Traditional ISV Transition to SaaS

RESEARCH ALERT RA-413 December 12, 2007 C. Burns, M. West, B. McNee Title

Traditional ISV Transition to SaaS: Reinvent or Virtualize?

What is Happening?

In our continuing thread of research providing guidance to application ISVs transitioning to SaaS, Saugatuck has repeatedly been asked about the viability of leveraging virtualization technologies, so that they can extend the life of their conventional on-premise solutions – versus immediately going down a path of building a new or adjacent multi-tenant application from scratch. This Research Alert provides some important guidance (pro’s and con’s) for ISVs relative to the issue of leveraging virtualization when charting a new course to a SaaS offering.

Why is it Happening?

The authors invite your comments and inquiries on this Research Alert. Please contact C. Burns at charlie.burns@saugatech.com, Mike West at mike.west@saugatech.com, or Bill McNee at bill.mcnee@saugatech.com.

Browse Related Research: • • • •

Business Strategy / Mgmt IT Management Software-as-a-Service (SaaS) The IT Utility

Over the past several months, Saugatuck has held numerous discussions with packaged application providers who deliver via a traditional onpremise structure. We have been regularly asked about the various IT infrastructure and technology options that are available that can be utilized as the foundation for delivering SaaS offerings. Our analysis has found that once again, there is no one-size-fits-all approach to delivering a SaaS offering. Rather, we have found two general approaches for delivering support for multiple customers while ensuring isolation/protection between customers: a) Adopt an evolutionary approach – utilizing some form of virtualization as a means of extending the life of existing on-premise application assets, with the main advantage being accelerated timeto-market; and/or b) Adopt a revolutionary approach – architecting, developing and deploying a new (or adjacent) single-instance multi-tenant application from the ground up, taking advantage of whatever new and evolved process flows (and technologies) would be relevant within the application category. To date, our research has found that for a would-be SaaS provider: • • •

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Almost all the same basic functionality can be delivered via either a virtualization or via a multi-tenant approach. Both virtualization and multi-tenancy provide for more efficient server utilization. Thus, both could be considered to be eco-friendly (i.e., “Green”). Conventional server virtualization, such as offered by VMware and XenSource (Citrix), entail executing a separate copy of the host operating system (e.g., Windows, Linux) for each instance of the application code. This form of virtualization inherently “costs” more capacity on the server hardware than do single-instance multitenant implementations. Other forms of virtualization, such as those offered by Parallels (formerly SWsoft – see Note 1), or rPath (see Note 2) do not incur

SAUGATUCK RESEARCH ALERT

Note 1 Co. Name: Parallels Inc. – formerly SWsoft Inc. (renamed 12/12/07)

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Yr. Founded: 1999 Solution Category: Server and desktop operating system virtualization; SaaS infrastructure Primary Solutions: Parallels Virtuozzo for operating system virtualization; Parallels Desktop for desktop virtualization; Parallels System/Business Automation for provisioning, billing, mgmt; Parallels OpenPlatform for Web services integration platform Target Market(s): Consumers, Enterprises, Services Providers, ISVs and SaaS vendors

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Employees: 900 Revenue: 2007 - $150+ million 2008 - $200+ million

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(Saugatuck Estimate)

IDC believes Parallels has 8% virtualization market share. Sample Customers: Over 700,000 customers (and 10 million users) in 125 countries.

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HQ Location: Herndon, VA, USA. Phone: 1-713-815-5670 Website: www.swsoft.com (for time being. Source: Saugatuck Technology

