SaaS Survives

We may be in a recession, but SalesForce.com has decided not to participate.

Last week SalesForce submitted financial reports covering the three deepest months of the current downturn. From February through April, SalesForce saw their revenues rise 23% and their net income nearly double, climbing 92%. They also announced that SalesForce is the U.S. economy and that Marc Benioff would ascend to the papal throne.

Defying economic gravity is considered a miracle on Sandhill Road.

We should not be surprised by this quarter’s occurrence. When in recession, companies and consumers alike reduce risk while attempting to expand opportunity. SaaS offers a reduction in risk for implementing a CRM system. Since SalesForce is currently absconding with nearly 10% of all CRM revenues and is thus the undisputed heavyweight of the SaaS CRM industry, 3,900 new customers instinctively turned to them in early 2009.

Another angle is that in tough economic eras companies look for ways to increase their own sales. Coordinating sales efforts and keeping proper tabs on your pipeline is part of hitting pay dirt. When times are good, you can be a little lax about managing your sales efforts. When you start raiding the kid’s college fund, you instill discipline on your sales force.

This brings an interesting revelation about SaaS. As a delivery system, SaaS reduces risk to the consumer (and to the vendor as well). During times of profit peril, low risk alternatives beat those with large commitments. Thus SaaS has the ability to grow during down business cycles when packaged software does not. SalesForce has shown that it grows during up cycles too. We might assume that Marc’s Marauders merely are great at what they do (and they are). But a more fundamental shift in the software market is in play.

SaaS’ ability to attract business during downturns is compelling. Not every product category is as fundamental and as organizationally flexible as CRM, so SalesForce’s success is not directly transferable to other software solutions. Yet the principle of engineering risk reduction while offering economic adoption of business-improving solutions alters market fundamentals. It reduces and perhaps eliminates the drastic dips that hit enterprise software companies as industries that consume software suffer. Sure, revenues may lower during recession, but negative growth appears unlikely and thus most of the misery associated with recession may be avoidable. Since SaaS is delivered globally and since other markets suffer recessions less (my New Year investments Brazil are doing quite well, thank you), economic undulations are less serious for SaaS.

Aside from the well discussed issues of integration, I fail to see why a software vendor selling database-centered solutions would not opt to offer a SaaS alternative. Proffering one does not preclude a packaged product, and may well attract customers reluctant to risk the ‘big investment’ during periods of low lucre. SalesForce shows that you can produce double digit growth numbers in a downturn.

There is risk however. Benioff will look bizarre wearing his miter.


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