SaaS Dead? I Think Not, Sir

Harry Debes, CEO of Lawson, went on a rampage against Software as a Service in an interview with ZDNet Asia, declaring SaaS terminal in two years - I presume that means by 2010, the cloud will have dissipated and fallen to earth in a harmless rain shower.

I found out about this fearless forecast from a tweet by Dennis Stevenson - a man who has provided me (and other Tweople valuable directions to important places and made some seriously smart comments about them, too. He noted that my blood brothers, Vinnie Mirchandani, Dennis Howlett, and HelpStream's Bob Warfield all have written their take on this. Since they all are Enterprise Irregular colleagues of mine, I figured, now that I'm feeling a lot better, that its time to jump into the fray and rip a new one for Harry Debes.

SaaS denial has been an interview pillar for many - remember Tom Siebel's now "ate-the-words-tasted-terrible" comments to CNET about salesforce.com in 2002 - ""I think they're not a factor in the marketplace. They don't have meaningful market share. The company's CEO left, its CFO left, and they can't get financing." What astounds me me is that it isn't usually SaaS that they attack, but its best known representative, salesforce.com - who created this market - but are hardly the only representatives. Joshua Greenbaum, also an Enterprise Irregular has been calling salesforce.com Siebel 2.0 and has predicted their demise by the end of 2009, which I don't buy, though I think they are facing a more formidable set of obstacles than they used to.

But back to Debes. His reasoning is:

1. The business model for SaaS is not profitable (salesforce.com has "average to below average profitability.")
2. Salesforce.com is holding up the whole industry so that when it has troubles, it all will fold.
3. My personal favorite with the question asked by the interviewer - "Won't people avoid the mistakes of "previous" SaaS incarnations, as you mentioned?
   "People are stupid. History has shown it repeats itself, and people make the same mistakes."
4. SaaS costs take 4.5 years to recoup and you have no firm way of saying customer will still be yours at that time.
5. "An industry has to have more than just one poster child to overhaul the system. One day Salesforce.com will not deliver its growth projections, and its stock price will tumble in a big hurry. Then, the rest of the [SaaS] industry will collapse."

There you have it, stupid people. The wisdom of a guy who's company has a projected growth rate of 30% (not bad) while his whipping boy salesforce.com has a projected growth rate of 43% (real good) in an industry that has projected growth rate, according to Gartner of 22.3% to $11.5 billion from 2007-2011.

But more importantly, take a look at some numbers thrown out by Saugatuck Research on SaaS, released in June 2008 :

• • "Among 'large enterprises' (5,000+ employees), only 4% are not planning on deploying SaaS, a radical departure from other market data we've seen from as recently as a year ago
  • "Midsized companies surveyed (100 to 499 employees) had a 95% customer satisfaction rate with their SaaS deployments - we can't recall seeing a number that high for anything, let alone anything associated with software."

  By 2010, they expect 65% of businesses w/more than 100 users to have some SaaS solution in place with that number jumping to 75% in the U.S.

Okay, those numbers were just the warmup act so that Debe's comments are seen for what they are - an on premise provider making the case for on premise - and, while more colorful than most, making the same old bland arguments that the anti-SaaS on premise providers make to justify their shrinking existence.

What are some of the things that Debe forgets?

