move to another provider. This could have a big impact on your ability to switch."

II.                  Infosys Profits Up: Forecasts revised

As for evidence that the slumping world economy and in particular global enterprises’ spending estimates for IT is on the way back, see Ketaki Gokhale’s article in Bloomberg Businessweek entitled Infosys Profit Beats Estimate; Increases Forecast. It appears the rebound may be a double edged sword for India’s second largest exporter of software. Yes, Net Income is up 13% for the first three months of their fiscal year, and yes, Infosys joins the likes of Intel in reporting that IT spending is likely to increase in the coming year. However a stronger rupee is stifling the return of those monies earned abroad back to the owner’s in the country of origin, India. Infosys derives 66% of its revenue from North America and 23% from Europe. Gokhale reports on the latest from Forrester Research Inc. that “Worldwide information technology spending, which includes computer equipment and software purchases, will grow 7.8 percent to $1.58 trillion this year after falling 8.9 percent in 2009, according to July estimates.”

III.                IT Street Fighting Hollywood-Style

As an attorney involved in the intricacies of software contract drafting, I have a special place in my heart for lists. For a very informative and also enjoyable read, I highly recommend Thomas Wailgum’s article in CIO.com entitled 10 Lessons Learned from the HP-Oracle-SAP-NY Times Saga. In case you haven’t noticed there have been some very high-profile and entertaining board room antics for the past several months. It appears that the CEO, now the ex-CEO, of HP might have been involved in a dalliance that caused the HP board to summarily dismiss him. Not to worry his tennis partner and uber-rich CEO of Oracle, Larry Ellison, hired him in an instant as co-President. Apparently a New York Times columnist wrote nasty things about SAP’s former CEO and this columnist’s girlfriend is employed by the law firm suing SAP. And it seems everybody is taking pot-shots at HP’s board and HP’s board is fighting back. And what about IBM? Looks like they want in on all the tomfoolery. 

 

 

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I highly recommend Larry Barrett’s August 20^th article in CIO Update entitled Intel’s McAfee Buy Latest Sign of Sea Change in IT. In the second half of his article Barrett discusses how Intel’s acquisition of McAfee opens the door for Intel to become a key player in the mobile device and network security markets. I will discuss some of his key points later in this posting.  However, what I found most interesting is his discussion in the first half of his article where he describes quite adroitly and with relative ease his perception of the “Sea Change” in the IT industry. Barrett lays out the salient points in rapid fire succession based on his perception that the arrival of wireless networks, smartphones, and the “consumers’ unquenchable thirst for mobile devices” has sparked an acquisition frenzy amongst the big IT players who have plenty of cash on reserve. For example, Google has gone from the prime search engine vendor to mobile devices, operating systems, Cloud Computing, and SaaS. He mentions Cisco Systems, IBM, and HP purchasing unified communications, network security, and business intelligence companies, all of these companies apparently outside of the acquirer’s original area of expertise.

And now Intel’s Security on a Chip:

This acquisition takes Intel in a totally different direction from its core business. Gartner security analyst, Peter Firstbrook, doesn’t believe you can build security on a chip:

"Security is dependent on the OS and the apps in the stack. You can't anticipate that in the chip."

However others are not so skeptical. They see the potential that exists for Intel to enter a whole array of markets from network security, to smartphones, to PC tablets, to the myriad of hardware and software these markets create. Intel CEO, Paul Otellini, stated that the purchase of McAfee and bringing security to the chip was

“not just the opportunity to co-sell but also the opportunity to deeply integrate into the architecture of our products."

 

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In my research of items concerning the latest in the software industry, I came across three short articles of interest. I’ll give you a brief synopsis of each and a link to the article if you wish to explore further.  I’ve added a bonus “Quote of the Week” at the end. Sorry but I just couldn’t resist.

1.       Gartner Reports on the Surge in SaaS

Larry Barrett’s article on Gartner’s SaaS Market Report entitled SaaS Market Growing by Leaps and Bounds: Gartner states the latest report from Gartner shows no indication on any slowing in the demand for on-demand software applications. Gartner defines “SaaS as software that is owned, delivered and managed remotely by one or more providers”. Gartner expects 2010 SaaS sales to top $8.5 billion, an increase of over 14% of 2009 sales.

Advantages to SaaS:

·         Lower start-up costs compared to on premises deployments

·         Lower maintenance costs compared to on premises deployments

·         Ease in sharing applications and documents through the cloud

Gartner analyst Sharon Mertz stated, "As tighter capital budgets demand leaner alternatives, familiarity with the model increases, and interest in platform as a service and cloud computing grows.”  Further Mertz noted, "Greater market competition and increased focus by the mega-vendors reinforces the legitimacy of on-demand, mitigating initial objections about security and availability for many, as acceptance of SaaS as a viable model for enterprise computing services grows."

2.       Microsoft Claims Top Spot in Cloud Computing

Stuart J. Johnston’s article on Microsoft’s claim to be #1 in Cloud Computing entitled Microsoft: We’re No. 1 in the Cloud reports that Kevin Turner, Microsoft COO, proclaimed at their annual meeting for financial analysts in Redmond, Washington that Microsoft is “number one” in cloud computing. The company claims 40 million cloud computing users globally and Turner reported that "Seventy percent of the wins in the cloud that we had in [the fourth quarter of fiscal 2010]… were new Microsoft customers." He touted three of their new customers:

·         Dow Chemical Co.

·         Hyatt Hotels & Resorts

·         University of Georgia

Additionally, Turner made sure that his audience was aware of the company’s record year due in large part to a total of over 175 million licenses sold for their new Windows 7 operating system in the short nine months since its release.

3.       Public Cloud Storage Services the New Choice for Enterprises

David Needle has a new article on Public Cloud Storage entitled New Public Cloud Storage Services Target IT. In it he discusses the latest report from research firm Ovum regarding public cloud storage services. Ovum senior analyst Timothy Stammers stated:

"Not only do they relieve the burden of storing data on customers' premises, but they also have the multiplying effect of transferring to the cloud provider the responsibility of backing up that data"

Initially companies poured vast sums of cash into online storage services to no avail. Economies of scale could not be reached due to the fact that the vendors were using the same storage systems of the enterprises they wished to sell. Huge network bandwidth costs along with their customer’s refusal to accept to the unknown contributed to the collapse of this new emerging venture.

The solution and/or opportunity was as follows:

·         Slowing economy put CIO’s on the hunt for cost cutting measures

·         Cost of network bandwidth plunges

·         The unknown becomes known due to success of certain vendors, most notably Amazon and Salesforce

·         New object-oriented storage technology, i.e. much more bang for the buck

New start-ups offering these services include Nirvanix, Nasumi, and Ctera. Stammers revealed that these vendors often leverage the storage clouds from such mega-providers as Amazon, Microsoft, and RackSpace. He stated,

“To the customer it still looks like ordinary storage and there's caching to alleviate latency issues. Typically these systems also provide their own backup, but companies may also choose to do that on their own for an extra level of protection.”

4.       Quote of the Week

And finally, I just couldn’t resist this one. To paraphrase a line from a well-known cable news network, I’ll Report, You Decide. Here is my pick from David Needle’s article entitled Say What? The Week’s Top Five IT Quotes:

"First of all, moving to the cloud is not the right way to think about anything. There will be new things in the cloud -- redoing something doesn't make a lot of sense. If you want to argue we've been somewhat slow in expanding to the cloud -- fair enough -- but customers have a lot of interest in seeing that our applications maintain their core value, the data integrity and consistency. Taking that to the cloud takes a lot of work."

Kaj Van de Loo, an executive in the office of the CTO at SAP, defending his company's cloud computing strategy.

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I have been a member of LinkedIn, the Professional Networking Site, for some time. I have joined several groups that compliment my background and/or can increase my understanding in my particular area of practice. I have found one group, Software Licensing Professionals, to be particularly helpful. There is one relatively new discussion started by Michelle Nerlinger,Sr. Product Marketing Manager, SRM Solutions at SafeNet, Inc., entitled SaaS v Software: Their Licensing Needs to be Integrated. I was very impressed by the comments from all the discussion participants. Their comments are evidence of each person’s vast experience in this area and the trials and tribulations they have experienced while we all take this journey into the world of SaaS. The one overriding issue in this series of comments, as well as in my many readings on the topic, is pricing. The concept of pay-as-you-go just hasn’t crystallized and many vendors have resorted to a sort of subscription model, if the customer can indeed make use of the model. I came across one very informative comment by one of the discussion participants and I want to share it with you. I want to give full credit to its author David Ochroch, Information Technology Strategic Sourcing Consultant and Manager. His comments on SaaS pricing are as follows:

“Most pricing for SaaS follows a per-user model because that tracks directly to web-based access rights. A number of on-premise apps can price per-user...and as long as the software is a true user-based application, a per-user model works well as a value indicator. The per-user pricing model starts to break down in (at least) two cases: 1) where the app can't readily define or track users; and 2) where the app is used very rarely or primarily during peak times. Software with those latter attributes are usually sold on some other basis (per server, per processor, etc.). From my experience, software with those attributes (e.g., databases, middleware, security monitoring, transaction processing) often resides on-premise for performance reasons -- and I don't see SaaS being widely used in those areas for some time. I'm suggesting that there won't be a one-size-fits-all licensing model for either SaaS or on-premise but there should be commonality in the licensing metrics between the same SaaS and on-premise software versions.”

