Is SaaS a broken model, with integral flaws, doomed to failure in the next two years? Lawson Software’s CEO, Harry Debes, thinks it is. Perhaps the structural elements of the SaaS reality just break Debes’ business models.
Reports of (Predictions of) SaaS Demise
…are greatly exaggerated. The SaaS is doomed thread has been circulating for a couple weeks, ever since ZDNet’s Victoria Ho interviewed Lawson Software’s CEO, Harry Debes.
Here’s a quick “get caught up” set of interviews and editorials.
- Victoria Ho’s interview, where Debes is quoted: “People will realise the hype about SaaS companies has been overblown within the next two years.”
- Hat tip to Gopal Shenoy, who said: “Debes made the prediction that Saas software model is bound to collapse in two years.”
- Joshua Greenbaum at Enterprise Anti-matter wrote: “But if Harry had said the SaaS model will collapse because a pure-play SaaS model is, in the long-run, untenable, I would have to agree.”
- Joshua actually takes a reasoned position, he also wrote: “all in all SaaS will end when customer choice ends, and no sooner.”
- Jeff Kaplan at Seeking Alpha wrote: “the SaaS movement is being fuelled by genuine customer demand and is experiencing accelerated growth because of widespread customer satisfaction”
- Krissi Danielsson at eBizQ wrote: “The idea that SaaS would fail because there were less profits in it sounds silly to me.”
First, let us (apparently) be the first to point out that Debes didn’t say the SaaS market would collapse in two years. He said people will see through the hype within two years. Big difference. Debes made a handful of other unimpressive comments, but not the one he’s being vilified for. There is other stuff to criticise, but his point about the hype is spot on. Anyone who’s followed the agile movement as it moved into the mainstream has had to undo the damage of overblown hype in conversation after conversation with clients and stakeholders.
Second, while Krissi humbly discounts her opinion as being “less expert” than others, she makes the most succinct points about the value to the customer trumping any other perceived dynamics.
Knocking Down Barriers To Entry
Debes points out, correctly, that (hosted) SaaS vendors do not have the luxury of the barriers to entry that they can create when they sell on-premise solutions. Debes describes the situation – after you have sold software to a customer and deployed it, it becomes very hard for that customer to ever move to a competitive solution. If your product provides a value of 10 units, and a competitor has a product with a value of 15 units (50% better), you will probably lose out on a competitive new sale. If it costs a company 6 units to change (deploying new software, training, etc), then you probably will retain your current customers. Those customers lose out on the “better” solution, because the incremental value is only 5 units (15 minus 10), but the cost to change is 6 units. This is a barrier to entry that mutes competition.
Take a look at his exact statement:
Getting signed up as a SaaS customer is fast, but getting out is just as fast, whereas traditional software is like cocaine — you’re hooked. It’s too difficult and expensive to switch providers once you’ve invested in one. If it were easier to jump ship, a lot of people would’ve hit the eject button on SAP a long time ago.
Where Debes is off the mark is that he uses the above to reach the conclusion that SaaS is flawed. What he really is exposing is a weakness in some company’s business models.
Any company that is dependent upon that barrier to entry (of high switching costs) for survival is doomed. The great wall of China worked fine against enemies on horseback. Not as effective today when cavalry implies helicopters instead of horses.
SaaS Creates a More Competitive Market
Because switching costs (both to and from) a SaaS solution are much lower, the market becomes much more competitive. Consider the following comparison (from a customer perspective) of the total costs of ownership for SaaS subscriptions versus packaged software licenses. This is from our earlier article on the economics of SaaS.
Debes’ barrier to entry is visible in the bottom chart – you have to clear that high barrier to justify a software purchase. And if you’re already getting much of the value with an inferior solution, it is harder to to financially justify the change to the superior solution. Customers have to live with their mistakes.
With the SaaS model, costs are incremental (in comparative scale). If, at any time, you desire to change solutions, you only have to deal with data migration and training costs. You may have to pay an early-cancellation fee (like with cell phone service) if you have signed up for a long-term subscription (to get a lower monthly rate).
From Debes’ perspective, that is apparently very scary. Anyone can come along with something just a little bit better, and steal his customer.
From your perspective – all you have to do is make something a little bit better than your competitor, and you can win that customer for yourself. This is great. Instead of looking at market-penetration to see how many customers are left, you look at the size of the market to see how many customers exist.
[Red alert! Logical flaw!]
There’s one problem. The barrier to entry is removed as soon as one of Debes’ competitors has a SaaS offering. As long as the customer can export his data from Debes’ tool, and decouple/recouple any interfaces to other customer systems, the barrier is removed as soon as a competitor offers a subscription pricing plan. So this is not a good argument for why Lawson should not have a SaaS offering – it is a plea to their competitors not to.
You may want to discourage your competitors from adopting SaaS models, or they might just take your “addicted” customers when they introduce a better product. Or, you can seize this as an opportunity to build a better mousetrap, and liberate your market from their past mistakes.