Get a Horse

I was literally gobsmacked and I had to re-read the post several times.  Gartner analyst Robert Desisto—who I don’t know at all—wrote a short post last week saying that today’s SaaS vendors, “will resist to the move to ‘pay as you go’ because it will have a very big impact on their business model predictability” and become “legacy dinosaurs” as his headline said.

But, but, but! I stammered to myself.  How can that be?  I have been researching and writing about this space for fourteen years.  I was the first analyst to cover Salesforce and a bunch of other early entrants, and one of the first people to have a practice dedicated to SaaS.  They all had pay as you go models, at least back then.  Did I miss something?

One of the real challenges of running a subscription business, and this includes SaaS companies as well as the Dollar Shave Club, ZipCar, and all the other companies that jumped on the bandwagon, is that you have very different revenue flows that must be accounted for.  Companies like Zuora have built big businesses and attracted hundreds of millions of dollars in venture funding to build billing, payment, finance and accounting systems that cater to this massive industry.  Now along comes Gartner with the clear implication that the pay as you go model is not in fact alive and well?  I didn’t get it.  Still don’t.

As a sanity check I contacted Tien Tzuo, CEO of Zuora, a subscription billing, payments and finance provider.  In his previous life Tzuo was CMO of Salesforce and at one point had the job of inventing a billing system for Salesforce that operated the way subscriptions run.  Here are some points from Tien.

• Just because some SaaS companies do three-year contracts that doesn’t make them enterprise software dinosaurs.  Every successful SaaS company realizes that keeping churn low is a core part of the model, and every successful SaaS company realizes that long term contracts do not equate to low churn—the only thing that truly reduces churn is to have strong adoption and customer success.  That’s why SaaS vendors invest in customer success while on premise software companies do not
• Many SaaS companies actually don’t offer three-year contracts.  At Zuora, we see lots of companies with month-to-month models.  CDNs, cloud companies, API companies, point-of-sale systems—these industries all skew towards month-to-month.  Radian6 also had a month-to-month model.  The post also says doing three-year contracts makes SaaS companies vulnerable to other startups who choose to offer month-to-month … but there’s nothing to stop the SaaS vendor from changing their billing policy whenever they want. (my note: provided they have a product like Zuora that makes this easy to do the billing and accounting).
• Customers don’t have to accept three-year contracts.  It’s naive to say that it’s the SaaS vendor that forces it on them—many companies actually prefer long term contracts once they are committed to the SaaS vendor, as this gets them the best price as well as longer-term price protection.  This can be a win-win scenario.
• This does create havoc on revenue recognition.  Monthly billing makes billing messy but revenue recognition easier.  Annual or multi-year billing makes billing easy but revenue recognition very hard.  There’s no free lunch.

It was such an odd thing to read.  It reminds me of some other chestnuts like, “If god wanted man to fly he would have given us wings,” or “We will never need telephones in England because we have such an abundant supply of messenger boys,” or “Someday every town will have a computer,” or my favorite, “640 KB is all the memory your computer will ever need.”  These are all such Luddite comments you just knew upon hearing them that they won’t stand the test of time.  Heck, this one didn’t survive a day before people started scratching their heads. 

Perhaps the last word on this comes from the most authoritative source—the marketplace.  On December 10, BrainSell, a Boston-based technology company announced it would offer an integrated solution of Intuit’s QuickBooks with bi-directional synch to Salesforce.  According to the press release, “What’s really great is that customers can get a Salesforce subscription from BrainSell with no contract, and the ability to pay month to month!”

http://www.itbusinessnet.com/article/Salesforcecom-Month-to-Month-Subscriptions-Now-Available-through-BrainSell-Boston-Based-Technology-Firm-2963070

 

 

Social, Analytics and Mobility Will Drive CRM Rewrite

“Call rewrite!”  That’s what they said in the olden days on movie sets when the script needed doctoring.  It’s also what the technology industry metaphorically does about every ten years.  We rewrite much of what we’ve been relying on for information processing because the accumulation of new technologies over the previous decade has made our current batch of gear and applications uncompetitive and relatively expensive.  So say Larry Ellison, Marc Benioff and many others.  So the cycle begins again though when exactly is a tricky thing.

