SaaS See Saw!!!

SaaS Applications/Companies in the "enterprise space" is an area of growing interest both in the board room and the CIO's office. SaaS has slowly begun eating into enterprise IT budgets, and now accounts for about $4.2B in spending, and growing at a speed of 22.3%.

Though this sounds primarily positive but on closer review the signals received are more conflicting, on the one side we hear a lot of the successes and converts of enterprises moving down the path. On the other side we hear the old concerns of privacy, security, risk , the overall cost equation from a customer point of view when looked at from a 5 year window point of view etc which is leading to reluctance from the CIO's.

Another concern that seems to be exploded in the recent past is the ability for the SaaS vendors to exist profitably and whether the current prices offered by these SaaS vendors are sustainable. This topic has become hot after the recent earning call of SAP and the comments around their BBD - Business By Design (SaaS delivered ERP - for the SME).

Some thinking around the reason for this problem:

SaaS may well prove to be less profitable than many software companies, pundits and investors anticipate. It’s certainly the case today. As noted earlier, the median TTM EBITDA margin of the 18 public companies in the SEG SaaS index was 6.1%, considerably lower than the 11.2% median TTM multiple of the 211 publicly traded software companies comprising the SEG Software Index. In fairness, the margins should improve as certain one-time expenses are absorbed and subscription renewals kick in.But it’s the pricing side of the equation that may ultimately prove to be the greatest deterrent for large enterprise SaaS adoption. As SaaS providers begin to fully grasp their higher than anticipated implementation, integration and infrastructure expenses, and as SaaS grows market share among large enterprises, it’s a safe bet SaaS providers will revisit their pricing models – and bite the hand that feeds them.

What is SAP Saying on BBD?

• The SAP Business ByDesign 2008 debut will focus on six countries, where all the current productive early customers are based. Additional country rollouts in 2009.
• It is expected to take around 12 months to 18 months longer than the original 2010 target to reach the SAP Business ByDesign $1 billion revenue and 10,000 customer potential.
• SAP said “SAP Business ByDesign innovations and technologies for the existing solutions and this will contribute significantly to the overall revenues of SAP in 2010.”
• BusinessByDesign will have significantly less than 1,000 customers in 2008.

Here is a comment from the co-CEO explain the reasoning

SAP co-CEO Leo Apotheker says that Business ByDesign, the application giant’s high-profile software as a service product, was delayed because of its total cost of ownership for the company.

“We’ve announced a price point and now we’re working backwards,” says Apotheker.

That’s a fancy way of saying SAP hasn’t figured out how to make money at its $149 per user per month price point.

This seems to be more SAP trying not to give jitters to the investor community / wall street than anything else, Yes they have some technical /architectural /economic model things (all are connected) to work out but alls not over for BBD or SaaS as the doomsayers would like you to believe.

But on the brighter side there are still a lot of positive indicators,

Worldwide total software revenue for software as a service (SaaS) within the enterprise software markets is projected to surpass $5.1 billion in 2007, a 21 percent increase from 2006 revenue ($4.2 billion), according to Gartner, Inc. The market is poised for strong growth through 2011, when worldwide revenue will reach $11.5 billion.

An recent survey of 850 enterprise users by McKinsey & Co. and the Sandhill Group shows that SaaS has moved into the mainstream. Respondents identified SaaS as the most important technology trend influencing their companies, with 74 percent of enterprise customers saying they are “favorably disposed to adopting SaaS platforms.”

SaaS moves from 37 to 18 as an enterprise IT spending priority. It would seem, and many industry pundits would have you believe, SaaS has won the day among large enterprises. According to the October 10, 2007 Goldman Sachs IT Spending Survey. Although SaaS had ranked 37 – dead last – in GS’ May 16 survey, it had moved halfway up the list to 18 in only a few months.

Thoughts at this time - SaaS is here to stay, As a model there were a few things wrong about the economics of ASP and it failed in its new avatar SaaS it might still have some problems, but I don’t believe they are big enough to have CIO's side track it completely. CIO's will continue to be cautious and we will see SaaS making more in roads into the enterprise, but primarily in the periphery and another important thing to watch out for is how the Platform As A Service movement plays out.

Source: 1, 2, 3

Tags: bbd - business+bydesign - a1s - sap - sme - saas - on+demand

Prashanth Rai

Comments

[Howard]

"Worldwide total software revenue for software as a service (SaaS) within the enterprise software markets is projected to surpass $5.1 billion in 2007, a 21 percent increase from 2006 revenue ($4.2 billion), according to Gartner, Inc. The market is poised for strong growth through 2011, when worldwide revenue will reach $11.5 billion."

As with the ASP era there were companies that kept their heads down and provided good service, and pricing. Those companies survived and prospered on a loyal customer base. We use http://www.123together.com for our enterprise mission critical hosted exchange. It’s a perfected solution for mission critical email.

[Nikki Patni]

There are lots of discussion going around the desk regarding success and failure of the SaaS. Before this SaaS was successfully working for the small products like Project Tracking Systems. Now a days due to the awareness of the benefit of the software,maturity of the technologies and software comapanies it seems that SaaS will remain forever as a part of the Software Industry.
In a near future the SaaS provider will not be limited to the big companies, but a small solution provider will also come up with the Custom/Local SaaS solution targetting specific group.