SaaS
Posts on SaaS, software as a service
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The question is a good one, let’s be honest. As companies like SF.com and NetSuite move upmarket they are bound to hear more questions of this kind from prospects in all markets. In other words, it’s not unreasonable to ask these questions. On this blog, in its last incarnation, we wrote about this topic often, but with, as I now realize, a bit of a chip on our shoulder.
We always argued that forcing SaaS vendors to answer these questions was unfair because no one ever asks these questions of on-premise software vendors. There is some justification for this defense, but I don’t think it really stacks up, all things considered. If an on-premise vendor ceases to exist, the customer has some ability and time to put together another solution and migrate, etc. But if you lose your SaaS provider you’re in some deep water.
So what is to be done? The question of business continuity came up again when my fellow Enterprise Irregular, Vinnie Mirchandani, questioned a post by Frank Scavo. I respect both of these gentlemen a good deal, especially now that several industry players got involved in a debate on both Frank’s and Vinnie’s posts. Some of the ideas were excellent and should be more widely circulated. Here they are in a nutshell:
The ideas are across the board as you can see, but what finally has to be answered is what works and what is affordable. In my mind this leave the first two option as both workable and affordable, and the last two fall off as unworkable, the escrow idea, or simply not affordable – the on-premise, vendor managed solution.
If I had to choose one idea I would select the Trust. SaaS providers could set aside $5 bucks per year per user into a trust that would pay to continue maintaining the software for a full 6 months in the case of vendor insolvency, or to restore the service in the case of data center emergency, etc. This makes a lot of sense to me and I hope that SaaS providers start thinking along these lines in the near future. Regardless of what they finally come up with, it’s important to take this whole contingency planning/business continuity issue seriously. In the end, serious businesses are taken seriously.
On the other hand, it’s really discouraging to see some of the on-premise pimps show up on the comments as well. You can tell some of these writers are not technology professionals but simply the pr types/hacks spreading around the FUD. I think in some ways it is the presence of so much FUD that makes SaaS providers avoid this issue. Put that issue aside though and meet the challenge head on. That’s the best way to win in the end.
But FUD continues. Last month I read a blog post that tried to throw ice cold FUD on NetSuite’s acquisition of QuickArrow, a software service in the ‘professional services automation’, or PSA, market. I thought it was strange, especially given the source of the article. Essentially, they tried to link NetSuite to Oracle, and suggest that QuickArrow would be rolled up into NetSuite, its client list assailed and treated recklessly, like this is possible in a SaaS business when clients can walk at any time. I was going to write about it then but felt that I would be just promoting the problem, not solving it, so I let it go.
But I did scratch my head about it a bit. After all, NetSuite has already purchased OpenAir and continues to support customers who do not use NetSuite financials, who use only OpenAir. But the real chutzpuh was the suggestion that NetSuite would take the ‘low road’, whatever that is, while the writer churns out a post with nuclear amounts of FUD. Really? There was a line about something his company was up to in the same PSA market, but without more details I whistled by it.
As it turns out, this company has much to worry about in NetSuite’s acquisition of QuickArrow and OpenAir. They have a PSA offering of their own now. So this was the reason for the FUD. They are a direct competitor with NetSuite. That’s fine. There should be several companies in this market as PSA is an important and underserved market. But why all the FUD? After I read the post again and then read a new post about the new PSA service I still do not understand what they offer, but I have a really good idea of what they are not – NetSuite. They give no indication of how their PSA offering enables any type of billing transaction, or profitability analysis, or anything else that might be important to a company running a large professional services staff. But we do know that they are built on salesforce’s force.com platform. That’s it; that’s their entire claim to fame, what some other company built.
For the life of me I cannot figure out why people get so focused on the competition that they forget to make even an attempt at explaining their own offering and its advantages. Does running on force.com really offer such an outstanding advantage that you needn’t tell us anything else? What is the force.com advantage, by the way? Well, building a hardware and software infrastructure is difficult, so rolling out new code on an existing platform is easier. So this is great for the vendor, but what does it do for the client? Nothing, that I can tell, and I read the posts twice. Having poured all of his energy into his illuminating article about NetSuite’s reincarnation as the grim reaper, the author had none left for prospective clients of his new service. Desperation makes intelligent people do stupid things, honestly.
