When it comes to software as a service’s potential, is the glass half full or half empty? Before you answer consider that MSPmentor’s SaaS 20 Stock Index is now down 50.42 percent from January through Nov. 14, 2008.
Even worse: The poster child for SaaS — Salesforce.com (CRM) — has seen its shares fall nearly 60 percent this year. Plus, five companies in our index have seen their shares plummet more than 70 percent this year. And investment firm Global Equities Research predicts SaaS and open source companies will suffer greatly amid the current economic turmoil.
Why are some people so down on SaaS? And why do I remain upbeat about the long-term promise of SaaS? Here are four quick observations.
1. Right Market, Wrong Time: Consider the situation at NetSuite (SaaS accounting software). The company’s most recent quarterly revenues grew 44 percent. Impressive, but profits didn’t meet Wall Street’s expectations and NetSuite shares are down nearly 80 percent this year. Part of NetSuite’s problem is timing. The company launched its IPO in December 2007, a few months before Wall Street headed into its downward spiral.
2. Sometimes, Hype Hurts: Many SaaS stocks are down sharply this year because their performance got ahead of earnings. Look at the five-year chart on Salesforce.com and you’ll see a mostly upward trajectory. The situation started to change dramatically in August 2008 — when Wall Street stumbled and investors wondered if Salesforce.com needed a correction. Well, that painful correction has arrived. (Full disclosure: I owned a few Salesforce.com shares in 2007 and early 2008 but sold this past fall.)
3. Sometimes, It Pays to Be Private: You know about publicly held SaaS companies. But keep a close eye on the private ones as well. SugarCRM, the fast-growing open source CRM provider, says SaaS represents more than 30 percent of its new sales. And managed services software providers like Autotask, ConnectWise, N-able , Level Platforms and Zenith Infotech have largely built their businesses around SaaS. (Watch for Kaseya to shift aggressively in that direction soon.)
4. It’s Still Early: Despite all the hype, we’re still very early in the shift to SaaS. Watch for established enterprise companies like CA Inc. (formerly Computer Associates) to launch some SaaS solutions in the days ahead. And you likely know about the SaaS efforts at Microsoft, Symantec and so on.
It’s a turbulent time for technology companies. Despite all the hype, SaaS companies are not immune to that economic turbulence. And I expect on-premise software to stick around for decades.
But the continued, gradual shift to SaaS is undeniable. The predictable costs, easy upgrades and reliable service are impossible to ignore.
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Posted In: SaaS 20 Stock Index
Tags: CA Inc. | Computer Associates | ConnectWise | Kaseya | Level Platforms | N-able | NetSuite (N) | SaaS 20 Stock Index | SaaS Stocks | Salesforce.com (CRM) | Software as a Service Stocks | SugarCRM | Zenith Infotech
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Hi Joe!
I’ll be very interested to see how SaaS shakes out over the next two years. Personally, I’m not convinced that SaaS is such a great model that the media has made it out to be, especially with respect to application such as ours that automate the entire business. SaaS is certainly the current buzz word and is getting all of the media attention, so it’s the bandwagon most are jumping on. However, I remember ASP (Application Service Provider) and that failed miserably. The Internet and Web 2.0 are supposed to overcome the problems of the old ASP model, and from a purely technical perspective, they do to some extent.
Here’s why I think SaaS won’t work in the long run for many (not all) applications:
• You’re renting, not buying. In two or three years when your SaaS contract is up, you are faced with the decision of signing another rental contract or having your software shut off. There are a lot of companies out there running a fully paid-for version of Tigerpaw. I would love to move them to a newer release, but many can’t afford it with the economy in the tank. I bet they’re glad they purchased software and didn’t rent it. Personally, I’d have a hard time sleeping at night if I was afraid I couldn’t pay a large monthly software bill, and the repercussions of missing a payment is the shutting down of my operations.
• Hidden fees. If you take a hard look at SaaS offerings, many of them are loaded with hidden fees. I’ve seen the gamut – from features that should be included in the core product but are charged extra for, to additional bandwidth costs, and even additional fees for each and every email sent from a system. This adds up!
• Ownership and security of data. Most SaaS applications are hosted applications. Your data resides on someone else’s server, with all of the inherent security risks involved. If you’ve got even one government client, you have some serious concerns about storing their information on a 3rd party server. In addition, if you need any of your data for any reason, expect to pay a fee to have your vendor provide it to you – if they even offer that service.
• Integration to 3rd Party Applications. If you run 3rd party products like TAPI phone dialers, Office applications, or accounting applications, it can be a challenge to create seamless integration between such products and a hosted application running in a SaaS model. Again, if you do get it working, expect to pay additional fees.
• You do not control your own roll-outs. Most SaaS vendors control the roll-outs of their software; they roll it out to customers when they think it’s ready, or when market pressures force them to. I’ve heard more than one horror story where a customer finds their phone lit up like a Christmas tree on a Monday morning because their vendor (one of our competitors in fact) rolled out an update that changed the screens and introduced bugs. All of the employees using the software were calling the IT department, and the poor gal in that department could do nothing but call the vendor in a panic. If you’re in IT, you know the importance of controlling a roll-out – you need to schedule the system time, train employees, test the new code, etc. With most SaaS models, you do not have this control and are at the mercy of your vendor. If your vendor has a history of sending out patches that break more than they fix (often without any documentation of what was changed), you are truly in for some heartache.
