SaaS Providers Increasingly Require 'Ecology' Solutions from Infrastructure Vendors

Edited transcript of BriefingsDirect[TM] podcast with Progress Software's Colleen Smith on SaaS, recorded July 26, 2007.

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Dana Gardner: Hi, this is Dana Gardner, principal analyst at Interarbor Solutions, and you're listening to BriefingsDirect. Today, a podcast discussion about Software as a Service (SaaS), the burgeoning marketplace for off-the-wire business and consumer applications, and the infrastructure that's required for those delivering these applications and services to thrive and prosper.

To help us sort out this market and the needs for infrastructure, we're joined by Colleen Smith, managing director of Software as a Service for Progress Software. Welcome to the show, Colleen.

Colleen Smith: Thanks, Dana.

Gardner: Tell us a little bit about how Progress Software, you, and how your research came to determine that the time is right for ramping up your offerings and their applicability to the SaaS provider market?

Smith: I was lucky. Progress had started to look at the application service provider (ASP) model back in the early 2000-2001 time frame to figure out whether there was an opportunity for some of the small ISVs who were using the Progress technology to become more of an application service provider. When I joined the company two years ago, I was basically asked to figure out how to build more of a SaaS partner program and look at ways in which we could work with our partners.

We basically stepped back and said, "All right, let’s look at a number of different areas," one being the technology enablement and how to build applications to go to market with SaaS. We also added a couple of other things, because we felt that one of the biggest challenges traditional software vendors had was around the business model, the go-to-market strategy, sales enablement, and figuring out ways in which we could actually help them to be more successful in this new business model. We were thinking of it more as a business model and not just as a technology.

Gardner: So, it's also providing the back-office applications and requisite integration for them to have a business go at this, not just the underlying guts of getting the scale and reliability for the applications themselves?

Smith: Right. We’re an infrastructure provider, but we also look very carefully at this channel, which happens to be ISVs that bring our infrastructure products to market. We wanted to make sure they could be successful with SaaS. Sure, there are the technical components of multi-tenancy, being able to have a Web-based access, and being able to drive policy configuration and personalization.

More importantly, we work with a lot with our partners or these ISVs to make sure they realize that this requires different marketing. It requires a different sales and business model, because clearly there are financial implications in terms of cash flows. There are also a lot of things they need to think about in terms of who is the target market.

We've helped them focus on looking at new markets and going down-market. Our partners have always focused very much on the mid-market, but SaaS has enabled them to target some very niche verticals and go down into the "S" of SMB (small and medium business).

Gardner: You mentioned application service providers (ASPs), and there was a lot of talk along the lines of potential for this market at least 10 years ago, maybe more depending on how the delivery was designed.

What's different between what was then conceived of as the ASP market and what we now call the SaaS market?

Smith: When I look back at the ASP market and what was going on, it was much more about the hosting. Everybody said that if you just take a business application and host it, you can be an application service provider. What they didn’t realize was that the folks who were trying to do the hosting really had no domain knowledge in terms of the business application. They didn’t understand how to focus on managing the business processes. They focused on getting the application up and running and hosting it.

There were a couple of problems with that. Number one, the applications were built for on premises. They weren’t built to be used by multiple customers. The other thing is that the people who had built those applications weren’t necessarily the ones who were doing the hosting. It was the hosting vendors who figured they could just load it up and run it.

SaaS and ASP in concept are still the same. The application is going to be housed and managed centrally, hosted somewhere, and run by different customers. The biggest difference is that the people who are now managing, building, and deploying those applications are more of the ISVs, who understand what it takes to run and manage that business process.

On the software side of it, there is much more of a focus on business-process automation, and the people who are building, deploying, and running those applications have a good, solid knowledge of the business itself. The second thing is that the applications are now architected specifically to be able to run for multiple customers, and it’s not a separate implementation for each customer.

The economy of scale is what killed a lot of hosting providers back in the ASP days and ran them out of business. They were just doing an implementation for every customer, as opposed to a single implementation that can now be used by multiple customers -- personalized and managed. The people who use the application run and use it differently, but the implementation is pretty much the same for all customers.

Gardner: Right. I want to get into a little bit of why the costs have come down and what the architectures are that make it more of a pure of-for-and-by the Web play. Before we do that, you mentioned that you've been at Progress for a couple of years. Why don’t you tell us a little bit about your background, and how you've come to be involved with the SaaS market?