 

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As many of my readers know, I am a member of the business networking site LinkedIn. In my practice I have had numerous inquiries regarding SaaS agreements and many requests to draft such agreements from my clients. I found and joined a very good group on the LinkedIn networking site entitled Software as a Service (SaaS) Group. The group site itself has a lot of information and discussion groups and news items and I found it to be a good resource when I encountered some unusual issues. So one day I’m sitting in front of my computer when a LinkedIn notice pops into my inbox from Justin Pirie entitled “Your guide to the week’s events in SaaS for the Linkedin SaaS group by Justin Pirie.” He got my attention and so I checked it out and I am glad that I did. His site Paradigm Shift Actionable Insight for a cloudy world has a plethora of information. It is current, it is informative, it is hard hitting, and a must read. I like the sources he cites. It is a bit of a “No holds barred” approach. 

As an ex-SAP employee sometimes it is hard to see the forest through the trees and I tend to tread lightly, especially since a significant part of my current practice involves SAP licensing and drafting of Master Service Agreements for the implementation of SAP software. However I also am aware that it is also important to be forthright and recognize the issues and Justin Pirie does that in his blog. With the current news regarding SAP and the upheaval that has ensued, I think Justin’s approach is the right one. He starts with a cite to Paul Hamerman’s article for Forrester entitled SAP Announces Changes at the Top; Hasso Steps Up. He follows up the hard-hitting truth of Hamerman’s article with more of the same with a quote from Jeff Kaplan of THINKstrategies and his February 8, 2010 article entitled SAP Needs Strong Leadership to Stop Sinking as follows:

 

“The significance of this event was clearly underlined by the role SAP’s Co-Founder and Chairman of the Supervisory Board, Hasso Plattner, played as the primary company spokesperson during a corporate conference call this morning.

During the call, Plattner made an emotional defense of the company’s strategies and tactics in response to rising criticism in the face of SAP’s financial struggles. Plattner used the occasion to dispute claims that SAP isn’t moving fast enough to respond to changes in the market by proclaiming that SAP is well on its way to becoming a “multiple product company”. He gave Apotheker credit for “turning around” BusinessByDesign and said the rollout of the v2.5 of the on-demand solution is “close”.

The reality is that BusinessByDesign has only had isolated success in a handful of deployments in the field, and its scalability from a technological and go-to-market point of view is yet to be proven.

The truth is that BusinessByDesign’s lack of success is a reflection of SAP’s lack of commitment to the solution and an overall SaaS strategy.

The company’s leadership has never fully acknowledged the fundamental changes disrupting the software industry as a result of rapidly changing customer preferences and competitive pressures. For example, various SAP leaders in the past have suggested that BusinessByDesign would primarily serve as an ‘on-ramp’ to its on-premise customers rather than a solid standalone solution. This half-hearted approach not only turned off prospective customers, it didn’t incent its own staff to make a concerted effort to develop and deliver a competitive solution. (Emphasis Ed.)”

 

Justin Pirie follows up this strong dose of truth with yet another quote from Vinnie Mirchandani’s article entitled Enterprise Software is Entirely Bereft of Soul:

 

“But the reality is the customer has been forgotten in enterprise software, not just at SAP. It’s about squeezing as much out of old technology as possible. As I wrote earlier in the week. “I wish the other bigger vendors had the cajones to acknowledge they similarly mostly live off profits from software 15- 20 years old, from consultants which implement that old software and provide services from data centers which were designed during the Cold War.”

Leo was expected to do more of the same in his new role as CEO. So, he did – unbelievably pushing maintenance price hikes in the middle of the deep recession. For all his talk about taking on the partners who have piled 5 to 10X costs on top of SAP’s own expensive solutions, he really could not – they were part of the “field” he created.

SAP needed someone to dismantle that “old field” as the market transitions away from the big, honking upfront license and implementation and operating cost model. It is screaming for soul and innovation. Instead they rewarded Leo. Surely, they did not expect him to choke his own baby?”

 

At this point, I’m not sure if another dose of reality is needed. Enjoy the articles and do stop by Justin Pirie’s blog.

 

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I recently came across a White Paper from Saugatuck Technology, Inc. entitled “SaaS Realities: Business Benefits for Small and Mid-sized Enterprises”. In the spirit of full disclosure, this research paper was sponsored by SAP so there is a one page blurb from SAP at the end of this White Paper which reemphasizes the benefits of SaaS for SME’s and then touts its own SaaS offering Business ByDesign. I chose to post this review of the White Paper since the research is very current, describes the benefits succinctly yet thoroughly, and is also presented in an unbiased format.

The paper is written with the SME in mind, as one can discern from the title, however it begins with a very brief background to the pre-SaaS days. As a bit of a history buff myself, I always appreciate it when an adequate foundation is laid so we can see how things have progressed over time. The paper points out the initial two choices available to us:

·         Purchase of software suite from an ERP Vendor: The enterprise’s IT department is then saddled with all the tasks from selection, installation, maintenance, all hardware, and networking; or

·         Engage a VAR or Systems Integrator (“SI”) to install new software and integrate it with its existing legacy systems: Here selection and installation are handed over to the VAR or SI, leaving maintenance to the Enterprise’s IT department or perhaps outsourcing it.

The authors address the question of when is the optimal time to contemplate a switch in technology from the old approaches mentioned above to the latest alternative, SaaS:

·         Establishing a new location

·         Serving new markets

·         Sudden sustainable growth

·         Preparing for a recession

·         A new sales channel

·         A new supply channel

·         New governance or reporting standards

·         New performance goals

·         Aggressive competition

·         Increased customer expectations

The authors then go into a deeper discussion of SaaS. They begin, as most SaaS discussions begin, with the pricing model, per user / per month, and variations of this model. This is followed by a discussion of what an enterprise is really purchasing with SaaS (i.e. a business service). This business service includes:

“… the entire range of data center infrastructure services: networks, storage, operating systems, databases, application servers, Web servers, and of course, disaster recovery and backup services. Moreover, a full range of data center operational services – authentication, availability, identity management, production monitoring, patch management, activity monitoring, software upgrades and customization …”

The research paper then gets into the heart of the issue, mainly the Advantages of SaaS. There is a very well-written discussion including:

·         Financial Value

·         Time to Value:  Quicker installation, quicker integration, quicker pay-back period.

·         Affordability:  No large up-front costs

·         New technology

·         Continuous innovation:  Multi-tenancy allows for a continuous stream of enhancements

·         Improved Operations

·         Customization: Easily adaptable for SME’s

·         Integration: Service Oriented Architectures (“SOA”) are standard for SaaS providers. Also, three additional means of achieving seamless integration with other enterprise applications on premise include: Web-based SaaS integrators, SaaS integration appliances, and SaaS system integrators.

·         Fewer technical resources needed: Less strain on your IT department and small firms can take advantage of the latest technologies

·         Focus: Allows firm to focus on its core competencies

The research paper concludes by recognizing that SaaS may not be the answer for your particular firm. For example:

·         The application differentiates your firm from the rest of the market (i.e. the application is tied to your core competency); or

·         An existing large investment in your existing IT; or

·         Regulations may require that you keep and manage your data behind a firewall and your SaaS provider cannot accommodate this requirement.

Saugatuck Technology, the author of this White Paper, is a strategic advisor to senior executives, information technology vendors and investors, providing strategy consulting, subscription research and thought-leadership programs focused on emerging technologies, key business / IT challenges, and effective management strategies.

For further readings on this topic, see the following posts in this Blog:

SaaS Customer: A Checklist of What You Need to Know Before Selecting the Vendor

SaaS Contracting: Tips Leading to the Decision and What to Include in the Agreement

Also on the left hand sidebar insert “SaaS” into Keyword search and hit “go”. You will find numerous articles relating to SaaS.

 

 

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Alex Goldman reports for Internetnews.com on McAfee’s recent announcement of its latest SaaS security software, Total Protection Service 5.0 in his article McAfee Embraces SaaS Security. McAfee’s senior vice president and general manager for SaaS, Marc Olesen, is quoted:

“The SaaS security market is growing a little over 30 percent per year, three or four times faster than the on premises security software market”.

 McAfee feels that its competitive advantage for Total Protection Service 5.0 is the solution’s comprehensive feature covering DLP, compliance, vulnerability scanning, e-mail, network protection, and endpoint protection. Its competitors in this marketplace are Symantec and Trend Micro. Although SMB’s will find the product’s “Security Center” straightforward and easy to use, this solution is not meant for the SMB market alone. McAfee plans to market this solution to the large enterprise customers as well. One interesting feature of this new product is that vulnerability testing can be performed from outside the network at POP’s (public points of presence) at ISP’s. This is something that cannot be done with on-premise software. The product will be user based pricing, subject to the number of modules employed, with quantity discounting available. McAfee envisions that some enterprises may choose a mix of the protections their product provides alongside any competencies the enterprise may build on its own.