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the same overheads as conventional server virtualization. These forms of virtualization typically “cost” capacity on the server hardware similar to that of multi-tenancy. Virtualization entails executing multiple discrete copies of the application code. Thus, virtualization poses more challenges in version control and maintenance of the application than does multitenancy. While some providers of virtualization (e.g., Parallels, rPath) offer functionality to facilitate maintenance and updates across the multiple instances of the application (as well as providing tight integration as it concerns order/billing and provisioning), the overall advantages of a single instance multi-tenant architecture as it concerns managing any schema changes can often be significant. Modifying application logic originally developed for traditional onpremise use to provide multi-tenancy can be a daunting task requiring a protracted development process in some cases. Implementing a virtualized infrastructure to support multiple instances of traditional application logic can be accomplished quite quickly. To minimize the impact on maintenance of the application code, any client-specific customization of the application should be done via a common database for storage and management of modifications. This structure can be implemented in both multi-tenancy and in virtualization. Some SaaS providers have found it desirable to collect various statistics which depict how their customers use the application logic. These statistics can be used for identifying new functional requirements, areas requiring performance tuning, as well as the ability to monitor customer usage patterns (which often leads to corrective renewal sales and marketing strategies). Collection of these statistics may be accomplished more easily and less expensively under a multi-tenant implementation. Some SaaS providers have found some of their customers require the ability to exchange data with other customers. Implementation of inter-customer data exchange may be less challenging in a multitenant implementation. Leveraging data for the purposes of creating residual informationbased assets that can be sold is much easier and less expensively collected under a multi-tenant structure.

Clearly, certain classes of applications require significant amounts of data (e.g., business intelligence, ERP, financial analysis) – where an appliance strategy might make more sense because you don’t want to move data over an inefficient and less reliable internet connection. In fact, we understand that some very large and dominant ISVs in transition are investigating on-premise appliances as a means of providing a cache of a hosted service, or delivering a more robust on-site application experience. Other emerging and next-generation SaaS vendors are taking innovative approaches to the large data volume issue by deploying in-memory

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SAUGATUCK RESEARCH ALERT databases to help address these unique performance challenges (e.g., Workday). Given the relative merits of virtualization and multi-tenancy, Saugatuck believes that the path for a traditional ISV to follow in transitioning to SaaS should be determined by: a) Customer requirements – Does the target segment require simply an on-demand licensing structure; or does the target segment want significant new functionality (such as the ability to support a distributed workforce, or to utilize a next-generation workflow, or to access a broader ecosystem of partners such as through Salesforce.com’s AppExchange)?; and b) Competitive issues – Is time-to-market more critical than enhanced functionality such as described above? Market Impact Note 2 Co. Name: rPath Inc. Yr. Founded: April, 2005. Venture Investors: North Bridge Venture Partners, General Catalyst Partner, Wakefield Group

Vendors should always consider the specifics of their individual market segments before charting a transition to SaaS. However, Saugatuck recommends the following transition steps as a means for many ISVs to rapidly deliver SaaS while maintaining the ability to implement multitenancy. These steps can be viewed as an evolutionary path leading eventually to a revolutionary offering:

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Step 1 – Offer a SaaS licensing structure of current “on premise” functionality by utilizing some form of virtualization to implement a profitable infrastructure. This will gain rapid entry into the SaaS market while “buying time” for Step 2. Recognize, however, that this CANNOT be the end-game, as virtualization of an existing application will not provide you the long-term agility, flexibility and robustness of a fully re-architected solution leveraging newer technologies and workflow.

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Step 2 – In parallel with Step 1, begin development of new functionality as identified in customer requirements, above. This will fend off competition and retain customers while “buying time” for Step 3.

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Step 3 – In sync with efforts in Step 2, develop new or adjacent multi-tenant applications to replace the virtualized interim approach. Should an ISV decide to follow the steps recommended here, all new functionality developed in Step 2 (e.g., statistics collection, inter-client data exchange, etc.), should be designed and implemented for easy reuse in the new multi-tenant application.

Solution Category: Virtual appliance creation and support Primary Solution: rBuilder for automating software builds and simplifying maintenance of appliance images; rPath Appliance Platform for appliance support and management, e.g., updates, upgrades, license management, backup) Target Market(s): Traditional on-premise ISVs and SaaS providers Employees: 50 (Saugatuck estimate) Revenue: 2007 - $3-$4 million 2008 - $6-$8 million (Saugatuck Estimate)

Sample Customers: Unica, Newbury Networks, Digium, Business Objects, Zimbra/Yahoo, Network Engines. Over 100 applications implemented on rPath Appliance Platform HQ Location: Raleigh, NC, USA. Phone: 919-851-3984 Website: www.rpath.com Source: Saugatuck Technology

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As with most things in life, there is always trade-offs when making important business and technology decisions. Recognize that moving forward with Step 1 above may be an excellent opportunity to bring SaaSlike solutions to market quickly, but virtualization alone will not guarantee longer-term survival in the quick-moving and increasingly competitive ondemand application environment that is emerging.

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