The End of SaaS? Or Just the End of Hype?

The End of SaaS? Or Just the End of Hype?

Summary: Lawson CEO Harry Debes started -- or rather continued -- a brouhaha that's getting some pixels in the blogosphere, and his position is worth commenting on for both its courage (foolhardy) and its excess (hyperbolically so). According to Harry, the SaaS market will collapse in two years time, due to the Saas model's inherent lack of financial merit.

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TOPICS: Cloud, Emerging Tech
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Lawson CEO Harry Debes started -- or rather continued -- a brouhaha that's getting some pixels in the blogosphere, and his position is worth commenting on for both its courage (foolhardy) and its excess (hyperbolically so). According to Harry, the SaaS market will collapse in two years time, due to the Saas model's inherent lack of financial merit. Speaking from the perspective of having predicted the demise of SaaS-market leader Salesforce.com a little more than a year ago, and having then had to change the timetable for my prediction (though not the prediction itself), I think Harry's comments deserve a little comment from someone who's been there, done that (sort of).

I think Harry is right that Salesforce.com's success doesn't spell the success of the overall SaaS model, and I would argue that recent evidence of profitability on the part of SFDC isn't enough to keep the competitive and market forces arrayed against SFDC from eating its lunch in the next year or so. While there are definitely SaaS companies that are making money, even good money (as noted by Bob Warfield here), my sense is that pure-play SaaS vendors will "collapse" more because they are ignoring customer choice more than because they are part of a hype curve that's heading south any time soon.

As my friend and fellow Enterprise Irregular Vinnie Mirchandani points out, SaaS will survive because its customer appeal is unstoppable. The pricing, the service model, the pay-as-you-go structure are so rock-solidly pro-customer -- particularly relative to the current on-premise licensing and service models, that SaaS companies can and will thrive for no other reason than this ability to break the current customer-unfriendly model that dominates the on-premise world.

But if Harry had said the SaaS model will collapse because a pure-play SaaS model is, in the long-run, untenable, I would have to agree. These same forces for customer choice will also dictate that hybrid SaaS/on-premise business models will be the ones that truly succeed in the long-run, precisely because customers, being only human after all, want to be able to do two things that, right or wrong, mean some version of on-premise is here to stay.

Customer choice #1 is customization to fit a specific business model: while not all functions need to be customized, the ones that deliver deep competitive advantage to individual customers will not be amenable to the one-size-fits-all on-demand model. Every company has some proprietary process IP that makes it unique, and insofar as those processes are realized in enterprise software, that software will be highly customized, and therefore only available as an on-premise solution. The important trick here is that the same two functions -- CRM, HRMS, ERP, SRM, etc -- can be strategic to one division or line of business and completely generic to another inside the same company, much less across different companies. And those needs change as the business model changes. The successful vendors in the long-run will be able to handle this requirement with the fluidity of a hybrid model -- SaaS only vendors won't be able to meet these customers' needs.

Customer choice #2 is local control over data and process. While we all know the myriad reasons why we don't ever ever ever have to worry about data being stored off-premise (did you catch the sarcasm there?), there are those businesses that insist on having everything locked down inside their four walls. There are even some good reasons for this, but good or bad, if what the customer wants is local, that's the only reason I need to hear. And, because there are lots of companies that feel this way, this guarantees that on-premise won't go away. It also guarantees that the smart on-demand vendors will have a hybrid offering precisely to capture these customers and either convert them when they see the light or keep them from going to the competition.

There are other good reasons why SaaS/on-demand isn't going away -- ever -- such as what I call value-added SaaS, but I think I've made my point. Harry Debes may be right to disparage the relative success of some of the SaaS market leaders, and maybe he's just doing his job by getting more people to pay attention to him and his company than otherwise would be the case, but all in all SaaS will end when customer choice ends, and no sooner. And when customer choice becomes passe in the enterprise software market, I hope I'm long retired. SaaS isn't collapsing, it's only just getting started.

Topics: Cloud, Emerging Tech

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  • Hype is not necessary

    Customers are not turning to SaaS for the financial merits of cheaper software licensing. The cost of the software is about the same as traditional software, it is the cost of maintaining the software and the hardware that runs it that customers can't stomach any longer.

    Salesforce.com did great things for the SaaS model but they've also created some misperceptions about the model that aren't always true.

    Service-now.com provides IT service management (think service desk on steroids) via SaaS. Our customers keep their customizations through upgrades. They can also choose either on-premise (10% choose this) or hosted, either way we still manage the instance. To this point, multitenant is not a prerequisite for SaaS.

    We've succeeded in the market because customer choice had been squashed by HP, BMC and CA. A SaaS / Web 2.0 alternative is changing all that.
    rglauser
  • Hypes repeat itself!

