Riding The Crest: The Original SaaS Companies

Ottawa, Canada 2009 Riding the Crest of a New Wave: How the Original SaaS Companies Have Gained the Upper Hand White Paper A Knowledge Leadership Publication By Procurement Insights Author Jon Hansen

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand Table of Contents EXECUTIVE SUMMARY: OUT IN FRONT OF THE PARADIGM SHIFT . . . ..................2 THE END OF AN ERA …... ……….. ………………………………………. . . . . ……………4 WHAT IS SOFTWARE AS A SERVICE OR SAAS? . . . .........................................................5 MODELLED FOR SUCCESS ......................................................................................................5 THE PERFORMANCE FOUNDATION.....................................................................................7 AGENT-BASED VERSUS EQUATION-BASED . . . ................................................................8 AN ADAPTIVE EVOLUTION BY DESIGN ….………………………….. …………………..9 A FINAL POINT . . . ...................................................................................................................10 ABOUT SOURCE ONE . . . ........................................................................................................12 Appendices APPENDIX A ...............................................................................................................................15 1

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand Executive Summary: Out In Front of the Paradigm Shift With tier one vendors such as Ariba and SAP moving into the SaaS space, a model upon which organizations such as Source One’s reputation and business have been built, it is in effect an admission that the traditional licensing model does not work. Because of what can only be described as a monumental shift (remember the old analogy about big ships turning slowly), overall awareness and acceptance for SaaS-based or on-demand solutions is on the rise. And with it, the players who are and have already defined this new paradigm. As a solidly established SaaS vendor Source One, who does not receive a single cent for their strategic sourcing services until they deliver to their clients’ expectations, is indicative of the how the industry is truly evolving. And unlike the mega-projects of yesteryear, when the lion’s share of the costs were born by the client before the “projected savings” were realized, Source One’s “trailblazing” approach has helped to pave the way for a contingency-based pricing model that has been long overdue. And while “traditional model” vendors like Ariba are now claiming that they are in “the on-demand business” having just reported “a 71 percent leap in subscription software revenues,” does not necessarily mean that they are truly an on-demand company. After all, proficiency in delivering under the SaaS model is not based upon an internalized increase in subscription revenues, but is instead tied to an historic performance record in terms of meeting and exceeding customer expectations. So rather than heralding a triumphant entry into a new phase of a successful business, Ariba’s historic performance would tend to indicate that the move into the SaaS world was predicated more on admittance that their old model did not work. This latter point is driven home by the fact that between 2001 and 2005, the company lost $3 billion on $1 billion in sales. This of course would lead me to ask the million, or in the case of Ariba billion, dollar question; “if they could not make it work under the old model, why would they be able to make it work with a new pricing structure?” 2

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand The fact remains, that now is the time for the original and true innovators such as Source One to emerge from the shadows of trailblazing to assume the mantle of broad, mainstream acceptance as the new standard for e- procurement/supply chain solutions and services. The purpose of this paper is to delve into the foundational elements of the key differentiators between what I refer to as the original SaaS innovators and the “interlopers” whose ability to deliver results will not likely change despite heralded announcements of a new day. 3

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand The End of an Era “Seth Godin predicts the end of installed software in a recent post and really hits the nail on the head Salesforce.com popularized this craze in the CRM world and rivals soon emerged (see Netsuite’s impending IPO). You know they are on to something when Microsoft, king of the installed software world, enters the space. Microsoft has announced an on-demand version of its CRM offering, Dynamics. Not only will it have functionality mirroring Salesforce’s, but they will price it at roughly 40% less in a bid to capture market share.” from the B2B Marketing ROI Blog The end of installations, by Adam Blitzer October 4, 2007 4