1. The conditions that took down the hosted software market of the late 90s and early millennium are not the same conditions that we have now. This isn't an investment in a software bubble blower - it's success is its service model, which is based on features, convenience and managed costs. Debe's thinking is that if you finance hosted licensed software, the very model that failed in the late 90s and early millennium, you're doing the same thing. But paying for licenses and hosted services gets to be expensive. Rather than the services substituting for the software, they become an added cost. His other line of reasoning is that once you depreciate sunk costs then your software is free. He says, "When the sunk costs have been fully depreciated, customers effectively run the software for free, thereafter. Whereas if they went to Salesforce.com, it'd cost them a million a year because they're paying for ongoing licensing and maintenance." The irony of this ridiculous statement is that somehow maintenance doesn't occur on premise and there is no cost to it if it does - though he might just be conveniently forgetting that problem. Plus upgrades, which in an on demand model are part of the subscription price - ain't free in the traditional license model that enterprise applications like Lawson use.
2. Debe is also forgetting that salesforce.com is not the only flagship or as he calls it, poster child. NetSuite is one, Oracle CRM On Demand, RightNow, Right90, Workday, ReardenCommerce, Entellium....oh crap...I could name hundreds of companies who are succeeding - and not just in salesforce automation. Companies like SAP's Business Objects have an on demand Business Intelligence version; companies like SAS have an on demand Customer Experience product; Zoho has dozens of modules all web-based. This is a robust market that is going through what any market goes through - mergers, acquisitions, successes, failures. But that's hardly a reason to deem a market that is growing at magnitudes faster than its on premise counterpart, a market that's going to fail within a couple of years.
3. He also is forgetting what small and medium businesses are interested in. They NEED subscription based software because they can control the cost and still be able to use it to support their growth and their engagement of customers. They can't afford the on premise license fees or the upfront setup and implementation services that the on premise model demands much of the time. This is a HUGE market that is just beginning to be tapped and for every salesforce.com that is moving upmarket to the enterprise and for every Workday that is signing a 200,000 seat deal, there is a Zoho who is aimed squarely at the small and lower end of the midmarket.
4. While Lawson has been successful certainly, reporting around $851,000,000 in revenue for their fiscal 2008 - which ends May 31, 2008, they aren't doing even as well as salesforce.com, which seems to be their chief whipping boy in the Debes rant. On August 21, 2008, salesforce.com reported "second-quarter sales of $263.1 million Wednesday, proclaiming itself the first software-as-a-service vendor to reach the $1 billion threshold in annual sales." Bob Warfield reports that salesforce.com is slightly less profitable on more revenue than Lawson - which certainly jabs Debe's argument in the face.

The most important thing, when it comes to the continued survival of SaaS is that customers are asking for it. You see the numbers above. This is what study after study shows, what conference after conference presents and what customer after customer says to me when I'm interviewing them for either a book or a consulting gig or aan article or any other reason I have to interview them on this subject.

Don't get me wrong. I not only have nothing against on premise, but I think it can be the most viable model for many companies. I also think that companies will choose the delivery model, the services model and the licensing model that makes sense for them. Sure, some of them get it wrong. But the rampant cynicism in Debe's argument that SaaS will collapse because the poster child will have trouble and people are stupid, is almost unconscionable, hard to stomach and minimally not very well reasoned. His equation to the prior hosted services incarnation and the ASP incarnation (which was just an earlier name for the current on demand model) as the models that guarantee collapse again is poorly founded since the social, political, cultural and economic conditions to support a SaaS model are here now, where they weren't a decade ago.

I also find it hard to be that cynical about human beings. I think they generally make the right decisions but that there are times they don't. Lawson CEO Harry Debes is making one of those mistakes by speaking in his own blatant self interest in an area that Tom Siebel had to eat his words about too several years ago.

THAT'S stupid.

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Comments

[Steve F.]

Fundamentally software companies think of the world in an on premise view or "cloud" computing view. As a former Lawson employee and now NetSuite reseller the value that is created for customers by providing complex ERP systems on demand is a 4X-10X savings. No wonder Harry doesn't want the model to change.

[Syntelligence]

SaaS will never die is how I see it. Great information in this post, thanks a lot. Keep up the good work.

[Chris P]

@Alexandre:

I don't think you can look at profitability the same way when comparing a SaaS-based software company to a traditional software company. For example, the marginal cost of getting another Oracle customer (and I realize I'm _hugely_ oversimplifying this) is the cost of burning, packaging and distribution of new CD's. But with SaaS, it's the ongoing costs of software plus the hardware to run it (and staff to run that and so on).

[Craig Klein]

Sometimes when someone goes on a rant, they're ranting because deep down they realize the insanity of what they're saying, they just haven't fully accepted the reality that's beginning to smack them around.

Sure, SaaS as a business model has its weak points. However, there are way too many entrepreneurs trying to make a go of it to assume that there won't be further innovations to strengthen those points.

On a macro scale, it just makes sense in terms of the utilization of resources - servers, software, IT expertise, end user hardware, etc.

Oh BTW - I wonder if Mr. Debes has heard of Google... they have what could be argued to be the biggest IT bet ever placed squarely on the SaaS model.

[Alexandre Trottier]

"Bob Warfield reports that salesforce.com is slightly less profitable on more revenue than Lawson - which certainly jabs Debe's argument in the face."

Are you referring to his argument that SAAS is less profitable? If so, I don't see how you come to that conclusion. If, in fact, Salesforce does make less on more revenue, it proves that they really are inefficient. If the game is maximizing revenue, more from less is better. Can Salesforce increase their margins over time? I think they can, so we'll see.

[Brent Leary]

Please, Hammer... Don't Hurt 'Em...Too Much!

[Paul Sweeney]

Ouch. Goin to need a big spoon to eat all the humble pie. :)