SaaS

  • November 24, 2010
  • Oracle won its lawsuit against SAP in federal court.  Oracle had complained that a now defunct subsidiary of SAP had unlawfully used its intellectual property to provide third party support to Oracle customers and the jury agreed.

    There are so many levels in this situation that I can’t get to all of them but one that interests me is the idea of a third party disintermediating the primary party (Oracle) to deliver a service that costs less.  This kind of thing happens all the time in the economy and the issue, as far as I can see, is that the third party made use of Oracle property without paying proper license fees.

    I get all of that and I agree with the decision—you have to pay for what you use.  On the other hand, though, the existence of the third party in the first place poses an interesting question for everyone and casts a shadow on the conventional software business model.  Support fees are often calculated as a percentage of the license fee and both are rather steep with enterprise software, in part because of vendor lock-in.  So there’s a built-in incentive for customers to seek out any way they can find to lower their costs.

    The idea of lowering costs is as old as capitalism because margin is, well, margin—the difference between what it costs you to deliver a product or service and what the customer pays for it.  But enterprise software customers have been complaining for years about high prices, especially the price of support and those costs suggest to me another example of the unsustainability of the conventional model.

    Back when the addressable market for software was a relative handful of companies that could afford big iron, high prices made sense, if only because the cost of development, maintenance and all the rest had a smaller base to amortize the costs against.  But today computer hardware is cheap and abundant and it can even be rented from the cloud.  Software has become much more complex and labor intensive—and costly—in part because the addressable market has grown but so has competition.

    If you compare the high costs of enterprise software with what’s on offer with cloud computing you see some big differences.  For years SaaS vendors have touted the advantages of a single monthly fee that includes not only hardware and software but all of the labor associated with service, maintenance and ongoing development.  It’s this model that is catching on in emerging markets in part because those markets simply cannot afford to support the old model.

    So while I see the Oracle v. SAP verdict as just, I also see it as a milestone in the march to cloud computing.  The conventional enterprise software paradigm is hugely expensive and unsustainable in the long term, not only for customers but sometimes for vendors too.

    Published: 9 years ago


    There are multiple ideas about the shape of the future competing for primacy in the electronic village.  I am pushing on sustainability but another idea that I really like is called the subscription economy championed most vociferously by Tien Tzuo, CEO of Zuora.  Subscriptions fit well into Tzuo’s company plan since his company has a billing and payments system for subscription purchases.  But there’s more to it than a self-serving motto and I think the subscription idea feeds nicely into the idea of sustainability.

    When we talk about the subscription economy it means that an increasing number of products and services are available today through subscription rather than outright purchase.  It’s easy to see through examples like car leasing and cell phone use.  When you lease a car you are actually subscribing to a certain use level for a time.  At the end of the lease you return the car and either get another lease or possibly purchase a car outright.

    With a cell phone you buy a package that leaves you with ownership of the phone but a mandatory period of subscription to the service.  Go over your subscription rate and you pay more.  At the end of the agreement most carriers let you continue month to month, until you want or need another phone and the process starts again.

    Car leases look just like a car purchase in that you get a monthly bill though that bill is lower than it would be if you had bought the car.  And we’ve been accustomed to buying phone service for over a century so there’s no drama in the cell bill except for the itemization, if you read it.

    Finally as a third example, there’s SaaS computing and we all know how that works.  But what we don’t see in any of these cases is the significant back office processing that comes with a subscription economy.  With cars and cell phones it’s no big deal because even though these are subscriptions, they are so tightly controlled that the subscription functions just like a purchase.  That’s true in billing for a car lease and, except for overages on your cell bill, it holds there too.

    SaaS is a different kettle of fish for several reasons.  First the usage costs are low and here’s the key — customers have broad latitude in changing their subscriptions which is very unlike the car and cell examples.  A hallmark of SaaS is that customers can change their configuration almost at will, which has direct impact on billing.  The overhead involved in billing can be substantial especially if a bill is incorrect because expensive human labor is needed to make corrections.

