"SaaS market will 'collapse' in two years"

So says Harry Debes, CEO of Lawson.

Part of me is not surprised. Over his career, Harry has been a solid operational guy at many software companies including GEAC, J.D. Edwards and now Lawson. Numbers are important to the man and he does not see SaaS as being very profitable.

Part of me is shocked. At GEAC he saw 35+ acquisitions. JDE was acquired by PeopleSoft. Lawson merged with Intentia. He was Larry Ellison before Larry became the new acquisitive Larry.

He has seen over and over again software companies which hit the wall. Dun & Bradstreet, which GEAC acquired for a song, was one of the most spectacular slides in the software market. In less than 5 years it went from dominant position to a distress sale as it missed the client/server wave in early 90s.

They hit the wall because they quit listening to their customers and the market.

SaaS is not growing because of Marc Benioff's wilful personality. It is a reflection of customers saying they are tired of the TCO of the license/integration/maintenance/upgrade treadmill. It is a reflection of customers wanting IT as opex, not capex. It is a reflection of customer's wanting to buy IT on a variable capacity basis. It is a reflection of customers seeing a secular decline in sw development, hosting and other technology charges - but not seeing that from their ERP budgets. No reason why when startups can be funded at one fifth of what they were a decade ago, companies should not expect similar efficiencies in enterprise software.

Investors may not be thrilled with the SaaS business model. But more customers are liking it, and that's who Harry - and Larry - should be listening to.

Comments

[Naomi Bloom]

Mr. Debes is just plain wrong. SaaS WILL SUCCEED, apart from the failings of individual vendors, where the software architecture allows for many individually configured clients in one instance of software, has sufficient stickiness in the application and user experience to make migration very undesireable, uses interrogatory configuration to produce very short implementations, and is priced to support growth. Done right, it's a winner. Done wrong, not. But I also believe that, in spite of the ITO advantages to the customer from SaaS, the real end game in many business processes is scaleable BPO, where you've done for many processes what Amazon has done for much of consumer product order-to-fulfillment-to-payment. Naomi

[Damon Edwards]

From what I've seen, Harry is right... and wrong.

He's right that many SaaS vendors are setup for failure. Not because the SaaS delivery model isn't what customers want, but because these "SaaS" companies haven't changed their business model enough. If you look at their sales and marketing costs they are pretty much in line with traditional on-premises licensed software vendors. Carrying those astronomical sales and marketing costs (without the oversized upfront license revenue) is like treading water with a heavy weight around your neck... paddle all you want but you're going down eventually. Interestingly, this is the same problem that a many of the venture backed "open source" vendors are experiencing. If you are going to fundamentally change your revenue model, shouldn't you completely rethink how your company is structured and incentivized?

Where Harry is wrong is exactly where you are calling him out. Customer's want a flexible pay-as-you-go and scale-as-you-need model. Those past attempts at SaaS-like models failed in large part due to the inability of the technology to deliver. It's still a long way from perfect, but the SaaS delivery model is finally a technical reality. Customer demand + technical reality = someone is going to make it work. Harry shouldn't be so fixated on these first generation SaaS failures, it's likely the SaaS company that will clean the traditional vendors clock's hasn't been founded yet.

-Damon
http://dev2ops.org

[George Gilbert]

Vinnie -

I agree with you that SaaS isn’t growing just because of Benioff’s colorful personality. Buying IT as opex over capex and as variable capacity is powerfully attractive. But the license/integration/maintenance/upgrade treadmill you reference with respect to traditional systems hasn’t been totally solved by SaaS yet – as you and I have discussed before.

Today’s SaaS products still need customers to build custom integration between separate products and with legacy systems. SaaS vendors have yet to prove that customers won’t get crushed under the same upgrade treadmill that required continually updating integration points as new functionality got rolled out with traditional products.

Lawson’s Debes is clearly exaggerating the profitability challenge, at least with vendors of departmental SaaS applications such as Salesforce.com. As the Smoothspan blog points out, their cash flow is actually much better than their reported profitability.

So far we have only seen vendors who are just serving individual departments. No vendors have built robust suites that deliver more end to end process integration. I think it’s worth noting that each generation of packaged applications from the ‘80s onward has delivered more integration in order to relieve the customer of that burden.

Delivering a suite creates another problem on the go to market side. The buying decision is much more diffuse and less conducive to the customer-initiated, self-service, inside-sales assisted process of applications like Salesforce.com. That requires either a much higher touch and more expensive direct sales process or the growth of a new class of VARs.

While I agree with you that SaaS isn’t going to collapse, it’s not exactly facing smooth sailing either.

[Gregory Y]

Naomi is right on the money. Most CRM SaaS offerings, I have seen, have a very artificial, shallow and not scalable business process footprint. They surely offer some functional and financial performance smaller organizations or groups have not experience before, but unless the model would figure out how to support true organizational transformation initiatives, they will not see improved profitability IMO. Amazon model provides BPU services to their retailers, which I see as quite different than SaaS.

[Rhett Glauser]

I should have read Vinnie's comments about Harry's comments before I made my comments on Josh's comments here: http://is.gd/21gs.

My comments and this post now both seem a bit redundant, redundant, redundant. We're definitely on the same page though.

[vinnie mirchandani]

George, agree little in the way of vertical suites via SaaS. But as we have discussed that is elusive in non-mfg verticals even with the on-premise vendors.

Greg, even with on-premise what we used to call "effective functionality" at Gartner - what users actually use in a package - is a small percent of the feature set. If anything, with SaaS vendors have much better visibility on who in the customer base uses what and can concentrate effort on enhancing those areas.

Damon, great point - first gen SaaS did not have viral marketing, blogs, SEO, self-serve demos, telepresence to leverage - the next generation should and cut out quite a bit of the ridiculous 30 to 50% SGA the sw industry has become addicted to.

Then there is sponsoring my blog - another way to slash SGA :)

[Darayush]

So is the internet "Internet about to collapse" - http://arstechnica.com/news.ars/post/20041018-4318.html .... and the universe .... "Universe is 'doomed to collapse'" - http://news.bbc.co.uk/1/hi/sci/tech/2346907.stm

SaaS is a application building and deployment paradigm that improves over the previous methods available. Will it go through a down or disillusionment cycle - Yes ... will there be other models like or better than SaaS - Yes .... will it collapse in 2 years .. No!!