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand What is Software as a Service or SaaS? While research indicates that the term Software as a Service originated as a concept prior to 1999, its revelation within the mainstream has largely been credited to a 2000 white paper titled “Strategic Backgrounder: Software as a Service.” According to the acknowledgements this paper, which was written and published in February 2001 by the Software & Information Industry Association’s (SIIA) eBusiness Division, “grew out of discussions between SIIA staff and a growing contingent of association members who,” at the time, were “either evaluating or entering the Software as a Service (SaaS) market.” In its opening paragraph, this seminal effort to explain the evolution from traditional licensing models in which “packaged desktop and enterprise applications will soon be swept away by the tide of Web-based, outsourced products and services,” accurately establishes the core principles or elements of the SaaS or on-demand model. Specifically, that the new model will “remove the responsibility for installation, maintenance and upgrades (and the associated heavy costs) from over-burdened MIS staff.” And that as a result “packaged software, as a separate entity will cease to exist.” Even though the paper at the time of its publication stressed that “due to technical and business issues, such drastic predictions,” had not yet happened, it nonetheless sent up the first flare indicating that a change was definitely on the horizon. A change that has in fact affected “all participants in the software industry.” Modelled for Success? In numerous articles, papers and posts over the years I have often expressed my position that the fee structures associated with traditional software licensing models had very little to do with the viability of the enterprise application being installed, or the actual results that it was expected to ultimately deliver. In fact my research had clearly demonstrated that at minimum, 85 percent of all enterprise application/IT initiatives worldwide failed to deliver the expected results. 5

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand This of course led to the obvious question, what are the fees associated with an End User License Agreement (EULA) which included software maintenance, ongoing operation patches, and patch support actually based upon? What was really behind the somewhat complex (some would even suggest obfuscated) pricing structures involving seat numbers or licenses per users or devices? The answer to this question can be found in a March 16, 2009 article from Procurement Leaders Magazine that appeared under the heading, “Ariba is in demand claims finance chief.” While revealing that “the first quarter was traditionally the toughest for Ariba,” and that this year marked a definitive change in the company’s Q1 fortunes,” CFO Ahmed Rubaie’s reference to the organization’s “heady dotcom past” was telling. Specifically, his statement that “The only thing we carry that’s related to the legacy Ariba is the name, the logo, $2 billion dollars of tax nols (net operating losses in the US), and an albatross of a lease in Sunnyvale California.” Rubaie concluded that Ariba “is a drastically different company today, and now operates under a “drastically different leadership team and model.” Based on the above, it would appear that traditional licensing fees had more to do with supporting a business model that ultimately did not work. Now I may be missing something here, but this is hardly the solid foundation of success upon which a “new” model can be reliably built. In my March 4, 2009 Procurement Insights post (There’s a slow, slow train comin’ up around the bend: Epilog for the Ariba Interviews), I observed that the “only real question that remains is how will the market respond as albeit smaller but more nimble and technologically seasoned vendors who have been in the SaaS space from the beginning emerge to compete directly with what was undoubtedly one of the industry’s former traditional model titans?” A titan I added, that “racked up enormous losses that if not for a war chest that rivalled that of a small country might have fallen prey to becoming a distant memory of a failed experiment.” The experiment of course was the “big up front pay, future ROI programs associated with the old school licensing models” that never seemed to live up to expectations. At least not from the standpoint of the client who saw 6