 

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So I’m sitting at my desk buried in work one day last week. As an aside, it appears that my writings on SaaS have sparked some interest and so I have been putting together some SaaS agreements for a couple of new clients. My email alert lets me know that an email has just arrived. It is an email from R. Ray Wang, Vice President of Forrester Research Inc. I have been reading a lot of Wang’s writings and research and have been quite impressed to say the least. I have even Blogged on some of his writings. He had a few kind words to say about my Blog and then he attached the latest update to the Enterprise Software Licensee’s Bill of Rights. I promised him that I would read this latest research work and mentioned in my email reply that it would probably be a treasure trove of vital and current information. Well I did read it and my comment hit that nail on the head. As a practitioner for over 20 years, with the last 10 years concentrated in this crazy world we call software licensing, this is a must read. As a Licensee, whether prospective or a veteran of ERP negotiations, perhaps a higher standard is in order, such as mandatory reading material. Here are some highlights from this latest work as detailed by R. Ray Wang:

1. Surveyed 71 vendors and 101 end users.
2. Built best practices from personal experience of 1000 contract strategy interactions.
3. Resulted in the inclusion of 11 new rights that support new deployment options, cost savings, client best practices, and vendor lock in avoidance.
4. Suggested seven simple steps to successfully negotiating enterprise software contract.

Of course reproduction of this research work is strictly prohibited. Regardless of the prohibition, space constraints in this Blog prevent me from adequately commenting on all the salient points. I do not think Wang or Forrester would mind if I whetted your appetite the best way I know how – with Wang’s own words in the Executive Summary.

For Business Process & Applications Professionals

Executive Summary 

July 7, 2009

 

An Enterprise Software Licensee’s Bill Of Rights, V2

 

Forrester Redefines 47 Basic Rights That Licensees Should Expect From Vendors

 

This is the 10th document in the “Building A Long-Term Apps Strategy” series.

 

 

by R “Ray” Wang

with Paul D. Hamerman, Andrew Magarie, and Ralph Vitti

 

 

 “Of all the assets that an enterprise acquires, enterprise software brings with it the most unusual, onerous, and restrictive set of constraints. In most cases, licensees may not resell, reuse, or share their license. Licensees often encounter numerous grievances across the software ownership life cycle from selection to implementation, utilization, maintenance, and retirement. Poor economic conditions have kept vendors from raising prices for now; however, rapid vendor consolidation has eliminated choice and customer leverage in the market. Upon economic recovery, enterprises can expect price increases in software categories where only a handful of solution providers compete. Fortunately, advances in new deployment options (e.g., software-as-a-service, platform-as-a-service, cloud computing, managed services, and virtualization) may slowly shift the pendulum in favor of the customer. Forrester’s updates to its 2006 Enterprise Software Licensee Bill Of Rights (LBoR) reflect these new best practices from more than 1,000 interactions. CIOs, business process and apps professionals, enterprise architects, and procurement experts should immediately review and incorporate these best practices into their vendor relationships, contract strategies, and packaged apps strategies.”

 

 

For information on hard-copy or electronic reprints, contact Client Support.

 

R. Ray Wang’s Blog is A Software Insider’s Point of View.

  

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It appears the tide is turning for the ERP giant. Initially Business ByDesign, the SAP SaaS offering, was targeted to the SMB marketplace. John Wookey, SAP’s new chief of on-demand software applications for Large Enterprises (“LE”) and former head of application development for Oracle, announced at the OnDemand Europe Conference in Amsterdam that SAP will allow online integration with core on-premise or hosted ERP platforms. This is a major switch in their strategy. SAP is determined to avoid the problems of data sharing and integration with this type of approach. Mike Simmons reports for ComputerWorld in his article SAP in SaaS U-turn:

“Wookey will initially promote the LE on-demand offering entirely at SAP's established customer base. Until now the company had been reluctant to sell SaaS products to its installed base, for fear of cannibalizing license and maintenance revenues”

Mary Hayes Weier of InformationWeek reports on her interview with John Wookey in her article SAP unveils SaaS Strategy. SAP will provide “function-specific software applications, available by subscription, that plug into customers' on-site SAP Business Suite systems, and that SAP will host for customers using a multitenant architecture”. 

Weier provides us with a good definition of Multitenancy and how SAP will provide it:

“Multitenancy -- in which groups of customers share the same instance of a software application, even though their data is kept separate -- helps software companies keep costs down for the hardware, software, and energy they use to host customers' applications. In turn, that allows them to offer competitive subscription prices. Wookey describes Frictionless' technology, which will be the foundation of SAP's on-demand platform, as "Java-based with a true multitenant architecture”

Development groups will bring on-demand applications to the market. SAP’s CRM already in the market, although not a multitenant architecture yet, will be a seamless upgrade soon. The other two on-demand products also in the market, e-sourcing and carbon emissions management are a result of earlier acquisitions. SAP’s acquisition of Sky Data will be able to provide a mobile component to their on-demand offerings.

 

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In late April 2009 Oracle announced its $7.4 Billion purchase of Sun Microsystems. As you can imagine, this deal will have a significant impact on the IT industry, but just how much of an impact remains to be seen. Invariably acquisitions of this size and nature will be examined for any possible anti-trust issues such as anti-competitive influences on the market-place. This process by regulators will be done here and abroad and the end-result may be the necessity to sell-off some assets of the newly combined business. If you are looking for an excellent in-depth analysis of this deal I highly recommend Bruce Guptill’s article in SandHill.com The Impact of Oracle – Sun. In it Guptill sees a totally changed IT Industry with Oracle emerging as a “portfolio” company with the following abilities and offerings:

·         Hardware

·         OS

·         Middleware

·         Applications

·         Development tools

·         Databases

·         Production environments for Hosting

·         SaaS

·         On-premise subscription services; and

·         Consulting solutions (vertical and horizontal).

 

Although Sun is primarily a hardware vendor, Guptill sees this as a play for Sun’s software capability. He quotes Oracle’s CEO, Larry Ellison, “Sun's Java programming language and Solaris operating system were the main attractions for Oracle”; and specifically as regards Java, “the single most important software asset we have ever acquired.”  Guptill believes this asset alone places Oracle at the epicenter of the industry. Sun has also played a key role in open source by opening Java and Solaris to developers and this should give Oracle the ability to influence such software development especially in the following specific vertical markets: financial services, government, academia, and high-performance computing. Lest we forget the hardware business, Sun’s server and storage revenue have been estimated at an annual amount of $7 billion and $9 billion respectively. All of the Sun components, from software to hardware, should provide Oracle the foundation to build its SaaS and Cloud Computing services.

Can Oracle successfully integrate the services and hardware businesses that come with the purchase of Sun? Guptill tells us to be on the lookout for Oracle Management to sell of some of these hardware lines, or alternatively as mentioned above, regulators may force Oracle to divest itself of some of these assets.

Guptill concludes his article with a brief description of the impact such a purchase has on several stakeholders and competitors. For example:

For Sun: This probably means the demise of Sun CEO Jonathan Schwartz who had pushed for the IBM acquisition of Sun rather than Oracle. Sun Chairman, Scott McNealy, although a friend of Larry Ellison, will probably go as well since a ship needs only one captain.

For MySQL: It should fit nicely into the Oracle family as a web server database engine.

For IBM: This was a lost opportunity at more profits and the ability to rein in Oracle competition. Also Sun’s capabilities would have enhanced IBM’s Cloud Computing efforts, but now this advantage goes to Oracle.

For SAP: Guptill sees the advantage going to SAP in the interim while Oracle’s sales teams learn how to integrate Sun products into the Oracle family. I am not so sure I agree. In light of SAP’s recent sales history any advantage may be illusory. See SandHill.com Software News Summary article SAP Struggles. The title tells it all.

For Hardware Vendors: For those that have partnered with Oracle in the past the loss could be significant.

For Users: Future investments in Sun hardware may be put on hold as the install base waits for reassurances on the direction of the server and storage lines of business.

Never a dull moment.

 

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There is an episode in Seinfeld where Jerry and Kramer are having a disagreement on an accounting issue. Kramer claims that the Post Office can just “Write Off” an insurance claim as a loss. Jerry implies that Kramer doesn’t even know what a write off is. When Kramer retorts, “Well do you?”, Jerry confidently states in a tone of honesty “No, I don’t”. That’s when Kramer comes in and seals the deal with the irrefutable line, “Well they do, and they’re the ones writing it off”.

