VC perspective: Can enterprise software companies do SaaS?
Recent discussions (including a great summary by Bob Warfield) questioned the impact of established enterprise software companies in the software as a service (SaaS) market. Therefore, I decided to seek the views of an experienced venture capitalist, who is actively investing in SaaS, for another perspective.
Mike Fitzgerald, founder and Managing General Partner of Commonwealth Capital Ventures, has been around the VC block quite a few times. His firm's conference room is lined with mementos of companies in which it has invested, including Aberdeen Group, Akibia, Centra Software, Compete, Constant Contact, Direct Hit, i-Logix, Tally Systems, Zoom Information, and many others.
I asked Mike whether he thought enterprise companies, such as Oracle, IBM, and SAP, could be successful selling SaaS software. His answer was definite and unambiguous:
These companies don't get it, won't get it, and never will. They are hooked on big deals and have a culture oriented around big deals. That culture can't understand $1000 per month subscription fees.
Mike drew a comparison with previous generations of computing, describing the evolution from mainframe to mini, then to personal computers and smart phones:
How many of these companies survived the transition from one phase to the next? Differences in technology, marketing, and mindset cause companies to ignore the next wave. SaaS is about innovation and opportunity.
THE PROJECT FAILURES ANALYSIS
Mike raises compelling issues around the organizational and cultural conditions that drive companies to succeed or fail in the SaaS market. In fairness, however, his perspective is biased because VC's have an inherent interest in disrupting the status quo.
Despite the obvious bias, Mike raises interesting points. In my recent post on SAP's strategy for Business byDesign, the company's SaaS offering, I partially concurred with his general assessment:
Business byDesign reflects a new way of managing and delivering software for SAP, a company with deep on-premise roots. As SAP has learned, on-premise vendors face formidable challenges and a steep learning curve during the transition to SaaS deployment. SAP obviously underestimated these obstacles.
My take. To some degree, economics and culture militate against large, established enterprise software players transitioning smoothly to SaaS delivery. However, in the end, I believe investment capability is the factor that trumps all others.
The post on SAP strategy reflected this perspective, concluding:
Given adequate strength of will to bring Business byDesign to market, combined with sufficient investment of time and resources, it’s likely SAP will eventually gain the operating experience and technology required to drive customer acquisition and retention costs down to a reasonable level.
The ability of established enterprise players to succeed at SaaS depends on their vision, strength of will, and capability to invest for the long haul. Given sufficient level of desire and investment, companies like Oracle, SAP, and IBM will eventually achieve their goals.
Of course, the big question is whether these companies will sustain that investment long enough to actually make a substantial impact in the market.