SmoothSpan Blog

For Executives, Entrepreneurs, and other Digerati who need to know about SaaS and Web 2.0.

Do You Read the SaaS Curmudgeons? Do You Enjoy SaaS Schadenfreude?

Posted by Bob Warfield on July 21, 2008

Do you read the curmudgeons?  I’m not exactly sure what else to call them, but these are the posts that tell you the new new thing is actually not very good at all.  There is always a willing audience for these sorts of things that are the large audience feeling threatened by the new new thing who would like it to just go away.  There is little downside risk of being found out wrong because they typically write about the new new thing early enough that there is still time for that new thing to screw itself up.  Very often they do too.  Every shiny new thing does not take over the world.  But even if one does, by the time the new new thing is the established way of life, the curmudgeon’s post has faded from memory.

Playing the curmudgeon is a time-honored way to get traffic.  It’s a link-baiting tactic that existed before there were links to bait.  I bring this up having just read Sarah Lacy’s  and Nick Carr’s posts about how terrible the on-demand business is.  Yeah, that Sarah Lacy that didn’t do so well playing the curmudgeon face to face with Facebook’s Mark Zuckerberg.  When you want to play the curmudgeon its usually important not to have too many representatives from the new new thing present, it’s best if they can’t take part in the dialog, and they certainly shouldn’t be as smart as the Zuck is. 

Nick Carr has a long history of curmudgeoning too, although he swings his bat both ways and frequently attacks the status quo as well.  He’s very comfortable attacking the on-premises world with an entire book (“The Big Switch”) and then writing a post like this one that proclaims, “Anyone who thinks the software-as-a-service business is a gold mine is wrong. The economics are fundamentally different from those of the traditional software business – and not in a good way.”  Darn!  Whichever way you want to deliver software isn’t going to work according to these conflicting views.

The Germans have a word for this curious phenomenon of enjoying the pain of others.  They call it “schadenfreude”. 

Let’s put the schadenfreude aside and ask, what would a Marc Benioff or Steve Singh be telling Ms Lacy if she was unlucky enough to be plying this “SaaS is a brutal slog” trade while personally interviewing one of them in front of a large audience as she did Zuckerberg?  Let’s review the major points Lacy is making about SaaS along the way.

Software sold “as a service” over the Web doesn’t sell itself, even when it’s cheaper and actually works.

AMR is quoted as saying “The challenge is you have to spend 50% to 100% plus of revenue in sales and marketing cost,” he says. “You need this [limitless] amount of cash to forever feed the growth machine.”

There’s just one problem with this statement, and the argument that somehow the marketing and sales costs of SaaS make it “a brutal slog.”  The problem is that on-premises software is an even worse slog, except for the very largest brands like Oracle, SAP, and Microsoft.

Think about it.  Every quarter is a scramble to make the number for on-premises vendors.  And when that number is made, the entire license is recognized and the next quarter the company starts over.  At best, there is recurring revenue from maintenance that is perhaps 20% of the original license price. 

SaaS, by contrast, has recurring revenue.  If you didn’t sell a single additional license in a quarter, so long as your customers are happy, you’ll still get the recurring revenue coming in.  Which one sounds like a worse slog to you?  I can tell you from having talked to a number of on-premises companies wondering if they should endure the horrors of a switch (ask Steve Singh of Concur what that’s like) that they’d prefer to deal with the SaaS slog.

Don’t take my word for it, or even theirs.  Take a look at what it costs public companies in terms of Sales and Marketing dollars to sell an incremental dollar of revenue:

Isn’t it interesting that the red squares, representing perpetual companies, are almost all to the right of the other symbols representing SaaS companies?  And isn’t it interesting that the reds wind up even past the point where AMR said the costs were so prohibitive?  It’s actually cheaper for SaaS companies to acquire revenue than similarly sized perpetual companies, and I’m surprised that Lacy and AMR didn’t do their research better to find that out.  The data has been here in this blog for some time for anyone that wanted to look.

And vendors are continually tweaking their software, fixing bugs, and pushing out incremental improvements.

Lacy says, “Great news for the user, but the software makers miss out on the once-lucrative massive upgrade every few years and seemingly endless maintenance fees for supporting old versions of the software.” 

Hold on just a minute there, Sarah!  First of all, the upgrades are almost always included for free in exchange for paying maintenance.  That massive upgrade revenue blip almost never hits, and when it does (for example with Peoplesoft 8), customers are so unhappy that the vendor dare not ever do it again.

As for all th e tweeking and bug fixing, let me tell you something about that.  There is a huge overhead associated with on-premises.  Engineering management colleagues whom I’ve hashed this over with estimate that overhead at about 40% of development cycles.  Yes, Sarah, it will cost you 40% more in ongoing R&D to do on-premises than SaaS. 

Why?

Building the first version may very well be harder for SaaS, but after that, you’re only paying the cost of bug fixing and innovation.  Meanwhile, on-premises has those same costs, but it’s much worse.  The reason?  They have to support multiple platforms and versions in the field.  Let me tell you, supporting Oracle, SQL Server, and DB2 simultaneously, a typical Enterprise makeup, is a lot of work.  Add to that multiple app servers, web servers, and whatever else factors into your platform stack.  With SaaS, it’s one platform all the time.

What about those bugs?  It so happens I’ve surveyed a number of On-premises technical support organizations and asked a simple question:

How many of the bugs reported are already fixed in the latest version of your product when they are reported?