Well, my friends, I am afraid that there is a bit of accounting “know-how” required to fully comprehend the latest opinion from Gartner analyst Robert DeSisto. As Richard Adhikari reports in his article for InternetNews.com entitled Gartner Warns on SaaS’s Hidden Costs, the Total Cost of Ownership (“TCO”) may be great for the first 2 years since SaaS does not require an initial capital outlay for hardware and the licensing model is pay-as-you-go. However the accounting for on-premises applications flips this advantage since the large capital outlay eschewed by SaaS proponents comes into play in later years. You see the larger expense for infrastructure in the non-SaaS model can be capitalized and any self-respecting accountant will tell you that means this “Capitalized Expense” can be depreciated. In essence the depreciation expense becomes a “Write-Off” against revenues. Oh dear, if I have confused you either see Kramer’s explanation above (or) the September 29, 2008 posting in this Blog, SaaS Contracting: Tips Leading to the Decision and What to Include in the Agreement.

Adhikari includes a rebuttal to DeSisto’s capital expense argument from Raju Vegesna. Vegesna comes back with the fact that SaaS pricing includes maintenance, support, and upgrades. Other SaaS proponents tout the ease of implementation and the favorable pricing model. On the flip side, DeSisto cautions that enterprises requiring tight integration with existing systems might not have the quick roll-out as promised. In addition, although the SaaS pricing model is advertised as a pay for the computing resources used, a significant number of SaaS Vendors have opted for other pricing models. In particular, DeSisto points to Salesforce.com whose pricing requires the customer to purchase subscriptions for a period of time regardless of use. 

I think the jury may still be out on this one. What isn’t discussed at length in this article, but is only hinted at, is the fact that the SaaS model should be attractive to the smaller enterprise and/or the start-up, while the larger enterprises might well be served with the traditional on-premises model.

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Richard Adhikari reports for Internetnews.com on a recent Forrester Research report addressing the strategies of CRM Vendors entitled Social Networks Among Trends in CRM for 2009.  The Forrester report discusses the difficulty in these tough economic times of obtaining funding for new CRM projects.  New customers are harder to come by and so one approach for 2009 will be to create customer loyalty in an effort to avert attrition and thereby at the very least maintain revenue for 2009.  CRM Vendors will direct their efforts on adding value to existing applications.  One way to do this is targeted offerings that will incorporate CRM into existing ERP and SCM systems.  These new solutions will utilize the existing systems to provide enhanced customer facing applications.  Forrester also sees the Salesforce.com model of incorporating Social Networking capabilities into its CRM offerings as yet another approach.

On the flip side of this equation, the enterprises will be looking for specific enhancements in their CRM applications in order to justify future projects.  As discussed in Forrester’s report, Customer Data Management seems to be the biggest area for improvement.  The enterprises will also be exploring SOA and SaaS licensing models as alternative means of obtaining value and keeping costs down.

 

 

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Bahan Sadegh, CEO and co-founder of NETtime Solutions and a veteran of the on-demand software industry, has written an article with the SMB Customer in mind.  Sadegh has created a list of questions for the SMB to consider before choosing its SaaS Vendor entitled 10 Questions To Ask A Potential SaaS Vendor.  His list is very informative and it would be wise to keep handy when considering which SaaS Vendor to select.  I cannot attest to the fact that this is an inclusive list, but I will tell you that his discussion of the points he has identified gives the reader enough information to perform their due diligence and ask more questions and there really are more than 10 points to know if one includes all the “sub-points” Sadegh includes.  I will try to provide a brief synopsis of his 10 Questions below:

1.     Billing should be pay-as-you-go: We all know there is a business cycle and your invoice should reflect this cycle.  Also, there should never be any maintenance fee on your invoice.

 

2.     Security:  Sadegh has a very good list of questions to ask in this very important area.  Instead of trying to paraphrase his words, I think it best to directly quote him on this matter:

“Ask your potential SaaS vendor:

-       Does the data center that is housing the servers have physical security 24/7?

 

-       Is the perimeter of the data center secured (do guards walk the perimeter at least once per 24 hours)?

 

-       Who has permission to the access these servers (only internal employees or do contractors also have access)?

 

-       Is there a log that captures who came in and when they left? If so then how often are those logs audited?

 

-       Does the application use industry standard 128-bit encryption?

 

-       If multiple customers are housed on the same server then are they logically/physically separated to ensure your data is not viewed by unauthorized eyes?

 

-       Has the staff of the SaaS vendor who has access to your data gone through a criminal background check? It’s important to know whether or not convicted felons have access to your sensitive personal data.

 

-       Does the vendor have a formal BCP (Business Continuity Plan)? Is the vendor willing to share it with you and does it satisfy your concerns?”

 

 

3.     Solution must be web based:  There should be no requirement to install an application on any computer.     Also any SaaS application should be able to run on any platform and any browser.  In the event of a computer crash, you must have access to your application.

 

4.     An experienced vendor:  Make sure the vendor has experience in hosting.  A vendor experienced in hosting has already addressed such issues as scalability and security and is not merely repackaging their application as SaaS. (NOTE:  See point 8 below regarding MSP’s).

 

5.     Upgrades should be automatic:  You want to be on the latest version and have the most current functionality.  There should be no need to retrain your users.  The upgrades should be seamless.

 

6.     Integration:  You should have the ability to transfer between the web based applications and any on-premise applications.

 

7.     Data must be backed up regularly:  Nightly onsite back-ups and weekly offsite back-ups should be the minimum.  Does the vendor test how to restore their database?

 

8.     Who is hosting the solution:  Is this an in-house hosting arrangement or has the SaaS vendor contracted out with a Managed Service Provider (“MSP”)?  Get a SAS 70 report and verify that in the data center every system has at least one independent backup to ensure availability in the event of system failure; this is known as N+1 configuration.

 

9.     Scalabilty:  Can the SaaS vendor grow as your company grows?  Ask about their largest customer and ask them about their plans for growth.

 

10.  Is the SaaS system monitored:  An easily overlooked question.  Do they have monitoring software and do they test their firewalls?

 

Sadegh concludes his checklist by suggesting that the SaaS Customer perform a bi-annual review of their service with the above checklist in mind.

 

 

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The SaaS story remains the same, but now the approach must shift.  SaaS is cheaper to implement and the enterprise can avoid the upfront capital expenditures for hardware.  Since it is a service, the pricing is based on per seat use and so there is no initial cash outlay for the software suite.  You pay for what you use.  In this current economic crisis enterprises are ripe for a way to lower costs and so the approach the SaaS vendor should take needs to adjust to the times and the SaaS vendor must highlight the advantages in their marketing approach.  Demian Entrekin, founder and Chief Technology Officer of Innotas, has written an Op Ed piece for SandHill entitled 10 Predictions for Software as a Service.  In it he cites a Gartner study that predicts the $6.4 billion in SaaS sales for 2008 will grow to over $14.8 billion by 2012.  In his article Entrekin discusses the 10 key trends that the SaaS vendor should consider in order to expand their market share by encouraging acceptance of their application.  I will provide a brief synopsis of these trends below, but I strongly suggest his article to my readers for the full story.

10 Key Trends to Growth and Acceptance:

1.     Sell the product features:  Abandon the traditional approach of selling the whole product and emphasis the individual product features that address the individual business processes desired.

 

2.     The application is seamless:  SaaS is not restricted to the enterprise and more directed toward user networks.  This should lead to easier adoption.

 

3.     Have an Elevator Speech:  Just when marketing yourself for a job, one needs to be able to sell oneself in the first few moments of the interview, Entrekin suggests the SaaS Vendor be able to demonstrate added value in the first minutes of meeting the prospect.

 

4.     A Deming Approach:  W. Edwards Deming would emphasis “the ability to support a reliable, scale-able service at a low cost.”

 

5.     Emphasis Tier 1 Support:  Stress the capability of your Tier 1 Support and suggest the enterprise eschew the need for high priced consultants to answer what become high priced questions.

 

6.     Product Alliances are key to growth:  Make alliances with other SaaS vendors as a means to growing market share.

 

7.     Video rules the day:  Use video for training and support.  It is cheaper and much more interesting than the traditional text tools.

 

8.     Consider a full service Hosting Provider:  This is the point of most interest to me.  Entrekin points out that the SaaS Vendor obtains the same leverage from an outsourcer that they provide to their own customers.  This has the added benefit of leading to aggregation of applications and partnerships.

 

9.     Grid Computing:  SaaS vendors should build their applications so they are “cloud compatible”.  It remains to be seen if grid computing becomes cost efficient, but the SaaS vendor should be ready to take advantage if such is the case.

 

10.  Your approach can shift from the technology hurdles to a marketing strategy: Entrekin believes the hurdles getting the application to market are slowly but surely being overcome and now is the time to shift to a viable marketing strategy.

 

 

 

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Due to the differences between traditional “on premise” software licensing and the newer software as a service (“SaaS”) offering, there were bound to be required adjustments on how the software customer contracted for these services.  We owe a debt of gratitude to Gene Landy with the law firm of Ruberto, Israel & Weiner, P.C. in Boston, MA.   Landy has put together a list of 8 items in his article 8 Legal Tips for SaaS Vendors that should be considered by the SaaS Vendor while developing their SaaS offering.  Including some or all of these tips in your contract may be a smart decision.  Here is a brief summary of those legal tips:

1.     Look for restrictions in your own software licenses:  As you develop your offering, do your licenses prohibit use as a service bureau or are there restrictions on remote access or use as an Application Service Provider.  You wouldn’t want your SaaS application to be in violation of any of these restrictions.

