Third Wave

I’ve been in the high-tech industry for almost 40 years and I’ve always been a ‘services guy’. That’s why when I saw Chris Barbin’s blog post announcing the soft launch of Tercera, he had me at “hello”. Let me give you a little historic perspective to explain why I think the founding of Tercera is so timely.

 

The Rise of IT Professional Services

I started my high-tech career in the 1980s as an industry analyst at IDC at the same time the computer and telecommunications industries were facing unprecedented disruptions. The introduction of the mini- and personal computers (PCs) fundamentally changed the way organizations acquired and utilized information technology (IT). And the divestiture of AT&T led to the deregulation of the telecommunications industry dramatically changing how organizations obtained voice and data communications equipment and services.

As I watched these industries quickly change, I also saw that the enterprises these computer and communications vendors served faced significant skills gaps. Gaps which limited their ability to quickly adopt the latest technological innovations and slowed the sales of new products. These skills gaps were being filled by a widening array of professional services firms, ranging from major companies, like Andersen Consulting, to local mom and pop consultancies. The escalating demands of these enterprises also fueled a boom in systems integration and outsourcing services that brought even greater attention to an increasingly influential group of global Professional Services (PS) firms – like CSC, EDS and Perot Systems – in the 1990s.

 

Dot.Com Era Spawns New On-Demand Services and Venture-Funded PS Firms

Rather than continue to sit on the sidelines as an industry observer, I decided to join a professional services start-up that was focused on filling a similar skills gap in the rapidly growing ‘internetworking’ segment of the market led by Cisco Systems. The company was called International Network Services (INS), and it caught the attention of three highly-regarded venture capital firms – Sequoia Capital, Canaan Partners and Sigma Partners – because it promised a higher rate of growth and profitability than traditional PS firms by combining highly repeatable project methodologies with software solutions derived from its various engagements. I became the director of strategic marketing and helped the company grow and gain industry recognition, go public, grow to over $300 million, and get acquired by Lucent Technologies in 1999 for $3.7 billion – over 12x revenues!

The 90s and the ramp up to Y2K not only sparked a surge in demand for IT professional services, like INS, it also spawned new ideas about how software functionality and computing power should be distributed and utilized. It was during the dot.com era that the idea of Application Service Providers (ASPs) and utility computing was born and caught the attention of VC and market research firms. However, the dot.com bust – along with the tragedy of 9/11 – caused the investors and industry analysts to abandon most of the early ASP and utility computing players.

Despite the demise of this segment of the market, I felt the idea of ‘on-demand’ services was going to regain its footing and attract renewed interest in the marketplace. And I made a big bet on this possibility by launching my own strategic consulting company, THINKstrategies, in 2001 to focus on the business implications of moving from physical, on-premise, packaged products to virtual, web-based, subscription services. Fortunately, Salesforce.com, Amazon Web Services (AWS) and a whole host of others gained success over the next decade to prove the viability and value of cloud-based solutions.

 

The First Wave of the Cloud Services Takes Hold In Departments Acquiring SaaS

Salesforce was one of the few companies that survived the backlash created by the dot.com bust and 9/11. And the early success of Salesforce and other Software-as-a-Service (SaaS) vendors represented the first wave of cloud computing. These SaaS vendors recognized there was increasing frustration among corporate end-users about the complexities and costs associated with traditional on-premise applications. They evangelized the virtues of SaaS primarily to address the specific needs of a single department – such as the sales department in the case of Salesforce.

Yet, what stood in the way of Salesforce gaining success wasn’t persuading sales professionals to give their new SaaS solution a try, it was helping them to quickly implement it within the broader department to prove its value to the business, not just a few individuals. The major PS firms weren’t ready to focus on this embryonic market opportunity, so a new generation of start-up consultancies, including companies like Bluewolf, emerged to fill the gap and help accelerate the deployment of the first round of department-centric SaaS solutions.

