Saturday, July 15, 2006

SaaS Revisited

I have been posting on and off on the SaaS model elsewhere in this blog. Sandhill.com published an article on The Bottom Line on SaaS recently. While this article was more focused on SaaS per se Salesforce.com, it summarily mentions the following three advantages of the SaaS offering:
1. SaaS Vendors Capture A Higher Share of Customer Spend.
2. Better Profitability for SaaS Vendors.
3. Continuous Innovation.
The other interesting thing this paper mentions that if you use SaaS, you can show your IT spend as an operating, recurring spend rather than a one time capex.
I would add the following points:

- SaaS vendors may indeed capture a higher percentage of the customer's spend, but they also have higher capital expenses in setting up a suitable IT infrastructure backbone. I am not sure of the economics involved, but if the SaaS vendors capture double of the customer's dollar spend percent, I am sure they incur higher expenses than they would have in a pure play license sale.

- SaaS vendors do not necessarily have economies of scale as the article mentions. In many cases, the SaaS vendors may maintain multiple complex "one-off" customer configurations that do not offer the scale advantage. Thus it is also important to understand that the "one size fits all" SaaS offering with standard software does not offer any competitive advantages for customers who are more desirous of exactly mirroring their business processes. It may be virtually impossible for an "out of the box" software (SaaS or other) to achieve this.

- SaaS vendors have many avenues of innovation that the customer cannot have in his captive setup. As I mentioned earlier, access to product and technology specialists and proactive fixes coupled with "learn one fix many approaches" are some areas where SaaS vendors have unique opportunities. I would also add security and compliance to this list.

2 comments:

Dennis Howlett said...

"standard software does not offer any competitive advantages for customers who are more desirous of exactly mirroring their business processes."

Where's the innovation in that? Doesn't this replicate the belief that existing processes are superior?

What about the mix 'n' match element offered by AppExchange? Or the ability to develop directly to the API?

Nitin said...

Dennis,

What I meant to say in that line ("standard software does not offer any competitive advantages for customers who are more desirous of exactly mirroring their business processes.") is:

Many customers are not interested in adopting pure play out of the box ERP/CRM implementions. As you pointed out, AppExchange or other tools (APIs for that matter) offer a suitable mix and match opportunity to make sure that the business processes are implemented as desired by the customer. Some customers will anyways argue that their existing business processes are indeed superior to what are available in the "out of the box" package.


Now where is the innovation? If I am a SaaS vendor and I am maintaing 100 customers, there is a probability that 20 out of those are not the standard, vanilla implementations. They will have customizations or extensions to the standard functionality, and in most cases, these will be "one off" or "one of a kind" category. The SaaS vendor cannot employ economies of scale for maintaining/patching/upgrading these 20 implementations, while the rest 80 are surely candidates for this leverage. Thus a SaaS evndor may not have the economies of scale as mentioned by the article. This also is an opportunity for the SaaS vendor to innovate and work out ways to manage these one offs.


Thanks,
Nitin