The ServiceNow Effect

The ServiceNow Effect ITSM MOVES TO THE CLOUD Spurred on by the runaway success of ServiceNow over the past decade, IT service management is increasingly delivered as a cloud service via a remotely hosted platform on which customers can build their own workflow-based service applications. Nearly all ITSM vendors have repositioned for the cloud. KEY FINDINGS Cloud-based IT service management (ITSM) is a $707m market in terms of annual revenue and is expected to grow into a $2.7bn space by 2017. ServiceNow, which has gone from startup to successful IPO to nearly $700m business in the last decade, has been the driving force behind ITSM s move to the cloud. Nearly every other vendor in this space has countered with its own cloud offerings, and startups have launched to take advantage of the cloud opportunity. One positive outgrowth of ITSM SaaS is that IT departments are extending the capabilities of their ITSM platforms to build more service request workflow applications for business users. We expect demand for such applications will continue to make the cloud a more attractive option for ITSM systems. M&A activity has been limited in this space, and we don t expect that to change. While some startups could make attractive takeover targets, tuck-in acquisitions of complementary technologies by larger firms, especially Service- Now, are more likely. Consolidation of the ITSM service providers should also be an active area for M&A. The expansion of ITSM into the cloud has driven new opportunities for IT service providers, especially at the enterprise end of the market. This includes migration, customization, integration, managed hosting and the MSP channel. JULY 2014

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The following is an excerpt from an independently published 451 Research report, The ServiceNow Effect released in July 2014. To purchase the full report or to learn about additional 451 Research services, please visit https://451research.com/products or email sales@451research.com. SECTION 1 Executive Summary Spurred on by the runaway success of ServiceNow over the past decade, IT service management (ITSM) is increasingly delivered as a cloud service via a remotely hosted platform on which customers can build their own workflow-based service applications. These applications often extend beyond the IT department into other groups within the organization that use the same service-request paradigm, including human resources, facilities, purchasing, etc. Cloud-based ITSM is a $707m space in 2014 and is expected to grow to a $2.7bn space by 2017. Nearly all ITSM vendors have repositioned for the cloud some better than others and some startups have launched to attempt to duplicate the success of ServiceNow, albeit at the lower end of the market. ServiceNow, which should come close to the $700m revenue mark this year, shows no signs of slowing down, but it could be vulnerable as its focus shifts to building a broad IT management platform and customers revolt against an unpopular licensing change it made late last year, then reversed in June. Still, we expect ServiceNow to continue to dominate the enterprise ITSM SaaS space while a host of competitors chip away at the lower end of its market, which it is trying to reach more effectively and better defend. Cloud is driving a healthy portion of revenue at the most established ITSM software firms, and we expect that IT departments at organizations large and small will continue to move their ITSM applications to the cloud for more worker flexibility, less management overhead and better extensibility to line-of-business departments. 1.2 METHODOLOGY This report on ITSM is based on a series of in-depth interviews with a variety of stakeholders in the industry, including IT managers at end-user organizations across multiple sectors, technology vendors, managed service providers, telcos and VCs. This research was supplemented by additional primary research, including attendance at a number of trade shows and industry events. Reports such as this one represent a holistic perspective on key emerging markets in the enterprise IT space. These markets evolve quickly, though, so 451 Research offers additional services that provide critical marketplace updates. These updated reports and perspectives are presented on a daily basis via the company s core intelligence service 451 Market Insight. Forward-looking

The ServiceNow Effect M&A analysis and perspectives on strategic acquisitions and the liquidity environment for technology companies are also updated regularly via 451 Market Insight, which is backed by the industry-leading 451 M&A KnowledgeBase. Emerging technologies and markets are also covered in 451 channels: Datacenter Technologies; Storage; Enterprise Platforms & Infrastructure Software; Networking; Information Security; Data Platforms & Analytics; Development, DevOps & Middleware; Social Business Applications; Service Providers; Cloud & IT Service Markets; European Services; Multi-Tenant Datacenters; Enterprise Mobility; and Mobile Telecom. Beyond that, 451 Research has a robust set of quantitative insights and data products such as ChangeWave, TheInfoPro, Market Monitor, the M&A KnowledgeBase and the Datacenter KnowledgeBase. All of these 451 services, which are accessible via the Web, provide critical and timely analysis specifically focused on the business of enterprise IT innovation. This report was written by Dennis Callaghan, Senior Analyst, Enterprise Software. Any questions about the methodology should be addressed to Dennis at: dennis.callaghan@451research.com. Dennis Callaghan Senior Analyst, Enterprise Software Dennis is a member of 451 Research s Infrastructure Computing for the Enterprise (ICE) team. He leads the firm s coverage of application and Internet performance management, servicelevel monitoring and management, and IT asset and service management. Before joining 451 Research, Dennis was a senior writer at eweek magazine for more than five years. At eweek he covered a number of application and productivity software beats, including CRM, business intelligence and analytics, email, IM, collaboration, enterprise search, business-toconsumer e-commerce technologies and portals. Prior to joining eweek, Dennis was Associate Editor at MC Magazine, where he covered the marketing of technology. He was also News Editor at Midrange Systems and Midrange Channels magazines, where he covered IBM AS/400 computing. For more information about 451 Research, please go to: www.451research.com.

