Cloud Computing is just the latest computing model fostering the creative destruction of the prior dominant computing model:  Mainframes to Mini Computers, Mini Computers to Local Area Networks, Local Area Networks to Client Server, Client Server to On-premises Browser Based, On-premises Browser based to Cloud Applications.  At each transition, expensive capabilities are commoditized, complexities are eliminated, and previously exotic applications became mainstream.  Each new model resulted in a larger total Information Technology (IT) market even though the cost of specific function declined.  These sea changes in technology models led to new wealth for the innovators and disaster for the laggards (remember DEC?).

The changes brought about by SaaS (Software as a Service) to the software industry in the paper are described in “Why SaaS Growth is Exploding”.  The Partners of these software companies are also experiencing radical changes with SaaS moving to become the dominant software model.  Those Partners include Value Added Resellers (VARs), Distributors such as Ingram Micro, Large Consultancies/System Integrators such as Accenture, Deloitte.  While the business models of each of the SaaS vendor Partners are different, the underlying disruption and opportunities are similar.

The net revenue received by these Partners for a given set of application capabilities contained in ERP or CRM will decline with the transition to the Cloud while new capabilities will arise to expand the total IT spend.

The Cloud shifts many IT responsibilities away from the customer and the Partners that support them to the SaaS, PaaS (Platform as a Service), and IaaS (Infrastructure as a Service) vendors.  Software Partners have been disintermediated from some less complex Cloud applications as fewer services are required for installation and upgrades and early SaaS startups have tended to adopt an initial direct sales strategy.  Modern SaaS applications also have much better “customer self-service” reducing revenue for these tasks.

The adoption of the SaaS model by SaaS vendors and their Partners defers their cash receipts compared with licensed On-premises applications.  While the Customer Lifetime Value (CLV) is greater for SaaS vendors and their Partners, the balance sheet implications of these delays of customer payments must be addressed.

Software Partners who cling to On-premises applications will see their revenue drop precipitously as the transition from On-premises applications accelerate.

The Good News

The paradox is that despite expensive products and services being replaced by less expensive solutions with every new computing model, the overall spend has increased with each generation.  Mainframes were much more expensive than mini computers, but the market for mini computers became much larger; Networked computers were much cheaper than DEC VAXs, but that market was also much larger.

While the drop in per user revenue for a specific SaaS application looks to be bad news, those that embrace the revolution will have new Cloud revenue opportunities that surpass the On-premises software model.  Service providers will see the greatest revenue potential both in capturing a larger share for SaaS subscriptions than their competitors while selling additional service offerings to setup, configure, and integrate SaaS software with other software.

The cost efficiencies gained by companies moving to the Cloud will allow customers to shift resources to new, high value initiatives particularly big data/analytics, social media, and mobile computing.  Additionally, customers have no choice but to find additional funds to address the relentless increase in compliance costs.   SaaS companies and their Partners will benefit from the shift of IT resources from low value functions (local hosting, lengthy installation, complex upgrades) to these new high value, high profit services for their customers.

Software Vendor Partners Actions:

The proactive Partner will prudentially size the Cloud opportunity with initiatives such as:

1)      Use SaaS to capture competitor’s customers: The first opportunity is to take business away from those vendors and their Partners that cling to the old On-premises model.   Companies where SaaS vendors and the Partners couldn’t previously break into are now accessible with new SaaS offerings.

2)      Help customers consolidate their applications with SaaS:  Many IT organizations have a diverse set of unintegrated applications that have been installed over the years.  These disparate applications provide an opportunity for consolidation increasing the Partner presence in the organization.  For example, IT focused VARs can expand into Cloud based Unified Communication with VOIP displacing On-premises PBX and call center systems.

3)      Partner with growing SaaS companies as they expand their channels: SaaS companies that started with a direct-focused sales strategy such as Salesforce and NetSuite are expanding their channels aggressively – their channel sales are growing even faster than their direct sales.  Take advantage of their strategic thrust to building their channel organization by partnering with these high growth companies – the percent of their sales through the channel is increasing.

