Michael Fauscette

SaaS continues to be the bright spot this week!

Once again this week announcements around SaaS and cloud computing brightened an otherwise bleak software outlook. The week kicked off with a strong turnout of excited customers in San Diego at travel and expense management SaaS vendor Concur's user conference. That was followed with a good showing by SaaS talent management vendor Taleo in their Q4 2008 earnings announcement. In a very anticipated announcement wednesday, the largest SaaS vendor, salesforce.com, showed that they too are seeing strength in the SaaS model as customers continue to vote with their dollars for cloud computing in its strong Q4 2008 earnings report. Finally salesforce.com ISV partner Appirio announced closing a series C round of venture funding of $10M, a vote of confidence from the VC community (GGV Capital and Sequoia Capital) for SaaS and for businesses built on PaaS in a hybrid ISV / SI model. Taken on the heels of Concur's and Netsuite's strong earnings announcements two weeks ago and the evidence is compelling that my bullishness on the business model, especially in a down economy, is not misplaced.

Looking at the salesforce.com announcement in more detail shows just how strong the results were in what arguably should be one of the worst quarters of the next two years. In the earnings call CEO and chairman Marc Benioff reported record results for both Q4 and FY 2008, with the company reaching a significant milestone of >$1B in revenue in a FY, the first SaaS vendor to break the $1B mark. The $290M in Q4 revenue represented an increase of 34% year / year and 5% quarter over quarter. This revenue mark represented an increase of ~3600 net new customers in the quarter and ~14,400 net new for the entire year. Revenue for the year was reported at $1.077B, an increase of 44% y/y. Salesforce.com also made some improvement in overall profitability, reporting an increase in GAAP EPS of ~130%. All in all a very respectable showing by the poster child of the SaaS business model.

SAP and SaaS, is its acquisition of Coghead a clue?

It should come as no surprise that I am a bit confused on SAP's SaaS / on demand / cloud (pick your buzz word) strategy (here's one post that talks about this recently). Two independent (and seemingly unrelated) data points came out this week that could possibly shed some light on the subject. The first data point comes from the announcement that SAP had acquired the IP and hired the engineering team of failing platform as a service (PaaS) vendor Coghead (which was a SAP Ventures backed start up). SAP did not acquire the customers and does not plan on continuing the PaaS offering in its current form past April 2009. There's already been quite a bit of blogging on the announcement so I won't belabor the point by detailing a deep analysis of SAP's actions (check Dennis Howlett's post out for a good overview, although possibly a bit colored in SAP's favor and a different take here from TechCrunch, which also is a bit slanted but towards salesforce.com).

The second data point came from a colleague in our IDC German office and is an article that appeared in Handelsblatt, a German business daily and discussed here (sorry, it's in German). The article basically says that SAP has put a sales freeze on Business by Design (BbyD), it's SaaS mid-market offering. I should mention that SAP has denied the action. Now it's possible that this is just a reference to SAP's actions of roughly a year ago when they stated that they were not broadly marketing BbyD because there were some quality issues that they wanted to address. Since that announcement SAP has been very silent on its SaaS strategy (the exception to this would be the SaaS offering from acquired Business Objects, which has continued to be sold and is now rolling out to the SAP field sales organization). In the absence of any clear information there have been many rumors of failed implementations and customer issues, mostly around problems with BbyD's multitenant architecture. I personally think that there were issues with the new modular development methodology that SAP was trying to implement, but that's only a guess.

Taken separately the two events might not create much of a stir, I mean, SAP buys technology fairly often and certainly one newspaper could mis-report the facts. But taken together in one week it does make you wonder if more is going on than meets the eye. Add in the hiring of ex-Oracle applications executive John Wookey to run SAP's enterprise on demand / SaaS efforts last Fall and the increasing interest in SaaS created by the current recession and at least it deems some closer examination.

So I've mulled this over for the past couple of days and with a few assumptions and a bunch of conjecture there is a reasonable "story" that could be wrapped around the two events. SAP, like all of the major SW vendors, is feeling the crunch around the recession, that's a fact. If the management team has realized that SaaS is holding up in this economy, which all the major analyst firms are reporting, including IDC and I've mentioned on this blog repeatedly (try 1, or 2) then maybe they are making a move to sort out their strategy. If they have major problems with BbyD, and if they realize they need to move more quickly, and if it would be easier to start over than fix BbyD (a lot of if's, I know) then an acquisition of a PaaS solution might just give then the jumpstart they need and would indeed be a reasonable strategy by Wookey (remember he's ex-Oracle, he does know acquisition strategies can provide a quick path to market) and the SAP management team. Maybe this was opportunistic, or maybe it was carefully planned, who knows, but the fact is that SAP now owns a fairly respected PaaS solution.

