Lawson’s chief executive, Harry Debes, just did a short interview with ZDnet Asia where he talks about the upcoming demise of SaaS.
I find several of his assertions wrong and in fact contradictory to other statements that he makes in the same interview. My takeaway: this reads like a classic case of a company not wanting to cannibalize its current revenue streams.
He makes a fair point that much of SaaS hype has been catalyzed by the success of a single company, Salesforce.com. He also points out that SAP’s SaaS offering, Business ByDesign, was a failure in the market with fewer than a 100 users after a couple of years. However, I see two major problems with his assertions:
- Salesforce.com’s success has little to do with the fact that it’s been licensed under a SaaS model.
- The way to retain customers is via vendor lock-in and retaining customers in SaaS is much harder because switching costs are lower.
First, to his point that he and others would use Salesforce.com because the software is very good, not because it’s SaaS, says nothing about whether or not the SaaS licensing model has helped to increase the market penetration of Salesforce.com. Fundamentally, if I’m a customer inside an enterprise and Salesforce.com gives me a packaged server I can install locally and have my users hit my local server via their browser, the primary benefit I derive is that I have more control over the infrastructure, but correspondingly, the downside is that I have to pay to maintain it. From the customer’s standpoint, the major difference is not the user experience, but the maintenance cost and the license cost structure.
From the vendor’s standpoint, the major difference is not the software, how it’s deployed, or how capital must be deployed in order to build the software (“the more you sell, the more you lose” with SaaS is his assertion). The major difference between traditional enterprise software licenses and SaaS licenses is that with SaaS, the revenues are spread out over a longer time period. Two similar situations, related to the difference between SaaS and traditional enterprise licenses are:
- Term licensing vs. perpetual licensing – one option when doing an enterprise sale is to give your customer a license to your software for a certain length of time e.g. a 3-year term and then require them to renew their license at the end of that period. Say you do a software deal for $300,000 for a 3-year term. Then, the customer would pay you $25,000 quarterly. According to Mr. Debes, this is a “more you sell, more you lose” kind of model as well. In practice, it works quite well – you have very predictable revenue recognition and cash flow – as long as you are not a start-up. With a start-up, you are investing significantly ahead of revenue and the term license defers revenue, stretching out your breakeven point further.
- Seat-based licenses vs. all-you-can-eat licenses – When I was selling BI software, I noticed that almost all the other major BI vendors sold seat-based licenses. That is, if you want 2000 people to read a report, you need to buy 2000 “report reading” licenses. If you want 500 people to able to write or modify a report, then you pay 500 “report writing” licenses. We decided that if we were to truly offer our customers “BI for the masses” – that is, large scale adoption of BI – we had to change our license as well. We tried out a model of per-application or per-enterprise. The other vendors could not offer the same easily; their sales incentives and organization were not structured to handle a different license structure.
I would suggest that Lawson may not be able to switch its revenue and cost structure over to a radically different licensing model. Without knowing much more, I would hypothesize that SAP’s experience may have been related to something similar. I also don’t have faith that SAP actually built a compelling SaaS product in the first place.
To Mr. Debes’ second point – that you can only accomplish customer lock-in via enterprise software, I would agree that you can accomplish stronger customer lock-in via a traditional enterprise software deployment. Usually, enterprise software deployments involve IT approval processes, small fiefdoms being built in IT around the software package, and “expertise” in maintaining the software and hardware to keep the application going. SaaS deployments, at least for initial adoption, require none of those things. So yes, it’s far easier for a customer to try out a different SaaS deployment because the barrier to use is lower; however, is the traditional enterprise model truly a better user experience for the customer?
I would argue that Salesforce.com has just as much lock-in as any other “in-the-enterprise” CRM product. There’s no lock-in because of IT approval processes and fiefdoms; the lock-in comes from Salesforce.com being a great product and the fact that companies customize their business processes around their usage of the tool. Once you have companies molding their business process around your tool, you have the ultimate form of lock-in.
On a slightly-related note, check out YC’s list of ideas that they’d like to fund. Having spoken with many enterprise customers that deal with large IT organizations, I particularly like the idea described under the heading “Outsourced IT.”