    Unfortunately, the billing systems that work well for relatively static business processes that include purchases and even leases, work poorly in the subscription economy.  The economic challenge is that if the overhead involved in making billing correct exceeds the cost of the good sold  (or subscribed to) then you can’t have a thriving or even sustainable business.  That means the billing system is potentially an inhibitor of innovation.  If you ask yourself what’s preventing wide scale subscription for more products and services that we use every day, part of the answer is likely the cost of billing.

    Take newspapers and periodicals for instance.  You might think of newspapers giving away their content on the Internet as silly and you might be right.  But content is one of those things whose demand is so variable that charging for it might cost more than the product itself.  In a way, when a paper gives you its content gratis, it is acknowledging that it would lose money selling it to you.

    Until recently, giving content away on web sites was OK because a large portion of print media revenue comes not from subscriptions but from advertisers.  But advertisers have been deserting print so the issue of charging for content has taken on new urgency.

    Of course content is just one example.  Other examples are waiting in the wings for a business model that enables them to become real and profitable.  Some of those examples can even be found in conventional areas like SaaS.  For instance, a SaaS company may be able to offer more permutations of its products to fit more market niches but because those niches may be rather thin and because the SaaS company may still be using a conventional billing system, the SaaS company cannot profitably exploit the niche.

    Then there’s the green issue.  Take a company like Brighter Place the group started by Shai Agassi to build networks of charging stations for electric cars.  The idea is that you can subscribe to car battery services, which include battery charging or outright swaps the same way you subscribe to cell phone service.  That’s a major part of an emerging subscription economy.  So far entire countries including Israel and Denmark, the state of Hawaii and the city of San Francisco have enlisted in this new idea.  But the idea will need a very scalable billing system to make everything work.

    Maybe that’s a bit complicated but the net of this discussion is that subscriptions can play a greater role in our economy if only we can get the business model right and that starts with back office overhead.  In case you are wondering why that’s important, consider this: as the cost of a product declines more people can afford it and the potential market size grows.  That was the beauty of SaaS when it debuted and it’s still true.  In fact, in a down economy, a price drop caused by subscriptions is equivalent to a big stimulus.

    So, Zuora introduced Z-Commerce for the Cloud last week.  It’s a solution designed to address many of the issues that so far hinder broader acceptance of things delivered as subscriptions.  The product is delivered as a SaaS solution — no surprise there — and there is good reason in my mind to believe that the subscription economy is one of those things that will contribute greatly to more sustainable business processes.  And that’s something we’ll all need down the road.

    Published: 9 years ago


    Yesterday’s news that Apple’s market value slightly eclipsed Microsoft’s was significant and in my haste to get out a post on it, I may not have been able to apply all of my analytical effort so I want to try again.

    First, to cover basics, the market value of a company is simply the value of a share times all of the shares outstanding.  A company’s market value fluctuates daily with the rise and fall of its share price.  Today will undoubtedly be different.  You can find the values in the original New York Times article that my post referenced.

    What’s significant about this news is not simply that Apple overtook Microsoft by a little bit on a hot spring day.  But if you view Microsoft as filling the niche once occupied by IBM as the technology supplier to business and if you view Apple as the technology supplier to consumers many things come into focus.

    For instance, Microsoft has been a relative laggard in providing what might be called creature comforts for computer users.  It was late to the game with Windows after Apple had deployed the Macintosh, late to deliver CRM and it was late to deliver a software as a service (SaaS) offering.  Nothing wrong with that, Microsoft simply demands a clear business purpose before launching into a new area.

    On the other hand, though, Apple has brought to market numerous new categories of devices starting with the iPod that changed the way we live.  Forget devices that start with “i” for the moment and think about Garage Band and iMovie.  They are examples of ways that Apple has changed the way creative people work and in the process these tools have democratized some formerly stodgy businesses.  Then there’s iTunes and if you want to talk about (formerly) stodgy businesses, you need only look at the music industry.

    Of course Apple is not alone in this democratic revolution, you have to include companies like Salesforce.com and the hundreds of partner companies it has spawned and Adobe whose products run across platforms today but whose origins are Mac.

