Yesterday, an article by Brendan Read over at TMCnet really caught my attention because it captured the spirit of what I think about every single day. The article announces the introduction of an IT service management SaaS offering by FrontRange Solutions, a relatively well known mid-market applications company with 2007 revenues at $135 million (as per their company Wikipedia entry) and apps like HEAT and GoldMine in its application portfolio. Brendan Read starts off by accurately stating that “…successfully hosting…complex applications such as IT support tools is much more than installing software onto a server and connecting it to a network that is linked to clients and their users. It requires carefully architecting the solutions for the hosted environment.” Read’s introduction set the stage for how FrontRange did SaaS the right way.
Read hit the nail on the head. Throwing an app onto some servers, whether on-premises or in the Cloud on something like Amazon’s EC2, is not SaaS. I’ve written many times about what it means to truly offer a business offering in the Cloud, but this article captures a real world example of the effort required to move to SaaS.
Read goes on to highlight data volunteered by Michael McCloskey, FrontRange’s CEO that provides an interesting data point: FrontRange “…spent two years re-architecting from scratch a new platform for the SaaS environment” Two years! (Notice the emphasis – I clearly care about this number) I don’t know the hard dollar investments made by FrontRange, but one must imagine that their SaaS platform project had a good number of developers working on it, and that the investment was, with a high probability, in the seven figure category (probably a few developers and architects, as these projects go, with a fully loaded average cost of somewhere in the $90K to $150K range per year working for two years). So a proper product to SaaS transition is a combination of 24 months of SaaS specific effort, seven figures in hard dollar costs (probably), resulting opportunity costs, and ongoing R&D maintenance costs (someone needs to fix the SaaS specific bugs and evolve the platform) – Holy smokes!
I seem surprised, but I’m really not. I’ve been in the thick of this very scenario, and responded by channeling all my effort into Apprenda. Apprenda was built on the premise that a high end SaaS architecture and operating tool-set could be productized into an application server. We built SaaSGrid to do just that – productize a world class SaaS platform so that applications running on it could inherit and give a company a sustainable short and long term solution with tremendous ROI. SaaSGrid was kicked-off as a product knowing full well the costs of a real SaaS architecture with things like multi-tenancy, provisioning, billing etc.
The scenario highlighted in this FrontRange scenario is in fact very much like the ROI analysis we go through with prospects and customers. Someone like McCloskey, faced with a SaaS decision (regardless of whether its a new application or a migration) needs to compare those build figures to investing in technology that they can buy that solves these problems out of the box. Fundamentally, you start to ask yourself:
- Does a 12 or 24 month time to market loss result in significant competitive disadvantage? (i.e. Am I liable to lose significant market share or position by letting competitors beat me to the punch?)
- What opportunity costs is associated with a competency distraction of this magnitude on the R&D side?
- We haven’t built this sort of architecture before, what risk level am I willing to absorb?
- Could an additional 12-24 month investment in the product functionality and not the SaaS platform give me access to new markets and revenue streams?
- If a home-grown SaaS platform is going to cost $1-$3 million to materialize, what investments am I giving up to make this happen?
- Are we going to be able to lend resources to the SaaS platform over time and evolve it despite it being orthogonal to the product, and if not, what untapped value are we leaving on the table?
If you add up the hard dollar costs of the above questions, you start to realize that millions of dollars are required, and the soft dollar costs add many more millions. SaaS is a strategic advantage, but the cost of that advantage is whats in question. Clearly, I do not think that building is a sustainable or strategic overall approach – it’s expensive and distracting. Thats not to say a company can’t be successful (just ask Salesforce.com), but the probability of success goes down while risk goes up when you build. We’ve seen this before – most companies don’t go out and build relational database servers because its not their core competency. Instead they download or license an RDBMS. A SaaS stack is of the same complexity level and same level of orthogonality, so why build? Our goal with SaaSGrid was to let people focus all of their energy on their offering – the stuff that your customers care about – and not on SaaS. My bet is that Cloud build vs buy cases like this will one day define a Harvard Business Review case study or two;-)
How do you feel about this - does building make sense, or is the ROI not there? Do circumstances exist where building is warranted, and if so, what are they? What other costs can you think of that should be factored in the SaaS platform build vs. buy?
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