Monday, September 1, 2008

Contention: SaaS is history repeating?

Interesting interview with Harry Debes of Lawson software last week - SaaS Industry Will Collapse in Two Years. In the interview Harry predicts that SaaS as a business model cannot sustain because of inherently lower profitability and so it will go the way of previous attempts like ASPs. He thinks the model has been hyped and while Salesforce.com has been successful it "just has average to below-average profitability" and it's the poster child for an industry that will collapse the first time CRM doesn't make its growth projections.

Frankly I don't agree with him. I think whether SaaS is the right model or not very much depends on the application you are selling and how well you service the customer. Licensing software is more profitable up front, but it inherently restricts the customers choices and, when competing with a well run SaaS application, the customer benefits of SaaS will win out.

In the marketing world we see vendors like Vocus providing on-demand systems for PR professionals and obviously the fabulous Salesforce.com for CRM. In the financial world the industry standard is subscription with services like Bloomberg and Thomson. We'd have many fewer customers if our business model was an up front purchase. Our customers simply don't invest in on-site software infrastructure for their front office activities - although they do for back office and trading systems.

But if you are going to provide your application through a SaaS model - the "service" component of SaaS is essential. I was talking with the CIO of Oracle's largest on-demand customer last week (who shall remain nameless) and she was talking about bringing Oracle in house just because their on-demand uptime is so bad. It's impractical to use a financial reporting system that is not available 99.99% of the time - just as it would be unacceptable to our customers if our system did not have similar uptime. Maybe Lawson and Oracle are down on SaaS because, unlike Salesforce.com, they haven't figured out how to provide the level of service required to be successful yet.

And in the end, for us, it's about being a Web application. We live on the web, we mine the web, the product was architected to live out on the web - i.e. on demand - from the beginning and we're not about to change that. So we're focused on building our client base rapidly with a model that works for them and maintaining a level of service to earn their renewal business.

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