A View From the MSP Trenches: Cloud Opportunities in the Midmarket

As discussed in my blog, IBM’s Managed Service Provider Initiatives for Midmarket: An Interview with Mike McClurg, IBM views MSPs as an increasingly critical channel for delivering cloud-based technology solutions to midmarket companies. Just a few days after I posted this interview, IBM announced that it would further strengthen its initiatives to help MSPs meet the growing midmarket demand for cloud services.

Now, all research (including SMB Group studies) points to a rise in midmarket adoption of cloud solutions. But, what do MSPs see as the key midmarket hotspots, how are they turning these into opportunities for their businesses, and how is IBM helping them? To help answer these questions, I spoke with three very different IBM MSP partners to find out their views on the cloud opportunity:

  • Oxford Networks characterizes itself as “a 112 year-old start-up,” which began as a phone company and has since reinvented itself a couple of times over to become a high-end carrier’s carrier transport network. Oxford recently acquired an MSP and is building on this to offer a spectrum of IT and telecom services SMBs.
  • Perimeter E-Security delivers highly secure infrastructure protection and compliance solutions via its security-as-a-software platform, including: firewall management and monitoring, vulnerability scanning, intrusion detection and prevention, hosted email, hosted collaboration, email security, message archiving and mobile device management. Perimeter offers its on demand in the cloud, and on customer premises.  About two-thirds of its customers are small and midsize businesses (SMBs).
  • Velocity Technology Solutions provides virtual private cloud managed application and hosting services for its customers’ ERP solutions. It also hosts and manages connected applications, such as analytics and workforce automation; and complementary technical solutions, such as imaging. In addition, Velocity offers remote managed services for customers’ on premises applications, including a full replication service for disaster recovery.  Velocity’s customers range from businesses with about $50M in annual revenues to the Fortune 500.

Despite different technology and market footprints, these MSPs share a similar view of the compelling opportunities to provide cloud services in the midmarket. They are zeroing in to meet  customers’ requirements in several key areas:

1. Offloadinfrastructure management. More midmarket companies want to outsource management of the “IT plumbing” that their businesses require—from infrastructure and telecom to middleware and applications. Demand for IaaS services is spiking as customers seek to move resources from IT to other, more strategic areas of the business. Often, the need for application upgrades trigger a move to an MSP. “Businesses have been there, done that and have little appetite to go through the headaches again”, according to Tom Bruno, President & CEO, Velocity Technology Solutions, “Our opportunity is to take software and turn it into a utility or dial tone for our customers.”But, says Bruno, “the most important thing we can have is our customers’ trust—trust translates into availability. Partnering with IBM gives us the peace of mind that we can deliver.”

Many companies aren’t ready to put all of their applications into the cloud, but still want to offload management. Offering remote managed services for customers’ on-premises applications gives MSPs with another healthy revenue opportunity in the near term.  And, as Bruno puts it, remote managed services also provide these customers with “an on ramp to the cloud.” Bruno envisions that IBM PureSystems will give Velocity even more flexibility to tailor offerings for either an on-premise or private cloud environment.

2. Implement the leading edge technology solutions necessary to grow their businesses. Midmarket businesses increasingly recognize that they need leading edge IT solutions to be competitive. But in most cases, they lack the IT skills and expertise to keep up with these technology changes. According to Craig Gunderson, President & CEO of Oxford Networks, “Our customers know that technology is moving very fast and disrupting the status quo. Moving to the cloud and outsourcing is often the only way that they can maintain a competitive position.” By providing customers with a fully managed data center, PaaS and IaaS solutions, Oxford can “give them far more capabilities than they could have on their own, with fewer limits, and at a lower cost.”

Mobile is a prime example of an area in which SMBs need to innovate, but struggle to keep pace. Perimeter recently rolled out a new mobile security offering that provides best practice guidance and services to help SMBs comply with privacy statutes in world in which “bring your own device” is becoming the norm.

Oxford’s Gunderson and Andrew Jaquith, Chief Technology Officer, Perimeter E-Security, both view new access to IBM’s four new Global Centers of Excellence as key to helping them keep up swiftly evolving market demands. By leveraging IBM’s technical and best practice expertise, they can develop the scalable and reliable new solutions that their clients will require.

3. Provide stronger security, availability and performance levels. Companies know that an IT outage or security breach can seriously compromised or even destroy their businesses. Jaquith asserts that as industries become more regulated, they are increasingly held to higher security standards, similar to what banks have become accustomed to. As a result, “Demand is rising for end-to-end security solutions for messaging—including mailboxes, archiving, encryption, control and reporting, content filtering and more. But the technology needed for this is getting very complicated.”

