Happy New Year!

In February Montclair Advisors launched our SaaS Business Profile Series and have been focused on covering as many SaaS companies as possible during 2009. As it turns out we were able to profile more than 30 SaaS companies of all types including pure SaaS firms, Cross-Overs and Hybrids!

We would like to thank all of the executives and companies that participated during 2009 and we look forward to continuing to follow their progress during 2010.

What we learned from these thirty-four profiles:

• SaaS is an evolving business model - It is still a new concept and few firms are running a pure subscription software models. Beware that there is still a lot of “Fake SaaS” out in the market overall.
• There are many variations of SaaS - these variations are based on the company’s starting point, the market they serve and the types of products they sell. Interestingly, Salesforce.com is actually not a very representative SaaS business model for the broader market.
• It takes time to build a real SaaS company - For many SaaS firms it takes up to 7 years to reach breakeven and nearly 10 years to ultimately gain scale with their business model.
• Cross-over providers will still need to hold onto their on-premise legacy for the foreseeable future, because it is hard to switch customers to SaaS all at once.  It is also difficult to upset your maintenance revenue streams, especially during tough economic times.
• The Great Recession has permanently changed the Software buyer’s behavior towards SaaS due to the lack of available capital. When you see SAP and Oracle and many of these profiled ISV’s moving their businesses to SaaS, you know it isn’t a fad.
• Penetrate and Radiate. The successful SaaS firms have started small, with easy to sell, easy to consume solutions.  They then develop additional software, services and content solutions to sell back into their installed base.

Here is an overview of the thirty-four companies Montclair Advisors covered in 2009:

Profiles by SaaS Category

Pure SaaS:        15     Started out and only offer SaaS subscription services

Cross-Overs:    11      Started out as on-premise, but have fully transitioned to SaaS

Hybrids:             8      Continue to offer SaaS services AND on-premise software

Public vs. Private

Public:               6

Private:             28

Profiles by Age of Company

0-5 Years:         9

5-8 Years:        10

8+ Years:         15

M&A by Companies

Sell-side:            2    Mint.com by Intuit for $170M and QuickArrow by NetSuite for $20M

Buy-side:           4    Lithium Technologies (Keibi Technologies), RightNow (HiveLive), Taleo

(Worldwide Comp), Xactly (Centive)

Fundraising Public & Private

What was also interesting to see is that even in the toughest economic climate since the Dot Com meltdown, that many firms that were profiled were able to raise capital in both the private and public market places.   The big winners were SuccessFactors who raised more than $200M in a public offering and Workday, raised an impressive $75M private round that was led by New Enterprise Associates.  As the economy begins to turn in 2010, expect to see more SaaS firms going back out to raise growth capital.

We hope these profiles have been helpful to our readers and we will continue to profile interesting SaaS firms in 2010, because we learn a lot about our emerging industry and we will continue to build back into the Montclair Advisors advisory services that help our clients become successful SaaS companies.

Please let us know what you think, because we would welcome any ideas on how to improve the Saas Business Profile Series for 2010.  Just drop me an email at kevin@montclairadvisors.com.

When I was learning to drive many, many years ago, I remember my dad telling me to pay attention to not only where the other driver’s eyes were looking but also to where their wheels were pointed. So it was with my search for SaaS at the recent Oracle OpenWorld event in San Francisco. Amid the hundreds of exhibitors and sessions, Cloud Computing in the form of SaaS based applications was being called out, acknowledged and exhibited. There were “campgrounds” of SaaS based applications exhibiting and the normal spread of CRM On Demand sessions. Clearly, Oracle senses the need to position itself as a supporter of Cloud Computing which requires them to encompass and embrace the growing proliferation of SaaS-based services and vendors. Like Levi Straus during the Gold Rush, who made his fortune supplying the miners with clothes and supplies, Oracle has the opportunity to provide the platform and infrastructure that can be a significant enabler in the Cloud Computing story.

