7.3.1 | Blogs

December 10, 2007 | On Demand is In Demand

By John Girard
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It's precisely what you would expect to hear from the CEO of a leading software as a service (SaaS) business, but here it is: the on demand model is slowly but surely destroying software as we know it.  And the world will be a better place as a result.

There are two important concepts buried in this thesis.  The first is that SaaS is, in fact, disrupting traditional software delivery channels; the second is that this disruption benefits most consumers of software.  To me, it is clear that both are completely supportable.

SaaS as a disruptor

There can be little question that SaaS is a disruptive influence, given the success of companies like salesforce.com, netsuite, and successfactors.

Hidden beneath the hype of these companies is a profound truth: they are succeeding largely because their business models predict that they will. 

Most SaaS businesses can easily demonstrate faster time to market, lower cost of ownership, shorter product cycles, higher customer productivity, higher customer satisfaction, and better security and uptime than their installed peers.  That doesn't leave a lot of room for installed vendor to carve out for themselves.

Compounding these business dynamics is the revenue model: for installed vendors its a one-time slug followed by (uncertain) maintenance contracts and (even more uncertain) upsells and renewals.  These leads to an inevitable "feast or famine" cycle that is the bane of most software companies' existence.  When all of  your revenue is tied to quarterly sales performance, visibility is horrible (and in case you were wondering, Wall Street like visibility -- a lot).

In contrast, SaaS businesses (at least properly engineered ones) derive the majority of their revenue from on-going service contracts with customers.  In our particular case, this means that if we were to not close another customer, we would still have more revenue over the next 12 months than we did over the previous 12 months -- and by 50%.

With these kinds of dynamics, SaaS businesses are disrupting traditional software businesses because they are orders-of-magnitude more efficient.  And if you believe the theories of Clayton Christensen in The Innovators Dilemma, there's not a thing incumbent businesses can do about it.

How SaaS benefits Consumers

One of the other great things about SaaS is that its not just great for SaaS companies: the buyers benefit dramatically too (which is probably why they're buying).

What I have been most interested to see over the last half decade is the unexpected results that customers of SaaS solutions have developed.  I think of this as the "Innovation Effect" (something I'll write more about later): what happens when you deploy a SaaS solution and free up technical resources that would otherwise be managing an installed alternative?  They are freed up to innovate, and they do so in wonderful, unexpected ways.

This is a subtle effect, but it is profound.  When people aren't spending extra cycles trying to make sure that the site is up, they tend to do interesting things.  The slow deterioration in the utility and usability of installed software has created a fantastic wedge here: just by making software that works the way its supposed to, SaaS companies are able to win consumers' and users' hearts.

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