From the Vendor's Point of View: Why 'SaaS Sucks'

by: Jeffrey M. Kaplan

No, I haven’t gone over to the dark side and abandoned the Software-as-a-Service (SaaS) movement.

But, I just gave a keynote presentation regarding the state of the SaaS and cloud computing market at SoftLetter’s latest SaaS University in Chicago, where the challenges of developing and delivering successful SaaS solutions were once again brought home in the discussions among the software executives and SaaS professionals attending the event.

Despite it being scheduled on the last day of the quarter and first week of many people’s summer vacation, the event succeeded in attracting about 70 CXOs from a cross-section of established independent software vendors (ISVs) and SaaS start-ups seeking insights about how to succeed in this rapidly growing industry.

Like past SaaS University sessions, the attendees were treated to a variety of tutorials from industry practitioners with a minimum of self-promotion. And, this group of attendees distinguished themselves by asking very pointed questions from the opening bell about specific operational issues associated with the SaaS model.

But, it wasn’t until we got to the working lunch session on the second day of the two-day event that their anxieties came to head. It was during the session focused on the latest accounting rules governing revenue recognition in the SaaS model that frustrations among the established ISV executives began to boil over as they learned that:

  • After making significant investments in (re)architecting their applications to be delivered as an ‘on-demand’ solutions,
  • After building hosting facilities or selecting a hosting partner to deliver their services,
  • After determining how to package, price and promote their solutions,
  • After developing a service level agreement (SLA) or comparable legal agreement that clearly outlines the company’s contractual obligations,
  • After convincing a committee of IT/business decision-makers to try their solution,
  • After determining how much ‘customization’ they can do for specific customers without breaking the common SaaS application and underlying service delivery model,
  • After accepting a fraction of the value of application in an initial subscription fee agreement,
  • And, accepting all the responsibility for the availability, reliability, security and performance of their SaaS solution…
  • The aspiring SaaS vendors then discovered they would only be able to recognize their subscription revenues on a month-to-month basis, decimating their traditional software revenue recognition models.

This harsh reality is what has kept the CXOs of the legacy, on-premise ISVs up at night hoping that the SaaS and cloud computing movement would disappear or be derailed by a major outage that would send customers fleeing back to the comfort of their on-premises software and systems safely hidden behind the firewall. Of course, the opposite has been true and SaaS/cloud computing market growth is accelerating as a result.

No, from a vendor point of view, SaaS isn’t as easy as it looks.

It can be disruptive and painful. And, the rewards can take a while to be realized.

But, unless a major service disruption or ongoing service failures occur, the SaaS/cloud computing services market isn’t going to go away because it offers customers too many business benefits. And, ultimately it’s the customer point of view that really counts.

And, by the way, there are a growing number of SaaS vendors, and established ISVs as well, who are figuring out how to be successful in this deceptively difficult business.