McKinsey says buy SaaS
An opinion column in ComputerWorld by two McKinsey consultants this week explains why they believe it's Time for the IT Industry to Take Notice of software as a service. Quoting McKinsey's research last year that found a jump from 38% to 61% in the proportion of CIOs planning to use SaaS, the authors set out "why this trend seems bound to gain traction where an earlier generation of hosted software failed to do so a decade ago." Several of their most compelling arguments come down to simple economics: they say that SaaS has less financial risk for buyers, is cheaper to use and yet just as profitable for vendors.
One of the most important factors they quote is a stand-out for me because it echoes what I keep on hearing from up-and-coming SaaS vendors who are targeting the enterprise market:
"... many customers are eager for the shift because they're frustrated by the traditional cycle of buying a software license, paying for a service contract and then having to buy upgrades. Many customers believe they would have more control over the relationship if they simply paid monthly fees that could be switched to another vendor if the first failed to perform."
Several vendors have recently told me that they're finding prospects are most responsive when they face the cost and disruption of an upgrade to a new version of their existing enterprise software package. In the past couple of weeks I've heard this from Workday, which is targeting the ERP market, and from Service-now.com, which targets the less visible but still significant IT service desk market.
McKinsey has good news on cost of ownership for customers who make the switch. Others have argued that SaaS solutions cost more over time because customers keep on paying subscription fees throughout the lifetime of the application. But McKinsey contradicts this view, and even suggests that competition will render the traditional licensed model unsustainable in some application categories:
"Ownership costs are typically less — as much as 30% lower for a typical CRM installation, according to McKinsey & Co analysis. Costs should drop even faster for commodity services such as e-mail and messaging, which may soon be offered at prices so low that the traditional licensing model will be uneconomical."
The article also shares some good news for SaaS entrepreneurs and shareholders. The McKinsey analysts have compared the profitability of leading SaaS vendors to conventional licensed software rivals, and have decided the former's lower profits simply reflect where they are in their respective growth curves:
"Although SaaS companies may be slightly less profitable than traditional independent software vendors, this is primarily a result of smaller scale ... We expect the economics of online delivery to improve as the market grows."