Friday, 22 May 2009

Is The Software World Changing?

Some while ago I did my personal review on why Software as a Service (SaaS) was gaining momentum. Since, I have looked at how Microsoft is now taking Cloud Computing seriously and how many big companies are beginning to open up to the benefits of changing the way they provision the enterprise for software.

The Changing World

The recession and credit crunch has taught everyone in business a major lesson - cash is really king. Of course, any wise businessman would have told you that all along but another lesson learnt from this recession is that many people who thought they were super businessmen got a short, sharp and nasty lesson in their own abilities. In that respect, the recession has been a humbling experience.

We have seen major gaffs on a mega-proportion where greed simply leads the way or desperation galvanises action which has terrible consequences. In the US, Bank of America (BoA) took over Merrill Lynch and the crucial negotiations are reputed to have taken less than an hour. Only after the acquisition did the terrible truth about Merrill's CEO, John Thain, come to light and BoA's Board looked like fools as losses were far greater than they were led to have believed and BoA CEO, Ken Lewis, lost his job. In the UK, a perfectly decent business in Lloyds Bank took over HBOS in mixture of greed, to get 28% of the UK mortgages, and desperation as, when the Board suddenly realised what they were taking on, no less than the Prime Minister stepped in at the eleventh hour to make sure the deal went through. In less then a heartbeat both companies sought bail outs and now the taxpayer owns 43% of the combined new group. Understandably, the Chairman, Victor Blank, has lost his job.

But down in reality-land we saw cash sources for business dry up dramatically and bull-headed CEOs and Sales Directors were quick to abdicate their responsibilities to Finance people and cost cutting consultants in an effort to make up for their lack of foresight and planning for the inevitable. Lots of executives will not lose their jobs, in fact, many will gain enhanced reputations for making 'tough decisions' which has resulted in an extra million job losses in the UK - a figure which is expected to rise by the same again in the next year. Only a few weeks ago we saw Steelmaking on Teesside stop as a single consortium pulled their contract which accounted for over 80% of the output - Corus and the Union blamed the customer but it was clear Corus had become fat and happy on the single customer. It was an accident waiting to happen.

Meanwhile, within the detail of costs, people began to question why they were outlaying large capital costs for software each year. True, the benefits theoretically are gained over a long period of time, but the reality was that if you are paying for an upgrade then you should only pay for what you use in terms of features and numbers of user plus the benefits should really be as soon as you flip the switch. Companies as big as Microsoft suddenly saw customers with light bulbs above their heads questioning their ludicrous licencing policy and for the first time in many years, Microsoft sales actually dipped causing around 5% of the workforce to be made redundant.

It was a massive wake up call to the software industry.

The World of Software

Major software purchases within enterprises have usually been treated as a capital purchase and in the accounts they have been amortised over a three year period as the benefits have notionally been gained over that period. This assumes a piece of software behaves much like a large machine. But a machine can be leased and so the capital can be saved and the cost taken as a lease in the overheads - cash is preserved. So what if the same can be done with software.

It would be a nice idea to think we could buy a thundering great software package through a lease but the reality is that once the software is installed it has no residual value in the eyes of leasing companies and so you cannot do this. The key to a lease is that if your company goes bust at least they have an asset. Software is not an asset.

So the concept of 'renting' software has become attractive. By not paying out a huge capital cost and recognising the benefits of using it as an immediate impact to the business by taking the cost to overhead, becomes an attractive proposition. Once again, cash is preserved and the accountants can see exactly what they are getting in terms of a Return on Investment (ROI) from day one.
With that in mind SaaS and Cloud Computing become attractive propositions.

The World of

Long before the days of, I worked at a company called PlaceWare and we sold online webmeeting software on a pay-as-you-go service - WebEx did the same. We had an easy, no cost to deploy model, that customers could try before they buy and then only pay for the numbers of seats they wanted on an annual basis. It worked fine for a non-critical application like webmeetings although we got in the ear when it failed, but what if a major critical application like CRM were to try the same? did just that. It leveraged a relatively low cost sales model of try before you buy, with an easy, low cost deployment and low entry point and again you only paid for what you used on a monthly annuity basis which included all upgrades, support and maintenance. A single monthly line cost which clearly showed the ROI instantly. started by automating Customer Relationship Management (CRM) enabling sales teams to access the most up to date information about their customers instantly and anywhere they had access to the internet. Today, that means pretty much anywhere and so is the crux of many an organisation which helps it run great rafts of daily activities by many departments from sales to marketing to support and link it directly in the ERP and Accounting systems so that a germ of lead can be tracked through the system to forecast to sale to invoice to commission payment. is a true enterprise application, hosted fully outside the network and 'rented' per user, per month.

Now, large scale enterprise applications like HR can be hosted offline the same way. Ex-Peoplesoft executives started a company called with the same principle and many large companies are using it with the single largest ever order for SaaS from Flextronics placed with last year. Former Astra Zeneca HR Technology Director, Mike Sheridan, is a big fan and now advises on the benefits and deployment of such innovative new technology and is a huge believer in the future of applications served in this way.

But it is the changing world of accounting which will drive SaaS to the next level. The technology is merely the technology and that always has its pro's and con's no matter where it is hosted.

Changing Perspectives on Risks

Beyond capital costs, the risks associated with large software installations have always been high. The risk involved in deciding on purchasing software has been pushed down the organisation and the potential heartache but also the thought of getting it wrong, botching the deployment or installation, delaying the benefits feeding through, cost of training and upgrade deployments start to worry executives who normally would not get involved. Take a CRM system - in the old days the IT manager may go and source the nice software for everyone to run. They might have chosen something like Siebel in the past and it would then have all the pain of taking legacy information into it, salespeople getting trained on how to use but on its vagaries. The sales managers could easily point the finger and blame the IT team if it went wrong. That has now changed as such decisions at least join in if not devolve to the sales managers.