By the looks of this economy the new cycle couldn’t arrive soon enough and thoughtful people are asking what the new world might look like.  Some of us may have been lulled into believing that the ten year replacement itch applied to other departments but not CRM.  After all, haven’t we been steadily accumulating changes all along?  And haven’t new technologies like SaaS, pretty much eliminated this cycle?  Well yes and no.

On-demand, SaaS or Cloud Computing—call it what you will—has done a lot to flatten the technology replacement curve but the reality is that new stuff finds a way to creep into the world and our existing infrastructures don’t always handle the newbies smoothly.  The case in point is Cloud 2.

Cloud 2 is as significant a departure from the norm as CRM or SaaS computing were when they were first introduced.  Driving Cloud 2 are three technologies that we are all very well versed in but which, taken together, add up to the call to rewrite.  Let me explain.

The three technologies aren’t even new.  They include mobility, social media and analytics and they’ve been around for decades in some cases.  The convergence of these three technologies within the CRM suite is driving us to rethink CRM and they have the potential to drive the next economic cycle.

Social media is transforming CRM but so is analytics though we are earlier in that deployment curve and while mobility has been a factor for a long time, the convergence of these factors is something special.  It reminds me of the 1990s.

The ‘90’s saw a wave of productivity enhancement and a long period of growth with low inflation and the two are rarely seen together.  It caused Alan Greenspan, chairman of the Federal Reserve, to speculate that we had entered a new economic era of permanently lower inflation and higher productivity.  With so much evidence around him, Greenspan could be forgiven for this thinking but the laws of economics had not changed and, in fact, they were working as advertised.

Under normal economic conditions, increased productivity—i.e. getting more output from workers—required more input.  More production translated into more people, more machines and more raw materials.  But that didn’t happen in the 1990’s as knowledge workers leveraged technology to increase their output.

The computer automation boom of the previous decade—the 1980’s—was largely responsible for the aggregate productivity improvement.  While individual companies might have been hard pressed to provide a valid ROI calculation for their technology investments, many decision makers knew that without those technology investments, they would surely be left behind.  It wasn’t until the 1990’s that this infrastructure buying spree aggregated forming the productivity boom.

The same kind of situation may be forming right now as three new drivers—social media, mobility and analytics—converge, especially in front office business processes.  As in the prior example, these technologies have been accumulating in our culture and they have become more robust in each passing year.  Social media may be new but its adoption has been significant.  With half a billion Facebook users alone social technologies have become ubiquitous, a key requirement in deploying any new networking technology.

Today mobility benefits from investments in infrastructure by the carriers and in devices by individuals that provide the essentials for using social media.  Finally, analytics have existed for decades but their coupling with social media is a critical turning point.  Social media generate mountains of data that must be analyzed to be useful and studies show that analytics adoption is shadowing social media adoption in business.

So here is the critical point for me—your investment in mobility will be enhanced and your investment in social media will be justified by how well you adopt social analytics.  That’s right, analytics is the last mile in this journey and analytics, if implemented appropriately, will make the other investments look shrewd because analytics alone will give you insight into the data churned up by the other technologies.  Analytics along with the other drivers provide the essentials for Cloud 2 and for a new round of prosperity.  Most importantly, analytics and Cloud 2 move the discussion from the hardware and software to the business process, which is where we’ve been trying to get for decades.

Oracle v. SAP

Oracle won its lawsuit against SAP in federal court.  Oracle had complained that a now defunct subsidiary of SAP had unlawfully used its intellectual property to provide third party support to Oracle customers and the jury agreed.

There are so many levels in this situation that I can’t get to all of them but one that interests me is the idea of a third party disintermediating the primary party (Oracle) to deliver a service that costs less.  This kind of thing happens all the time in the economy and the issue, as far as I can see, is that the third party made use of Oracle property without paying proper license fees.

I get all of that and I agree with the decision—you have to pay for what you use.  On the other hand, though, the existence of the third party in the first place poses an interesting question for everyone and casts a shadow on the conventional software business model.  Support fees are often calculated as a percentage of the license fee and both are rather steep with enterprise software, in part because of vendor lock-in.  So there’s a built-in incentive for customers to seek out any way they can find to lower their costs.