4)      Broaden the scope of new services and applications: There are new strategic initiates that weren’t previously feasible for companies to undertake.  Enable your client’s new mobile, big data/analytics, and social initiatives with new products and services.

5)      Provide additional higher value services:  Compliance is a very high growth area for many companies that cannot be deferred.  SaaS applications can assist in compliance initiatives since much of the compliance work is shifted to the SaaS vendor and its Partner;  That requires new Partner expertise and new Partner relationships.  Higher value business process optimization can now have renewed emphasis as the channel moves from mundane installation and upgrade processes to higher value services.

6)      Provide Cloud expertise to IT: The Cloud is both making organizations rethink which IT functions they perform in-house, and requires them to find expertise in transitioning to Cloud IT models.   VARs and Consultancies can profit by providing expertise in the Cloud transition and providing Cloud centric IT expertise to companies outsourcing much of their IT to the Cloud.

Finally, while the Cloud has taken greatest hold in small and Medium Businesses (SMB), the Cloud transition is now gaining momentum in larger organization more predisposed to significant services expenditures.

How SaaS Companies can Help Drive their Partners’ Success

SaaS companies should foster the success of their Partners that are already moving or are primed to move to the Cloud model.  The SaaS companies must create a partner model that ensures mutual success for those Partners that “get it”.

There are three castes of SaaS company Partners:

1. Forward thinking Partners who are ready to move their practice to embrace the Cloud
2. Laggard Partners that wish the world wouldn’t change
3. New Partners where a new relationship with the SaaS vendor is enabled by the Cloud

The approach to Partners is the same as for employees in the transition to the Cloud.  1) Support those who “get it” in the transition to the Cloud, 2) Ease out those who won’t/can’t make the transition to the Cloud, and 3) Recruit new Partners (and employees) that are attracted by the Cloud strategy.

SaaS vendors need to help educate their Partners on the best practices for succeeding in the SaaS world.  This includes supporting training and helping Partners work through their business model and cash flow to ensure they can be successful.  SaaS vendors should devise SaaS contract terms to provide sufficient up-front payments to make the Partner’s business viable in the short term before long term reoccurring revenue benefits are realized.  SaaS vendors should assist in sales and marketing strategies in a SaaS world to ease selling costs.  This also requires supporting demonstrations and trial usage as appropriate for use by the customer.

The Partner networks are increasingly important to SaaS vendors as they move to larger customers with the need for more services.  SaaS vendors also need to keep their sales costs low given the revenue stream deferrals – SaaS Partners are an important part of this strategy.  For newer, pure-play SaaS companies just establishing these new Partner relationships, it is crucial to minimize channel conflict and make sure the VARs and Consultancies get early wins.

The transition to the Cloud for all size organizations creates great opportunities for Partners  that embrace the new computing paradigm and leave the old models behind.  Those VARs and Consultancies that establish business relationships with SaaS companies and obtain Cloud expertise in their organization will have great opportunities to succeed in the Cloud era.  The computing industry is replete with examples of companies that died sticking to computing models from the last era while those that led the charge to the new model thrived.

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In this seven part series, I have described barriers removed and tipping points reached that have resulted in the acceleration of SaaS products being funded and developed in 2012.  Customer attitudes have changed making them comfortable with SaaS, and in fact demanding SaaS products.  Customers have become more willing to move their most critical business functions to the cloud.  End users find new power in the ability to try new SaaS software without having to go through lengthy IT procurement process — the barrier to “trying” new software is greatly reduced.

Larger business will migrate to the cloud more slowly given their inertia and greater concerns of cloud security, reliability issues, and integration issues, but divisions or large companies are embracing SaaS.  Smaller companies find it a “no-brainer” to eliminate the IT complexity of managing their own applications.  As Amazon AWS evangelists frequently advise, “eliminate the undifferentiated heavy lifting” of managing your own infrastructure to focus on the core business value companies can uniquely provide.