• You are essentially pre-paying for your software updates. To me, this is a real stickler. In the traditional software model, I produce an update by listening to customers and focus groups and then I approach you, my customer, with my new offering. If you are impressed and can see the potential for a positive ROI, you buy it. If not, you pass and I have to work harder to get your business. As a SaaS customer, that power is taken from you and given to the vendor. You essentially pre-pay for updates (buying goodwill, if you will), and you are the mercy of what the vendor produces. Don’t like what they’ve given you? Too bad – you own it and usually can’t go back a version so you have no choice but run the new version. One of our competitors won’t even support you if you aren’t on the very latest release. I’ve personally witnessed one SaaS vendor lose a LOT of customers in a short time by shipping a bug-ridden update over six months late. All the customers that had been paying him monthly asked themselves, “what am I paying all of this money for”?
• Your business is at the mercy of the Internet. The Internet is more and more stable, but large outages do occur. With a hosted SaaS PSA/CRM solution, if your Internet is down your company is down. At Tigerpaw, we automate everything from sales, marketing, and quoting to service management, inventory control, serial number tracking, and purchasing all in one product. Imagine an Internet shortage of even 30 minutes where all of your departments are sitting around with nothing to do because your business automation software can’t be accessed. Imagine that for a full eight hour day! In addition, if you use VOIP, you’re probably already burdening your network. Adding a robust SaaS application company-wide can pose very real bandwidth and QOS issues.
I talked to a lot of people at the N-Able show about SaaS and hosted applications, and was pleasantly surprised that a lot of attendees preferred that we were a traditionally licensed application and that we weren’t hosted. I think some of the sheen of SaaS has worn off, but only time will tell.
Now, I should add that I’m not fully gloomy on SaaS, and I recognize that many vendors are currently making a lot of money with SaaS. I think SaaS has its place, but I don’t think it’s the best choice for mission-critical applications that touch your entire business, and it I don’t think it’s the panacea the media has made it out to be; it’s just one of many possible approaches to licensing any give software solution. However, owning your own software, choosing what versions to adopt and what versions to skip (aka controlling your checkbook), controlling your rollout process, and having full control over the security and access of your data is often a far better choice than renting an application from a SaaS vendor.
James Foxall
Tigerpaw Software
http://www.tigerpawsoftware.com
James: Sorry to see you don’t have a strong opinion on this
Thanks for sharing some comprehensive thoughts. We should continue to share notes in the months ahead to see how the SaaS journey evolves, and whether the destination matches our original expectations.
It could be that I’ve been in this game so long I’ve gotten cynical!
Actually, I think it’s just that I’ve seen so many things come and go that I really want to see the business value of something before I jump on it. I love how the focus of MSP information seems to be on being pro-active and adding value (not just sitting there gathering monitoring revenue).
This is SO KEY.
In the software business, a lot of talk is simply on SaaS purely from a financial perspective. What we need is more discussion on how to add value to software in general, rather than simply how we (as software vendors or resellers) can improve our receivables. The SaaS bandwagon is very much about how the vendor can make more money, but less discussion is placed on how to truly SERVICE the users. Of course, I am looking at it from a vendor perspective, not a reseller perspective, but the underlying issues affect both perspectives.
What’s really been missing regarding SaaS is good data on companies that have gone through 3 years on a SaaS contract, how they felt about it when it was over, and what they chose to do when the contract was up. I think within the next 12 months or so we might start seeing such data; Tigerpaw might even commission such a survey. Sort of an “after the honeymoon” analysis.
This data is very important in etermining the true success of SaaS, and needs to be segmented across application types.
We’ll be watching closely, and if we see SaaS as a win-win for both Tigerpaw AND our clients (or if the market simply demands it), we’ll adapt as necessary.
PS: I enjoy the dialog Joe - thanks for the great site and allowing me to participate!
James Foxall
Tigerpaw Software
(http://www.tigerpawsoftware.com)
James: We should talk. I love the survey idea. I will give you a call.
Hi Joe and James:
Interesting perspective from James on this topic. You’re right: we have seen trends come in with great fanfare and exit without notice.
I think there are a couple of reasons why SaaS/hosted may not be one of those passing trends:
1. There are several vertical markets, such as financial and medical, where hosted offerings have been successful for years. The last time I looked (almost 2 years ago), over 40% of community banks in the U.S. outsourced their I.T. and the number was growing. So, there are markets where the SaaS/hosted model has been successful.
2. Communications has gotten appreciably better since the ASP boomlet of the late 90s. Bigger pipes at lower cost with more redundancy lowers the likelihood of an outage. We’re still vulnerable to the clueless guy with a backhoe, but many of the other risks have been mitigated.
3. We had Nick Carr as one of our keynote speakers at this year’s ConnectWise Partner Summit. Nick makes a compelling case (very, very abbreviated version) that if technology doesn’t create differentiation for you in your business, then you should treat it like a utility.
As with many other things, the real answer is to give buyers a choice and give them the flexibility to move as their requirements change. That’s why we offer ConnectWise is a hosted or on-premises model and enable our partners to move between the two as they see fit.
At my last job, our user group board used to have near-religious arguments every meeting over in-house vs. (their words) outhouse. I suspect those arguments will be going on for a long time. Because one size doesn’t fit all.