Microsoft's launch of Dynamics AX 2009 last week in an on-premise version only -- at announcement there was no indication of a future SaaS version -- has stirred the debate once again over what midmarket companies are demanding from CRM and ERP applications and how that demand will shape the future look of business software.
Dynamics AX is Microsoft's backend ERP offering. The Redmond giant also offers Dynamics CRM for the front end, this time in both SaaS and on-premise versions.
Vendors experiencing huge growth in SaaS for midmarket Most ERP and CRM midmarket solution vendors such as Intacct, NetSuite, Sage, and Salesforce.com define the midmarket as companies with anywhere from 10 to 1,000 employees or divisions of large companies with a similar employee makeup.
Intacct, a SaaS ERP vendor, is experiencing in excess of 100 percent growth year over year according to Dan Druker, senior vice president of marketing at Intacct. NetSuite, one of the few vendors that offers an ERP/CRM business suite of SaaS services is reporting a 62 percent growth. Sage, a huge UK based business software provider with both on premise and SaaS solutions and a whopping US$2.3 billion in revenue last year is reporting a 30 percent increase year over year.
Microsoft is also hitting all of its numbers, with growth in the triple digits, according to Josh Greenbaum, principal at Enterprise Application Solutions.
"They're getting some very big deals, especially by working with Avanade as a reseller."
ERP SaaS adoption is trailing Although many vendors are riding the crest of a huge wave for SaaS CRM solutions, there is no similar sales tsunami as of yet on the ERP beachfront.
Companies appear to be moving at a more deliberate pace before replacing current ERP solutions that are so central to their existence.
Paul DeSaro, senior operations officer, IT, for Wilmington Trust uses Sage CRM but he said going outside the firewall for an on-demand ERP solution "is a [security] concern."
Nevertheless the ERP vendors are seeing growth and NetSuite's Druker is extremely confident that midmarket companies will come around to SaaS for ERP.
"Nobody wants to change a core system of record, but at some point they have to make a transition. You simply run out of steam with QuickBooks."
Economics and innovation drives midmarket adoption Economics is driving the adoption process for SaaS in the midmarket across almost all business applications, according to Denis Pombriant, principal at Beagle Research. He says the two economic drivers are price point and the fact that business users in the midmarket understand the value of investing in a solution that will allow them to compete with companies much larger than their own.
Dan Buettin, CFO of Domin-8 Enterprise Solutions, makers of property management software, was driven to adopt NetSuite by both its price point and flexibility. Domin-8 is a startup that was created by the merging of eight smaller companies. Sounding like someone who's been burned once or twice, Buettin says he is familiar with J.D. Edwards and PeopleSoft and he knows what the company would have "to deal with every day" if they went that route. The TCO was the compelling argument for him to choose NetSuite.
"We did not have to make investments for on premise hardware and technical capabilities," Buettin said.
But as Greenbaum points out, after everyone has a SaaS offering they will want to see the value beyond the delivery model. Speaking with vendors, users, and analysts it becomes clear that it is Pombriant's second economic driver -- being able to offer similar services as their larger competitors -- that will shape the future direction of SaaS.
"Everyone is competing for shelf space at Walgreens or Office Depot. As a supplier it is a competitive advantage to offer a big retailer the same inventory management capability as your biggest competitor," Greenbaum said.
In addition, Greenbaum notes that smaller and mid-size companies are working with more sophisticated partners, especially in the supply chain, who are demanding more functionality from their vendors.
Channel partners and vertical solutions Intacct sees vertical solutions as the first future competitive differentiator. By giving companies solutions that meet the specific needs in their industry with the flexibility that the SaaS model gives users to add features quickly, SaaS will make the difference.
"We plan to achieve differentiation through reseller partners who can offer industry-specific IP and best practices. The VARs give the value add," said Mini Peris, vice president of marketing at NetSuite.
Both NetSuite and Salesforce.com are also pursuing verticals in a slightly different way. Rather than developing a VAR channel of resellers, both of these midmarket vendors are offering a platform for other vendors on which to build vertical solutions.
The NetSuite Business Operating System creates a cloud computing partner eco-system, according to Peris.
SaaS is not a religion, or is it? Finally, we come to the question of whether successful vendors will have to offer both a SaaS and on-premise solution.
To hear Chairman and CEO of Salesforce.com Mark Benioff tell it, that's nonsense. Benioff believes only SaaS makes sense, first for the midmarket and eventually for the enterprise as well.
Intacct's Druker compares the shift from on-premise to SaaS to making the jump from the mainframe to client server. "No one said they were going to keep both."
To hear Druker and Benioff tell it, the transition is better for the client and the supplier. But not everyone agrees. "The real issue is about customer choice. Anybody who says I have the architecture and deployment model for the midmarket is fooling themselves," Greenbaum said.