SaaS industry 'will collapse' in two years

Q&A

Lawson Software's chief executive, Harry Debes, doesn't believe in software as a service.

In fact, the ERP (enterprise resource planning) software company's top executive has put a two-year expiry date on software as a service's (SaaS's) head.

Debes led Lawson's $607m (£329m) merger with Intentia in 2006.

In an interview, Debes told ZDNet Asia why SaaS is history repeating itself, and why the company is not going down the same path as its bigger competitors that have jumped aboard the 'on-demand' bandwagon.

Q: All the other big players are going on-demand. Is cloud computing the next big thing?
A: This on-demand, SaaS phenomenon is something I've lived through three times in my career now. The first time, it was called 'service bureaux'. The second time, it was 'application service providers', and now it's called 'SaaS'.

But it's pretty much the same thing, and my prediction is that it'll go the same way as the other two have gone: nowhere.

SaaS is not God's gift to the software industry or customer community. The hype is based on one company in the software industry having modest success. Salesforce.com just has average to below-average profitability.

People will realise the hype about SaaS companies has been overblown within the next two years.

An industry has to have more than just one poster child to overhaul the system. One day Salesforce.com will not deliver its growth projections, and its stock price will tumble in a big hurry. Then, the rest of the [SaaS] industry will collapse.

Won't people avoid the mistakes of 'previous' SaaS incarnations?
People are stupid. History has shown it repeats itself, and people make the same mistakes.

So it's safe to assume Lawson does not have a SaaS strategy?
Actually, the original design three years ago for one of our better products was SaaS. In 2005, we started building a human capital management product.

At that point, people were talking about SaaS. There was a lot of buzz around it, so we decided that, in case it was going somewhere, we'd build the software for the SaaS model.

But, as we did the maths, we realised we could get killed. It was going to take us seven to 10 years before we made any money. That's nonsense. So we reversed our plans. I'm very glad that happened because now we can sell the software in both models. We wouldn't have to wait 10 years to make a profit.

But what about your competitors offering SaaS models?
[Oracle's chief executive] Larry Ellison has the same perspective as I do. He accidentally funded the CRM product and NetSuite. He didn't really mean to. They've had small successes but, overall, they've been spectacularly unsuccessful.

And SAP's Business ByDesign is a disaster. [SAP] said it would have 10,000 customers [for ByDesign] within a couple of years. And yet they have less than 100 today, after all that hype and marketing.

We use Salesforce.com, and I like it. But I would've bought the product even if it wasn't SaaS. The success of Salesforce.com, in my opinion, has to do with their product being good, not because it's SaaS.

Theoretically, the business case for SaaS seems fairly straightforward.
Yes, but, because all your costs are up front and your revenue is over a five-year period, the more you sell, the more you lose.

You don't break even till the four-and-a-half-year mark, but here's a bigger problem: there's no guarantee that that customer is still going to be yours in four years' time.

Getting signed up as a SaaS customer is fast, but getting out is just as fast, whereas traditional software is like cocaine — you're hooked. It's too difficult and expensive to switch providers once you've invested in one. If it were easier to jump ship, a lot of people would've hit the eject button on SAP a long time ago.

So is Lawson looking to lock people in, in the same way?
It isn't about locking people in. People lock themselves in. They see the software, like it and want it. This is true of all professional software.

The cost of moving is too high. As long as it's working, people are happy to stick with one product.

When the sunk costs have been fully depreciated, customers effectively run the software for free, thereafter. Whereas, if they went to Salesforce.com, it'd cost them a million a year because they're paying for ongoing licensing and maintenance.

SaaS is just a financing option for the customer. For that, we offer a hosting service. If the customer pays [over a period of time] through a financing entity, it's exactly the same [experience] as SaaS.

What is your plan for Asia, a region with a large proportion of SMEs? Many don't have the capital for a big, upfront investment in ERP software.
There are still several thousand companies that fall into the revenue range of between 50 million and a couple of billion dollars.

We sell into target verticals, not generically. Frankly, we can't compete against SAP or even Microsoft by being generic. They can outspend us and outmarket us.

By being vertical-specific, that's the way we are levelling the playing field.

Talkback

Debes' remarks show how little care and understanding legacy on-premise vendors have for their customers, and how poorly suited they are to help businesses address today's challenges. Is this really how traditional software executives view their customers? Cocaine addicts?

<a href="http://www.appirio.com/blog/2008/08/lawson-ceo-traditional-software-is-like.php">Here's a point by point rebuttal on the Appirio Blog...</a>

ryan@appirio.com 28 August, 2008 09:23 Reply

While traditionally vendors may have looked to lock companies into using their software, the fact is that there is now more choice than ever before, with more vendors offering increasingly flexible, lower cost options for businesses. SaaS offerings can change and evolve quickly based on business needs traditional software deployments cannot. Yes, companies have to pay ongoing licensing costs, but many prefer this to making an upfront investment, as its a more manageable cost and the number of licenses can easily be modified based on immediate needs.