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand the majority of a program’s promised savings dissipate into a tangled morass of change management strategies and increased consulting service costs. Don’t get me wrong, this diminished return on client investment was not limited to Ariba alone, as industry giants such as Oracle and SAP have with surprising frequency, also missed the mark in terms of expected outcomes. This again prompts the question, can you transition a poorly executed application platform that has routinely failed to deliver results to one that can meet or exceed client expectations through the introduction of a new pricing model? The Performance Foundation “History,” claimed Winston Churchill, “is written by the victors.” He also said that “history will be kind to me for I intend to write it.” I have often referred to this quote in previous work because it demonstrates that it is not necessarily how one starts the race, but instead how one finishes the race that matters. Very few people for example will remember that CP/M was the first operating system for the microcomputer. Even the youngest of PC users will have some indirect knowledge of Microsoft’s DOS operating software, which served as the stepping stone to the ubiquitous Windows platform that dominates the global infrastructure of high speed computing today. Based on this, it is possible and perhaps even reasonable to presume that even though an Ariba is a “late comer” to the on-demand world, their sheer size and presence would serve as an equalizer with those vendors who have slowly evolved from within the SaaS framework and quietly grown into mature, reliable vendors with a proven performance history. However the on-demand world, and more specifically the solutions upon which it has and is being built, is vastly different from the applications that have been produced under the traditional licensing model banner. It is not merely a matter of semantics or payment plans, but is instead tied to a difference that exists within the very foundations of the on-demand solution’s structure and adaptive qualities. Qualities that are largely absent from the enterprise applications with which the market has been most familiar. 7

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand Agent-based versus Equation-based “A true centralization of procurement objectives requires a decentralized architecture that is based on the real-world operating attributes of all transactional stakeholders . . . in other words, your organization gains control of its spend environment by relinquishing centralized functional control in favor of operational efficiencies originating on the front lines. This is the cornerstone of agent-based modeling.” When I wrote this excerpt from my 2005 white paper titled “Acres of Diamonds: The Value of Effectively Managing Low-Dollar, High Transactional Volume Spend, I based its premise on extensive research into the utilization of an agent-based model operating within the framework of a Metaprise platform. A Metaprise or centralized private hub is the intelligent conduit that connects and manages the seemingly disparate (and dynamic) relationship between various internal and external stakeholders on a real-time, real-world basis to achieve the desired “best value” outcome at that particular point in time. As a means of providing some context, Source One, and more specifically its solutions and related services, acts as a centralized hub. Solutions that are developed in accordance with an agent-based methodology, otherwise referred to as meta-enterprise applications, deliver an on-demand capability that provides the purchaser with the needed insight or intelligence to consistently make the best spend decisions possible. Unlike the equation-based models or platforms upon which traditional, ERP- centric applications have been built, on-demand solutions represent the future of eProcurement/supply chain application development. A future that has now arrived, and signalled by the first of what is likely to be several migratory strategies starting with Ariba. This is one of the reasons why, in his August 30, 2007 article titled “Small fish, big sea” business writer Mike Ouellette identified the on-demand “hosted ERP and SaaS” models as a “potential competitive advantage for smaller ERP-type providers.” A sentiment that was echoed around the same time period by the ARC Advisory Group’s Simon Bragg. And even though Bragg later suggested that the ability to “exploit niche markets,” was not necessarily within the 8

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand sole domain of the small provider, as players such as SAP and Oracle “are getting exceedingly good at identifying niches which could be served with only minor tweaks to their core products,” he did not provide the data or basis to support this latter claim. An Adaptive Evolution by Design, Rather than Necessity Where Bragg missed the mark was his emphasis on a niche market. This implied a limitation of opportunity whereby, and for the time being, the smaller players were better positioned to serve for example the SME community. What he did not touch on of course was the consistently high-rate of initiative failures that plagued the majority of implementations that were associated with the larger players operating under a traditional, equation- based licensing model within their supposed indigenous client market. And it is this “gap” in serviceable results, regardless of client company size, that the smaller on-demand vendors like Source One are best equipped to address through their historic focus on strategic areas of an enterprise’s overall supply chain practice. In short, the advantage is not linked to an untapped market where it is only a matter of time before the big boys catch- on and catch-up. It instead goes much deeper than that, into the very core foundational elements under which the applications themselves have been developed, and the related service value delivered. In the case of Source Once, who provides strategic sourcing capabilities on a global scale for clients whose annual sales range between $500 million and $10 billion, it is their “proprietary database of commodity information” which distinguishes their offering. Information that includes critical data on suppliers, products, service levels, prices, industry tariffs/regulations, and specifications for over 70,000 product and service terms structured into multiple categories across all industries. This competitive advantage, which is not confined or limited to a particular market niche, was compiled through the utilization of an agent-based solution that “evolved” or matured over a period of 17 years. In other 9

