This is causing traditional ISVs to reconsider their business models.
These predictions from Gartner provide an insight into what is driving this remarkable change in how companies are acquiring and deploying enterprise software. We can now safely say that SaaS is completely changing the enterprise software market. Think about it — 85% of all new software will be SaaS within the next 36 months. Therein lies the problem for these legacy providers. This is market disruption on steroids!
Interestingly, while the growth is predicted to be the fastest in the USA, Europe is expected to be almost as robust, with Asia Pacific not far behind. SaaS knows no boundaries.
The initial move to SaaS was fueled by customers understanding the significantly lower TCO. SaaS products do not need in-house servers on which the software is installed. There is no software to be managed by the customer. There are no upgrades, no infrastructure refreshes and no staff required to maintain and update the software.
A key positive aspect of this market disruption is that successful, fast-growing SaaS companies have all received high valuations from investment markets. Another positive factor for SaaS is the Venture Capital investment level, with companies such as Box, Marketo and Workday each raising in excess of $50M. This was further reinforced by the recent successful IPOs of Eloqua and ServiceNow.
As with any disruptive period with incumbents under enormous pressure to protect their installed customer base, acquisition activity has spiked significantly. This is driven by the urgency of the traditional on-premise vendors to enter the SaaS market without the delay of in-house innovation and engineering. Exacerbating this for all of these legacy vendors is the challenge of disrupting their own base. All on-premise vendors sell perpetual licenses followed by maintenance contracts. In fact, this maintenance revenue is the lifeblood of any on-premise vendor. Replacing maintenance revenue with SaaS subscription revenue does little more than tread water. Actually, it is worse than that as the potential of selling a future major upgrade or new release disappears completely. This will impact every on-premise vendor. The captive market may still be captive (if they succeed with their own SaaS replacement which is highly unlikely), but it now generates less revenue over time — the occasional spike from a new or revised release is no longer there.
The importance of SaaS to the legacy vendors has been unconditionally confirmed by the multiples being paid in these acquisitions. One example is the 50% premium paid by SAP for Success Factors.
There are other key drivers for this explosive growth, besides TCO. It is also important to look into what the elements of the TCO calculation are. For example, rapid deployment through superior engineering with a greater emphasis on “software you’ll love to use” is an important factor. End users, the people who actually use the software and drive much of the lower TCO are demanding enterprise software that is as easy to use and intuitive as the software that they use in their personal lives — “Why can’t my service desk software look and feel like Facebook?” While this may sound a little ridiculous to enterprise software old-timers, it is a reality and the senior leaders and boards of the legacy vendors are reacting to the very real risk of becoming obsolete. One may consider this to be unlikely, but who of us predicted the rapid demise of Kodak for precisely the same reason — the inability to adapt to a major switch in the market, driven almost totally by the end user?
At SAManage we are thrilled to be part of this disruption. We have proven our ability to replace previous generation vendors from each of the installed base leaders and have been rewarded with a funding round from leading VC firm Carmel Ventures. We are now firmly in the race and see the strong potential of emerging as the market leader in multi-tenant SaaS, delivering IT Service Desk and Asset Management. Our recent successes in replacing older competitors at customers such as Consumer Reports, Fugro, Hearst Magazines and many educational institutions has us well positioned for the challenge. We are ready — stay tuned.
About Darroll Buytenhuys
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