Jaquith sees IBM as “a technology leader that gets the cloud, and a partner to help us achieve our goal to provide instant-on, scalable and elastic cloud services.” IBM storage and security solutions underpin Perimeter’s current offerings. With IBM’s new MSP initiatives, Jaquith sees opportunities to develop new services built on IBM SmartCloud, which provides enterprise-class cloud computing technologies and services for securely building and using private, public and hybrid clouds.

 The demand for higher availability solutions is also rising. Velocity’s Bruno notes that “Midmarket businesses may have 5 to 20 applications in the back office alone. They want providers to get the formula down for higher availability.” Velocity does this by providing standardized virtualization solutions and a single source of support across applications—from break/fix to functional, “how do I do this” support.

One of the common threads I heard was that midmarket companies are looking for comprehensive services. Although they may want to tap into discrete services in an incremental way, they want them to integrate with each other in a Lego-like fashion. Since few MSPs can provide everything, those I spoke with emphasized the importance of being part of a strong ecosystem. For example, at Oxford Networks, the focus is IaaS and PaaS services. But Gunderson and team work with IBM and its ecosystem partners to also provide SaaS solutions to customers when they are a good fit. Meanwhile, as Velocity’s Bruno explained, “Everything is advancing so fast in the ERP world. There’s a rush of analytics, industry apps, mobile apps, collaboration requirements and more. This creates more complexity in the infrastructure.  We can tap into IBM and its expertise to provide new services more efficiently.”

Clearly, the rapid rate and pace of change in technology—and what it means for business—creates an enormous opportunity. MSPs can leverage economies of scale and skill to provide better-performing and more cost-effective IT solutions than midmarket companies can attain relying only on internal IT resources.

But capitalizing on this opportunity also presents challenges for MSPs, who need to keep ahead of the technology learning curve, improve their marketing skills and programs, and identify and enter new markets. In my next post in this series, I’ll discuss these challenges, and how these three MSPs work with IBM’s MSP program to help address them.

This is the third of a five-part blog series by SMB Group that examines the evolution of midmarket business technology solutions and IBM’s Managed Service Provider Channel programs. In the next post, I’ll look at what MSPs see as their top challenges, and the role IBM plays in helping them to meet them.

Dell 2.0: Top Takeaways from Dell’s Virtual Era Event

A couple of weeks ago, I attended Dell’s Solutions for a Virtual Era analyst and press event in San Francisco. At the event, Dell unveiled its new strategy to help companies more readily and easily provision computing capabilities to in the ubiquitous anytime, anywhere information era. At the event, Dell introduced several new hardware offerings based on the new Intel Xeon 5600 architecture to enable cloud-based solution deployment. But for me, the more interesting focus was Dell’s ambitious vision and roadmap to capitalize on the shift to cloud computing, and market demand for better, more cost-effective and easier to deploy, use and manage IT solutions. Here are a few of my top takeaways about what Dell’s vision, how it plans to execute on it and my commentary.