The idea of lowering costs is as old as capitalism because margin is, well, margin—the difference between what it costs you to deliver a product or service and what the customer pays for it.  But enterprise software customers have been complaining for years about high prices, especially the price of support and those costs suggest to me another example of the unsustainability of the conventional model.

Back when the addressable market for software was a relative handful of companies that could afford big iron, high prices made sense, if only because the cost of development, maintenance and all the rest had a smaller base to amortize the costs against.  But today computer hardware is cheap and abundant and it can even be rented from the cloud.  Software has become much more complex and labor intensive—and costly—in part because the addressable market has grown but so has competition.

If you compare the high costs of enterprise software with what’s on offer with cloud computing you see some big differences.  For years SaaS vendors have touted the advantages of a single monthly fee that includes not only hardware and software but all of the labor associated with service, maintenance and ongoing development.  It’s this model that is catching on in emerging markets in part because those markets simply cannot afford to support the old model.

So while I see the Oracle v. SAP verdict as just, I also see it as a milestone in the march to cloud computing.  The conventional enterprise software paradigm is hugely expensive and unsustainable in the long term, not only for customers but sometimes for vendors too.

The Subscription Economy

There are multiple ideas about the shape of the future competing for primacy in the electronic village.  I am pushing on sustainability but another idea that I really like is called the subscription economy championed most vociferously by Tien Tzuo, CEO of Zuora.  Subscriptions fit well into Tzuo’s company plan since his company has a billing and payments system for subscription purchases.  But there’s more to it than a self-serving motto and I think the subscription idea feeds nicely into the idea of sustainability.

When we talk about the subscription economy it means that an increasing number of products and services are available today through subscription rather than outright purchase.  It’s easy to see through examples like car leasing and cell phone use.  When you lease a car you are actually subscribing to a certain use level for a time.  At the end of the lease you return the car and either get another lease or possibly purchase a car outright.

With a cell phone you buy a package that leaves you with ownership of the phone but a mandatory period of subscription to the service.  Go over your subscription rate and you pay more.  At the end of the agreement most carriers let you continue month to month, until you want or need another phone and the process starts again.

Car leases look just like a car purchase in that you get a monthly bill though that bill is lower than it would be if you had bought the car.  And we’ve been accustomed to buying phone service for over a century so there’s no drama in the cell bill except for the itemization, if you read it.

Finally as a third example, there’s SaaS computing and we all know how that works.  But what we don’t see in any of these cases is the significant back office processing that comes with a subscription economy.  With cars and cell phones it’s no big deal because even though these are subscriptions, they are so tightly controlled that the subscription functions just like a purchase.  That’s true in billing for a car lease and, except for overages on your cell bill, it holds there too.

SaaS is a different kettle of fish for several reasons.  First the usage costs are low and here’s the key — customers have broad latitude in changing their subscriptions which is very unlike the car and cell examples.  A hallmark of SaaS is that customers can change their configuration almost at will, which has direct impact on billing.  The overhead involved in billing can be substantial especially if a bill is incorrect because expensive human labor is needed to make corrections.

Unfortunately, the billing systems that work well for relatively static business processes that include purchases and even leases, work poorly in the subscription economy.  The economic challenge is that if the overhead involved in making billing correct exceeds the cost of the good sold  (or subscribed to) then you can’t have a thriving or even sustainable business.  That means the billing system is potentially an inhibitor of innovation.  If you ask yourself what’s preventing wide scale subscription for more products and services that we use every day, part of the answer is likely the cost of billing.

Take newspapers and periodicals for instance.  You might think of newspapers giving away their content on the Internet as silly and you might be right.  But content is one of those things whose demand is so variable that charging for it might cost more than the product itself.  In a way, when a paper gives you its content gratis, it is acknowledging that it would lose money selling it to you.

Until recently, giving content away on web sites was OK because a large portion of print media revenue comes not from subscriptions but from advertisers.  But advertisers have been deserting print so the issue of charging for content has taken on new urgency.