One more observation that's a bit self serving, in my IDC group's 2009 top ten predictions we predicted that major SW vendors would look to building / acquiring a PaaS solution this year (IDC Doc #216214, Dec 2008). While it remains to be seen what, if anything, SAP will do with the Coghead PaaS offering, it does make us start to look on target with that one (one down, nine to go).   

What is Enterprise 2.0 anyway?

I realized the other day that I had fallen into a bit of a trap on my blog. I had some thoughts on e2.0 and had jumped into posts about it, when in truth I had never defined what I was talking about. I've built an initial model and started refining that but the most basic thing, a definition, was lacking. Now truth be told I had a taken an approach of "you'll know it when you see it". So what are we talking about when we talk about e2.0, is it simply Web 2.0 applied to business? I think it's a little more than that, although that's a big part of it today. Here's what I think e2.0 is: applying emerging technologies like Web 2.0 accompanied by organizational, cultural and process changes to improve business performance in an increasingly connected global economic environment. Let's dissect that a bit more. The most basic part of this is why do we need an e2.0 initiative? e2.0 is an imperative for business because of the shift created by the growing use of the web in business. This shift has created a connected, global economy where any local business can rapidly become a global enterprise on everything from sourcing (global supply chain) to distribution (global customer base). A new competitor used to be the new brick and mortar store down the street (which had to be constructed, you saw that competition coming), now it could easily be an unknown established firm from half-way around the globe (and could appear almost instantly). Competitive advantage comes from conectedness in this environment, the word ecosystem, or a symbiotic relationship between your business and suppliers, outsourcers, partners and customers has taken on a very different meaning today.           

e2.0 is not about the technology, but instead about the business transformation, that is organizational, cultural and process change necessary to apply emerging technology to greater advantage in this new connected economy. It's also not just Web 2.0, although Web 2.0 certainly created the first wave of technology and concepts that are providing a response to the connected business imperative. This business transformation is happening in a different way than transformation in the past, which is also the Web 2.0 influence. e2.0 is happening, at least in its initial wave, from the outside in and from the bottom up, not just top down. I read an interesting post recently in a Harvard Business Publishing blog on bringing the core of the business to the disruptive edge, very appropriate, in my opinion, to what's happening in the e2.0 transformation.

The other underlying factor in the e2.0 definition is that business is becoming social again. In the era of the local small enterprise (which lasted into the 1970's), business was social. That changed in the 1980's with the impersonal enterprise hitting everything from grocery stores to banks (some have argued that this impersonal approach to banking is a key contributor to the current financial crisis, makes you think anyway). The internet, and more accurately Web 2.0 is changing the definition of social, friend, acquaintance and changing the way we interact socially. This same model is being applied to the enterprise, building new relationships based on interaction and value.

Netsuite Q4 & 2008 Earnings, SaaS holds up in tough economic times!

I admit that I listened to Netsuite's earnings call yesterday with a bit of anticipation. If you read this blog you know how far out on the SaaS limb I am for this year's predictions. In addition I've worked with my SaaS analyst, Robert Mahowald to raise the SaaS forecast for the third time in a year so we're very bullish on the success of the market, even when the rest of the traditional vendors are reporting a slow down (or in some cases a halt) in growth. Concur reported last week and its earnings were strong through the very period that should have been the slowest in this crisis, Oct - Dec, so far so good. Netsuite is the second benchmark company to report out, and if they held up as good or better during the same period then I felt like our prediction was in fact playing out exactly as we thought. The day after the announcement I'm still digesting the finer points but let's just say I'm more than pleased with what I heard. I'll summarize the key points:

1. Record results on both top and bottom line

2. 1st net profitable quarter

3. 30.5% growth over Q3

4. 40.5% growth over 2007

5. >350 net new customers in Q4

6. Increased average street price (ASP) by ~20% in Q4

7. Bookings up 20% over Q3 and 30% over 2007

8. Customers are negotiating to pay monthly or quarterly rather than annually as a result of the economic situation

All in all a strong quarter and exactly on track with what we had expected to see this year. Customers are increasingly interested in SaaS solutions because of the financial crunch (no credit, reducing capital expenses) and are very attracted to the pay as you go model (operating expenses versus capital expenses). In addition customers still need to invest in IT for cost reductions, competitive advantage, better business visibility, etc., just like in good times except that in this economy these imperatives are providing even more reason to invest in systems like Netsuite.