The number was staggering, and ranged from 40-70%.  Imagine that your customers just never encountered 40-70% of the problems.  That’s very good for customer sat.  Even better, imagine you didn’t have to hot fix and patch any of those problems because customers were transparently upgraded in your data center.  Further, imagine no problems due to new untrained IT trying to run the app.  You run the app according to the best practices you’ve established.  I can’t imagine a happier place to be from an Engineering cost standpoint.

Meanwhile Dare Obasanjo chimes in that Partners can’t take a SaaS switch

Dare comes closest to the real problem for on-premises vendors with this.  Sarah Lacy appears to buy Larry Ellison’s claim that SaaS just isn’t profitable enough.  That’s actually far from clear because no SaaS vendors have reached remotely the size of Oracle.  We don’t know what effect total brand domination can have on their sales and marketing costs.  We know there is a pronounced knee in the curve for on-premises vendors that starts at over a billion dollars.  Those companies can sell more cheaply.  We don’t know the effect when you’ve taken so much market share as the big guys have that you no longer are struggling to hit the kinds of growth numbers we see with Salesforce and other SaaS vendors.  Most importantly, we don’t know the impact after 10 years of recurring revenues keep coming in.

What we do know, is that it is extremely painful to switch.  There is huge channel conflict, both internally and externally.  Businesses that want to switch have to endure a couple of years of brutal slog, to use Lacy’s words, to get there.  But once they are there, they never look back.

I’ve seen a number of on-premises companies trying to get to SaaS.  Have you seen any SaaS companies trying to convert to on-premises lately?

Related Articles

It’s becoming obvious that BusinessWeek just doesn’t get SaaS.  Here is another blogger’s take on BW’s foolishness.

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14 Responses to “Do You Read the SaaS Curmudgeons? Do You Enjoy SaaS Schadenfreude?”

  1. [...] http://smoothspan.wordpress.com/2008/07/21/do-you-read-the-saas-curmudgeons-do-you-enjoy-saas-schade… [...]

  2. Do You Read the SaaS Curmudgeons? Do You Enjoy SaaS Schadenfreude? « SmoothSpan Blog…

    [...][...]…

  3. kepesben said

    Bob – in defence of Sarah and Nick – I believe their posts highlighted the hard work it’ll take to bring about the disruption that SaaS promises.

    The fact is (as you point out) it’s an untrodden path and time will tell what actually eventuates in the space – as commentators perhaps Sarah and Nick have a right, or perhaps even an obligation, to be a bit curmudgeonly.

    No?

  4. smoothspan said

    Ben, the software business as a whole is hard right now. My only point is that the on=premises business is even harder than the SaaS business at the moment.

    CHeers,

    BW

  5. sireland said

    Excellent response! Thanks for this.

    Sarah’s article appeared to have worked. It called Marc (Salesforce) out and the resultant interview put some of the myths to rest. http://www.sarahlacy.com/sarahlacy/2008/07/my-mini-moby-di.html “People are always over-estimating what you can do in one year in our industry and under-estimating what you can do in one decade.”

  6. smoothspan said

    Lacy is funny. She says she called Benioff out with her column and that’s why he agreed to the interview. Then she tees up this totally softball game and doesn’t really bring on any of the challenges in her “Brutal Slog” post. Why? She knows Benioff would chop that up into little bits.

    It was a nice inteview, but hardly earth shattering.

    Cheers,

    BW

  7. no SaaS vendors have reached remotely the size of Oracle

    No? I just checked — Google’s market cap is 150 billion vs. Oracle’s 110.

    Someone might object, but everything Google does is nothing but SaaS.

  8. smoothspan said

    Berislav, it’s a good point, though not completely conclusive in the sense that we lack a non-SaaS Google comparison and it isn’t “business” software. Still, I like it. I especially like that the scale point was about the power of brand, and Google has one of the most powerful brands on Earth.

    Thanks!

    BW

  9. [...] This level of achievement also underscores fellow Irregular Bob Warfield’s contention that much of the current analysis around saas business models is bunk. A view with which I thoroughly [...]

  10. lonniewills said

    Bob,

    I couldn’t agree more with your comments. I am always amazed when I see the curmudgeons and statements about “not sure SaaS is here to stay.” It’s been here since 1999 and Salesforce.com and Google are nothing but SaaS. I am not sure, but I think google will be around for at least another day or so…

    I recently ready an article about higher education by destinationCRM, “Market Focus: Education — Making CRM Mandatory for University Administration” Keith Hontz from SAP makes this blanket statement about SaaS solutions, “Everyone is very enamored and loves the low-cost per-user, per-month story, he says. But at the end of the day, what they are not getting is complete integration.” Talk about mis guided and misinformed. SaaS doesn’t allow complete integration? Another example of client/server cool aid and not really understanding SaaS and more importantly, integration.

    As always Bob, great stuff.

    Lonnie Wills
    http://saasevolution.blogspot.com

  11. [...] SaaS market will collapse within 2 years.  Even Sarah Lacy is jinking back and forth in her views, first declaring SaaS “a Brutal Slog” and then taking Debes very much to task.  Harry Debes must be feeling he can’t win with Lacy [...]

  12. [...] are killed by Flickr (huh?), Twitter, and Facebook according to Boutin.  What a goof.  This is Sarah Lacey quality curmudgeoning, though not quite at the level of a Nick [...]

  13. [...] Comments Blogs Are So Over? L… on Do You Read the SaaS Curmudgeo…Is Enterprise 2.0 a … on Why Are Startups Running at a …Giving your Marketin… [...]

  14. [...] almost unnoticed in the fracus.  We’ll see people like Gilmore and Scoble battling the Social Media Curmudgeons for a little while longer, but then the romaticism of a post like Steve Gilmore’s will start [...]

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