  • Change the economics of IT. Companies spend more than 50% of their IT budgets just to keep the systems they have up and running—stunting investments in new IT solutions that can help them to innovate and grow. Dell intends to apply its “direct” DNA and supply chain know-how to automate IT and change the economic equation to help companies get out of this quagmire. By delivering “open, capable and affordable” solutions with industry standard-based building blocks, Dell believes that it can reduce technology lock-in, complexity and cost for customers. Some specific capabilities in the works include autonomic self-maintenance and management; automated dynamic allocation of resources, and policy-driven management. In a recent keynote at Oracle OpenWorld, IT budgets in North America amount to $1.2 trillion, but through widespread adoption of x86 servers managed in a more automated fashion, $200 billion could be saved, asserted Michael Dell, president and CEO of Dell. He used Dell’s own plan to take $200 million out of its own IT spending by the end of 2010 as evidence that Dell–which provides two of every five x86 servers shipped–can help customers achieve this goal. Our recent research on Dell Managed Services customers also provides a strong proof point that Dell can deliver on this goal: built on its Silverback and Everdream acquisitions, web-based technologies, and Dell data center expertise, Dell Managed Services offers SMBs web-based, standardized infrastructure management services on a pay-as-you-go basis. I’m kind of surprised that its taken so long for Dell to get around to this, as its business model and technology legacy (Dell has no proprietary systems of its own) affords it a significant opportunity to differentiate.
  • Move from delivering solution components to delivering the total solutions experience. In Dell’s view, companies today spend far too much time, energy and money deploying, running and managing IT solutions. Dell wants will to simplify and make IT more affordable with turnkey, pre-tested, pre-assembled solutions that combine hardware, software and services. Although this may seem like a radical departure for Dell—best known as a hardware vendor—the company has been building towards this for quite some time, acquiring software companies (including KACE, Silverback and Everdream), along with Perot Systems. In addition, Dell is partnering with companies including Joyent, VMWare, Microsoft, Aster Data, Canonical and Greenplum) to provide additional solutions expertise and components.
  • Give customers “and” instead of “or” choices. Dell intends to help customers simultaneously pursue evolutionary and revolutionary paths towards cloud computing. To facilitate the evolutionary path, Dell’s Cloud Partner Program (partners include Citrix, Microsoft and VMware) enables companies to migrate legacy applications to more efficient virtual environments, pre-tested and optimized for Dell systems. On the revolutionary path, Dell’s platform-as-a-service (PaaS) will offer an efficient, scalable and flexible platform to deploy and manage new Web application workloads. Dell’s inspiration for this comes from its own Data Center Solutions Group, which provides cloud and high-performance computing solutions for companies that require massive hyper scale environments such as Facebook, Ask.com and Microsoft Azure. Dell’s open source platform is built on PHP, Python, Ruby on Rails, and runs Apache, MySQL, Rails and Java. The vendor plans to offer a full spectrum of delivery options, where customers can self-integrated components or turn on everything as a service. The initial target market for the platform is ISVs, telcos and others who would build on top on it, and sell through their services to end-user customers. However, Dell left the door open to offering it directly to the end-user market at some point in the future.
  • Start with a mid-market design point. Dell’s design point for the Virtual Era is the mid-market—which is a very big deal! Starting with mid-market requirements and scaling up or down from there can give Dell a big competitive edge—for a couple of important reasons. First, mid-market companies have complex IT needs, but scarce IT resources–they can’t afford a lot of expensive labor or IT tools. This aligns well with Dell’s theme of automating IT. Second, Dell’s major competitors, HP and IBM, offer mid-market solutions, but tend, more often than not, to gravitate towards a large enterprise design point for infrastructure solutions. Finally, history has proven that it’s very hard to scale down successfully. One concern I do have is that I heard different definitions for how Dell is defining mid-market in this context. Will Dell center the design point around its traditional definition of medium business (100 to 499 employees), or upwards into what I would call the upper mid-market—topping out at about 5,000? Dell needs to be clear on this because there’s a big difference in designing for 5,000 versus 500 employee firms.
  • Lead in listening. Dell has been a pioneer in building open community forums for customer input and dialogue. The vendor learned the hard way that in a Web 2.0 world, its important it is to let it all hang out–the good, the bad and the ugly. Dell was blindsided in 2005, when professor and blogger Jeff Jarvis used the phrase “Dell Hell” in his blog to describe his experience with Dell support. His blog unleashed a torrent of blogger complaints about Dell service, and escalated into an avalanche of unwanted media attention in publications such as The New York Times and Business Week. Once the shock wore off, Dell took action to listen proactively to and get involved in conversations relevant to its business and interests, globally and 24/7. Since then, Dell has dug deeper into social media to harvest and apply the collective wisdom of ever-larger crowds. Taking advantage of what it calls its “direct nature”, Dell intends to expand these initiatives. As an example, to reach and support their almost 400,000 fans on Facebook, Dell now provides “Dell Support on Facebook” widget on the Dell fan page. The widget is designed to provide Dell fans a way to engage with Dell support via Facebook to get assistance with technical and non-technical issues, check on an order status or any other issue they may be experiencing. Since the launch, Dell’s “customers’ heroes” team is touching about 3,500 customers a week through this widget, catching potential issues and flagging them so Dell can alert impacted customers and get issues fixed early. With social media rapidly displacing traditional one-way marketing in terms of influence, this should provide Dell with an enormous return.
  • Turn up the marketing volume. At the same time, Dell readily admitted that it needs to beat its own drum louder and more clearly to rise above the din in the industry. I think Dell is off to a good start with this event (the first analyst event they’ve held in a few years). I was also impressed with their executives’ ability to rein in business and IT jargon in most pitches. And, when execs did use motherhood and apple pie terms such as “open, capable and affordable” (which almost every IT vendor uses) they did a good job of following up with explanations about how they will actually deliver to those lofty goals. To really fire things up though, Dell will need to get more creative with broad and creative marketing campaigns that spark attention and interest around this new Dell and what it has to offer.

Since essentially reinventing the PC and x-86 server markets with its direct and efficient supply chain model, Dell has taken its share of lumps over the last few years for not moving past its traditional hardware-centric comfort zone. In the cloud era, Dell has the opportunity to create a new game, with new rules—ones that will favor its strengths and approach. Improving operational efficiencies has always been at the core of Dell’s DNA—a strength it can capitalize on again if it executes well in the solution, marketing and partner endeavors that back up its vision.

