There is no doubt that SaaS is becoming part of the mainstream. Salesforce.com hit $500m annual revenue run-rate in the 2nd quarter of 2006. On the other end of the spectrum consumer-oriented software is going business class.
What was consumer email from Yahoo and Google now is repackaged and sold as a business email solution for small businesses. It’s not always a poor man’s solution. Most users will tell you that this email is better than the Exchange and Lotus solutions that they have used in the past. Even Microsoft has stopped fighting this trend and has joined in. In November it launched Office Live which offers web hosting, ad management (allowing you to advertise your external site) and basic accounting for free.
For me the real poster child for the new breed of application companies coming online is Amazon. They have taken a consumer platform and turned it into an offering for businesses like Target and OfficeDepot.
Amazon, Salesforce.com, Google, etc. - these NewAppCo’s are as different from OldAppCos as software is from hardware. Their DNA is about multi-tenancy, scalability and intense end-user personalization. This personalization translates to rapid customization for business users. This is why you can be up and running as a business with Amazon or Salesforce.com in a matter of days rather than months.
Horseless carriages
The media relentlessly highlights how the NewAppCos are displacing the old work horses in large enterprises. The current Economist has just such a story about how Arizona State University has switched to Google Apps and how Adrian Sannier, the CIO there, believes that “the trend is inevitable, and his job requires him to get on top of it”. Increasingly the security concerns are seen as “red herrings thrown by ageing IT bosses trying to justify their salaries”. Also, the unease about high availability of hosted applications is dissipating. For instance, yesterday’s hiccup with Gmail is now seen as an aberration.
To step back and look at the big picture, it’s helpful to read a very perceptive comment that Axel Schultze made recently in response to a post on first-mover advantage. He said:
Yes, there is no such thing like a “first mover advantage” - more so it’s a first mover disadvantage. Xerox invented the graphical UI, Apple took it to the next level and Microsoft really monetized it. Some Canadian University developed a first microprocessor operating system, Digital Research took it to the next level and again Microsoft monetized it. Alta Vista brought one of the first search engines to life, Yahoo took it to the next level and Google monetized it. Act! was one of the first standard CRM systems, Siebel took it to the next level and it looks like Salesforce.com is really going to monetize it… The triage of invention, progression and production is true for the light bulbs, the first locomotives, the first commercial planes, soda drinks, yes there was soda long before Coca Cola and Hamburgers before McDonald and so forth.
Where are we with SaaS right now? I think we are at “progression” stage right now. What we are seeing come out of the NewAppCos today is mostly hosted look-alikes. Many contenders to Office2.0 fall in that category; so do the hosted mini-ERPs and mini-QuickBooks. There is a lot of discussion around how quickly will SaaS get adopted. I think all this is exciting but one needs to look beyond to the “production” stage of SaaS as well.
Cars, not horseless carriages
Ultimately SaaS will be about market expansion, not displacement. It will not be about replacing horse carriages by cars (although that will happen), but about making a Model T affordable to a whole new class of buyers.
What will the applications in the “production” stage of SaaS look like? While everything is not yet clear some contours are becoming visible:
- The successful application will be targeted at the micro-firm and also at the industry network that supports it. Its primary role will be to reduce network cycle-time (say, by shaving off 2 weeks in the 14 week garment design-to-delivery process that touches many network participants) and foster network specialization (by creating new markets).
- The hosting model will also undergo some tweaks. For instance, it will have to have offline capability based on synchronization. Moreover it will be mostly mobile-centric and not PC-centric.
- The distribution model is likely to be community-based and will involve bundling with other core products/services that are relevant to the network participants.
Undoubtedly this will be another orbit shift. How soon will it come? Where will it come from? These are good questions to which one can only give somewhat speculative answers. I think the action will be in Asia, particularly India. There is a lot happening here in this space. Meaningful traction should become visible by late-2007 in some pockets.
The new edge
The bottom-line is that focus in SaaS will gradually move away from selling to large and medium enterprises to selling to networks of micro-firms. Growth, innovation and value creation will happen at this new edge. To be successful here, one will have to abandon the old common-sense model of a successful software applications company. In this new occasional series I will share my musings on this new common-sense model. Join the ride!
Previous articles in this series:
Rethinking SaaS for India
Later article in this series:
[to be added later]
Sharad,
Excellent post- I like the title too. Like most real revolutions, this revolution too shall be silent and slow. Many consumers that use email, anti-virus security, search, online calendaring/documents/storage, use PayPal/TurboTax etc. do not think of these as SaaS. And that is how it should be. I don’t go to Costco or Target to use retail-and-distribution as a service, I just buy stuff I need. Similarly, consumers and businesses use services like Payroll without worrying about what model of business they operate.
This is a quite revolution, but its very very real.
This one makes sence “One’s first step in wisdom is to kuesstion everything - and one’s last is to come to terms with everything.”