 

2.     Has your contract model evolved:  Initially the SaaS offering came in a 2 part form - first a software license and then a hosting agreement.  Today the more common contract model is to view this as a subscription and not mention licensing in the agreement.

 

3.     The Tax Man:  Your customers may be interested to know that most states do not levy a tax on services as they do for the sale of a license.

 

4.     Trials:  The SaaS Vendor could include a trial period bundled into the subscription agreement.

 

5.     Required upgrades limit the SaaS vendor’s maintenance costs:  Require customers to upgrade and eliminate having to maintain prior releases.

 

6.     Security:  It is fine to tout your security measures, but never promise 100% guaranteed data protection.  This is IT after all and you are using the internet.

 

7.     Consider SAS 70 as a selling feature:  You can provide your customers with an extra level of comfort and some of your customers may actually require a SAS 70 certification.  This is a certification performed by an outside accounting firm which attests to the accuracy and security a vendor provides.  The certification states that the controls are adequate.

 

8.     Data Breach Notification:  In the event of a data breach most states require a notification be sent out to the subjects of such a breach.  Make sure that your customers do not attempt to place such obligation upon you.  The costs could be prohibitive.

This is by no means an inclusive list, but Landy has hit some key issues. I found it very informative and helpful.

 

 

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Due to the current economic conditions, IT departments are coming under increasing pressure to do more with less.  However, over the last few years upper level management has become leery of divesting themselves of the servers and network to a service provider.  In prior postings to this Blog I have provided reasons why outsourcing can benefit the enterprise, 10 Reasons to Outsource, and also a comprehensive checklist to consider prior to making the decision, Checklist Before Outsourcing Your IT.  In an effort to continually update this topic as events evolve, this posting is another in this series and concentrates on the concerns one might have regarding the Service Provider.  To get the full detail underlying the following points to consider when evaluating which Service Provider is best for your enterprise read Outsourcing Your Infrastructure: Ten Points to Consider When Making the Move.  Here is a brief summary of those ten points:

 

·         Uptime:  Greater reliance on the internet makes “On” the only option.  The global marketplace makes this a necessity.  The options could be straight hosting, managed service, or SaaS.

·         Redundancy and Business Continuity:    loss of customer call center could result in lost orders.

·         Data Restoration:  eDiscovery Laws require a significant and competent back-up plan.

·         Response Time and Site Performance: providers have high-performance servers and high-speed access, but do they have only one location.

·         Scalability to meet growth: Can the Service Provider add capacity quickly to meet the rapid increase in demand, in other words, does the Service Provider have the financial capital available to rapidly add more servers.

·         Customer Support:  This is the “value-add” dimension that differentiates one Service Provider from the other.

·         Security:  Must be able to adhere to the Data Privacy laws such as Sarbanes-Oxley, and Gramm-Leach-Bliley.

·         Cost Reduction and One-Stop Billing:  Abandon the ala carte approach to IT infrastructure.  Bundled services are discounted.

·         Optimized IT resources i.e. dedicated servers:  Allows IT staff to redirect their efforts to delivering their own services.  Plus services on demand priced on usage is better offered from a service provider’s business model.

·         Financial improvements:  Eliminates the need for cash oulay for hardware and turn the cost into an operational expense as the enterprise pays for a service.

 

 

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There are many items to consider before deciding to adopt a SaaS approach to your IT operation.  Marcia Gulesian, a software developer, project manager, CTO, CIO, and author of numerous feature articles on IT, has captured the salient points in her article SaaS: Financial, Legal & Negotiation Issues.  As the title to her article suggests, the financial implications should be addressed first.  Gulesian has a very descriptive section on the differences between buying the software application and leasing it.  She discusses the differences of owning an asset and its tax advantages of the deductibility of depreciation as opposed to the leasing option.  There is a brief explanation of cash flows between the two alternatives, finding your opportunity cost, and making your determination on the comparison of the present values of the cash flows from the cost of owning versus the cash flows from the cost of leasing.  Before we go too far afield, my readers can attest to the fact that I always try to define our terms before delving into the nuances that the subject line suggests.

Wikipedia’s definition of SaaS is very complete yet succinct:

“Short for Software as a Service, SaaS is a software delivery method that provides access to software and its functions remotely as a Web-based service. SaaS allows organizations to access business functionality at a cost typically less than paying for licensed applications since SaaS pricing is based on a monthly fee. Also, because the software is hosted remotely, users don't need to invest in additional hardware. SaaS removes the need for organizations to handle the installation, set-up and often daily upkeep and maintenance. Software as a Service may also be referred to as simply hosted applications.”

I also have a posting in this blog, which I must admit has become quite popular based on the number of hits registered to it, entitled SaaS is the Future.  In it I discuss how a Managed Service Provider (“MSP”) can help software developers get their product to the market faster since the infrastructure barriers and capital expenditures are significantly lessened.  In another posting about Unified Communications I have quoted Mat Taylor, a senior software architect with British Telecom, regarding the benefits of SaaS:

"The ability to get things done faster, get workers more engaged in a business scenario, provide better customer service, are all big productivity wins that benefit the bottom line"

In light of the above discussion surrounding “lower total cost of ownership and quicker time-to-value”, Gulesian cautions us that the other factors to include in the financial calculation is the maintenance and support fees that come with ownership as compared to the SaaS fees which includes these items.

SO WHAT DO I INCLUDE IN THE SAAS CONTRACT?

Gulesian points out three areas that must be addressed in the contract:

·         Integration with your non-SaaS systems

·         Loss of control of data

·         Dependence on the provider for security

The CIO and his or her team are the main players to address the integration issue.  Although the next two points also require the IT organization’s participation and input, these are matters that must be addressed upfront in the agreement itself.

Risk of loss of your data is paramount.  In the event that the SaaS provider is unable to provide the support anticipated, it is essential that you have access to the applications as well as your proprietary data.  Inability of the provider to provide support may happen for a myriad of reasons such as bankruptcy of the provider or a real or threatened patent infringement claim and subsequent injunction.  The preferred approach to protect against such loss is to insist that the provider place its code into an ESCROW account.  Language can be drafted which will instruct the trustee  of the escrow ( an independent and trusted third party) to release the code to the beneficiary (i.e. you) upon the happening of certain events which are defined in the escrow language in your SaaS agreement.  One shortcoming to this occurrence is the downtime that may be involved in getting your systems up and running, but this is a necessary protection that you must include in your contract.

Transition assistance is another item to consider.  In the future you may wish to change the SaaS application currently in use.  Language should be included to require the provider’s assistance in developing the data migration strategies and the procedures to be followed so you can move your data to another application.

Since the SaaS model is economical by nature (see Wikipedia definition above), traditional discounting expectations are not available.  Pricing is based on users or seats.  The more users subscribed, the more likely the cost per user can be discounted.  So plan accordingly and try to build in volume discounting per blocks of users.

Other items Gulesian notes for inclusion in the agreement are:

·         Service Level Agreements (SLAs) regarding

§  Availability

§  Response times

§  Notifications of outages

·         Regulatory compliance

·         Data integrity

·         Data Privacy

·         Frequency of backups

·         Disaster Recovery

Gulesian’s article hits the main points and I highly recommend it to my readers.

 

 

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Richard Adhikari reports in InternetNews.com that SAP plans to move aggressively forward with its SaaS offering, Business ByDesign, and is targeting the SMB customer in his article SAP to Innovate Heavily in SMB On-Demand Suite - updated - Business intelligence to pervade enterprise software giant's forthcoming products.  It appears from some of the comments quoted from the SAP executive suite that the word “aggressive” is only the tip of the iceberg:

Henning Kagermann, co-CEO stated:

“When you come to challenging times, you have to take risks. Business ByDesign is not just about product, we also want to focus on profitability, and in the volume business you have to do a lot of innovation to make the business profitable”

Jim Snabe, head of SAP's business solutions and technology, stated further:

“You can look at it from two angles. One is how to convert money into ideas; the other is how to convert ideas into money”

In addition to the predicted new innovation of this SaaS offering which includes CRM, SAP will integrate its Business Intelligence (“BI”) technology into the business suite as a direct result of its purchase of Business Objects last year.  This will bring the analytics portion into the new offering.  Customers will be able to analyze their historical projections as well as future projections.

So when should we expect this new business suite to be rolled out.  SAP says to look for it by next year.  Just exactly when next year isn’t quite clear.

In related SAP news:  In a move to emphasize its focus on profitability and a bid to match the pricing of Oracle, its chief competitor, SAP customers are none-too-happy with the recent price increase for its enhanced maintenance “Enterprise Support”.  For the full story see SAP CEO Defends Price Hikes as Customers Gripe - In its drive to become more profitable, has the enterprise software vendor stirred up a hornet's nest?  Kagermann defended his company’s actions by stating:

"We're offering a new service which is much larger than before, has a certain value and a certain price. The cost for us is higher, and so we believe it's a fair price."

