The widening gap between SaaS demand and supply

The growing customer demand for SaaS solutions and the shift from perpetual license models bears mostly bad news to the traditional software industry. The high margins of applications vendors cannot be sustained in a SaaS model, nor the extensive and expensive on-site consulting and services of large SI’s. Worse, the switch to the new models is very costly. In order to develop and deliver a SaaS solution, a vendor needs twice the capital – and it takes at least twice as long to break even. Vendors who already service a customer base have thus to more than double their costs by maintaining virtually two businesses – one to continue and serve their on-premise customers, and one to develop and later deliver the SaaS version. Once this is achieved, they have to maintain two code bases on two different platform and technologies.

In the current business and investment climate, it is almost impossible for vendors to engage in such transitions and investments – they are more busy with survival.

So at present we have a growing demand for SaaS, and a stagnant supply of some 40 successful SaaS solutions that has little chance to grow and match the demand for more variety, due to the technical and financial barriers mentioned above. Consequently, we could expect some M&A activity as successful SaaS vendors would acquire failing traditional vendors with good IP, and then start porting that IP to their platforms. But that would take a few years – until new solutions become available in quantity.

Which means that we have a growing vacuum – on one hand stagnant supply, and on the other growing demand. Hence the increasing recognition of hybrid models and the appearance of application platforms such as Longjump and Magic Software’s uniPaaS, positioned to can take advantage of that vacuum and grow on it.

SaaS Enabled Application Platform (SEAP) vendors who already have an ISV ecosystem, like Magic Software, might alleviate this situation. I’m familiar with Magic Software’s ecosystem, so I’ll use it as an example. It consists of quite a lot of ISV’s (about 2500) with a broad variety of vertical solutions. Many of them are small, but their continuing existence over the years means that they have good competence in their line of business and loyal customers. Some of them are more professional and have compelling and leading solutions, such as Intelys (French market leader in Real Estate ERP), Creativ (Swiss market leader in NGO ERP) or Dove Tree Canyon (US leading provider of Warehousing and Distribution solutions). Many of these ISV’s see the expansion of their offering to SaaS as their growth path. To do so, they’ll have to migrate to uniPaaS and RIA they will have to improve their User Experience and processes to match current best practices. Yet all this effort would require a fraction of the cost and time compared to traditional vendors, and be much more sustainable. They would be able to pursue a more balanced business model with both short-term on-premise revenues and longer term SaaS based revenue, and fill up the growing vacuum in SaaS solutions.

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3 responses to “The widening gap between SaaS demand and supply

  1. nice info… thank you…

  2. Avigdor,

    Good analysis concerning the plight of traditional software vendors. I suggest that the work of Harvard prof. Clayton Christensen, author of The Innovator’s Dilemma etc. (and with whom I am sure you are familiar) provides relevant insight.

    His analysis of multiple industries shows that commitments by established and dominant players to existing ecosystems — and the business models and even sociological relationships characterizing those ecosystems — make it almost impossible for the incumbent to adapt successfully to new market conditions.

    I have personal experience of this phenomenon when for five years I worked in marketing for Digital Equipment, at the time that it began to go through its convulsions, only to be acquired by Compaq of course.

    Christensen’s recommendation is that any new initiative, based on a new model, be entirely separated from the mothership, if there is to be any chance of success. In a way, a channels model is a way of actually executing this “outside-the-firewall” model for success.

    For this reason, I found your comments very interesting.

    John

    • avigdorluttinger

      Thanks, John. A year ago, there was a broad mindshare amongst industry analysts who follow SaaS that trying to sell a software solution both on-premise and on-demand is doomed to fail, because SaaS demands a total commitment and completely different mindset. Now it is different, and many realize that there is a different way. My opinion is that SaaS does require a new mindset that is much more customer and service oriented, but such a mindset and associated processes can work very well also for on-premise customers – provided you have the same software application and platform for both populations. Can an incumbent solution vendor evolve to become a successful SaaS vendor? Frankly, I think they do not have a choice. I refer here to a Tweet I posted today “it’s the architecture, stupid”. It is not about the business model as much as it is about the usability and architecture, which I believe is going to dominate the landscape because it is much more economical and usable.

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