    So if you look at the marketplace today, the fact that Apple is worth a bit more than Microsoft says that the end customer is becoming more important than the corporation.  What we do on our iPads, iPhones, iPods and their imitators (some of which run a Microsoft OS) is as economically important as what we do on our desktops and laptops.

    Last week at Sapphire, SAP’s user conference in Orlando, we saw a company doing many things but one of the more important things SAP did was to fully acknowledge the importance of the customer and promise to put the customer more in the center of what it does as an enterprise software company.  Sage did some of the same things at their conference, Insights.  At the time, I referred to these and other things happening in our industry as the triumph of CRM but in a sense, it was also the triumph of Apple, just a week before Wall Street made it official.

    Published: 9 years ago


    Sage’s introduction of SalesLogix for cloud computing has caused me to do a lot of thinking.  The operative terms we use in the industry for software functionality delivered across the Internet is SaaS or now cloud computing and numerous vendors find themselves twisting themselves and the definition into barely recognizable forms.  Enough of this I say, let’s do a re-think.

    If SaaS and cloud computing are mysterious to you, let me provide some background.

    I started covering the field (it wasn’t a market yet) in 2000 and I devoted my practice at Aberdeen Group to it.  In those early years other terms dominated the discussion, notably, hosted, on-demand and ASP.  All applications were hosted and available on-demand but the earliest distinction, one that persists today, was between ASP’s and multi-tenant solutions.

    Briefly, ASP’s or application service providers offered client server products like Siebel served from a central location across the Internet.  It was slow going and each customer had a single instance of the software running out on the Internet.  It didn’t work out well and many VC funds took goose eggs on their report cards from the ASP’s.

    Multi-tenant was another matter.  Salesforce.com was a pioneer but so were Salesnet, RightNow and UpShot.  Ironically, only Salesforce understood the power and value of its proposition (RightNow got religion a little later) and most treated the multi-tenant on-demand solution as simply a delivery model and not much more.  UpShot was bought by Siebel, Salesnet by RightNow and the debate about superiority abated because Salesforce and RightNow (which hardly competed then) had prevailed.

    Then something interesting happened.  Vendors like Oracle (which bought Siebel) started dabbling in on-demand services and began delivering application services that hybridized the on-demand and ASP models.  They did this by re-architecting away from client-server and supporting applications in browsers.  They then began hosting their applications in a have it your way scenario.  The re-architected applications had been retrofitted to support the multi-tenant model but multi-tenancy was strictly voluntary.  Customers could elect to run their applications as single instances in their IT departments or from a remote data center.

    With multi-tenancy everyone shares a single instance of the application and through metadata configures and customizes their instance.  All data in a multi-tenant system is stored in one server farm with metadata again serving to segregate it.  Some people worry about this virtual segregation but so far it has been resilient to corruption and hacking.  Nonetheless, some vendors offered single tenant solutions to assuage jittery nerves.

    But wait there’s more.

    Terminology evolution continued and SaaS or software as a service and cloud computing have been front and center for several years (in the case of SaaS).  In its quest to differentiate multi-tenant from conventional single tenant, the industry keeps adding differentiators.  SaaS has usually meant multi-tenant and cloud usually refers to a plethora of computing services available on the Internet.  So, raw computing power is also called Infrastructure as a Service (IaaS), there’s still SaaS and cloud seems to refer to platform — the whole computing stack of hardware, operating system, database, middleware, applications and more.

    So where does this leave us?

    In a word, confused.

    The relative dearth of terms has caused us to re-use what we have in ways that have confused the market.  I also do not leave out the possibility of savvy marketers hitching a ride on a popular term to bend it to mean whatever they need it to, which lead me to my opening paragraph.

    So I propose the following.

    ASP is the new term used to describe a single tenant implementation in some remote data center that serves applications across the Internet.  A vendor that serves multiple customers with this architecture would be said to be delivering an application service in single tenant mode. Full stop.  No need to apologize for it.  If that’s what the customer wants then sell it to them.  It doesn’t have all the advantages of multi-tenant cloud computing but some people clearly don’t see these things as advantages anyhow.