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I have reported on several new technologies as they have entered the market, such as SaaS and SOA, and also the newest devices powered by the latest applications.  Jim Hemmer, an experienced CEO in the hi-tech and communications industries, brings this altogether in his cutting-edge Op-Ed for SandHill.com entitled The Mobile Bang Theory.  I highly recommend this article to my readers and it is a must read for the IT managers trying to get a handle on the security and control issues that mobile computing presents.  Hemmer begins his article by announcing the new shift in the archetype and identifying its 3 components:

“a mobile renaissance is afoot as a result of more powerful devices, faster wireless networks and broader use and acceptance of Web services and SOA”

Hemmer’s insight begins by recognizing the catalyst for enterprise mobility.  He labels this the “outside-in demand” phenomenon.  Consumer’s personal use of mobile services on mobile devices has forced enterprises to rethink their approach.  With this new approach come the challenges of providing access to the data and applications so the employee/user can optimize their efficiency.

For the enterprise the competitive advantage comes from the ability of the mobile user being able to enter data once into a mobile device which results in not one response but puts in motion a multitude of real-time business processes.  Hemmer identifies the trends in mobile computing and how the applications perform.  He then provides some real-life examples of how this approach works and the higher returns the innovative enterprises have experienced.

Hemmer’s advice to the IT managers is to develop a mobile strategy that supports multiple devices and multiple solutions.  The old siloed approach does not fit into this model. Its inflexibility is too costly.  He puts it succinctly by stating:

“The real game-changer is to mobilize diverse business processes, applications and data from a variety of internal and external sources — from one unified, cohesive platform.”

 

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Richard Adhikari reports on a recent summit of SaaS executives in his article Are Changes Coming in the SaaS World?  The direction the industry should take was discussed but with little consensus.  It seems that those assembled see the huge potential in acceptance of SaaS by the large global enterprises, but no one can quite figure out how to break through the barriers.  Adhikari has done an excellent job of presenting the plethora of diverging views on why or why not the SaaS vendors should target the large enterprise market and how to go about doing it.  I am not privy to their marketing research nor have I suffered the trials and tribulations that some of the participants relate.  It just seems to me that sometimes it might be best to let the sleeping giants sleep.  Will these large enterprises come on board sooner or later?  Adhikari cites Maynard Webb, CEO of virtual call center company LiveOps who states:

It's a vicious circle: SaaS vendors can't sell to the enterprise because they haven't solved many of the concerns IT has with on demand software, so they don't try.  Most SaaS vendors target the SMB market, while the rest aim "at niches in the enterprise such as human resources"

What becomes apparent when reading Adhikari’s article is that there isn’t just one reason for the reticence of large enterprises to accept the SaaS model.

In my research in this area I have come across varied opinions and insight into just what exactly SaaS is and who should take advantage of it.  In my February 10, 2008 posting to this Blog SaaS is the Future software developers were scrambling to meet the demands of their market.  At that point their market was the SMB enterprise.

A further explanation as to the non-universal acceptance of SaaS can be gleaned from an insightful comment by Sybase CEO John Chen:

“ … But the reality is that every new technology and every new method will have its audience – but it won’t wipe out the previous ones.”  For the full story and an interesting perspective see my May 1, 2008 posting What Customers Want from their Software Vendors.

Of course there also is the other side of the coin.  The SaaS software developers themselves have their own internal hurdles to surmount.  In my June 1, 2008 posting Growing Pains of OnDemand I highlight one of the problems of managing a subscription business:

“Simply put, the business processes needed to run a subscription business do not yet exist, and when these new business processes do come on line, they will be incompatible with the existing business processes for a large enterprise software company.”

Perhaps it is best summed up in Adhikari’s article by Lisa Lambert, managing director of the software & solutions group at Intel Capital:

Intel's Lambert thinks the notion of selling to the enterprise is a red herring.  "I don't think it's a question of enterprises not being ready to buy SaaS, it's that it makes more sense for small businesses to buy SaaS.  The value proposition of SaaS really appeals to small businesses, which were excluded from being able to buy legitimate software infrastructure that's enterprise ready because they couldn't afford it, it was too expensive and complex, and had long implementation cycles."

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Business Objects, an SAP Company, continues its strategy of partnering with innovative companies offering Business Intelligence (“BI”) in a SaaS approach with the blessing of its parent, SAP. Its latest association is with Oco. Although both companies are players in the SMB space and both offer BI in the SaaS mode, Oco is a much smaller company. Oco’s competitive advantage comes from its development of templates for various vertical niche markets such as analytical tools and reports in the retail, industrial manufacturing, and consumer packaged goods industries. This collaboration suits both companies. SAP furthers its desire to make its products work with other vendors’ products and Oco gains an entrée to the larger SMB customer that was not previously available to them.

The BI marketplace has become extremely competitive. The main distinguishing factor for vendors in this market is to provide the products that give the enterprise the ability to make decisions faster. Business Objects’ SaaS offering, Business OnDemand, provides a fast and accurate solution. Now with the added advantage of Oco’s data discovery and mapping tool, the solutions for the SMB will come faster and at a lower cost. These partners recognize that the much larger enterprises who want their intelligence customized might not be so receptive to the Oco data model. Richard Adhikari explains in his article Business Objects Teams Up With Oco the customer first accepts Oco’s data model and this data model then finds all the data in the enterprise and produces the BI in a low cost manner.

Adhikari cites Business Objects Vice President Mani Gill, who explains the enhanced OnDemand offering this way:

Oco will let us deliver hosted multi-source data warehouses in multiple industries and functional areas.

We use our enterprise information management tools to pull data from customers, host it ourselves and provide business intelligence on top.

For a fuller explanation see Adhikari’s article. He points out that the combination of these two vendors additionally benefits both by allowing Oco to become a reseller of Business Objects products and permitting Business Objects yet another opportunity to differentiate itself and gain a foothold in this market space.

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First I would like to define what we mean by Unified Communications (“UC”).  Unified Communications encompasses email, instant messaging, texting, phones, and other networking and mobility applications.  In short Unified Communications “ … lets users access people and resources, no matter the location or communication channel, spurring productivity and boosting business processes at an economical cost.”  For an in-depth discussion on this topic see UC Will Prove Challenging to Buyers And Sellers by Judy Mottl.

Initially SMB’s have found it a daunting task to try and pull all these various applications together into one cohesive platform.  The lack of funds and the lack of familiarity with these tools have hindered their move to UC.  The familiarity issue is evaporating as more people are using these communication tools in their non-work life and begin to demand these tools in the workplace.  For further discussion on the capabilities and uses of the newest wireless devices and the coming of the Mobile Web see the following posts in this blog:

• Blackberry Bold RIMs Next 3G High Speed Wireless Handset

• 4G and The Mobile Web: WiMAX v LTE

SaaS may be the way that SMB’s can overcome the budgetary constraints as well as the integration problems that have acted as a barrier for these enterprises.  SaaS provides a faster deployment and the right provider can pull all the telephony tools and applications together into one unified and interconnected unit.  Judy Mottl has written an excellent article that details in the ins and outs for those SMB’s considering this next step into UC.  In her article SaaS Best Path for SMB Unified Communications: Service strategy lets small companies enjoy technology benefits without the headaches she interviews Simon Edwards, UC project director, British Telecom (“BT”), who cautions not to get locked into one particular platform:

"SMBs have to make sure they stick to an agnostic platform," said Edwards, adding that the best approach is an open standards platform that allows emerging technologies from different tool makers

Mottl concludes her article with a quote from Mat Taylor, a senior software architect with BT:

"The ability to get things done faster, get workers more engaged in business scenario, provide better customer service, are all big productivity wins that benefit the bottom line"

For more on the coming of age of handheld devices for the UC revolution see the following posts in this blog:

• Future of Wireless Devices

• SAP Sapphire 2008

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Daniel Druker posted an interesting article in his blog SaaS 2.0 entitled Sage Advice. In it he explores an interesting twist to the value of SaaS to the Channel Partner. SaaS is not only the wave of the future, but it also fits quite nicely into one’s retirement planning.

Druker points out that the Value Added Reseller (“VAR”) has a business model that emphasizes upfront revenue. They sell the software and can also look to implementation as another source of revenue, but by and large there is no steady stream of cash that hits the P&L. The value of the Channel Partner’s business is dependent on finding new customers and selling year after year.

The missing element to the cash flow problem is what the SaaS business model can provide, Contracted Monthly Recurring Revenue (“CMRR”). See my post in this blog March 2nd entitled Best Practices for the SaaS CEO – Top Ten Rules. Byron Deeter’s first rule is that “Cash is King”.

In Daniel Druker’s article he recounts a discussion he had with an established Channel Partner thinking about retirement and the selling of his business. Adopting the SaaS model seems to provide the answers this VAR owner needs. As Druker points out:

• the valuation of any business is driven by future cash flows
• shifting to SaaS will mean a much higher valuation and selling price

Albeit not entirely altruistic, yet another reason to adopt the SaaS approach.