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand words, they haven’t just “revamped” their business model retaining only a small segment of a past life, in an effort to finally succeed. In fact, Source One’s expertise (and value) actually extends even beyond the capabilities of a SaaS or On-Demand model, as their indigenous knowledge platform which includes their proprietary commodity information data base builds on a history of proven results. And it is for this reason that Source One confidently provides their solutions and services within the framework of a “pay-for-results-only” SaaS model. A Final Point Referencing the Churchill axiom that history is “written by the victors” the importance of a solid track record for delivering results cannot be underestimated in terms of predicting future success. If we place a high degree of importance on past performance when selecting a vendor and their corresponding solution, then the following excerpt from an article that appeared in the May 2008 Outsourcing Journal will go a long way toward favoring the services of a “technologically seasoned” on- demand veteran like Source One. In the article, the CFO for Source One’s client Spraylat Corporation “enthusiastically proclaimed” that the vendor “blew right past the targeted numbers we set and came up with savings we never dreamed of.” The CFO then added, “We ended up paying them more for our two-tier pricing than if we’d gone for their original offer, but we saved more than we ever expected. They are truly professional sourcing experts.” If I were asked to sum up the differences between traditional licensing models, and on-demand models, as well as the differences between agent- based solutions versus equation-based applications, I would probably say that with the former you will pay less for more, while with the latter you will pay more for less. The only question that remains is what organization you believe is better positioned to deliver the best results; the one that has been in the on-demand world from the beginning, or the one who has just recently fled to it? I believe that the answer is pretty clear. 10

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand Source One Operates Under A Set of Guiding Principles Source One is a completely independent third-party consultant. Unlike many other organizations in the procurement consulting industry, Source One Never Accepts referral fees, agency fees or commissions from suppliers. We work on exclusively on behalf of our clients and ensure they are getting the best value for their procurement initiatives. Source One is unique. We live by a set of Guiding Principles that set us apart from the rest of the industry. Our Guiding Principles:  Reward for Value... It's a matter of principle and practicality...Our contingency model holds us accountable for achieving results. We must produce value.  Exceed Expectations... Continually move the bar higher.  Treat People Like People... People are not customers, employees, suppliers... People are People. Treat People Well.  Always with Integrity... There is no compromise.  And Do It Together... Team, Collaborate, Share. Source One recognizes that the lowest cost purchase is not necessarily the highest value purchase. Consultants that focus exclusively on the bottom line often loose focus of the needs of the organization they set out to assist. Source One will work with our sponsors to ensure the best total value solution is implemented in our client's organizations and will help you sell the initiative internally. Strategic Sourcing Throughout our 16 year history, Source One has sourced over one billion dollars worth of products and services for our clients. On average, our clients saved 18% on their total procurement costs. For details of some recent strategic sourcing projects, please take a moment to read our Case Studies and review our Results. To see a sampling of our previous and current clients, please click here. To read strategic sourcing success stories and case studies, please click here. Procurement Source One is a Procurement Service Provider that has been assisting companies with their strategic sourcing and procurement initiatives for over 16 years. We bring an entrepreneurial spirit to Strategic Sourcing and Procurement, and realize that the internal selling of your initiatives and your organization's total buy-in is imperative to the success of the initiative. To read more about our procurement change management services, please click here. 11

