Software is Now SaaSy

I hate it when a market matures. Sure, the profits are more predictable, but the excitement evaporates. Kinda like getting married.

As a marketable technology concept, SaaS has matured. This is evidenced by several factors, from adoption rates by enterprises, and by seeing companies with the most to loose from SaaS competition joining the fray. The giddy days of SaaS are soon behind us, but reduced profits ahead.

The good news is that enterprise customers have shaken their SaaS jitters and are adopting services at a fair clip. A recent survey of CIOs showed some interesting numbers:

10-15% of IT budgets are spent on SaaS
86% are using SaaS non-experimentally either for department point solutions or corporate wide
An average of six SaaS solutions are in use in an enterprise
73% of the CIOs plan on expanding use of SaaS
This bodes well for software companies who bet the farm on SaaS. Adoption and satisfaction rates are high and growing, which drops the barrier to adoption. SaaS will soon be given equal consideration in all project planning within IT.

And all a pure play SaaS software company has to do is make less money.

The McKinsey Quarterly reported that SaaS software vendors do not make as much as traditional software firms. This may be a side effect of being a relatively new offering, and that SaaS start-ups face significant SG&A costs (49% of revenues compare to 35% for a traditional and established software concern). But the net effect is that today a SaaS software company keeps about 13% of their revenues as profits (EBITDA), and folks that sell bits on CD keep 31%, almost three times as much.

So why would Microsoft be at all interested in SaaS? Microsoft rakes in a lot of money from software, upgrades and technical support services. Given that the average cost of goods sold and SG&A expenses are so much higher for SaaS than Microsoft's existing business model, it would seem suicidal to adopt SaaS.

"The industry will change," is what Allison Watson, the corporate vice president of Microsoft's worldwide partner group, said in a recent interview. Microsoft is old and cagey enough to spot trends, and know when to not fight them. SaaS will dominate in some markets, and CRM is the top achiever ( 36% enterprises that have deployed SaaS deployed SaaS-based CRM applications ). SalesForce.com added 253,000 new seats in 2006, and Microsoft had far fewer with their Dynamic CRM product ( some estimates claim that Microsoft owns a mere 1.4% of the total CRM license sales ). Thus, Microsoft is entering the SaaS market and targeting the low end, with a long-term plan of up-selling SaaS accounts to software licenses.

Microsoft's changing strategies avoid treating software as a zero-sum game. They see when they are being cut out of a market, and drive to adapt -- to claim or recapture market share. Knowing the lifetime value of a customer, they are willing to suffer lower margins in a highly competitive market to gain customers, and begin the insidious processes of creating interdependencies between Microsoft products, and raising customer switching costs.

SaaS is now officially here to stay, so you had best think through SaaS as an offering. It may be on your customer's requirements list.

Guy Smith is the chief consultant for Silicon Strategies Marketing. Guy brings a combination of technical, managerial and marketing experience to Silicon Strategies projects. Directly and as a consultant, Guy has worked with a variety of technology-producing organizations. A partial list of these technology firms include ORBiT Group (high-availability backup software), Telamon (wireless middleware), Wink Communications (interactive television), LogMeIn (remote desktop), FundNET (SaaS), Open-Xchange (groupware), VA Software (enterprise software), Virtual Iron (server virtualization), SUSE (Linux distributions and applications), BrainWave (application prototyping) and Novell.

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