2010 Top 10 SMB Technology Market Predictions

Fellow SMB analyst Sanjeev Aggarwal and I have teamed up to bring you our top ten technology related predictions-plus three bonus predictions–for the SMB (companies with 1-1000 employees) market for 2010. Details for each prediction follow the list below.

Remember to vote for your top prediction here!

2010 Top 10 SMB Technology Market Predictions

1. Pent Up SMB Demand Will Be There—But Won’t Be Easy to Capture

2. SMBs Accelerate Their Shift to Digital Marketing Media

3. The Collaboration Battle Heats Up

4. The New Face of Small Business

5. Savvy SMB Vendors Get Strategic About Social Media Analysis

6. SMBs Drive the Mobile Internet Tsunami

7. Virtualization Boosts Cloud Computing Adoption

8. SMBs’ Appetite for Managed Services Grows

9. Beyond Excel—Targeted Workflow and Analytic Tools Takes Flight

10. 2009 Acquisitions Drive New Value for SMB customers in 2010

Bonus Predictions

1. Time to Get Paid for Selling a Free Lunch

2. Vendors Scramble for SMB Developer Loyalty—and New Integration Needs Arise

3. SaaS Computing Lifts Off in New Areas

Top Ten Predictions

1. Pent Up Demand Will Be There—But Won’t Be Easy to Capture. In 2010, as the economy comes out of recession, SMBs will be more willing to spend again, but only for solutions that will provide demonstrable bottom and/or top line business benefits. SMBs will spend only if they believe that the investment will help them operate more profitably, grow revenues, increase productivity, save money or gain time-to-market advantages. SMBs are also evaluating and making trade-offs in areas that offer strategic, long-term advantages vs. those that meet more urgent, short-term needs. In many cases, IT investments must also be weighed against requirements for other core goods and services essential to the business.

To have any chance at making the final cut, vendors will need to redouble efforts to illuminate their value proposition in a clear and compelling manner, and provide more quantifiable evidence that their solutions will help slash costs, increase productivity and provide payback value. Time-strapped SMBs will also increasingly demand that vendors be easy to do business with—heavily favoring vendors that offer an accessible, transparent and positive sales experience from discovery through purchase.

2. SMBs Accelerate Their Shift to Digital Marketing Media. In 2010, SMB adoption of digital marketing media will accelerate, as more SMBs turn away from traditional media (yellow pages, print, direct mail, etc.) and towards social networking (e.g. Facebook and Twitter), email marketing, search engine marketing, blogs, forums, etc. As SMBs become more familiar with the basics, they will seek out solutions that help them streamline and integrate customer interactions across multiple digital venues. Prime opportunities include more specific, tailored search optimization and management services.

Examples include Lotusjump, designed to help retailers and etailers optimize organic search for hundreds or thousands of products; Yodle, aimed at helping services businesses create an integrated Web site and SEO campaign to drive foot traffic and make the phone ring; and WebVisible, which helps local businesses create more effective online marketing and advertising campaigns. Another sweet spot will be services that help SMBs manage and integrate inbound and outbound social media streams, along with more structured digital marketing tools, such as SEO, SEM and email marketing. Vendors such as Cloudprofile and Hubspot offer such capabilities now, with Salesforce.com’s Chatter slated for the second half of 2010. With the market getting more crowded and noisy by the minute, however, vendors will need to avoid overloading SMBs with techno-babble, and focus instead on providing SMBs with an exceptional user experience and measurable business benefits.

3. The Collaboration Battle Heats Up. In an age of information overload, SMBs need better collaboration tools, integrated with daily workflow, to bring order to the chaos. SMB decision-makers and employees are reaping the benefits of social networking and collaboration tools like Facebook and Evite in their personal lives—and asking how they can derive the same kinds of benefits in their businesses. They want to make information easier to find, share and use; extend and enhance the body of shared knowledge; and connect with people they need when they need them. In 2010, the collaboration battle will swing into full gear, as vendors introduce more integrated solutions that pull together people, tools, services and content. After all, collaboration is the only business activity that every employee engages in every day—offering vendors an irresistible opportunity to expand their market footprints and installed base presence.

For instance, IBM LotusLive and Lotus Foundations make powerful Lotus collaboration capabilities affordable and digestible for SMBs; Microsoft continues to extend SharePoint and hosted messaging capabilities; and smaller players, such as HyperOffice and Zoho, feature services built for small business from the ground up. At the same time, business solutions vendors from SAP to Salesforce.com are embedding richer collaboration capabilities into their offerings. Even networking vendors, such as Cisco are getting into the game under the unified communications umbrella.