    There are not many new ideas they can explore and sell. So one hype dies away, then resurffice using another acronyms. Let's what what words they will use in the next cycle! On heaven computing?
    joemartn
  • Is Salesforce.com the new ADP ... or the next Datapoint?

    Is Salesforce.com the new ADP ... or the next Datapoint?
    What will happen if blue sky clears the cloud?

    ***

    This headline recently appeared in several places across the Web:

    "Salesforce.com Passes $1 Billion Annual Revenue Mark"

    THIS IS NOT TRUE. I don't know whether this material misstatement arose from media manipulation or an honest mistake, but it's genesis is most likely this 20 August 2008 press release...

    "Salesforce.com Announces Record Fiscal Second Quarter Results"
    http://tinyurl.com/5m5mea

    ...the subheading of which claims:

    "First Ever Software as a Service Company to Exceed $1 Billion Annual Revenue Run Rate"

    THIS IS NOT TRUE, EITHER. "Software as a Service" is marketing technospin for "service bureau". And payroll processing giant ADP--another service bureau--exceeded not only a "run rate" but actual annual revenues of $1 billion in 1985:

    "The original outsourcer, Automatic Data Processing..."
    http://tinyurl.com/56y5tx

    Yes, SalesForce.com did report revenues of $263 million for their most recent quarter. And yes, they have raised "FY09 Revenue Guidance to $1.070 - $1.075 Billion". But NO, Salesforce.com has NOT passed the "$1 Billion Annual Revenue Mark". And despite Cheerleader/CEO Marc Benioff's effusive exuberance, some like Tiernan Ray do not share his enthusiasm:

    "Salesforce's Deferred Revenue Debacle"
    http://tinyurl.com/6oagtp

    Perhaps in an effort to meet ever-inflating investor expectations--a fire they themselves have fueled--Mr. Ray notes that Wedbush Morgan analyst Michael Nemeroff "...thinks Salesforce may be pushing customers to sign more multi-year subscription contracts by lower prices, which could be hitting deferred revenue." And reading that, for me, brought on a disturbing case of Datapoint deja vu:

    http://tinyurl.com/gk77r

    "By the early 1980s, Datapoint was a Fortune 500 company. Under immense pressure to increase sales figures, its sales representatives encouraged customers to place large orders at the end of the fiscal year, permitting the company to count the orders as revenue even though the money had not been received and, in some instances, the sold equipment had not yet even been produced.... When some of the customers went broke before paying their bills, Datapoint had to reverse sales or record substantial bad debts, which caused the company to lose $800 million of its market capitalization in a matter of a few months in early 1982. The U.S. Securities and Exchange Commission (SEC) ordered Datapoint to stop this practice."

    Is Salesforce.com the new ADP ... or the next Datapoint? Some say their business model is to take your watch and then bill you for the time. If so, what will happen to all those watches if blue sky clears the cloud?

    Bruce Arnold, Web Design Miami Florida
    http://www.PervasivePersuasion.com
    MiamiWebDesigner
  • RE: The End of SaaS? Or Just the End of Hype?

    The hybrid model provides the advantages of the SaaS model, while mitigating the drawbacks for customers. For example, the hybrid model allows companies to move the software and data in-house when:

    * They need to store highly sensitive information and are concerned that SaaS providers might have inadequate security or be socially engineered

    * They need tight integration with sensitive back-end systems and this is either technically impossible with a remote system, or their IT department is unwilling to create holes in the firewall that would permit an outside server to initiate actions on internal systems.

    * They need to transfer large files and cannot afford the delay that results from the typical Internet connectivity speeds of 100kbs - 1000kbs, as compared to internal Ethernet speeds of up to 1,000,000kbs.

    * They are concerned about the long term financial viability of their SaaS vendor.

    * They need to modify the core software itself.

    * They would rather pay a lump sum than monthly rental charges that every 2 years may total the cost of purchasing the application outright.

    The adoption of this model by SAP, Google Docs Offline, EnterpriseWizard CRM and Microsoft CRM shows that it has momentum and will probably replace the "pure" SaaS model.
    SimonGantley
  • RE: The End of SaaS? Or Just the End of Hype?

    Customers are not turning to SaaS for the financial merits of cheaper software licensing. The cost of the software is about the same as traditional software, it is the cost of maintaining the software and the hardware that runs it that customers can't stomach any longer.

    Davteks is Miami's premier <a href="http://www.davteks.com/" target="_blank" >Web Design Miami</a> firm. We specialize in complete web solutions in the South Florida - Miami area. Anywhere from professional web site design, to Internet marketing.
    Davteks