Of course content is just one example.  Other examples are waiting in the wings for a business model that enables them to become real and profitable.  Some of those examples can even be found in conventional areas like SaaS.  For instance, a SaaS company may be able to offer more permutations of its products to fit more market niches but because those niches may be rather thin and because the SaaS company may still be using a conventional billing system, the SaaS company cannot profitably exploit the niche.

Then there’s the green issue.  Take a company like Brighter Place the group started by Shai Agassi to build networks of charging stations for electric cars.  The idea is that you can subscribe to car battery services, which include battery charging or outright swaps the same way you subscribe to cell phone service.  That’s a major part of an emerging subscription economy.  So far entire countries including Israel and Denmark, the state of Hawaii and the city of San Francisco have enlisted in this new idea.  But the idea will need a very scalable billing system to make everything work.

Maybe that’s a bit complicated but the net of this discussion is that subscriptions can play a greater role in our economy if only we can get the business model right and that starts with back office overhead.  In case you are wondering why that’s important, consider this: as the cost of a product declines more people can afford it and the potential market size grows.  That was the beauty of SaaS when it debuted and it’s still true.  In fact, in a down economy, a price drop caused by subscriptions is equivalent to a big stimulus.

So, Zuora introduced Z-Commerce for the Cloud last week.  It’s a solution designed to address many of the issues that so far hinder broader acceptance of things delivered as subscriptions.  The product is delivered as a SaaS solution — no surprise there — and there is good reason in my mind to believe that the subscription economy is one of those things that will contribute greatly to more sustainable business processes.  And that’s something we’ll all need down the road.

Apple and Microsoft

Yesterday’s news that Apple’s market value slightly eclipsed Microsoft’s was significant and in my haste to get out a post on it, I may not have been able to apply all of my analytical effort so I want to try again.

First, to cover basics, the market value of a company is simply the value of a share times all of the shares outstanding.  A company’s market value fluctuates daily with the rise and fall of its share price.  Today will undoubtedly be different.  You can find the values in the original New York Times article that my post referenced.

What’s significant about this news is not simply that Apple overtook Microsoft by a little bit on a hot spring day.  But if you view Microsoft as filling the niche once occupied by IBM as the technology supplier to business and if you view Apple as the technology supplier to consumers many things come into focus.

For instance, Microsoft has been a relative laggard in providing what might be called creature comforts for computer users.  It was late to the game with Windows after Apple had deployed the Macintosh, late to deliver CRM and it was late to deliver a software as a service (SaaS) offering.  Nothing wrong with that, Microsoft simply demands a clear business purpose before launching into a new area.

On the other hand, though, Apple has brought to market numerous new categories of devices starting with the iPod that changed the way we live.  Forget devices that start with “i” for the moment and think about Garage Band and iMovie.  They are examples of ways that Apple has changed the way creative people work and in the process these tools have democratized some formerly stodgy businesses.  Then there’s iTunes and if you want to talk about (formerly) stodgy businesses, you need only look at the music industry.

Of course Apple is not alone in this democratic revolution, you have to include companies like Salesforce.com and the hundreds of partner companies it has spawned and Adobe whose products run across platforms today but whose origins are Mac.

So if you look at the marketplace today, the fact that Apple is worth a bit more than Microsoft says that the end customer is becoming more important than the corporation.  What we do on our iPads, iPhones, iPods and their imitators (some of which run a Microsoft OS) is as economically important as what we do on our desktops and laptops.

Last week at Sapphire, SAP’s user conference in Orlando, we saw a company doing many things but one of the more important things SAP did was to fully acknowledge the importance of the customer and promise to put the customer more in the center of what it does as an enterprise software company.  Sage did some of the same things at their conference, Insights.  At the time, I referred to these and other things happening in our industry as the triumph of CRM but in a sense, it was also the triumph of Apple, just a week before Wall Street made it official.

Let’s get our terms straight

Sage’s introduction of SalesLogix for cloud computing has caused me to do a lot of thinking.  The operative terms we use in the industry for software functionality delivered across the Internet is SaaS or now cloud computing and numerous vendors find themselves twisting themselves and the definition into barely recognizable forms.  Enough of this I say, let’s do a re-think.

If SaaS and cloud computing are mysterious to you, let me provide some background.