 

The major PS firms weren’t ready to focus on this embryonic market opportunity, so a new generation of start-up consultancies, including companies like Bluewolf, emerged to fill the gap and help accelerate the deployment of the first round of department-centric SaaS solutions.

 

The Second Wave of the Cloud Services Washes Across the Enterprise with IaaS and PaaS

The second wave of cloud consultancies appeared in the market as the concept of SaaS gained acceptance among companies large and small, and gave companies like Amazon confidence to apply the same pay-as-you-go model to the compute and storage side of the tech marketplace. Amazon Web Services (AWS) basically resurrected the utility computing idea of the Dot.Com era and ignited the Infrastructure-as-a-Service (IaaS) market opportunity.

Once again market acceptance and adoption were slow at first because the economic drivers weren’t fully in place and a skills gap still existed. The financial crisis of 2008 created the economic imperative for enterprises to look for new ways to cast aside their capital-intensive data centers of the past in favor of more flexible and economical cloud services. That new sense of urgency brought on by the financial crisis also forced many enterprises to turn to PS firms for help leveraging IaaS – along with Platform-as-a-Service (PaaS) – across their operations.

This second stage of cloud growth was not only predicated on application and department specific skills, but on enterprise-wide integration service capabilities to pull the solutions from various ISVs and other cloud providers together. A new wave of cloud-centric consultancies, including Appirio, that were helping the leading vendors capitalize on the rapidly expanding cloud opportunities.

 

Appirio Venture Funding Opens New Chapter of Cloud Services

I became friends with Chris Barbin shortly after he, Narinder Singh, Glenn Weinstein, and Mike O’Brien founded Appirio. Chris and Appirio caught my attention when the company received venture funding from Sequoia Capital, an accomplishment which only occurred occasionally since my days at INS. And when I saw it was another alum of INS, Jim Goetz, who was responsible for Sequoia’s bet on Appirio after Salesforce did the same, I knew this would be a new cloud consulting firm worth paying attention to. So, I reached out to Chris because I was one of the few independent analysts focused on the rapidly evolving professional services side of the cloud computing marketplace and interested in Appirio’s go-to-market strategy.

 

Chris and Appirio caught my attention when the company received venture funding from Sequoia Capital, an accomplishment which only occurred occasionally since my days at INS..I knew this would be a new cloud consulting firm worth paying attention to.

 

As it turned out Appirio’s strategy echoed many of the elements I had seen pioneered at INS. First, it was aligned with a major vendor – Salesforce. Second, it was providing a combination of rapid deployment and sophisticated integration services. And third, it was developing a highly repeatable methodology and productizing its solutions to give it greater scalability and profitability that made it appealing to investors.

The success of Salesforce and AWS attracted more competitors and created greater demand for multi-vendor integration services to not only successfully deploy the cloud alternatives and ensure they were being properly utilized. Appirio was in a great position to capitalize on this opportunity.

 

Strategic Acquisitions Prove Value of Cloud PS Investments

In addition to filling an important skills gap, professional services firms are the ‘trusted advisors’ for many enterprise decision-makers. As a result, they have helped drive significant revenues to cloud vendors. In fact, IDC estimates PS firms have sourced nearly two-thirds (64%) of the $1.2 trillion market opportunity in the Salesforce ecosystem alone.

 

In addition to filling an important skills gap, professional services firms are the ‘trusted advisors’ for many enterprise decision-makers. As a result, they have helped drive significant revenues to cloud vendors.

 

Although the first wave of cloud-oriented consultancies didn’t attract a significant amount of venture funding, it did create good exits among major ISVs, PS firms and other vendors seeking to augment their internal capabilities. For instance, Bluewolf was acquired by IBM for $200 million. And another fast-growing cloud consultancy, Cloud Sherpas, was acquired by Accenture for $350M-$400M. As Appirio became a market leader during this second wave of the cloud it too achieved an impressive exit when it was acquired by Wipro for $500M in 2016.

