A recent interview with Lawson's CEO Harry Debes has him predicting that Saas (aka on-demand software, ASPs, etc.) will go "nowhere" and be gone in several years. I read the interview on a blog posting by Daya Baran on August 27, 2008 titled SaaS Industry Will Collapse In Two Years.
But that's not the only controversial statement Mr. Debes made. In response to the question "Won’t people avoid the mistakes of ‘previous’ SaaS incarnations?" Mr. Debes says "People are stupid. History has shown it repeats itself, and people make the same mistakes."
Will this prediction by Mr. Debes join other 'dumb' quotes on technology such as these?
“There is no need for any individual to have a computer in their home.” - Ken Olson, President of Digital Equipment Corp, in 1977.Because the quote comes from the CEO of a large and reputable firm like Lawson it cannot be ignored or tossed aside as "The guy is a moron" like one person said in the comments of the blog referenced above.
“No one will need more than 637 kb of memory for a personal computer. 640K ought to be enough for anybody.” - Bill Gates, founder of Microsoft, in 1981.
“Heavier-than-air flying machines are impossible.” - Lord Kelvin, British mathematician and physicist, in 1895.
“Well informed people know it is impossible to transmit the voice over wires and that were it possible to do so, the thing would be of no practical value.” - The Boston Post in 1865.
The key points Mr. Debes makes about why SaaS is doomed include:
- Because all your costs for SaaS are up front and your revenue is over a five-year period, the more you sell, the more you lose.
- With Saas applications, there’s no guarantee that that customer is still going to be yours in four years’ time to recoup the invstments.
- Getting signed up as a SaaS customer is fast, but getting out is just as fast, whereas traditional software is like cocaine — you’re hooked. It’s too difficult and expensive to switch providers once you’ve invested in one. If it were easier to jump ship, a lot of people would’ve hit the eject button on SAP a long time ago.
- With installed software (not Saas) when the sunk costs have been fully depreciated, customers effectively run the software for free, thereafter. Whereas, if they went to Salesforce.com, it’d cost them a million a year because they’re paying for ongoing licensing and maintenance.
Like many of our readers, I could put forth an intelligent rebuttal to each of these points. But that wouldn't prove anything. Ultimately, the customer decides. I think Josh Bersin of Bersin & Associates does a great job discussing Mr. Debes comments.
Here are a few comments from Mr. Bersin:
"There is no question that SaaS business models are great for solution providers once they reach a certain size. SuccessFactors is desperately trying to prove this in the HR market (but so far they still lose nearly 95 cents for every dollar of revenue they produce). Many solution providers like payroll providers (ADP, Paychex), CRM (Salesforce), Survey Software (Vovici), and others are doing fine. And the reason they succeed is because the product they sell provides tremendous amounts of functionality and their core market is mid-sized to small companies. Salesforce.com in particular has done an amazing job of also providing APIs and integration solutions to integrate its product with many internal systems."Lawson, like most legacy providers of "on premise" or "installed" software has had great difficulty converting their business model to SaaS. This is extremely difficult to do, especially if you are a publicly held entity that must meet quarterly numbers. So in many ways, they have to fight it because they may have little choice. But if Lawson was hitting the ball out of the park I might take Mr. Debes prediction more seriously. But Lawson has their own problems:
"Our research clearly shows that many companies prefer the SaaS model (particularly small and mid-market companies), but the larger more complex organizations often prefer to own the software, pay for it once, budget for the ongoing maintenance fees, and put their additional dollars into customization, integration, and internal development. Hence our research finding that most SaaS solution providers still get 80-90% of their revenues from companies with fewer than 10,000 employees."
So what do I think as the founder of a company that runs it's own SaaS application (HRmarketer.com) which by the way is profitable and has been for nearly 8 years?
- After going public at $16 per share in 2002, their stock price currently trades at about $8.
- Their trailing PE is over 100 suggesting that even at $8 per share they may be significantly over valued.
- Their profit margin is 1.5%.
- Their ROA (a good measure of management's effectiveness) is about 3%. For what it's worth, most investment professionals like to see an ROA come in at no less than 5%.
- Their EPS is about $0.08. For comparison, Microsoft is at 1.867, Oracle at 1.056 and SAP is 2.21. Oh, and SaaS provider SalesForce.com is 0.269 and SaaS talent management vendors Taleo and Kenexa are at 0.234 and 0.975 respectively. All are higher than Lawson.
I believe the take away from Mr. Debes comments for many SaaS providers, especially in the HR marketplace, is to do a better job at running your business because the broader marketplace is still undecided as to whether SaaS applications offer customers a better solution - and the competition is ferocious with entry barriers so minimal. To Mr. Debes' credit, it is true that many SaaS providers have done a weak job at building their business for the long term.
But so have providers of installed solutions like Lawson.
Ultimately, I do not believe customers care if the solution is on premise or hosted - they want a quality product that addresses their business needs. I don't hear many people complaining about hosted payroll solutions which oddly enough Mr. Debes fails to reference in his interview. We use a hosted payroll solution at our company and it's terrific. But many SaaS firms have not delivered. For this reason alone, I think Mr. Debes' comments serve a good purpose - to light a fire under the chairs of CEOs in the SaaS marketplace. But I personally believe SaaS is here to stay and the good ones will flourish.
Remember, Saas is not a product, industry or technology in and of itself. It's simply another way to deliver a business solution. Just like any software product.
Labels: ASP, On-Demand, SaaS