    SaaS refers to multi-tenant application delivery across the Internet.

    Cloud computing is an umbrella term encompassing ASP and SaaS as well as IaaS and Platforms.  ASP’s and SaaS providers may very well use infrastructure from other cloud providers as Sage is doing with SalesLogix.

    My whole point in doing this is simple.  I think the industry and the market are mature enough for us to develop some new terms or possibly adapt an old one.  Since there are obviously several models for delivering software as a service, why not differentiate enough to give concreteness to them?  Calling everything SaaS without qualifiers is not helpful to the market or the customer and the confusion it can cause can only slow down a sales cycle and who needs that?

    Published: 10 years ago


    Perhaps the most interesting CRM development to come out of Denver this week was Sage’s unveiling of its SaaS or cloud offering.  But now that the initial hoopla has died down (mine included) it’s time to take a more measured look at what is being delivered.

    As I mentioned in an earlier post on my blog the announcement means that Sage is offering a hosted version of SalesLogix but not one that has been re-architected to take advantage of multi-tenancy.  The company still legitimately claims a better total cost of ownership profile for SalesLogix because the arrangement off-loads from the partner the need to support a physical installation and from the customer, the cost of most infrastructure.  The usual configuration and modification cycle remains the same however.

    So is this good or not?  I say both.

    First, let’s ‘fess up, this is not SaaS or cloud computing, except in the broadest possible definition you can imagine.  Amazon’s EC2 compute services, which delivers infrastructure as a service (IaaS), provides the cloud aspect.  It’s really ASP or application service provider, a model that waned away in the last decade for competitive reasons.  ASP is back because the applications are no longer client-server and thus have lower server overhead; that single change should make the model much more competitive.

    Sage is betting that this change is enough to help its partners battle against NetSuite, Salesforce and RightNow (and others) by enabling them to check off the SaaS box in any bake-off and that’s a good point.  In fact, in briefings with SVP Larry Ritter and EVP and GM Joe Bergera that scenario came up.  Sage partners can continue the discussion about CRM and business issues with prospects once they’re past the SaaS beauty pageant and for them it’s a good thing.

    Sage’s secret sauce has always been its partners.  The channel may be hard to administer at times but one thing you have to admit is that partners get right into the shoes of their customers in ways that software sales people simply cannot.  No wonder then that most SaaS companies are trying to breathe life into a channel solution.  Microsoft has sold through a channel for a long time, NetSuite is building one and even Salesforce has its version with its AppExchange developers who sell seats as a matter of course.

    Sage’s strategy from here is to enable a hybridized approach to its solutions by offering the choice to customers over core CRM functions but increasingly to also offer complementary SaaS solutions that leverage customer data wherever it happens to reside.  That may represent an optimum for this business model, at least for now.

    On the other hand, though, Sage seems to be taking its time bringing out complementary solutions and appears to regard that as its domain.  It would be better if the company opened up this space to more competition and contribution from partners and ISVs.  A more open approach would enable Sage to stock its catalog faster and make the promise a reality sooner.  The company’s statement so far is that it’s going for quality over quantity but I have a mild disagreement here.  I think it’s better to look for quality by letting a thousand flowers bloom and picking the best, rather than by over controlling the process.

    SalesLogix in the cloud takes the company a long way to delivering lower cost solutions but Sage still has work to do.  Its customers represent a market very much oriented toward operational efficiency as opposed to, say, customer intimacy.  It needs to deliver low cost, easy to implement and deliver solutions, a quest that never ends.  Now that infrastructure has been dealt with Sage can focus more attention on business processes and vertical deployments, which is always on its roadmap.

    So to net it out, Sage was the odd man out in the hosted services derby but that changed this week because Sage is now in the hosted services game.  It’s a solution that might seem odd to a SaaS purist, but it fits the special circumstances of a channel operation.  I think we need a new name to distinguish multi-tenant SaaS and cloud computing from solutions that simply use IaaS, something that is assertive rather than pejorative.  ASP anyone?

    Published: 10 years ago