4. The New Face of Small Business. In 2010, vendors need re-examine the evolving small business market with a new segmentation lens to better identify the composition of the small business market, and how they can create the most compelling offerings as the sands shift. Triggered by the recession, generational changes, and globalization, a tectonic shift is changing the face of small businesses. The generational shift has been underway for a while, of course: the U.S. Bureau of Labor Statistics forecasts that the number of workers between ages 33 and 44 will decline rapidly through 2020, and that more people in the labor pool are likely to be either under 30 years old or over 50. Meanwhile, more people are opting to start their own businesses: the U.S. Department of Labor notes that 650,000 new businesses started up in 2006, compared to roughly 570,000 in 2002.

Different types of entrepreneurs, small business owners and their employees have diverse requirements and expectations for technology solutions. While older workers may tend to stick with the familiar, younger new business owners and workers are unlikely to have much allegiance to existing market leaders. As baby boomers in the U.S. retire, younger Gen X and Gen Y workers—and soon Millenials—will replace them. But, many retiring or laid off older workers will move on to start new businesses, out of economic necessity and/or for lifestyle preferences. In addition, persistently high unemployment will accelerate the entrepreneurial trend across all age groups. Meanwhile, globalization is fueling the need for small businesses to expand interactions beyond their traditional geographies.

5. Savvy SMB Vendors Get Strategic About Social Media Analysis. Social media is becoming a mainstream way for vendors and service providers to engage with small and medium businesses. Most vendors already have a social media presence and publish content regularly through social media channels, while many have integrated social media into their customer service approaches and/or using tools to measure brand performance. However, only a handful have developed an effective approach to extract meaningful strategic insights from social media conversations, engagements and information.

In 2010, vendors will augment tactical use of social media with a more sophisticated, strategic plan to monitor and analyze broader SMB trends and directions. By listening, synthesizing and analyzing conversations at a higher level, vendors can strengthen market insights for use in marketing, product planning, channel development and merger and acquisition strategies. Coupled with more traditional research, domain expertise and analysis, this strategic perspective on social media conversations will provide actionable insights and a competitive edge.

6. SMBs Drive the Mobile Internet Tsunami. In 2010, SMB adoption of smart mobile devices and services will increase at an even faster pace, as the number of mobile applications and services grows exponentially. SMBs with services businesses are already serving up local ads in local searches delivered on iPhones and Blackberries—as evidenced by the fact that vendors providing local search solutions saw their revenues jump by 50% to 100% in 2009. Things will continue to heat up as new Google Android-based smart phones continue to swarm the market, Dell’s new division focused on mobile devices debuts, Apple’s iPhone AppStore expands, and vendors such as RIM and Nokia extend their own application stores in response to Apple’s success. Vendors that can go beyond devices and applications to help SMBs create more engaging content, and develop more effective e-commerce and permission-based strategies to reach their target customers on these devices can gain a significant advantage going forward.

7. Virtualization Boosts Cloud Computing Adoption. For the foreseeable future, SMBs’ will continue to take a hybrid approach to technology, combining on-premise and public cloud-based solutions to satisfy business requirements. In 2010, vendors will offer a greater range of targeted solutions for hybrid environment requirements to spur SMB interest and traction. Virtual desktops, business continuity/disaster recovery, on-demand computing and storage will feature prominently in vendors’ lineups.

As SMBs contemplate Windows 7 migration strategies, they will more closely evaluate the total cost of ownership (TCO) of cloud delivered virtual desktop solutions vs. deploying new Windows 7 desktops/laptops—as well as the added benefits around security, backups, updates, etc. that virtual desktops provide. Growing adoption of virtualization will also open the door for SMBs to consider high availability and disaster recovery solutions, which until now, have been highly desirable, but largely unfeasible for smaller companies. Look for VMware to lead the way, with others, such as Citrix and Microsoft playing catch up.

8. SMBs’ Appetite for Managed Services Grows. SMB business requirements continue to become more complex, and their reliance on technology is increasing. But most lack the resources to keep IT infrastructure up and running at peak performance. Increasing business reliance on IT infrastructure will fuel rising demand for managed services providers (MSPs) to increase performance, reliability, availability and service levels—but at reduced or at least neutral costs.