I started covering the field (it wasn’t a market yet) in 2000 and I devoted my practice at Aberdeen Group to it.  In those early years other terms dominated the discussion, notably, hosted, on-demand and ASP.  All applications were hosted and available on-demand but the earliest distinction, one that persists today, was between ASP’s and multi-tenant solutions.

Briefly, ASP’s or application service providers offered client server products like Siebel served from a central location across the Internet.  It was slow going and each customer had a single instance of the software running out on the Internet.  It didn’t work out well and many VC funds took goose eggs on their report cards from the ASP’s.

Multi-tenant was another matter.  Salesforce.com was a pioneer but so were Salesnet, RightNow and UpShot.  Ironically, only Salesforce understood the power and value of its proposition (RightNow got religion a little later) and most treated the multi-tenant on-demand solution as simply a delivery model and not much more.  UpShot was bought by Siebel, Salesnet by RightNow and the debate about superiority abated because Salesforce and RightNow (which hardly competed then) had prevailed.

Then something interesting happened.  Vendors like Oracle (which bought Siebel) started dabbling in on-demand services and began delivering application services that hybridized the on-demand and ASP models.  They did this by re-architecting away from client-server and supporting applications in browsers.  They then began hosting their applications in a have it your way scenario.  The re-architected applications had been retrofitted to support the multi-tenant model but multi-tenancy was strictly voluntary.  Customers could elect to run their applications as single instances in their IT departments or from a remote data center.

With multi-tenancy everyone shares a single instance of the application and through metadata configures and customizes their instance.  All data in a multi-tenant system is stored in one server farm with metadata again serving to segregate it.  Some people worry about this virtual segregation but so far it has been resilient to corruption and hacking.  Nonetheless, some vendors offered single tenant solutions to assuage jittery nerves.

But wait there’s more.

Terminology evolution continued and SaaS or software as a service and cloud computing have been front and center for several years (in the case of SaaS).  In its quest to differentiate multi-tenant from conventional single tenant, the industry keeps adding differentiators.  SaaS has usually meant multi-tenant and cloud usually refers to a plethora of computing services available on the Internet.  So, raw computing power is also called Infrastructure as a Service (IaaS), there’s still SaaS and cloud seems to refer to platform — the whole computing stack of hardware, operating system, database, middleware, applications and more.

So where does this leave us?

In a word, confused.

The relative dearth of terms has caused us to re-use what we have in ways that have confused the market.  I also do not leave out the possibility of savvy marketers hitching a ride on a popular term to bend it to mean whatever they need it to, which lead me to my opening paragraph.

So I propose the following.

ASP is the new term used to describe a single tenant implementation in some remote data center that serves applications across the Internet.  A vendor that serves multiple customers with this architecture would be said to be delivering an application service in single tenant mode. Full stop.  No need to apologize for it.  If that’s what the customer wants then sell it to them.  It doesn’t have all the advantages of multi-tenant cloud computing but some people clearly don’t see these things as advantages anyhow.

SaaS refers to multi-tenant application delivery across the Internet.

Cloud computing is an umbrella term encompassing ASP and SaaS as well as IaaS and Platforms.  ASP’s and SaaS providers may very well use infrastructure from other cloud providers as Sage is doing with SalesLogix.

My whole point in doing this is simple.  I think the industry and the market are mature enough for us to develop some new terms or possibly adapt an old one.  Since there are obviously several models for delivering software as a service, why not differentiate enough to give concreteness to them?  Calling everything SaaS without qualifiers is not helpful to the market or the customer and the confusion it can cause can only slow down a sales cycle and who needs that?

Sage SalesLogix for the cloud: The return of ASP

Perhaps the most interesting CRM development to come out of Denver this week was Sage’s unveiling of its SaaS or cloud offering.  But now that the initial hoopla has died down (mine included) it’s time to take a more measured look at what is being delivered.

As I mentioned in an earlier post on my blog the announcement means that Sage is offering a hosted version of SalesLogix but not one that has been re-architected to take advantage of multi-tenancy.  The company still legitimately claims a better total cost of ownership profile for SalesLogix because the arrangement off-loads from the partner the need to support a physical installation and from the customer, the cost of most infrastructure.  The usual configuration and modification cycle remains the same however.

So is this good or not?  I say both.