But this blog is not about Cloud Computing, it’s about where Oracle is with SaaS-based applications. Certainly, they are continuing their efforts to build out their primary SaaS offering, CRM On Demand with new features and social networking capabilities. There were large banners in the exhibit areas for CRM On Demand and a section of the exhibit hall was dedicated to a few dozen SaaS add-on applications like Helpstream, Adaptive Planning and Eloqua. Oracle’s decision to allow a huge presence for one of their primary SaaS competitors, Salesforce.com, in the west convention hall was interesting. Even more interesting was the opportunity that was provided to Salesforce.com’s CEO, Marc Benioff, to present at an SRO executive session. Marc eloquently thanked Oracle for the opportunity to participate in OracleWorld, talked about the growth of Cloud Computing, their newest offering, Service Cloud 2 and gave away copies of his insightful new book “Behind the Cloud.” In comparison to the exhibits of SaaS vendors and the mega-exhibit of salesforce.com, Oracle’s SaaS offerings had a relatively small presence. No new SaaS offerings for key markets like Human Capital Management or Enterprise Performance Management.

So back to my original point, where is Oracle looking regarding SaaS but also, where are their wheels pointing? Gauging by my OracleWorld observations, Oracle definitely feels the need to acknowledge the proliferation of SaaS-based applications. In my opinion, allowing Salesforce.com to present and exhibit is a huge change in course regarding SaaS. Salesforce.com is Oracle’s biggest competitor in the Customer Relationship Management marketplace but they also are built on top of Oracle database technology. This is not a unique situation in the Oracle world of co-opetition. SAP, their biggest competitor in the enterprise resource management marketplace, is also built on top of Oracle database technology. SaaS is here to stay and though Oracle is not showing any signs of interest in building out its SaaS offerings, it is very interested in ensuring that its database, middleware technologies and possibly its expansive infrastructure are used in the SaaS gold rush. The question of why Oracle is not looking at SaaS as an application delivery vehicle but has its wheels pointed to supporting SaaS vendors and gets into a discussion of Oracle’s business priorities and culture.

Oracle’s business model is heavily dependent on maintenance and support revenue. At 22% of license revenue, this represents a significant portion of Oracle’s revenue and margin. Any significant move away from license sales and to SaaS will disrupt this model and the business culture that has been built upon it. A second factor to Oracle’s delay to move to SaaS-based applications can be found in their sales model. The SaaS sales model is significantly different than the license sales model. SaaS sales typically involve a higher volume of transactions at a lower total contract value. Because SaaS based applications are pay-as-you-go and require limited configuration to be production ready, not only is the software component of the total sale reduced, the consulting component of the total sale is reduced as well. Getting a massive sales organization like the one at Oracle to embrace a SaaS applications focus will be a time consuming, culturally altering and expensive proposition. This is not likely to happen soon.

A more likely strategy for Oracle to pursue if they want to become a leader in SaaS based services would be to focus on the small or medium size business market with a dedicated and independent sales team selling SaaS based applications and not try to convert their existing base of global 2000 enterprise customers. Given the investment by Oracle’s CEO, Larry Ellison, in Netsuite, I am tempted to think of them as an experiment to test a new SMB sales model for Oracle. I suspect that part of the reason that Oracle allowed such a significant presence for Salesforce.com at Oracle OpenWorld is that they do not see them as a significant competitive threat to their installed base and need for them to continue their success to help drive the growing need for platform as a service and infrastructure as a service technology, a market that Oracle is definitely interested in. Of course, Oracle could use their merger and acquisition machine to quickly become the leading provider of SaaS based applications. There are definitely candidates out there other than salesforce.com that could help Oracle accomplish that.

Oracle OpenWorld as usual was an interesting window into the thinking and direction of Oracle. Regardless of the rhetoric that we have heard from Oracle about SaaS, as evidenced by the presence of SaaS on the exhibit floor and Marc Benioff’s presentation, Oracle is positioning to be a player in this market … someway, somehow.

This week’s Smart SaaS blogger is Gary Damiano.
He can be reached on LinkedIn or at gedamiano@gmail.com.

Monday October 12th

It has been several years since I went to my last Oracle User Group meeting, prior to them buying PeopleSoft, Siebel and BEA.  Here are my thoughts around the first day:

The Keynote

Charles Phillips and Safra Catz kicked things off and were helpful in shaping how Oracle is planning on not only rolling out Fusion but also how Sun will fit into their strategy.  Unlike other firms like CA or Infor who just purchase software firms and milk them for the maintenance dollars, Oracle is spending $3B a year on research and development.  They are trying to fit all of these acquired pieces together for their customers, to making them easier to install and purchase.  The analogy of buying a car piece by piece is one that is often used by firms that are looking to provide a tightly integrated ecosystem.  I am not sure if this is really what customers are interested in buying because it really creates a classic vendor ‘lock-in’ scenario.

