SaaS and the downturn

Summary:It seems inevitable that the blow-up on Wall St will make credit scarcer and more expensive for everyone. But if there's less money being spent in the economy as a whole, does that mean more or less being spent on SaaS?

What's the outlook for software-as-a-service vendors as the current financial and credit maelstrom continues? The question is especially relevant for ISVs, IT solution providers and entrepreneurs who are weighing up whether now is the time to press ahead with SaaS initiatives. It seems inevitable that the blow-up on Wall St will make credit scarcer and more expensive for everyone. But if there's less money being spent in the economy as a whole, does that mean more or less being spent on SaaS?

Look for bellwethers to take a short-term hit. A year or two ago, fast-growing financial services companies were hitting the headlines with huge SaaS deals. On-demand talent management vendor SuccessFactors was mighty pleased with its 85,000-seat deal with Wachovia. Salesforce.com was celebrating a 25,000-seat deal with Merrill Lynch as well as signing Bear Stearns Asset Management. Now all of those contracts may be vulnerable following the collapse and/or acquisition of each customer.

SaaS demand slows but continues to grow. If credit remains tight, then one of the first things businesses are going to cut is capital expenditure — either because they can't stomach the risk, or because they can't raise the finance. The upside for SaaS vendors is that those cash-strapped businesses will find the pay-as-you-go SaaS model highly appealing — especially if it helps deliver operational cost savings at the same time. So while the credit crunch seems certain to harm the front-loaded cost model of conventional software sales, SaaS should continue to grow by picking up some of those canceled projects.

Funding tightens as cashflow becomes king. That noise you heard when Authoria revealed its sale today to private-equity firm Bedford Funding was the sound of the IPO door slamming shut. Talent management vendor Authoria, which has been backed with more than $100 million in venture funding, sold for $63.1 million, plus a further $8 million investment to bolster its working capital. It must have been a tough decision for founding CEO Tod Loofbourrow and the company's board, but this may have been their last chance of securing its cash position before nuclear winter set in. With VC funding drying up in the face of losses elsewhere and shrinking exit opportunities, SaaS startups are going to have to focus all of their wits on generating cash and minimizing expenditure. That's a big ask when the appeal of the model rests on taking on upfront costs that your customers would otherwise have to fund. Well-financed SaaS infrastructure providers will do well out of the double bind that imposes on impoverished SaaS vendors incapable of funding their own infrastructure needs.

In summary, my guess is that you're going to hear and see conflicting signals. Some of the best-known names in the SaaS business are going to show some short-term hurt as large enterprises cut back on subscriber headcounts, especially in financial services. But if the hurt spreads into the wider economy, SaaS could become a refuge that benefits from others' misfortunes, finding opportunities from canceled big-ticket projects and other cost constraints. Unfortunately, not all SaaS players will have enough funding to carry them through, but those with a strong enough capital base or cashflow model will be well-placed to profit.

PS: I'm hosting a webinar tomorrow (at 11am Eastern) on behalf of European SaaS enabler SaaSplaza [a paid engagement — see disclosure] in which founder Herb Prooy makes the case that SaaS solution providers can actually earn substantially more from SaaS contracts than they do from conventional licence sales. That's because the provider can make a margin on expenditure the customer would otherwise be bearing in-house. It's another facet of the case I'm making above: a recession may be bad for tech employment in general, but it could still leave SaaS players counting their blessings.

Topics: Emerging Tech, Cloud

About

Since 1998, Phil Wainewright has been a thought leader in cloud computing as a blogger, analyst and consultant. He founded pioneering website ASPnews.com, and later Loosely Coupled, which covered enterprise adoption of web services and SOA. As CEO of strategic consulting group Procullux Ventures, he has developed an evaluation framework t... Full Bio

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