DS SolidWorks World 2009

Dassault SolidWorks World opened this Monday to an excited, energetic crowd that numbered almost 4000, about 1000 more than SolidWorks expected due to the current economic climate. As much doom and gloom as we hear lately it was very exciting to see the level of engagement of the SolidWorks customers! DS SolidWorks CEO Jeff Ray, opened the conference by first setting the Twitter hashtag as #sww09, then putting the economic conditions and hardships out in the open and told some stories about how several loyal customers had paid their own way and even taken vacation to get to the conference in the wake of budget reductions. He then sent time with a recap of its success on moving three key elements on the products and for the customers: 1. customer service, 2. product performance, 3. user experience.

. CEO Jeff Ray

Grading company performance on each element, which by the way, I think is a strong move for transparency and continues to increase customer loyalty, Jeff gave the company:

B- customer service (an area he stated was a very high focus over the last year)

C+ product performance

B+ user experience

The highlight of the opening session though was the "interview" session that Jeff conducted on stage with Sir Richard Branson.

CEO Jeff Ray interviewing Sir Richard Branson

The two executives discussed Sir Branson's business successes and failures, his world records and took questions from SolidWorks community bloggers. Following the main stage event Sir Branson held a press conference and continued to answer questions.

During the questions Sir Branson raised one of his key concerns, that not enough women are going into engineering / product design fields and that was, in his opinion a hinderance to innovation. Sir Branson was engaging, humorous, and at the same time very insightful on the process of innovation.

One of the most interesting bits of information that was first shared on the main stage by CEO Jeff Ray is SolidWorks use of social media to capture and prioritize customer needs by using crowdsourcing and wisdom of crowds approaches. In a follow on interview I discussed this process with DS SolidWorks VP of strategy Suchit Jain. The executive team has made a solid commitment to involving users in the product enhancement and development process. Suchit put a process in place that captures customer input in three ways, 1. "voice of the customers" that captures enhancements in a web based system that allows customers to vote on the proposed enhancements, 2. Lead users, which is a small council of innovative customers that provide input and guidance and 3. a program called "Observations" which pairs each SolidWorks executive with a consultant and requires each pair to conduct 2 observation session per year, which entails sitting with end users for several hours and observing their work flow. This three pronged approach balances the type of feedback and distributes across the three channels to give insight both at the tactical product level and also helps craft a longer term strategy.

Wordle

I love words, which I suppose makes sense considering what I do. I found this tool and created a wordle by using the site and pointing to my blog. The tool is useful for presentations and it's fun to play around with. You can change fonts, colors, layout options, etc. Give it a try.

The week in SaaS

"It was the best of times, it was the worst of times", oh wait, this is SaaS news not "A Tale of Two Cities" and I'm certainly no Charles Dickens so...back on target, this was a interesting week from several different angles. There were three events that bear some analysis I think in relation to SaaS. The first was Concur's Q1 earning announcement , which was quite good, especially considering the current economic climate. The second was SAP's Business Suite 7 announcement , which included a curious lack of information on what SAP plans to do in SaaS. The third was news from salesforce.com indicating that its president Steve Cakebread had resigned for personal reasons and that the top two sales executives had left the company because their jobs had been eliminated.

Let's look at Concur first. For the quarter that ended 12/31/2008 (its Q1 FY 2009) it reported that subscription revenue was up 22% year over year, total revenue was up 19% year over year and 2% over the previous quarter for a total revenue of $58.6M and net income was $5.8M compared to same quarter the previous year of $3.4M, exceeding the street's and the companies expectations. To put that in perspective Concur showed strong double digit year over year growth during the 3 months following the start of the financial crisis, a time when most vendors were reporting that many prospects were just not making buying decisions as they tried to digest how bad things really were. Steve Singh, Concur's Chairman and CEO, also reported that NEW client acquisitions were up over 50% over the previous year. Concur gave guidance for Q2, saying that it expected revenue to increase by 6% over Q1. It also pointed out that its partnership with American Express would start to generate new customers in Q2 (basically Amex could be seen as a distribution partner and the relationship should generate quite a bit of business). All of this reenforces my belief that SaaS vendors will in general continue to thrive and grow in this economic climate because of their value proposition. For more on that see my previous post.

