Sightings in SaaS

Archive for the ‘Technology for the Small to Medium Enterprise’ Category

I thought this was an interesting interview with Zach Nelson, NetSuite’s CEO, in a recent Forbes publication.

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.

Microsoft and Google recently announced their intentions to revisit WWI’s Battle of Passchendaele. There they will slug it out in mud up to their waste. Microsoft will try to lay waste to the encroaching Google empire with a frontal attack on Google’s search franchise. Google doesn’t want to die just in the trenches though, when there’s real glory out in the open field making a frontal assault on MS’s Windows operating system and Office applications.

Google is going to engineer a new pc operating system and has already released a set of online applications for creating documents and spreadsheets. They will also host your email if you are a fairly large company. MS now has Bing search and a new deal with Yahoo to run Yahoo’s search. My humble suggestion to General Balmer is that they take a look at how easy and useful Googles Adwords is for a customer to use, and then take a look at the completely useless and unfathomable Yahoo search application. This would be a small but welcome step in the right direction, but I digress.

Or perhaps I do not digress. In all the talk about the new MS/Yahoo search I have only seen one comment about the paid search advertising application that a company uses to put it’s short add on top or right side of the page. This common omission reveals the bias that you see not only in the media but in the companies involved, also. Thousands of enterprises, from the largest to the smallest, use search advertising as a way of putting their product or service in front of a person who is looking for that particular product or service. But the companies have only really talked about the searcher, not the searchee, in this whole affair. As is the norm now, the enterprise is forgotten. The whole purpose of search for Yahoo, MS and Google is to attract enterprises to place their adds for particular keywords. That’s the monetization part of search. Without it you wouldn’t have a Google.

But for all of the billions that Google and MS have made over the years from the coffers of the Enterprises that buy software or advertising, where is the payback? Where is the love, man? MS spends its every waking minute trying to engineer a new I-pod competitor (they finally put the Zune out of its misery last week), or trying to be #1 in children’s video game players. What do they have for the enterprise? How about Vista? How about 4 different business software application lines that they purchased and are now harvesting without any new development? How about Office, a perfect example of bloatware?

Google is headed in the same direction. Now that they are all rich with our cash, the enterprise is forgotten. They’re all about the consumer now. Consumer cell phones to compete with the I-phone. Consumer operating system for small computing devices. The small computing devices themselves. To wage war with MS Google will soon be on the shelves of the local mall.

If you are a corporate technology buyer at any level, you have to wonder how any of this helps you. Every year a greater and greater percenatage of your budget goes to these ingrates and what go you get in return? You get to buy your kid a new personal music device powered by Moogle? It’s more than sad or disappointing, it’s humiliating.

I’m all for competition and frankly I wish they could sell seats to this fight on pay per view. I’d pony up. But at some point the enterpise must ask why we are always paying for everyone else’s good time. When I buy a software service I want to know that part of my outlay is plowed back into the service to make it better, faster, more complete. Say what you want about Oracle, NetSuite or SAP, but at least they don’t turn my corporate IT budget into toys for teens.

I just read Larry Dignan’s post over on ZDnet about the tipping point for on-demand ERP, and my first reaction is that Larry is correct: There will come a time when on-demand ERP loses that new kid on the block look and becomes the enterprise’s first selection when picking teams. My second reaction is that that there is only 1.5 players right now and unless that changes there will not be a tipping point, not anytime soon. Let me explain.

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.

Oktoberfest is the 16 day festival in Bavaria that celebrates the harvest. With amenities like these who can argue with the idea:

beer and beauty

Thinking about the Enterprise Software market recently it dawned on me that we have entered our own Octoberfest Harvest celebration, almost universally. Harvest refers to the last phase of a product’s life when the marketing department comes to the conclusion that there isn’t much left to exploit, so cut all inputs and just harvest whatever value is left in the product. In enterprise software this phase appears to have happened across many vendors and products at roughly the same time. Let’s take a look:

• Microsoft purchased several vendor offerings including Great Plains, Axapta, Navasion and has done little with any of them. There was originally a thought about turning some of these into SaaS offerings, or merging the best of these products into a new MS product, but over the past couple of years there hasn’t been any news in this area. MS is all about consumer products and its operating system. One wonders why they purchased all of the software that they did, unless it was simply because they could. Google ‘microsoft business applications’ and on page one you will find this note from 2005 about MS’s big plans for their latest acquisitions.
• Oracle also went on a buying binge and they were pretty honest about the fact that they believe the market for enterprise software was leaving the growth stage and sliding toward consolidation. However they also said that under their ownership all of these products, JD Edwards, Peoplesoft, Oracle’s own applications, would undergo some serious tuning up, and that there would eventually be a fusion product allowing all of the best functions into a new product. The fusion middleware became a reality earlier this year, and we await the fusion applications. In the end, the innovation is really about supporting fewer products and upselling a new fusion app to currect customers.
• Sage has also acquired several products over the years and they are definitely in harvest mode. Their apologists even offer the idea that Sage is not in the technology/software market so much as the confidence market, as in this software will be around for a while. They, like SAP, have taken a poor swing at a SaaS product but have yet to make contact. Dennis Howlett doesn’t think they are really interested in launching a new SaaS version anyway.
• SAP has a SaaS product that they have been trying hard to keep under wraps for the past few years. Evidently they did not architect it in a way that allows them to scale the service profitably, even though they sell an account with a minimum of 25 users at $149/month/user, $44,700 a year. You would think you could make money at this, but who knows. When your core products attain 40% margins by virtue of their maintenance alone, you have a business model that is going to be very difficult to duplicate in the SaaS model. And what of the core products? Any innovation there or just bloatware additions that add a few more users and maintenance dollars to the annual bill? I haven’t heard of a game changer in a long time, so harvest mode once again. How important is harvest over new sales? The big news for SAP in 2008 was a huge fight with the user community over an uptick in maintenance fees. If the proof is in the pudding then that was an olympic pool of pudding.
• Any big innovators out there other than the SaaS offerings like Workday, NetSuite, Intacct or WorkingPoint?

