SaaS frustration

I've just come off a call with Phil Wainewright, fellow Irregular and saas maven on ZDNet. Phil and I go back many years so calls are always jocular and not always SFSV (Safe For Saas Vendors) ears. We were ruminating on Phil's swipe at Sage Software, a company I've followed ever since my first published piece was a review of Sage Sovereign 4.3 (I think) back in 1991. The gist of Phil's argument comes down to this:

The true moral of this story is that big, established software companies know diddly-squat about delivering on-demand applications — even platform vendors like BEA (now owned by Oracle). Smaller ISVs in particular should heed this warning. If you want to know how it’s done, only ever consult and listen — at first hand — to people who have actually done it. And resource your SaaS projects properly, because doing this right will prove more difficult and more costly than you think.

I've calculated that Sage has about $50-75 million in what I call 'real' R&D budget given the myriad of products it is backfilling around the world. It seems reasonable then that Phil's assertion about resourcing is accurate. Even so, and given the company claims to have spent 18 months on this project, to be so woefully unaware of serious security issues (at least one of which is way worse than is in the public domain) is bordering on the unforgiveable. To Sage's credit, it acted swiftly and we can only hope they will return soon with a more robust offering. As a bellweather vendor in the SMB market, Sage's entrance into a market is an important event. They have to get it right. The question is how?

The same could be said of SAP which has been struggling to find a workable business model with Business ByDesign. The common factor in these two and other cases are companies that have a particular business model that is dependent on very high margins across all service lines. I've long argued this is neither acceptable nor sustainable. Regardless of what the financial markets want, net profits in the 20-30% or even 40% range at scale may sound like a gold mine but as with all mines, they run out. The problem, so eloquently put by Ray Wang in a Tweet message is simple:

Wondering what would it take to move an on premise based software vendor to a SaaS model without impacting company valuation and stock price

The answer should be self evident. Look at the sharp contrast between performance among the saas vendors and the traditional on-premise vendors. On the one hand, RightNow, SuccessFactors and NetSuite all put in numbers that will make the battered mega vendors green with growth envy. All the pressure is on downtrending on-premise software prices, the response to which seems to be an attempt to shift towards a more services based model. I'm waiting to see if this translates into even less money going to innovation by the mega vendors.

SaaS hand wavers argue - and correctly - that this form of delivery and model is counter cyclical in recessionary times. Results so far would suggest that is correct. It is also long term sustainable.

In all the excitement about the new kids on the block, we forget for instance that ADP has been running a successful services based business for donkeys' years. Even though it is essentially a bureau payroll and HR admin company, it still has a market cap of $18.9 billion per today's Yahoo! Finance. So that's a fraction of SAP's $43.7 billion but then SAP's footprint is much larger.

Where I see the real risk for those contemplating transition to on-demand comes in several flavors:

DNA - when you have a long history of financial success and established a large business, it is hard to see beyond corporate history.I've experienced that first hand and it is both baffling and myopic. Companies develop internal bubbles where it is almost impossible to see beyond

History echoes - using SAP as the example, it grew phenomenally out of the 1990's client-server mega trend at the expense of D&B. Those of us with long memories will recall that D&B was the world's no. 1 packaged accounting software vendor before SAP came along with a new business model and ate their lunch. Yet the mega vendors seem to have lost sight of how they achieved success. SAP is not alone. The same can be said for Microsoft now that Bill Gates is no longer at the helm. do they truly believe they are so well insulated that one could not become the next D&B?

Worshipping false gods - the last few years have seen the mega vendors become increasingly beholden to Wall Street for their validity. It's all about survival in an M&A driven world. Or rather it was. The current economy provides the best opportunity to bite the saas bullet and move the model. Investors are just going to have to get used to a different type of return but one that should be attractive in the long term as it is based on an annuity model. Explaining that to the Street will be awkward in the short term given comparative price movement over the last year (see next image) but how long before the NetSuite's start closing down markets that are growing?

Courtesy of Yahoo! Finance

Agility - this is the Achilles heel for incumbents and especially the mega vendors. During NetSuite's earnings call, I had an ah-ha moment when Zack Nelson talked about the way the company responded to market demand for new terms. Analysts on the call were bothered about customer push back (do they EVER understand it's customer that pay for services?). Nelson played the 'market response' card eloquently. It doesn't seem to have impacted NetSuite's market cap or overtly moved the price needle the last day so where's the big deal? Or what about SuccessFactors continuing to innovate with services that match market need? Everyone I listen to says the markets are volatile, uncertain, unclear. That is a perfect play for agile vendors who appear far more capable of spinning on a dime than their larger brethren. That is a factor of size and relative completeness but even so, I constantly see saas vendors bringing new 'stuff' that customers want. The inucmbents? Two to three year roadmaps.

Entitlement thinking - past success and fat budgets makes for inertia, something Phil discussed during our call. I see it as coupled to an insane desire to maintain share price valuations at any cost even though it must becoming obvious that current models represent the road to the long term dead pool. As Phil knows better than most, doing saas right is hard. It is expensive but it is the future. My message to vendors is simple - do you want to be dead in 5..10...years' time?

Nil value - report after report talks about the cost of keeping the lights on with existing IT landscapes. Gartner consistently reports that once you strip out the cost of maintaining systems, customers have little money left for innovation. Yet at the same time, everyone I speak with agrees that innovation and smart spending is the way to pull out of the recession. Saas provides that breathing space because those are the vendors taking on the lion's share of cost in exchange for a wider footprint in the business. It is a partnership model that doesn't really exist in the incumbent space.

Gartner via DTS

If you accept that any or all of the above factors has a part to play in how the software landscape is changing then it is a very short step to understanding that despite all the history, past success and so on, we are on a different path.