Before you can attack either of these two areas, you’ve got to develop a SaaS solution that is timely because it solves a specific inefficiency within an organization and is clearly differentiated in the market. In most cases, this means creating an easy to use application that appeals to a specific persona (salesperson, marketing administrator, IT manager, etc.) and helps them perform a task or function that has historically been difficult to complete because of the complexities of their legacy software or because there wasn’t an application that addressed this particular need.

For instance, Jobs2Web provides “transformational technologies that straighten the path and break down the barriers, we’ve radically shortened the commute between your jobs and the people you want to hire.” The SaaS company’s “Recruiting Marketing Platform” automates many of the steps that were previously performed manually, increasing efficiency while reducing the costs of recruitment. (For more information, go to http://c488692.r92.cf2.rackcdn.com/CaseStudy_jobs2web_r02.pdf.)

Creating a winning SaaS app can take a lot of work and numerous iterations. It requires a keen understanding of the customer’s needs and preferences. And, it requires a rapid deployment capability and agility to out maneuver your competition. Time to market is essential in the SaaS marketplace because of escalating competition and rising expectations among customers that their “on-demand” applications will keep pace with their rapidly evolving needs. Therefore, the best SaaS companies have focused their energies and limited resources on building and promoting their solutions. These companies have also chosen to partner with leading Infrastructure-as-a-Service (IaaS) providers to satisfy their service delivery requirements.

Partnering with a leading IaaS provider makes sense for the following reasons:

Focus and Cost Mitigation

Contracting for IaaS not only makes sense because it enables the SaaS vendor to focus on developing winning apps, but also because few SaaS companies are able to predict their initial data center requirements or make the upfront investment in these costly resources. This is especially important as they try to keep their Customer Acquisition Costs (CAC) and Cost of Service (COS) down as they build their Monthly Reoccurring Revenue (MRR) and TRuC (Total Revenue under Contract).

Investor Appeal

Managing their Customer Acquisition Cost to Sales (CACS) Ratio while optimizing Monthly Revenue is also critical to appeal to investors who are essential to funding future growth. The best venture capitalists and private equity firms fund SaaS companies that not only offer compelling solutions, but also demonstrate tight financial controls and a highly scalable operations model.

Service Reliability, Security and Scalability

Of course, delivering reliable and secure services is also crucial to mitigate risks and minimize churn. Losing customers is not only costly in terms of lost opportunities for additional account penetration, but also because it could tarnish a SaaS company’s reputation in the market if word spreads about subpar service quality.

Ultimately, optimizing Customer Lifetime Value (CLV) by maximizing the upsell and cross-sales opportunities within each customer account is dependent on delivering highly reliable, secure and productive SaaS solutions. While some might debate which business apps are “mission critical,” no one wants their SaaS app to be disrupted by a service outage that could prevent them from getting their jobs done. Therefore, teaming with an IaaS provider that can ensure maximum uptime and performance is essential.

Building a robust SaaS ecosystem that can provide customers with a set of complementary SaaS solutions can also increase customer loyalty. Ensuring SaaS integration and the ease of provisioning among multiple SaaS providers is imperative. Many SaaS vendors leverage IaaS providers’ security certifications and integration partners to address these issues quickly and economically. This can reduce their costs significantly. For instance, a SAS70 certification can cost $75,000 and take months to obtain. Leveraging integration tools from companies like Informatica and Pervasive can also accelerate the deployment process and increase the likelihood of success.

Monitoring, Measurement and Management

Finally, you can’t manage what you can’t measure. The best SaaS companies measure everything. They track every user keystroke to better understand how users utilize their solutions. And, they monitor all the systems that impact application performance to optimize their responsiveness while minimizing their operational costs.

The best SaaS companies depend on in-depth analytics to run their business as well as maximizing their service delivery capabilities. They track the effectiveness of their marketing campaigns, sales productivity and customer service satisfaction. They rely on integrated reporting systems within their marketing automation, customer relationship management (CRM) and IT service management (ITSM) systems. They also leverage the management portal of their IaaS provider to gain real-time visibility into their service delivery availability and performance levels.