Larry’s vision is to tightly assemble all the technology components a customer might need; horizontal and industry applications, middleware, databases, infrastructure and, after the Sun deal is approved, they can offer hardware too.  This type of vertically integrated strategy seems to work beautifully for Apple and their consumer-oriented iPhone but will this approach be as widely adopted by Global 2000 organizations with very complex requirements?

The other surprise to me was that there was no announcement of any ‘native’ Oracle Fusion applications. Many of us were hoping that there will be more news about Oracle Fusion application delivery dates, but maybe something will be announced over the next few days.  I believe that when the very smart development people at Oracle started working through the plan to rewrite JD Edwards, Siebel, PeopleSoft, Hyperion, Retek, etc…. Maybe taking a phased approach over 5-10 years might be more realistic than rewriting all the products into a new suite all at once.  That is probably why we saw all of the application ‘mash-up’ demonstrations using Fusion this morning.   This Fusion middleware mashup approach is the near term future for Oracle application customers.

This was only Day One, so stay tuned.

Here are some other general observations from Day One.

Open World Positives

• I was really impressed with the size of the event with more than 35,000 attendees, even in a recession.  The show appeared to be well organized and all of the keynote sessions that I saw were well executed and informative.  So Judy Sim, Oracle’s CMO, should be given a lot credit for her team’s efforts.

• Most of the customers that I interacted with appeared to be interested and engaged.

• The partner pavilion (trade-show) was completely filled out and appeared to be well attended.

• The Oracle Fusion middleware and Oracle Business Intelligence solutions were full featured and had  many new enhancements.  The little 5-minute demos were helpful and gave the audience a quick look at each product.

• I was pleasantly surprised to see the number of global customers and many provided public testimonials.

• I liked the tables (with power-strips) that were set up for analysts and bloggers for all of the Keynote sessions.

After working at Oracle for almost five years in the early 90’s, I can tell you that when Larry sets his mind to something he usually gets it.

Let’s take a trip down memory lane…

It started by just plain beating your competition at sales and marketing.  Remember, crush Ingres, destroy Informix, smash Sybase … they were close to dead and Larry let them slip away.  He would have obliterated DB2 and SQLServer but IBM and Microsoft were too big.  Still he ended up owning the database market.

With the database market securely in his grasp, he started looking to other places where data resided… Ah, applications.   Larry had always said that Oracle didn’t care about applications and that they were focused only on the database market.  Then starting in 2005, he started his assault on the applications market first with Retek, then PeopleSoft, J.D. Edwards, Portal, Siebel and then Hyperion.  SAP is too big to take out and you still need an aspirational competitor anyway.

Humm… if you combine middleware into databases, you probably would sell more databases… then he acquired BEA and Agile.

In September 2008, Larry ranted about “What the Hell is Cloud Computing?”  Then just a few months ago Oracle buys Sun Microsystems and is arguably now one of the leading Cloud Computing providers.  I guess the ‘Network really is the Computer‘.  Now with his new toy Exadata, he is going after Teradata but when he gets his new toys from Sun - Java, MySQL, storage, grid computing, virtualization - he will have a lot of Cloud Computing fun.   It will be interesting to see if Oracle keeps the hardware part of Sun or spins it out to his friends at HP.

So now we come to SaaS.

The battle between mentor and protege.  Marc Benioff, with the help of Larry Ellison, has done a phenomenal job launching the leading Software-as-a-Service firm, Salesforce.com and creating the entire SaaS industry.  At Oracle’s earnings call last week Larry claimed that although Salesforce.com is the largest SaaS firm at $1 billion annual run rate, and Oracle is now the second largest SaaS provider at an $750 million annual run rate.  This included some high profile wins for their CRM on-demand offering last quarter including NetApps, McAfee, Land O’Lakes and Conoco.   But I can imagine that Salesforce.com won their unfair share of the on-demand CRM deals last quarter.

Oracle Fusion finally arrives.

What I found interesting is that the new Oracle Fusion suite of applications is now code complete and in beta.  This means it will be available from an Oracle sales rep near you in the fall. Oracle Fusion is on-demand ready and will offer three delivery models; traditional On-Premise, SaaS and then there is On-Premise SaaS.   On-premise SaaS, is that like military intelligence? This is usually and incredibly bad idea unless you are a $23 billion dollar company that generates more than $5 billion in profits.  The new Oracle SaaS suite will all ERP modules including CRM and HCM applications focused mainly on F1000 sized organizations.

