software as a service
Why is the SaaS Adoption Rate Rising in Spite of the Downturn?
The week’s Blog entry is provided courtesy of Christian Smagg, a respected French SaaS expert. Further commentary by Christian can be found at http://www.saastream.com/my_weblog/ Christian’s experience is very simliar to the Steelwedge experience on a daily basis – demand for SaaS appliciations are rising.
As experienced in previous economic downturns, companies that invest smartly during the bad times, emerge quicker, and better equipped to grow faster after the recession. Thinking creatively about how to do more with less is the key to IT innovation during challenging times and allow companies not only to survive but also to seize the extraordinary opportunities that arise during periods of vast uncertainty. When you think about it, creative application of new technologies during weak economies actually gave rise to huge waves of productivity like Software-as-a-Service, Web 2.0 or social networking.
But fear is driving decisions at many companies these days, causing this unhealthy lock-up of budgets. Current miasma should not slow down or prevent companies from innovating and creating value so as to survive, weather the economic storm or even outperform competition.
Financial crises are often having a huge impact on IT departments, resulting in significant increases in business activity, placing greater burden on IT resources and forcing them to find new ways to boost productivity while slashing expenses. At times like these, it is highly recommended that companies seriously consider leveraging applications delivered via a software-as-a-service (SaaS) model, harnessing the broader value that these solutions can play in not only moving the business forward but moving it beyond the current economic crisis as well.
Indeed, CIOs should take a much closer look at SaaS solutions as a way to avoid significant up-front investments in new software platforms by simply “renting” on-demand applications that would provide added returns where most needed: the top line. SaaS would empower IT teams to achieve and sustain efficiency and quality, while facilitating the kind of cost-effectiveness that becomes a top priority during a recession.
SaaS is providing a faster and more economical way for organizations to deploy, run and utilize softwares. This flexibility is particularly valuable during economic uncertainty for the following obvious reasons:
1. Reduced upfront costs. SaaS makes it more affordable for budget-conscious organizations to implement the new applications they need to execute effectively their “recession-proofing” plans.
2. Reduced in-house IT overheads and increased focus on strategic IT projects. SaaS is helping the business through the economic downturn by freeing IT staff from deploying and maintaining in-house solutions.
3. Continuous quality of service. Even if business activity and the demand placed on technology solutions are often increasing significantly.
4. Lower licensing and maintenance costs, reduced overall cost of ownership, also smoothed by the actual SaaS subscription model.
5. Quicker, easier and less risky deployment and upgrade to new future versions. This reduced implementation risks together with the ability to respond more nimbly to changing business needs while smoothly and incrementally adding new capabilities are making this option significantly more attractive in tougher economic times.
A major advantage of SaaS solutions is the optimum flexibility provided, enabling companies to downsize or reorganize while minimizing waste by instantly reducing or increasing the size and scope of their solution, at any time.
These benefits mean that SaaS is now being increasingly used by companies in a number of areas, not only including Customer Relationship Management (CRM) and Sales Force Automation but also enterprise collaboration, web conferencing and back-office requirements such as expense management, procurement, Supply Chain Management, Enterprise Resource Planning (ERP) and Human Resources functions to name a few.
In tougher economic times, companies want to shed the extra costs and risks inherent in large, long-term IT implementation projects. It is therefore becoming obvious that, as companies aggressively implement cost-cutting measures, IT organizations that leverage SaaS solutions will realize tremendous cost savings, while continuing to support the business’ needs in the most flexible and effective manner.
SaaS is already an important part of mainstream IT in companies both large and small. Its basic value propositions are now widely established and accepted, including low upfront costs, simplified software management (for both maintenance and upgrades), effective security, high reliability, and increasingly, integrative capabilities to bridge data and functional gaps that exist as a result of existing systems and processes. It is therefore expected that SaaS solutions will gain significant share during and immediately following the current economic turmoil, since offering customers the ability to continue to innovate at a substantially lower absolute cost of entry and ongoing TCO, during a period of intense capital spending constraint.
For further insight on this topic, you may want to review a recent Gartner survey analysis focusing on identifying usage patterns and key trends for SaaS within the enterprise, including SaaS usage per market segments, migration activity between deployment models, projected future usage and investment for both on-premises and on-demand, and the state of governance policies within enterprises currently using or planning to use SaaS.
