Is conventional software built on bubble economics?

OK, I'll get back to some more serious points in a moment, but I couldn't help commenting on a jaw-dropping statement from SaaS blogger Bob Warfield. It comes in the middle of an interview with Concur CEO Steve Singh, just after Singh compares his own company's performance — since switching to on-demand in the years after 2000 — to its once near rival Extensity:

Singh: "In March of 2000, both [Concur and Extensity] were the same size. During the downturn, Concur went on-demand and Extensity stayed on-premise. Extensity was betting the downturn was the source of their problem, that it was just the economy and their growth would resume as soon as the economy turned around. Fast forward to today and our guidance is almost $35m, Extensity is at $3m."

It's a telling comparison, but even I was taken aback at the conclusion Warfield draws from it in a side comment (my emphasis added):

"I wonder sometimes whether the conventional software model has ever really flourished except during bubbles of one kind or another. Look at Big ERP. They had the benefit of several major bubble waves: the rush to switch to client server architectures, the Y2K debacle, and then right on the heels of Y2K was the Internet Bubble. Would these businesses have grown nearly so large without any of those bubbles? Maybe SaaS would’ve gotten here sooner. The choice between the two is a Tortoise (SaaS) versus the Hare (Old School ISV) race."

As a follow-up to my posting yesterday, in which I noted Larry Ellison's admission that Oracle isn't getting into SaaS because there's no easy money in it, Warfield's contention is a blockbuster. He's implying that the only reason anyone buys conventional software is because they're flush with money and caught up in a bubble mentality. The buying decision is as rational as the decision to lend a subprime mortgage — perhaps justifiable using the flaky economics prevailing at the time, but one that you're bound to rue when reason returns.

The corollary is that, come the recession, conventional software vendors' revenues will simply collapse, while SaaS vendors will power ahead.

Is SaaS so strong compared to conventionally licensed software? In the interview, Singh provides some interesting insights — based on Concur's experience — that lend weight to this view:

• "Our first quarter of transition [to the SaaS model] expanded new customer sales faster than ever before. This was like getting instant feedback that our decision had been a good one, so I've never looked back ... There was no proof they'd buy software as on-demand. We did do customer research, but it was a bet. Our first quarter told it all. We couldn't have asked for a better response."
• "Initially, we tried to incent our sales orgs to tackle big accounts perpetually to offset the cash flow issue. Eventually we made comp completely neutral — same commission no matter what the customer buys. We let the customers decide whether to go SaaS or on-premises. When the sales comp favored on-premises, it was a 50/50 split. When we made it neutral it went to 99% on-demand versus 1%."
• "I don't believe large companies can make the conversion. Forget their genetic code. How many will take the pain? Companies won't reinvent themselves. Think of taking a $40 billion company to on-demand. The value of the business will go through huge negative change. It will get crushed. Cash flow will get crushed. You have to layoff. The transition is really hard and it's very sudden. If you're north of $100 million it's hard. Over $1 billion it's impossible."

I should add that Singh prefaces that final comment with the rider: "This is just one guy’s prediction." But remember he's not any guy. He's one of the few people who have led a public company through the transition from conventional on-premises perpetual-licensed software to an on-demand model. He knows precisely what he's talking about, and how difficult a transition it is. The interview conveys that really well and I commend it to any conventional software vendor who's embarking on the transition.

PS: There's an insightful Talkback comment on my posting yesterday that suggests Larry Ellison understands the SaaS model all too well, and that's why Oracle isn't adopting SaaS. Here's an excerpt that makes a lot of sense in the light of what Singh says above:

"Larry dabbled in Saas in the late 90's and quickly realized that enterprise sales reps used to closing multi-million dollar 'vaporware' deals were not going to stick around and wait on annuity based compensation plans to kick-in, Big-5 consulting firms used to charging millions for drawn out software implementations were not going to recommend Saas, and on-going support staff (based in India) used to resolving technical issues could not be taught overnight to address REAL business issues.

"Give Larry credit, he understood that Saas was the future. He understood that Oracle was too big and too set in its own ways to ever make the cultural shift required to change its 25 year distribution model."