Even though Fusion might be a positive development for the Oracle On-Demand sales team, it is doubtful this will be enough to enable Oracle to control the SaaS market organically.   So look for Oracle do what they have always done when they want to control a market, buy their way to the top.  That would mean that some Oracle alumni’s like Marc Benioff or NetSuite’s (Larry and his family own a majority of Netsuite) Zack Nelson will probably be on Uncle Larry’s radar screen.  This is just like other Oracle alumni’s Craig Conway from Peoplesoft - who is also on the board of directors of Salesforce.com and Tom Siebel were pursued.

I guess in the end if you can’t beat’em, join’em.

Looks like someone is assuming an attack formation … the end of 2009 should be very interesting for the ever-evolving SaaS market landscape.

In Charles Darwin’s landmark work on the Theory of Evolution, he stated that “…Natural selection acts only by taking advantage of slight successive variations; it can never take a great and sudden leap, but must advance by short and sure, though slow steps.” Based on what has been happening with our economy over the past six months, the Human Capital Management software world is going to be forced to do a quick evolution.

Times are tough; just consider the global economic slowdown over the past three years. In 2007 it was the sub-prime mortgage crisis, in 2008 it was the Banking crisis and in 2009 we are beginning to see the Human Resources crisis.

This is very different environment for HR professionals than the old War for Talent era that was discussed by industry experts over the past five years; this current crisis is more related to a dramatic reduction in jobs in the economy and unemployment approaching 10%. Human Resources related budgets and headcount have been cut way back in an effort to stem the financial tide. Unfortunately most companies were not ready to eliminate anywhere from 5-30% of their workforces overnight. Not only were they not prepared for this change but they probably don’t completely understand what the future impact of their actions will be for their workforces. These dramatic changes have left HR in a precarious position looking forward because they have little in the way of staff or resources but their charter remains the same.

HR’s Rapid Evolution

As someone who sold HCM software for the last 12 years, it was always part of the sales pitch that the HR organization is always expected to do more with less. Now that the environment has really changed, when senior executives now say to HR, ‘do more with less,’ they really mean it.

Just like in natural selection, the HR survivors need to evolve. So in this brave new world, you no longer have the level of resources that that you have taken for granted for years. Resources like IT support, capital dollars in your annual budget, a team of people to work on projects and time. You may ask, how do I evolve? With dramatically less people, budget and basically the same responsibilities, you need to automate as much of your workload as well as your personal interactions. In this new world, the human touch is going to be at a real premium when it comes to HR.

Well - now that you are completely depressed, let’s review some ideas on how you can be an HR survivor. Did you know that most companies have up to 200 different HR suppliers, depending on the size of your company? Do you really need all of them? Since you are now in a zero sum budget exercise, start looking at your operating expenses as one big pot of money and start determining what is essential and what is optional. As you start your process, you need to free up budget to fund critical automation projects that can enable HR to continue to push along its strategic objectives. This may actually be a process that your IT business partners might actually be willing to help you with, since they are feeling HR’s pain like never before.

Natural Selection

So as you start thinking about your natural selection budget project, you should start to build out your game plan by trading out your old software for new software. My general conclusion about software is simple, old software is bad and new software is good.

Let me explain…

Many of the current Human Capital Management software providers evolved from PeopleSoft. PeopleSoft was the leading HR software provider in the market for nearly twenty years and spawned a complete suite of Enterprise Resource Planning applications including benefits administration, payroll and other HR applications. When PeopleSoft was purchased by Oracle in 2005, Oracle became the dominant provider but they appear to have no clear future plans for their HR software. So you need to continue to pay maintenance for old software, which keeps getting older.

When thinking about natural selection for HR software, think about the clear disadvantages in the current environment for your old school software provider:

• Software requires a large capital investment. This might be really difficult to get funded in our current environment, no matter how critical the software is to your company’s objectives.

• Implementation projects are both long and complex. Lots of investment to support customization and an expensive team of consultants who will live on-site for months or years. The consultants have to install your software in your data center, which will require a significant investment in hardware and infrastructure.

• Massive software upgrades. Whether it is moving from PeopleSoft 8 to PeopleSoft ? or to the latest version of SAP, these upgrades are expensive and require a lot of internal support resources and a big hardware investment.

• Lack of flexibility. The older software providers typically have rigid products, which make it tough to make even basic changes to features, reports or anything else. This is also a big disadvantage of buying all your HR software from a single vendor, like Oracle or SAP.