Although demand for point services (for things like backup and recovery, security and virus protection) will remain healthy, more SMBs will seek out comprehensive managed services offerings in order to free up resources to focus on core business requirements and get the benefits of “one throat to choke.” By coupling cost-effective, round the clock remote management services with onsite support, vendors will make managed services more affordable and accessible for SMBs. Examples include Dell’s ProManage Managed Services, which combines the advantages of remote management services with a scalable network operating center along with a team of local Dell and partner support professionals around the globe that provide onsite support; Mindshift, which offers horizontal managed services, as well as vertical managed services solutions for industries such as legal, healthcare and professional services; and HP, which is approaching the SMB managed services segment through its HP Smart Management Services for SMBs and Total Care Business Solutions.

9. Beyond Excel—Targeted Workflow and Analytic Tools Takes Flight. SMBs often rely on disjointed, ad hoc methods to manage many tasks and workflows, such as spend management, expense management, sales compensation and corporate performance management—to name a few. For the most part, they tackle these and other jobs with Excel spreadsheets and a messy mix of emails, paper documents and manual processing. Besides being a headache for everyone involved, this cumbersome approach has many other drawbacks, such as limited reporting abilities, high error rates, a lack of real-time visibility and collaboration capabilities, and limited flexibility.Until recently, most solutions to help manage these processes were too expensive and cumbersome for the typical SMB customer.

However, the rise of cloud computing has given wings to many software-as-a-service (SaaS) solutions that give SMBs purpose-built tools that help streamline workflow and provide critical intelligence to help improve top and bottom line performance. In 2010, vendors’ mid-market offerings in areas such as corporate performance management (CPM), with vendors such Adaptive Planning and Clarity Systems; sales compensation management, with players such as Xactly; and spend management, with entrants such as Rosslyn Analytics, which recently launched RA.Pid, a free self-service solution for SMBs. Meanwhile, traditional enterprise BI players, such as IBM Cognos and SAP Business Objects will continue to carve out more digestible BI offerings for the mid-market, offering up solutions and/or end-to-end on demand business process services to customers.

10. 2009 Acquisitions Drive New Value for SMB customers in 2010. In 2009, many deals were struck that portend great impact on the SMB market, channel and competitive landscape. Among the most notable were HP’s acquisition of 3Com, which gives HP the ability to provide a full complement of networking and connectivity solutions for SMB customers. In a market long dominated by Cisco, the HP-3Com combination gives SMBs a strong alternative, with attractively priced, competitive networking products and services with a compelling value proposition. Intuit’s acquisitions of PayCycle, Mint.com and BooRah continue to build and refresh the vendor’s portfolio of services for it’s core small business and consumer segments—which often overlap in the “prosumer” category. Intuit will likely continue on an aggressive acquisition trajectory in 2010. Avaya’s acquisition of Nortel Enterprise Solutions makes Avaya the runaway market share leader in voice and unified communications in the SMB market, with roughly twice the market share of Cisco. But at the same time, Cisco’s pending acquisition of Tandberg will enable it to bring cost effective, standards based video conferencing solutions to SMBs, creating new awareness and interest in the SMB video conferencing market. We also expect 2010 to spawn a new round of acquisition activity as vendors converge collaboration, social media and business solutions.

Bonus Predictions:

1. Time to Get Paid for Selling a Free Lunch. There may be no such thing as a free lunch in the physical world, but there is an abundance of free and very low-cost software-as-a-service (SaaS) tools for everything from personal productivity and collaboration applications (such as Google Apps, Zoho and Dimdim) to financial management (including Freshbooks, Sage BillingBoss and Workingpoint) for small businesses. With more people starting their own businesses—often on a very tight budget—use of these services will continue to rise. But in 2010, vendors with this model will start feeling the pressure to scale.

The business models for these services are predicated on the assumption that a small percentage (usually in the range of 5% to 10%) of customers will convert to a premium paid offering. Many vendors also get advertising revenues, and some see data aggregation services as another way to generate income. To profitably scale their businesses, these vendors need to stimulate rapid viral adoption (which enables both advertising and data aggregation sales) and achieve their conversion rate goals for premium services. But the combination of rapid, high volume viral growth and paid conversions is a to tough code to crack. While Google may not need to worry about cracking the code anytime soon, smaller, venture-backed vendors have a much shorter time horizon to make it work. Many will not be able to, and will need to either get acquired or shut their doors. However, some will get the formula right—with good odds on FreshBooks and Zoho.

2. Vendors Scramble for SMB Developer Loyalty—and New Integration Needs Arise. Cloud infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) are giving SMB application developers lower cost, lower risk options to develop and bring new solutions to market. In 2010, both traditional platform vendors, such as Microsoft and IBM, along with newer PaaS and IaaS types such as Salesforce, Intuit and Amazon, will need to fight tooth and nail to get both commercial SMB developers and end-user customers to create applications for their environments. Meanwhile, since its highly unlikely that most customers will only want solutions from one of these ecosystems, vendors that provide integration solutions, such as Pervasive, Boomi, and Cast Iron, have a whole new market opportunity ahead of them—integration between these different platforms and ecosystems.

