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Demand for this improved information flow had major players like SAP, Siebel and Oracle supplying a market with enterprise applications – which would need huge amounts of manpower and resources to be customized to suit the needs of a particular business. Applications grew to become suites of applications, with vendors aiming to provide a one-stop shop for every need. The original premise was that implementation of these application suites would typically occur over the course of years and run into the millions of dollars.

Then the cloud came along and changed everything. Now, the competitive advantage belongs to companies that find newer efficiencies through tightly integrated SaaS applications– and in the process uncover new opportunities. It’s this idea that inspired me to found MuleSoft, which is now the most widely used integration platform for connecting SaaS and enterprise applications in the cloud and on-premise.

SaaS disintegrated the application suite

Software as a Service (SaaS) has quickly blossomed and become the fastest-growing software market ever. Forrester estimates that by 2020 the SaaS market will hit $125 billion in global revenue, with 2012 projected to hit $20 billion. The appeal of SaaS is clear: With its attractive economics and frictionless deployment, its impact on the way enterprises now operate is immeasurable.

SaaS completely disrupts acquisition and maintenance models for enterprise applications. It offers fast implementation with little to no need for customization. SaaS applications are managed to a Service Level Agreement (SLA) by the vendor, which removes the costs of maintaining hardware and software in a data center, as well as the cyclical upgrade burden. Furthermore, SaaS applications tend to be more robust, since thousands of customers battle-test the platform every day.

SaaS offerings tend to be targeted at specific business problems. This disintegrates the traditional enterprise stack and means customers are no longer purchasing entire application suites. Instead, enterprise customers are able to pick and choose and then subscribe to best-of-breed point solutions for CRM, ERP, marketing automation, talent management, expense management and many more. Each of these point offerings look pretty much the same for every customer.

Traditionally, integration has been the pain point for getting siloed applications to work together. With SaaS, this pain can be amplified since there are potentially many more applications to integrate. Say a company needs its Salesforce CRM talking to its Workday ERP, and the SuccessFactors Talent Management system integrated with payroll and ERP, as well as Marketing automation and eCommerce applications talking to its CRM. Things get complex fast, and the number of integration points multiplies the more applications you need to connect.

APIs and the integration challenge

The advent of APIs for SaaS has revolutionized the way organizations can connect applications together and create new business models. With SaaS, you can pick and choose individual SaaS applications to run your business, connecting them together through their APIs. But even with APIs, each application is still different, which creates a challenge in finding a bridge to get the applications working together. (So, for instance, while SalesForce CRM and Workday ERP both have an API, they don’t know how to talk to each other.) Typically, integration needs to synchronize information between two or more applications, providing data transformation, security, reliability, visibility and error handling. Ideally this all happens in real-time so that your applications don’t get out of sync and users are always working with the most up-to-date information.

To further complicate matters, most organizations will have on-premise applications but want to adopt SaaS where it makes sense. To realize the benefits of SaaS without disrupting IT infrastructure calls for a new type of integration approach: one that enables connectivity on-premise, or cloud for SaaS and traditional on-premise applications.

Getting ahead of the competition

SaaS levels the playing field, theoretically giving all companies access to the same applications and tools. The atomization of enterprise applications means that companies can pick and choose the best applications for their needs rather than settling for ‘good enough’ application suites as before. Thus the enterprises that figure out how to make SaaS part of their application landscape will be best able to compete. The rest will be outpaced by the newcomers that understand how to integrate SaaS applications to build new business models, grabbing competitive advantage.

For this to be possible companies need an integration platform that provides connectivity for all their applications whether it be SaaS applications such as Salesforce.com, NetSuite, or Workday; or on-premise such as SAP, Microsoft and Oracle. But its not just about connectivity, its about reliability and agility.  The connections between your applications need to be working silently in the background. You need analytical visibility to the information running through your applications to help tune your business and discover new insights. And you need to be able to respond quickly to changes in your business model, processes and applications.

In short, your company’s competitive advantage is no longer in the applications you use, it’s in the platform you choose to connect them with.