SaaS companies that can gain a command over these KPIs are in the best position to succeed in an increasingly competitive marketplace.

A case in point is the way many have debated the tradeoffs of moving to the cloud.

Although today’s leading cloud solutions fundamentally change the way computing power and software functionality are delivered, procured and utilized, they don’t have to adversely affect the way organizations operate. While moving to the cloud can radically change the economics and elasticity of your IT operations, migrating to cloud alternatives doesn’t have to require revolutionary actions. Instead, it can and should be done in a methodical and incremental fashion.

Unlike the all-or-nothing outsourcing decisions of the past, THINKstrategies believes today’s cloud services represent a new generation of more flexible ‘out-tasking’ alternatives. In the past, if IT and business decision-makers chose to outsource all or part of their IT operations they had to make a long-term commitment and sign a complicated contract filled with byzantine bylaws regarding the policies and procedures for initiating change-orders to respond to changing market forces and customer needs.

Traditional IT outsourcing (ITO) agreements have generally been five to 10 years in length because the outsourcer needed at least three to five years to earn a return. Because of the duration of the contract and difficulty associated with making changes, the outsourcer isn’t incented to respond quickly to customer requests. And, anticipating a customer’s needs over a five- to 10-year period is impossible. So, it is inevitable that the outsourcing arrangement must be modified continuously to keep pace with changing market dynamics and customer requirements.

Given these structural weaknesses, it is easy to understand why traditional outsourcing arrangements have lost their appeal. In fact, Gartner recently predicted data center outsourcing (DCO) growth will decline in 2012. According to Bryan Britz, research director at Gartner, “The data center outsourcing market is at a major tipping point, where various data center processing systems will gradually be replaced by new delivery models through 2016.”

THINKstrategies has seen this trend evolving over the past decade as the number, size and renewal rates of traditional ITO agreements have declined steadily during this period. At the same time, the success rates in the Software-as-a-Service (SaaS) market have skyrocketed.

The pay-as-you-go nature of SaaS drives vendors to work to achieve better than 90 percent renewal rates in order to survive and motivates them to gain greater account penetration in order to succeed. This means customer satisfaction is essential and encouraging continuous incremental adoption is critical.

The success of the SaaS market has created a powerful alternative to legacy software applications and opened the door for a wider array of cloud services, including Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS) built on the same business models.

Smart IT and business decision-makers are recognizing the advantages of moving to these cloud services at an escalating rate. As a result, all the major research firms are predicting over 20 percent growth for SaaS over the next three to five years, while installed base of traditional on-premise applications are expected to shrink.

In the same way SaaS is packaged and priced to appeal to the varying needs of particular organizations in a low-risk, rapid return fashion, IaaS providers have pioneered a number of new ways for SaaS vendors and ISVs to acquire and utilize IaaS alternatives incrementally. They can try free or low-cost services on a trial basis for ‘test/dev’ projects for instance before committing to more sophisticated cloud services for more important production purposes.

ISVs and SaaS vendors can take advantage of IaaS offerings that range from ‘spot’ market services to enterprise-class managed services. They can tap public and private services with varying levels of storage capacity, security capabilities and management functionality.

Bottom line: Moving to the cloud doesn’t have to be an either/or proposition. But, there is no question that employing cloud services into your overall sourcing strategies is essential to your short-term competitiveness and long-term success given its unprecedented power, agility and cost-effectiveness.

There are various architectural approaches to supporting SaaS development and delivery vying for vendor business. These range from proprietary vendor-centric platforms to open source oriented environments.

The tradeoffs are both clear and subtle. In the case of the vendor-centric platforms, a SaaS company must make a big bet on not only the vendor’s technical capabilities, but also its long-term strategic direction. The most obvious risk associated with moving in this direction is vendor lock-in. Depending on the nature of the vendor’s platform; the SaaS company may be at the mercy of the vendor’s every technical and strategic move. And, if the SaaS company becomes unhappy with the technological or strategic direction of the vendor, it may have to make a significant investment in re-architecting its SaaS solution in order to migrate it to another IaaS provider.

