Overview

Cloud-delivered services brought an entirely new concept into the consumption of IT services with enhanced features resulting in cost savings and business benefits through usage-based pricing. The delivery transformation of solutions and IT processes through subscription services highlighted inefficient IT procurement processes. Customers were accustomed to large capital expenditures and periodic licensing fees with long sell cycles complicated by an arduous negotiation process. IT departments conducted multi-vendor Proof of Concepts (POCs) to reduce risk, further slowing down innovation and flexibility of implementation. Software as a Service (SaaS) gained popularity with business users exasperated with inefficient IT departments. Seeking innovation, line of business (LOB) bypassed the traditional procurement process by acquiring software subscriptions for quicker implementation with credit cards. LOB skipping the painfully slow procurement processes was often called shadow IT. This paper investigates the success of Salesforce using AppExchange as a software marketplace to drive innovation in CRM processes. Over time, the Salesforce AppExchange has expanded to include a broad spectrum of business processes beyond sales, including service, marketing, and industry solutions.

Background

Salesforce was founded in 1999 as a hosted Customer Relationship Management (CRM) software provider. AppExchange, the Salesforce marketplace for apps and experts, was launched in 2006. On January 20, 2022, Salesforce announced its ten-millionth app install. This write-up looks at the IT subscription model and how a cloud marketplace accelerates customer innovation while expanding the ecosystem of cloud providers like Salesforce and Workday.

Observations

Traditional IT Procurement
The legacy IT procurement process was stacked against business agility due to the inefficient and expensive process of acquiring hardware, software, or services. Large upfront capital expenditures required legal oversight, and approvals were often needed from the board of directors. IT departments went through long proof of concepts to reduce the risk of a software or hardware purchase. Vendors bundled complete hardware and software solutions with significant discounts or free services to help customers implement the solution. Unnecessary software was often purchased upfront due to steep discounting offered by vendors. Inadequate planning for deployment led to substantial portions of purchased software not being installed, leading to a popular term called “shelf-ware,” resulting in poor business users becoming disenchanted with the IT procurement process.

Entrepreneurs Marc Benioff (Salesforce) and Aneel Bhusri (Workday) started SaaS companies to provide enterprise software efficiently to address the CRM and HR business processes, respectively, with hosted software.
SaaS Subscription Model
Early customers readily embraced easy-to-implement SaaS solutions in the era of inefficient and disjointed IT procurement processes. The subscription model made “shelf-ware” irrelevant due to the pay-as-you-go model. Implementation was simple since it did not require on-premises equipment installed with corresponding software licenses. As the primary users of Salesforce, sales teams found the ease of signing up and using the software to be extremely useful. Word of mouth spread the popularity to other companies.

Some advantages of a subscription-based applications consumption model are:

1. Ease of acquiring and using applications.
2. No significant upfront expenses and lower ongoing costs
3. Rapid delivery of new features
4. Security built into the application
5. No increase in data center capacity
6. Minimal support needed

The ability to subscribe using a credit card with minimal monthly costs and a low entry price for basic features grew Salesforce subscriptions at a very high rate. Workday followed with a similar growth trajectory after being launched in 2005. Adobe successfully transitioned to a subscription model that, while causing short-term investor concerns, paid off handsomely over the long term.

SaaS and the cloud marketplace
Once customers begin subscribing to services from a SaaS provider and settle into taking advantage of the basic features, connecting the products to internal and external resources drives additional benefits. Initial customers built homegrown and proprietary connections, but demand for end-to-end connectivity to manufacturing, financial, and other systems grew over time. SaaS vendors opened marketplaces where customers could purchase application add-ons with the click of a button that was fully integrated with the core software solution using a common platform. These applications were curated to ensure that the applications worked seamlessly with the rest of the hosted SaaS environment.