While these may have been the most prominent PS firm exits in the first two waves of the cloud, there were plenty of other PS acquisitions that didn’t get as much attention. In fact, the pace of acquisitions in the Salesforce ecosystem alone has accelerated over the past 2-3 years, and the assortment of ISVs and other vendors making these acquisitions has dramatically expanded as a list compiled by Channele2e shows.

PS firms continue to add cloud consultancies to their operations at a pretty fast clip, including IBM which most recently acquired Salesforce consultancy 7Summits. The ISVs themselves are making more and more strategic acquisitions as well. This includes Salesforce, which most recently acquired Acumen solutions and has seeded the entire market with investments in more than 50 service firms over the years through its Salesforce Ventures arm.

This latest flurry of acquisitions has not only validated the value of cloud consultancies but has created a need for a new generation of PS firms to address the escalating demands produced by the pandemic and the latest technological advancements.

 

Welcome to the Third Wave of Cloud Consulting Opportunities

Few enterprise executives have to be educated about what the cloud is or why it’s important anymore. And they don’t have to be convinced about the viability or value of cloud-based solutions, especially as a result of the global pandemic. They now need help answering where and how to take the greatest advantage of the power of the cloud to meet their particular corporate requirements and objectives.

If the first wave of the cloud was centered around departmental requirements like CRM to satisfy sales teams, and the second wave was focused on enterprise-wide data center migration and application integration needs – then the third wave of the cloud is aimed at extending the power of SaaS, PaaS and IaaS to support escalating inter-enterprise requirements at a global scale.

 

The third wave of the cloud is aimed at extending the power of SaaS, PaaS and IaaS to support escalating inter-enterprise requirements at a global scale.

 

While many organizations responded to the dramatically different demands of the global pandemic admirably to connect their employees remotely and accommodate their customers electronically, the systems that they quickly put in place still need a lot of work to ensure their ongoing viability.

Although everyone is looking forward to returning to some form of normalcy once vaccines push back on the coronavirus, most organizational leaders recognize that the way we work, shop, and interact has changed forever. Businesses and other institutions will become even more reliant on the Internet (i.e. the Cloud) to support their employees, customers, and partners. In fact, we’re entering an era in which most organizations will rely on multiple cloud providers to support various requirements.

And every enterprise will need to augment their in-house teams with external resources to meet these escalating multi-cloud needs. In fact, the demand for PS help will grow because most enterprises will be keeping tight reins on their internal operating budgets and be seeking outside expertise to help them fortify, extend, and transform their newly digitized business processes.

 

In fact, the demand for PS help will grow because most enterprises will be keeping tight reins on their internal operating budgets and be seeking outside expertise to help them fortify, extend, and transform their newly digitized business processes.

 

The population of new cloud consultancies will also expand to surround a broader array of strategic vendors. Salesforce, AWS and Microsoft have attracted much of the attention of cloud consultancies in the past. As other cloud vendors gain success – like Workday, ServiceNow, Twilio, Snowflake and Okta – they will also need independent cloud consultancies to help their customers adopt their solutions and expand their market opportunities.

I’ve always believed that the ultimate irony about the rapid rise of the “cloud” is that it has grown because it promised a simpler and more economical method of obtaining compute power and software functionality. Yet, in reality it has compounded the complexities, and costs for many organizations because it adds another layer of complications to the on-premise applications and data center operations already in place. You can see a clear illustration of this stark reality – during ‘normal’ times – when you enter the exposition hall of the Dreamforce conference and are immediately confronted with the largest professional services firms situated in the biggest booths at the front entrance to the event.

Organizations of all sizes – and cloud vendors of all types – need professional services firms with varying skills to make cloud solutions work in real-world environments. As a ‘services guy’, I’m excited about the additional opportunities for PS in the third wave of the cloud, and the investment opportunities for Tercera in the coming decade. I look forward to them identifying and building that next generation of cloud consultancies.