SaaS, it already killed you, and you did not notice

After a month or two off, one topic has risen to the top of my agenda sufficiently to be blogged about. I’ve been concerned for years now in how people use software to entertain themselves. Then, more recently, how software can be used to help people realise creative tasks at home that previously required professional tools and teams of people. Since around 1996, I have been personally concerned with how the internet enables communities to socialise and co-operate. Now I am wondering why business software remains so bad, when games and social media software is do good.

During that time, I’ve enjoyed watching ‘serious business’ people look down their noses (sometimes figuratively, but surprisingly often, actually) at computers being used for creativity or entertainment. My views are clear “the only proper use for a computer is entertainment”. I’ve had to stretch that to include “the only proper uses for computer are entertainment and empowerment of everyone”.

Still, it has proven hard to convince business people that they owe more to the fact that consumers love entertainment than they ever cared to acknowledge. OK, there have been pockets of prescience in the major software companies: Oracle (in the form of David Christopher for one), BT (with Dan Baillin), Sun (the inestimable Stewart Townsend), Microsoft (Claire O’Halloran then Bindi Karia both carry the new media torch elegantly), and in those places the social media / entertainment revolution has clearly found its voice. Elsewhere, not so much.

Which is why I have been delighted to attend a short seminar this morning on Software as a Service sponsored by Spectrum. The speakers were really excellent, insightful and relevant. They all had a core theme (apart from, obviously, trying to sell us their solution…). That theme was: the real pressure on business software is coming from your employees’ and your customers’ experiences at home of consumer entertainment and social media.

The speakers were

Keynote Address: Dr. Steve Garnett, Chairman EMEA, Salesforce.com
Emerging Venture Perspective: Andrew McGregor, CEO, eCommera
Sector Update: Claudio Alvarez, Principal, GP Bullhound
Client Perspective: Bernie Segal, European Head, Software as a Service, Infosys

I won’t embarrass anyone with quotes, but will try to pick up on themes.

First theme: your customers know more than you

SaaS enables a raft of technologies that old school packages or self-developed solutions do not:
Consumer sentiment analysis (which I have a personal love of) (which, when handled well, can drive a 40% improvement in consumer sell-through, as Nike have found)

Wisdom of Crowds / Wikinomics product and service creation (ORACLE, DELL and Starbucks have all pioneered in this area and the real benefits appear to greatly outweigh the risk and cost)

Self-solving community support (which can cut the cost of support, for sure, as most people will Google the error message anyway, but the other side of that blade is that the while world can see what problems your product has. As many lithium battery users have found recently)

Internal and external community engagement (breaking down the ‘us and them’ barrier can hugely improve both staff AND customer engagement, which makes it a bit of a ‘no brainer’ decision for me)
Consumers use computing more than business, so they know more. Even in terms of raw bits, consumers now ship 20 million Terabytes of data a month, more than double business users. The old priest-hood of business IT is dead. Long live the consumer!

Second theme: your employees and customers won’t stand for that old crap any more

After a few days on Amazon or Facebook, no employee is really willing or happy to use traditional CRM, Accounting Ledger, ERP or other solutions. They are too slow, too ugly, to ‘restrictive’, deny the joy of discovery and way too unfriendly. Treating employees as key-pecking battery farmed hens is not the way to engage them in your business.

Even your CIO knows that the in-house server farm is far too expensive. On average an established business finds that 80% of its CIO budget goes on maintaining and upgrading the existing infrastructure, and only 20% on improving the customer and employee experience and genuine innovation. No start up would waste money like that, nor should any CEO permit a system that ties his business into a legacy that is, inevitably, doomed to fail through competition or market changes.

The recession has shown that scaling works both ways. Large companies quickly found they were being killed from three sides: by fixed costs, by employee culture that was tied to using legacy processes, and by consumer demands for engagement + price falls. It is one thing to show your stockholders that you once scaled up from 10,000 users to 1 million, and quite another to explain to them how you will survive (or even thrive) on going back down to 500,000.

Third theme: SaaS is not an optional incremental upgrade, it is a total business changer

You need to think in absolute terms. While it is nice to hear that the average SaaS installation achieves an ROI of 51% and CAGR of near 19% in under 18 months, you need to look at the business drivers. Business that engages with its customers and empowers its employees will rapidly (very rapidly) outcompete those who do not. Not decades, a few years.

SaaS enabled businesses showing 19% CAGR , 50% ROI, reduced sales cycles (in some cases from years to weeks), 90% user retention, 70% user ‘trade-up’ and hugely improved customer engagement are going to eat traditional business alive. And spit out its bones.

Investors know this, which is why exit multiples for traditional businesses in software and services languish at 1.0 to 3.0 Enterprise Value to Sales (“EV/T”) while SaaS businesses have enjoyed 3.5 to 7.0 EV/T exits. Although the market dipped last year, SaaS offerings are rebounding much faster.

Forth theme: the old way is deader than a dead thing

I used to think that the average software project cost over-run was about 28%. No real reason for that, it is just a number that stuck in my head about 15 years ago from some work I did at Deloitte. I was, therefore shocked to learn that 53% of in-house software or ASP projects run 189% over cost. Seriously, anyone who does that needs to be fired BEFORE they screw over your business! How that came to be the ‘accepted’ standard of performance in software installations staggers me, and, one has to wonder what the large ‘tied-consulting’ firms thought they were doing.

Read through all the points above, and if it does not already convince you, consider this: when recruiting top flight graduates, where will they want to work? In cloud hosted SaaS businesses with all the cultural and economic benefits, or with a traditional ASP or discrete installation business?

Things not addressed

Trawling through my notes there are a couple of points worth putting on the ‘cons’ side of the page:

Beware where your data goes, as political and territorial risk has not gone away. I, for one, would not, under any circumstances, put business critical operations or data into China, Russia or the Middle East right now. No matter how good your SaaS supplier, they can’t stop a tank or a vindictive government.

What are the true telecoms costs of moving to SaaS? Are they really and fully figured into the ROI figures that are bandied about? One has to wonder.

What about the impact on mobility, as SaaS should enable mobile apps in a way that ASP never did?

Can businesses really go to SaaS with all the corporate ‘antibodies’ that appear to exist to stiffle innovation and kill change? Will your CIO happily give up the power that comes from having the server power switch under this thumb? Can you go outside your corporate structure to innovate?

Final thoughts (and what this means to start-ups and entertainment or creative media companies)

The deep human drivers have not changed; they have just had the SaaS and social web spot light shone on them, so we notice them more. People, all people, want to be engaged in like minded communities, they want to co-operate with others and they want to reach their personal goals in public. SaaS and social media enable this. No one wants to work in the ‘technological jails’ that are proprietary business systems. (Yes, SAP and SAGE, I am thinking of you here, as well…)

Startups can save HUGE sunk costs by putting the non-core elements of their business onto SaaS with a reputable provider. Seriously: do not think of coding a sales system, an e-commerce engine or a project-scheduling platform. Just rent it. You get major risk reduction, and a potential sales partner out of that deal as well. (Proviso: if you think you can do better than INFOSYS, SaleForce or eCommera, go right ahead and innovate. Just use a SaaS platform as your own support system until you do 🙂 )

Investors are not going to support discrete downloadable or installed software any more, and even if they do, the exit routes will probably have closed in a year or two. Why put effort into those areas, then, as an entrepreneur?

Memo to self: the next thing I do will be cloud hosted, SaaS and consumer engaging.

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