• Don’t play well with others. Ideally all of the software works together to make it easier to configure workflows, data elements, reports, and analytics because your data is sitting in a lot of different systems. If your software isn’t open to working with other systems, it can get really expensive, and you don’t have any budget to glue everything together.

Now you can see why old software is bad… and why they may be going the way of the dinosaur in the next 5-10 years. That’s right, even Oracle and SAP. Remember MSA and McCormick & Dodge!

What attributes should you be looking for in your future surviving HCM software suppliers?

These survivors have these clear market advantages:

• Software-as-a-Service. You have probably heard this term but it is simply when the software company rents you the software and you subscribe to their service the next 3-5 years. Because of this approach to delivering software as a service, SaaS firms are forced to be more cost-efficient because they get paid over time. SaaS software is delivered to your users through the Internet, which means your IT department doesn’t have to have to buy or support any software or hardware – this can save your company a lot of money.

• Long-term relationships. Because you rent the software, your SaaS provider has a vested interest in keeping you happy because you will want to continue to renew your subscription to the their software. Unlike old software firms who would sell you their software and disappear, SaaS firms are encouraged to stay close their clients and listen to your input.

• Incremental changes. It was not only the expense but also the tremendous organizational disruption associated with large software upgrades that customers really dislike about the old software model. SaaS clients enjoy a ongoing stream of transparent upgrades, that fix bugs, add features and their software literally evolves over time.

• Less extra costs. Since SaaS providers host their software in their own data centers, your company doesn’t need any IT staff to support their software or infrastructure (servers, firewalls and security) typically required to run HR applications.

• Configuration. SaaS firms offer more flexibility in the way they set up your software. Unlike the older software firms that bring a cast of thousands to customize and install your software, SaaS companies can set up an initial version of your software in minutes or hours rather than in months. Then once they understand your business needs, the software can be configured without custom programming. This approach saves you both time and money.

• Open for business. In this new world it will be difficult for any company to purchase every type of HR software from a single provider, so it is important for software to communicate and share information with many different software packages. This sharing will enable you to automate as many HR tasks as possible, allowing you to do more with fewer resources over time.

Slow Evolution of HCM Software

A little known fact is that the original Software-as-a-Service provider is Automatic Data Processing. They have been delivering payroll and HR services as a service, for nearly fifty years. Their offerings started out as a basic payroll service and their internal software just helped them to deliver their service more efficiently to their clients.

In the 1990’s, the next generation of on-line solutions appeared - where on-premise software was transitioned to being hosted in providers’ data centers (commonly referred to as Application Service Providers). A number of HR ASP software providers emerged including: Employease, PeopleSoft eCenter, and Workscape.

Then about ten years later, the conversation evolved from just hosting traditional software and a new model emerged - on-demand software, that provided a pay-as-you-go pricing model along with streamlined upgrades and new support processes. Some of these on-demand providers included: Authoria, Kenexa, SumTotal, Stepstone and Ultimate Software.

Then just a few years ago SaaS providers started to gain momentum. These firms really looked at delivering their software truly as a service and never delivered it on premise, sold in the traditional way. The HR SaaS providers always delivered their software over the Internet, with a modest amount of services, no upgrades, per-employee-month pricing and self-service support. Many better known HR SaaS providers include SuccessFactors, Taleo and Workday.

The next generation of HCM software might be based on Cloud Computing, where the SaaS providers no longer own their data centers and use providers like Google or Amazon.com to deliver world-class infrastructure support at on a pay-per-transaction fee. This approach could drive down costs, complexity and make a wide range of traditionally expensive HCM software much more affordable for small and medium-sized businesses.

Darwin Speaks

The HCM software market has undergone a number of wide ranging transformations over the last thirty years. We come back to the premise of old software is bad and new software is good. Old software is bad because it is expensive to maintain, modify and upgrade. Software teams that have the experience of working on traditional software but now working at new companies where they are using modern techniques might find it difficult to make their software better, faster and cheaper.

As you think of your portfolio of HCM software providers, maybe Darwin could help. And if Darwin were alive today, and knew about Human Capital Management software, I think he could put many of your company’s providers into these categories:

• Endangered – they are doing some of the right things to turn themselves into survivors but haven’t turned the corner just yet. These are the providers you need to keep a close eye on, just in case they become extinct.

• Extinct – those providers who are on the downside of innovation, living off of your precious maintenance, old architectures, delivered on premise and probably won’t be around for the long term.

• Survivors – those software firms who are worthy of your investment and will be in the market for the long term.