Now on to SAP and the BS 7 event. First, if you're interested see my more detailed post on the announcement. But what about SaaS and "cloud". SAP clearly omitted almost any reference to either during the event. When asked about "cloud", SAP Co-CEO Leo Apotheker simply said that SAP was researching cloud but that at present it was not robust enough to be an alternative. Now honestly, what does that mean? IMHO they do not have a good answer yet for what they plan to do around SaaS and cloud.

Lastly salesforce.com's executive shake up. This is only conjecture on my part but I believe that their direct sales model is running up against the same enterprise resistance that the traditional players are feeling. SaaS companies that are moving to indirect, like Intacct, are not seeing a slow down. Also companies that are squarely focused on 1. small and medium businesses (SMB) and 2. industry vertical variants are also not seeing the slow down (Netsuite & Concur for example). Salesforce.com has a few issues working against it IMHO: 1. it has moved up market over the last 2 years, 2. no real vertical focus, it is almost completely horizontal, 3. more agressive competitors, especially in the SMB market (Zoho, SugarCRM) and 4. the PaaS strategy is only an experiment for ISV's, only a handful are doing much business yet (Appirio for example). Salesforce.com's move into social CRM could give them a helping hand but it's to early to tell, companies are doing social experiments and are mostly using the free web 2.0 tools for those experiments I think. I do think that their platform partnerships with Facebook and Google will be a positive factor for salesforce.com this year.

The next event to focus on from a SaaS news perspective is next weeks earnings announcement from Netsuite, scheduled for Tuesday 2/10 @ 2:00PM PST. All the evidence so far points to good solid results but of course we'll have to wait till Tues to see.

SAP announces Business Suite 7, all sun and no "clouds" allowed

Wednesday SAP announced the new Business Suite 7 at its global marketing HQ in New York. I listened to the live webcast (one of the analyst in my apps group attended) and I ended feeling like I usually do with SAP, a little fuzzy on just what the announcements meant and with the need to dig in a deeper to figure out just what was really changing / launching. Since the event I've listened to the recording a few times, viewed some of the videos and dug through the released material. Now I think I do "get" it.

Going into the event there were really two general opinion camps, either this would be a mostly marketing "message" or "spin" heavy release or maybe this would be a substantive, feature-rich release. There was also some hope that the announcement would clear up the current haziness around SAP's SaaS / cloud strategy and the status of BusinessbyDesign. As far as the SaaS question goes nothing was cleared up, in fact there is probably a bit more mist just by the fact that nothing was cleared up (and a few comments about "cloud" that left the "concept" in the research project bucket for SAP). For the rest though I'd have to say that the announcement falls somewhere in the middle. some marketing but underneath there are a few key changes that customers will probably find interesting.

1. For the first time with Business Suite 7 (which includes PLM, CRM, SRM, SCM + all with 7.0 version numbers and the core ERP 6.0 with no change in version number) SAP moves to a synchronized release of all products in the suite.

2. Overhaul of the GUI which results in a fairly consistent user experience across the suite. The more modern GUI of the CRM product provided the model for the rest of the modules.

Note: with these first two changes it would also potentially allow SAP to consolidate some R&D with some cost savings in the future.

3. SAP now taking a modular approach and has moved away from the monolithic suite approach. Now this is partially marketing but also involves pricing changes (pay by the module).

Note: This move away from the suite messaging and towards a modular approach is partially a reaction to the current economic environment where companies are doing things in "bite size" pieces rather than investing in large, long term projects / rip out and replace. In a modular approach a company could focus on areas of greatest value and implement in a phased approach (which all good IT project managers know is the least risky path). The modular approach is also an attempt to block Oracle and others (which might be seen as "best of breed" apps in specific business processes) from getting more apps into SAP accounts. With SOA enablement in most apps these days customers have been buying in more of a mixed-brand best of breed suite or virtual suite. They also are starting to buy in hybrid suites that mix on premise and cloud-based apps.

4. Increase of embedded analytics throughout the modules using acquired products from Business Objects.

5. A change in the frequency of enhancement packs. Enhancement packs were announced in late 2007 as a replacement for upgrades and were planned for release every 6 months. Customers apparently couldn't consume the packs that frequently. The new schedule would provide packs annually going forward (and presumably will be twice as large as the 6 mo packs).

Note: I remain skeptical that calling something an "enhancement pack" makes it easier to consume than an "upgrade". The push back from customers on the 6 month release cycle would seem to support the idea that they still require resources and a project to implement.