Smith: Prior to coming to Progress about two years ago, I spent five years as an industry analyst. I was looking at the ASPs back in those days and understood what was going on around the market, but I also looked at the overall infrastructure market. Prior to that, I spent 15 years in the enterprise-application space.

What's interesting is my background. I started in the mainframe days, saw the transition to client-server, then saw the transition to the Internet. So, I watched the different transitions in how the software industry has grown over the last 20 years or so. I even started off my career at EDS doing service bureau and outsourcing. I've seen it come full circle.

When I joined Progress, I said, "Let’s look at this new business model, SaaS, and figure out how an infrastructure company can make a play in terms of being part of this new business model through using our technology, but at the same time working with a lot of ISVs who are out there trying to figure out how to make that transition.

Gardner: For those listeners who might not be that familiar with Progress. You have been involved with ISVs, first with tools, then with runtimes, and then increasingly with stack and infrastructure platform approaches. So, your core audience, your clientèle, are really ISVs. Isn't that the case?

Smith: Yes. We’ve been in business 25 years, and I would say for a 23 of those years our go-to-market has been to work with ISVs who take our technology, build applications on top of it, and bring it to market. We also have a direct arm, but a long-standing portion of what we’ve done over the years is to provide the software infrastructure for application partners or ISVs to be able to bring their applications to market, build them, and deploy them.

Gardner: One of my earlier questions was about the timing. Why is the timing right now. For a lot of reasons, these ISVs recognize that they can continue to support their licensed, on-premise businesses and, at the same time, pursue other market segments at a price point that makes it worthwhile. Would you agree with me that the timing is right for the ISVs, as they increase their business model directions, in terms of the price points? Why is this a good time for these ISVs to start looking at SaaS?

Smith: I do agree with you. I think the timing is right. There are a bunch of reasons why. Number one, the Web is finally viewed as a business platform. Seven or 10 years ago, the Web wasn't viewed as the way in which business applications were going to be run and managed. Because of that, as I mentioned before, a lot of traditional ISVs have been selling to the upper end of the mid-market, or to large enterprises. Those have been the folks buying business applications.

The "S" in SMB really couldn’t do a number of things. They couldn’t afford the dedicated IT staff to manage and maintain the applications. They didn’t necessarily have the infrastructure and the technology to run these business applications. A lot of business applications are much too complex and require too much manpower to manage and maintain the app.

A couple of things have happened. One, the price of computing has come down. People now have access via web browser to business applications.

The other thing, one we’ve all seen, is that ISVs realize there’s a whole new market. There’s that long tail, if you will, of the software market that allows them to be able to go after new people. In the past, software just wasn’t accessible to them, and now there’s a whole new market opportunity.

We stress to our ISVs, "You can continue to be in the traditional software business for your core market and the market that you’ve been going after, but there’s a whole new opportunity for you to look at new markets, whether they be the low-end of your current market, adjacent markets, or even new geographic territories."

Throughout South America, Africa, and Asia-Pacific, what we’re finding is tremendous growth opportunity for ISVs to look at these as new markets and to go into those new markets with a new business model. That new business model is SaaS.

Gardner: So, on the delivery side of things, that is to say on the direction in which they sell, there’s this long tail and globalization benefit that provides them new market opportunities. These areas are ripe for the need for productivity, yet they probably don’t want to set up their own data centers.

On the other side of the equation, on the supply side of how these ISVs can deliver, there’s a new support ecology available to them. They don’t have to create their own data centers themselves. They can find partners. We’ve heard a lot about Amazon, for example, and there are others, of course. These ISVs can focus on what they do well, which is their software, their logic, and then also take advantage of some hosting.

Tell us a little bit from your vantage point as a software infrastructure and tools provider how that ecology works when it comes to these hosting options?

Smith: You’re exactly right. Back in the ASP days, it was all about hosting. I’m not saying that in the SaaS world hosting isn’t important, because it absolutely is. What has changed over the last 7 to 10 years is that now you look at it in terms more of an ecosystem.

You’ve got your infrastructure providers, your application providers, and your hosting and managed-service providers. The biggest change that I have seen now is that each realizes they have a role to play, they have a core expertise, and that through building of this ecosystem and through partnerships you can be much more successful in being able to lower your deployment cost, but still being able to target and go after these new markets.

