Business & Technology Nexus

Dave Stephens on technology and business trends

The Other Side Of On-Demand & SaaS

with 2 comments

It's been my experience that enterprise customers are trying to balance 3 factors when purchasing software: control, cost, and speed. After seeing all the SaaS "mania" going on lately I thought I would go ahead and offer yet another opinion on the subject. And it's not completely favorable. But first a short history.

In 2000 my team developed Oracle Exchange, Oracle's first multi-tenant hosted service. We chose to issue it SaaS, though eventually we relented to customer pressure and issued the software more traditionally too. Although my principal role was building the software, I also managed a fair amount of Oracle's online delivery, including software upgrades. Going SaaS enabled us to issue releases every quarter. Going SaaS enabled our customers to go live in just a few weeks after signing deals.

So why did customers eventually want to take control of the software themselves? Over time, their thinking evolved. They had figured out what they wanted from the platform & were either satisfied enough with the feature-set -or- looking to heavily customize the solution to meet their needs. It was a natural maturation in their viewpoint.

It makes sense, doesn't it? As an enterprise's experience with the software evolves they understand what they truly need. And once they get what they need they want to "freeze" the solution & avoid incurring any more cost. Sure, 5 years down the road the whole thing might be open for re-evaluation. But at the current time, and for a long time to come, they're done.

You see, SaaS is great when you start. It's a year or two in when you may start to sense you've painted your company into a pretty tight corner. So customers need to go in with their eyes open, and separate their short-term "get a quick win" thinking from their long-term plans.

Don't get me wrong, there's a lot that's right with SaaS. For Procurement, SaaS is what makes a best-of-breed selection possible at many firms. Procurement just doesn't carry a big enough stick to garner IT resources – IT instead tend to be focused instead on fixing past mistakes in a horribly complex internal infrastructure. SaaS can be the perfect end-around on a reluctant & overwhelmed IT organization.

Further, you get "live" on solutions faster the SaaS way (when you don't have to install and implement them). SaaS is perfect for getting up and running fast. All the normal & necessary red tape, from security audits, to hardware selection, etc, has all been done for you. It's as close to plug-and-play as enterprise applications will get.

These conveniences are compelling, no doubt about it. But SaaS comes with a cost. And that cost can be summed up as "loss of control."

With SaaS, best-of-breed vendors can be "sloppier" in their product development, and can issue patches constantly to fix problems that traditional software delivery would have never allowed. As a customer, you may or may not get to test new versions of the software before they are forced on you.

Here's what's behind this behavior: Software producers HATE maintaining old versions of their software. Customers would be surprised how much tension and angst and, above all, thought goes into how to make older versions of enterprise applications "go away".

For large firms like Oracle and SAP, old versions can be maintained with very high profit margins. They are juicy – just the type of revenue stream & profits that gets these businesses extending their release cycles to 2 or 3 years or beyond. The playbook is simple: outsource all maintenance to India, encourage customers not to touch their instances AT ALL, and receive big checks in the mail.

But for smaller software vendors trying to tap into the latest trends & become the next big thing, older versions kill. The name of the game is to keep all your customers at the highest rev, thereby reducing support costs and improving margins!

The small guys need their customers to upgrade at the their pace & discretion (with some sense of reasonableness of course).

And no doubt this "forced march of upgrades" is initially warmly received by customers hungry to get complete functionality. But very soon thereafter it is dreaded. And for good reason. Change causes instability – if a customer already has what they need their best course of action is to keep it as-is (If it ain't broke don't fix it). And customers usually don't understand that forced upgrades don't just apply to software. They include your hosted operating system, network switches, routers, and the hardware itself.

When I was at Oracle and thinking of how to respond creatively to multi-tenant SaaS, I thought through a ton of analogies. The one I liked the best were 2 pictures – one of rundown apartment buildings (for SaaS) and another of a model home (for software you buy a perpetual license to).

the caption, of course, was "tired of renting your software?"

Tired of renting your software? Own your own home!
And in the end that's just what SaaS is – a large, shared apartment building where you rent… your software.

The other curiosity I have with SaaS and the whole software rental business model is the "landlord." You see, because of time to market pressures, SaaS and the software provider are synonymous. But in a mature version of the current market, I predict the software provider and the SaaS provider (aka hosting provider) may very well split into separate entities.

Perhaps that is a contrarian view in today's SaaS times. But there's a reason GoDaddy.com charges $3.99 a month for an online hosted instance – including a full development infrastructure, database, etc. They are better at it than salesforce.com or any other high tech start-up out there. And they can certainly beat the pants off Oracle or SAP.

So isn't it possible the a mature market around SaaS will look a whole lot more like traditional outsourcing of IT systems management? I think so.
But perhaps until then this post will just be sass on SaaS. :)

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Written by Dave Stephens

05/26/06 3:18 PM at 3:18 pm

Posted in Opinion

2 Responses

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  1. […] In his recent post, Dave touts his former ERP company’s “exchange” (read: online marketplace software) software as one of the original gangster’s of SaaS. He says that his former employer’s exchange offering eventually failed due to the fact that customers reached a maturation point where they were either “satisfied enough with the feature-set or looking to heavily customize the solution meet their needs.” […]

  2. Tim’s response above is entertaining. I recommend reading it for an alternative view!

    Dave Stephens

    05/30/06 9:24 PM at 9:24 pm


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