On my personal blog, I skimmed over recently published results for Agresso and COA Solutions. Agresso is emerging in the US as a small if solid player in public sector as well as for those businesses that need a more agile approach to business configuration than you'd likely get from one of the big boys. COA is highly localized to the UK market and also has a strong presence in public sector. While the results are not exactly comparative, there are enough similarities to discern several characteristics:
- Top line license revenue is weak, but not quite as weak as we have seen at SAP and Oracle. That's a reflection of the lag in following the general economic indicators we have seen in the US and the fact that public sector demand has not been as weak as we've seen in commercial sectors.
- There are still plenty of replacement deals to be done - this was apparent in Agresso's results.
- Public sector is wising up to the idea of managed services with COA telling me they are blowing out their forecasts.
- There is much more of a focus on service line revenues and a general acceptance that while replacements are always handy, expectations about future mega growth at the license level are at best optimistic.
This last point is important because it reflects a growing reliance on service and support revenues. This is something we've discussed in relation to both SAP and Oracle at some length, frequently concluding that an insistence on very high margin maintenance revenue is a dead end. At least in the long term. The same will be true for all players, hence the need to look at alternative means of generating revenue. Saas/on-demand represents one such alternative that has the benefit of appealing to a well publicized and much hyped trend.
What was intriguing to me is the very different way each is approaching the saas/on-demand trend. This is where we start to see how different saas strategies can have very different outcomes.
Agresso has been very public in its alignment to Salesforce.com via its CODA2Go accounting solution strategy, something I see as both brave and innovative. During the earnings call, the company did not reveal specifics on customer numbers but did say that it is continuing with significant go to market investments in CODA2Go. It seems relaxed about the fact this LOB will not be profitable for the time being but is talking about moving into profit within the next 'couple of years.'
Given CODA has been investing in saas for a little over two years, this will be a credible achievement. Salesforce.com took around 8 years to make money and NetSuite has only recently gotten into profit after 10 years in the game. It is clear then that having the ability to leverage off of Salesforce.com's platform offers high potential for early break out growth and profit. That may not apply to public sector but it is a proxy for commercial sector entry points.
COA on the other hand has fallen into the saas world through an acquisition in the public sector procurement space. It is taking a much more cautious approach, being prepared to pick up on what it sees as the 'second wave' of saas adoption. Instead, it is using its acquired expertise to test out different aspects of procurement such as spend analytics as a way of seeing how saas demand breaks out. It is also using the ancillary acquired data center expertise to provide managed services to its customers.
In my conversation with the company, we discussed the potential for proliferating user numbers at relatively low cost. This was something I discussed in the context of SAP and BI, comparing SAP's approach via its BusinessObjects acquisition and a wee company I stumbled across doing great things: PivotLink.
COA has tended to be carefully acquisitive but the saas trend is giving it pause for thought. There are not that many potential targets that would readily fit into its current portfolio. What's more, it's unlikely there will be many candidates in the near term, even though the company knows it will have to restart acquiring in the next 6-9 months. That pre-supposes COA doesn't plan any major changes to its vertical market strategy.
Being in a position where for the moment at least it has to figure out saas for itself means COA has a difficult time articulating benefits. It is only understanding what benefits are likely to accrue to customers as it takes tentative steps towards saas/on-demand. While I appreciate COA's caution and see why it is placing those types of bet, I think there are better ways to work this one out.
In the meantime, while I have no doubt that both companies will do well in large part because they are both well managed and have solid cash positions they are running the risk of having maintenance revenues come increasingly under the spotlight. Yesterday, Ray Wang argued that:
- Continued weakness in the economy. Vendor revenues continue to decline as new license sales drop and vendors become more dependent on support and maintenance revenues. Customers looking to upgrade or commit to new apps can expect vendors to be more generous on the support and maintenance front.
- Dated and inflexible architecture of legacy applications. Change in business models, workplace dynamics, and macro economic conditions apply new pressures to aging systems purchased pre-Y2K. Customers seek paths to upgrade but are limited by economic pressures.
- Vendor awareness of customer discontent with existing support offerings. Customers now seek to understand what value vendors deliver in their support and maintenance agreements. Many vendors have proactively responded by improving service or making appropriate concessions.
- Growing acceptance of third party maintenance (3PM) options. Vendors such as Rimini Street and Spinnaker have proven to the market that they can deliver 3PM to an array of ERP applications. Cutting maintenance fees by 50% or more can free up funds for innovation or pay for the next upgrade.
While Ray is targeting the larger vendors, the same general principles can be applied to any vendor. SAP and Oracle can withstand a degree of pressure on the maintenance issue, smaller vendors are less able to do so. It's a matter of scale.
The industry as a whole is in a state of generalized top line license revenue decline, a trend I see no sign of reversing in organic terms. Shaving even 10-20% from the high margin maintenance line item will have a much larger impact on smaller players.
That suggests to me that rather than 'wait and see' on saas, the better strategy is to consider an orderly but progressive switch to a services based business that embraces saas across as many categories as possible in the next 1-3 years.