Each quarter, Ray Wang takes a snapshot of earnings from a selection of the publicly quoted on-premise and -on-demand/SaaS/cloud players. His latest analysis notes the broad return to double digit growth in license fees among on-premise providers after a brutal 2009 although there is wide variation. Equally interesting and with the exception of NetSuite and Ariba, the SaaS players continue to consistently plow on with double digit growth.
Figure 1. Software Insider IndexÂ® On Premise Vendors: Q1 CY 2010
Figure 2. Software Insider IndexÂ® SaaS Vendors: Q1 CY 2010
[Click on each image to get a better view.]
In Ray's analysis, he suggests that:
- Overall growth rates on a YoY revenue basis have stabilized for most SaaS vendors at the mid teens to twenties.
- Of interesting note, professional services fees for on-premise vendors match or double the license revenue. SaaS vendor professional services revenue are well below 1x license revenues, closer to 10% or less.
There's a risk of reading too much into Ray's observations about the subscription/service ratio among SaaS players. Remember that with the exception of NetSuite - which doesn't break out service revenue - the remainder of the players in Ray's list are providing relatively simple point solutions.
Speaking with NetSuite and SAP, both are ideally looking to implement within the 60-90 day timeframe, although much will depend on the amount of data normalization and tweaking required by individual customers. Is 60-90 days so unusual? I'm not 100% convinced. Microsoft Dynamics for example can certainly be implemented in similar timeframes.
At the larger end, implementing within such time frames would be nigh on impossible for any of the on-premise vendors in Ray's list but then their solutions are far more complex and geared towards large, complex organizations. The SaaS providers are demonstrating a challenge to on-premise vendors that have had up to 40 years to perfect their implementation methodologies and yet still talk about multi-year projects.
I am more interested in the fully loaded cost per user at the point of go live amortized over the expected application lifecycle. So far there is little publicly available data to provide direct comparisons to the on-prem world. That analysis tells me much more about the value delivered from a solution and provides an indication whether SaaS represents value for money in real rather than assumed terms. If the numbers stack up then it is easier to understand why SaaS continue to grow at 'roaring 90's' rates.
Instead, what we see are cost saving comparisons. The following graphic shows an example from NetSuite and its customer Xtellus:
While those savings are impressive, I am aware the company was coming off a hodge podge of home grown and manual systems. Would they have saved more/less if they'd gone with an on-premise solution? We cannot know but we can be impressed a company measured value delivered post go-live.
As both NetSuite, FinancialForce with Salesforce and SAP in particular start to execute against 'surround' strategies designed to pick off small satellite companies of large groups or fast track provision for new ventures then we will start to see some of those comparative metrics emerge.
My sense is that with SaaS gaining more attention among mainstream influencers, there is an opportunity to revisit the good ol' ROI question in a more meaningful way than has been possible in the past. If that happens then I expect we will see metrics that justify growth numbers of the kind Ray is recording. In my mind, that should be a central part of the SaaS service story.
In the meantime, watch out for a hardening of attitudes around license fee negotiation. One quarter doth not a recovery make but optimistic sales people will try extrapolate to a full year. Confidence in the market may be returning but it would take very little to crush it into a double dip.
As an aside to Ray's observations, my own soundings among unquoted SMB providers suggest that growth among nearly all players is at least 10% compound per month. Some are talking as high as 15%. That should not be a surprise when many are operating at $20-30/month price points and where the relative number of customers is tiny, often less than 10,000. Seasonality plays into this equation and from what I can tell, the Feb/Mar/Apr period was especially buoyant. Among those that are quoted and serving the SMB market, Intuit has come out saying that SaaS now represents $1 billion of its $3 billion revenue. While this blog tends to concentrate on the larger brands, we should not forget there is a strong level of interest in SaaS at the SMB/VSB end of the market.