Investing in SaaS – Fidelity Investments

Fidelity Investments put out an interesting macro analysis on  Software-as-a-Service (SaaS) as an Investment Themes for clients.  I reproduced the article here with additional commentary.

Key Takeaways

• As virtualization and other technology developments break the link between applications and the hardware on which they run, software can be offered as a service rather than a product.
• The shift from servers to services can provide tremendous cost savings in application development and maintenance to a variety of businesses.
• Properly executed… SaaS users will benefit initially from lower start-up costs, and developers of popular applications can generate significant subscriber revenue on an ongoing basis.
• However, figuring out which applications to bring into the cloud and which to retain in the traditional data center can be a daunting task for any IT organization.

Investment Theme – Software as a Service

Accessing software as a service (SaaS) is a direct result of cloud computing.

Under the traditional model, even a small- or medium-sized enterprise (SME) would incur significant start-up costs of software application licensing and installation, as well as ongoing expenses for maintenance, renewals, upgrades, and professional services such as IT consultants. Similarly, consumers had to purchase and support software on their own computers.

Investing in Cloud Computing – Fidelity Investments

Fidelity Investments put out an interesting macro analysis on Cloud Computing  as an Investment Themes for clients.

Driving the interest in Cloud is executive dissatistfaction with IT in most corporations. Typical reasons:   IT assets are underutilized? IT costs are too high? IT is too slow and not current (e.g., tablets, etc.)?  Not getting the bang from IT projects or investments?

Basically,  the Cloud is a shift from “buy-and-own” to “pay-as-you-go.”  This (IT-as-a-service) has broad implications for activities such as procurement and staffing— and it could lead to a new role for the IT department.

Key Takeways — The Cloud’s “Snowball Effect”

Massive new wave of IT infrastructure upgrade is underway.  Check out this causal chain.

• Maturation of Virtualization Technology driven by VMware has happened (2007 – present)
• Server Virtualization enables Compute Clouds
• Compute Clouds create demand for Storage Clouds
• Storage + Compute Clouds create Cloud Infrastructure
• Desktop virtualization creates demand for Network upgrades
• Cloud Infrastructure enables Cloud Platforms & Applications
• Multiple Cloud types lead to Cloud Aggregators
• Niche requirements enable Cloud Extenders

Investment Theme – Cloud Computing

Every decade or so, there is a major architectural shift in technology where a dominant ecosystem emerges and results in massive wealth creation. Cloud computing—using data centers pooling compute, storage, and network resources to manage data and run software—represents such a shift today.

Cloud Services Brokers – New Wave in Systems Integration

Multi-tenant, subscription based Software-as-a-Service is entering a new phase.  SAP announced in December 2011 that it’s acquiring Success Factors for $3.4 billion. The acquisition of Success Factors is aimed at making SAP AG  a leader in “cloud computing”.  Seems like a catchup play. The good news is that this acquisition legitimizes the Cloud and makes it mainstream.

Every customer’s reality is that they are going to have multiple datacenters.  Inside the private cloud, inside the public cloud, they will use different service providers, and we’re going to live in this world of hybrid IT for all time to come.  And you really need a distributed computing fabric that brings things together on behalf of enterprise IT as well as the developers writing native cloud applications.  And these commonalities of identity, virtualization, management, and application development is what makes the next generation systems integration challenge very unique.

As SaaS, IaaS and PaaS becomes mainstream, we are seeing a new demand for Systems Integration capability.  According to Forrester Research: “…developers are bypassing IT and putting applications onto public clouds at a rate five times greater than IT thinks.” 

Companies need to hook up [users, systems, databases, applications, and web services] with more than a dozen different cloud services providers.  Instead of doing a point to point integration they are looking to hook into a Cloud Service Brokers, who would serve as intermediaries, offering such services as customization, integration, security, and aggregation.

The figure below shows a simplistic view of the service broker model.

A new category of players is emerging in the Systems Integration market: Cloud Service Brokers (CSB). Because CSB is not a technology, it is necessary to understand describe the business model, providers, functions and enablers.

Private Cloud vs.Public Cloud Adoption Curves

Value Migration from old to new models is happening….Tech research firms (Gartner, IDC, Forrester etc.) are forecasting that the market for cloud services will expand at a dizzying pace over the next several years.

The driver is the need for responsiveness and innovation. Corporations struggle with the fact that it takes months to deploy applications and infrastructure, and too long for IT to respond to change requests. At the same time the rapid consumerization of IT trend is put even more pressure on IT groups.

So, whether you believe in the cloud trend or not, it’s penetrating faster than you think.   Many lines of business are procuring cloud services on their own. The issue for companies and IT leadership: do you want to fight the trend or embrace the trend.

Right now most CIOs are not treating the cloud as a priority.  Given the backlog of upgrades, Cloud is not a primary focus of IT departments, but another nice-to-have tool in IT’s bag of tricks.  I anticipate that over the next 2-3 years, cloud computing will increasingly become a greater part of the portfolio of compute models that IT departments manage, sitting alongside traditional stand-alone computing and virtualization.

Picking a Cloud Vendor: Questions to Ask in Due Diligence

Multi-tenant, subscription-based cloud computing  is entering a new phase.

“Buy” instead of “build” will be a common strategy as companies race to become relevant in the Cloud.

As cloud momentum builds, every large, medium and small public and private corporation is looking for a IaaS, PaaS or SaaS vendor.

So what questions should you ask in your RFI, RFP or research process before selecting a vendor? What specific areas should be analyzed when choosing to move your data to the cloud?

The following are some questions to ask a potential provider and other considerations. Note that some of the information should be checked in due diligence or carefully reviewed in the service-level agreements (SLAs) or contracts.

Cloud Engineering and Management Brokers

The days when corporations assembled their IT resources by buying servers, installed their own software to run on them, and managed them, are essentially over.  Instead, corporate IT will for the most part be a collection of services running in the cloud.

IDC believes that in an Outsourcing 3.0 scenario, the sourcing of business and IT services from multiple external suppliers will result in a major challenge for the enterprise CIO. They will become a service broker and aggregator, involved in sourcing, integrating and managing the services — on behalf of their business units. With cloudsourcing, the cloud will metamorphose into a universal service catalog of individual cloud services.

What’s missing as yet from that is something to manage and keep track of all those disparate services.  Making cloud easy — is where the new breed of Cloud Engineering and Management Brokers come in.

In this blog, I highlight a few promising companies that are carving out a niche for themselves in the arena of cloud engineering and management.