You only have so many opportunities to connect with people. When you do have a new service announcement take advantage of it, explain, be gracious and intelligent and people will respond. Honestly, let’s stop with the junior high antics of poking out competitors in the eye and running away. It not only makes you look stupid, but it reflects poorly on all of us.
If you would like to read the posts that got me started today, you can see them here. You have been warned about gangly junior high boys with more energy than good sense.
I have attended several of these in the past and I always find it interesting to hear how a particular company uses NetSuite for their business. Every company is different and NetSuite has the flexibility to accomodate a great deal of complexity. So if you are thinking that the cloud might be the right place for you, then this might be the right webinar to attend.
The most important question facing the company considering an ERP system, whether it is a replacement or a first time purchase, is ‘Does this system fit my business?’ It is a daunting question to answer, and most companies realize over time that the better question is ‘Is this system flexible enough to meet my business needs, not just today but in the future as well?’ It is impossible to meet all of a company’s needs out of the box, so flexibility is key. I’m sure that in this webinar you will hear a lot about flexibility. I hope you find it an hour well spent.
The vendors own and operate the physical infrastructure including the servers and the communication bandwidth. On top of this infrastructure the vendor or the VAR installs operating systems and databases. Then on top of this the VAR installs open source business applications. The Customer operates their business on this platform by accessing it over the internet, with the normal security protocols in place.
The cloud by itself is a great move forward for computing. It’s radically more efficient, greener, and less expensive than everyone running their own little server farm. And open source software by itself is also fine, especially for the lower levels of software like operating systems and databases. But when you put open source business applications on top of the cloud, the best aspects of both are lost and you end up with a storm. Let’s take a look.
The cloud offers businesses a way to pay for utility computing. When they need and use more power, bandwidth, disc space, they pay for it. But just as demand spikes it can also drop. A retail chain may have huge needs in December and January, but much less in July and August. Why buy and maintain a computing infrastructure to handle the Christmas rush when the other 10 months of the year you utilize 20% of your load capacity? It’s wasteful because you still have to pay the electric bill every month.
On the cloud this problem goes away. You pay for what you use by leveraging a common infrastructure. Open Source applications however have a different reason for being. They exist so that a business can adapt the base code of the system to meet their very specific needs. Open Source applications are about a custom computing environment. A company that uses open source business applications does not want to be hindered by a common code base – they want to do things their way. They don’t want to vote on enhancements with 10,000 other users of the software; they want to do the enhancements and own the enhancements.
So on the one hand you have a common computing environment, and on the other an uncommon, idiosyncratic computing environment. When you mix the two it’s like bringing humid, hot air up from the Gulf of Mexico and introducing it to cold, dry air from Canada. Folks from Oklahoma to the Dakotas can tell you how this works. It’s not good.
You can see the appeal of this idea from the VAR’s point of view. They can essentially run their own Software as a Service, SaaS, operation without actually writing a system. They will have many billable service hours as they customize and install the applications, and over the ensuing years they can collect a nice percentage for ongoing support. They do not have the headache of managing the infrastructure themselves, nor do they have any capital outlays. It’s SaaS on the cheap.
But how about from the customer’s POV? What’s in it for them? They may save a few bucks on software licensing, but they now have a system built by a small VAR that has been customized to the umpteenth degree. Where are they if the VAR moves on, goes out of business, how will they continue to support an application code base that they do not understand built on an platform they have no idea of how to manage? Can they find another VAR to assume responsibility for their system? How long will it take them to come up to speed, and at what price?
Bottom line is that the combination of open source business applications and a cloud computing environment takes the best arguments for each and, together, turns them into a huge negative. Customized business applications need long term ownership and if your business is counting on them then you should own them. But by trusting a VAR to set them up in the cloud you have handed over ownership to a third party.