Vinnie Mirchandani, the deal architect, spent several days at Fortune magazine’s Brainstorm and complains that the event was severly tilted toward consumer technologies. And when the attention does turn to enterprise matters, the topics are usually around other technologies that may use the enterprise transaction processing systems as a platform, but are rarely focused on business process innovation.

As someone who has spent, and continues to spend, a good deal of time on enterprise business process questions, problems and solutions, I wonder why the marketplace has turned as it has? Do  most organizations have the business processes that they need, creating the value that they want? Is it a case, then, of been there, done that and we’re good?

Or have organizations simply lost their enthusiasm for business process design and innovation? And if they have, then why have they? I meet very few enterprise application users who have mastered their processes, yet it appears from the evidence that no one seems too concerned about just moving on to whatever’s next. My question is have enterprise software applications simple sapped the strength of enterprise users? Has the bloatware complexity of products like SAP, Oracle, Sage and Microsoft simply exhausted organizations? And at this point do they just accept the fact they have an expensive business system that has ceased creating value but which it too difficult to move out of the way?

Oktoberfest can be a good time, but the day after can also be a a helluva hangover. Is this the way enterprise software buyers are feeling about their business applications?

Enterprise buyers feel affects of software inebriation

The SaaS channel continues to be a bit of a conundrum. Recently SightLines had the opportunity to speak to several NetSuite partners about how they are handling the business of being in a SaaS channel and there was one thing that came through perfectly clear: Everyone continues to search for the right mix of consultants, employees, 1099s, support staff and for the right mix of business.

In other words, no one has yet figured out how to make the SaaS channel partnership a business with a clear roadmap to growth and long term profitability. Most common is the channel partner with 1 or 2 principals and a stable of 1099s for both consulting and customer support. There are a few partners with a short list of high value employees, and a group of 1099s for implementation and customization. It is nigh impossible to support a large employee base on the SaaS business model. Where on-premise consulting can often charge 8 times licenses fees for implementation, it is nearly impossible for SaaS consultancies to justify more than 2 times subscription. There is no hardware setup and configuration, no database install and training, no application server install and training, no application install and patching, patching, patching. These activities, often opaque to the business’s managers, eat up an awful lot of time, budget and timeline. They are big money makers for on-premise consulting.

So the SaaS partner is left with business process requirements and system configuration and, in some cases, customization. These are time consuming and laborious tasks, often difficult to predict. In addition, the SaaS client has not spent $250,000 for licenses. Their firm with 25 users can probably negotiate something in the $30,000 to $40,000 range, depending on what they need. So you have not going to walk in and suggest a $100,000 implementation. It’s just not going to happen. The end result is that you have an implementation in the range of $40,000 to $50,000 on the high end. You pay a short list of bills, take a salary, pay the consultants and that’s it. You have supported the cost of sales and implementation, but there is little left to grow the firm.

So what’s the answer? Some partners are looking back at the on-premise model and trying to find deals where they can push the tab into the low to middle 6 figures. These are home runs and they come along rarely. It’s a dubious strategy I think. You have to add in the $20,000 – $40,000 implementations to keep cash flowing. But in the long run you are still looking at a low margin business that will have a very hard time breaking out.

NetSuite has suggested publicly and to the partner group that the way forward is twofold: Model the business on ‘Service as Software’  using a remote sales and implementation strategy and building vertical apps on the NetBIOS (NetSuite’s Business Operating System – customization and extension platform). This sounds like a great idea but how can a Solution Provider partner with already thin service margins make the jump to Vertical software development, maintenance and support? This is not a simple jump to make. A company doing custom software development, which is finally what a vertical built on NetBIOS is, needs some deep pockets, maybe even VC or Angel pockets.

Selling grilled sausages is also a dubious business model unless of course you have a concession at a stadium, in which case you can make some good coin. Likewise, the most successful vertical apps on SaaS, NetSuite or otherwise, have a captive audience. I had the chance to chat a few years ago with a company that sells information and they created a vertical app for NetSuite that included integration with their data warehouse, enabling their customers to formulate deals on the fly for thousands of different items.  Their customers became then not only their data customers but their NetSuite customers as well. Good work if you can get it.

One of our favorite SaaS writers Phil Wainewright had an interesting piece not long ago about the opportunities in the SaaS integration space and I agree with him. But again, in this kind of derivitive market you have to have a product with a huge potential audience, or a captive audience to succeed, methinks.

So there is still much to figure out in the SaaS channel. SightLine will have its own announcement in the near term as we make our way forward.

Regular readers of this blog will immediately see that we are starting over and have a new format. Not only is this a new look, it is also a new start. For the first 4 years of our blogging life we used a blogging service that had exceptional functionality, but it also came at an exceptional price. Service however was not their hallmark. After constantly finding issues with the blog we decided to move on and have now implemented a simpler wordpress blog through our registrar, bluehost.com. It will take time to create a foundation of posts, and more time to add the necessary plug-ins etc. But we are confident that we can get there. We hope you stick with us for the ride.

Tom