The early SaaS innovations were achieved by startups such as Salesforce and NetSuite who did not have to worry about cannibalizing their base.  While some traditional on-premise software companies wish SaaS would just “go away” according to Jim Armstrong of Clearstone Ventures, the appeal of higher company valuations and the necessity to adapt to a new computing model or be left behind is driving their movement to SaaS.

Several companies such as Intuit have moved aggressively to create SaaS products.  Intuit’s QuickBooks Online and Turbo Tax Online demonstrate how legacy software companies can successfully move to a hybrid on-premise and SaaS model.   Large software companies including Oracle and SAP are making expensive new SaaS acquisitions to accelerate their movement to SaaS.  There will also be an acceleration of traditional software companies providing SaaS offerings further increasing the range of SaaS products and providing “big name” comfort to SaaS products.

These factors are driving substantial acceleration beyond the 25% CAGR in SaaS revenue of the last several years.

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Top 5 reasons why Customers are driving the SaaS Explosion

1) SaaS enables today’s agile business imperatives

In these uncertain times, companies need to rapidly respond to business challenges and opportunities.  The financial benefits to SaaS customers (reason #5 below) are secondary to the ability to facilitate business transformations.

IT systems must be able to respond quickly to changing business needs.  New business opportunities need to be responded to in weeks, not years.  Typical SaaS  implementation time for a mid-size company is two to four months while a large multinational rollout could take a year.  This is about half the time to implement a typical on-premise ERP rollout.  Companies with SaaS systems take advantage of new software capabilities immediately , rather than often being locked into dated releases that may be several years old.  Most SaaS vendors rollout new capabilities every two to four months.  SaaS vendors are able to deliver new software features to their customers much faster than on-premise vendors.  Since the upgrades happen quickly, SaaS vendors don’t have customers running software that is years old.

2) Everyone else is doing it

In the past SaaS was brought into companies through rogue user projects outside of the purview of IT, or through the rare bleeding-edge IT management.  It was a risky decision to put a high profile project on SaaS; now installing a major new system on an on-premise system looks like an outmoded business decision for all but the largest companies (which lag in deploying new technologies across a large organization).  The federal government is even driving adoption of SaaS within its agencies — the National Institute of Standards and Technology (NIST) is accelerating the move to Cloud Computing through its standards efforts.

Many of management’s concerns about cloud reliability and security are diminishing as the message is getting through (and hard to argue with) that the vendors providing cloud services such as Amazon, Rackspace, Google, and IBM, provide far better security and availability than most corporate IT departments.

SaaS has become safe.

3) SaaS choices abound

Most software categories have SaaS alternative; with the acceleration of new SaaS products currently being developed, 2013 will have an even broader set of SaaS alternatives to on-premise software.  Going forward, SaaS alternatives to on-premise software should be considered for new IT projects.  These SaaS products are likely to be more modern, have richer, more consumer-like (think Facebook) interfaces, and have inherent support for mobile platforms superior to their on-premise competitors.

4) You can ease your way into SaaS

As mentioned in the prior post, SaaS integrations with legacy systems are becoming easier and more prevalent.  SaaS doesn’t have to be an all or nothing proposition.  A hard cutover to SaaS would be impossible for large companies, but incremental capabilities to legacy systems such as analytics, marketing software, or mobile support can be added with SaaS applications.  SaaS vendors can “Land and Expand” to gradually displace legacy systems.  We’ve seen this movie before with minicomputers applications eroding mainframe applications at the end of the mainframe era, and then Novell applications eroding minicomputer applications at the end of the minicomputer era.

5) Oh yes, and the economics are compelling

The hard dollar benefits of SaaS are compelling.  The desire to eliminate large capital IT commitments that lock in expense levels for years is great.  The cash flow benefits of the “pay as you go” approach are compelling.  The ability to reduced fixed IT costs associated with maintaining on-premise applications is big.  The ability to reduce the large implementation services costs are enticing – the days of spending millions for an SAP upgrade are waning.