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand About Source One Management Services, LLC Our services help clients optimize their performance and profitability through cost reduction and process improvement in their Strategic Sourcing and Procure-to-Pay operations. Source One has built a strong and diverse staff with collective industry experience in Strategic Sourcing, Procurement Best Practices, e-Sourcing (visit www.whyabe.com), Project Management, Negotiation, Telecommunications, Logistics, Inventory Management, Purchasing Management and Strategic Planning. We tailor our services to the unique needs of our clients using creative sourcing strategies, our visibility into billions of dollars of spend, and state of the art technology. This enables us to achieve superior results for our clients. Since 1992, Source One as serviced a diverse, global client base that has included customers such as Exelon, Amerigas, L3 Communications, Lincoln Education, Universal Health Services, Eileen Fisher and Teva Pharmaceuticals. For more information, visit www.sourceoneinc.com. © Procurement Insights 2008-2009 12

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand About the Author Jon Hansen has studied and written extensively about e-Procurement and the changing face of procurement around the globe. In addition to being a highly acclaimed international speaker, his Procurement Insights Blog reaches 300,000 syndicated subscribers each month worldwide, and is currently available in several languages. He has written more than 200 articles and papers on subjects ranging from supply chain optimization and the utilization of agent-based modeling in the software development process to the evolution of sustainable purchasing practices and the impact of traditional ERP-centric implementation methodologies on the high rate of supply chain initiative failures. Funded by the Government of Canada’s Scientific Research and Experimental Development (SR&ED) program Mr. Hansen’s work in both identifying the existence of Commodity Characteristics as well as defining and recording their impact on “best value” purchasing practices represented a seminal breakthrough that led to the establishment of new theories surrounding the practical utilization of synchronized platforms in achieving sustainable coordinated savings and overall process efficiencies. Other white papers by Jon Hansen: The Greening of Procurement: How Social Consciousness is Re-Shaping Procurement Practices Talent Attraction and Retention in a Global Economy SAP Procurement for the Public Sector Preserving Supply Base Integrity During an Economic Downturn Yes Virginia! A Profile in Excellence To obtain copies of the above referenced white papers, or to inquire about Jon’s availability to speak at your next conference or seminar contact Jennifer Cameron at jenncameron@sympatico.ca, or 819-986-8953. 13

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand White Paper Appendices 14

Riding the Crest of a Wave: How the Original SaaS Companies Have Gained the Upper Hand APPENDIX A Pages 2, 6 (Ariba Announcement Reference); There’s a slow, slow train comin’ up around the bend: Epilog for the Ariba Interviews, Procurement Insights (March 4, 2009) Page 4 (The End of an Era Reference); http://b2bmarketingroi.com/2007/10/04/the-end-of-installations/, from the B2B Marketing Blog, The end of installations, by Adam Blitzer (October 4, 2007) Page 5 (Software as a Service Reference); http://www.siia.net/estore/ssb- 01.pdf , from the “Software as a Service: Strategic Backgrounder” white paper, by the Software & Information Industry Association (SIIA) (February, 2001) Page 6 (Ariba “in demand” Reference); http://www.procurementleaders.com/news/latestnews/ariba-in-demand/, from the Procurement Leaders Executive Network, Ariba is in demand claims finance chief, Latest Procurement News (March 2, 2009) Page 8 (Acres of Diamonds Reference); http://www.edocr.com/doc/664/acres-diamonds-value-effectively-managing- low-dollar-high-transactional-volume-spend, from the “Acres of Diamonds: The Value of Effectively Managing Low-Dollar, High Transactional Volume Spend” white paper, by Jon Hansen (September 2005) Page 8 (Small fish, big sea Reference); http://www.canadianbusiness.com/innovation/article.jsp?content=20070830 _095911_5596, from the ERP: Small fish, big sea article, by Mike Ouellette, Canadian Business Online (August 30, 2007) Page 10 (Outsourcing Journal Reference); http://www.outsourcing- journal.com/may2008-sourceone.html, from the Source One Provides End- to-End and On-Demand Strategic Sourcing Solution for Mid-market Companies article, by Kathleen Goolsby, Outsourcing Journal (May 2008) 15

Riding The Crest: The Original SaaS Companies

by Jon Hansen on Mar 20, 2009

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Riding The Crest: The Original SaaS Companies — Document Transcript