They want lower risk options, easier to deploy, faster to get the benefits, low training requirements, and ease of upgrading - they want to minimise sales time wasted in the whole process and therefore not risk their earnings and therefore their jobs. was ripe for success in such an environment. While IT moaned about security, data ownership, cost of bandwidth, sales managers simply said 'do it' and the change was steam-rollered in. The same arguments apply today on other SaaS products and Luddite IT men fear for their skins as the enterprise is suddenly demanding less risk and more benefits - quicker. But the real force of change is coming from the Finance department, who are questioning the need for capital outlays and the real ROI of major enterprise software implementations - they also want change.

The recession and credit crunch has been 'The Perfect Storm' to get this driven into business minds.

The Dying Art of Selling

What SaaS has done is to reduce the cost of the sales model. The concept of ease of trial, deployment and 'sales consulting' has meant that fewer, less costly salespeople have got involved. Still today, Oracle or SAS salespeople can earn upward of £250,000 a year for their skills. A salesperson is less cost to the business as many points in the sales cycle are eliminated. At PlaceWare, we were able to quickly achieve $1m of quarterly annuity revenue on just 4 salespeople costing less than £250,000 a year to run in total. At any time, we had over 1,000 people trying before they bought so that we could concentrate on doing demos, helping people see the benefits of buying more licences and focusing on the larger deals. The next batch of deals were taking care of themselves via a neat free version called 'My PlaceWare' which over 15,000 accounts worldwide were using. It was the perfect sales funnel.

Longer term, this is a good trend. I have always challenged the skills of selling large scale enterprise software as a capital cost vs. SaaS - I think you need equal skills because ultimately you are solving the same problem and producing value to the customer - the skill is proving the value. I would match any SaaS salesperson against the £250,000 heavyweight because they just sell by the book - the tried and trusted 3 year ROI model which neatly hides a million issues. SaaS means you work harder on showing the ROI instantly - it's all about proving real, instant value. And that's a growing skill that requires heavyweight thinking but in a faster moving, less cost and agile salesforce.

It is like the trend to lower equipped, faster to deploy, lightly armed specialist troops in war rather than the heavy batteries of the past. The benefits are much faster to see for less cost.

Subscribing To The Future

The idea of paying for software by a monthly or quarterly subscription answers many of the questions on consuming capital unnecessarily. But it brings further benefits as companies can faster measure the ROI the software brings, while it provides a far lower risk method of deploying such solutions. But add into the equations that it also means that companies have wider choice and bargaining power. Just as the decision to buy is made easier and less risk by trying before buying, so to the cost of change is made easier. True, there is legacy, but the power moves back to the enterprise to make sure the solution continues to meet ROI benefits and that the software continually matches their needs. The issue that many have with a Microsoft is that you pay for far more than you get in terms of added products not used in the 'Stack' or for all staff when only a small percentage are using the software at any one time and many departments not at all.

SaaS allows you to drill down to every feature and every user - you only pay for what you use.

It also means that flexing up the model becomes far easier - the cost of infrastructure for delivery is absorbed by the vendor so you only pay for each new licence when you need not new servers when you reach limits. Software subscriptions provide the benefits of accuracy of billing while enjoying the benefits of easy scaling - up or down.

This is another reality of the recession. As companies clamour to take cost out of the business as staff disappear through redundancy, while they get payroll cost savings they do not save in the cost of software paid for them. Wrapped in those enterprise software agreements is no provision for return of 'licences not used' or 'no longer required'. In fact, all the software brutes look to get incremental sales each year regardless of staff size. SaaS allows you to scale both up and down - you simply vary the numbers of licences as and when. It means that in a recession, you can make not just cost savings on payroll but on services provided to the individuals too - immediately. This is something accountants will remember for the future as slashing costs associated with staff never quite hits the cost of a Full Time Head as dictated in the budget as most actually include these costs as well.

SaaS Should Never Have Got Off The Ground

When you think about it, SaaS should never have got off the ground. There was no big recession to drive people to think this way or a compelling requirement by IT of the business to go to a rental model. It was perhaps the innovation of entrepreneurs on the West Coast of America who thought about how to start up companies for lower costs without having to pay for big increments in infrastructure and licences every time they had added staff. There had to be a better way to get off the mark quickly, remain lean and be flexible to grow and take advantage of best in class software and the benefits to be gained.

It's why revolutionised the way companies think. The whole concept of effectively outsourcing the entire CRM system so that salespeople just had laptops, a car and no big databases to refresh each evening across expensive, secure networks was only the start. The whole process of running a salesforce could be outsourced and that's when SaaS got to the enterprise and became mission critical.

Lots of people complain that SaaS is open to the vagaries of the internet and in the early days this was a huge problem to the likes of Placeware and WebEx. But the world has changed. We hear loud shouts when Google's Apps go offline because it is a rarity and it affects lots of users. But how many times on a corporate network do we say to one another 'Email is playing up', or, 'the network is slow today,' or, 'I can't log on,' or, 'I can't get at that data', or worse still, 'I haven't got the most up to date data.'

The fact is that SaaS is here and now. It is always the freshest data, the latest revision of software and is available where ever you are, whenever.

SaaS - Right here, Right Now

The recession has taught a lot of things, but as always it is whether we actually take on board the learning. Certainly, one of the most powerful messages is that availability of capital is paramount to survival - it dries up and your business contracts, instantly. SaaS brings the ability for companies to conserve precious cash, scale up and down at will and be ready to meet the world with best in class features, every day.
SaaS is literally right here and right now - there has never been a more compelling reason or time to take a close look.

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