Kicking Out the Ladder
Now is the time to set high goals – and achieve them! The Japanese phrase “kicking out the ladder” examplifies what is required in these times – climbing to the top and hanging on even after the ladder has been pulled away. The closest equivalent phrases in American culture are “Sink or Swim” and – courtesty of NASA - “ Failure is Not an Option!”
In other words, set high goals and achieve them because there is no choice! It is succeeding when our very survival requires success. Our livelihoods depend on it – even our families depend upon it.
The video below created by Honda Motor’s illustrates this concept and exemplifies the spirit of the Steelwedge sales and operations planning software team.
Now is the Time to Innovate!
This is the second recession since Steelwedge was founded. The first was at the beginning of the “new century” and was prompted by the telecom crash and dotcom bust. While that recession was mild in comparison to what we face today, the combination of a technology crash, a significant recession, and a generation of business leaders who had spent their professional lives in a period of wild exuberance was unique.
This time businesses are responding very differently. Although the emotional trauma of the financial meltdown has continued, the response is more measured this time around and reflects a level of thoughtfulness that didn’t exist that last time around.
Unfortunately, the instinctive reaction to cut costs across the board is still prevalent. Many companies are doing that even though there is plenty of evidence telling us this is not the best approach. At this critical juncture, the greatest mistake a company can make is to walk away from providing a great product or service and instead commoditize their offering.
But how does one spend precious cash reserves during these difficult times? The Depression was actually the birthplace of many great companies that became market leaders because they invested wisely. For example, Henry Luce, who co-founded Time magazine in the boom times of the 20’s, launched Fortune magazine in 1930, the beginning of the depression. He recognized that people wanted to experience business news in a way very different than the dry, black and white, facts and figures journals of the day. Luce gave them insight to the people, thought and issues behind business, and delivered it as a sensual, visual, literary experience. And he commanded a price premium – one dollar per issue.
A few years later, in 1936, the middle of the depression, Luce began publishing Life. The beginning of photojournalism in the United States, Life drew together reporting and publishing tools that already existed, but by using them in a different manner, crafted an entirely new and compelling way to experience the news.
This sort of success is not just accidental — in a study of the early 90’s recession, McKinsey & Co learned that successful leaders (businesses that started and remained in the top quartile of their industries) did so in part by increasing their R&D spending dramatically – more than double their pre-recession spend.
Successful challengers followed similarly contrarian strategies, and displaced former leaders who did not, taking their places in the top quartile. In fact, the challengers grew their businesses by 10.4%, while their former peers declined by 15.0%. At Steelwedge we have recently upped our R&D budget by 20% precisely because we see this is an opportunity to innovate to better satisfy our customer’s needs.
Obviously, simply being contrarian and spending aimlessly through a recession is not the recipe for success. The McKinsey study gives us some guidance, and Kellogg Professor Andrew Razeghi puts greater detail to it with data from the PIMS study, which tells us that supporting the costs of innovation and meeting user need generally ends up benefiting the business, while the cost of fixed capital tends to hurt the business.
So how do we innovate – provide new and better services without significant investment? Inspired design, deep customer feedback, flawless planning, effective execution. Incorporating new product planning into your sales and operations planning process. Recognizing that new product introductions are tied to excellence in planning. Creating and managing demand in accordance with new product strategies. These are critical tenets.
If the value of getting experience a design right is magnified in a recession, then the cost of getting it wrong can be catastrophic. Starbucks founder Howard Schultz recognized exactly this problem when he wrote, “Stores no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store.”
Excessive expansion and unfocused innovation had stripped Starbucks of the third-space experience that their customers valued, placed them in competition with McDonalds and Burger King, and set them up for costs of around $330 million as they try to regain what they lost.
So why does this recession feels different from previous ones? Great companies are still engaging in R&D. Companies that are investing wisely will be the ones that come out ahead when the recession ends.
The Chips are Down, Now What?
With each passing day, the news seems to get worse – Chip makers faced a 29% drop in demand in January, PC makers are suffering, Dell continues to cut-back, Spansion files for Chapter 11. Now what?
What on earth does one do to manage through times that seem to be impossibly difficult? Where to start?
Our perspective is that the sooner or later the pain will end. Even for chip makers, there is base demand for the technology that drives global living. But, how does one predict when the patient will stop bleeding? When does the sales forecast inflect? When does demand finally start matching potential supply – when does one stop cutting?