I look at our ISVs and our ecosystem within SaaS. We use partners like OpSource, for example, to be able to do some of the hosting and managed services. Our ISVs are the ones with the business and domain expertise, and know what their business application is. They know their particular vertical niche and they know how to best deploy, manage, and build out business processes to be able to support it. What we provide in the equation is the underlying infrastructure that helps them to develop, deploy, integrate, and manage and monitor their business applications.

Together, what we have is more of an ecosystem that’s able to go out and lower the overall total cost, because each one of us is playing our role in the system. Because it’s a partnership, the pricing and licensing is all done based upon what we call the shared risk/shared reward model.

Gardner: I think they also call that "pay as you drink," right?

Smith: Something like that.

Gardner: Now, we’re not just talking about big honking business apps anymore either. As more companies adopt Web services and look at methodologies such as SOA, we can perhaps get a little bit more granular as to what is hosted, and look to business process management from a hosted or SaaS view. I guess we could call them "components as a service." That requires quite a bit more heavy lifting on the infrastructure side. There’s more integration, managing data, and making data available in near real time across multiple services.

Can you address the opportunity for applications to be decomposed into services as a service, and also what new requirements there are for the infrastructure to support that?

Smith: Sure. What happens early on in a market is that we see lot of these niche, vertical, best-of-breed or single applications or components in the first wave of coming out to market with SaaS. So, whether it's in the legal sector, healthcare sector, or financial services, they say, "Here’s one specific business application -- mortgage applications, loan applications, or patient billing." What slowly happening is being able to start integrating business processes and offer them out to the community.

If you look at financial services, instead of just being able to offer loan applications, there’s now a whole suite of different types of business services or business components. As long as somebody who’s part of the financial services arena has the ability to integrate those different business processes and offer them out to their community, they basically have become more of a business service provider.

What we’re seeing is that you no longer are an application vendor like you were in the traditional business model. If you do this right and you use the underlying technology of governance, policy enforcement, integration, and development, then you can build out a whole service delivery environment or platform, where you can now offer multiple business services to a community that might be very vertical-based.

We see a lot of this happening in financial services, healthcare, the legal sector, and even in agriculture, which needs to now manage and maintain a lot of different business processes because of federal regulations, mad-cow disease, and all the other reasons people have to manage and monitor business processes a lot more thoroughly.

Gardner: Okay. So, where the traditional ISV might have had a monolithic application standalone, we’re seeing more decomposition into services. Their role becomes more of a services integrator off the wire, but at the same time they have more flexibility in how they deliver.

They also have more flexibility in how they create, in that they can exploit reuse more generally. They can also shop around for business services that might be on the market and available to them through the ecology. So, there seems again to be a two-prong benefit: one in how they can deliver, but also in how they can aggregate and create. Does that sound right?

Smith: Yes, and what that comes down to is the winner in all this is the end customer, who is looking for a single business-service provider who knows their business, whether they know healthcare, legal, or any business sector, and they’re able to provide a number of different business services for them. The big challenge that most large organizations had was integration, because they’d go to one vendor and buy a business app, then go to another vendor and buy a different business app.

In the SaaS world you could run into the same thing, if you’re going out to all these different SaaS providers. But, if you start to think in terms of those SaaS providers participating in this ecosystem that’s much more based upon who the end customer is, the end customer can end up benefiting. They’ll be able to go to a single business-service provider.

Maybe that business provider has built those services, or maybe they haven’t, but they’re able to pull in these multiple business services, Web services, or whatever technology they’ve been built in, and offer them out to the community. So, the end customer, who might be that smaller business user, can now have a single point where they go to access a number of different business services.

Gardner: Again, that points to the long tail. You can have a higher level of customization, but also manage your costs in dong so.

Smith: Exactly. The biggest challenge people have about going after that long tail is the fact that you’re really talking about millions of markets of a dozen. It’s very difficult to get your cost model to a point where you’re able to go after all of those millions.

But, if you really think about it and you build the business application that’s very specific to what they need to do, and you’ve built them based upon the small services, then the customer chooses which business services they need to run their business. You’re offering a spectrum of different services, because you understand what their marketplace looks like and what vertical they’re in.

Gardner: Now, when I speak to some enterprises and increasingly smaller businesses -- the S in the SMB -- I keep hearing the same concerns come up around data. They’re concerned about data ownership, managing iterations of data, and coordinating data between their on-premises locations, applications, data centers, what might be happening out in the cloud, and within the ecology, and then how that translates properly to the end user.

