Popping the SaaS Bubble or Sour Grapes?

September 18, 2008 at 8:16 am | Posted in SaaS | 3 Comments

Lawson Software CEO Harry Debes has proudly proclaimed the impending collapse of SaaS (and the stock price of his SaaS rival Salesforce.com) in an interview with ZDNet Asia (“SaaS industry ‘will collapse’ in two years“).

First, it needs to be noted that Mr. Debes seems to be talking exclusively about the CRM and ERP SaaS market since those are his only talking points.  That overlooks the applicability of SaaS to many other domains such as web conferencing, web analytics, and e-mail where it is undeniably having an impact.  I say “undeniably” because I just ran a survey on SaaS along with Ziff-Davis Enterprise that shows what Mr. Debes is missing.

So, let’s go through some of Mr. Debes’ great quotes from this article to justify his assertion that SaaS will die out in 2 years and see where the survey results can shed some light:

The first time, it was called ‘service bureaux’. The second time, it was ‘application service providers’, and now it’s called ‘SaaS’.  But it’s pretty much the same thing, and my prediction is that it’ll go the same way as the other two have gone: nowhere.

To start with, Mr. Debes is ignoring the fact that a sizable SaaS segment of his market does exist.  According to our survey, 52% of organizations are using or plan to use SaaS software.  Of those, 24% are using it for CRM and 23% are using it for accounting/billing/finance/tax applications.  Add to that the 10% of organizations who plan to license CRM as SaaS in the next 24 months and 9% more that will license accounting/billing/finance/tax as SaaS and there is clearly a sizable SaaS market right in Lawson’s segment.  As far as the SaaS model in general, 76% of organizations we surveyed agree or strongly agree that their company plans to expand use of SaaS applications.

we offer a hosting service. If the customer pays [over a period of time] through a financing entity, it’s exactly the same [experience] as SaaS.

If Mr. Debes would talk to a few hundred organizations he would find that there are some actual drivers that strongly favor SaaS over conventional software.  When we asked the respondents that were interested in SaaS what appealed to them about the model, it is true that the #1 reason (pushing out the responsibility for maintenance) is also possible through a hosted model.  However, the next 4 reasons in the list lean towards SaaS over hosting (in order: shorter time to rollout, usable anywhere due to internet UI, faster improvement cycles, short-term financial benefits).  They are not exactly the same.

Even from the vendor’s point of view I think Mr. Debes is also missing some of the benefits of getting out of a spiky revenue model that depends on getting your customers to upgrade every few years.  Microsoft has done spectacularly well with that model, but buyers and vendors seem to be reaching a fatigue point and buyers are proving slower and need more convincing to upgrade each version.  This dynamic will slowly alter the buying model over time.

“People are stupid. History has shown it repeats itself, and people make the same mistakes” (Mr. Debes when asked whether people – presumably his competition and buyers – won’t learn from past SaaS mistakes)

Kudos for a straightforward, no spin answer, but hearing a CEO severely underestimate his competition and customers for no better reason than that they are stupid and won’t learn from past mistakes does not inspire confidence.

traditional software is like cocaine — you’re hooked. It’s too difficult and expensive to switch providers once you’ve invested in one.

Well, that’s just a wonderful endorsement.  Keep in mind that he’s comparing his company’s model to dealing cocaine in a positive way.  I can see his competition fighting back with new SaaS slogans now: “Just say NO! to the high exit costs of conventional software …” (apologies to Nancy Reagan).

Salesforce.com just has average to below-average profitability … One day Salesforce.com will not deliver its growth projections, and its stock price will tumble in a big hurry. Then, the rest of the [SaaS] industry will collapse.

Mr. Debes’ implication that Salesforce.com (and SaaS by proxy) is just a bubble that he can help burst is off base.  Clearly Salesforce.com is addressing a new market for CRM software with a different delivery model that was not being tapped into with conventional software.  A firm should be rewarded by the market for finding a new market, particularly one that still has legs.  I’m no stock analyst and can’t justify Salesforce.com being so far above Lawson, but Salesforce.com is no bubble either.  Salesforce.com runs a lower margin business (5% EBITD in 2008 compared to 11% for Lawson), but respondents to our survey reported lower prices and operating costs for buyers of SaaS, showing that much of this savings is going to the customer.  Revenue for the past 3 years has been on a steady increase (on par with Lawson’s) and cash flow in 2008 has been good.  This isn’t the income statement and balance sheet of a stock built on speculation or hope for a buyout. 

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