First, let’s ‘fess up, this is not SaaS or cloud computing, except in the broadest possible definition you can imagine.  Amazon’s EC2 compute services, which delivers infrastructure as a service (IaaS), provides the cloud aspect.  It’s really ASP or application service provider, a model that waned away in the last decade for competitive reasons.  ASP is back because the applications are no longer client-server and thus have lower server overhead; that single change should make the model much more competitive.

Sage is betting that this change is enough to help its partners battle against NetSuite, Salesforce and RightNow (and others) by enabling them to check off the SaaS box in any bake-off and that’s a good point.  In fact, in briefings with SVP Larry Ritter and EVP and GM Joe Bergera that scenario came up.  Sage partners can continue the discussion about CRM and business issues with prospects once they’re past the SaaS beauty pageant and for them it’s a good thing.

Sage’s secret sauce has always been its partners.  The channel may be hard to administer at times but one thing you have to admit is that partners get right into the shoes of their customers in ways that software sales people simply cannot.  No wonder then that most SaaS companies are trying to breathe life into a channel solution.  Microsoft has sold through a channel for a long time, NetSuite is building one and even Salesforce has its version with its AppExchange developers who sell seats as a matter of course.

Sage’s strategy from here is to enable a hybridized approach to its solutions by offering the choice to customers over core CRM functions but increasingly to also offer complementary SaaS solutions that leverage customer data wherever it happens to reside.  That may represent an optimum for this business model, at least for now.

On the other hand, though, Sage seems to be taking its time bringing out complementary solutions and appears to regard that as its domain.  It would be better if the company opened up this space to more competition and contribution from partners and ISVs.  A more open approach would enable Sage to stock its catalog faster and make the promise a reality sooner.  The company’s statement so far is that it’s going for quality over quantity but I have a mild disagreement here.  I think it’s better to look for quality by letting a thousand flowers bloom and picking the best, rather than by over controlling the process.

SalesLogix in the cloud takes the company a long way to delivering lower cost solutions but Sage still has work to do.  Its customers represent a market very much oriented toward operational efficiency as opposed to, say, customer intimacy.  It needs to deliver low cost, easy to implement and deliver solutions, a quest that never ends.  Now that infrastructure has been dealt with Sage can focus more attention on business processes and vertical deployments, which is always on its roadmap.

So to net it out, Sage was the odd man out in the hosted services derby but that changed this week because Sage is now in the hosted services game.  It’s a solution that might seem odd to a SaaS purist, but it fits the special circumstances of a channel operation.  I think we need a new name to distinguish multi-tenant SaaS and cloud computing from solutions that simply use IaaS, something that is assertive rather than pejorative.  ASP anyone?

Cloud9 Analytics raises 8 megabucks in C round funding

Not bad for a recession, that’s what I say.  The news from Cloud9 Analytics and Mayfield Fund says a lot about a lot.  First, the nearly moribund venture capital industry is showing signs of life after a couple of long, quiet years.

Last year, 2009, was the worst venture capital year since 1997 measured by the amount of cash invested (about $17.8 billion) and cash raised (about $15.2 billion).  That’s right in 2009 the industry invested more than it raised and that hasn’t happened in a long, long time.  For a benchmark, in 2000 the industry invested just over $100 billion and then you know what happened.  A more typical annual tally in the last decade was between $20 billion and $30 billion.  So the fact that Cloud9 was able to raise $8 million is very interesting news.

Of course, a C-round is an important marker because it means the company is maturing and becoming ready for a liquidity event.  The short event horizon is a sign that the VC’s a stepping carefully into the water again.  When we see a stampede to A round companies it will be a different story.

So, what about Cloud9 makes it appealing?  I think a couple of things.  First, they offer SaaS based analytics but that’s not enough these days.  SAS got into that market a month ago and they’re the gold standard and there are many others doing something with analytics as a SaaS service.  But the thing I like about Cloud9 is that they’re articulating, or starting to, a vision of more strategic use of analytics for the small business through the small enterprise.

SAS can be excused from this conversation, but there are a lot of analytics vendors out there that haven’t gotten beyond the idea of selling people on the tactical use of analytics.

