Software is now SaaSy

I hate it when a market matures.  Sure, the profits are more
predictable, but the excitement evaporates.  Kinda like getting married.

As a marketable technology concept, SaaS has matured.  This is evidenced
by several factors, from adoption rates by enterprises, and by seeing companies
with the most to loose from SaaS competition joining the fray.  The giddy
days of SaaS are soon behind us, but reduced profits ahead.

The good news is that enterprise customers have shaken their SaaS jitters and
are adopting services at a fair clip.  A recent survey of CIOs showed some
interesting numbers:

  • 10-15% of IT budgets are spent on SaaS
  • 86% are using SaaS non-experimentally either for department point
    solutions or corporate wide
  • An average of six SaaS solutions are in use in an enterprise
  • 73% of the CIOs plan on expanding use of SaaS

This bodes well for software companies who bet the farm on SaaS. 
Adoption and satisfaction rates are high and growing, which drops the barrier to
adoption.  SaaS will soon be given equal consideration in all project
planning within IT.

And all a pure play SaaS software company has to do is make less money.

The McKinsey Quarterly reported that SaaS software vendors do not make as
much as traditional software firms.  This may be a side effect of being a
relatively new offering, and that SaaS start-ups face significant SG&A costs
( 49% of revenues compare to 35% for a traditional and established software
concern ).  But the net effect is that today a SaaS software company
keeps about 13% of their revenues as profits ( EBITDA ), and folks that sell bits
on CD keep 31%, almost three times as much.

So why would Microsoft be at all interested in SaaS?  Microsoft rakes in
a lot of money from software, upgrades and technical support services. 
Given that the average cost of goods sold and SG&A expenses are so much higher
for SaaS than Microsoft’s existing business model, it would seem suicidal to
adopt SaaS. 

"The industry will change," is what Allison Watson, the corporate vice
president of Microsoft’s worldwide partner group, said in a recent interview. 
Microsoft is old and cagey enough to spot trends, and know when to not fight
them.  SaaS will dominate in some markets, and CRM is the top achiever ( 36%
enterprises that have deployed SaaS deployed SaaS-based CRM applications ). 
SalesForce.com added 253,000 new seats in 2006, and Microsoft had far fewer with
their Dynamic CRM product ( some estimates claim that Microsoft owns a mere 1.4%
of the total CRM license sales ).  Thus, Microsoft is entering the SaaS
market and targeting the low end, with a long-term plan of up-selling SaaS
accounts to software licenses.

Microsoft’s changing strategies avoid treating software as a zero-sum game. 
They see when they are being cut out of a market, and drive to adapt — to claim
or recapture market share.  Knowing the lifetime value of a customer, they
are willing to suffer lower margins in a highly competitive market to gain
customers, and begin the insidious processes of creating interdependencies
between Microsoft products, and raising customer switching costs.

SaaS is now officially here to stay, so you had best think through
SaaS as an offering.  It may be on your customer’s requirements list.


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