Ross Mason is the founder and CTO of MuleSoft.

Photo courtesy of Shutterstock/Andrea Michele Piacquadio.

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SugarCRM CEO Larry Augustin said the company’s goal  is to be a public company and “there’s a chance we can get there in 2013,” according to Bloomberg.com.

Despite signs that enterprise SaaS is the place to be — Workday’ share blew past expectations on its October 12 launch — Augustin signaled the need to proceed with caution.  He’s been burnt before. 

As Bloomberg pointed out, Augustin was CEO of VA Linux, another open-source oriented company, which went public  in 1999, and quickly saw its  market cap spike at $15 billion based on sales of $12 million to $15 million, and then crater in the dot.com bust. The company unwound over the years becoming SourceForge, then GeekNet. What was left was acquired in September by Dice Holdings.

As Augustin told Bloomberg West TV: “There are lots of lessons from that. You saw that valuation come down very quickly.”

SugarCRM claims customers including Coca Cola Enterprise and ThyssenKrupp System Engineering, the State of Oregon and Men’s Wearhouse (which Salesforce.com also claims as a customer).

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Workday provides human resources Software as a Service (SaaS) and is the brainchild of PeopleSoft founder Dave Duffield and Aneel Bhusri, another respected former PeopleSoft executive.  The two decided to take what PeopleSoft did best — tasks like handling employee records, reviews, payroll etc. — and move the whole kit-and-kaboodle to Software as a Service a la Salesforce.com. The company launched in 2005 about a year after Oracle completed its highly contentious battle to acquire PeopleSoft.

By most accounts Workday has done very well winning customers like Brown University, Guardian Life, and Morgan Stanley. And it replaced Oracle and SAP applications in accounts like Flextronics International, Kimberly-Clark, Sun Life Financial Inc. and Lenovo, according to Bloomberg Businessweek. Unlike old-line enterprise software rivals like Oracle and SAP, Workday does not have to worry about its SaaS offerings cannibalizing the sales of pricey on-premises software.

All of that customer traction has been reflected in the company’s valuation. Documents filed with the SEC on October 1, pegged the company’s valuation at $3.6 billion, but when the company re-set the expected opening day share price, raising it from the $22-to-$24 per share range to $28 per share, that valuation soared to $4.5 billion.

Stock chart courtesy of Bloomberg.com

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VCs and startups alike have been in the hunt for operational smarts in the enterprise arena of late. That demand likely will keep growing as the big data wave builds. Splunk went public with much ballyhoo a few weeks ago; Greylock portfolio companies Palo Alto Networks and Service-Now are expected to follow in the near future. Sumo Logic, another Greylock-funded company, emerged from stealth mode in January and will take on Splunk in the big data analysis arena. Other Greylock enterprise-oriented companies include SaaS startup Workday, founded by former PeopleSoft CEO Dave Duffield and Hadoop fan favorite Cloudera.

Ittycheria co-founded BladeLogic — a provider of server-and-storage configuration and management tools – in 2001. He led it as CEO and president and sold it to BMC seven years later for $900 million. He stayed on to lead BMC’s $1.4 billion enterprise service management business. He is also a board member for AthenaHealth and AppDynamics, a Greylock-backed company. Before BladeLogic, he co-founded Applica, an early cloud computing company.

Ittycheria will work out of Greylock’s Menlo Park, Calif., office and focus on enterprise-focused cloud-based services and IT infrastructure. Greylock partner Asheem Chandna said Ittycheria’s expertise will be invaluable to the company. In a blog post, Chandna wrote:

“Having founded two companies, Dev understands that building great technology is not enough, and that equal effort needs to go into the design, construction and management of the company’s distribution channel.”

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To hear IBM and Microsoft tell it, their respective cloud strategies are coming up rosy. But given the lack of real numbers, it’s hard to tell if that’s the case. These two incumbent tech giants, which both hosted earnings calls last week, are under the microscope as they navigate the transition from client-server computing to the cloud services model pioneered by younger competitors like Amazon and Google.