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In my reading of interesting and relevant articles posted on the web, there have been several follow-on articles which expand on some of my more recent posts to this Blog. Due to the number of articles that I have come across, I thought it best to cite to some these articles, with a line or two of brief explanation, and let the reader pick and chose any article(s) of interest. I found the following to be of particular interest:

• 
  Time to Scrap Your BPM Spreadsheets? SMBs have powerful SaaS alternatives: Here is a way to streamline the budgeting and financial planning process. This will facilitate collaboration, what-if scenarios, and contingency planning.
• 
  Apple Watchers Salivate Over 3G iPhone Rumors - Developer conference expected to be launch venue for new iPhone: This will be one to watch this week. Apple’s Worldwide Developers Conference (WWDC) starts Monday, June 9th in San Francisco. Could this be Apple’s answer to the recent flurry of applications announced to be integrated into the BlackBerry?
  
• 
  Software Sales in 'SaaSy' Transition - The consumer-inspired trend of easy, online access to applications is finding a ready market in the enterprise: What can I say. We told you so. This is a discussion about applications designed for the end-users and not colorful reports to impress the top brass.
  
• 
  BlackBerry Defies Stagnant Tech Spending - Companies are untying IT purse strings for smartphones but not for much else these days: With IT spending slowing down, RIM’s market share is estimated to reach 82% this year.
  

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There is a revolution of sorts going on in the computing world. I do not want to over-dramatize this fact; however I am reminded of author and pamphleteer Thomas Pain who wrote:

• “Lead, follow, or get out of the way”
• “These are the times that try men’s souls”
• “The harder the conflict, the more glorious the triumph” (yes, this is drama)

Why all the drama? Well, I recommend you read Tien Tzuo’s article entitled The Global Transformation to On-Demand. Tzuo’s subtitle may aid in understanding my reference to the drama (i.e. “Why the world is moving to subscriptions and what it means for businesses”). This article should be read in conjunction with Daniel Druker’s article Different is hard: SAP - (Not Too Much) Business by Design.

Let’s start with Tzuo’s rather succinct history of the change in the paradigm from on-premises computing to subscription buying via the internet. Tzuo was on the cusp of the wave that brought in the SaaS business model. The guiding ideology for Tzuo and his contemporaries regarding SaaS is that

“ … software belonged on the Internet, not on a CD, and in that process it is transformed from a product that you buy to a service that you subscribe to.”

Tzuo’s analysis of why the trend towards subscriptions (i.e. On Demand or SaaS) rather than the traditional purchase or licensing model covers a broader spectrum than just the software industry. He explains that the internet has transformed the way people buy. The purchaser now has more options from more packages and as their needs change so can their subscription. Buyer’s remorse is eliminated.

“no large up front investment, no ongoing maintenance costs or hassles, no insurance costs – just pay for how much you use.”

Tzuo points out that there are significant differences between the processes for managing a subscription business versus the traditional product for sale business. These differences are:

• The ability to offer your product in parts, as well as full packages
• Invoicing and payment terms must be able to track the flexibility in the product offerings
• There are constant changes in the subscription and the revenue collection process becomes convoluted
• The metrics for this type of business differ from the usual billing metrics and so the ability to measure success and redirect efforts must adapt

The difficulties in managing a subscription business can be demonstrated by reference to the current situation at SAP and its announced delays and reduction in investment in its hoped for SaaS offering, Business by Design. Daniel Druker presents an in-depth analysis to the possible problems facing SAP. He lays out the trials and tribulations that a mega-corporation must face when trying to adapt to the changes in the industry. Instead of the purported technical issues facing this new service such as the “Mega-tenancy” model that a company the size of SAP is trying to implement, Druker sees the problem as the age-old issue of resistance to change. He labels this the “innovators dilemma”. The best and the brightest personnel shun the new innovation, especially if the promise of returns is far removed from the fundamental business model. It almost seems as though the company sets up its own barriers. A matrix organization, such as SAP, organized by country or region, is more inclined to focus on hitting their sales goals for the quarter or month and less likely to assist in the latest project.

In addition to the innovators dilemma, Druker also includes a discussion much like Tzuo’s differences between a subscription run business and that of the traditional product driven business model. Simply put, the business processes needed to run a subscription business do not yet exist, and when these new business processes do come on line, they will be incompatible with the existing business processes for a large enterprise software company.

Druker concludes by stating that, “SAP is an amazing, well run company”. It remains to be seen how well they will manage this latest innovation in the computing world.

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Maryann Jones Thompson interviews Sybase CEO John Chen in an Op-Ed in SandHill.com. Thompson artfully takes the reader through the strategy and growth of Sybase and allows Chen to discuss his stewardship of the company from 1998 to the present.  What I found of particular interest was Chen’s response when asked why Sybase was slow to embrace SaaS, Open Source, and other new technologies.  Chen responded as follows:

“In the 1980s during the transition from mainframes to UNIX, everyone forecasted the death of mainframes. Then NT arrived and the end of UNIX was proclaimed. Now people are talking about open source or SaaS in the same way. But the reality is that every new technology and every new method will have its audience – but it won’t wipe out the previous ones.”

To me this answer is right on and makes good business sense.  Chen’s approach seems to fit quite nicely with another SandHill.com Op-Ed piece written by M.R. Rangaswami entitled Old Rules for a New Era.  It appears that Rangaswami has a similar view vis-à-vis Chen’s recognition that new methods come online and attain their own audience.  I think implicit in Chen’s comment is what Rangaswami discusses regarding the fact that today’s IT Buyers struggle with the ever-changing new models and technologies such as SaaS, Cloud, and SOA.  Yes, the future does look bright as these new products come to market and affect the technology strategies of today’s global enterprises.  However, the proliferation does have its drawbacks. Just how can the software vendor get its products noticed?  In essence the question becomes ‘Just what is it that the IT Buyer wants’.  The answer to this question is alluded to in the subtitle to Rangaswami’s article, “Software vendor success will not be determined by a specific technology or model but by meeting customer expectations”.  Here are those expectations as developed by M.R. Rangaswami:

• 
  Reliable – Products will be expected to work out-of-the-box and continue to do so as they interoperate with other products. Heavy integration work will not be expected or tolerated.
• 
  Secure – Software must be secure beyond today’s acceptable levels. Vendors must provide guarantees and incentives to convince buyers of this heightened security.
• 
  Fast – Solutions have to be able to be deployed quickly and offer a speedy time-to-value. If it can’t be on-demand, then it needs to be close.
• 
  Simple – The hallmark of next-generation software will be its ability to be intuitive for its users – as intuitive as an online application aimed at consumers. No training should be required. It must also be simple to purchase and deploy.
• 
  Innovative - Buyers will expect vendors to continue to innovate their solutions. They will value new approaches to solve the same problems as well as attempts to solve entirely new business problems.

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Andy Patrizio reports for InternetNews.com on a new offering from Sun Microsystems that will allow software vendor’s customers to convert from an on premise version of their application to SaaS using existing technologies.  The good news is that this conversion can be done without rewriting code, which in some cases can take many engineers an inordinately long period of time to design and then test the new architecture.  This is all made possible through Sun’s new “virtualization service”.  Sun or a Sun partner will then host the application.  Of course the service only “supports applications hosted on a Sun server using Solaris, Solaris' Containers virtualization technology and xVM, Sun's virtualization software.”

The advantage to this service was explained by Vince Vasquez, business development manager for SaaS programs at Sun:

"People see the demand for on-demand but they are stuck with a year or more of development time without actually knowing if there's a market there for their product.  With virtualization, they can get into that market right now."

If this is of interest, I strongly recommend reading Patrizio’s article entitled, Sun Latest to Help App Vendors Get 'SasSy'.  In it Patrizio reports on the success to date of this service with a case study and also discusses pricing and Sun’s 90-day free trial offer.

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Byron Deeter, Partner with Bessemer Venture Partners, a founding CEO of one SaaS business and a board member of three other pure-play SaaS companies, has firsthand experience with the on-demand model and is well-qualified to state that CEO’s of pure-play SaaS companies need to change their paradigm.  When one lacks a role-model and cannot find a neatly put together list of best practices, the skillful CEO pulls together his own rule book. Deeter and his team studied both hybrid and pure-play SaaS companies and developed their own list of best practices for the on-demand model. Veteran software CEO’s might want to heed his advice and shift their paradigm. I strongly urge my readers to read Deeter’s article Bessemer’s Top 10 Laws for Being “SaaS-y”. I’ll try to summarize below his ten “laws” for running a successful SaaS business.

1.     Cash is King (i.e. Contracted Monthly Recurring Revenue or “CMRR”): The old model that would value a longer deal with slightly less CMRR over a short term deal with a larger CMRR is out. The new model recognizes the likelihood that renewals will make up the difference. The need for working capital in the SaaS model emphasizes the importance of “customer churn” on this first rule. “The top performing SaaS companies typically achieve annual renewals on a customer count basis above 90% (much of which is often due to bankruptcies, acquisitions, and other events beyond the company’s control), and over 100% renewals on a dollar value basis due to up-sells into this installed base.”

