Update on SaaS and Open Cloud

Interest in On Demand services remains strong despite the tough economic climate that we are in. Second, Cloud Computing is clearly taking center stage over SaaS. SaaS and Cloud providers are clearly battening down the hatches and slowing key investments that will result in slightly lower growth than they would have otherwise achieved.

Why is it Happening? According to Saugatuck there are three main theme's in play

Buyer Interest in On Demand Services Remains Strong Despite a Tough Economic Climate.

Interest remains strong reg: NetSuite and Salesforce.com where more than 150 mid-market CFOs attended on a very cold late-January day to learn more about NetSuite's future plans. Also at a recent Salesforce.com event, mroe than 20 percent or more of the attendee’s were prospects.

Regardless, both firms are not only focused on selling to new customers, but are heavily going after existing customers, as they attempt to up-sell new offerings and solutions, and hold the line if not increase the number of seats per customer (a challenge for all SaaS providers – as one of the key customer benefits for SaaS is the ability to scale up and down as the business demand grows). In fact, retention will be a critical metric to watch in 2009, as we heard a number of cases where clients are absolutely committed to their SaaS providers, but are scaling back the number of seats that they are deploying.

In NetSuite’s case, they have recently come to market with a broad-based platform called NS-BOSS which provides the full NetSuite SaaS offering plus development tools to extend and customize customer deployments extensively (targeting VARs and SI who have vertical markets to exploit, as well as existing users who wish to use NetSuite as a platform to develop custom applications). More recently they have announced SuiteCloud, which provides strong integration capabilities to a variety of SaaS providers – in particular Salesforce.com, which enables existing customers to connect both platforms. In the case of Salesforce.com, the firm is very focused around its Force.com platform and its new Service Cloud initiative, which Saugatuck believes has significant market potential, and may be the engine of growth for its core CRM business this year.

The strong turnout at both of these events as well as at the Parallels Summit (1,000+) and the OpSource SaaS Summit (600+), combined with recent Saugatuck survey research of more than 1,750 users (conducted in early December, 2008 – a full two months after the start of the recent economic crisis suggests that buyers continue to be remain bullish on SaaS and Cloud Computing despite (and maybe because of) the tough budget climate. While collaboration and customer service / CRM remain near the top of the list of top applications in demand, there is a continued shift toward core systems of record, especially with HR and Finance now near or at the top of the list of top SaaS solutions going forward.

While in Europe, they shared that the economic crisis appears to be helping to accelerating customer adoption in France, especially around Google Apps. The biggest demand thus far has been in the mid-market, for customers who have 500-5,000 PCs, where decision processes and deployment cycles are shorter than in very large enterprises (and where the decisions are often business executive rather than CIO-driven). Similarly, at the SaaS / ASP Forum in Paris conversations with customers, SaaS providers, ISVs in transition and channel partners points to continued strong customer demand among both the US-heavy weights who are investing in Europe, as well as a variety of country-specific and pan-European SaaS providers.

Less SaaS More Cloud. Throughout our travels, industry messaging has clearly shifted to the Cloud versus SaaS. We were very happy to see this happening, as Cloud Computing in our view is the natural evolution of SaaS, and a much broader umbrella that encompasses not only the application / business services solution layer, but also the compute, infrastructure, Cloud development, integration, service hubs and business process / managed services layers.

In fact, Salesforce.com is among the most aggressive of the larger SaaS players in adopting this positioning (given the broaden company focus around PaaS, Cloud application development et al), although both it and Netsuite have clearly been fine-tuning their messaging and value proposition to re-emphasize the key advantages that are core to both SaaS and Cloud Computing (i.e., (e.g., no capital expense, modest operating expense, and ability to scale as needed).

On the user side, whether at the Parallel’s Summit, OpSource’s SaaS Summit, SaaScon, CloudForce, the NetSuite NYSE event or other key events where we heard a variety of customers share their experiences – messaging around the Cloud clearly dominated over SaaS. We were pleased to hear some of the details and lessons learned from user executives at mid-size and larger customers who are further down the road with their deployments and their success (e.g., Wells Fargo, Merrill Lynch, Pfizer, Georgia Aquarium) – and especially concerning the complex custom Cloud development work that has been occurring, not just the deployment of standard “out-of-the box” SaaS solution capabilities.

We also valued participating in Pitney Bowes company-wide SaaS Summit – as they move forward in their strategies and plans to leverage SaaS across the wide range of offerings, services and markets that they are in. While this was a confidential closed door event (and as such we can’t share any insight into their plans) – it is gratifying to see larger enterprises deeply look at their business and delivery models to investigate how SaaS can be brought to bear in moving forward their business agenda. We look for other traditional business services providers who are not normally considered “technology” companies per se, to likewise rethink how SaaS and Cloud Computing can be applied for competitive advantage.

Providers Battening Down the Hatches. With the economic climate changing so quickly, the need for SaaS and Cloud providers to get as close as possible to break-even or better has become paramount. Most of the vendor executives and venture capitalist that we spoke to recognize that even though SaaS and Cloud Computing are the future, the easiest thing for customers to do in a tough economy is nothing – even if the value proposition clearly is superior over traditional on-premise options.

As such, many providers have scaled back new spending and expansion plans – which will no doubt impact top-line growth, as the SaaS industry slows moderately in the face of tightened customer budgets. But this trend is not universal – by any means – as more recent conversations (over the past few weeks) with a number of SaaS and Cloud companies suggests that after a lighter investment period November 2008-February 2009 (when the economy looked to be in free-fall), many providers are scaling up their sales and marketing plans for significant calendar Q2 and Q3 programs.

In fact, revenue guidance from large industry players such as Salesforce.com continues to show solid growth in 2009. In the Industry / Financial Analyst sessions that we attended last month at CloudForce, Salesforce.com only moderately lowered their fiscal 2010 revenue guidance to $1.300-$1.330 billion (which represents 21%-23% growth over fiscal 2009) – which is only slightly lower than the guidance that they provided in October, 2008 ($1.350-$1.360 billion).

Bottom Line: No doubt, the current economy is impacting user budgets and spending plans – with recent forecasts by Gartner and others suggesting flat to slightly negative IT spending in the current year. However, Saugatuck believes that based on its’ most current in-the-field travels and survey research – SaaS and Cloud Computing will continue to gain share at the expense of traditional on-premise alternative. In many respects, the current economic climate only heightens the economic advantages that these new computing paradigms represent.