On the other hand, a true SaaS vendor, whether it’s Helpstream, or saleforce.com, or SuccessFactors or NetSuite, takes complete responsibility for generating, debugging, maintaining and upgrading the code base. They install this code base on a cloud of their choosing and therefore they can offer you, the customer, the utility computing efficiencies of the cloud. With their flexible systems, they can also offer you the ability to add on additional functionality for your particular business model. But they own the code base, not you or your VAR. They have the long term support of the system in mind. Sure, SaaS companies are merged, acquired and they sometimes even go out of business, but they are an order of magnitude more stable and dependable than a VAR.
In the end, open source business applications on the cloud are just too risky; they have no true owner and in the end may literally become orphans. You can put your own applications on the cloud; you can buy software services on the cloud; but having a VAR customize open source applications and put them on the cloud is a tornado waiting to happen.
First, NetSuite now offers a financial only package. Very useful and a good move by NetSuite. This tells me that they understand that the SaaS model means that collaboration between applications from different vendors is a reality from which they cannot hide. We have always advocated an integrated suite at SightLines, as they have of course at NetSuite, but let’s face the music: Not everyone sees the world like this. Some people would rather run another CRM and link it to NetSuite Financials. Why not oblige them? The fact that both systems are SaaS actually enables this union. Again, we are not saying that it’s a union we would bless, but if dogs and cats living together is your dream, the joining is easier when both come in a SaaS mode, that’s for sure; especially if both parties have a web services api, which they do, by the way.
In another announcement, NetSuite surprised us when it revealed an acquisition of QuickArrow. QA is a SaaS company in the Professional Services Automation, PSA, category. In fact they were direct competitors of OpenAir, purchased by NetSuite last year. Why another acquisition in the same market? My guess is that NetSuite saw OpenAir as a way to add some very important functionality to its ERP offering. OpenAir gave NetSuite instant visibility and viability in the Professional Services arena. QuickArrow is a way to strengthen that position and add customers, frankly. The direction, as explained on the QuickArrow website, is to move those QA customers who need additional functionality to OpenAir, and of course all of them will be offered NetSuite Financials, or the full Suite.
One interesting side note on the QuickArrow acquisition is that salesforce.com will, when the deal is completed, become a NetSuite customer – they currently use QuickArrow. But that’s not a big deal as NetSuite now offers a link from its applications to salesforce.com, check out the OpenAir site for details.
PSA, as NetSuite CEO Zach Nelson noted in the most recent earnings call, is a robust growth area, perfectly correlated to the growth of professional services itself in advanced economies. It also presents a nice fit for the SaaS model because it inevitably presents the company with geographic challenges: Multiple offices, staff in the field, difficult communication channels. Operating a company with this model online makes infinite good sense, from employee self -service for hours and expenses, to multiple offices using the same ledger and rolling it all together at month end. Everyone has perfect visibility into their role and data, from any node on the Internet. That in itself is a very compelling story.
I also find it interesting to see NetSuite’s strategy for growth at work. Obviously the bulk of their growth is and will continue to be organic, but if you have evolved a great knowledge base around running a SaaS business over the past 11 years, as NetSuite has, then acquisitions of other SaaS companies makes sense from two separate angles; you can bring enough efficiencies to bear on the target that it becomes more profitable over time; and you can entice its customers to buy other products in your SaaS universe.
From a pure business point of view, when you have one good reason to do something, the risk is normally too great to overcome. But when you have 2 or more good reasons to act, you have a sound business case and the risk, though ever present, subsides somewhat. The point is that in the future I can see NetSuite, the parent company, owning and running several SaaS companies in various categories. Users of one service will never be forced to purchase other services, but they will have a natural inclination to at least take a look. So the question that remains is from what SaaS category NetSuite makes its next acquisition?
The questions were tough and right to the heart of NetSuite’s business and SaaS – software as a service, especially on security. On several occasions Nelson mentions that the target maket is th 5 million companies in the segment just below the Fortune 500. This might be a ‘bit’ of an exaggeration but we’ll give it to him. These are actually good size companies, most of them. They probably have over 200 employees and several locations, and many of them have of course an employee count in the 1000′s.