SECTION 2 ITSM in the Cloud: A Primer As we noted in Section 1, IT service management can constitute any application that the IT department uses to manage its own operations and its service relationships with its internal constituents. To understand how and why ITSM moved to the cloud requires a quick history lesson. In the late 1990s, sales, marketing and customer service applications began to move to the cloud, spearheaded by salesforce.com, the most successful of the new breed of CRM SaaS providers. This transformation typically happened outside the IT department as sales, marketing and customer service departments drove adoption of the new SaaS offerings, often in opposition of governance-weary IT departments. Midway through 2004, salesforce.com, by then rapidly taking market share and customers from market-leader Siebel Systems and other CRM software companies, had a successful IPO. Meanwhile, 500 miles south in San Diego, ServiceNow had just begun to make available its SaaS offering for managing IT rather than customer service relationships. ServiceNow founder Fred Luddy had been chief technology officer at Peregrine Systems, which sold its Remedy flagship to BMC in September 2002 and the rest of its company to HP in September 2005. Luddy applied the on-demand SaaS model to what he knew: workflow applications for IT service and asset management. To this point, SaaS adoption, whether for CRM, ERP, collaboration or project management, had been driven by demand outside the IT department, often against the objections of the IT department. ServiceNow set out to prove that the same model could work for the IT department, which went against the conventional wisdom of the time that IT wanted control of all applications, not to mention its own applications.

The ServiceNow Effect FIGURE 2: TIMELINE SAAS VENDOR AND LAUNCH DATE SAAS VENDOR DATE 2003 SysAid Technolovies September 2003 2004 ServiceNow June 2004 2005 EasyVista May 2005 2009 Cherwell On-Demand March 2009 Axios assystsaas November 2009 2010 Samanage (full ITSM support) April 2010 BMC Remedy OnDemand April 2010 ManageEngine ServiceDesk Plus On-Demand November 2010 BMC Remedyforce December 2010 2011 FrontRange HEAT Cloud January 2011 CA Cloud Service Management April 2011 (as Nimsoft Unified Manager) 2012 ITinvolve February 2012 SunView ITIL as a Service June 2012 HP Service Anywhere October 2012 2.1 ITIL ITIL is an acronym for Information Technology Infrastructure Library, a service management framework and the most widely used best-practice approach to IT service management. ITIL has been in place for the last 25 years, and virtually all of the vendors profiled in this report support the ITIL framework. ITIL determines best practices for IT service strategy, design, transition, operation and continual service improvement. Incident, problem and change management, as well as use of a configuration management database (CMDB) to track configuration items and the changes made to them, are the pillars of ITIL.

2.2 HOSTING INFRASTRUCTURE Most vendors in this report use colocated datacenters operated by managed hosting companies for their ITSM SaaS offerings. These colocated datacenters are typically in multiple geographies, both for better support of global customers and for backup and failover. Some use public cloud providers such as Amazon.com for either primary or backup hosting. BMC s Remedyforce and ITinvolve both run on salesforce.com s Force.com platform. Not all hosting options are necessarily the same, though. While multi-tenant databases are the norm for some cloud-based applications, like CRM, not all ITSM vendors most notably marketleader ServiceNow have multi-tenant database models, using single-tenant, multi-instance architectures instead. This means that instead of customers sharing the same physical infrastructure and databases, with instances partitioned from one another as in multi-tenant architectures, each customer gets their own instance of the software, their own database. Single-tenant, multi-instance SaaS architectures support greater customization and security than multi-tenant, single-instance architectures and are often preferred by larger organizations, especially those in tightly regulated industries such as financial services and pharmaceuticals. However, these architectures are more costly to maintain for the vendor, thus typically more expensive for the customer. They also create more management challenges for both vendor and customer. Upgrades are more challenging because customers have done so much customization and extension-building that they do not all upgrade at the same time or pace when a new version is available. This leaves customers of single-tenant, multi-instance SaaS on different versions of the hosted software, although many of these customers appreciate being able to upgrade at their own pace. All customers of multi-tenant, single-instance SaaS get upgraded at the same time whenever the SaaS vendor deploys the upgrade. For vendor-specific information about this subject, please see figures 4 and 5 in Section 3.

