Following on Sarah Lacey's story in Business Week last month about how hard SaaS is for traditional enterprise software vendors and the disparaging comments about SaaS by the CEO of Lawson last week, Richard Waters of the Financial Times just published a story about SAP and SaaS called The End of the Software Gravy Train.
Waters' story focuses on SAP's reaction to SaaS, and brings together some of the themes I've been writing about on this blog - the internal innovator's dilemma for the established software firms looking at moving to SaaS, the customer lock-in that comes with enterprise software, the addiction to maintenance revenue and the shocking lack of focus on what is good for the customer.
In the Financial Times story, Waters talks about his impression of a recent discussion he was in with the CEO of SAP, Henning Kagermann, and his heir apparent, Léo Apotheker.
There is a distinct tone of sour grapes as they contemplate how Wall Street has embraced lossmaking or only marginally profitable Saas start-ups with open arms. “If you are a start-up and you burn money, the Street rewards you,” says Mr Kagermann; established companies do not get given the benefit of the doubt.
One can sympathise – but only up to a point. This has all the hallmarks of a big, successful company trying to learn an entirely new business and floundering. The technology approach, the management skills and the financial incentives are all very different in the Saas business. SAP may eventually get the formula right, but it has high cultural, organisational and economic barriers to cross.The article goes on to demonstrate how the traditional enterprise software vendors have become dependent on a model driven by customer lock-in. As Ray Wang, the lead ERP analyst for Forrester Research notes, when you adopt an on-premises ERP system (or any single vendor suite) you put yourself at great risk of vendor dependence and resultant lock-in - and since you are stuck, vendors like SAP and Oracle and NetSuite have shown that they will arbitrarilly raise your price year after year. In other words, if you become too dependent on any one vendor, bad things will happen to you.
From the vendor perspective - customer lock-in is of course great news, and it is at the heart of their business model - and your lock-in becomes their major revenue and profit engine. To quote Rick Dubinsky, They don't want to kill the golden goose, they just want to choke it by the next until it gives them every last egg.
What is interesting and what the stories above show is that in many ways the vendor becomes stuck too - trapped in their old business model that has become co-dependent with locked-in customers - so it becomes very hard to overcome the innovator's dilemma and fight the internal battles to make the move to SaaS.
So it seems to me that we are starting to see the same repeating themes over and over again in regards to SaaS and the large enterprise software vendors.
- A focus on company profits instead of on what is good for customers - and frighteningly often no discussion of the customer at all.
- Vision limited to developing more and more features to increase complexity and drive maintenance cycles.
- A pattern of customer-unfriendly price increases, particularly for the single vendor suites, inevitably substituting margin for growth for the vendors.
- Vendor dependence on customer lock-in and the resultant nearly 100% profit maintenance and support revenue streams.
- Massive innovator's dilemma issues, structural challenges and internal conflict.