IBM first. Last week, speaking on IBM’s fourth quarter and 2011 fiscal year earnings call, CFO Mark Loughridge  said the company tripled its cloud revenue year over year. That’s impressive as far as it goes — which isn’t very far. What IBM means by “cloud” remains murky, and no actual dollar amount was attached to this claim. (A transcript of the call is here.)

An IBM spokesman said the cloud number counts revenue related to the work it does building private clouds for customers, including software and hardware; delivering public cloud services (Smart Cloud Enterprise); and industry-specific cloud services (Smarter Commerce). Beyond that, the company doesn’t break cloud revenue out.

Here’s what IBM has said about cloud: Last March, IBM’s then-CEO Sam Palmisano said the company expects to log $7 billion in Software-as-a-Service (SaaS) related revenue by 2015.  Then in November, IBM Software SVP Steve Mills told InformationWeek that his unit was making “hundreds of millions of dollars” in SaaS revenue. (Such SaaS revenue is one indicator of a company’s cloud business.) As InformationWeek’s John Foley pointed out, while that figure was fuzzy, at least it was something. He wrote:

Until now, IBM hasn’t shared any numbers on its cloud computing revenues, other than to provide a forecast of where it hopes to arrive: $7 billion by 2015. Where that number stands right now has been anyone’s guess.

IBM has come up with internal metrics to count “cloud computing” sales from all the various hardware, software and services units, Mills said. But it has not shared those metrics with anyone outside Armonk. On its call last week, IBM added no more clarity around its cloud revenue figures or where cloud revenue actually comes from.

Microsoft cloud metrics also fuzzy

Microsoft executives offered vaguely encouraging comments on the state of its cloud business on the company’s second quarter earnings call on Thursday.

Office 365, Microsoft’s hosted Office and SharePoint offering, is leading the charge. On the call, CFO Peter Klein cited more than 100,000 Microsoft online services customers as an example of Microsoft’s cloud traction, but since Microsoft said there were 100,000 customers when Office 365 launched last June, this does not seem such a big deal. If there has been big momentum there in the past six months, this would have been a good time to say so. (A transcript of the call can be found here.)

Klein also touted double-digit revenue growth in the company’s business applications group, but that’s a big bucket. It includes on-premises Office and  SharePoint as well as their SaaS counterparts, so it’s unclear how much of that growth can be attributed to cloud. Similarly, Azure is lumped into Microsoft’s overall server and tools group, which saw an overall 11 percent growth year-over-year but which also includes the company’s bustling SQL Server, Systems Center, and Windows Server businesses.

To be sure, Microsoft remains in investment mode with Azure; very few of Microsoft’s own products run on Azure as of yet, but the goal is for them all to be hosted on the Azure platform at some point in the future. The question is when.

To be fair to these incumbents, not every customer wants to put all its work in the cloud, so vendors like Microsoft that offer a deployment choice have a leg up there. But it’s clear that cloud deployment is the fast-moving train.

Cloud or smoke-and-mirrors?

IBM and Microsoft are hardly alone in this tough transition. SAP and Oracle, the top-two powers in enterprise software, are similarly focused on moving to cloud without dinging their existing on-premises software businesses. They’re doing this both through acquisition — SAP recently bought SuccessFactors and Oracle most recently bought RightNow —  and internal development.

Just how well IBM, Microsoft and other legacy tech giants do transitioning from an on-premises software business to a cloud model or balancing the two — will not only determine how they fare against cloud companies like Salesforce.com, NetSuite, Workday, and Google, but how well they’ll do in general as more technology purchases shift to an on-demand model.

Photo courtesy of Flickr user peggyhr

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SAP is the leader in enterprise resource planning (ERP): the software brains behind most companies’ inventory and accounting systems. But in the tough transition from client-server to cloud computing, SAP lost its way. It launched a subscription-based Business ByDesign ERP offering in 2007, boldly predicting it would attract 10,000 customers and contribute €1 billion in revenue by 2010. It came in just a little bit short — only 100 companies signed up.

