Narinder Singh
Last Thursday we had the pleasure of participating in the 3rd Annual Pacific Crest On-Demand Conference, the kickoff to Pacific Crest's Emerging Technology Summit. Salesforce.com CEO Marc Benioff invited us on stage during his keynote to illustrate how partners can harness the power of the Force.com platform, Visualforce and the AppExchange.
The participating companies covered the spectrum from large on-premise software companies such as EMC and SAP, who were describing their expansion into the newest "hot" market, to companies such as NetSuite, Salesforce.com and SuccessFactors that have built their business from the ground up with Software as a Service.
Interestingly, a number of companies there are in the process of trying to radically shift their business model from on-premise to on-demand, and they talked about the challenges. Most of these companies were small and nimble, which enabled them to make the transition cold-turkey. All were very clear that it wasn't an easy switch to make.
Can Companies Have Their SaaS Cake and Eat It Too?
Can companies successfully split their focus between traditional software and on-demand services?
This is a question we've been raising, skeptically, for quite some time in our blog. Our original Services 2.0 position paper in April 2007 described how the disruptive effects of SaaS will impact the economic models of on-premise software vendors. After a year of additional information and insight, it's even more apparent that treating SaaS as just another channel or product feature is a recipe for failure.
Spending a day with companies that have, or are attempting to make the switch from on-premise to SaaS reinforced the major challenges. IDeaS CEO Ed Booth gave a great presentation highlighting the challenges and upside of moving to an on-demand model. Concur Technologies has often been referenced as the best example of a company that successfully made the transition. Some issues raised by them and others included:
- One-time revenue hit: How do you manage through the decline in revenue growth when you move from an up-front license model to a monthly subscription model? With Wall Street and shareholders as panicky as they are today, this is a very difficult proposition for large public companies. Upfront licensing, even with longer term contracts, can drop by as much as 75%. As the Patricia Seybold Group has noted, As a company moves from perpetual licensing - where customers pay a relatively large, one-time licensing fee - to SaaS - where customers pay a relatively small, monthly license fee - financial performance slips in the short-term."
- Internal channel conflict: How do you manage the channel conflict that happens with your own partners, and even your own sales force, when offering both traditional license and on-demand software? Companies like EMC, with established business units focused on driving demand for SaaS or cloud computing, will have a serious challenge with this. The most reliable solution is to completely separate the businesses - which eliminates any synergy of having both models in the same company.
- Shifting to a "month by month" culture: How do you change the way you sell to and support customers when you have to earn their business every month instead instead of every few years when the next big version comes along? This is a huge cultural change for sales and support teams to make. SaaS companies require the culture of the web - where sites like eBay, Amazon, Google and others constantly monitor, serve and improve their customer's experience.
- Speeding up R&D: How do you adapt your product development processes to deliver an on-demand service? Successful on-demand vendors get the benefit of releasing new features quarterly, not every two or three years. When features are released, they are expected to work with other systems indefinitely. Salesforce.com still supports each of its 12 versions of its API. How many on-premise vendors can claim anything even close?
EMC, SAP, Microsoft and Oracle make it clear to customers and stockholders that their foray into SaaS or cloud computing is not a departure from their software strategies, but an expansion of it. They say things like "SaaS is just another delivery model," or "we're giving customers a choice." Yet they keep increasing the on-premise maintenance fees. SAP just increased its maintenance rate from 17% to 22% per year - an increase of 30%! This leads to one of two possible conclusions:
- The cost of supporting a growing legacy of capabilities keeps increasing, which eliminates the benefits of on-premise scale. Compare this to any internet company, where increased scale lowers cost and results in expanded services for customers.
- They are taking advantage of customers' inability to easily switch off of their on-premise software.
Traditional software companies - especially large ones - will certainly have to straddle the fence for a while. Yet the doubletalk and denial will not help in the transition. First, they must acknowledge the need to make a transition. Second, in many cases, dramatic actions, like separating SaaS products into completely independent business units or taking companies private to allow for transition, will be needed to make the change. It's likely that legacy companies will not switch until customers stop tolerating increasing TCO and diminishing innovation from their on-premise systems.
In the 80's, Bell Atlantic spent $3 Bil on AT&T 5ESS switches for Bell's telephone network. AT&T's switches were much more superior to Northern Telecom and Siemens at that time.
ReplyDeleteHowever, Bell didn't properly size the vendor lock-in.
The 5ESS switches ran an operating system proprietary to AT&T, so whenever Bell wanted upgrades or new features, it was pretty much at the mercy of AT&T's pricing weather.
Case in point: Bell Atlantic wanted its systems the ability to identify toll-free "1-800" calls. AT&T didn't provide (of course they didn't!) any documentation or API for Bell to develop this feature themselves, and quoted Bell $8 Mil for a software upgrade just to do that. Bell had no choice and bent over. Voice dialing? $10 Mil! (really)
This extortion was a fat consistent revenue stream for AT&T, and made up 30-40% of AT&T's switch revenues. AT&T's position was further solidified by using its proprietary OS to prevent others from developing compatible equipment that may cannibalize sales from AT&T's product line.
Bell Atlantic could not just throw AT&T out because (1) the switches had a lifespan of over a decade (2) removing and installing was expensive (3) the used switches had low re-sale value, because nobody not already locked-in would want to be locked-in ;)
In other words, the switching costs were astronomous, and Bell was hurting real bad in the wallet. It sued AT&T in 1995 for monopoly.
With SaaS, this problem goes away. The customer can switch vendors on a dime; without the safety net of a perpetual licensing scheme, vendors have to constantly prove themselves by continuously delivering innovation and value to their customers -- or risk losing them to the competition.
A flat world combined with fierce competition to innovate can only mean more and better options to the consumer :)
Unlike traditional on-premise vendors, SaaS vendors can't rely on their own product development "baggage" to milk a drying revenue stream.
Hi Jay-- Absolutely agree with your broader point about the value created for customers by the continuous innovation driven by the SaaS model.
ReplyDeleteHowever, I would not agree with your statement that "customers can switch vendors on a dime." Customers make real investments in shaping their business processes around certain solutions-- investments including custom application development and change management. So understandably, customers are making very careful decisions about the SaaS platforms that they embrace.