SaaS Companies Vulnerable in a Recession 6 comments
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Whether a real recession hits the US and spreads to the global economy or the US economy simply slows down in 2008, all software companies - enterprise-license oriented and software-as-a-service (SaaS) on-demand vendors alike will see a meaningful impact in terms of license revenue growth and maintenance renewals.
SaaS on-demand companies' revenue models are typically based on a number of user seats, so in an expanding economy with growth in hiring, SaaS companies are able to grow within their installed base and capture revenues as their clients expand with the economy. In a declining economy, SaaS companies may take a triple hit as they will see their initial transaction sizes trimmed, upsell opportunities reduced or eliminated, and then there is a possibility that users will aim to reduce the number of subscribed seats.
In practice, it may be difficult for users to instantly dial down the number of subscribed seats, as most contracts are for 12-24 month intervals and there is the pesky issue of SaaS vendors holding the user data making migrations painful. History suggests that if the downturn/recession lasts longer than nine months, we will likely witness a meaningful negative impact on SaaS companies. This is not to say that vendors oriented towards traditional enterprise licensing models will do much better in a recession, but just to point out that SaaS vendors are far from immune to an economic decline.
When it comes to software company performance in a recession, the results will stem from management experience and economic efficiency of the business model. Some of the early SaaS companies were “christened by fire” in the technology meltdown of 2000-2002. The few of these early SaaS adopters that are still run by the original management team are likely to do well if the economy takes a dip. On the other hand, the bulk of the pure-play SaaS vendors were funded between 2004 and 2007, and their management teams will have a steep learning curve when it comes to adjusting their business model to deal effectively with an economic downturn. This is in part due to pure psychological conditioning as industry press and many analysts and investors have already designated the SaaS business model as “superior”.
In reality, “execution is everything” – regardless of the business model. And so far, the economic efficiency of SaaS companies has clearly lagged behind the rest of the applications software industry. In a recent benchmark of applications software companies, the business model efficiency (as measured by the MGI Index benchmark score - the MGI-X) of SaaS application providers has trailed behind the traditional enterprise software licensing oriented suppliers and the sector averages. For example, Salesforce.com (NYSE: CRM) placed only 11th out of 65 applications software vendors benchmarked in the study - behind "traditional" enterprise license & delivery model vendors such as Oracle (Nasdaq: ORCL), Microsoft (Nasdaq: MSFT) and Amdocs (NYSE: DOX). Less well known, but a much better example of a well-managed software company with a SaaS/On-demand model is Vocus (Nasdaq: VOCS). Of the sixty five application software vendors we benchmarked, only four out of thirteen pure-play SaaS vendors rank above the sector median.
Some of the reasons why SaaS vendors are not as efficient as their "traditional model" competitors have to do with how revenue is booked on a deferred basis, but in part the inefficiency stems from heavier support and infrastructure burdens that many SaaS vendors have been privately complaining about. In an enterprise model, the user provides the first level of support, but in the SaaS model, most - if not all - support is the domain of the SaaS vendor. SaaS vendors have to run an operations center that hosts the system (or manage a third-party hosting provider). In discussions we have held with some SaaS CEOs, many have expressed a desire for a hybrid business model, a notion that is often at loggerheads with what they are being told by their VCs.
Bottom Line: In the event of an economic downturn, SaaS vendors will be sharing the pain with their enterprise model brethren. With the exception of one SaaS company, MGI Index benchmarks for most SaaS application providers reveal mediocre efficiency scores that are well behind the overall economics of the applications software sector.
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This article has 6 comments:
Given a nine month time frame for a recession I would think that 'all' software suppliers would be feeling some sort of pain. It's not as if the established 'real' software suppliers do not rely on a process of continuous 'improvement' to keep the money flowing in.
I'd hazard a guess, and you imply it yourselves, that the 'poor' performers are WEB2.0 centric suppliers of SaaS where the product quality as such may be dubious and, of course, there is the 'lock in' that you mention. It might be 'cheap', it might be 'quick' and it might be, at face value, responsive and flexible, but, is it dirty?
There is much talk amongst and from the suppliers about implementation of platforms on which the end user will be able to make their own contribution to the product base. It sounds very WEB2.0 community paradigm but does that mean the customers are now expected to contribute to the vendors profits.
And all this is really in its infancy so what sort of wave are people trying to ride. If you dig deeper then you will find that the base langauges for this sort of thing are really just abstractions of any common object oriented language but they are being built on or within restrictions set by the delivery method.
The problem is that the foundations for them are still being laid and, at the moment, all we have is sand which appears to being built on more sand.
Of course I'm only here to mention the other available delivery model for SaaS which is Streaming SaaS. This is the real deal.
Established software companies with an investment in real programs written using proper software now have an opportunity to deliver their product in a way that makes WE2.0 SaaS look like the toy it really is. And they don't have to re-write or cripple anything to get the job done.
There are noises from Microsoft in this direction. However the new (but old) kid on the block is Endeavors Technologies.
www.endeavors.com
Do yourselves a serious flavor (sic) and check out what a Streaming SaaS model might do for you. The revamped version of AppExpress is now available for download at..
tryitnow.endeavors.com...
That's the Lite version and it is free. Q1 2008 the Application JukeBox is tagged for release.
So, before you go breaking what you have got in order to jump on the 'New Paradigm' wagon just make sure someone else didn't go and re-write the 'Paradigm' whilst everyone else was shouting about the New one.
Camilla
As use of an application spreads accross a company, so does the need for tight integration with sensitive back end systems such as accounting and ERP. Just try going to the head of Information Security and asking her to allow an event which occurs outside the firewall to trigger updates in these systems. Some such individuals are as accomodating as that (ex) HP ethics officer, but most will respond in a direct and blunt manner.
This is why we support the hybrid model referenced in the above article. Applications built on SaaSWizard can be moved to the customer's choice of Linux or Windows server inside their firewall with just 6 mouse clicks. We call this SaaS+.
Prehaps more interesting is that SaaSWizard (www.saaswizard.com) enables the development of full enterprise-class SaaS+ applications in a matter of weeks and without writing a line of code.
ManuLogic (www.lexnetcg.com/index...) was developed in under a week and recouped that investment before it was even accounced.
Our vision is to allow VAR's and System Integrators to leverage their specialized industry knowledge to create SaaS applications without having to invest in programmers or hosting infrastructure. We provide the software infrastructure, they provide the in-depth understanding of customer requirements and together we deliver a precisely targeted solution for their market.
In summmary, the entire economy seems to be heading for a downturn and I am sure that all segments will suffer, but for VAR's and SI's who offer unique SaaS applications and enjoy both ongoing SaaS revenue as well as service revenue and follow-on sales revenue, the future looks bright indeed.
Colin Earl, CEO
saaswizard.com