Since then, SAP re-launched Business ByDesign and set a target of 1,000 customers for this year. Last fall, it said it was on its way to that goal.  Last month, it ponied up $3.4 billion to buy SuccessFactors, which offers SaaS-based human resources capabilities. That purchase came just weeks after SAP co-CEOs Jim Hagemann Snabe and Bill McDermott (pictured) pledged to push SAP into new markets – by acquisition if need be.

SAP’s preliminary numbers were pretty flashy, especially coming after Oracle announced disappointing earnings. For its fourth quarter ending Dec. 31, SAP software revenue rose 16 percent to €1.74 billion ($2.2 billion USD) compared to €1.51 billion for the year-ago period. Its full-year software revenue was up 22 percent to €3.97 billion from €3.27 billion for the 2010 fiscal year.

But, cloud-related revenue makes up a tiny portion of those earnings, by all accounts. Subscription revenue — one measure of cloudy SaaS implementations — accounts for about €120 million out of  the company’s overall revenue of €14.2 billion, according to Ray Wang, principal analyst of Constellation Research. But he and others expect that mix to change.

There were some positive signs outside of SAP’s legacy ERP business.  SAP’s HANA in-memory database and analytics appliance, available since July, outperformed expectations. The company expected €100 million from HANA this year, but the actual number will be about €160 million. The company also said the €100 million it reaped from mobile solutions came in over target. Those mobile solutions derive from SAP’s $5.8 billion buyout of Sybase two years ago.

In its cloud efforts, SAP is obviously focused on Oracle, its chief rival for enterprise software dollars, but Oracle is only one piece of the competitive puzzle. Perhaps a bigger issue are the new-age cloud companies that are also attacking enterprise applications, like NetSuite which offers cloud-based ERP applications. And Workday, the brainchild of PeopleSoft founder David Duffield, which offers a range of SaaS-based human resources capabilities. These companies, unlike SAP, don’t have to worry about cannibalizing an on-premises software business.

Workday, which is reportedly eyeing an IPO, isn’t some small-but-feisty startup. In October, it snagged $85 million in new VC funding, bringing total capital raised to an impressive $250 million, according to All Things D.

In other words, while the latest numbers look rosy for SAP, the company still has to navigate this tricky mix of on-premises and cloud-based services and outmaneuver both legacy and new-look competitors before it can put its cloud mis-steps behind it.

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And it follows that the programs employees prefer incorporate the social and collaborative aspects that define the apps they use in their personal lives, according to an on-stage conversation between Flextronics CIO David Smoley and Workday Co-CEO Aneel Bhusri at the GigaOM Net:Work Conference held in San Francisco Thursday.

For business leaders, this new environment requires a willingness to improvise and being very open to change. “You have to be willing to continuously grab things if they’re interesting, try them, and throw them out if they don’t work,” Smoley said. “In a way, you have to be a ‘yes’ guy, you can’t tell people no.”

This flexible attitude is needed to get the most out of today’s workforce, which is comprised of people who are used to having control over the technology they use. “We’re much more intently aware at the highest level that every employee is first a consumer,” Bhusri said. “There’s this massive revolution happening in consumer Internet, social media, that is training people to use systems in a certain way. So when they get to work they also expect their systems to work in a certain way.”

The à la carte nature of collaborative software is not all rosy, though. There are often generational gaps that come to play, as well as integration pains. “Tools are very individually specific and team specific. One customer may want to use Cisco WebEx, while the next customer may say they want to use Skype. Often even within companies you’re constantly pinging between different tools,” Smoley said. “The hope for a guy like me is that all this will actually converge, and that unified communications will be unified some day.”

But the panel’s moderator Stowe Boyd, who monitors these trends as an independent analyst and as an analyst for GigaOM Pro, did not think that day would come any time soon. “I think continued chaos is more likely.” At least we will all continue to live in interesting times, both at home and at work.

Photo by Pinar Ozger.

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