The ServiceNow Effect 2.3 SAAS ADOPTION SaaS continues to outpace IaaS and PaaS adoption as the most popular cloud deployment option. Our latest Changewave Corporate Cloud Usage Survey showed that 72% of organizations surveyed have adopted SaaS for at least one application, a small but steady increase from 68% at the beginning of last year. FIGURE 3: CLOUD MODELS CURRENTLY USED With regard to public cloud computing, in which of the following ways does your company use cloud computing services? 80% Software as a Service (SaaS) Infrastructure as a Service (IaaS) Platform as a Service (PaaS) 70% 60% 50% 40% 30% 20% Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 While we don t have exact data on ITSM SaaS adoption, we expect that growth rates would be greater for ITSM SaaS, since early SaaS adoption came from business departments.

SECTION 3 Vendor Landscape 3.2 MIDMARKET TO MID-ENTERPRISE 3.2.2 EASYVISTA EasyVista traces its roots to 1980s Paris-based IT consultancy Staff & Line Group. Its business model eventually evolved to ITSM software, and in 2005, it both went public and made its software available as a service. The company remains small, projecting just $25m in revenue this year. Still, SaaS is the fastest-growing part of its business, accounting for more than 60% of new customer implementations and half of license revenue. The company typically sells to organizations with 4,000-50,000 employees, 25-600 IT staff members, and 20,000-200,000 nodes to manage. That pretty much keeps EasyVista out of the 500 largest enterprises in the world, but gives it good penetration at the next-largest organizations. Finance and insurance, travel, education, manufacturing, retail and distribution, information technology, biotechnology/pharmaceutical/chemicals, government, and professional services are its key verticals. EasyVista has roughly 900 customers. Most of those clients almost 90% are in Europe, but North America is its fastest-growing market; it went from 19 North American customers in 2012 to 74 by the end of 2013. EasyVista offers a suite of ITSM software applications, as well as a platform on which customers can build their own service applications for IT or business department use cases. The company s flagship offering is EasyVista Service Manager, which is a workflow engine that supports ITIL-based service management applications (incident, problem, change, etc.) and CMDB; IT asset lifecycle management; IT financial management; organizational and customer service management; and project management. Service Manager is built on EasyVista s Neo platform, which includes Neo Design, Neo Connect and Neo Deliver. Neo Design consists of a workflow engine and forms and reports templates for customers to build their own service applications without coding. Neo Connect supports codeless integration to third-party applications and data sources. Neo Deliver is an on-demand software delivery platform. 451 Take: EasyVista is moving up to larger deal sizes and making some headway in the US at the same time. Although it has plenty of licensed software baggage, SaaS has been a key growth driver at the company. As the only publicly traded company in this segment, it can provide good visibility into its performance, and right now, it s doing pretty well, although it remains small.

The ServiceNow Effect SECTION 4 Market Sizing and M&A Outlook 4.1 MARKET SIZE The global cloud ITSM market is valued at $707m this year and expected to grow to $2.7bn by 2018, according to 451 Research s Market Monitor service. The compound annual growth rate in the sector is 42%. As perpetual licenses expire, we expect to see more ITSM implementations move to the cloud, whether customers change providers or not. Our Market Monitor team expects to update these numbers later this summer. FIGURE 6: GLOBAL ITSM MARKET SIZING AND FORECAST ($M) $2,660 42% 2013-2018 CAGR $1,991 $1,462 $1,041 $707 $455 $269 2012 2013 2014 2015 2016 2017 2018

SECTION 6 Conclusions and Recommendations 6.2 RECOMMENDATIONS End-user organizations that haven t explored ITSM SaaS yet are behind the curve. ITSM SaaS can save IT departments a lot of self-management overhead and free up IT to better support business units. Along the same lines, IT departments that have moved their ITSM systems to SaaS should be looking to extend service-request workflow applications to business departments like HR, facilities, procurement and customer service, if they haven t already done so. End-user organizations need to take into account multi-tenant vs. multi-instance architectures and licensing schemes, along with extensibility, when moving to ITSM SaaS. Virtually all ITSM vendors have already moved to SaaS in one form or other. More competition exists at the midmarket, although more competition may be welcome by end users at the enterprise level. Service provider partners have plenty of opportunities as well, mostly with enterprise ITSM vendors. These opportunities include migration, custom development and integration, managed hosting and MSP delivery to customer organizations. Virtually every vendor profiled in this report needs partners to help it enter and succeed in non-us markets. Opportunities for venture capitalists appear limited with a dominant player at the enterprise level in ServiceNow and a host of smaller competitors at the SMB and midmarket levels, with limited opportunities for acquisitions of ITSM vendors. Any stumbles by ServiceNow could change that equation. However, one area that may get VCs attention is the partner arena for ITSM. As ITSM in the cloud has exploded, so have the opportunities for partners.