Salesforce and partners began offering connectivity services to expand the value of an application, and customers were able to apply it easily to real-life challenges without significant investments. Startups who identified opportunities built and delivered applications to fill in functionality gaps through the Salesforce AppExchange.

Innovation with the cloud marketplace

SaaS companies have taken different paths to grow revenue in the core products and market adjacencies. Investing in a startup is an excellent way to allow innovation to be done without the lethargy of a larger organization while placing bets in multiple startups. Startups can also be acquired after building capabilities in sync with the SaaS investor. Another way is to open the core product with published API’s allowing several independent startups to add small but unique features to the core SaaS product. Startups hosting products in a SaaS companies marketplace benefit from free exposure without marketing expenses. SaaS companies benefit from taking a percentage of sales from the application.

Salesforce Ventures, formed in 2009, has been an incubator of several start-ups on and off the Salesforce platform with $4.8B capital deployed with $1.8B invested in 2021 alone. One exciting startup that comes to mind is Miro, with a highly innovative collaboration platform. If acquired, Miro can add significant value to the Salesforce portfolio of products. The acquisition of Mulesoft, Tableau, and Slack allows Salesforce to accelerate the capabilities delivered through the marketplace.

Workday is another example of a SaaS solution provider with a venture arm investing in solutions related to Workday’s enterprise management portfolio of products. One example is Pymetrics, a Workday Ventures partner whose product uses behavioral science and AI to make unbiased workforce decisions. The Workday Ventures fund is currently $250M with 39 companies part of the portfolio. Workday’s solution framework includes expanded integration capabilities for its venture portfolio companies.

The Next Generation Cloud Marketplace

As organizations become accustomed to working from home during the pandemic, person-to-person contact during a sales cycle reduced significantly. This has opened an opportunity for more business-to-business (B2B) transactions to be conducted digitally. The procurement function of organizations is already digitized, and software procurement through marketplaces will further optimize innovation using software obtained from marketplaces. Some areas where marketplaces can be further innovated are listed below:

1. Transparency: Several marketplaces make it hard to track and predict spending, often increasing the risk to customers. Giving the ability to get insight into all components of expenditures would be a way to increase the purchase of software through marketplaces.
2. Industry-specific offerings: The ecosystem of vendors on a marketplace need to provide unique capabilities that meet customer needs. The ability to quickly gain benefits from subscribing to software available on a marketplace is enhanced if it addresses an industry pain point, such as the ability to digitize a real estate transaction completely.
3. Trust: Customers expect a product to work out of the box. A marketplace that contains fully vetted products with examples of ROI from other customers allows users to take a leap of faith and press a button to subscribe to obtain a new capability.
4. Contracts: Customers often have existing contracts, and a digital procurement process requires a smooth transition from existing agreements. Contractual terms may also vary by geography, and vendors need to be prepared to offer multiple contract types and even personalization around customer requirements.

Salesforce seems to be executing on all these areas to allow customers to innovate rapidly at lower costs and risks. As millennials take charge of IT departments, organizations are more likely to avoid traditional procurement processes and embark on a journey to acquire software through marketplaces.

Summary

Innovation using technology has been the centerpiece of enterprise strategy for a long time. The urgency of developing business agility is constantly growing, and the pandemic showed organizations how quickly IT services could be procured and deployed through subscription services. SaaS solutions combined with marketplaces enable IT departments to develop and deliver agility to business units. The popularity of subscription services in the IT industry enabled by cloud technologies has trickled into consumer purchase transactions. Apple offers an interest-free pay-as-you-go model, and Delta airlines recently joined in this trend, allowing customers to pay for tickets in installments.

As evidenced by the success of the Salesforce marketplace with ten million app installations, every enterprise on a transformation journey would accelerate agility by prioritizing IT services to be acquired through marketplaces. SaaS solution providers must put marketplaces high on their priority to expand the ecosystem of partners. Investors will find it helpful to identify SaaS solution providers taking advantage of marketplaces to grow new sources of revenue.