I’ve always believed that the SaaS and cloud industries owe a lot to the open source movement. In fact, I published a commentary almost exactly two years for Ecommerce Times identifying three key forms of innovation of the SaaS/cloud operating model which can be directly attributed to open source principles and byproducts:

1. technological innovation
2. business model innovation
3. community-building innovation

Technologically, the open source movement has perfected the use of crowd-sourcing to generate continuous innovations which enhance and advance the functional capabilities of software and systems on an ongoing basis. Because every user has a stake in the quality of the solution being high in order to support their technical requirements, open source solutions have gained widespread acceptance and growing adoption. Linux-based technologies in particular have become mainstream.

The open source business model has also become widely recognized with free, shared versions of open source solutions that are readily available often being trumped by commercial versions which promise even more features and more formal support services. It is the support services which are of greatest appeal to most business users that want to ensure the availability and performance of the solution.

And, the open source community not only generates continuous technological innovation but also produces important industry best practices and benchmarks for success.

These same principles are now taking hold in the cloud and fueling the rapid growth of the OpenStack architecture. The goal of OpenStack is to:

“produce the ubiquitous open source cloud computing platform that will meet the needs of public and private cloud providers, regardless of size, by being simple to implement and massively scalable.”

Practically speaking, OpenStack is a cloud operating system designed to help users manage large pools of compute, storage and networking resources throughout a datacenter, using a single dashboard so administrators can better control their cloud operations and provision resources through a web interface. Putting these ideas into historical perspective, THINKstrategies believes OpenStack is becoming the “Linux of the Cloud” – an open source platform capable of gaining widespread acceptance in the commercial/enterprise environment.

In the same way that Linux became a clear alternative to proprietary operating systems, THINKstrategies believes OpenStack will succeed in becoming a solid option for powering leading edge cloud services and corporate datacenter environments.

In fact, over 150 companies are already supporting OpenStack by providing technical input, contributing code and incorporating it into their operations and offerings. These companies span cloud service providers, software and system vendors, enterprise customers and academic institutions, including NASA, which co-founded OpenStack. In fact, eBay recently announced it is using the OpenStack open source environment to run some of its research and development (R&D) operations.  Click here to see the full membership list.

IT management solution vendor Zenoss conducted a survey in 2011 regarding OpenStack adoption that was completed by over 750 IT professionals who attended that year’s OpenStack Conference and are members of the Zenoss open source management community. Here are some the highlights from the survey findings:

• 73 percent of participants were considering an OpenStack deployment.
• The biggest drivers for considering OpenStack were cost (47 percent) and avoiding vendor lock-in (46 percent).
• The adoption curve for OpenStack is steep with 40 percent of organizations planning to be operational within one year.

Although the major research firms haven’t published their own market size and forecast numbers, the continuous stream of companies endorsing OpenStack and offering solutions built around this architectural framework is a clear indication that a broad cross-section of companies are finding real value in aligning with this open source approach to deploying cloud services.

In addition to the functional benefits that OpenStack delivers, one of the most important strategic considerations is the ability to move your cloud-based applications across service providers or between various cloud environments. This prevents organizations from being locked into a single cloud service provider or specific cloud environment. This flexibility and freedom is essential for organizations that want to capitalize on various alternatives as their cloud computing and business requirements evolve.

It is for these reasons that THINKstrategies believes organizations of all sizes will be well-served to seriously consider and adopt OpenStack and an open cloud as a part of their overall cloud migration strategy.

So, here are the top eight things you should consider when evaluating your cloud alternatives:

1. Public, Private and Managed Cloud Services

The first consideration is what level of Infrastructure-as-a-Service (IaaS) is necessary to support your SaaS app. For some applications, which don’t demand stringent security safeguards, basic public cloud services might suffice. For others that involve storing sensitive data, more secure private cloud services might be a better fit. Flexibility is an important consideration as most SaaS apps are not written with a cloud infrastructure architecture in mind. Therefore, SaaS vendors should be able to host their offerings on whichever type of IaaS option best fits their business needs. And, SaaS vendors needing extra help monitoring and managing their IaaS operations should consider managed cloud services.

