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IBM:  Another Big ISV Tries Their Hand at SaaS

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Last week, IBM announced their move to offer high volume cloud based email services. The offer, called LotusLive, is intended to counter the move to a new set of online offers like Google Apps, and our own Rackspace Email service. IBM is the latest in a long line of traditional enterprise software companies feeling the impacts of new SaaS models. And, like many of those companies, they intend to compete.

They need to. We currently host the email of several hundred thousand businesses and Google is using its free edition to get millions of businesses. IBM makes their money by selling software and service to enterprises. If those same businesses start buying turnkey services online, there is a big hole in the IBM business model.

But, based on history, IBM faces long odds. Since the dawn of the SaaS model, there has been literally no major ISV that has become a power in the SaaS space. Siebel, SAP, Microsoft, Intuit, Oracle, and many more large ISVs have made big splashes about online offers only to retreat (or admit defeat by buying major competitors, like Intuit’s acquisition of Mint.com).

Now, some, like Larry Ellison, will say, this is a tiny market, so who cares? So far, he is right. There is only one billion dollar company in the SaaS space (Salesforce.com). But, if history is not headed in this direction, why try at all? IBM clearly is admitting that the idea of cloud based software is the future. So now they have to compete. Will they meet with the same poor results? Here are some thoughts on why traditional ISVs have failed at this model and some thoughts on how they apply to IBM:

  1. Skills gaps. SaaS is not the same as building and shipping code. Multi-tenancy, scaling, customer support, uptime reporting and community outreach are all integral parts of a SaaS business. This does not come naturally from innovation oriented, build it and ship it companies. IBM likely realized this when they bought Outblaze to drive the core of the new offer. While small and primarily a reseller enabler, Outblaze does give IBM a core set of SaaS oriented skills and mindset. The real risk is how well this mentality will be integrated? How long will this talent remain? A lot of it depends on the other risks.
  2. Sales compensation. Sadly, sales comp is much of what makes the business world move. Every top ISV is built on the lump sum, perpetual sale. How you turn an organization into a machine to sell recurring revenue is a massive challenge. There is no place more ingrained in the big deal than IBM. So, barring a wholesale change to the IBM model, the idea that the massive IBM salesforce will be pitching this offer is a pipe dream.
  3. Cannabilization. The NotesLive offer flat out competes with the core IBM on premise software plus services model. Combined with a compensation conflict, this is the most critical challenge facing a company like IBM. And, looking at their site, the whole effort seems to be a mass market attempt to generate leads for a salesforce. Just try to buy online. My hunch is the goal is not to sell $3/month accounts, but much larger solutions.
  4. Enterprise vs. SMB. Related to the last point is the true commitment any of these companies have for the SMB market. SMBs are driving the move to SaaS, just as they drive almost any major shift in technology. SMBs are willing to compromise and sacrifice – a critical requirement to embrace the productized model. They also want a low price. The low end iNotes offer, from the looks of it, is not meant to sell, but generate interest. Look at this price sheet:

    The set of compromises runs counter to our $1/month offer or Googles $50/year offer. Those are flagship products with full feature sets (calendaring, contacts, large storage, etc.) Given IBMs enterprise focused history, I am curious to see how far their commitment goes.

You can never take a behemoth like IBM coming into your market lightly. Believe me, we do not. However, in many ways their entrance is welcome. They have a voice much louder than ours and they are declaring openly that you should not run your own mail servers. Hallelujah! But, could they be the first major ISV to get it right in the SaaS world. They are as a good a candidate as any. But, for our money, those that are focused on this from the ground up are the real threats. For now, in the email and apps market, that is Google. Stay tuned for some thoughts on that battle.

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This is a post written and contributed by Website Team.

The Rackspace Website Team manages and maintains all Rackspace web properties.

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1 Comment

J — Sorry about that.  We’ll make sure to spell these things out in the future.  Here you go for now though:
ISV = Independent Software Vendor

SMB = Small and Medium-Sized Business

avatar Cameron Nouri on October 9, 2009 | Reply

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