While it is impossible to predict the future, reducing latency in decision making through effective sales and operations planning (S&OP), creating a truly integrated business planning process by integrating financial planning with S&OP, and updating plans weekly if not daily is an imperative.
In the old work, the idea of listening to field sales and operationalizing that feedback into the integrated planning process was a luxury. In today’s brave new world, it is mandatory.
Incorporating both qualitative and quantitative inputs into the planning process and carefully evaluating the early warning signals providing by oppotunity tracking and CRM tools such as Salesforce.com (SFDC) is now a survival skill.
Obtaining a wholistic view of the world by connecting historic buying patterns provided by ERP systems such as SAP with current opportunity feedback provided by Salesforce, evaluating financial plans creating by planning tools such as SAP BPC or Oracle Hyperion with current state S&OP plans is fundamental. The good news today is that a handful of companies have created software-as-a-service, pay-as-you-go offerings to support these planning processes.
Steelwedge software’s Executive S&OP offering is unique in so much as it enables companies to improve there planning processes in as little as 60 days. While 60 days can seem like a lifetime in today’s economy, improved planning is clearly a survival issue.
To quote Benjamin Franklin, “an investment in knowledge always pays the best interest.”
SaaS is Surging in the Downturn, says IDC
Market researcher IDC has published an upward revision to its market size projections for SaaS in 2009. At a time when most industries and economies around the world are slashing their growth forecasts into single digits or even negative territory, IDC now expects SaaS growth to surge by more than 40 percent in the current year. That’s a significant move up from its previous forecast of 36% growth, published back in July when most economists were still trying to deny the onset of recession.
SaaS’s counter-cyclical boom is entirely due to the enhanced attractions of the model when times are bad, says IDC:
“… the harsh economic climate will actually accelerate the growth prospects for the software as a service (SaaS) model as vendors position offerings as right-sized, zero-CAPEX alternatives to on-premise applications. Buyers will opt for easy-to-use subscription services which meter current use, not future capacity, and vendors and partners will look for new products and recurring revenue streams.”
Don’t you just love that definition of SaaS? “Right-sized, zero-CAPEX alternatives to on-premise.” The report’s author, director of on-demand and SaaS research Robert Mahowald, adds an interesting observation that bears out the uprating:
“… several key vendors finished the year very strong, reporting stable financials and inroads into new customer-sets.”
From my own conversations with privately held SaaS players, I can certainly confirm that business seems to be expanding with continued momentum. Yesterday I was on a call with Phil Fernandez, CEO of marketing automation vendor Marketo, when I heard a bell ring and some cheering in the background. “We ring that bell whenever someone closes a deal in the sales team,” he explained. “Someone’s had a good start to their day,” I commented, noting it was 10am in his timezone. “That’s the third time so far this morning,” he replied. Marketo, which launched its offering just ten months ago, has already signed up its first hundred customers, at subscription levels that start from $1,500 per company per month.
Yesterday, collaboration vendor Central Desktop reported that in 2008 it had seen a 150% increase in user count and revenue over 2007, bringing its user base to the quarter-million mark. Growth continued througout Q4 and the company signed ten new customers in December alone, including urban planning consulting firm IBI Group and on-demand ERP vendor Workday. In a counterpoint to this week’s bleak employment news, Central Desktop says it tripled its workforce last year.
Chris Cabrera, CEO of sales performance management vendor Xactly, which last week acquired its largest rival, blogged about the IDC finding yesterday and picked up on Mahowald’s contention that many of these SaaS purchases are seen as “tactical fixes which allow for relatively easy expansion during hard times.” Cabrera counters:
“I will be surprised, very surprised, if an appreciable number of SaaS customers dump their on-demand applications in favor of on-premise solutions when the economy eventually rights itself. The excellent renewal rates enjoyed by SaaS leaders show that, once bitten by the SaaS bug, there’s little impetus to go back to on-premise solutions.”
I side with that analysis, and it’s interesting that a mainstream market researcher like IDC, even when it can’t deny the success that SaaS is experiencing, still feels it has to qualify it as some kind of blip in the normal scheme of things. I think Cabrera is spot on when he concludes that IDC’s findings show that the tipping-point from conventional software to SaaS “is now a lot closer than anticipated. And once tipped, no matter what brought you to that point, it will be counter-intuitive to go back.”
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