So this announcement has legs and it shows hope that the venture capital industry in resurgent and that analytics is gaining more traction where it’s needed.

Incidentally, the hot markets for venture funding, in order are Biotech, Software, Industrial/Energy, and Medical Devices according to PriceWaterhouseCoopers and the National Venture Capital Association who compiled the data referenced here.

The terminology wars

I had the pleasure of attending two events last week, Microsoft Convergence 2010 in Atlanta and the Salesforce-VMWare VMForce.com announcement in San Francisco.  Each event was useful and informative in its own way and I am pleased to have witnessed each first hand.  I have written exhaustively — at least I’m tired — about each of these so rather than another recitation of events, I want to spend this piece drilling into one aspect.

Terminology was common and different in the two events and it’s worth looking at.  The term de jour is cloud computing and it has been current for at least ten minutes — more like about two years.  We know it’s the “in” thing because until very recently both Salesforce and Microsoft were using it albeit in very different contexts.

A couple of years ago, Salesforce and a few other intrepid vendors began using cloud computing to describe the confluence of SaaS applications, increasingly available infrastructure and the ability to “mashup” components to make novel solutions.  Cloud computing meant Infrastructure as a Service (IaaS), SaaS or software as a service and PaaS or platform as a service.  For instance, Google Maps, running on Google’s server farm, plus your prospect list in SFA, running on Salesforce’s farm, could yield a map or satellite photo of a territory with markers indicating prospect locations.  In one vivid and visual screen a person could see and strategize a set of sales calls, for instance.

Cloud computing was fun and it replaced SaaS, more or less.  To be SaaS seemed to imply an application ran for the benefit of those who were earthbound in a building or within the constructs of the enterprise.  To be in the cloud was to let your imagination soar, to combine and recombine in limitless ways to produce new functionality, to go where no man has…er, you get the idea.

Cloud computing was fine and wonderful until many vendors either entered the space with their own ideas or when they discovered that they couldn’t exactly do it without serious reconfiguration of their product sets and business models.  Cloud computing was a disruptive innovation.

Not to worry, the inevitable commoditization of the term then began in earnest.  Like watching the sky on a windy day clouds could morph into wonderful shapes and thus cloud computing could be many things.  That’s about when Microsoft entered the fray with Steve Ballmer’s famous quip that “we’re all in” meaning that the software giant was making the biggest bet that it could on cloud computing.

“All in” for Microsoft means that their vision of cloud computing is essentially infrastructure as a service (IaaS) — the ability to tap into a server in the sky on which you’ve bought space to run a conventional application.  With Microsoft’s market power it is likely that cloud computing will come to mean whatever the company wants it to mean and that means cloud computing will look more like time-sharing than a mashup.

This brings us to last week.  While Microsoft was all in, in Atlanta, Salesforce was way out on the west coast announcing an alliance with VMware.  You’ve seen the news no doubt, that the Force.com platform is being enhanced to provide Java runtime services for legacy applications through this association.  It demos well and if it runs that way I think we’ve got another important brick in the wall of new-fangled IT.

In his introduction, Salesforce CEO, Marc Benioff, called the alliance the beginning of a new era in “Mobile Internet Computing”.  When he uttered those words my ears pricked up and it made me wonder if we were witnessing the birth of new terminology yet again.

Salesforce and its close allies and partners have managed to stay one step ahead of the terminology commoditization curve for the last ten years and it wouldn’t surprise me if we were about to get another new term.  In this way, Salesforce has managed to use accelerating terminology commoditization to its benefit saving its marketing budget for more important things and always managing to pigeon hole its competition as retrograde.

I have only heard Mobile Internet Computing once and it may not stick but I wouldn’t be surprised if it did.  The thing I don’t understand though, is why Microsoft continues to fall into the same trap of letting someone else name a trend and then spending lots of its own money popularizing it.

An alternative for Microsoft might go like this.  Microsoft has four ERP systems and one CRM system and you could make a good argument that it is an ERP company and that ERP ought to be an on-premise application except in rare cases.  I am not saying I agree with it because there are other benefits of cloud computing we’re not talking about here.