My one question for Nelson, which was not asked, is how NetSuite is going to help to create a SaaS ecosystem in its targeted customer base. For example, if a company is going to use a SaaS ERP and CRM system then you have to expect it is also going to use a SaaS HR System, and a SaaS Supply Chain, etc.. As I wrote recently, NetSuite suffers in my opinion from a lack of competition from other SaaS ERP systems in this market, and helping to create a SaaS ecosystem would be one way to crack this nut.
Of course, it’s a lot easier said than done, as anyone in business knows. There is a lot less collaboration between software firms that have synergistic, as opposed to competitive products, than one would expect. Alliances are difficult to start and often end up creating more problems than they solve. NetSuite has also used some of the proceeds from 2007′s IPO to purchase some products that gave it broader functionality – like OpenAir and QuickArrow, both in the Professional Services Automatoin space. Buy or ally – probably not a question NetSuite or others can answer at this time, and this also makes alliances more difficult.
At the very least, some of the key SaaS players in various software verticals should really think about creating a unified force. It would be great to see Saleforce.com, SuccessFactors, Taleo, Concur, NetSuite, HelpStream and several others together in a SaaS showplace.
As Larry clearly delineates in the article there are really only 2 players in the on-demand ERP market at present: NetSuite and SAP’s BusinessByDesign. But SAP has had an awful time trying to bring ByDesign to market and their current strategy leaves one scratching one’s head vigorously. SAP’s biggest issue is that they have not been able to scale the ByDesign applications for new customers, and now they are baking in business intelligence, making the product even more difficult to scale. You wonder if they are killing ByDesign with kindness. At any rate, BBD is not generally available and the current thinking is that it won’t be until some time in 2010.
So where does that leave us? We have NetSuite with a full ERP less manufacturing - though partner RootStock is taking care of that – and a fully integrated CRM and E-commerce engine as well. There is Intaact, very strong on the finance side but less interesting when it comes to operations. Then there is Coda2Go, a financial app built on the SalesForce platform with an interface to the SF CRM apps. But that’s it. There are a few other offerings of simple accounting applications, and some even simpler invoicing applications, on demand.
But there are not enough competitors out there to create a strong team. My sense is that software buyers, whether they are the business owner or the CIO or whatever, like to look at several strong players before making a choice. Right now, that means looking at a couple of on-demand players lined up alongside of several on-premise players.
This is NetSuite’s unique dilemma: They are first to market, far out in front of everyone else, so much so that they have not yet been challenged. It must make tech buyers wonder why the field is so sparsely populated?
Larry commits to a tipping point 2 or 3 years out for on-demand ERP, and that’s probably within reason. But the quicker NetSuite finds some other players in this market, the quicker the tipping point will happen. On-premise ERP really got going when buyers saw Oracle, SAP, Peoplesoft, Lawson and dozens of others in the market. Vendor exuberance for an idea, like integrated enterprise resource planning applications, created excitement in the buyer community and furthered their acceptance of integration over best of breed. In my opinion we will need to see a couple of strong new players in on-demand before buyers sense the excitement of this new idea.
Also, Zach Nelson, NetSuite CEO, reiterated his interest in Service Organizations while talking about NetSuite’s recent acquisition of QuickArrow. Nelson said that the service sector would continue to see strong growth in mature economies and this is where NetSuite wants to play. NetSuite has always gone after those sectors of the market where they see strong growth, like e-commerce for example in the late 90′s and earlier this decade, and it’s a useful strategy. With OpenAir, an earlier acquisition, and now QuickArrow NetSuite has the opportunity to make hay in a very attractive sector.
Given the news that came out this morning about software sales continuing to decline, though at a lesser rate, in the US Q2, I also thought it remarkable that N posted growth in the quarter. Not stratospheric growth, but growth nonetheless. From a MarketWatch article on the US Q2:
Business investments fell at an 8.9% annualized rate during the second quarter, shallower than the 36.9% drop in the first quarter
Investments in structures dropped 8.9%, and investments in equipment and software fell at a 9.0% pace. Business fixed investment subtracted 0.94 of a percentage point from GDP, compared with a whopping 5.29 percentage points in the first quarter.
So all together I was impressed by N’s 2nd quarter. I don’t think that they set the world on fire, but they signed up over 200 new customers, and made significant progress moving upstream in customer size.
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