Coming Next — Part IV, “Software Vendors Move to SaaS”

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Top 5 reasons why Server-side innovation will accelerate SaaS adoption

1)      The Credit Card payment and free trials for IaaS/PaaS services

One of the greatest innovations of Amazon’s AWS was the ease of gaining cloud computing resources through credit card signups and free trials.  Amazon courted programmers by removing financial barriers to creating Cloud applications – with no management financial approval required; skunkworks projects by internal development teams and cash poor entrepreneurs blossomed.  Amazon followed Salesforce’s Land and Expand Strategy getting a foothold into a company with a small customer investment and then expanding.  AWS enabled many new SaaS applications to be built enabling Amazon to benefit from these applications’ explosive growth.

Microsoft followed Amazon’s lead by offering free trials and an easy purchase of computing resources, while some more traditional hosting firms looking to become IaaS/PaaS providers don’t get the value of seeding their use by entrepreneurs and early adopters within an organization.

2)      PaaS Matures

While Amazon made it simple to develop applications on their cloud with IaaS services such as EC2 and S3, PaaS is maturing to raise the level of abstraction reducing the grunge work of getting an application deployed in a production setting.  Major SaaS players, Salesforce and NetSuite, are offering their own platforms, Force.com and NetSuite SuiteCloud as PaaS platforms available to other SaaS companies.  Salesforce also acquired Heroku as a second PaaS platform supporting Ruby on Rails.  Microsoft and Google have their own internally developed PaaS platforms with Microsoft Windows Azure and Google App Engine.  All of these PaaS platforms (and many more) are enabling efficient ways to develop new SaaS offerings at lower cost and less time.

3)      SaaS enabling toolsets proliferate — The SaaS ecosystem develops

Beyond PaaS, the cloud ecosystem is developing rapidly to accelerate the development of SaaS applications.  For ISVs with legacy Java applications, Corent Technologies provides a platform to enable the essential conversation of on-premise software to a multi-tenant architecture.  Many other new solutions such as RightScaleare being offered to the market enabling ISVs to build and scale robust SaaS applications to the enterprise in areas including provisioning, user authentication and authorization, metering and billing of SaaS usage, performance monitoring and exception handling, and auditing capabilities.

4)      SaaS integrations enable SaaS to become part of the IT ecosystem

Integration with SaaS applications (or on premise applications) has been difficult.  Existing EAI tools were complex and best suited for applications behind the firewall.  New tools such as Dell’s Boomi greatly simplify the integration between SaaS and legacy applications.  RESTful APIs are becoming prevalent often replacing the much more complex (though more powerful) SOAP protocol easing the ability to realize the potential of Mashups through simple URL based procedural integrations.  Companies such as Google have abandon SOAP interfaces in favor of the simple REST architecture.   Nearly 50% of Salesforce daily transactions are performed over their API.

5)      The Cloud ecosystem matures

The crash of 2011 (Amazon’s AWS outage on April 21, 2011) seemed like ancient history.  We thought (hoped) those system wide failures were behind us until Microsoft’s Azure failed on February 29, 2012 not being able to handle leap years!  Amazon, Microsoft, and the industry has made major strides in reliability and isolating failures that caused the cascading failures we had seen.  While the reliability of the infrastructure has become more mature and reliable, perhaps more importantly, SaaS developers understand the limitations and are building applications more tolerant to infrastructure failures.  Maturation of the platforms and toolsets, and a better understanding of their capabilities by SaaS vendors is leading to the building of SaaS applications that are highly reliable, scalable, secure, compliant with regulatory standards, and auditable.

These developments in 2012 will lead to an explosion of great new SaaS applications being deployed in 2013.

Coming Next — Part III, “The Customer Pull”

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Everyone believes the SaaS market is growing; some more rapidly than others.

I believe the inflection point for adoption of SaaS will come in 2013 — We will hit the infamous knee of the curve and the acceleration of SaaS adoption will reach an all time high.

This post discusses forces impacting the client side applications and devices that will help drive SaaS adoption.  Half of the road to SaaS is moving the user interface from an old style/client server to a modern browser interface.