Of course theres a risk that customers will simply abandon a generic SaaS offering once they no longer require it. However, smart vendors will look to tailor their offerings to meet each companys individual requirements, thus making them an integral part of day-to-day business processes and helping foster a successful long-term relationship.

Rikke Helms 28 August, 2008 16:55 Reply

Collapse in 2 years. I would be surprised if it did. Whether on not it does eventually only time will tell.

This guy displays an arrogance that demonstrates no concern at all for his customers, which is of itself sufficient reason to suggest he is out of touch with reality.

Tezzer 30 August, 2008 00:04 Reply

I agree with Rikke, the argument for SaaS is compelling, although more compelling for the customer than the vendor. Lawson is a smart company, but Debes is making a significant error in his judgement call here, and not just in his use of the well worn and ill considered cocaine analogy.

To dismiss SaaS simply because he has perceived three supposedly similar markets fail completely disregards a myriad of advances in both the appetite for the delivery model, and the technology capabilities to support it. It seems as though they may be hedging their bets anyway, developing software that can be on or off-premise hosted sounds like SaaS by any other name. So why rail against it? Hubris would be my guess, that and the fact that their classic licensing model makes them better margins, so why promote the other option?

Also, to quote:

People are stupid. History has shown it repeats itself, and people make the same mistakes.

Well Mr Debes, history is also littered with once successful companies that have gone to the wall or been acquired because they failed to keep up with disruptive trends. If you truly believe in what you say then Ill look out for Lawson becoming consigned to the annals of history.

Simon W 1 September, 2008 16:48 Reply

First, this type of arrogance and willful blindness to a massive trend foreshadows significant business problems for Mr. Debes and Lawson. Think DEC (PCs will never replace minicomputers) and all the software companies that missed the DOS to Windows wave for whatever reason.

Re: Mr. Debes remark that "people are stupid"... I couldn't disagree more, especially when it comes to SaaS customers. They know what they want and they're adopting SaaS solutions across the globe and at a rapid pace. Here at projjex.com we receive a constant flow of intelligent feedback and great ideas from our customers. Nice try Harry but belittling your customers isn't going to derail the SaaS locomotive!

Alex Glassey
projjex.com

alexglassey 8 September, 2008 18:12 Reply

I understand Debes' argument and to some degree I accept his conclusion, but I think he misunderstands what SaaS is.

SaaS is NOT a revenue model, SaaS is a delivery method.

I run a SaaS based business in the UK and whilst we clearly offer a classic SaaS revenue model, we also offer a more traditional software revenue model BUT with a SaaS delivery framework.

So long as the margins work and the billing platform can cope them why can't a blend of revenue options exist?

Our large clients demand a more traditional model, but like the SaaS delivery method. They don't have to concern themselves with depreciation only with maintenance. Whereas our smaller customers like the SaaS model because it is low cost (relatively) and easy to adopt.

I also believe that if you are wary of the SaaS model because it doesn't tie in your customers, then your concern should be in the quality of your product and your overselling of features/functions. I would argue that SaaS companies are much more tuned to the competitor space and the needs of customers. But hey, what do I know??

IntelligenceNewsBusiness 10 September, 2008 16:36 Reply

This guy's a dinosaur. All of the most succesful sites on the web have got to where they are through an ongoing communication with their users. That's the way of the web. Ebay. Amazon (reviews) How come Wikipedia is the top of the SERPs while the Encycopaedia Brittanica site generally languishes a close 353rd? It's SaaS to Brittanica's Microsoft, and it's going to be the next big thing.

When web and software developers realise the power of some of the mash-up possibilities sites like The Web Service (http://www.thewebservice.com/) are offering, it will become the industry standard.

So traditional software is like "cocaine"...? I don't think so... I think people will realise how it's just as ensnaring but not as addictive. People resent being tied to software. And where is the accountability? There isn't any. You just have to take it as the program crashes or takes 2 hours to update itself yet again. SaaS opens up a whole new way to pay for software - small companies in particular will have access through "pay-as-you-go" models to the kind of software that would have broken the bank before Web 2.0. It opens up a whole new world of profitability that companies would be mad to ignore. And if the web's taught us anything, it's that the little guys add up to something big.

PhilipMarlowe 18 September, 2008 17:03 Reply

So, the Lawson philosophy is :-
People are stupid
After "sunk" costs - software is free

Lawson's performance is relatively lacklustre, it's probably time for a change of management

Davep 15 October, 2008 12:10 Reply