3. SaaS Computing Lifts Off in New Areas. Cloud poster child Salesforce.com celebrated its 10th birthday and hit the $1 billion in annual revenues mark in 2009—and software-as-a-service (SaaS) CRM is now a mainstream—even preferred–choice for SMBs. SaaS is also gaining a solid foothold in HR, marketing and content management are other areas in which SaaS is gaining a solid foothold. In 2010, the rate and pace of cloud computing adoption among SMBs will continue its upswing.

Key areas to watch include the historically elusive SaaS financials market. Smaller companies are showing a good appetite for self-service online accounting solutions such as Intuit QuickBooks Online Edition and Workingpoint, and point solutions for things such as invoicing, from vendors such as Freshbooks and Sage Billingboss, and others. Moving upmarket, firms such as NetSuite, Intacct, FinancialForce—and after a hiatus, SAP Business By Design–should enjoy good growth spurts in midsize companies, especially in those that are faced with a costly upgrade of a legacy packaged financials solution. Both internal IT and business decision-makers move to cut upgrade, maintenance and application management costs, while also speeding time to solution value. This momentum will be further fueled as SaaS vendors make progress in bringing integrators, VARs and CPAs on board to amplify marketing and sales capabilities.

Flying Through the Cloud: Dreamforce Takeaways at 50,000 Feet

A couple of weeks ago, I attended Salesforce.com’s Dreamforce event–along with about 19,000 other people. Having had a chance to digest the proceedings (as well as Thanksgiving dinner), here’s my commentary on what stood out as the top takeaways from the conference in terms of where Salesforce is headed and what it means for the software industry and market.

  • Super-charged energy levels. Ever the master of marketing, Marc Benioff did not disappoint. As he continues to thrust Salesforce beyond its CRM roots into ever-widening orbits, Benioff’s passion and enthusiasm remain high—and contagious, as evidenced by  the strong turnout, constant tweeting and feedback I heard in many 1-1 partner and customer conversations. (Not to mention that people were lined up to have their pictures taken with Salesforce mascots Saasy and Chatty…scary!). More to the point, the energy level at Dreamforce was off the charts in comparison to most recent industry events. While it’s easy to be cynical about people drinking the Kool-Aid, it seems the substance is there to sustain Salesforce’s energy. Competitors will need to dig deep to inspire the same intensity of purpose as Benioff breaks new ground in quest to develop Salesforce.com’s next billion dollar market.
  • May the Force be with you. Force.com, Salesforce.com’s cloud computing platform-as-a-service (PaaS), is fueling a lot of this energy. Force.com enables people to build multi-tenant software-as-a-service (SaaS) applications that are hosted on Salesforce.com’s servers. A long line of customers and partners testified to the power of the Force–which is basically that it gives them a fast, easy, low risk way to build applications.  According to Salesforce, 200,000 people are now developing on the platform, and 100,000 custom applications have already been built for it. More important, Force.com is racking up wins across many segments, including small end-user customers, such as Ball In Air, to larger corporate customers, such as Kelly Services. On the commercial development side, Salesforce has reeled in an impressive roster of partners large and small, young and established. Here’s a sampler: Xactly launched a new sales performance solution for small and medium businesses (SMBs); FinancialForce, which Salesforce invested in with Coda to to deliver business critical financials solutions on the platform; BMC is partnering with Salesforce to bring Service Desk Express to the Force.com platform in 2010; and CA and Salesforce are teaming up to deliver agile development management via the Force.com platform.  As Force.com development momentum accelerates, it leaves less time and money for companies to invest with  traditional platform powerhouses such as Microsoft and IBM.
  • Unveiling Chatter. The biggest news was about Chatter, Salesforce’s strategy to aggregate social media streams into a single place. According to Salesforce, Chatter will both a collaboration application and a platform for building social cloud-computing apps, and will be available sometime in 2010. To me  “chatter” is one of those words that can get very annoying when overused—and Benioff must have used the word “Chatter” about 80 gazillion times in the keynote alone, leading me to imagine that he will have the Rolling Stones rewrite Shattered to Chattered as a marketing gimmick. But with adoption of social media skyrocketing, Salesforce is likely envisioning Chatter as a good bet for it’s next billion in revenues. After all, collaboration is the one thing every employee does, every day, regardless of role. Naturally, Salesforce has set its sights on the collaboration gorillas,  IBM Lotus and Microsoft SharePoint. Of course, this is unchartered territory for Salesforce, which hasn’t really ventured here before, and it will have to navigate a lot of new turf in areas such as corporate governanc, which bigger rivals have had years of experience with. At the same time, Salesforce will also need to deal with newer, more nimble Davids–such as CloudProfile, which lets small businesses manage both outgoing and incoming social media in one place.
  • No longer David, not yet Goliath. Salesforce has clearly left the David stage of development, but is not yet a Goliath. At the analyst luncheon, a very astute analyst (apologies that I did not get his name) asked Benioff how Salesforce will position itself and operate now that it’s a billion dollar company, with a very large appetite for a bigger chunk of the software pie. Benioff assured us that Salesforce still wants to do good in the world and put customers first, etc. (I’m paraphrasing of course). However, a new crop of Davids, such as Zoho, are nipping at Salesforce’s heels, with effective guerilla marketing, strong viral adoption and no/low cost offerings. As a tweener, Salesforce must navigate and position amidst the competition from both above and below. Just as important, it will need to rethink its “co-opetition” agenda. For instance, Benioff repeatedly cast IBM Lotus as old-school collaboration, apparently unaware (or unwilling to acknowledge) that Lotus has reinvented itself for the world of Web 2.0 and social media with offerings such as Connections, LotusLive, Sametime, Quickr—just to name a few. In fact, the vision for Chatter looks a lot like Lotus Connections.

