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

Which Came First: The SaaS Chicken Or The On-Premises Egg?

Posted by Bob Warfield on September 1, 2008

There’s quite a lively discussion among the various Enterprise Irregular blogs about Harry Debes extreme prediction that the 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 nailing either viewpoint.

As I mention in my previous post, the prediction makes no sense to me whatsoever because the reasons Debes outlines, namely profitability, just don’t hold water when you look at real numbers.  This was my argument when I took Sarah Lacy to task as well.  Everyone wants to bash SaaS over profitability, but it’s just not that bad.  It’s also a red herring, because it is far from clear how well On-premises software even sells these days unless the company selling approaches a billion dollars in revenue.

One of the refrains common to all of these SaaS articles has been the point that SaaS is good for customers, though some are arguing it’s bad for vendors.  Perhaps “good for customers” is too strong, though I think it is, but certainly SaaS is something customers want.

Out of curiousity, I polled some sales contacts I have at hybrid companies.  I was curious about their thoughts concerning SaaS vs On-premises in a situation where they have both products to sell.  What do customers prefer and why?  How much control does the vendor have to sway those preferences.  The answers that came back were interesting.

First, SaaS is very much a phenomenon of small and medium businesses.  They overwhelmingly prefer SaaS and most of the time don’t even want to talk about On-premises, according to my sources.  Pity poor Lawson and Harry Debes, because this is precisely their market.  It must be tough not having a SaaS offering to give to them, and not wanting them to have it in any case.  Once that SaaS offering is available, it’s very very hard to sway smaller organizations away from it, all other things being equal.  Here, Lawson primarily has the advantage of a much richer offering than the SaaS world has been able to put together, to date.  But we all know those kinds of advantages are very hard to sustain forever.

What about larger organizations?  Here the story is also interesting.  It’s a tale of what IT wants versus what the Business people want.  That has to be familiar to anyone who has been involved with selling Enterprise Software.  And, also not suprising, these two have quite different agendas.  As an amalgam, the four reasons my sales sources tell me a large organization chooses SaaS include:

Perception of Faster Time to Market for SaaS

My sources were careful to label this “perception” as they still sell On-premises.  But, the general world perceives a SaaS app can be brought live and made valuable much sooner than an On-premises app.  This is typically a bargaining chip for the Business side.  They’ll get a go-live quote for SaaS and then hang that around IT’s neck.  Can you make that same deadline with On-premises?  Even if they think they can, there is serious organizational risk and political capital at stake to make a run at it. 

Lower Implementation Costs

Closely allied with time to market are lower implementation costs.  Typically there will be no large SI firm involved with a SaaS install.  Cost overruns are percieved as much less likely.  SaaS companies are honed around the idea that the service has to be cheap to install else the other economics will make no sense, so they’ve spent a lot of time fine tuning this process.  Having seen both models myself, I think this one is more than just perception.  If nothing else, the SaaS company can insist on and get Best Practices around nearly every aspect of implementation since it takes place with their personnnel largely in their data center.

SaaS has a Better Risk Profile:  Turn it Off Any Time

Interestingly, this comes up from IT as often as the Business.  IT appreciates being able to just turn off the SaaS service and move on if things aren’t working.  In the On-premises model, there are huge sunk costs, not the least of which is the up front license fee, but there’s also hardware and a whole host of other charges.  Most of the money is spent before the service is ever seen working or delivering value.  My friend Chris Cabrera of Xactly is fond of saying (as have other SaaS CEO’s) that you have to earn the business again each and every month with SaaS.

What’s Unsaid:  Business Often Wants to Minimize IT Involvement

Another one that should not be surprising to anyone who has sold in the Enterprise:  Business and IT often don’t get along very well.   There are a host of reasons for it, some fair, some not so fair, but the fact is that many on the Business side feel that internal IT is expensive, hard to deal with, and produces mediocre results at best.  More than one clever SaaS sales person has fanned these flames to take advantage of the rift when selling their solution.  The trouble is, unless the application in question requires almost no integration (Sales Force Automation, anyone?), the SaaS vendor will have to deal with the IT folks anyway.

Conclusion

So there you have it.  After talking to some sales people, I am more convinced than ever that SaaS is here to stay, despite whatever Harry Debes might think.  I suspect there are probably a host of other reasons I did not uncover that go to why SaaS sells so well.  We can continue to debate the profitability question as Harry Debes and Sarah Lacy are wont to do, but it seems to me there are SaaS companies out there showing this is also less of a problem than we’re led to believe.  I leave you with another great article for exploration:  Penny Crossman’s WSJ piece on the “almost meteoric rise of SaaS on Wall Street.”  Surely success in the fickle and extremely risk-averse world of financial instituations is a good sign for the future of Software as a Service.

Related Articles

Jeff Kaplan chalks Debes’ rant up to arrogance.

2 Responses to “Which Came First: The SaaS Chicken Or The On-Premises Egg?”

  1. Zoli Erdos said

    Very useful data points, Bob. I’m just wondering which one really is the chicken or the egg:-)

    Here’s my counter-theory:

    Chicken: you have to buy the whole thing, hence it’s on-premise.
    Eggs: they keep on coming, you don’t have to own the chicken to get them – SaaS.

    Joke apart, I agree with the actual arguments you present🙂

  2. Zoli Erdos said

    I should run and trademark EaaS, Eggs as a Service:-)

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