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.
Conclusion
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.
I love the perspective you have offered up. I have implemented both types of software. The one thing that remains constant for success is the level of sophistication of really implementing software to make the business more efficient. This has become an art form. With all the variables that dynamically shift and change the one role can really insure success for both the Business and Technology groups is the Business Analyst. All parties involved must have skin in the game and they must feel their are true collaborations happening to understand the perspective of “What” it is and “How” it will be used.
Once we get over this hump and make technology make businesses more efficient with use of technology we get to true innovative solutions. We have developed a process and framework that builds trust, collaboration, synergies, and well analyzed solutions for both sides of the table and everyone is contributing, but it still comes down to the Business Analyst to live in both worlds and be the gas to keep the innovation train moving. And not everyone can do it. Coupling Analytics with Creativity Right and Left Brain firing on all cylinders is truly an art form. The Processes, Deliverables, Facilitation, Documentation and Management of this information is the hard skill that can be taught. The other stuff you can learn it, but you have to have the passionate to take many shades of grey and clearly concisely management to deliver software…..install or SaaS. I would have to say SaaS offers up more of the house already built, but the creativity for your business is where you truly see competitive advantage. Plus I see so many of the SaaS bells and whistles bolt-on’s having huge a leg up on the installed path. Plus business people love demo’ing it in a sandbox with SaaS gives the collaboration and synergies between the businesses and IT a huge advantage.
History repeats itself mainframe or client server argument….client server or SaaS…….seems scary similar in nature. Uuuumm how did that play out for the IMS’s and the AS/400’s of the world?
Good article; thanks for the insights! Regarding the “you only have to deal with data migration and training costs” statement, however, I would typically include user migration costs due to collaboration as a significant part of the barrier to entry.
The more successful an SaaS solution has been in penetrating an organization, the less practical a “flip the big switch” migration becomes. By that I mean migrating all data and users during the same “offline” timeframe, say overnight or over a weekend. The probable outcome of a such mass migration tends to be disrupted user productivity, flooded Help Desks, and lynch mobs roaming the corridors looking for whatever idiot planned that transition. So generally a managed approach is taken, with users being migrated in small enough chunks (e.g. teams, groups or departments) such that Training and Support can deal with any issues in a timely fashion.
A plan to migrate away from an SaaS solution tends to pose additional challenges, however, given that one of SaaS’ prime virtues is improved collaboration. Once teams/groups/departments have gotten used to sharing key information on a (near) real-time basis, what happens when they’re being migrated to a new solution at different times? The old and new solutions become separate data silos, and users can only share with other users on the same side of the migration wave. Given continued data activity in both silos, the affected business processes become disconnected.
So to keep from breaking the collaboration model, with SaaS it’s typically no longer sufficient just to maintain both the old and new systems for the duration of the migration. That organization would also have to be committed to accomplishing the ongoing bidirectional data migration needed to let all teams/groups/departments continue to stay in sync during the transition, regardless of which solution they’re using. That of course tends to represent a much bigger task, cost and headache than just a one-time, unidirectional data migration.
So in a practical exercise, I think that business process planning will typically show that the away-from-an-SaaS-solution migration barriers are higher than they may appear at first glance.
Keith, thanks for the great thoughts and welcome to Tyner Blain! You do raise an interesting question about the previous ASP model.
Ten years ago, when I was working in the enterprise software space (on sales / sales engineering applications), we had many discussions about desktop versus server solutions. Our clients were compelled economically to develop server-side solutions (cost of deploying changes, cost of multi-platform development, business agility – delays of rolling out changes / updates).
Users had inconsistent access to sufficiently useful network connections (speed and availability) such that user adoption / value to end users, practically speaking, mandated disconnected, thick client applications. Our clients were caught in the middle. Some paid the price of distributed solutions, others adapted their sales processes and engagement models to the constraints of online-only applications. A couple tried to do both.
Ultimately, for almost all of those customers, the businesses chose a third solution (this change happened over about 10 years). The solution they chose was to change their business model to no longer “need” the benefits our products provided, thus removing the justification for the costs.
It would be really interesting to engage those same customers again in an environment of ubiquitous internet (well, much more so, anyway).
We weren’t providing solutions as SaaS at that time (we did try, in some cases, but we did not offer a compelling price/model/value, so it never succeeded). The “customer to user” model at that time, however, had much of the same dynamics (thick versus thin client).
Thanks again!
Bill, thanks for the great insights and welcome to Tyner Blain!
You’re right – data migration is a significant barrier in enterprise situations, presenting an often unanticipated (or at least under-appreciated) barrier to entry for replacements.
Your comment that ‘facilitated collaboration’ makes the barrier higher for SaaS solutions is really intriguing. While not being an extra barrier implicit in SaaS, it is a barrier implicit in “enlightened applications” that encourage, leverage, and glean value from collaboration. And I agree with you that newer applications tend to focus on collaboration more – and that server-side applications tend to enable collaboration more effectively. Nothing prevents peer-2-peer communication (Microsoft Groove comes to mind) except mindset.
Further, SaaS companies, by focusing on customer retention (versus acquisition), will find those “low hanging fruit” opportunities. It is easier to incorporate collaborative capabilities into an existing application, especially when you get the agility benefits of the SaaS development / business model. So I agree with you that the market forces will tend to drive things in this direction too.
Thanks again!