Now, Progress Software has made some acquisitions and has focused quite a bit of energy and investment on this data issue -- the real time, management, semantic issues around not just data availability, but about how things are termed, labeled, and classified, application by application, instance by instance, and even site by site. Help us understand how Progress is helping the ISVs in the SaaS environment deal with somebody’s complex data and semantic issues.

Smith: When people initially thought of integration, they thought about point to point, and it was more about at the business process level. We realized was that if you’re not addressing data-level integration semantic issues, then you’re not going to solve all of the problems that customers have.

We made an acquisition last year of a company called Pantero, and we have built a product that we’ve termed Data Xtend Semantic Integrator. It's all about looking at the semantics of the data and being able to match and manage that data from one system to another. So, it’s just another product that we’ve added to our infrastructure, and it allows customers or our ISVs to look at all different levels. We’ve got integration at a business-process level, at the enterprise service bus (ESB) level. We now have integration at the data level. We also have capabilities to govern and monitor and manage Web services.

Progress continues to add different technologies into our environment to support what’s going on in terms of all of the different integration and Web services challenges happening in the industry. Our basic focus is to continue to add software infrastructure components to support the needs of large enterprises, as well as to support the needs of business-service providers who are trying to offer these integrated business applications to their customers.

If you think about it, large enterprises can do a lot of this themselves and can buy the infrastructure to build, integrate, and manage. In a lot of ways, the SMB requires these services providers or these business services providers to be able to do all of that integration, and they expect that that integration will just be handled for them, and that’s what they’re really looking for.

So, that’s the big challenge of whether ISVs are going to become business-service providers or whether they’re going to partner with business-service providers. They almost become the manufacturer, if you will, of these small-business components that larger business-service providers will pull into their environment. So, you might see a different breed. We might move away from the traditional systems integrators and you might see more business-service providers focusing on supporting the customers. The ISVs are actually building some of the components that are used, but they aren’t necessarily going to be the service providers.

Gardner: So, it's still murky and up in the air as to how this supply chain works, who interfaces with the customer, and which type of organization does customization versus underlying OEM types of activities.

Colleen, I wonder if you could put on your analyst hat again for a minute and try to forecast how that market might shake out.

Smith: I think the SaaS market, in general, is really still in its nascency, and there are a lot of things that have yet to happen. But, the good news is this isn’t just a fad. We see a fundamental change in terms of the business model.

What I say a lot is that if we think in terms of the software industry over the last 20 years, we’ve come a long way in terms of building partnerships, and in terms of how systems integrators and service providers work with ISVs. What I see being the success of SaaS is that if we continue to enhance that model, it's going to be about hosting providers, working more closely with system integrators and ISVs. The only way that the end customer is going to win in this is if we get into a business model where there is that shared risk and shared reward, but the customer pays for only what they need to use.

It's going to come down to pricing models. It still has to come down to some building of ecosystems out there, where everybody knows their role and plays that role, but doesn’t necessarily try to do the other person’s role. There are still a lot of things happening.

I believe it’s going to be vertically focused. I don’t think this is going to be a horizontal play. We’ve seen a lot of success in vertical business expertise. There's going to be content, business applications, data, and services. If all of those can be offered in a single environment through a single service provider, the customer will end up winning.

Gardner: I suppose from the business point of view, software companies historically have been motivated to try to move towards the one-size-fits-all volume model. That’s been in their best interest. So, what we’re seeing here is the flipping of that model to, "You can do as well, or perhaps better, over time by focusing on the one-size-fits-small niche. Through reuse and efficiency in your infrastructure and tooling you can accommodate those small niches and still prosper." Is that the value proposition that you would like to stake out for Progress?

Smith: Absolutely. We’ve always worked with a lot of our partners and told them, "Figure out where your niche is, and, if you can be the best at your niche, you can be successful." We aren’t necessarily talking about creating the next SAP, but if you can be really successful within your specific niche area, then your customers are going to value your service.

In the SaaS model, there are two S's. One is the software part and the other part is the service. If you have business domain expertise, they’re going to look at you as a partner and they’re going to ask you to help to run, manage, and grow with their business. That’s the other part. If you’re focusing on SMB, you also have to help those small organizations figure out how they can scale to become large organizations. So, it’s your opportunity as well as your responsibility to make sure that you can scale with them.

Gardner: So, it’s domain expertise that becomes a differentiator that’s more valuable over time, rather than just the ability to write good software.

