SaCS - Software as a Customized Service

Forrester says on-premise beats out SaaS economics for organizations with 500 or more users. (or that SaaS is not right for larger companies).

McKinsey says SaaS adoption in large organizations is about to explode.

Who is right? Neither...

Take Forrester's analysis. At 500+ users, after volume discounts, SaaS pricing for horizontal ERP and CRM functionality could be at $ 60 a user a month. After 6 years, the point where Forrester believes on-premise becomes more competitive, the total SaaS cost is around $ 4,500 per user. I challenge any on-premise vendor combined with an outsourcer to deliver license, maintenance at 17 to 22% a year, hosting, application help desk,  maintenance/tuning, upgrades etc at that price for 6 years.

However, if Forrester appears pessimistic, McKinsey appears overly optimistic. There are just too few vertical applications for which there are robust SaaS offerings. Few large companies are going to use a generalized order entry or billing system. Or have zero customizations. Just as importantly, few of today's SaaS vendors would stand the security and SLA scrutiny of large company due diligence.

I think a far more logical solution for large companies will be a hybrid - what I call SaCS - a customized service. It is an aggressively negotiated software license and maintenance contract, combined with an on-demand outsourcing arrangement. The outsourcing would be a no-capex, utility computing, fractional resource, shared infrastructure, flex capacity with robust data center, connectivity, disaster recovery and security standards. Not completely multi-tenant, but uses multi-tenant concepts in appropriate areas.

The big problem is even after extremely aggressive negotiations per user pricing for such SaCS today would be $ 500 + per user per month (SAP's vertical engine licenses are not by user count - and amortized per user cost in the thousands).  It needs to be closer to $ 150 per user per month - users will pay a premium over today's horizontal SaaS pricing but not much more.

Lots of inefficiencies and premiums in the software and outsourcing markets to be removed to get there. But then watch the market just take off.   By then, both Forrester and McKinsey will have updated research papers out...

Comments

[Dennis H]

How does the $500/month compare with existing technology alternatives? What factors lead you to believe it needs to be nearer $150/month. Are there departmental differences?

[vinnie mirchandani]

Dennis, against current SaaS functional footprint $ 150 would be realiztic for the customizations, increased robustness etc larger companies expect. For other processes, larger numbers would be justified. One reader already sent me an email saying for some processes user based pricing does not work..

[Ram Medury]

Salesforce.com has announced a supposedly India specific (and scaled down) offering, InstantCRM Power-Start Bundle at the price of Rs 2,500/user/month which is almost the price of $60/month. Do you think such a pricing will hardly work for the budget conscious Indian SME sector?

[vinnie mirchandani]

Ram, you could do somewhat better with products like Zoho CRM. salesforce.com has established a leaderhsip position and can position its premium pricing

[Dennis H]

In which case the model needs revisiting. I've never been comfortable with per user pricing where large numbers are concerned. The appliance alternative looks better and solves 'behind the firewall' issues.

[vinnie mirchandani]

Dennis, kinda like democracy has its flaws but it's better than the alternatives - user based pricing has tis flaws but revenue, employee count, number of gadgets etc often are not great metrics either - especially when ISVs do not adjust pricing downwards easily

[sig]

Vinnie, I could not agree more!

Actually my (definitely self fulfilling / self interest) hunch is that focus will eventually drift even more towards the "customising" part away from the rather mundane issue of "delivery and maintenance method".

After all what makes business competitive? Being better and different from their competitors. How can that be attained unless you can customise the way you do things, and customise again every morning? You cannot.

If all use same generalised systems then only way to compete is to get into the office two hours earlier...

SaCS is now a part of my vocabulary - thanks!

(Better late than never, found link to this post in your latest post!)

[Brian French]

I like the SaCS tenant, however I believe you would only need to use it for differentiating processes. And in most cases, that is less than 20% of the processes of any company. A company's enabling and guiding processes (e.g. Employee Offloading or Last Day at Office) aren't giving you competitive advantage anyway, so why not use the SaaS model? You don't want to customize here anyway. The ROI isn't there. The issues of SLAs, security, and others are still there; but assuming those can be solved I think this is when and where big companies will get on the SaaS bandwagon.

[vinnie mirchandani]

Brian, agree...but are you suggesting getting granular SaaS functionality from multiple vendors/sources? If they use a similar data model may be, and think of the security/privacy/compliance considerations of vetting all those providers...may be I don't understand your point?

[Tony Van Der Linden]

Interesting discussion folks but, in reference to Sig's remark about differentiation - is the system as far as differentiation goes? There are assumptions here about processes being exactly implemented by a system and then the people adhering exactly to the processes.
Especially using sales processes as an example, I can walk into one store and get great service and into another and get rubbish service, and these two stores may well have exactly the same systems and processes. There is still much in the human touch and whether it's a caress or a grip. Perhaps as IT folks we are too fixated on the system, and there is still room for differentiation at other levels. Just a thought, which probably doesn't help any of us sell software or services.