On The ISV Landscape & Transitioning to SaaS
I just read a post over at PaaSTalk that painted a scary picture in Germany. A recent survey showed that almost half of the ISVs have no plans for SaaS offerings. Granted, some subset of those probably are in a business where SaaS doesn’t fit at this point, but I imagine the remaining ISVs are resisting change.
The problem with resisting is how staying in the on-premise world interacts with what the SaaS paradigm does to market sizes. SaaS is an amortization of sorts when compared to on-premise licenses (from the expense perspective), and as a result absolute market size shrinks or growth rate is dampened because of the marked differences in license costs (think of it as market level cannibilization). As SaaS continues to spread across the space and end users continue to accept the model, resistant ISVs have to battle shrinking market size where their on-premise license charges are significantly disproportionate. I’m not sure how those ISVs intend to deal with this and compete. My guess is that resistant ISVs will have their “lunch eaten” by a new player in the space who clobbers them with a SaaS offering.
One thing I’m curious about is the “why” aspect of those resistant ISVs for which SaaS does make business sense. Is it because of the difficulty of transitioning (cannibilization, rehashing their company to be service focused, etc.)? Is it because they think SaaS is a “fad”? Are the hurdles technical in nature? If you had to guess, why do you think ISVs generally resist the transition?
As the founder of a PaaS company, these curiosities are multi-level: why would some people stay away from SaaS and is there something that a PaaS offering can do to alleviate their concerns?
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Hi Sinclair,
Here in Germany many small to medium-sized ISVs are often owner-run, they have a tendency to be conservative. Many ISVs have been in business for decades and take a while to adapt.
I remember talking with ISVs when applications were changing from text to GUIs in the early 1990s. Many ISVs felt strongly that GUIs were just toys and that real users would not need them. In their view, productivity was much higher with a keyboard, so why would anyone change?
For SaaS I think there is an even bigger reluctance to change because of the broad scope of SaaS. They know how to change (later, of course, no hurry…) from one platform, programming language or database to another. SaaS is different; this time they must change all parts of the their business.
The owner of a German ISV told me why he did not want to selling products on the Web. His reason? Because “we might have too many customers and not be able to cope.”
I think the impact of SaaS on their business scares many ISVs. They would rather wait and see what happens rather than risk “rocking the boat” in their day-to-day business.
I agree ISVs are taking a big risk that a new competitor will enter their niche and “eat their lunch”!
A key advantage of PaaS is that the platform solves most of the infrastructure issues. A new competitor therefore has a head start and does not to rebuild everything the existing players already have.
The move towards simpler products compounds this advantage. A new competitor can (initially) support the top 10% of the specific niche features and deliver then by SaaS. If they can do then this I think most customers look at the new solution.
Customers often have a long history of using an a specific on-premise solution. Even so, given a simpler, easier and cheaper choice I think the chances of getting them to switch are good.
Andrew.
Some good questions Sinclair,
I’d start by saying that this reluctance to move is both a good and bad thing. Its good if you are a start up because of MS or oracle could happily migrate…well they are helluva competitors aren’t they.
Its bad because when they do it half cocked (seibel, MS etc) they destroy the market reputation (the good work of SaaS vendors).
I think the reason they don’t move is multifaceted
1) can milk installed base
2) installed base (being milked) when asked, don’t want to move to SaaS
3) cultural – be step change
4) financial – hard to tank cashcows and get away with in on the ‘street
5) distribution / sales channel. they aren’t set up for it. Siebel for instance are still leading with their on prem, if they loose they have a throw away line ‘we do it on demand
6) confusion about what SaaS is, how it works and how it makes money
Blogs were good ,i need how ISVs converted to SaaS model, conversion road map.thank you
As with all new technologies your TAM is quickly separated in innovators and early adopters versus the late adopters and laggards. Geoffrey Moore’s “Crossing the Chasm” is an absolute must read for technology innovators. It is my experience that if a potential customer’s first reaction is a reason why it doesn’t work they are not innovators in your space. Since if they were they would have already thought about it and would ask a question how to make it work. That is the big difference between innovators and followers. Don’t waste your time on customers that are not thinking WITH you on solving the problem: you could waste too much time or worse be directed into the wrong direction.
Do sample the responses and analyze them to formulate a possible state of the industry. From the responses of your potential customers will develop a story line that you will need to address up front in any of your sales material.
Your business plan should have the monetary benefit of your solution quantified and if your insights are true, folks that are looking for answers will find you and will recognize the value proposition. It is those customers you need to focus on as a tiny little start-up. You do not have the muscle, or time, to go up against vague opinion. It takes very deep pockets to steer the narrative and opinion.
Larry Ellison said it best when he recently highlighted still no $1 billion + players in the SaaS space?
As others have said. It’s a completely new technology model, support model, financial model, sales compensation model and pricing model.
Is that enough for you? :-)
I don’t think Larry Ellison’s comment matters or is too accurate. Salesforce, for example, brought in revenue figures of $750 million for FY2008, and has a market cap of $7 billion. There are also plenty of players in the $50 million to $500 million range.
Measure by revenue is not apples to apples with SaaS since there is a tradeoff; that sort of scale acheivement takes longer because of the incremental addition of revenue but at the benefit of a much more stable revenue stream.
Sinclair. You want to know why traditional ISV’s are resistant to change. Saas isn’t producing stellar growth rates or returns. When your largest player in the space, your benchmark, is on 10x revs, that’s fine, but not worth the headache of all the change that I outlined in my previous post.
Senior executives see a huge pile of risk and very little reward for 3+ years – apples or no apples.
Justin, good points but they don’t address competitive issues. I agree entirely that execs see lots of risk and little reward if they are in a vacuum. Unfortunately, free market dynamics require that at some point they respond to smaller competitors who are taking advantage of the shift and chewing into their market.
Someone like Salesforce may be at 10x in market cap, but their revenue is very real and has grown to $750 mil in 8 or so years and they didn’t create new customers, but instead took someone else’s customers who felt SaaS was a fad and since their was no opportunity, ignored. IMHO, existing ISVs need to look at the defensive benefits of moving to the model.
what is the actual benifits that customers getting?
what are the basic challenges while using ISVs?
what are the probable solutions for those challenges????
Hi Raam,
A while back we wrote two articles that address your questions,
The first one addresses the benefits, and the second one addresses the challenges.
As far as possible solutions you could consider a PaaS offering (Platform as a Service, or SaaS Platform) to aliviate most of them.
Cheers,
Abe