Looking back on SaaS in 2008, the most interesting thing wasn't the inexorable increase in SaaS's market share, but the vocal backlash against SaaS from the large legacy on-premise software providers:
- First, Larry Ellison reiterated that Oracle won't be aggressively pursuing SaaS because it's not profitable enough.
- Then, SAP followed up on the delayed rollout of its SaaS offering, BusinessByDesign, with comments about needing to optimize it and automate the sales/delivery process so it could be profitable.
- Finally, Lawson CEO Harry Debes trumped everyone with the ridiculous pronouncement that the SaaS market will 'collapse' within two years after Salesforce.com misses its growth targets.
I wondered, if SaaS is such a big part of the future, why are the big players hesitating to jump into SaaS due to profitability concerns, and even dispraging it?
So I pulled down my copy of "The Innovator's Dilemma" by Clayton Christensen, and all was explained within a few pages:
"...despite established firms' technological prowess in leading sustaining innovations... the firms that led the industry in every instance of developing and adopting disruptive technologies were [new] entrants to the industry, not its incumbent leaders."
Very interesting. Why don't the incumbent dominant vendors invest in disruptive technologies?
"First, disruptive products are simpler and cheaper, they generally promise lower margins, not greater profits. Second, disruptive technologies typically are first commercialized in emerging or insignificant markets. And third, leading firms' most profitable customers generally don't want, and indeed initially can't use, products based on disruptive technologies. By and large, a disruptive technology is initially embraced by the least profitable customers in a market."
So is SaaS a disruptive technology? Absolutely - SaaS meets all of these definitions:
"...disruptive innovations are technologically straightforward. They generally package known technologies in a unique architecture and enable the use of these products in applications... [that] previously had not been technologically or economically feasible."
"Products based on disruptive technologies are typically cheaper, simpler, smaller, and frequently more convenient to use."
"Disruptive technologies bring to a market a very different value proposition than had been available previously."
SaaS repackages software functionality onto a lower-cost multi-tenant infrastructure and a new delivery mechanism (via web browser over the Internet) that greatly improves the value proposition for the customer - faster time-to-value, lower infrastructure cost, and ongoing operating costs rather than huge up-front licenses.
For the SaaS vendor however, the economics are far less attractive than shipping CDs for millions of dollars - SaaS margins are lower than on-premise offerings, due to SaaS's up-front infrastructure investment and deferred subscription payments.
So the major ERP providers are looking at decreased profitability from SaaS offerings, and they are prevented by investor expectations from moving strongly into SaaS. For example, even though SAP has V2.0 of Business ByDesign ready, their CEO said that if they were to start pushing it, "we would be hurting our margin, and hurting our stock."
In addition, "The Innovator's Dilemma" states that incumbent vendors' org structures and skillsets (i.e., what they focus on and do well) are internal impediments to adopting a disruptive technology.
Finally, the ERP providers' most profitable customers don't want SaaS, which "The Innovator's Dilemma" says leads to long-term disaster:
"...the leading firms are held captive by their customers, enabling attacking entrant firms to topple the incumbent industry leaders each time a disruptive technology emerges."
So since he can't offer the SaaS disruptive technology, Lawson's Harry Debes instead puts down SaaS to try to delay SaaS adoption and his firm's inevitable decline. Harry has seen a lot of changes in the software industry over the years, but in comparing SaaS to service bureaus and ASPs he is ignoring two decades of Moore's law that have fundamentally restructured the economics of operating software for customers (i.e., personnel time is now much more important than hardware costs), which makes SaaS's time-efficient value proposition very compelling to customers. Plus, SaaS is lower-cost to deliver than the ASP offerings during the bubble, since SaaS is built for time-efficient configurability and cost-efficient multi-tenant delivery.
SaaS has a better value proposition and better economics for customers, leading to ever-increasing customer demand but lower margins for SaaS providers - the formula for a disruptive technology that topples the market leaders. So my view is that Lawson is much more likely to collapse than the SaaS industry, signalled by the brewing ERP backlash.