But the ERP worker is usually someone who works in the finance or a related department.  This worker does the job at a desk in an office and has little use for a SaaS application.  So why the big push to call this cloud computing?  Selling infrastructure services isn’t really cloud computing so why call it that?  Why not define yourself in terms of what you do rather than in terms of what others make up?

If Microsoft wants to compete in cloud computing CRM that’s fine.  It could easily develop a hybrid model for integrating front and back office applications and not have to fight an uphill battle with its ERP customers over where their data is stored.  It would be a novel position and one that is immediately appreciated by its ERP customers.

RightNow’s kinder, gentler contract

RightNow fired what may be the first salvo in an escalated competition for customers in the SaaS market today.  Other vendors and customers will have to decide for themselves whether to follow.  Company CEO Greg Gianforte cited numerous ways other vendors were making life hard for customers saying that SaaS was originally supposed to be low cost, easy to get into and out of and a dream to deploy.  In his estimate, the SaaS industry has not always lived up to all that.

First the good news.  RightNow identified a handful of issues it thinks the SaaS industry could improve for customers and the company says it is writing all of the following into its standard contracts.

• No penalty for adjusting the number of seats a customer buys.  The company said it would let customers adjust up or down the number of seats it buys with no penalty.  Currently, most agreements operate like Hotel California, you can add seats any time you like but often you can’t rev down if, for example, economic conditions deteriorate.
• Three year price commitment plus a three year renewal cap.  Gianforte said this would give customers six year price stability.  This needs details.  You can always say you won’t increase prices 50% but that’s not very comforting.  Hopefully, there’s something like a cost of living adjustment tied to core inflation or something like it.
• Annual termination for convenience.  There’s no lock in and customers can leave any time they want without cause.  No complaints here.
• Gianforte also introduced the concept of seat month — like rollover minutes in the cell phone industry.  The idea has merit especially for companies with big seasonal swings in the number of agents it employs.
• Cash service credit for not meeting service levels.  This is a biggie since a lot of vendors don’t offer SLAs.

My take

RightNow conflated some issues blaming traditional vendors for perceived SaaS problems.  For instance when it talks about other vendors it focuses on SAP, Oracle and Salesforce.  Gianforte said SAP has a 60% shelfware rate.  That might still be true, I know it was pretty high a few years ago but that was for conventional software.  SAP is not a SaaS powerhouse the last time I checked.  The same is true for Oracle, the announcement didn’t make any distinction between Oracle’s premise and SaaS business.  At one point Gianforte called Oracle the “Poster child for bad customer relationships”.  Ok, maybe, but I’d like to see some stats.  I was at OpenWorld the last few years and it looked like there were thousands of reasonably happy people there.  Interestingly, there was no mention of Microsoft as a competitor.  Whatever, at the end of the day you need to filter.

But the interesting point for me is that none of this preamble was needed.  The SaaS industry could certainly use some of these adjustments to the basic relationship as Ray Wang noted in a recent paper titled a “SaaS Bill of Rights”.

It’s too bad Gianforte doesn’t run an airline.  Imagine an airline CEO saying bags fly free (Southwest does that but who else?), you can have enough room for both knees and we’ll feed you.  For some people, that’s about what the RightNow announcements amount to.

The adjustments Gianforte introduced amount to risk sharing between the vendor and the customer.  That was what SaaS was supposed to be but the original benefits have commoditized so a new round was needed, at least according to RightNow.

This risk sharing is something I think we will see a lot more of and it won’t be in software only.  I expect we’ll see some creative forms of risk sharing in all sectors just to keep the gears moving in a tough economy.  Risk sharing started with the reintroduction of layaway by Kmart at the start of the recession and I think we’ll see more creativity in the B2B space.

RightNow’s announcements also reveal a turning point in the SaaS industry.  When the industry was younger, vendors needed as much revenue as they could get to build infrastructure and to plant the idea that SaaS was safe in people’s minds.  For many that’s mission accomplished at this point, so they probably have a little excess cash flow to fund these initiatives.  But that also closes a door for the industry.  These givebacks will reduce the cost of a seat (seat-month as RightNow would say) and act as a barrier to entry for other vendors.

It had to happen at some point.  From here if you want to be a SaaS application provider you might have to layer on someone’s platform such as Salesforce.com.