6. SAP is in some ways returning to its roots by focusing on business process again and introduced the concept of value scenarios (which are basically cross app business processes). The processes can be enabled / disabled with a Netweaver component called a switch framework (which is a reasonably descriptive name). There are around 150 value scenarios at present but one would assume that SAP will deliver more over time.

Note: Customers use software in a business process format, not an application by application approach. This is a good move by SAP to get more in alignment with what the customer wants.

7. SAP joins the other major enterprise SW vendors and announced some Enterprise 2.0 (E2.0) capabilities in BS 7. BS 7 includes something called a “sentiment engine” which during the demo on Wednesday, was pointed at Twitter. It's a brand management tool that I assume could capture conversations from various cloud-based services.

All-in-all some interesting announcements. Of course to implement BS 7 the customer must be on ERP 6.0 (enhancement pack 4). It remains to be seen though, how customers will react to BS 7 and whether they will rush to purchase in very difficult economic times, either module by module or mega-suite.

A few more thoughts on SaaS profitability and SaaS channels

  Back in Sept I did a post looking at SaaS profitability and some of the issues that seem to exist around the "pure-play" SaaS business model. I won't go back through the analysis but I realize, looking back that I focused a lot of the problem with the cost of scaleable infrastructure and neglected to discuss another issue that I believe plays into the "numbers" that I showed. Simply, most SaaS vendors sell direct today (I discussed some partner issues in this post in July). Their sales and marketing cost, especially considering that up until last year, involved a great deal of evangelizing the benefits of the model and convincing reluctant customers to give it a try, are high. The other bit of information that has surfaced though is that renewals of the subscription, often thought to be a simple matter, also involved expensive sales and marketing, much like an initial close. In some part, this might be due to the industries own marketing messaging around SaaS, easy to implement, easy to use, fast to deploy might also equal easy to switch? Direct sell, in a market that is being developed and with a product that doesn't necessarily fit into the sweet spot of traditional VAR's, was a reasonable choice. But what happens when SaaS is mainstream and vendors try to extend their reach, especially in the small and mid-markets? Conventional software wisdom would lead us to think that SaaS vendors have to look for alternate distribution models. And if SaaS is now mainstream, which I do believe, then the partner model is critical.

Last week I had a briefing from a SaaS vendor that opened my eyes to the channel question even more. It seems that Intacct, a SaaS financial management and accounting applications provider, with over 2,500 SMB customers, is sold through a combination of direct and a channel partner network. Their current VAR ecosystem counts over 100+ partners and they are aggressively growing that number and accounted for 50% of their new business last year (and growing). What's more, these VAR's are set up in a traditional "dealer" channel partner model and receive revenue for the deal for the life of the relationship + services. Intact also claims a >95% project success rate (I haven't validated that yet, I'm just repeating what was presented). Although private, Intacct is reporting that they are seeing increased activity through the end of 2008 and into 2009.

I think this shows a couple of important things, there are SaaS companies that are embracing a more traditional channel distribution model to reach the SMB customers, we will have the opportunity to see if the model can be validated over the next couple of years and see if this indirect model can positively impact the over profit model of a SaaS company. If nothing else, Intacct is a company to watch.

Should you look at Enterprise 2.0 projects in the economic downturn?

I've read quite a bit lately on Enterprise 2.0 and the different areas in business that are utilizing Web 2.0-like technology, processes and concepts. There is a least a lot of "talk" about it, although the actual use is evolving slowly. I've mentioned before that I believe that the current economic situation will accelerate E2.0 use, as businesses try to get and stay closer to their customers and partners. There are several areas that could benefit from the use of E2.0, here's a model that I've worked up to start looking at these opportunities.

This is just a start to capture some of the potential of E2.0 and will evolve from here. So with this model a few areas of benefit seem clear:

• IT infrastructure to the cloud, reduces capital expense and internal expense to maintain. SaaS / subscription pricing of applications and infrastructure out of operating expenses.
• Increase innovation and greater opportunity to meet customer needs by using crowdsourcing and the wisdom of crowds (lower cost methods for building requirements, understanding customer needs, etc)
• Lower customer service cost and increase satisfaction by providing service to customers when, where and how they want it. Increased intimacy by creating an ongoing customer dialog.
• Increase effectiveness of partners, P2P networks, ecosystem.
• Reduce supplier cost while increasing performance and visibility.
• Increased sales effectiveness by providing greater visibility to prospects.
• Brand monitoring and brand building, conversations.

This is a short list so far, what do you think belongs here?

cloud, Enterprise 2.0, financial crisis, PaaS, SaaS, SaaS, Social CRM, social media, Software, Web 2.0