Apart from feeling a bit too chattered, my overall take is that Salesforce will continue to rearrange the competitive landscape as it moves into new areas. While it’s not always the first to innovate, Salesforce is among the best when it comes to helping customers “get it” in terms of  using new technologies and tools to solve business problems. Competitors who underestimate its ability to reframe the market—whether the market is development platforms, collaboration or character mascots—risk ending up on the short end of the stick.

Intuit Partner Platform: Changing the Rules of Cloud Platforms with Federated Applications

Cloud platforms, or “platforms-as-a-service” (PaaS) are quickly becoming a key channel for application developers. By writing and publishing their applications to integrate with those of a major PaaS provider, such as Salesforce.com or Microsoft, smaller developers can gain instant access to a large installed base of customers.

With so many vendors creating their own clouds, however, it’s easy for software developers to get lost in them—or potentially, locked into in a cloud. After all, it takes a lot of time and effort to write an application that conforms to the requirements of a particular cloud platform. Smaller developers, without extensive resources, have to place their bets carefully, as they may not have the resources to rewrite their applications for different environments when a new or better opportunity arises.

But recently, Intuit unveiled a new capability called “Federated Applications”, which opens up the Intuit Partner Platform to developers that have existing software-as-a-service (SaaS) applications built on other cloud platforms, programming languages or databases. Instead of having to rewrite applications from scratch, developers can use basic XML integration to configure or “federate” their solutions with key integration points, including the user interface, billing, account management and permissions, data and single sign-on to ensure that their solutions integrate with QuickBooks and other solutions on the Intuit Workplace. For example, the partner solutions that Intuit announced at its launch—Expenseware, DimDim, Setster, Rypple and Vertical Response–are built on a wide range of different platforms.

Intuit also provides a wizard to help developers create their pricing plans, and checks each application to ensure that it meets Intuit security and privacy requirements. Once the process is complete, applications are published to the Intuit Workplace, where four million small businesses and their 25 million employees that use QuickBooks can access them.

With its Federated Applications model, and tremendous presence in the small business market, Intuit is poised to change the rules for cloud computing platforms, both for small business developers and customers, as well as rival PaaS vendors. Intuit’s model makes it much easier and faster for developers to leverage existing investments and reach a new market than for PaaS competitors without this capability. In turn, millions of Intuit customers get access to one-stop shopping, account management, connected data, and single sign-on for applications in the Intuit Workplace.

Intuit’s business model represents a dramatic shift from that of the current PaaS gorilla—Salesforce.com. In the Salesforce model, every user of any AppExchange solution must also pay a platform fee to salesforce.com, whether they need to use the Salesforce solution or not—a tax that many small business customers, in particular, are unwilling to pay. In comparison, Intuit charges Workplace developers a percentage fee (typically 14% to 20%, depending on volume) when they sell their solution on the Workplace. In return, developers get a sales channel, platform services, and a friction-free route to Intuit’s large installed base.

By lowering the bar to entry to its platform so significantly, Intuit’s federated approach makes it easy for developers to place a bet on the Intuit Workplace. Intuit customers, meanwhile, can look forward to a flood of new solutions that will work with QuickBooks. At the same time, its more likely that these solutions will be available on other cloud platforms, should the customer decide to move to another accounting solution. Seems like a win-win-win for Intuit, its partners and its customers—and a challenge to PaaS competitors with more proprietary models.

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