2. IaaS Architecture

Underlying the three primary cloud service alternatives is service delivery architecture which supports the IaaS. This architecture must be highly elastic, scalable and resilient to enable the service provider to support a widening array of SaaS apps in a cost-effective fashion, and to pass these economies along to the SaaS vendors. The IaaS architecture should leverage the latest innovations in virtualization, multi-tenancy, load-balancing, etc.; permit self-provisioning of the public cloud services; and enable rapid deployment of the private and managed cloud services.

3. Manageability

The cloud service provider should utilize a management platform to monitor its operations and optimize its performance, which gives the SaaS vendor equal visibility into the availability, security and cost of its service delivery systems. This management dashboard should report issues and provide real-time status reports to ensure the cloud service provider is meeting its SLA obligations and to demonstrate its service transparency. This same reporting system should also be extensible to enable the SaaS vendor to report its performance to its customers as well.

4. Security & Certification

The biggest fear and objection to SaaS solutions is security among corporate decision-makers, both on the business and IT sides of the organization. Their security fears generally fall into three areas:

• Is my data safe from hackers?
• Is my data partitioned from other SaaS customers?
• Can I get my data back if my cloud service provider has a problem or I decide to change providers?

The cloud provider should have the latest security protection systems in place and an automated method to continuously update its anti-virus and other security software applications. It should also have state-of-the-industry encryption, single sign-on (SSO), authentication, monitoring, alarm/alert and reporting systems. These software security systems should be augmented with appropriate physical security measures which ensure that the cloud service provider’s facilities are also properly protected. The cloud provider must also have trained staff to administer these security systems, and formal policies in place to govern how they operate.

The most important way to prove that the cloud service provider possesses the right security systems, skills, policies and procedures is through testing and documentation which are verified by a series of industry recognized certifications. These certifications start with SAS 70 which affirms that the cloud service provider has the appropriate policies and procedures in place to provide reliable security on a continuous basis. PCI certification is essential to safeguard credit card transactions. And, HIPAA is an example of an industry-specific certification which is critical in the healthcare environment.

5. Disaster Recovery, Back-up and Recovery

Regardless of the IaaS architecture and the number of certifications in place, every cloud service provider can potentially experience a disruption to their operations that can adversely impact the SaaS vendors that rely on their services. Sometimes these disruptions are caused by natural disasters or other outside causes not in the vendor’s control. In either case, it is essential that the cloud service provider has sufficient disaster recovery, back-up and recovery systems in place, and has properly instructed and encouraged SaaS vendors to take advantage of these safeguards. Once again, successfully activating these systems requires more than software automation. It also relies on skilled and experienced staff to quickly deploy and implement the disaster recovery, back-up and recovery systems.

6. Technical Skills and Support Services

While many cloud service providers can boast about their technical architectures and service delivery technologies, few can demonstrate that they have the necessary support systems and qualified staff to guide SaaS vendors through the migration process, work with them on a daily basis to ensure that their specific IaaS requirements are being met and quickly respond to and resolve issues as they arise. In fact, THINKstrategies firmly believes that IaaS architecture and service delivery systems are becoming commoditized and it is the quality of a cloud service provider’s tech support that is the key differentiator that sets one provider apart from another.

7. SaaS Ecosystem

THINKstrategies also believes that the best cloud service providers are creating partner ecosystems which encourages them to share innovations and best practices. This type of ecosystem can accelerate their software development processes, strengthen their service delivery capabilities and strengthen their position in the market. The best type of partner ecosystem is that which is built around open rather than proprietary architectures and operating models.

8. Sales and Channels to Market

And, one of the most important benefits that a cloud service provider can offer SaaS vendors is a vibrant channel to market for their solutions. Most cloud service providers serve three constituents: small and mid-size businesses (SMBs), enterprise organizations and SaaS vendors. Smart cloud service providers are creating online marketplaces which enable their SaaS vendors to sell their solutions to the cloud service providers’ SMB and enterprise customers.