2.     Sales Learning Curve – don’t ramp up your efforts too quickly: Refine your sales model and as it grows think in terms of CMRR.

3.     Once the Sales Learning Curve peaks begin to hire more renewal orientated account managers. These new account managers should be compensated on customer service, renewals, and upsells.

4.     Sell Directly – Channel relationships are unattractive. Without systems integration work nor the need to require huge hardware purchases or vast amounts of software licenses, the old Channel partnership model is not appealing. A new generation of partners and resellers will develop.

5.     Don’t rush to go global - Hold on Europe and save Asia for later. More barriers exist such as service level expectations, data access, and security. Don’t weigh down your company with the costs. Develop a strategy where Europe and Asia will come online as you become a public company.

6.     One datacenter: Studies show one datacenter is sufficient. No need to take on the costs and organizational complexity, at least until your company is public. Invest in backup and disaster recovery.

7.     Design a SaaS product that is single instance and multi-tenant. Multi-instance and single tenant does not apply to this model.

8.     Online marketing is a core competence – Your sales prospects are online. Leverage search engine optimization.

9.     Cash flow is critical due to low monthly subscriptions and so financial management is key. Weigh investments carefully and structure them in a way to allow future CMRR to produce measureable amounts.

10. Have enough investment capital to last at least 4 years. It takes a while to get to breakeven. The SaaS model takes a lot of R&D and sales expense on the front end.

I particularly like Deeter’s eleventh rule. Oh, did I say there were only ten? Here is number 11:

 You can ignore one of the above 10 rules. But only one. Deeter recognizes that there are no absolutes and welcomes a refinement when needed. However, his studies show successful SaaS companies stayed very close to the above best practices.

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So you want to know the hot areas in ERP. If so I highly recommend to my readers Forrester Research’s R. “Ray” Wang’s Op-Ed piece 7 Trends in Enterprise Software Adoption for 2008. In it Wang discusses the latest survey that finds the trend for IT Decision Makers is for upgrades, collaboration, and knowledge management. Wang’s article is comprehensive and includes detailed bar graphs that enable the reader to clearly follow his text and assists in understanding the salient points.

I’ll list out these 7 trends with a brief explanation/summary, but check out his article for the full impact of the findings:

1.     Software spending budgets for 2008 nearly identical to 2007:  There actually is a slight up-tick of 9% planned for 2008. Although enterprises will be spending on licenses, operations, and development, there still is quite a lot to be spent on maintenance.

2.     There is a need for Long Term App Strategies: Companies are laboring under the disjointed approach of the past (i.e. a little upgrade here, a little BPO there, with a little project integration thrown in for good measure). As we move to a Service Oriented Architecture (“SOA”) enterprises will take advantage of this and begin to implement long term strategies. Integration of applications is the number one priority.

3.     A move toward packaged applications: Due to a possible economic slowdown, enterprises are focusing on operational efficiency and compliance as their main business drivers. Interest in BI is closely followed by CRM. There also will be major upgrades of ERP suites.

4.     Web 2.0’s time has come: Enterprises are slowly recognizing how these tools improve collaboration and productivity, but are still reticent about security.

5.     A majority adopt SOA: This supports the enterprise’s integration projects.

6.     SaaS adoption grows by 50% in 2008: Pricing, ease of deployment, and minimal IT involvement are the key drivers for adoption.

7.     Software investment in collaboration and content management: Enterprises allow access to new stakeholders such as suppliers, partners, and customers.

Wang concludes his article with a list of three recommendations and urges enterprises to develop a long term app strategy:

·         Don’t delay: No need to buy all the new technology today. Plan ahead with an eye on use of existing technology and investment in future apps.

·         Take an inventory of existing apps:Organize these apps by business process.

·         Ongoing review of your apps strategy: Gauge progress and adjust accordingly.

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SaaS is no longer solely for the start-up software firm. Enterprise software developers have heard the call from their customers and seen the competition latch on to SaaS and are now offering mainstream applications. Software developers, big and small, face many demands and constraints placed upon them by the market. Their customers seek rigorous specifications.  The application development process comes with a whole new group of constraints, and the competition is fierce and ever present.

Gary McAuliffe, in his article Excelling in the Evolution of Sass, points to the Managed Service Provider (“MSP”) as the “great equalizer”. 

Managed Service Providers engineer infrastructure for reliability, resiliency, and security, in some cases offering 100% network uptimes. 

McAuliffe lays out a detailed analysis of the value MSP’s bring to the table. He describes how using an MSP can get your product to the global market faster. The other advantage is what McAuliffe labels “optimal user experience” (i.e. customer satisfaction). This customer satisfaction could potentially reap rewards downstream as opportunities for selling licenses present themselves.

The benefits are not solely for the external market. McAuliffe adroitly states:

Internally, partnering with a Managed Service Provider can provide software companies with a plethora of benefits. The capital expenditures to provide and maintain everything the business requires to launch and sustain itself from the application, developers, system administrators, to any commercial software required to run the application, along with a full infrastructure pose daunting barriers to overcome. A MSP will deliver those harsh capital expenditures over a more tolerable operational cost structure allowing software companies to reinvest their upfront capital into software where it is more beneficial in the overall well being of the firm.

If this has sparked your curiosity, then perhaps you might also be interested in Jeff Kaplan’s article Top Ten Reasons Why On-Demand Services Will Soar in 2008. I’ll whet your appetite and list out the ten reasons. You’ll have to read his whole article to get the benefit of his wisdom and predictions.

The Top Ten Reasons are as follows:

1.     Services are Recession Proof

2.     Everyone’s Going Virtual

3.     Amazon, IBM and Google Bet on Utility Computing

4.     Nick Carr Returns

5.     SaaS Solves SOX

6.     Managed Services 3.0, Unified Communications Services and Service Automation (Hint: The key for Kaplan is the “3.0” in the title)

7.     Carriers and Channel Companies Find Success With New Services

8.     Failure Doesn’t Matter

9.     IT Discovers Services are the Solution

10. Wall Street Buys Into Services

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SAP unveiled nine new software packages that allow the monitoring and response to business information from any format or application. Three of the nine new offerings are targeted to the SMB market space. This all stems from SAP’s purchase of Business Objects (see post 12/21/07 in this Blog SAP Merges with Business Objects). SAP’s CEO, Henning Kagermann, stated:

Our key competitive differentiator is that we're building a portfolio on the most open platform. We are the only one that can offer business performance optimization in a closed loop.  At the end of the day, you have to take immediate action. Our business suite and business intelligence close the loop. You have faster and better insights and you can transform it immediately into actions.

Is this rollout all in response to the current activity now taking place in the industry? As I alluded to in my post of 1/9/08 What’s Next for ERP in 2008, Larry Ellison has not and will not sit on the sidelines as these mergers and new products are rolled out to the customer base. Just this week Reuter’s reports that Oracle has finally succeeded in its bid for BEA.

Kagermann addressed the issue of growth and competition in the industry stating:

You never in life should exclude an opportunity in business. The question is where is your priority.  Growing through organic growth is No. 1 for SAP.  If there's a unique opportunity to expand our opportunities, we will do it.  These are things you can't plan ahead and sometimes you have the opportunity and must take advantage of it.

SAP plans to integrate functionality from Business Objects into its Saas offering, Business ByDesign. SAP’s 2007 operating margins were down by .8% due mainly to its approximate half a billion dollar investment in getting Business ByDesign to market.

To read the full article click here

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InternetNews reports that Gartner predicts outsourcing will grow by more than 8% this year to approximately $441 billion. The trend in this continued use of outsourcing seems to be moving away from large vendors to more of the smaller vendors with specialized products or services that can meet a company’s particular needs. Gartner’s survey results indicate a recent change in company’s strategies and priorities vis-à-vis outsourcing. There has been a decidedly huge increase in the percentage of companies from 2005 to today that have established a disciplined process in their approach to determine if they will outsource.

"[We're] seeing our clients set up internal processes and applications to create a service model for other internal organizations to leverage," Hemant Ramachandra, managing director of BearingPoint's Technology Solutions unit, wrote in an e-mail to InternetNews.com. "This can be software-as-a-service or even application as a service. Setting up the right governance structure is critical to ensure that outsourcing is leveraged appropriately."

In 2007 IBM increased its market share for IT outsourcing to 8.1%. EDS was second with a 5.3% increase followed by a 3.3% increase for ADP.

In know what you’re thinking. Woe is me. All of our jobs are going overseas. This is the initial knee-jerk reaction when one hears about outsourcing and its inevitable increased use. But this does not have to be the only truth. As our economy evolves and adapts to the changes in our society and new needs arise, the way we work and the makeup of our workforce will necessarily evolve as well. The largest increases in new businesses in the US are in small business and a large percentage of those new small businesses are home based. New companies will also need to be created to meet the changing model from ASP to the new approach of Web-based Software as a Service (“SaaS”), which allows businesses access to software functionality for a more cost effective monthly fee instead of the cost of the application’s license fee and the upfront cost of more hardware. Who these new companies will employ is yet to be determined.

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