The drive to web and mobile app interfaces, and web services accelerates the drive to SaaS.

Top 5 reasons why client interfaces will accelerate SaaS adoption

1)    Client/Server architectures are dead – long live HTML5

April 8, 2014 == January 1, 2000

Windows XP’s market share was 27.3 percent in April of 2012.   On April 8, 2014, Microsoft drops support for Windows XP resulting in the end of updates to resolve malware issues.

Without Microsoft support, you will no longer receive security updates that can help protect your PC from harmful viruses, spyware, and other malicious software that can steal your personal information. http://windows.microsoft.com/en-us/windows/products/lifecycle.

The migration from Windows XP to Windows 7 or 8 will begin to accelerate dramatically by April 2013 when CIOs realize they need to move their base off of Windows XP long before support is discontinued.

Windows XP does not support IE9, the first Microsoft Browser with (basic) HTML5 support.   More complete HTML5 support from Microsoft will come with the general release of IE10 later in 2012.  IE9 is also the first Microsoft browser to support auto update pioneered by Google with Chrome, and later adopted by Firefox.  This is crucial since auto updates keep browsers current and avoid the problem of the old, dated browser requiring browser based applications to support old versions.

We need Windows XP to die so people will move off of their old browsers to modern browser with HTML 5 support and the move to new browsers with auto updates to keep up with the rapidly evolving HTML5 implementations.  As the client base is moves from Windows XP to Windows 7 or 8, those users will also migrate to a modern browser.

This migration to modern browsers will end the most typical reason why CTOs cling to their old client/server architectures (and Silverlight and WPF) rather than build new project on HTML5.  There will finally be a very high percentage of the user base running on an update-to-date browser with far fewer inconsistencies between browser versions than in the past.

2)    Client side programmers are moving to HTML5

HTML5/JavaScript/CSS3 is nowhere near as good as WPF, Silverlight, Flash, Flex, etc.  

Get over it!

Yes, I know JavaScript is significantly flawed, making it harder to write and maintain large projects.  It is getting better with new frameworks making HTML5 based development much better.  A major problem has been the inconsistent browser support that is getting better with modern browsers as discussed above.

But the war has been won (or is about to be won) by HTML5/JavaScript/CSS3.  This will result in most new clients apps being written for a browser further driving the adoption of SaaS.  The most telling sign of this is the rapid adoption of HTML5 by the development community with over 50% of client side developers now becoming fluent in HTML5.

http://evansdata.com

3)    Mobile devices are SaaS consumers

Are Virtual Desktops on an iPad really a Cloud application?

It is hard to believe the iPad was first announced two years ago.  Mobile devices drive SaaS adoption because legacy client/server applications don’t (really) work on mobile devices. Virtually all companies I work with are furiously fleshing out their mobile strategy.  Increasingly that means building HTML5 applications rather than a unique application for each mobile platform.   When a mobile application, be it browser based, or an iOS or Android application are built on a web services interface, you are half way to a SaaS implementation.

4)    The BYOD (Bring Your Own Device) revolution

Saying “Bring Your Own Device” is an IT Trend is like saying peanut butter in school lunches is a trend.

Paul French, “ReadWrite Enterprise”

The end-user has won, and the traditional IT control of the user’s device is quickly ending.  It is no longer just a Windows PC and a Blackberry, but now also iPhones, iPads, Android devices, and Macs.  The adoption of these new platforms is another pull to move away from client/server and their VPN interfaces and to a world dominated by Web Services provided by SaaS applications.

5)    The Facebookification of the User Interface

“That looks like Windows 95″

A doctor commenting on a (client/server) Electronic Medical Records GUI

Business users expect modern interfaces.  That means no Windows95 style, 3270 redux, or Citrix interfaces.  Users expect a modern look and feel with a user experience like they experience as consumers.  Client/Server interfaces are getting very dated very fast.

The Consumerization of the UI drives business applications to browser-based applications.

Coming Next — Part II, “The Server-Side Pull”

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