The key trends fueling the growth of SaaS alternatives to traditional on-premise, perpetual license-based applications are,

• Continuing economic uncertainty
• Growing global and web-based competition
• Changing workplace and mobile requirements
• Escalating technology requirements

These trends are driving businesses of all sizes to reconsider how they acquire, deploy and utilize software applications to more cost-effectively achieve their corporate objectives.

As a result of these forces, THINKstrategies has seen a steady increase in interest and adoption of SaaS alternatives among businesses of all sizes and across nearly every industry. Our view is verified by the market size estimates and growth projections of all the major market research firms. For instance, Gartner expects global spending on SaaS to rise 17.9 percent this year and equal $14.5 billion by the end of the year and jump to $22.1 billion in 2015.

As in any fast-growth market, an industry shakeout is inevitable. Even the breadth of the SaaS market is unlikely to sustain the rapidly growing population of companies seeking to win a share of the projected revenue opportunities.

For competitive reasons alone, it is imperative that SaaS vendors focus their energies on creating and promoting highly differentiated solutions and offload their ‘non-core’ operational requirements to best-of-breed third-parties.

However, the growing acceptance of SaaS by IT, CIOs and the CXO suite has also raised the bar for SaaS vendors who now have to step up to higher security, availability and performance expectations in order to remain competitive.

In order to deliver SaaS solutions that meet these rising expectations, SaaS companies must have both the right service delivery infrastructure and operational skills to cost-effectively utilize these resources.

This means SaaS vendors must demonstrate that they can deliver highly reliable and secure solutions. This means they must be able to select, deploy and continuously adjust myriad server, storage, networking, load balancing, security and management systems to host and secure their applications. They must also have the necessary staff to continuously monitor these systems. That staff must be experienced in identifying potential problems before they occur or quickly respond to issues if they arise to ensure optimal availability and performance.

In many cases, SaaS companies must provide prospective customers with various certifications, such as SAS 70, and policy documents to verify their compliance capabilities. Attaining and maintaining these certifications can be an expensive and time-consuming effort, which can distract operational staff and executives from their primary responsibilities. Few SaaS companies can afford to dedicate their limited personnel to these tasks in today’s highly competitive and demanding marketplace.

The SaaS vendor is now responsible for ensuring the availability, reliability, security and scalability of the software solution. This also places a greater support burden on the SaaS vendor because it not only has to answer questions about its applications, but it must also respond when availability and performance issues arise.  If it fails to meet its service level agreement (SLA) objectives, it is at risk of paying a penalty, and could easily lose customers and harm its reputation in the marketplace.

SaaS companies should focus on creating clearly differentiated solutions and let others worry about delivering their solutions in an economical and reliable fashion because the SaaS model changes many of the rules of the game.

The pay-as-you-go subscription pricing model not only places additional pressure on SaaS vendors to continuously improve the quality of their services, it gives SaaS vendors less capital to finance the development and delivery of their solutions. Therefore, it is essential for SaaS vendors to stay focused on their core competency of software development and marketing their solutions.

It is for these reasons smart SaaS vendors are turning to leading Infrastructure-as-a-Service (IaaS) providers to satisfy their service delivery needs.

Partnering with a proven IaaS provider enables the SaaS vendor to obtain the expertise and experience necessary to properly configure their service delivery infrastructure to meet their customers’ expectations.

The IaaS provider can more easily and quickly deploy the correct infrastructure technologies at a more economic cost.

The SaaS vendor can also leverage the IaaS provider’s security and compliance certifications, rather than expending the resources and expense to obtain their own certifications.

And an IaaS provider can better monitor and manage these resources to ensure optimal availability and performance in a scalable and cost-effective fashion. This is particularly important in an industry that is experiencing exponential growth and accelerating technological innovation. Picking an IaaS partner that offers the right combination of leading edge technology and strong technical skills, plus superior support to quickly respond to client questions and concerns, is critical to meet rising customer expectations, keep pace with today’s technological advancements and overcome growing competition.