Smith: Yes. I often talk about it. You’re moving from develop-package-ship into develop-build-service-deploy. It’s much more about the ways in which you can deploy and service the customer, as opposed to just packaging, shipping, and saying, "Well, now it’s somebody else’s responsibility."

Gardner: I suppose it's being more of a partner with your customer, rather than just throwing software onto a disk, shipping it out, and saying good luck. Right?

Smith: Yes, because the switching costs are lower. It’s not necessarily happening in the industry today that everybody is dumping their SaaS application to go to another one, but you have to be able to service your customer. If they’re not getting the service that they require from you, they will look elsewhere.

Gardner: We’re getting towards the end of the show. I wonder if you have some examples that you could share with us, either by name or by definition, of ISVs that have focused in this vertical direction, have embraced SaaS, and are getting along okay.

Smith: I’ve got a couple of interesting examples in terms of ways in which you can think specifically about accessing the long tail, but being able to target a whole new set of users.

One of our partners is in the K-12 education area. They had a traditional business application that sold to faculty and to the student administration systems. They figured out that they could offer a business application that can now be accessed by parents over the Web. So, they re-architected their application for multiple school districts. They now allow parents to go in and track absenteeism, as well how students are doing in terms of grades, and things like that.

They've completely re-architected and re-thought the way in which they’re building and deploying business applications for K-12. That’s an interesting example of thinking about SaaS and thinking in terms of a new market, as opposed to just looking at large universities or schools that can afford a system.

They’re selling at the state level and saying, "Here is a state-wide student administration system that can now be used at all schools. Even if they don’t have a large IT staff, all they need is access via the Internet." That’s interesting in terms of the education. This is one of my small partners called Skyward, and they’re located in Wisconsin.

Another interesting area is in library management systems. They've been around for a while, and we’ve got a partner, Keystone, who has focused on a very small niche in terms of braille and applications for the visually impaired. What they’ve done is to rethink the way in which you can have access to books and to look up books available at libraries. And, it can all be done via the Web.

They’re actually coining themselves as the Netflix, if you will, of libraries, because what you can now do is use the Internet to look for availability and access to different books that might be available, not only in your town, but statewide, and have those books actually shipped to your house.

So, they've re-thought the way in which library systems are built and used, and are able to bring in access from the Internet, and, in this particular instance, can allow handicapped individuals access information right from their homes.

These are just two examples where you start to think about who the user of a system is. It’s a very traditional backend accounting and business management system, but it’s now being used and serviced to expand their market, as well as just to be able to have a service for some small end users, who, in the past, wouldn’t have had access to these types of technologies.

Gardner: So, it really provides for some creative business development by looking for these, as you say, entirely new types of customer bases.

Smith: It's looking at new markets, being able to target now at a statewide level, as opposed to a smaller individual school or individual library. So, it’s a new market opportunity, but they’ve been able to take something they’ve been doing for years with domain expertise and really expand their opportunity. What we see is that there are tremendous opportunities for ISVs out there, if they step back and think in terms of what they know, what's business domain expertise they have, and where they could provide a better level of service to consumers or customers.

Gardner: So, depending on the type of organization you are, you have the opportunity to scale up -- if that makes sense -- to scale down, perhaps to do both, and then, as we mentioned earlier vis-à-vis globalization, in a sense, scale sideways.

Smith: Exactly, we’ve had other partners who have looked at this as an opportunity. I've got a law firm software company in the UK that looked at this SaaS as an opportunity to go to both Australia and South Africa. They have expanded their territory, without having to build a lot of support in data centers and development centers in Africa or Australia.

They’re still running their main headquarters out of the UK, but they’ve been able to go into these two countries, because it just so happens that the legal systems in South Africa and Australia are similar to the one in the UK. So, the business processes were similar but they were able to expand into new geographies.

Gardner: Very interesting. Well, thanks. We’ve had a nice discussion about Software as a Service, and particularly on the business development opportunities for ISVs. We’ve been discussing this with Colleen Smith. She is a managing director of Software as a Service for Progress Software. Thank you, Colleen.

Smith: Thank you, Dana.

Gardner: This is Dana Gardner, principal analyst at Interarbor Solutions, you've been listening to BriefingsDirect. Come back and listen next time. Thank you.

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Transcript of Dana Gardner’s Podcast on SaaS with Colleen Smith of Progress Software. Copyright Interarbor Solutions, LLC, 2005-2007. All rights reserved.