On-Demand in Demand as SAP Goes SaaS

If ever there needed to be a “big bang” validation of the software-as-a-service (SaaS) concept, then SAP’s September 19 unveiling of its Business ByDesign on-demand software for midsize companies surely suffices. Not only is SAP the first major enterprise software player to get serious about SaaS, it is the absolute largest enterprise software player and its move is thus freighted with significance.

But there really doesn’t have to be a big-bang validation of SaaS. Many thousands of customers are endorsing the concept every day as they leverage SaaS offerings, and will continue to do so in increasing numbers, with or without the help of traditional enterprise software companies. It is not SAP nor any other huge software company that will drive SaaS. It is the customers who are in the driver’s seat, and SAP is wisely reacting to this fact. And now SAP will have to meet these customers’ expectations—expectations built up by trail-blazing, 100 percent SaaS companies like salesforce.com, NetSuite and Xactly.

There’s no doubt that SAP’s on-demand offerings have the potential to provide immense value to the targeted customers—SaaS delivery coupled with SAP functionality packs a powerful punch. But SAP is not about to abandon its on-premise model anytime soon, and its management will be wrestling for some time with such issues as how to keep from cannibalizing its bread-and-butter software licensing revenues and how to successfully support two entirely different delivery models. And along the way, they will learn what 100 percent SaaS companies have known from the start: If you don’t meet the expectations of SaaS customers, they can cut you off in an instant, no questions asked. That’s not something that enterprise software vendors, with their long-term licenses and claws sunk deeply into their customers’ costly IT infrastructures, have traditionally needed to deal with.

Still, SAP is doing the smart thing by getting started in SaaS now, when it can be lifted by the rising SaaS tide. In doing so, SAP will add to the tide by increasing the portfolio of software functionality available to customers on demand. SAP’s move doesn’t prove that SaaS is viable. That’s already established. What it really demonstrates is that the traditional enterprise software model is not all that viable for most companies. And for that we welcome SAP to the SaaS world.

SaaS IPO Tipping Point?

Could the NetSuite IPO be the beacon for a sea of change between Software as a Service companies and Wall Street? Are the days of trepidation for the SaaS business model, security and viability waning?

As I watch the revenue and sheer number of customers for on-demand companies like Salary.com, DemandTec and NetSuite amass—I say yes. All three companies are demonstrating to the market the benefits of this efficient and cost-effective model and calling Wall Street to attention.

Sure, a lot of companies are founded on a pure SaaS model, but relatively few have reached the public markets successfully. Why is this? It’s because many people are still struggling to understand the SaaS model and failing to truly grasp the fundamental differences between SaaS-based and on-premise software offerings. Investors can't look at SaaS companies through the same lenses they have used for years with traditional enterprise software companies. When I talk to investors, I tell them to focus on two main differences: customer renewal and the revenue dynamic.

First, recognize that SaaS companies are built from the ground up around customer satisfaction and customer renewal. To survive, they must earn the customer’s complete satisfaction every year, and often, every month. This focus is very different from traditional software companies whose first priority is to get to the next million dollar license deal in order to keep Wall Street happy, and whose second priority is to have these customers pay expensive ongoing maintenance and upgrade fees.

The second major difference: because there is no million dollar license fee, the revenue trails traditional software companies. This is actually great for investors because revenue SaaS companies earn is not an artifact from a relatively few very large deals, it comes from hundreds and hundreds of happy customers. This revenue dynamic is also the reason SaaS companies are so attractive and so much more predictable to Wall Street.

Because of the business model differences, it takes a little longer for SaaS vendors to ramp to the revenues that will justify an IPO, but—have no doubt—they are getting there fast. Salary.com, DemandTec and Netsuite are proving that it can be done and are helping to move the SaaS IPO market forward.

From a customer perspective, why SaaS and why now? SaaS offers customers an undisputable value and time to market advantage over traditional enterprise models, including no hardware, no maintenance fees, minimal implementation fees and, most importantly, no software upgrades. This means new features are available to customers instantaneously, as soon as they are live, saving customers from expensive upgrade costs while ensuring they’ll never trail behind on older releases of software.

SaaS is also breathing new life into technologies that were too expensive for the masses in a traditional enterprise model. The fast growing Sales Performance Management market is living proof. Founded on a pure on-demand or SaaS model, Xactly Corporation has quickly amassed more than 70 customers including Salesforce.com, CNet and Polycom—all of whom are now utilizing an on-demand Sales Performance Management platform to create a strategic competitive advantage within their businesses.

For companies like Xactly and investors in the market, the SaaS IPO tipping point may very well be here, and I think it’s about time.